1371.
In view of the ambiguity caused by
ILLUSTRATIVE CASES:
1)A party was given the option “after the exploration’’
of the mineral claims belonging to another to
purchase or not to purchase the property and the
understanding was that the fi rst party was under
obligation to conduct the exploration.
Facts: S was the owner of the claim over certain
gypsum deposits. For and in consideration of 100,000
bags of cement, B (Cepoc) executed an option to
purchase said claims. The option contained the
following stipulation: “That in case B, after the
exploration, decides not to continue the negotiation to
purchase the property, S (seller) shall refund the
amount equivalent to the cost of 100,000 bags of
cement. In case B decides to continue to purchase,
the 100,000 bags of cement shall be considered as
part of the consideration. ”B delivered 99,000 bags of
cement to S but did not conduct any exploration of the
claim. Later, B demanded the payment of the value of
the 99,000 bags of cement.
Issue: Is the obligation of S to pay for the cement
conditioned upon an exploration being fi rst conducted
by B?
Held: Yes. An examination of the circumstances
surrounding the execution of the contract should be
taken into consideration when the express terms of
the contract are not clear. From the evidence, it was
the understanding of the parties that the obligation of
B to make the exploration was definite and
unconditional, whereas, the return of the cement was
conditioned upon the completion of the exploration.
2. The conflicting terminologies in a document create
doubt as to whether it is a mere loan with security or a
pacto de retro sale but the circumstances reveal the
real nature of the contract.
Facts: In 1927, S executed a document, which stated
that needing money, he thought of selling a piece of
land to B for P225, that the land could be reconveyed
in 10 years, and that in the meantime S, would be
responsible for all tenancy matters over the land. In
1948, S filed a complaint for the reconveyance of the
property. B claimed that S had failed to exercise the
right to repurchase within 10 years and, therefore,as
vendee a retro, he had become the owner of the land.
Issue: Is the contention of B tenable?
Held: No.
conflicting terminologies in the document (viz.: “urgent
necessity for money,” “selling the land,” “ownership,”
“I will be responsible for all tenancy matters,” “this
receipt is made as security.”) which are sufficient to
create doubt as to what the document truly purports, it
becomes necessary to inquire into the reason behind
the transaction and other circumstances
accompanying it so as to determine the intent of the
parties. In the case at bar, the collective weight of the
following considerations supported the findings and
conclusion that the document is a mere loan with
security and not a pacto de retro sale. (see Note 2,
Chap. 4.)
First, the reason behind its execution was that S was
in urgent necessity for money and had to secure a
loan of P225 from B for which the rice land was given
as “security.”
Second, the amount of P225, even in 1927, was too
inadequate for a purchase price of an irrigated rice
land with an alleged “perimeter” of 240meters and an
“area of 1,269 square meters.”
Third, although symbolically, the possession of the
property was transferred to B, it was S, the supposed
vendor, who continued to be in physical possession of
the property, took charge of its cultivation, and all
tenancy matters.
Fourth, B, the supposed vendee a retro never
declared the property in his name for taxation
purposes nor did he pay the taxes due thereon; and
Fifth, B failed to take any step to consolidate his
alleged ownership over the land by the mere
registration of an affi davit of consolidation, a judicial
order not being necessary under the old Civil Code
which is required now under Article 1607 of the new
Civil Code.
ILLUSTRATIVE CASE:
The parties for many years had understood the free
ride privilege as granted only to those “wearing official
badges.’’
Facts: Under a franchise which is in the nature of a
contract granted by the City of Manila for the
construction and maintenance of a street railway
system, employees of the police and fi re departments
of the city shall be entitled to ride free upon the
Meralco cars. For nine (9) years, the parties had
understood the provision giving the privilege of free
ride as granted only to those “wearing official badges”
visibly during the period of transportation.
Subsequently, the city secured an order from the
Public Utility Commission an order requiring the
Meralco to give the same privilege to city detectives
who did not wear their badges visibly.
Issue: In the light of the conduct of the parties during
the period of nine years, was the interpretation given
to the provision correct?
Held: No. The construction placed by the parties to
the contract on the clause under consideration must
exert a powerful influence in the determination of the
question presented. The construction adopted by the
Commission was diametrically opposed to that which
the parties have placed thereon for so long a time.
ILLUSTRATIVE CASES:
1. The stipulations in a document entitled “Barter’’
indicate an intention on the part of the signatories
thereto not to convey ownership of their respective
properties.
Facts: The spouses A and B were owners of a
residential lot. They executed an agreement entitled
“Barter” whereby they agreed to “barter and
exchange” with spouses C and D the lot with the
latter’s rice land. Under the agreement, the parties
shall enjoy the material possession of their respective
properties. A and B shall reap the fruits of the
Riceland while C and D shall have the right to build
their house on the lot, and in the event any of the
children of E (daughter of A and B) shall choose to
reside and build his own house on the lot, C and D
shall be obliged to return the lot to such children and
that neither party shall encumber, alienate or dispose
of their respective properties without the consent of
the other. F, son of E, filed a complaint to recover the
lot from C and D claiming he needed it for his own
house. C and D contended that the agreement
transferred to him the ownership of the lot.
Issue: Did the parties really enter into a contract of
barter?
Held: No. Contracts are not what the parties may see
fit to call them but what they really are as determined
by the principles of law. Thus, in the instant case, the
use of the term “barter” in describing the agreement is
not controlling. The stipulations in said document are
clear enough to indicate that there was no intention at
all on the part of the signatories thereto to convey the
ownership of their respective properties.
Facts: The document executed by S and B is entitled
“Kasulatang Sanlaan.” In the document, S declares:
“aking inilipat, ipinagbili nang bilingmabibiling muli” to
B the parcel of land in question. Immediately after its
execution, B entered into the possession of the land,
paid taxes thereon, and enjoyed its fruits.
Issue: Is the title of the document controlling as to the
nature of the contract entered into?
Held: No. The words used by the parties are
expressive of their intent that the property be sold with
a right of repurchase. These words must be given
their common and ordinary meaning. The title is not a
decisive factor. Furthermore, the actuations of both
parties show that the document cannot even be
presumed an equitable mortgage within the purview of
any of the cases mentioned in Article 1602 of the Civil
Code.
Facts: The contract executed by the parties is
captioned “Labor Contract” providing, among others,
that E shall be paid by R the sum of P8.00per day of
actual work done on the field. It appears, however,
that: E did not receive any wage but rather a share in
the net produce of the land; he paid a rental of 25% of
the harvest; he got cash advances or “vales” only as
his needs arose; he did not observe regular work
hours; he handled all phases of farm work although at
times with aid of hired labor; and he has hut erected
on the land holding.
Issue: Is E a farm worker or a tenant?
Held: A tenant. The title of a contract does not
necessarily determine its true nature. Judicial notice
may be taken of the practice of landowners, by way of
evading the provisions of tenancy laws, to have their
tenants sign contracts or agreements intended to
camoufl age the real import of their relationship.
1372.
EXAMPLES:
(1) S sold his house “including all the furniture
therein.” The term “all should not be understood to
include S’s refrigerator which is distinct and different
from “furniture. ”Neither should it be interpreted to
include chairs borrowed by S from C for the reason
that they do not belong to S.
(2) S sold parcels of land to B. In the deed of sale, the
description stated a greater extension than the actual
area of the lands sold thereby including a piece of
land belonging to C. This piece of land cannot be
among the subject matter of the sale simply because the Agreement refers “to all the obligations and
it was included in the description. liabilities” of the decedent.

(3) R mortgaged his land to secure the debt of D to C, Facts: In the intestate proceedings of D (decedent) no
without expressly assuming personal liability for the claims were filed within the period fixed in the notice
debt. In case there is a deficiency remaining after the to creditors. Legally, therefore, creditors of D are
mortgage is foreclosed, R cannot be compelled to pay forever barred from prosecuting any claim against the
the same. estate of D, pursuant to Section 5, Rule 86 of the
Rules of Court. Nevertheless, H, etc., intestate heirs
ILLUSTRATIVE CASES: of D, aware that the latter did leave obligations and
liabilities, the existence of which they acknowledged
1. “Fair value’’ mentioned in a contract of lease was
and enumerated in the Inventory of Estate Liabilities
not construed as referring to the purchase price
and/or Obligations attached to the Partition
because purchase by the lessee of the leased
Agreement, personally assumed payment of the same
property was never intended by the parties
in proportion to their shares in the estate of the
decedent. C, a creditor of D, fi led a civil case against
Facts: Under an agreement entitled “Contract of
H, etc. on the latter’s undertaking in the Partition
Lease,” it is provided, among others, that the “lessee
Agreement to assume and pay all the outstanding
shall surrender possession of the premises upon the
liabilities and obligations of D. Admittedly, C’s claim is
expiration of his lease and if so required by the lessor,
not listed in the Inventory. C argues that inasmuch
shall return the premises in substantially the same
that paragraphs 5(c) and7(c) of the Partition
condition as that existing at the time the same were
Agreement providing for the assumption by H, etc. of
first occupied by the lessee, . . . provided that the
“all liabilities or obligations of the decedent,” omitted
lessee shall have the right and privilege to
any reference to the Inventory in paragraph 4 thereof,
compensate the lessor at the fair value or equivalent,
those paragraphs were meant to include all other
in lieu of performance of its obligation, if any, to
liabilities and obligations of the decedent although not
restore the premises. Fair value is to be determined
listed in said Inventory.
as the value at the time of occupancy less wear and
tear and depreciation during the period of this lease.”
Issue: Are H, etc. personally liable to C?
Issue: Does “fair value’’ at the time of occupancy
Held: No. H, etc. intended to assume only those
mentioned in the lease agreement refer to the value of
obligations of D which they acknowledged and
the property if bought by the lessee?
enumerated in the Inventory. Paragraphs5(c) and 7(d)
merely define the extent and proportion by which they
Held: No. It refers to the cost of restoring the property
assumed the decedent’s obligations and should not
in the same condition as of the time when the lessee
be construed to comprehend all other obligations of
took possession of the property. What was expressly
the decedent. The rule that “particularization followed
agreed upon in the lease agreement was that, should
by a general expression will ordinarily be restricted to
the lessor require the lessee to return the premises in
the former” is based on the fact in human experience
the same condition as at the time the same was first
that usually the minds of the parties are addressed
occupied by the lessee, the latter would have the
specially to the particularization, and that the
“right and privilege” (option) of paying the lessor what
generalities, though broad enough to comprehend
it would fairly cost to put the premises, in the same
other fields if they stood alone, are used in
condition as it was at the commencement of the lease
contemplation of that upon which the minds of the
in lieu of the lessee’s performance of the undertaking
parties are centered. In other words, the enumeration
to put the land in said condition. Such fair value
in the Inventory of the liabilities or obligations of D,
cannot refer to the purchase price, for purchase was
expressly acknowledged by H, etc. and the payment
never intended by the parties. It is a rule in the
of which had been assumed by them implied the
interpretation of contracts that “However general . . .
exclusion of all others. Moreover, considering that H,
agree.”
etc. themselves had assumed the obligation of
2. The heirs intended to assume only those answering to creditors for the debts and obligations of
obligations of the decedent enumerated in an D, it is but just that they should be bound only by the
Inventory attached to their Partition Agreement but exact terms of their promise.

1373.
1374.
EXAMPLE:
R leased his house to E. In the contract, it was stated
that E should not sublease the house without the
written consent of R. Another stipulation therein
contained stated that E should pay P1,000.00, as
additional rent a month should he violate this
condition. E subleased the house without the consent
of R. Has R the right to eject E? No,in the light of the
clause stating the penalty for the violation of the
condition.
ILLUSTRATIVE CASES:
1. Stipulations and language employed in a “Bill of
Assignment” of a formula indicate an intention to
transfer only the “use” of the formula.
Facts: P executed a Bill of Assignment in favor of
UFC which recites, among others, that the patentee
(P) “assigns, transfers and’’ convey sall his property
rights and interest over said Mafran trademark and
formula for Mafran Sauce unto UFC” and that “such
assignment, transfer and conveyance is absolute and
irrevocable and in no case shall P ask, demand or sue
for the surrender of his rights and interest over
saidMafran trademark and formula.”
Issue: UFC claims that the formula itself was ceded to
it. On the other hand, P contends that what was
transferred was only the use of the formula.
Held: A literal reading of the Bill of Assignment seems
to support the conclusion that the formula itself was
ceded by the patentee. However, an analysis of the
entire instrument and the language employed therein
would lead one to the conclusion that the intention of
the parties was to transfer only the use of the formula.
Firstly, one of the principal considerations of the
assignment is the payment of “royalty of 2% of the net
annual profit” which UFC may realize out of its
production of Mafran sauce. The word “royalty,” when
employed in connection with a license under a patent,
means the compensation paid for the use of a
patented invention.
Secondly, to preserve the secrecy of the formula, it is
provided that P was to be appointed “chief
chemist . . . permanent in character, of UFC and that
in case of his “death or other disabilities,” then his
“heirs or assigns who may have the necessary
qualifications shall be preferred to succeed him;” and
that P shall exercise absolute control and supervision
over the laboratory and personnel and over the
purchase and safekeeping of the chemicals and other
mixtures used in the preparation of thesaid product.
Thirdly, should dissolution of UFC take place, “the
property rights and interests over said trademark and
formula shall automatically revert” to P.
Fourthly, the facts of the case compellingly
demonstrate continued possession of the formula by
P.
Finally, a conveyance should be interpreted to effect
“the least transmission of rights.” (Art. 1378, par.
1.),and allowing or permitting only the use, without
transfer of ownership, of the formula, would effect “the
least transmission of rights.”2. Main contract contains
a 90-day warranty period against defects with surety
bond while annex thereto provides a one-year
warranty period against defects without mention of
surety bond.
Facts: Under a written contract, P undertook to do a
painting job for C (Caltex [Phils.].) Among others, the
contract provided that should any defect be found by
C within 90 days from the acceptance of the work, P
shall make good such defect. P furnished a surety
bond given by S(surety) “for any defect arising out of
defective materials or workmanship which may be
found by C within 90 days from date of completion
and acceptance of work.” The last clause of the
“Specifications for Tank Painting,” Annex “A,” on the
other hand, provides thus: “Any defects in
workmanship that may be discovered within the
period of one year shall be corrected by P without any
additional charge to C.” The alleged defects in the
painting job were noted only after more than three
months. S fi led a complaint against P to recover what
it had paid to C under the bond, and on the strength of
the indemnity agreement executed by P in favor of S.
Issue: Is S entitled to reimbursement from P for
paying C on the surety bond, the alleged defects
having been discovered after 90 days but within one
(1) year from acceptance of the painting job?
Held: No. The 90-day warranty period in the main
painting contract should be applied. Its evident
purpose is to make the surety bond liable for defects
discovered within the 90-day period defined. On the
other hand, the 1-year warranty clause in the
contracts Annex “A” not only fails to mention the
surety bond but explicitly makes P directly and
personally liable for the defects therein contemplated.
The two provisions may, therefore, be reasonably
reconciled with each other and construed together to
mean that P and C intended for the surety bond to be
chargeable for “defects arising out of defective
materials or workmanship” found within 90 days but
for P to be directly liable for“ defects in workmanship”
discovered beyond said period of 90 days and until
nine (9) more months thereafter, to complete the one-
year period. Hence, C could no longer enforce the
surety bond and as a necessary consequence, S
should not have paid C on the bond and
correspondingly, P may not be required to reimburse
S under the indemnity agreement. Parenthetically,
had this been a suit between C and P, the latter would
have been liable to correct such defects on the basis
of the last clause of Annex “A.”
1375.
EXAMPLE:
R leased to E a roof for the purpose of erecting an
advertising sign. The contract provides for the
termination of the lease by E if a “building” should be
constructed on an adjoining property of such height as
to obscure the view of E’s sign. There was erected on
the roof of an adjoining building a sign which
obstructed the view of E’s sign. In this case, the term
“building” as the term is used in the contract may be
interpreted to include the obstructing sign having in
mind the nature and object of the contract.
ILLUSTRATIVE CASES:
1. Scope of authority of agent to “exact the payment”
of the sums of money“ by legal means.”
Facts: A (agent) was appointed by P (principal) as
manager of the latter’s business under a power of
attorney which confers authority to “exact the
payment” of sums of money “by legal means.”
Issues: Does this authority include the power to exact
the payment of debts due the business concern by the
institution of suits for their recovery?
Held: Yes, for it cannot be reasonably supposed, in
the absence of very clear language to that effect, that
it was the intention of P to withhold from A a power so
essential to the efficient management of the business
entrusted to his control as that of suing for the
collection of debts.2. In one deed, the bank may be
compelled to pay; in another deed, it is given the
option of whether or not to pay certain obligations.
Facts: SIP corporation purchased three vessels thru
financing furnished by defendant bank, BPI. The
vessels were placed under the booking agency of
defendant ISC with the undertaking that freight
revenues shall be deposited with the BPI. As SIP and
BPI were not satisfied with the amount of revenues
being deposited, SAG was organized to manage the
operations of the vessels without, however,
terminating the booking agency of ISC. SAG
contracted the services of P to carry out repairs in
said vessels. Payment for the cost of repairs was
advanced by ISC which, however, stopped payment
of the checks for the balance. Consequently, BPI
(drawee) dishonored the checks when presented for
payment by P. Meanwhile, by reason of the inability of
SIP to pay its mortgage indebtedness, it sold the
vessels to mortgagee BPI by way of dacion en pago.
Immediately preceding the execution of the deed of
sale, SIP and BPI executed a “Confirmation of
Obligation” whereby the parties acknowledged,
among others, the obligation due to P. The
“confirmation” provides that SIP has “authorized BPI
to pay certain expenses in connection with the sold
vessels. ”P instituted action against SIP, ISC, SAG,
and BPI to recover the balance.
Issue: Did BPI in purchasing the vessels assumed the
obligations SIP on the basis of the confirmation of
obligation?
Held: Yes. At the time the subject obligation was
incurred, the vessels were owned by SIP although
mortgaged to BPI. Hence, SIP as owner is liable for
the cost of repairs. ISC and SAG were undeniably
mere agents of SIP, the disclosed principal. BPI,
being the purchaser of the vessels, is jointly and
severally liable for the balance of the repairs
admittedly a lien in the vessels. The “Confirmation of
Sale’’ is but a part of or a corollary to the deed of sale.
In fact, reference thereto was made by the deed of
sale as to the settlement of obligations, among which
are the repairs in question. Said deed provides: “any
amount or amounts that the Bank has voluntarily paid
and/or has been compelled to pay or hereafter will
voluntarily and/or will be compelled to pay for the
encumbrance, claim or particular average x x x in
order to save the vessel from any legal seizure or
suits by third parties shall be for the account of SIP x
x x.” Applying Articles 1370, 1371, 1373, and 1374,
the above stipulation interpreted together with the
“Confirmation of Obligation” leaves no room for doubt
that while the bank may indeed pay certain obligations
voluntarily or by choice, there are those that the bank
will be compelled to pay to save the vessels from any
legal seizure or suits by third parties. In other words,
the primary purpose of the contracts is the protection
of the vessels. Among them are liens on the same
under which the obligation to P belongs.
1376.
EXAMPLES:
(1) X rendered services to Y but the contract did not
provide for the amount of compensation to be paid. In
this case, the amount must be determined by the rate
customarily paid in the place where the services were
rendered. (see Arroyo vs. Azur,76 Phil. 493 [1946].)
(2) In a contract, the word “prenda’’ is used. This word
admits of several definitions, as its usage in particular
parts of the country dictates .It is a kind of special
contract which is akin to salda in Ilocano, san grain
Bicol, or mortgage in prenda whereby the debtor
delivers to the creditor the possession of a parcel of
land as security for a loan he has obtained from the
latter who enjoys the usufruct. It may be equated with
the ordinary mortgage. It may be construed also as a
sale with a right of repurchase. (Republic vs.
Intermediate Appellate Court,
1377.
ILLUSTRATIVE CASE:
The ambiguity is in the application for insurance.
Facts: A provision in the application for insurance with
the GSIS states this condition: “That any policy shall
be made effective on the first day of the month next
following the month the first premium is paid x xx.”
Another provision states: “That failure to deduct from
my salary the monthly premiums shall not make that
policy lapse,” and that, “the premium account shall be
considered as indebtedness which I bind myself to
pay the System .”E, an employee of the Bureau of
Public Works died in an airplane crash. It appears,
however, that the Bureau had not remitted to GSIS
even a single premium.
Issue: Has the insurance taken effect?
Held: Yes. The ambiguity created by the operation of
the conditions stated in the application should be
interpreted adversely against the GSIS.
1378.
EXAMPLE:
R gave his car to E. It is not clear, whether the
contract is a donation or a commodatum. The contract
should be presumed as a mere commodatum
because it would transmit lesser rights than a
donation since R retains his ownership of the car.
(2) Onerous contract. — If the contract in question is
onerous (see Art. 1350.), the doubts should be
resolved in favor of the greatest reciprocity of
interests.
EXAMPLE:
D borrowed from C P5,000.00 at 18% interest. It
cannot be determined from the terms of the contract
whether the loan is payable in six (6)months or in one
(1) year. It must be assumed that the period agreed
upon is one (1) year which results in a greater
reciprocity of interest since D can use the money for
one (1) year, and C, on the other hand, can earn
interest due for one (1)year instead of only six (6)
months.
EXAMPLE:
S sold his land to B. S has many lands. It cannot be
determined which land was intended by the parties to
be the subject of the sale. Therefore, the contract
shall be null and void and it is as if the partieshave not
entered into any contract at all.
ILLUSTRATIVE CASE:
The properties covered by the deed of exchange
were not specified and described.
Facts: A deed of exchange was executed between X
and Y, whereby X transferred all her rights in the
estate of her deceased mother located at Iloilo to Y
who, in turn, by way of exchange, conveyed all her
rights to certain real and personal properties situated
at Cotabato. X inherited actually nothing from her
parents. Her share was adjudicated to her siste rwhen
the case for rescission fi led by Y was already
pending. It is provided in paragraph 7 that the deed of
exchange should not be construed as an
acknowledgment by X and Y that they are entitled to
the properties involved therein and that it was
executed “in anticipation of a declaration” of their
rights to the properties. Then, it is stipulated in
paragraph 8 that the parties should take possession
and make use of the properties involved in the deed.
The properties covered by the deed were not
specified and described. While the deed gives the
impression that it involves many properties ,in reality it
refers only to 8,124 square meters of land which Y
would inherit from her uncle and to the 9,000 square
meters representing the share of X in her parents’
estate. However, X rendered impossible the
performance of her obligation under the deed when
she waived her share in favor of her sister.
Issue: Is the exchange valid?
Held: No. The two provisions mentioned are
irreconcilable because the first contemplates that the
properties are still to be awarded or adjudicated to the
parties whereas the second envisages a situation
where the parties have already control and
possession thereof. It is evident from the deed that
the intention of the parties relative to the lots, which
are the objects of the exchange, cannot be definitely
ascertained. This circumstance renders the exchange
void or “inexistent.” (Art. 1409[6].)The rescissory
action of X may be treated as an action to declare
void the deed of exchange.
1379.
1380.
1381.
EXAMPLE:
G is the guardian of W (ward). G sells the property of
W worth P20,000.00 for only P15,000.00.The contract
of sale cannot be rescinded because the lesion4 is
not more than one-fourth. However, if the property is
sold for less than P15,000.00, W can rescind the sale
by proper action in court upon reaching the age of
majority.
EXAMPLE
S sues B for the recovery of a parcel of land. In this
case, the land is a“ thing under litigation. ”If, during
the pendency of the case, B sells the land to C
without the approval of S or of the court, the sale is
rescissible at the instance of S in case he wins in his
suit for the recovery of said land unless C is in legal
possession of the land in good faith. (Art. 1385, par.
2.) S, however, may protect his right by fi ling a notice
of lis pendens. (Sec. 14, Rule 13, Rules ofCourt.)If the
action involves personal property, S may petition the
court for the issuance of an order of attachment
(Secs. 1, 2, Rule 57, Ibid.) or the appointment of a
receiver (Sec. 1, Rule 59, Ibid.) to place the property
incustodia legis
.ILLUSTRATIVE CASE:
The contract in question was executed by debtor after
a judgment had been rendered against him. (see Art.
1387, par. 2.)
Facts: The spouses H and W mortgaged to B (bank)
the property in question in order to defeat the
effectiveness of the decision declaring 1/2as
belonging to C, and to frustrate the collection of the
monetary claims of C for which H and W were
sentenced to pay.
Issue: Is Article 1381 applicable?
Held: Yes. Paragraph 3 of Article 1381 is applicable, it
appearing that C was not able to collect said
monetary claims in view of the third party claim fi led
by B based on the deed of mortgage in question. Said
deed as to the 1/2 belonging to the spouses must,
therefore, be cancelled and rescinded. Although there
is no direct evidence to the effect that they executed
the deed with the purpose of defrauding C, said
purpose may, however, be deduced from the fact that
the deed was executed after an adverse decision had
been rendered against them. But if any doubt is to be
entertained as to the applicability of paragraph 3,
there cannot be any question as to the applicability of
paragraph 4 of the same article. The deed of
mortgage in question has for its object a property in
litigation, and it was executed by H and W without the
knowledge and approval of neither the plaintiff (C) nor
the court having cognizance of the litigation.
1382.
1383.
1384.
EXAMPLES:
(1) G, the guardian of M, a minor was authorized by
the court to sell two parcels of land valued at
P200,000.00 each. G sold the two properties to B for
only P200,000.00.In this case, the entire contract
need not be rescinded. Rescission may properly be
applied only to one parcel to cover the damage
caused by G. (see Art. 1381[1].) But if G or B is willing
to pay the difference ofP200,000.00, rescission is
precluded.(2) S sold his only property, a parcel of land
with an area of 3,000square meters, to B to defraud
C, a creditor of S.If the value of 1/3 of the land is
sufficient to cover the damage caused to C, then the
rescission shall only be to that extent. The alienation
with respect to the 2/3 portion is valid even if B had
acted in bad faith.
1385.
ILLUSTRATIVE CASE:
Lessor sold property leased to a third party in
violation of the “exclusive option to purchase the
same,’’ given to lessee who fi led a suit for specific
performance and annulment of the sale.
Facts: Respondent MT, Inc. leased portions of a
commercial building together with the land owned by
CB, lessor, which it used as a movie theater. Under
two contracts of lease inter alia, MT, Inc. “shall be
given30-days exclusive option to purchase the same,’’
if CB should desire to sell the leased premises. CB
sold the building to ERD, petitioner, which received
rents from MT, Inc. for sometime. Subsequently, MT,
Inc., claiming it had been denied its right to purchase
the leased property in accordance with the lease
contracts with CB, fi led a suit for specific
performance and annulment of sale with prayer to
enforce its “exclusive option to purchase’’ the
property. The dispute between MT, Inc., CB and ERD
reached the Supreme Court (referred to as “Mother
case’’) which rescinded the absolute sale to ERD,
ordered CB to return to ERD the purchase price,
directed ERD to execute the documents necessary to
return ownership of the disputed lots to CB, and
ordered CB to allow MT, Inc. to buy the said lots for
P11,300,000. This decision became final and
executory on March 17,1997. MT, Inc. fi led with the
trial court a motion for execution which was granted.
Subsequently, the Clerk of Court of the Manila
Regional Trial Court, as Sheriff, executed a deed of
conveyance in favor of CB and a deed of sale in favor
of MT, Inc. On the basis of these documents, the
Registry of Deeds of Manila cancelled ERD’s titles
and issued new certificates of title in the name of MT,
Inc. On September 18, 1997, or after the execution of
the decision of the Supreme Court, ERD fi led with the
Regional Trial Court an action for collection of a sum
of money, to wit: (1) the sum of P11,548,941.76 plus
legal interest, representing the total amount of unpaid
monthly rentals/reasonable compensation from June
1, 1987 to July 31, 1997; (2) the sums of P849,567.12
and P458,853.44 a month, plus legal interest as
rental/reasonable compensation for the use and
occupation of the property from August 1, 1997 to
May 1, 1997; and (3) the sum of P500,000 as and for
attorney’s fees, plus other expenses of litigation, and
the costs of the suit.
Issue: Is ERD entitled to back rentals?
Held: No. (1) ERD never took actual control and
possession of the property sold to it. — “From the
peculiar facts of this case, it is clear that petitioner
never took actual control and possession of the
property sold, in view of respondent’s timely objection
to the sale and the continued actual possession of the
property. The objection took the form of a court action
impugning the sale which, as we know, was rescinded
by a judgment rendered by this Court in the mother
case. It has been held that the execution of a contract
of sale as a form of constructive delivery is a legal
fiction. It holds true only when there is no impediment
that may prevent the passing of the property from the
hands of the vendor into those of the vendee. When
there is such impediment, “fiction yields to reality —
the delivery has not been effected. Hence,
respondent’s opposition to the transfer of the property
byway of sale to ERD’s was a legally sufficient
impediment that effectively prevented the passing of
the property into the latter’s hands.’’
ILLUSTRATIVE CASE:
Applicability of Article 1385 to contracts “rescinded”
by mutual consent.
Facts: B, on account of having purchased lands from
S, took possession of the same and collected their
products. Subsequently, Band S, by virtue of another
contract, “rescinded” the sale, and as a result thereof,
B returned the lands to S who, in turn, bound himself
to return to B the part of the price that the latter has
paid.
Issue: Is B obliged to return to S the products of the
land that B collected during his possession?
Held: No. Rescission, in the light of Articles 1381,
1382, and 1385, is a relief which the law grants, on
the premise that the contract is valid, for the
protection of one of the contracting parties and third
persons from any injury and damage the contract may
cause, or to protect some incompatible and
preferential rights created by the contract. Article
1385refers to contracts that are rescissible in
accordance with law in the cases expressly fixed
thereby but does not refer to contracts that are
rescinded by mutual consent and for the mutual
convenience of the contracting parties. The rescission
in question did not originate in any of the causes
specified in Articles 1381 and 1382, nor is it any relief
for the purposes sought by these articles. Its effects
should be determined by the agreement of the parties
or by the application of other legal provisions not by
Article1385.The possession of B, until the contract of
sale was dissolved, and the lands returned by him,
was in good faith. As such possessor in good faith, he
is entitled to the fruits received before his possession
was legally interrupted (Art. 541.), and, therefore, he
is not obliged to return them toB in the absence of any
covenant.
1386.
1387.
EXAMPLES:
(1) Alienation by gratuitous title. — R made a donation
of a parcel ofland to E. Before the date of the
donation, R had contracted several debts. With the
donation to E, the remaining property of R is not
sufficient to pay all his debts.
ILLUSTRATIVE CASES:
1. What was transferred by the debtor was merely the
business name of his store, not the store itself or its
furniture.
Facts: A big fi re totally burned the furniture store of X
and its contents. X was then a furniture dealer under
the business name and style “Modern Furniture
Store.” Not long thereafter, Y, X’s brother, puton the
same site a new furniture store, adopting the same
business name and style. Y secured a new license
and privilege tax to operate the store. On the same
date, X verbally transferred the “Modern Furniture
Store” to Y. Subsequently, a judgment was rendered
against X in favor of Z in an action for recovery of a
sum of money fi led by Z when X was then a furniture
dealer.
Issue: Does Article 1387 on presumption of fraud
apply?
Held: No, since there was in fact no transfer of the
store or its furniture or its contents. The transfer refers
merely to the business name and style“ Modern
Furniture Store.” The store of Y and its contents are
completely new coming from his own capital. suit
against latter’s son for rescission of transfer of the
same property made by the father to the son.
Facts: The house in question was originally entered in
the assessment rolls in the name of S, judgment
debtor of C to whom the house was sold at public
auction pursuant to a writ of execution. Later, it was
registered in the name of B son of S who mortgaged it
to a bank to secure the payment of a loan. The bank
foreclosed the mortgage and bought the land together
“with all the buildings and improvements” thereon. C
charges that any transfer by from S to B is fictitious,
fraudulent and null and void and claims damages
against B and the Bank.
Issue: Would the action by C for rescission of the
transfer of the house from S to B and the claim for
damages prosper?
Held: No. The bank’s registered mortgage is superior
to the judgment and levy and sale in favor of C.
Furthermore, S is not a party to the suit against B and
the bank. S is an indispensable party. For any
decision on either action would affect him. He is
entitled to be heard, to defend the validity of the
transfer to his son, B.
ILLUSTRATIVE CASE:
The sale by a debtor of property was made while
there was a pending suit for collection of money
against him.
Facts: S sold to B a lot on January 4, 1956. The sale
was inscribed in the land registry on February 15,
1956. Meantime, since November,1955, there was
pending against S a complaint fi led by C for the
collection of a sum of money. Judgment was rendered
in favor of C on February27, 1956. The land was sold
at public auction on October 17, 1956. The sheriff’s
certificate of sale was executed on October 29, 1956,
followed by a definite deed of sale on January 9, 1959
in C’s favor. C seeks to have the prior sale to B set
aside on the ground that it was executed in fraud of C
upon the presumption set forth in Article 1387.
Issue: Does the presumption of fraud apply?
Held: No. The judgment obtained by C against S,
owner of the land in dispute, was rendered after the
sale of the same to B. Nor was a writ of attachment
issued. It is true that the sale to B was made after suit
had been begun by C against S. This lone
circumstance itself alone, however, Is not sufficient to
prove fraud. There is no showing that B knew of the
pending action.
1388.
EXAMPLES:
(1) S sold his car to B in order to avoid the payment of
his debt to C, his creditor. B knew of S’s purpose. If
the sale is rescinded, B must return the car. Should
the car be destroyed with or without his fault, then C is
entitled to be indemnified for damages by B.(2)
Suppose, B transferred the car to D who also acted in
bad faith. Then D sold it to E who did not know of the
purpose behind the previous conveyance. As the fi rst
acquirer. B is liable first. If he cannot pay, then D will
be liable. If B acted in good faith, the good or bad faith
of D is not important ,except where D connived with S
to make B a mere innocent intermediary in which case
D can be held liable.(3) Without making any inquiry, B
bought a parcel of land from S ,who is not the
registered owner, although the land object of the
transaction is registered. May B be considered a
purchaser in good faith? No. “One who buys from one
who is not the registered owner is expected to
examine not only the certificate of title but all factual
circumstances necessary for him to determine if there
are any flaws in the title of the transferor or in his
capacity to transfer the land.”

1389.

1390.

1391.

1392

.1393.

EXAMPLES:

(1) S, a minor, sold his land to B. Upon reaching the

age of majority, S, with full knowledge of his rights in
the premises, instead of repudiating the contract,
disposed of the greater part of the proceeds, or
collected the unpaid balance of the purchase price
from B. In this case, there is tacit ratification by S.