hidden defects

FIRST DIVISION

[ G.R. No. L-30965, November 29, 1983 ]

G.A. MACHINERIES, INC., PETITIONER, VS. HORACIO YAPTINCHAY, DOING BUSINESS UNDER THE NAME AND STYLE "HI-WAY EXPRESS" AND THE COURT OF APPEALS, RESPONDENTS.

D E C I S I O N

GUTIERREZ, JR., J.:

Petitioner G. A. Machineries, Inc. (hereinafter referred to as GAMI) seeks the reversal of the decision of the Court of First Instance of Rizal, affirmed by the Court of Appeals in the original case entitled Horacio Yaptinchay, doing business under the name and style "Hi-way Express", v. G. A. Machineries Inc. for recovery of damages.

The antecedent facts of the case are not seriously disputed and are summarized by the Court of Appeals as follows:

"Sometime early in January, 1962 appellant GAMI, thru a duly authorized agent, offered to sell a brand-new Fordson Diesel Engine to appellee Horacio Yaptinchay, owner of the freight hauling business styled 'Hi-Way Express'.  Relying on the representations of appellant's representative that the engine offered for sale was brand-new, appellee agreed to purchase the same at the price of P7,590.00.  Pursuant to the contract of sale thus entered into, appellant delivered to appellee, on January 27, 1962, one (1) Fordson Diesel Engine assembly, Model 6-D, with Engine Serial No. A-212193, at 1500 RPM, with fly wheel, fly wheel housing, fuel injection assembly, exhauster, fuel filter, oil filter, fuel lift pump, plus conversion kit for F-500, subject to the standard warranties, particularly the representation, relied upon by appellee, that the same was brand-new.  Said engine was installed by appellant in Unit No. 6 of the Hi-Way Express.

"Within the week after its delivery, however, the engine in question started to have a series of malfunctions which necessitated successive trips to appellant's repair shop.  Thus, it first sprang an oil leak such that, on February 6, 1962, it was brought in to '1.  Adjust idling of engine and tappete clearance; 2.  Inspect and remedy oil leaks of engine; 3.  Replace clutch disc and pressure plate w/original; and 4.  Replace release bearing hub trunion bolt' (Exhibit C).  Thereafter, the malfunctioning persisted and, on ins­pection, appellee's mechanic noticed a worn out screw which made appellee suspicious about the age of the engine.  This prompted appellee, thru his lawyer, to write appellant a letter, dated February 10, 1962, protesting that the engine was not brand-new as represented (Exhibit E).  Because of the recurring defects, the engine was again submitted to appellant's shop to '1.  Inspect engine oil leaks on cylinder head; 2.  Check up propeller shaft (vibrating at high speed); and 3.  Tighten bolts of pump.' (Exhibit F).  All these notwithstanding, the engine could still not be returned into operation because it continued not to function well.  In fact, it was sent back to appellant's shop on the same day it was delivered after the last repair work done on it.  Another check up was thereafter required to be made on March 5, 1962 (Exhibit G).  Then, again, on March 10, 1962, the engine was back at the repair shop to '1.  Inspect leaks on No. 1 & 5 high pressure pipe; and 2.  Change engine oil with flushing & oil element' (Exhibit H).  Still, the oil leaks remained unchecked and, on July 2, 1962, one last effort to '1.  Remedy engine oil leaks' (Exhibit 1) was made, but all to no avail because, instead of improving, the engine's condition became worse as it developed engine knock and appellee had to stop its operation altogether due to its unserviceability.

"These repeatedly recurring defects and continued failure of appel­lant to put the engine in good operating condition only served to firm up in appellee's mind the suspicion that the engine sold to him was not brand-new as represented.  He then sought the assistance of the PC Criminal Investigation Service to check on the authenticity of the serial number of the engine, with due notice to appellant.  Scientific examination and verification tests revealed that the original motor number of the engine aforesaid was tampered.  Further inquiries by appellee from the Manila Trading Company, which also handles the importation and distribution of similar engines, also disclosed that, unlike the engine delivered to appellee whose engine body and injection pump were painted with two different colors, brand-new engines are painted with only one color all over.

"Thus convinced that a fraudulent misrepresentation as to the character of the engine had been perpetrated upon him, appellee made demands from appellant for indemnification for damages and eventually instituted the present suit.

"In its defense, appellant interposed prescription of the action, denied the imputation of misrepresenta­tion, and disputed the propriety and amount of damages claimed." x x x

After trial on the merits, the trial court ruled in favor of plaintiff Yaptinchay as follows:

"FOR ALL THE FOREGOING CONSIDERATIONS, the Court hereby renders judgment ordering the defendant, G.A. Machineries Inc., to pay the plaintiff, Horacio Yaptinchay, actual damages sustained in the sum of P54,000.48; to reimburse the purchase price of the Fordson diesel engine in the amount of P7,590.00; and to pay attorney's fees to plaintiff's counsel on the sum of P2,000.00 and costs.

"Plaintiff is, likewise, ordered to return the Fordson diesel engine with serial number A-21219 to the defendant."

Defendant GAMI appealed the decision to the Court of Appeals.  As stated earlier, the decision was affirmed by the Appellate Court.  A motion for recon­sideration was denied.  Hence, the instant petition.

Petitioner GAMI raises the following alleged errors of judgment of the respondent court:

I

THE COURT OF APPEALS ERRED IN NOT APPLYING THE PRESCRIPTIVE PERIOD OF ARTICLE 1571 OF THE CIVIL CODE TO THE CASE AT BAR.

II

THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE IN THE CASE OF ASOCIACION ZANJERA CASILIAN vs. CRUZ, 46 O.G. 4813, 4820 REGARDING ADMIS­SION BY FAILURE TO REBUT, TO THE ISSUE OF ACTUAL DAMAGES, WHICH MUST BE PROVED BY THE BEST AND COMPETENT EVIDENCE.

III

THE COURT OF APPEALS ERRED IN AWARDING ACTUAL DAMAGES IN THE FORM OF UNREALIZED PROFITS (LUCRUM CESSANTE) WHEN THE ISSUE RAISED BY THE PLEADINGS REFERS ONLY TO ALLEGED ACTUAL DAMAGES IN THE FORM OF DAMNUM EMERGENTE.

IV

THE COURT OF APPEALS ERRED IN FINDING THAT THE FORDSON DIESEL ENGINE DELIVERED BY PETITIONER TO RESPONDENT HORACIO YAPTINCHAY WAS NOT BRAND NEW, REACHING SUCH FINDING BY WAY OF A MANIFESTLY MISTAKEN INFERENCE AND ON THE BASIS OF A MISAPPREHENSION OF FACTS AND SOLELY ON THE GROUND OF SPECULATION, SURMISES AND CONJECTURES.

The assignments of errors raise the following issues:  1) whether or not the respondent's cause of action against the petitioner had already pres­cribed at the time the complaint was filed in the trial court; 2) whether or not the factual findings of both the trial and appellate courts as regards the subject Fordson diesel engine are supported by evidence and 3) whether or not the award of damages was justified considering evidence on record.

The first issue is premised on the petitioner's proposition that the respondent's cause of action was for breach of warranty against hidden defects as pro­vided under Articles 1561 and 1566 of the Civil Code.  Article 1571 of the Civil Code provides for a six-month prescriptive period from the delivery of the thing sold for the filing of an action for breach of warranty against hidden defects.  According to petitioner GAMI when respondent Yaptinchay filed the case with the trial court, more than six months had already lapsed from the time the alleged defective engine was delivered and, therefore, the action had prescribed.

The petitioner contends that Yaptinchay's asserted cause of action was premised and anchored on the delivery by the defendant of a DEFECTIVE ENGINE and that the allegations in the complaint that the engine was not brand new are clearly mere specifica­tions of the precise nature of the hidden defects.

A cursory reading of the complaint shows that the petitioner's arguments are not well-taken.

The main thrust of the complaint is the conten­tion that the Fordson diesel engine delivered by the petitioner to the respondent was not brand-new contrary to the representations of the former and the expectations of the latter.  The complaint was couched in a manner which shows that instead of the brand-new Fordson diesel engine which was bought by the respondent from the petitioner, another engine which was not brand new was delivered resulting in the damages sought to be recovered.  It is evident therefore, that the complaint was for a breach of a contract of sale rather than a breach of warranty against hidden defects.  This is so because an action for breach of warranty against hidden defects presupposes that the thing sold is the same thing delivered but with hidden defects.  Consequently, the six-month prescrip­tive period under Article 1571 of the Civil Code is not applicable.

The petitioner takes exception to the factual findings of the appellate court and argues:  1) the fact that the Fordson diesel engine developed oil leaks does not necessarily imply that the said engine was not brand new and 2) the testimony of laboratory technician Captain Garcia of the Philippine Constabulary to the effect that the motor or serial number of the engine was tampered does not deserve credence.

The first argument is premised on the proposition that even brand-new engines in many cases develop oil leaks.  To support this proposition the petitioner presented documentary evidence (Exhibits "5", "7", "8", "9", "10", "11", "12", "13", "14", "15", "16", and "17") consisting of job orders for allegedly brand new engines which developed oil leaks.

An examination of the documentary evidence shows that the job orders were for twelve (12) different engines.  Moreover, the petitioner's witness who testified on the said job orders admitted that some engines were repaired only after a few months.  On the other hand, the subject Fordson diesel engine was repaired on the complaint not only of oil leaks but also replacement of clutch disc and pressure plate, replacement of release bearing hub trunion belt, and other defects within a week after it was delivered to the respondents or on February 6, 1962 (Exhibit "C").  Thereafter it was returned for more repairs on February 28, 1962 (Exhibit "F"), on March 10, 1962 (Exhibit "H") and on July 2, 1962 (Exhibit "I").  The documentary evidence of the petitioner consisting of the job orders of the supposed brand-new engines which also developed oil leaks is no reason to doubt the trial court's and appellate court's factual findings.  In fact, the documentary evidence and the admissions of the petitioner's witness enhance the respondent's allegation that the Fordson diesel engine sold to him was not brand-new.

The second argument questions Captain Garcia's findings that the original motor number of the engine was tampered as shown by the presence of fragmentary numbers which appeared in the engine when he conducted a macro-etching test thereon by applying acid on the surface of said engine.  The petitioner emphasizes Captain Garcia's alleged testimony that "x x x what he calls fragmentary numeral" is not definitely a numeral or a fragment of a numeral and states that the same could have been caused by any molecular pressure applied to the area of the metal where it appeared.  In effect, the petitioner insists that the supposed fragmentary numerals could have been merely scratches or indentations near the serial number of the motor which might have been caused by sparks from the welding process.

The arguments are not well-taken.  First, the statements attributed to Captain Garcia are not accurate.  An examination of the record shows that Captain Garcia positively stated the fragmentary numeral to be a numeral or a number but in the absence of key portions he could not positively identify the exact number or numeral.  He discounted the possibility that such fragmentary numerals could be mere scratches.  Second, the witness did not categorically state that any molecular pressure could have caused the fragmentary numeral.  Hence, Captain Garcia under cross-examination stated:

"Q.  This fragmentary numeral could be caused deliberately by tamper­ing with the engine number or by other factor such as scratches or burning by other foreign element, is that right?

"A    No, sir, they can be caused by scraping but not by scratching, because by scraping there is molecular disturbance of metal.

"Q   When you say molecular disturbance does it mean you first apply in the area, or would it disturb the molecule in or around that area?

"A    Once you stamped the number, you impressed it and there is molecular disturbance in the structure of the metal.

"Q   If the metal is burned, there is also molecular disturbance in the metal, is that correct?

"A    The metal will only expand.

"Q   There is no spark of the machine could not cause the molecular disturbance in the steam, is that right?

"A    It cannot"

(T.S.N., Iluminado C. Palisoc, February 5, 1965, pp. 99-100)

The petitioner's argument that the Court of Appeals findings are based on manifestly mistaken inferences, misapprehension of facts, and purely on speculation, surmises, and conjectures is without merit.

The Fordson diesel engine delivered to the res­pondent was not brand-new.

We agree with the Court of Appeals that:

"Indeed, it would be too much to say that the successive malfunctions of the engine, the defects and other discrepancies therein that cropped up so soon after its delivery, the numerous trips it had to appellant's repair shop the demonstrable tampering with its serial number, and its ultimate breakdown despite appellant's attempts to put it into good working order could be attri­buted to mere coincidence.  If all these mean anything at all, it can only be that the engine aforesaid was not really brand new.

The petitioner committed a breach of contract against the respondent.  The misrepresentation of the quality of the subject Fordson diesel engine is tantamount to fraud or bad faith.  The return of the P7,590.00 purchase price with legal interest from the date of purchase and computed pursuant to our ruling in Viloria v. Court of Appeals (G.R. No. 63398, June 29, 1983) is justified.  The next question refers to the award of actual damages in the amount of P54,000.48.  This amount covers the probable income which the respondent failed to realize because of the breach of contract.  Is the award of damages in the form of lucro cessante justified?

The law on the matter is spelled out in Raagas v. Traya (22 SCRA 839), where we stated:

"x x x In Abubakar Tan v. Tian Ho, L-18820, December 29, 1962 and Lim Giok v. Bataan Cigar and Cigarette Factory, L-15861, April 16, 1960, we held that even if the allegations regarding the amount of damages in the com­plaint are not specifically denied in the answer, such damages are not deemed admitted.  In Tomassi v. Villa-Abrille, L-7047, August 21, 1958, Suntay Tanjangco v. Jovellanos, et al., L-12332, June 30,1960, and Delfin v. Court of Agrarian Relations, et al., L-23348, March 14, 1967, 1967 A PHILD 453, we declared in no uncertain terms that actual damages must be proved, and that a court cannot rely on 'speculation, conjecture or guesswork' as to the fact and amount of damages, but must depend on actual proof that damages had been suffered and on evidence of the actual amount.x x x"

The fact that the defendant does not dispute the amount of this kind of damages does not necessarily imply that the other party outright is entitled to the award of damages.

Article 2200 of the Civil Code entitles the respon­dent to recover as compensatory damages not only the value of the loss suffered but also prospective profits while Article 2201 entitles the respondent to recover all damages which may be attributed to the non-performance of the obligation.  However, in order to recover this kind of damages, the plaintiff must prove his case -

" 'When the existence of a loss is established, absolute certainty as to its amount is not required.  The benefit to be derived from a contract which one of the parties has absolutely failed to perform is of necessity to some extent, a matter of speculation, but the injured party is not to be denied all remedy for that reason alone.  He must produce the best evidence of which his case is sus­ceptible and if that evidence warrants the inference that he has been damaged by the loss of profits which he might with reasonable certainty have anticipated but for the defendant's wrongful act, he is entitled to recover." (Cerreno v. Tan Chuco, 28 Phil. 312 quoted in Central Bank of the Philippines v. Court of Appeals, 63 SCRA 431, 457).

Applying the foregoing test to the instant case, we find the evidence of the respondent insufficient to be considered within the purview of "best evidence".  The bare assertion of the respondent that he lost about P54,000.00 and the accompanying documentary evidence presented to prove the amount lost are inadequate if not speculative.  The document itself merely shows that everytime a truck travels, Mr. Yaptinchay earns P369.88.  This amount is then multiplied by the number of trips which the truck was allegedly unable to make.  The estimates were prepared by a certain Dionisio M. Macasieb whose identity was not even revealed by the respondent.  Mr. Yaptinchay was in the freight truck business.  He had several freight trucks among them the truck with the subject Fordson diesel engine, covering the route from Manila to Baguio.  To prove actual damages, it would have been easy to present the average actual profits realized by the other freight trucks plying the Manila-Baguio route.  With the presentation of such actual income the court could have arrived with reason­able certainty at the amount of actual damages suffered by the respondent.  We rule that the award of actual damages in the amount of P54,000.08 is not warranted by the evidence on record.

WHEREFORE, the decision appealed from is hereby modified.  The award of actual damages in the amount of P54,000.48 is deleted.  The petitioner shall also pay six (6%) percent interest per annum on the P7,590.00 purchase price from January 27, 1962 to July 29, 1974 and twelve (12%) percent interest per annum from July 30, 1974 until the purchase price is reimbursed.  In all other respects, the appealed decision is affirmed.

SO ORDERED.

Teehankee, (Chairman), Melencio-Herrera, Plana, and Relova, JJ., concur.

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hidden defects

SECOND DIVISION

[ G.R. No. 173575, February 02, 2011 ]

IMMACULATE CONCEPTION ACADEMY AND THE LATE DR. PAULO C. CAMPOS SUBSTITUTED BY HIS HEIRS, DR. JOSE PAULO E. CAMPOS, ATTY. PAULO E. CAMPOS, JR. AND DR. ENRIQUE E. CAMPOS,^[1] PETITIONERS, VS. AMA COMPUTER COLLEGE, INCORPORATED, RESPONDENT.

DECISION

ABAD, J.:

This case is about the rescission of a lease contract on the ground that the building turned out to be structurally unsafe even as the lessee had previously inspected the same.

The Facts and the Case
Immaculate Conception Academy (ICA) owned a three-storey building in Dasmariñas, Cavite.  The property caught the eye of AMA Computer College, Inc. (AMA) and it sought to buy the same but did not succeed.  Subsequently, after inspecting the building, AMA settled on leasing it.^[2]  The parties signed a contract of lease for 10 years from September 22, 1997 to September 21, 2007.  The agreed rent was P561,000.00 plus VAT per month.  In accordance with the contract, AMA paid ICA P500,000.00 in earnest money, three months advance rentals, and security deposit.

After the signing of the contract, officials of AMA re-inspected the building and began renovating it for the upcoming school year.  But during an inspection, AMA's Chief Operating Officer for its Cavite Campus noted several cracks on the floor and walls of the building's second storey.  This prompted more inspections.  Eventually, AMA applied with the municipal engineer's office for an occupancy permit.^[3]  After inspection, Municipal Engineer Gregorio C. Bermejo wrote AMA a letter dated September 29, 1997, detailing his findings and conclusion, thus:

x x x x

[The] inspection reveals the following defects in the building, such as:

1. Multiple cracks in the second floor slabs showing signs of insufficient or improper reinforcements.

2. Deflections in the second floor slabs and bears ranging from 20 mm to 50 mm which are beyond normal and allowable.

3. Unusual vibrations in the second floor level which are apparent when subjected to live loadings.

Based from the above observations we are in doubt as to the structural soundness and stability of that three-storey building.  Whether it can withstand against any natural calamity is presently under question.  We are convinced that the building is structurally unsafe for human occupancy.^[4]

On the same date, September 29, 1997, AMA wrote ICA demanding the return of all that it paid within 24 hours from notice. AMA cited the building's structural deficiency, which it regarded as a violation of ICA's implied warranty against hidden defects.  AMA did not pursue the lease contract and instead leased another property from a different party.

When its request for reimbursement remained unheeded, AMA filed an action^[5] for breach of contract and damages with prayer for the issuance of a writ of preliminary attachment against ICA before the Regional Trial Court (RTC) of Dasmariñas, Cavite. In its complaint, AMA alleged that ICA (represented by the late Dr. Paulo C. Campos) fraudulently entered into the lease agreement, fraudulently breached the same, and violated its implied warranty against hidden defects; that despite knowledge of the instability of the building, ICA insisted on offering it to AMA; and that ICA had been unable to produce the building's certificate of occupancy. AMA prayed for restitution of the amounts it paid to ICA with interest and award of exemplary damages and attorney's fees.

In its Answer, ICA denied that AMA asked for the building's certificate of occupancy.  ICA alleged that it was AMA's responsibility to secure the certificate from the municipal government as stipulated in the contract.  Further, ICA claims that it never misrepresented the condition of the building and that AMA inspected it before entering into the contract of lease.

In its Decision dated April 8, 2003, the RTC took AMA's side and ruled that the latter entered into the lease contract without knowing the actual condition of the building. The RTC held that ICA failed to disclose the building's condition, thus justifying AMA's rescission of the contract.  The RTC ordered ICA to return the P4,072,150.00 it got from AMA, representing five months security deposit and three months advance rentals plus interest of 6% per annum, from January 19, 1998 until full payment and, further, to pay AMA P300,000.00 and P200,000.00 as exemplary damages and attorney's fees, respectively.^[6]

On appeal,^[7] the Court of Appeals (CA) rendered a Decision dated February 27, 2006, holding that ICA did not violate its implied warranty against hidden defects, misrepresent the building's condition, or act in bad faith since AMA inspected the building before it entered into the lease agreement.  It should have noticed the patent cracks on the second floor.  Still, the CA ruled that AMA was justified in rescinding the lease contract considering ICA's default in repairing the defects in the building's structure.  The CA held that AMA's demand for the certificate of occupancy amounted to a demand for repairs. Thus, the CA affirmed the decision of the RTC but deleted the grant of exemplary damages and attorney's fees.  ICA now turns to this Court for succor.

The Issues Presented
The issues presented in this case are:

1. Whether or not AMA was justified in rescinding the contract of lease either on account of ICA's fraudulent representation regarding the condition of its building or on account of its failure to make repairs on the same upon demand; and

2. Whether or not ICA and Dr. Campos are entitled to their claims for damages against AMA.

The Court's Rulings
One.  The Court is not convinced that AMA was justified in rescinding the contract of lease on account of ICA's alleged fraudulent representation regarding the true condition of its building. The fact is that AMA's representatives inspected the building to determine if it was suitable for their school's needs.  The cracks on the floor and on the walls were too obvious to suggest to them that something was amiss.  It was their fault that they did not check the significance of such signs.  ICA for its part was candid about the condition of the building and did not in fact deny AMA access to it.

Apparently, AMA did not, at the beginning, believe that the cracks on the floor and on the walls were of a serious nature.  It realized that such cracks were manifestations of structural defects only when it sought the issuance of a municipal occupancy permit.  The local building official inspected the cracks and concluded that they compromised the building's structural safety.

The CA ruled that, upon the discovery of the building's structural defects, AMA had the right to seek their repair by ICA on the strength of the following stipulations in their contract:^[8]

x x x x

LESSEE shall comply with any and all laws, ordinances, regulations or orders of national or local governments concerned arising from the occupation and/or sanitation of the leased PROPERTY.

x x x x

8. REPAIRS - LESSEE hereby agrees that all minor repairs or those caused by the use of the leased PROPERTY or use due to any ordinary wear and tear shall be for the account of the LESSEE while the major repairs or those affecting the structural condition of the building and those due to fortuitous events shall be for the account of the LESSOR.  (Underscoring supplied)

The CA ruled that AMA's demand for ICA to produce a certificate of occupancy covering the building from the local building official amounted to a demand for ICA to undertake a repair of its structural defects.

But this ruling reads from AMA's letter a demand for repair that was not there.  AMA simply asked ICA to produce a certificate of occupancy for the building even when the contract placed on AMA the responsibility for complying with the government's occupancy requirement.  Indeed, it was AMA that applied for the certificate of occupancy.^[9]  A demand to repair the defects in the building's structure, a clearly difficult and costly proposition, cannot be so easily implied from AMA's demand that ICA produce such certificate.

True, the quoted provision of the lease contract requires ICA to undertake major repairs "affecting the structural condition of the building and those due to fortuitous events."  But AMA's outright rescission of the lease contract and demand that ICA return the deposit and advance rentals it got within 24 hours from such demand precluded ICA, first, from contesting the findings of the local building official or getting some structural specialists to verify such findings or, second, from making the required repair.  Clearly, AMA's hasty rescission of the contract gave ICA no chance to exercise its options.

AMA belatedly invokes Article 1660 of the Civil Code which reads:

Art. 1660.  If a dwelling place or any other building intended for human habitation is in such a condition that its use brings imminent and serious danger to life or health, the lessee may terminate the lease at once by notifying the lessor, even if at the time the contract was perfected the former knew of the dangerous condition or waived the right to rescind the lease on account of this condition.

AMA is actually changing its theory of the case.  It claimed in its complaint that it was entitled to rescind the contract of lease because ICA fraudulently hid from it the structural defects of its building.  The CA did not agree with this theory but held that AMA was nonetheless entitled to rescind the contract for failure of ICA to make the repairs mentioned in the contract. Now, AMA claims that it has a statutory right to rescind the lease contract on the ground mentioned in Article 1660, even if it may be deemed to have initially waived such right.

Article 1660 is evidently intended to protect human lives.  If ICA's building was structurally defective and in danger of crashing down during an earthquake or after it is made to bear the load of a crowd of students, AMA had no right to waive those defects.  It can rescind the lease contract under Article 1660. But this assumes that the defects were irremediable and that the parties had no agreement for rectifying them.  As pointed out above, the lease contract implicitly gave ICA the option to repair structural defects at its expense.  If that had been done as the contract provides, the risk to human lives would have been removed and the right to rescind, rendered irrelevant.

In any event, the fact is that the local building official found ICA's building structurally defective and unsafe. Such finding is presumably true.^[10]  For this reason, ICA has no justification for keeping AMA's deposit and advance rentals.  Still, the Court holds that AMA is not entitled to recover more than the return of its deposit and advance rental considering that, contrary to AMA's claim, ICA acted in good faith and did not mislead it about the condition of the building.

Two.  Aside from seeking the dismissal of the complaint, ICA and Dr. Campos separately seek moral and exemplary damages in the amount of P90 million and P10 million plus attorney's fees and cost of suit.

To be entitled to moral damages, ICA needed to prove that it had a good reputation and that AMA's action besmirched the same.^[11]  Such proof is wanting in this case.  As for Dr. Campos, he has amply proved that he suffered mental anguish, serious anxiety, and social humiliation following AMA's unfounded accusation that he fraudulently misled AMA regarding the structural condition of ICA's building.  However, due to his untimely demise before the finality of this case, his claim for moral damages does not survive and is not transmissible to his substitutes, for being extremely personal to him.^[12]

Since AMA acted in a reckless, wanton, oppressive, and malevolent manner in imputing fraud and deceit on ICA and Dr. Campos, the Court finds ground for awarding them exemplary damages.  Further, the Court holds that, having been compelled to litigate in order to protect their interests, ICA and Dr. Campos are also entitled to attorney's fees.

WHEREFORE, the Court GRANTS the petition and REVERSES and SETS ASIDE the Decision of the Court of Appeals in CA-G.R. CV 82266 dated February 27, 2006.  Further, the Court:

1. DIRECTS petitioner Immaculate Conception Academy to return to respondent AMA Computer College, Inc. its security deposit and advance rentals for the lease of the subject building totaling P4,072,150.00 plus interest of 6% per annum from the date of the finality of this decision until it is fully paid; and

2. DIRECTS respondent AMA Computer College, Inc. to pay the heirs of Dr. Paulo C. Campos, namely, Jose Paulo, Paulo, Jr., and Enrique, all surnamed Campos and the Immaculate Conception Academy P100,000.00 as exemplary damages and P50,000.00 as attorney's fees.

SO ORDERED.

Carpio, (Chairperson), Nachura, Peralta, and Mendoza, JJ., concur.

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^[1] Per Resolution dated December 3, 2007.

^[2] TSN, October 15, 1998, p. 26.

^[3] TSN, November 21, 2000, p. 5.

^[4] Records, Vol. I, p. 28.

^[5] Docketed as Civil Case 1662-98.

^[6] Thereafter, AMA moved for execution of the Decision dated April 8, 2003 pending appeal which the RTC granted.  ICA questioned the Order of the RTC allowing execution of the decision pending appeal on certiorari with the CA.  The CA reversed the Order of the RTC and disallowed the execution of the decision. AMA filed a petition for review on the decision of the CA and is now pending before this Court [G.R. 161398].

^[7] Docketed as CA-G.R. CV 82266.

^[8] Records, Vol. I, pp. 12-17.

^[9] Supra note 3.

^[10] Rules of Court, Rule 131, Sec. 3, "(m) That official duty has been regularly performed;" x x x.

^[11] Manila Electric Company v. T.E.A.M. Electronics Corporation, G.R. No. 131723, December 13, 2007, 540 SCRA 62, 81-82, cited in Handbook on Philippine Commercial Law, 2^nd Ed., Divina, N., 2010.

^[12] See Bonilla v. Barcena, 163 Phil. 516, 521 (1976), cited in Cruz v. Cruz, G.R. No. 173292, September 1, 2010 and Ruiz v. Court of Appeals, 363 Phil. 263, 269 (1999): "The question as to whether an action survives or not depends on the nature of the action and the damage sued for.  In the cause of action which survive, the wrong complained [of] affects primarily and principally property and property rights, the injuries to the person being merely incidental, while in the causes of action which do not survive, the injury complained of is to the person, the property and rights of property affected being incidental." (Emphasis supplied)

warranty against hidden defects

THIRD DIVISION

[ G.R. No. 148173, December 10, 2004 ]

SUPERCARS MANAGEMENT & DEVELOPMENT CORPORATION, REPRESENTED BY ITS PRESIDENT BENIGNO CHAN, PETITIONER, VS. THE LATE FILEMON FLORES, SUBSTITUTED BY HIS SURVIVING SPOUSE, NORA C. FLORES,^[1] RESPONDENT.

D E C I S I O N

SANDOVAL-GUTIERREZ, J.:

Before us is a petition for review on certiorari assailing the Decision^[2] dated November 29, 2000 and Resolution^[3] dated April 26, 2001, both issued by the Court of Appeals in CA-G.R. CV No. 40419, entitled “Filemon Flores vs. Supercars Management & Development Corporation, Mamerto Catley, Pablito Marquez, and Rizal Commercial Banking Corporation.”

In the second week of December 1988, Filemon Flores, respondent, purchased from Supercars Management and Development Corporation, petitioner, an Isuzu Carter Crew Cab for P212,000.00 payable monthly with a down payment equivalent to 30% of the price or P63,600.00. The balance was to be financed by the Rizal Commercial Banking Corporation (RCBC). The sale was coursed through Pablito Marquez, petitioner’s salesman.

Upon delivery of the vehicle on December 27, 1988, respondent paid petitioner the 30% down payment, plus premium for the vehicle’s comprehensive insurance policy amounting to P7,374.80. The RCBC financed the balance of the purchase price. Its payment was secured by a chattel mortgage of the same vehicle.

A day after the vehicle was delivered, respondent used it for his family’s trip to Bauang, La Union. While traversing the national highway in Tarlac, Tarlac, the fan belt of the vehicle snapped. Then its brakes hardened after several stops and did not function properly; the heater plug did not also function; the engine could not start; and the fuel consumption increased.^[4]

Upon their return to Manila in the first week of January 1989, respondent complained to petitioner about the defects of the vehicle. Marquez then had the vehicle repaired and returned it to respondent that same day, assuring the latter that it was already in good condition.

But after driving the vehicle for a few days, the same defects resurfaced, prompting respondent to send petitioner a letter dated January 30, 1989 rescinding the contract of sale and returning the vehicle due to breach of warranty against hidden defects. A copy of the letter was furnished RCBC.

In response to respondent’s letter, petitioner directed Marquez to have the vehicle fixed. Thereafter, he returned the vehicle to respondent with the assurance that it has no more defects. However, when respondent drove it for a few days, he found that the vehicle was still defective.

Hence, on February 7, 1989, respondent sent petitioner another letter restating that he is rescinding the contract of sale, a copy of which was furnished RCBC. On February 9, 1989, he returned the vehicle to petitioner. Later, Marquez and Mamerto Catley, petitioner’s salesman, tried to convince respondent to accept the vehicle as it had been completely repaired. But respondent refused.

On March 1, 1989, respondent sent petitioner a letter demanding the refund of his down payment, plus the premium he paid for the vehicle’s insurance.

Petitioner failed to comply with petitioner’s demand. Consequently, respondent stopped paying the monthly amortization for the vehicle.

On March 21, 1989, RCBC sent respondent a letter demanding that he settle his past overdue accounts for February 15 and March 15, 1989. In reply, respondent, through a letter dated March 31, 1989, informed RCBC that he had rescinded the contract of sale and had returned the vehicle to petitioner. This prompted RCBC to file with the Office of the Clerk of Court and Ex-Officio Sheriff, Regional Trial Court, Quezon City, a Petition for Extra-judicial Foreclosure of Chattel Mortgage.

On June 2, 1989, a Notice of Sheriff’s Sale of the vehicle was set.

On June 1, 1989, respondent filed with the same Office a Manifestation/Motion asking for the postponement of the scheduled auction sale until such time that petitioner and/or RCBC shall have reimbursed him of the amount he paid for the vehicle; and that should the auction sale be conducted, the proceeds thereof equivalent to the amount he spent be withheld and turned over to him.

The auction sale proceeded as scheduled. RCBC, being the highest bidder, purchased the vehicle. Subsequently, RCBC sold the vehicle to a third party.

On November 3, 1989, respondent filed with the Regional Trial Court (RTC), Branch 150, Makati City a complaint^[5] for rescission of contract with damages against petitioner, Marquez, Catley and RCBC, docketed as Civil Case No. 89-5566.

In their separate answers, petitioner, Marquez and Catley denied having committed any breach of warranty against hidden defects, claiming that the vehicle had only “minor and inconsequential defects” which “were promptly and satisfactorily repaired by petitioner Supercars pursuant to its warranty as the seller.”^[6] For its part, RCBC claimed that it has no liability whatsoever against respondent because it merely enforced its right under the chattel mortgage law. All the defendants prayed for the dismissal of the complaint.

On April 13, 1992, the RTC rendered its Decision in favor of respondent and against the defendants, thus:

“WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, ordering the latter to jointly and severally pay the plaintiff as follows:

1. the amount of P70,974.80 representing the 30% down payment and premium paid for one year comprehensive motor vehicle insurance plus interests at the rate of 14% per annum from date of filing of this complaint on October 30, 1989 until fully paid;
   
   
2. the sum of P50,000.00 as moral damages;
   
   
3. the sum of P25,000.00 as exemplary damages;
   
   
4. the sum of P20,000.00 as attorney’s fees; and
   
   
5. the costs of suit.

SO ORDERED.”^[7]

Upon motion for reconsideration by RCBC, the RTC, in an Order dated December 21, 1992, modified its Decision by absolving RCBC from any liability and dismissing the complaint against it, thus:

x x x

“Going into the merits of defendant bank’s contention that it has valid and meritorious defense which should ultimately exculpate it from any liability, jointly and severally, with the other defendants, the Court, after a careful review of the evidence on hand, reconsiders its Decision insofar as the said bank is concerned. The valid exercise by the plaintiff of its right to rescind the contract of sale for the purchase of the motor vehicle in question does not apply to defendant bank. Said contract is effective only as against defendant Supercars Management and Development Corporation, which must principally suffer the consequence of its breach of the contract.

This Court likewise takes notice of the fact that since the motor vehicle was voluntarily surrendered by the plaintiff and that defendant bank merely exercised its right under the chattel mortgage law, no fault can be attributed to the latter. The fact that the plaintiff sent a letter to the Office of the City Sheriff of Quezon City, copy furnished the bank, seeking the postponement of the auction sale of the subject motor vehicle, will not and cannot be considered as a valid ground to hold said bank liable for only exercising its rights under the law. At most, the liability must really be imputed only against defendants Supercars Management and Development Corporation, Mamerto Catley and Pablito Marquez.

“WHEREFORE, considering the foregoing premises, the Decision of this Court dated April 13, 1992, insofar as it holds defendant Rizal Commercial Banking Corporation jointly and severally liable to the plaintiff, is hereby MODIFIED and the case against said bank DISMISSED. Similarly, the compulsory counterclaim against the plaintiff is likewise dismissed.

The dispositive portion of the same Decision insofar as the rest of the defendants are concerned is hereby maintained and affirmed in toto.

SO ORDERED.”^[8]

From the above Decision and Order, petitioner, Marquez and Catley interposed an appeal to the Court of Appeals, docketed as CA-G.R. CV No. 40419. In a Decision dated November 29, 2000, the Appellate Court affirmed the RTC Decision with modification in the sense that the complaint against Marquez and Catley was dismissed, thus:

x x x

“It is with respect to appellants Catley and Marquez’ liability that we are minded to modify the (appealed) Decision. The two being mere employees (of appellant Supercars Management and Development Corporation), they cannot be held liable to refund the amount claimed by Flores. Nor can they be made liable for damages and attorney’s fees, there being no clear evidence that they had a hand in giving rise thereto.

WHEREFORE, the appealed Amended Decision is AFFIRMED, with the MODIFICATION that the complaint insofar as defendants-appellants Mamerto Catley and Pablito Marquez is hereby DISMISSED.

SO ORDERED.^[9]

Petitioner filed a motion for reconsideration but denied in a Resolution dated April 26, 2001.^[10]

Hence, the instant petition.

Petitioner contends that respondent has “no right to rescind the contract of sale”^[11] because “the motor vehicle in question, as found by the RTC and the Court of Appeals, is already in the hands of a third party, one Mr. Lim – an innocent purchaser for value.”^[12] Thus, both courts erred in ordering petitioner to refund respondent of the amounts he paid for the vehicle.

The issue here is whether respondent has the right to rescind the contract of sale and to claim damages as a result thereof.

We rule for respondent.

Respondent’s complaint filed with the RTC seeks to recover from petitioner the money he paid for the vehicle due to the latter’s breach of his warranty against hidden defects under Articles 1547,^[13] 1561,^[14] and 1566^[15] of the Civil Code. The vehicle, after it was delivered to respondent, malfunctioned despite repeated repairs by petitioner. Obviously, the vehicle has hidden defects. A hidden defect is one which is unknown or could not have been known to the vendee.^[16]

The findings of both the RTC and Court of Appeals that petitioner committed a breach of warranty against hidden defects are fully supported by the records. The Appellate Court correctly ruled:

“The evidence clearly shows that Flores [now respondent] was justified in opting to rescind the sale given the hidden defects of the vehicle, allowance for the repair of which he patiently extended, but which repair did not turn out to be satisfactory.

x x x

For when by letters of January 30, 1989 and February 7, 1989, which were followed up by another dated March 1, 1989, Flores declared his rescission of the sale, which rescission was not impugned or opposed by appellants as in fact they accepted the return of the vehicle on February 9, 1989, such extra-judicial rescission x x x produced legal effect (UP vs. de los Angeles, 35 SCRA 102 [1970]; Tolentino Commentaries and Jurisprudence on the Civil Code, citing Magdalena Estate v. Myrick, 71 Phil. 344 [1940-1941]).

x x x”^[17]

It is well within respondent’s right to recover damages from petitioner who committed a breach of warranty against hidden defects. Article 1599 of the Civil Code partly provides:

“Article 1599. Where there is a breach of warranty by the seller, the buyer may, at his election:

x x x

(4) Rescind the contract of sale and refuse to receive the goods, or if the goods have already been received, return them or offer to return them to the seller and recover the price or any part thereof which has been paid.

When the buyer has claimed and been granted a remedy in anyone of these ways, no other remedy can thereafter be granted, without prejudice to the provisions of the second paragraph of Article 1191.

x x x.” (Underscoring supplied)

Petitioner’s contention that under Article 1191 of the Civil Code, rescission can no longer be availed of as the vehicle was already in the hands of an innocent purchaser for value lacks merit. Rescission is proper if one of the parties to a contract commits a substantial breach of its provisions. It creates an obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return whatever he may be obliged to restore. Rescission abrogates the contract from its inception and requires a mutual restitution of the benefits received.^[18] Petitioner is thus mandated by law to give back to respondent the purchase price upon his return of the vehicle. Records show that at the time respondent opted to rescind the contract, the vehicle was still in his possession. He returned it to petitioner who, without objection, accepted it. Accordingly, the 30% down payment equivalent to P63,600.00, plus the premium for the comprehensive insurance amounting to P7,374.80 paid by respondent should be returned by petitioner.

As further stated by the Court of Appeals:

“Appellant’s invocation of Article 1191 of the Civil Code in support of his argument that as the vehicle had been sold to a third party, rescission can no longer ensue is misplaced.

For, Flores is asking for the refund of the downpayment and payment for insurance premiums. This brings us to appellant’s final argument.

Appellant’s professed excuse from their inability to give refund – that refund would necessitate the return of the subject motor vehicle which is impossible because it is now in the hands of an innocent purchaser for value – miserably fails.

x x x appellant Supercars was paid the balance of the purchase price by RCBC and, therefore, in addition to the downpayment given by Flores, it had been fully paid for the vehicle.

Ergo, Supercars had nothing more to do with the vehicle.”^[19]

However, the lower court’s award of P50,000.00 as moral damages and P25,000.00 as exemplary damages to respondent is erroneous. While no proof of pecuniary loss is necessary in order that moral damages may be awarded, the amount of indemnity being left to the discretion of the court, it is nevertheless essential that the claimant satisfactorily prove the existence of the factual basis of the damage and its causal relation to defendant’s acts. Moral damages are in the category of an award designed to compensate the claimant for actual injury suffered and not to impose a penalty to the wrongdoer. This has not been proved by respondent.

In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.^[20] Likewise, respondent failed to establish that petitioner acted in such manner.

As to the award of attorney’s fees, the same must be deleted since the award of moral and exemplary damages are eliminated.^[21] Moreover, the trial court did not give any justification for granting it in its decision. It is now settled that awards of attorney’s fees must be based on findings of fact and law, stated in the decision of the trial court.^[22]

WHEREFORE, the petition is DENIED. The assailed Decision dated September 20, 1999 and Resolution dated February 1, 2000 of the Court of Appeals in CA-G.R. CV No. 52177 are AFFIRMED with MODIFICATION. The award of moral and exemplary damages and attorney’s fees are DELETED. Costs against petitioner.

SO ORDERED.

Panganiban, (Chairman), and Garcia, JJ., concur.
Corona, J., on leave.
Carpio-Morales, J., No part. Ponente of assailed decision.

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^[1] Per Resolution of this Court dated March 11, 2002 (Rollo at 174) and Resolution dated July 29, 2002 (Rollo at 180).

^[2] Penned by Justice Conchita Carpio-Morales (now a member of this Court) and concurred in by Justice Candido V. Rivera (ret.) and Justice Josefina Guevara-Salonga, Rollo at 30-41.

^[3] Rollo at 43-44.

^[4] Complaint, Annex “F”, Rollo at 48, 50-51.

^[5] Annex “F”, Rollo at 48-58.

^[6] Petition, Rollo at 12.

^[7] Rollo at 122.

^[8] Id. at 123-125, 2-3.

^[9] Id. at 40.

^[10] Id. at 43.

^[11] Petition, id. at 23.

^[12] Id. at 2.

^[13] “Article 1547. In a contract of sale, unless a contrary intention appears, there is:

(1) An implied warranty on the part of the seller that he has the right to sell the thing at the time when the ownership is to pass, and that the buyer shall from that time have and enjoy the legal and peaceful possession of the thing;

(2) An implied warranty that the thing shall be free from any hidden faults or defects, or any charge or encumbrance not declared or known to the buyer.

This article shall not, however, be held to render liable a sheriff, auctioneer, mortgagee, pledgee, or other person professing to sell by virtue of authority in fact or law, for the sale of a thing in which a third person has a legal or equitable interest.”

^[14] “Article 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it; but said vendor shall not be answerable for patent defects or those which may be visible, or for those which are not visible if the vendee is an expert who, by reason of his trade or profession, should have known them.”

^[15] “Article 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold, even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the hidden faults or defects in the thing sold.”

^[16] Knecht vs. Court of Appeals, No. L-65114, February 23, 1988, 158 SCRA 80.

^[17] Rollo at 39.

^[18] Velarde vs. Court of Appeals, G.R. No. 108346, July 11, 2001, 361 SCRA 56.

^[19] Id. at 39-40.

^[20] Art. 2232, New Civil Code.

^[21] Estanislao, Jr. vs. Court of Appeals, G.R. No. 143687, July 31, 2001, 362 SCRA 229.

^[22] Sanitary Steam Laundry, Inc. vs. Court of Appeals, G.R. No. 119092, December 10, 1998, 300 SCRA 20; Salao vs. Court of Appeals, G.R. No. 107725, January 22, 1998, 284 SCRA 493.

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Source: Supreme Court E-Library | Date created: July 01, 2008
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Supreme Court E-Library

equitable mortgage 3

FIRST DIVISION

[ G.R. NO. 162112, July 03, 2007 ]

DOMINGO R. LUMAYAG AND FELIPA N. LUMAYAG, PETITIONERS, VS. HEIRS OF JACINTO NEMEÑO AND DALMACIA DAYANGCO-NEMEÑO, REPRESENTED BY MELITON NEMEÑO, RESPONDENTS.

D E C I S I O N

GARCIA, J.:

Challenged and sought to be set aside in this petition for review on certiorari under Rule 45 of the Rules of Court is the decision^[1] dated September 30, 2003 of the Court of Appeals (CA), as reiterated in its resolution^[2] of January 9, 2004 in CA-G.R. CV No. 63230, affirming, with modification, an earlier decision of the Regional Trial Court (RTC) of Ozamiz City which ruled that the instrument entitled Deed of Sale with Pacto De Retro executed in favor of the herein petitioners by the respondents is actually an equitable mortgage.

The facts:

During their lifetime, the spouses Jacinto Nemeño and Dalmacia Dayangco-Nemeño, predecessors-in-interest of the herein respondent heirs, owned two (2) parcels of coconut land located in Manaca, Ozamiz City. The parcels are: Lot No. 4049, with an area of five (5) hectares and covered by Original Certificate of Title (OCT) No. 0-1743 and Lot No. 4035 C-4, consisting of 4,420 square meters and covered by Tax Declaration No. 13750.

In 1979, Dalmacia died survived by her husband, Jacinto, and their six (6) children, to wit: Meliton, Eleuteria, Timoteo, Justo, Saturnino (now deceased) and Felipa.

On February 25, 1985, Jacinto, joined by his five (5) children, namely, Meliton, Eleuteria, Timoteo, Justo and Saturnino, conveyed to his daughter Felipa and the latter's husband Domingo Lumayag the aforementioned Lot Nos. 4049 and 4035 C-4. The instrument of conveyance is denominated as Deed of Sale with Pacto De Retro.^[3] Thereunder, it was stipulated that the consideration for the alleged sale of the two (2) aforementioned lots was Twenty Thousand Pesos (P20,000.00) and that the vendors a retro have the right to repurchase the same lots within five (5) years from the date of the execution of the instrument on February 25, 1985. It was likewise agreed thereunder that in the event no purchase is effected within the said stipulated period of five (5) years "conveyance shall become absolute and irrevocable without the necessity of drawing up a new absolute deed of sale, subject to the requirements of law regarding consolidation of ownership of real property."

On April 4, 1985, Jacinto died while undergoing treatment at the MHARS General Hospital in Ozamiz City.

More than a decade later, or on August 28, 1996, the spouses Domingo Lumayag and Felipa Nemeño-Lumayag filed with the RTC of Ozamiz City a petition for the reconstitution of the owner's duplicate copy of OCT No. 0-1743 covering Lot No. 4049, one of the two lots subject of the earlier Deed of Sale with Pacto De Retro. In that petition, the Lumayags alleged that said owner's duplicate copy of OCT No. 0-1743 was in Domingo's possession but the same was lost when a typhoon hit and destroyed the couple's house in Talisay, Cebu on November 12, 1990. The petition was opposed by the other heirs of Jacinto and Dalmacia who claimed that the owner's duplicate copy of the same OCT was actually in the possession and custody of their brother Meliton Nemeño, the administrator of the property, when it was burned in a fire on May 22, 1992. In an order dated December 20, 1996,^[4] the RTC resolved said petition by ordering the issuance of a new owner's duplicate copy of OCT No. 0-1743 and its delivery to the heirs of Jacinto and Dalmacia.

Such were the state of things when, on December 24, 1996, in the same RTC, the heirs of Jacinto and Dalmacia, namely, their children Meliton, Eleuteria, Timoteo and Justo and grandchildren Ricky and Daisy who are the heirs of Saturnino, (hereinafter collectively referred to as the respondent heirs) filed against the spouses Domingo Lumayag and Felipa N. Lumayag a complaint^[5] for Declaration of Contract as Equitable Mortgage, Accounting and Redemption with Damages. In their complaint, docketed in the trial court as Civil Case No. 96-69 and raffled to Branch 35 thereof, the plaintiff heirs prayed that the Deed of Sale with Pacto De Retro executed on February 25, 1985 in favor of the defendant spouses Domingo Lumayag and Felipa N. Lumayag over Lot Nos. 4049 and 4035 C-4 be declared as an equitable mortgage and considered as already redeemed, with accounting and damages.

Essentially, the complaint alleged that the subject Deed of Sale with Pacto De Retro was executed only for the purpose of securing the payment of a loan of P20,000.00 obtained from the defendant spouses in connection with the medication and hospitalization of the then ailing Jacinto Nemeño. To support their claim that the contract in question was an equitable mortgage, the plaintiff heirs materially pointed out the following: (1) the grossly inadequate price of the subject lots considering that Lot No. 4049 with an area of 5 hectares has a market value of P40,760.00 and an assessed value of P15,230.00, as shown by Tax Declaration No. 94-07335-A, while Lot No. 4035 C-4 with an area of 4,420 square meters has a market value of P4,120.00 and an assessed value of P1,460.00, per Tax Declaration No. 94-07355-A; (2) their (plaintiffs') continued payment of realty taxes; (3) the land title and tax declaration remained in the names of Jacinto Nemeño and Dalmacia Dayangco-Nemeño; (4) their possession, particularly Justo Nemeño's, of the subject lots with the petitioner spouses only given two-thirds share of the harvest therefrom; and (5) the pactum commissorium stipulation in the subject contract. Thus, the heirs pray for a judgment (a) declaring the subject Deed of Sale with Pacto de Retro as an equitable mortgage and considering the lots subject thereof as redeemed; (b) ordering the defendant spouses to render an accounting of the fruits and/or income of the coconut lands from 1985 to 1996 and to return whatever remains of the amount with interest at the legal rate after deducting the P20,000.00 loan; and (c) ordering the same defendants to pay litigation expenses and attorney's fees.

In their Answer,^[6] the spouses Lumayag denied that the contract in question was an equitable mortgage and claimed that the amount of P20,000.00 received by the plaintiff heirs was the consideration for the sale of the two lots and not a loan. By way of affirmative defenses, the spouses Lumayag asserted that the action was already barred by laches and prescription and the complaint itself states no cause of action.

With the pre-trial conference having failed to bring the parties to any amicable settlement, trial on the merits ensued.

Eventually, in a decision^[7] dated February 3, 1999, the trial court adjudged the subject Deed of Sale with Pacto De Retro as an equitable mortgage and ordered the defendant spouses to reconvey Lot Nos. 4049 and 4035 C-4 to the plaintiff heirs for P20,000.00. We quote the fallo of the decision:

WHEREFORE, in the light of the foregoing, judgment is hereby rendered to wit:

1. Declaring the Deed of Sale with Pacto de Retro marked annex "A" to the Complaint as equitable mortgage;
   
2. Ordering the defendants to reconvey the properties in litigation to the plaintiffs in the amount of P20,000.00 within 30 days after the decision has become final and executory;
   
3. Ordering the defendants to pay the cost of this suit.

SO ORDERED.

Dissatisfied, both parties appealed to the CA. Unfortunately, for failure of the plaintiff heirs to submit their appeal brief, their appeal was dismissed, leaving that of the defendant spouses which was docketed as CA-G.R. CV No. 63230.

As stated at the threshold hereof, the appellate court, in its Decision of September 30, 2003, affirmed that of the trial court but with the modification that the mortgaged properties are subject to foreclosure should the respondents fail to redeem the same within thirty (30) days from finality of the decision. More specifically, the CA decision dispositively reads:

WHEREFORE, premises considered, the Decision dated February 3, 1999 rendered by the Regional Trial Court, Branch 35, Ozamiz City in Civil Case No. 96-69 is hereby AFFIRMED with MODIFICATION, in that [petitioners] could foreclose the mortgaged properties in the event [private respondents] fail to exercise their right of redemption within thirty (30) days from the finality of this decision.

SO ORDERED. (Words in brackets supplied.)

Explains the CA in its decision:

xxx xxx xxx
In the instant case, we hold that the deed of sale with pacto de retro is actually an equitable mortgage. For one, the supposed price for the sale with pacto de retro in the amount of P20,000.00 is unusually inadequate for the two (2) parcels of land, the total area of which is almost 5.5 hectares. Also, [respondents heirs] remained in possession of the subject properties even after the execution of the subject instrument. Not only did [respondent heirs] retain possession of the subject properties, they also paid for the realty taxes of the same. Indeed, as the trial court found the transaction was one of an equitable mortgage,

Finally, the subject instrument provides that if the vendors a-retro, herein plaintiffs-appellants, fails to exercise their right to redeem or repurchase the subject properties within the period stipulated upon, then the conveyance shall be deemed to be an absolute and irrevocable sale, without the necessity of executing any further deed. Such stipulation is void for being a pactum commissorium. xxx

Having ruled that the instrument executed by the parties is one of an equitable mortgage, [respondent heirs] can now redeem the mortgaged properties from [petitioner spouses] within thirty (30) days from finality of this decision. Otherwise, [petitioner spouses] would be given the option to foreclose the mortgaged properties, for as a rule, in a real estate mortgage, when the principal obligation is not paid when due, the mortgagee has the right to foreclose the mortgage and to have the property seized and sold with the view of applying the proceeds to the payment of the obligation. xxx. (Words in brackets supplied).

With their motion for reconsideration having been denied by the appellate court in its equally impugned Resolution of January 9, 2004, petitioners are now with this Court via the instant recourse on their submission that:

I
HON. COURT OF APPEALS GRAVELY ERRED IN NOT REVERSING THE DECISION OF THE TRIAL COURT AND DISMISSING THE PRIVATE RESPONDENTS' COMPLAINT ON GROUNDS OF LACHES AND OR PRESCRIPTION.

II
HON. COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE DEED OF SALE WITH PACTO DE RETRO IS ACTUALLY AN EQUITABLE MORTGAGE.

III
THE DECISION RENDERED BY THE HON. COURT OF APPEALS IS NOT SUPPORTED BY THE EVIDENCE AND CONTRARY TO LAW.^[8]

We DENY.

Petitioners initially put the CA to task for not dismissing the case considering that the titles to the subject parcels of land had already been consolidated to them by operation of law because the five (5)-year prescriptive period for the respondents to repurchase expired in 1990.

Under a pacto de retro sale, title to and ownership of property are immediately vested in the vendee a retro, subject only to the resolutory condition that the vendor repurchases it within the stipulated period.^[9] The failure of the vendor a retro to repurchase the property vests upon the vendee a retro by operation of law the absolute title and ownership over the property sold.^[10]

Here, there is no issue as regards the fact that the subject Deed of Sale with Pacto De Retro provided for a 5-year redemption period which expired on February 25, 1990. Evidently, then, the failure of the respondent heirs to redeem the properties within the stipulated period indubitably vested the absolute title to and ownership thereof to the petitioners. But such consequence would only be true if the contract that was executed between the parties was indeed a pacto de retro sale and not an equitable mortgage.

The two (2) courts below unanimously found that the subject Deed of Sale with Pacto De Retro, while purporting to be a sale, is in truth and in fact an equitable mortgage. Such factual finding, more so when supported by the evidence, as here, commands not only respect but even finality and is binding on this Court.^[11]

An equitable mortgage has been defined "as one which although lacking in some formality, or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law."^[12]

Article 1602 of the Civil Code enumerates the instances when a contract, regardless of its nomenclature, may be presumed to be an equitable mortgage, to wit:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation.

In any of the foregoing case, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws.

Article 1604 of the Civil Code provides that the provisions of Article 1602 shall also apply to a contract purporting to be an absolute sale, and, in case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage.^[13]

The law requires the presence of any one and not the concurrence of all of the circumstances enumerated under Article 1602, supra, to conclude that the transaction is one of equitable mortgage. So it is that in Socorro Taopo Banga v. Sps. Jose and Emeline Bello,^[14] this Court, citing Aguirre v. CA,^[15] unequivocally ruled:

The presence of even one of the circumstances in Article 1602 is sufficient basis to declare a contract as one of equitable mortgage. The explicit provision of Article 1602 that any of those circumstances would suffice to construe a contract of sale to be one of equitable mortgage is in consonance with the rule that law favors the least transmission of property rights. To stress, the existence of any one of the conditions under Article 1602, not a concurrence, nor an overwhelming number of such circumstances, suffices to give rise to the presumption that the contract is an equitable mortgage. (Emphasis ours)

Here, the CA correctly found the presence of not merely one but four (4) circumstances indicative of the true nature of the subject transaction as an equitable mortgage, to wit: (a) gross inadequacy of the contract price of P20,000.00 for two (2) parcels of land, the total area of which is almost 5.5 hectares; (b) respondent heirs remained in possession of the subject property even after the execution of the supposedly Deed of Sale with Pacto de Retro; (c) said respondents' payment of realty taxes; and (d) the provision on pactum commissorium.

While we are not in full accord with the CA in its observation that the consideration of the sale with right to repurchase is grossly inadequate since the market value and assessed value of the two lots were not made on or before the date the subject contract was executed on February 25, 1985 but only on June 8, 1994, still, there are other circumstances convincing enough to support a conclusion that the transaction in question is really an equitable mortgage.

Evidence is extant on record that the respondent heirs, as vendors a retro, remained in possession of the subject lots after the execution of the deed of sale with right to repurchase. In stark contrast, evidence is wanting that petitioners ever enjoyed possession thereof. If the transaction was really a sale with right to repurchase, as claimed by the petitioners, then the latter should have asserted their rights for the immediate delivery of the lots to them instead of allowing some of the respondents to freely stay in the premises. Well-settled to the point of being elementary is the doctrine that where the vendor remains in physical possession of the land as lessee or otherwise, the contract should be treated as an equitable mortgage.^[16]

As well, that the parties intended to enter into an equitable mortgage is further accentuated by respondents' continued payment of the real property taxes subsequent to the alleged sale. Payment of those taxes is a usual burden attached to ownership and when, as here, such payment is coupled with continuous possession of the property, it constitutes evidence of great weight that a person under whose name the realty taxes were declared has a valid and rightful claim over the land.^[17]

Lastly, the stipulation in the subject deed reading: "if we fail to exercise our rights to repurchase as herein granted within the period stipulated, then this conveyance shall become absolute and irrevocable without the necessity of drawing a new absolute Deed of Sale, subject to the requirements of law regarding consolidation of ownership of real property," - is considered a pactum commissorium. This stipulation is contrary to the nature of a true pacto de retro sale since in such sale, ownership of the property sold is immediately transferred to the vendee a retro upon execution of the sale, subject only to the repurchase of a vendor a retro within the stipulated period.^[18] Undoubtedly, the aforementioned stipulation is a pactum commissorium because it enables the mortgagee to acquire ownership of the mortgaged properties without need of any foreclosure proceedings which is a nullity being contrary to the provisions of Article 2088^[19] of the Civil Code. Indeed, the inclusion of such stipulation in the deed shows the intention to mortgage rather than to sell.

WHEREFORE, the instant petition is DENIED, and the assailed decision and resolution of the CA in CA-G.R. CV No. 63230 are AFFIRMED.

Costs against petitioners.

SO ORDERED.

Puno, C.J., (Chairperson), Corona, and Azcuna, JJ., concur.
Sandoval-Gutierrez, J., on leave.

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^[1] Penned by Associate Justice Juan Q. Enriquez, Jr. with Associate Justices Roberto A. Barrios (deceased) and Arsenio J. Magpale, concurring; rollo, pp. 52-59.

^[2] Id. at 23.

^[3] Original Records, pp. 163-164.

^[4] Id. at 156.

^[5] Id. at 1-5.

^[6] Id. at 16-19.

^[7] Id. at 209-223.

^[8] Id. at 28-29.

^[9] Vda. de Rigonan et al. v. Zoroaster Derecho representing the Heirs of Ruben Derecho et al., G.R. No. 159571, July 15, 2005, 463 SCRA 627, 636.

^[10] Luis Misterio et al. v. Cebu State Colleg of Science and Technology, G.R. No. 152199, June 23, 2005, 461 SCRA 122.

^[11] Gregorio Amante v. Vicente Serwelas, G.R. No. 143572, September 30, 2005, 471 SCRA 348.

^[12] Benny Go v. Eliodoro Bacaron, G.R. No. 159048, October 11, 2005, 472 SCRA 339, 347.

^[13] Article 1603, Civil Code.

^[14] G.R. No. 156705, September 30, 2005, 471 SCRA 653, 663-664.

^[15] G.R. No. 131520, January 28, 2000, 323 SCRA 771, 775.

^[16] Bernice Legaspi v. Spouses Rita and Francisco Ong, G.R. No. 141311, May 26, 2005, 459 SCRA 122.

^[17] Go v. Bacaron, supra at p. 352.

^[18] Bernice Legaspi v. Spouses Rita and Francisco Ong, supra at p. 144.

^[19] Article 2088. The creditor cannot appropriate the things given by way of pledge or mortgage , or dispose of them. Any stipulation to the contrary is null and void.