Page 1 of 11

CAVITE DEVELOPMENT BANK and FAR EAST BANK AND TRUST 1. Was there already a perfected contract of sale?
COMPANY, petitioners,
vs.
SPOUSES CYRUS LIM and LOLITA CHAN LIM and COURT OF HELD – YES.
APPEALS, respondents.
G.R. No. 131679. February 1, 2000. Giving effect to the substance of the contract, the SC found that the “option
money” defined in the subject agreement was actually an earnest money,
which is a proof of the contract’s perfection. This is in light of the fact that after
Rule Synopsis the payment of such “option money,” the buyer was liable only for the balance
of the purchase price; this is precisely the definition of an earnest money under
Art. 1482 of the Civil Code. The effect is that, there was a perfected contract of
While the seller is not required to be owner of the thing at the time of the sale entered into by the parties, which had also been partially consummated
perfection of the contract, he must be so at the time that he is required to given the part payment. The SC reiterated the doctrine that contracts are not
transfer ownership thereof. Also, as a general rule, persons dealing with
defined by the parties thereto but by principles of law.
properties covered by a Torrens title may rely on said title, however, banks
accepting such properties as security for loans are bound to stricter standards
in view that their business is imbued by public interest.
2. Was the sale between CDB and Chan Lim null and
void?
Case Summary
HELD – YES.
Rodolfo Guansing obtained a loan from Cavite Development Bank (CDB;
seller) secured by a mortgage on the former’s land. Guansing failed to pay and While the seller is not required to be owner of the thing at the time of the
the security was foreclosed; CDB was the highest bidder at the auction sale. perfection of the contract, he must be so at the time that he is required to
Guansing failed to redeem. One Lolita Chan Lim (buyer) then offered to transfer ownership thereof. The principle nemo dat quod non habet applies to
purchase the subject property from CDB for P300k, payable 10% “Option the consummation stage of the contract of sale, not at the time of its perfection.
Money,” balance in cash. However, the prospective buyer found out that In this case, CDB never acquired valid title over the subject property as the
Rodolfo’s title had been cancelled for being fraudulent. foreclosure sale was void since the mortgagor was not the absolute owner of
thing mortgaged (the rule that the mortgagor or pledger be the absolute owner
of the thing is in anticipation of the eventual foreclosure of the property). Rules
The buyer and her husband then filed an action against CDB for specific on ordinary sales apply to foreclosure sales as well since the debtor-mortgagor
performance and damages arguing that the latter committed serious is obliged to transfer ownership of the mortgaged property to the highest
misrepresentation. CDB contended, among others, that there was no perfected bidder, the latter being obliged to pay its price. Thus, the debtor-mortgagor, as
contract of sale yet as the buyer’s offer was still subject to approval. the seller, must be the owner of the thing sold at the time it has to be delivered.

The RTC ruled in favor of the buyers holding, among others, that there was
already a perfected contract of sale and that the sellers failed to exercise due 3. Was the CDB, a “mortgagee in good faith,” which
diligence for failure to discover the defect on Rodolfo’s title. The CA affirmed. would allow the foreclosure sale to be given effect by
The SC affirmed. reason of public policy?

Issues resolved — HELD – NO.

 Page 2 of 11

CDB failed to exercise their duty of exercising the due diligence required of
banking institutions. While it is not required to make a detailed investigation of
the history of the title of the property given as security before accepting a
mortgage as this was covered by a Torrens Title (persons dealing with
properties covered by a Torrens title are not required to look further than what
is stated on its face). It was noted by the SC that it is standard for banks to
investigate on the properties offered to them as security for loans. Banks are
held at stricter standards given that their business is imbued with public
interest. In this case, it was shown that Rodolfo obtained a his fraudulent title
via a self-executed deed showing that he and Perfecto were the only heirs over
the subject properties, and that the latter waived his rights thereto This should
have placed the bank on-guard to conduct further inquiry. There was also no
showing that the records of the investigation conducted by CDB was
introduced as evidence.

4. Who, if any, among the parties was at fault for the

nullity of the contract?

HELD – CDB, FOR BEING NEGLIGENT.

The SC deferred with the ruling of the lower courts, this question being one of
fact. In any case, the high court was convinced that CDB acted negligently.

5. What are the legal effects of the nullity of the contract

of sale?

A. THE BUYERS WERE ENTITLED TO RECOVER THE “OPTION MONEY”

PAID;

B. INTEREST AT LEGAL RATE SHALL COMMENCE FROM THE TIME OF

FILING OF THE ACTION;

In case of a void sale, the seller has no right whatsoever to keep the money
paid by virtue thereof and should refund it, with interest at the legal rate,
computed from the date of filing of the complaint until fully paid.

C. THE BUYERS WERE ENTITLED TO MORAL DAMAGES.

 Page 3 of 11

G.R. No. 131679. February 1, 2000. * Same; Same; Same; Earnest Money; The parties actually entered
CAVITE DEVELOPMENT BANK and FAR EAST BANK into a contract of sale, partially consummated as to the payment of the
AND TRUST COMPANY, petitioners, vs. SPOUSES price, where the Offer to Purchase provides that, after the payment of
CYRUS LIM and LOLITA CHAN LIM and COURT OF the option money, only the balance of the purchase price need be paid,
implying that the “option money” forms part of the purchase price.—
APPEALS, respondents.
In this case, after the payment of the 10% option money, the Offer to
Contracts; Sales; Contracts are not defined by the parties thereto
Purchase provides for the payment only of the balance of the purchase
but by principles of law.—Petitioners deny that a contract of sale was
price, implying that the “option money” forms part of the purchase
ever perfected between them and private respondent Lolita Chan
price. This is precisely the result of paying earnest money under Art.
Lim. They contend that Lim’s letter-offer clearly states that the sum
1482 of the Civil Code. It is clear then that the parties in this case
of P30,000.00 was given as option money, not as earnest money. They
actually entered into a contract of sale, partially consummated as to
thus conclude that the contract between CDB and Lim was merely an
the payment of the price.
option contract, not a contract of sale. The contention has no merit.
Same; Same; While it is not required that, at the perfection stage,
Contracts are not defined by the parties thereto but by principles of
the seller be the owner of the thing sold or even that such subject matter
law. In determining the nature of a contract, the courts are not bound
of the sale exists at that point in time, of the delivery or consummation
by the name or title given to it by the contracting parties. In the case
stage of the sale, it is required that the seller be the owner of the thing
at bar, the sum of P30,000.00, although denominated in the offer to
sold.—A contract of sale is perfected at the moment there is a meeting
purchase as “option money,” is actually in the nature of earnest money
of minds upon the thing which is the object of the contract and upon
or down payment when considered with the other terms of the offer.
the price. It is, therefore, not required that, at the perfection stage,
Same; Same; Option Contract; Words and Phrases; “Option
the seller be the owner of the thing sold or even that such subject
Contract,” Defined; An option contract is a contract separate from and
matter of the sale exists at that point in time. Thus, under Art. 1434
preparatory to a contract of sale which, if perfected, does not result in
of the Civil Code, when a person sells or alienates a thing which, at
the perfection or consummation of the sale—only when the option is
that time, was not his, but later acquires title thereto, such title
exercised may a sale be perfected.—In Carceller v. Court of Appeals,
passes by operation of law to the buyer or grantee. This is the same
we explained the nature of an option contract, viz.—An option
principle behind the sale of “future goods” under Art. 1462 of the Civil
contract is a preparatory contract in which one party grants to the
Code. However, under Art. 1459, at the time of delivery or
other, for a fixed period and under specified conditions, the power to
consummation stage of the sale, it is required that the seller be the
decide, whether or not to enter into a principal contract, it binds the
owner of the thing sold. Otherwise, he will not be able to comply with
party who has given the option, not to enter into the principal contract
his obligation to transfer ownership to the buyer. It is at the
with any other person during the period designated, and, within that
consummation stage where the principle of nemo dot quod non
period, to enter into such contract with the one to whom the option
habet applies.
was granted, if the latter should decide to use the option. It is a
Same; Same; Mortgages; Foreclosure Sale; A foreclosure sale,
separate agreement distinct from the contract which the parties may
though essentially a “forced sale,” is still a sale in accordance with
enter into upon the consummation of the option. An option contract is
Article 1458 of the Civil Code, under which the mortgagor in default,
therefore a contract separate from and preparatory to a contract of
the forced seller, becomes obliged to transfer the ownership of the thing
sale which, if perfected, does not result in the perfection or
sold to the highest bidder who, in turn, is obliged to pay therefor the
consummation of the sale. Only when the option is exercised may a
bid price in money or its equivalent, and the rule that the seller must
sale be perfected.
be the owner of the thing sold also applies.—A foreclosure sale, though
 Page 4 of 11

essentially a “forced sale,” is still a sale in accordance with Art. 1458 expected to conduct an exhaustive investigation on the history of the
of the Civil Code, under which the mortgagor in default, the forced mortgagor’s title, they cannot be excused from the duty of exercising
seller, becomes obliged to transfer the ownership of the thing sold to the due diligence required of banking institutions. In Tomas v.
the highest bidder who, in turn, is obliged to pay therefor the bid price Tomas, we noted that it is standard practice for banks, before
in money or its equivalent. Being a sale, the rule that the seller must approving a loan, to send representatives to the premises of the land
be the owner of the thing sold also applies in a foreclosure sale. This offered as collateral and to investigate who are the real owners
is the reason Art. 2085 of the Civil Code, in providing for the essential thereof, noting that banks are expected to exercise more care and
requisites of the contract of mortgage and pledge, requires, among prudence than private individuals in their dealings, even those
other things, that the mortgagor or pledgor be the absolute owner of involving registered lands, for their business is affected with public
the thing pledged or mortgaged, in anticipation of a possible interest.
foreclosure sale should the mortgagor default in the payment of the Same; Same; Same; Same; Same; Same; Extrajudicial
loan. Settlement of Estates; The fact that a title was obtained by the
Same; Same; Same; Same; Land Titles; Doctrine of Mortgagee in execution of an Extra-judicial Settlement of the Estate With Waiver
Good Faith; Under the doctrine of “the mortgagee in good faith,” where it was made to appear that the mortgagor and another are the
despite the fact that the mortgagor is not the owner of the mortgaged only surviving heirs entitled to the property, and that the latter had
property, his title being fraudulent, the mortgage contract and any waived all his rights thereto should place a bank on guard against any
foreclosure sale arising therefrom are given effect by reason of public possible defect in or question as to the mortgagor’s title.—In this case,
policy.—There is, however, a situation where, despite the fact that the there is no evidence that CDB observed its duty of diligence in
mortgagor is not the owner of the mortgaged property, his title being ascertaining the validity of Rodolfo Guansing’s title. It appears that
fraudulent, the mortgage contract and any foreclosure sale arising Rodolfo Guansing obtained his fraudulent title by executing an
therefrom are given effect by reason of public policy. This is the Extrajudicial Settlement of the Estate With Waiver where he made it
doctrine of “the mortgagee in good faith” based on the rule that all appear that he and Perfecto Guansing were the only surviving heirs
persons dealing with property covered by a Torrens Certificate of entitled to the property, and that Perfecto had waived all his rights
Title, as buyers or mortgagees, are not required to go beyond what thereto. This self-executed deed should have placed CDB on guard
appears on the face of the title. The public interest in upholding the against any possible defect in or question as to the mortgagor’s title.
indefeasibility of a certificate of title, as evidence of the lawful Moreover, the alleged ocular inspection report by CDB’s
ownership of the land or of any encumbrance thereon, protects a buyer representative was never formally offered in evidence. Indeed,
or mortgagee who, in good faith, relied upon what appears on the face petitioners admit that they are aware that the subject land was being
of the certificate of title. occupied by persons other than Rodolfo Guansing and that said
Same; Same; Same; Same; Same; Banks and Banking; While a persons, who are the heirs of Perfecto Guansing, contest the title of
bank is not expected to conduct an exhaustive investigation on the Rodolfo.
history of the mortgagor’s title, it cannot be excused from the duty of Actions; Appeals; Petition for Review; Only questions of law may
exercising the due diligence required of banking institutions, for banks be raised in a petition for review, except in circumstances where
are expected to exercise more care and prudence than private questions of fact may be properly raised.—As a rule, only questions of
individuals in their dealings, even those involving registered lands, for law may be raised in a petition for review, except in circumstances
their business is affected with public interest.—We are not convinced, where questions of fact may be properly raised. Here, while
however, that under the circumstances of this case, CDB can be petitioners raise these factual issues, they have not sufficiently shown
considered a mortgagee in good faith. While petitioners are not that the instant case falls under any of the exceptions to the above
 Page 5 of 11

rule. We are thus bound by the findings of fact of the appellate court. Burkley, Santiago, Sarcida, Carriaga, Obinario &
In any case, we are convinced of petitioners’ negligence in approving Jornales for petitioners.
the mortgage application of Rodolfo Guansing. S.V. Ramos Law Office for private respondents.
Same; Sales; Interest Rates; In case of a void sale, the seller has
no right whatsoever to keep the money paid by virtue thereof and
should refund it, with interest at the legal rate, computed from the date
of filing of the complaint until fully paid; Without a prior demand, the
obligation to return what was given does not become legally
demandable.—Private respondents are thus entitled to recover the
P30,000.00 option money paid by them. Moreover, since the filing of
the action for damages against petitioners amounted to a demand by
respondents for the return of their money, interest thereon at the
legal rate should be computed from August 29, 1989, the date of filing
of Civil Case No. Q-89-2863, not June 17, 1988, when petitioners
accepted the payment. This is in accord with our ruling in Castillo v.
Abalayan that in case of a void sale, the seller has no right whatsoever
to keep the money paid by virtue thereof and should refund it, with
interest at the legal rate, computed from the date of filing of the
complaint until fully paid. Indeed, Art. 1412(2) which provides that
the non-guilty party “may demand the return of what he has given”
clearly implies that without such prior demand, the obligation to
return what was given does not become legally demandable.
Same; Damages; Moral damages may be recovered even if a
bank’s negligence is not attended with malice and bad faith.—
Considering CDB’s negligence, we sustain the award of moral
damages on the basis of Arts. 21 and 2219 of the Civil Code and our
ruling in Tan v. Court of Appeals that moral damages may be
recovered even if a bank’s negligence is not attended with malice and
bad faith. We find, however, that the sum of P250,000.00 awarded by
the trial court is excessive. Moral damages are only intended to
alleviate the moral suffering undergone by private respondents, not
to enrich them at the expense of the petitioners. Accordingly, the
award of moral damages must be reduced to P50,000.00.

PETITION for review on certiorari of a decision of the Court of

Appeals.

The facts are stated in the opinion of the Court.

 Page 6 of 11

SECOND DIVISION (1) 10% Option Money;

G.R. No. 131679 February 1, 2000 (2) Balance payable in cash;

CAVITE DEVELOPMENT BANK and FAR EAST BANK AND TRUST (3) Provided that the property shall be cleared of illegal
COMPANY, petitioners, occupants or tenants.
vs.
SPOUSES CYRUS LIM and LOLITA CHAN LIM and COURT OF Pursuant to the foregoing terms and conditions of the offer, Lim paid CDB
APPEALS, respondents. P30,000.00 as Option Money, for which she was issued Official Receipt
No. 3160, dated June 17, 1988, by CDB. However, after some time
MENDOZA, J.: following up the sale, Lim discovered that the subject property was
originally registered in the name of Perfecto Guansing, father of mortgagor
This is a petition for review on certiorari of the decision1 of the Court of Rodolfo Guansing, under TCT No. 91148. Rodolfo succeeded in having the
Appeals in C.A. GR CV No. 42315 and the order dated December 9, 1997 property registered in his name under TCT No. 300809, the same title he
denying petitioners' motion for reconsideration. mortgaged to CDB and from which the latter's title (TCT No. 355588) was
derived. It appears, however, that the father, Perfecto, instituted Civil Case
The following facts are not in dispute. No. Q-39732 in the Regional Trial Court, Branch 83, Quezon City, for the
cancellation of his son's title. On March 23, 1984, the trial court rendered a
decision2 restoring Perfecto's previous title (TCT No. 91148) and cancelling
Petitioners Cavite Development Bank (CDB) and Far East Bank and Trust
TCT No. 300809 on the ground that the latter was fraudulently secured by
Company (FEBTC) are banking institutions duly organized and existing
Rodolfo. This decision has since become final and executory.
under Philippine laws. On or about June 15, 1983, a certain Rodolfo
Guansing obtained a loan in the amount of P90,000.00 from CDB, to
secure which he mortgaged a parcel of land situated at No. 63 Calavite Aggrieved by what she considered a serious misrepresentation by CDB
Street, La Loma, Quezon City and covered by TCT No. 300809 registered and its mother-company, FEBTC, on their ability to sell the subject
in his name. As Guansing defaulted in the payment of his loan, CDB property, Lim, joined by her husband, filed on August 29, 1989 an action for
foreclosed the mortgage. At the foreclosure sale held on March 15, 1984, specific performance and damages against petitioners in the Regional Trial
the mortgaged property was sold to CDB as the highest bidder. Guansing Court, Branch 96, Quezon City, where it was docketed as Civil Case No. Q-
failed to redeem, and on March 2, 1987, CDB consolidated title to the 89-2863. On April 20, 1990, the complaint was amended by impleading the
property in its name. TCT No. 300809 in the name of Guansing was Register of Deeds of Quezon City as an additional defendant.
cancelled and, in lieu thereof, TCT No. 355588 was issued in the name of
CDB. 1âwphi1. nêt
On March 10, 1993, the trial court rendered a decision in favor of the Lim
spouses. It ruled that: (1) there was a perfected contract of sale between
On June 16, 1988, private respondent Lolita Chan Lim, assisted by a Lim and CDB, contrary to the latter's contention that the written offer to
broker named Remedios Gatpandan, offered to purchase the property from purchase and the payment of P30,000.00 were merely pre-conditions to the
CDB. The written Offer to Purchase, signed by Lim and Gatpandan, states sale and still subject to the approval of FEBTC; (2) performance by CDB of
in part: its obligation under the perfected contract of sale had become impossible
on account of the 1984 decision in Civil Case No. Q-39732 cancelling the
title in the name of mortgagor Rodolfo Guansing; (3) CDB and FEBTC were
We hereby offer to purchase your property at #63 Calavite and
not exempt from liability despite the impossibility of performance, because
Retiro Sts., La Loma, Quezon City for P300,000.00 under the
they could not credibly disclaim knowledge of the cancellation of Rodolfo
following terms and conditions:
Guansing's title without the admitting their failure to discharge their duties
 Page 7 of 11

to the public as reputable banking institutions; and (4) CDB and FEBTC are courts are not bound by the name or title given to it by the contracting
liable for damages for the prejudice caused against the Lims.3 Based on parties.7 In the case at bar, the sum of P30,000.00, although denominated
the foregoing findings, the trial court ordered CDB and FEBTC to pay in the offer to purchase as "option money," is actually in the nature of
private respondents, jointly and severally, the amount of P30,000.00 plus earnest money or down payment when considered with the other terms of
interest at the legal rate computed from June 17, 1988 until full payment. It the offer. In Carceler v. Court of Appeals,8 we explained the nature of an
also ordered petitioners to pay private respondents, jointly and severally, option contract, viz. —
the amounts of P250,000.00 as moral damages, P50,000.00 as exemplary
damages, P30,000.00 as attorney's fees, and the costs of the suit.4 An option contract is a preparatory contract in which one party
grants to the other, for a fixed period and under specified
Petitioners brought the matter to the Court of Appeals, which, on October conditions, the power to decide, whether or not to enter into a
14, 1997, affirmed in toto the decision of the Regional Trial Court. principal contract, it binds the party who has given the option not to
Petitioners moved for reconsideration, but their motion was denied by the enter into the principal contract with any other person during the
appellate court on December 9, 1997. Hence, this petition. Petitioners period; designated, and within that period, to enter into such
contend that — contract with the one to whom the option was granted, if the latter
should decide to use the option. It is a separate agreement distinct
1. The Honorable Court of Appeals erred when it held that from the contract to which the parties may enter upon the
petitioners CDB and FEBTC were aware of the decision dated consummation of the option.
March 23, 1984 of the Regional Trial Court of Quezon City in Civil
Case No. Q-39732. An option contract is therefore a contract separate from and preparatory to
a contract of sale which, if perfected, does not result in the perfection or
2. The Honorable Court of Appeals erred in ordering petitioners to consummation of the sale. Only when the option is exercised may a sale be
pay interest on the deposit of THIRTY THOUSAND PESOS perfected.
(P30,000.00) by applying Article 2209 of the New Civil Code.
In this case, however, after the payment of the 10% option money, the
3. The Honorable Court of Appeals erred in ordering petitioners to Offer to Purchase provides for the payment only of the balance of the
pay moral damages, exemplary damages, attorney's fees and costs purchase price, implying that the "option money" forms part of the purchase
of suit. price. This is precisely the result of paying earnest money under Art. 1482
of the Civil Code. It is clear then that the parties in this case actually
I. entered into a contract of sale, partially consummated as to the payment of
the price. Moreover, the following findings of the trial court based on the
testimony of the witnesses establish that CDB accepted Lim's offer to
At the outset, it is necessary to determine the legal relation, if any, of the
purchase:
parties.
It is further to be noted that CDB and FEBTC already considered
Petitioners deny that a contract of sale was ever perfected between them
plaintiffs' offer as good and no longer subject to a final approval. In
and private respondent Lolita Chan Lim. They contend that Lim's letter-
his testimony for the defendants on February 13, 1992, FEBTC's
offer clearly states that the sum of P30,000,00 was given as option money,
Leomar Guzman stated that he was then in the Acquired Assets
not as earnest money.5 They thus conclude that the contract between CDB
Department of FEBTC wherein plaintiffs' offer to purchase was
and Lim was merely an option contract, not a contract of sale.
endorsed thereto by Myoresco Abadilla, CDB's senior vice-
president, with a recommendation that the necessary petition for
The contention has no merit. Contracts are not defined by the parries writ of possession be filed in the proper court; that the
thereto but by principles of law.6 In determining the nature of a contract, the
 Page 8 of 11

recommendation was in accord with one of the conditions of the We cannot sustain petitioners' view. Article 1370 of the Civil Code
offer, i.e., the clearing of the property of illegal occupants or tenants is applicable only to valid and enforceable contracts. The Regional
(tsn, p. 12); that, in compliance with the request, a petition for writ Trial Court and the Court of Appeals rules that the principal contract
of possession was thereafter filed on July 22, 1988 (Exhs. 1 and 1- of sale contained in Exhibit C and the auxiliary contract of
A); that the offer met the requirements of the banks; and that no repurchase in Exhibit D are both void. This conclusion of the two
rejection of the offer was thereafter relayed to the plaintiffs (p. 17); lower courts appears to find support in Dignos v. Court of Appeals,
which was not a normal procedure, and neither did the banks return where the Court held:
the amount of P30,000.00 to the plaintiffs.9
Be that as it may, it is evident that when petitioners sold
Given CDB's acceptance of Lim's offer to purchase, it appears that a said land to the Cabigas spouses, they were no longer
contract of sale was perfected and, indeed, partially executed because of owners of the same and the sale is null and void.
the partial payment of the purchase price. There is, however, a serious
legal obstacle to such sale, rendering it impossible for CDB to perform its In the present case, it is clear that the sellers no longer had any title
obligation as seller to deliver and transfer ownership of the property. to the parcels of land at the time of sale. Since Exhibit D, the
alleged contract of repurchase, was dependent on the validity of
Nemo dat quod non habet, as an ancient Latin maxim says. One cannot Exhibit C, it is itself void. A void contract cannot give rise to a valid
give what one does not have. In applying this precept to a contract of sale, one. Verily, Article 1422 of the Civil Code provides that (a) contract
a distinction must be kept in mind between the "perfection" and which is the direct result of a previous illegal contract, is also void
"consummation" stages of the contract. and inexistent.

A contract of sale is perfected at the moment there is a meeting of minds We should however add that Dignos did not cite its basis for ruling
upon the thing which is the object of the contract and upon the price.10 It is, that a "sale is null and void" where the sellers "were no longer the
therefore, not required that, at the perfection stage, the seller be the owner owners" of the property. Such a situation (where the sellers were no
of the thing sold or even that such subject matter of the sale exists at that longer owners) does not appear to be one of the void contracts
point in time.11 Thus, under Art. 1434 of the Civil Code, when a person sells enumerated in Article 1409 of the Civil Code. Moreover, the Civil
or alienates a thing which, at that time, was not his, but later acquires title Code itself recognizes a sale where the goods are to be acquired . .
thereto, such title passes by operation of law to the buyer or grantee. This . by the seller after the perfection of the contract of sale, clearly
is the same principle behind the sale of "future goods" under Art. 1462 of implying that a sale is possible even if the seller was not the owner
the Civil Code. However, under Art. 1459, at the time of delivery or at the time of sale, provided he acquires title to the property later
consummation stage of the sale, it is required that the seller be the owner on.
of the thing sold. Otherwise, he will not be able to comply with his obligation
to transfer ownership to the buyer. It is at the consummation stage where In the present case, however, it is likewise clear that the sellers can
the principle of nemo dat quod non habet applies. no longer deliver the object of the sale to the buyers, as the buyers
themselves have already acquired title and delivery thereof from
In Dignos v. Court of Appeals,12 the subject contract of sale was held void the rightful owner, the DBP. Thus, such contract may be deemed to
as the sellers of the subject land were no longer the owners of the same be inoperative and may thus fall, by analogy, under item No. 5 of
because of a prior sale.13 Again, in Nool v. Court of Appeals,14 we ruled that Article 1409 of the Civil Code: Those which contemplate an
a contract of repurchase, in which the seller does not have any title to the impossible service. Article 1459 of the Civil Code provides that "the
property sold, is invalid: vendor must have a right to transfer the ownership thereof [subject
of the sale] at the time it is delivered." Here, delivery of ownership is
no longer possible. It has become impossible.15
 Page 9 of 11

In this case, the sale by CDB to Lim of the property mortgaged in 1983 by send representatives to the premises of the land offered as collateral and to
Rodolfo Guansing must, therefore, be deemed a nullity for CDB did not investigate who are real owners thereof, noting that banks are expected to
have a valid title to the said property. To be sure, CDB never acquired a exercise more care and prudence than private individuals in their dealings,
valid title to the property because the foreclosure sale, by virtue of which, even those involving registered lands, for their business is affected with
the property had been awarded to CDB as highest bidder, is likewise void public interest. We held thus:
since the mortgagor was not the owner of the property foreclosed.
We, indeed, find more weight and vigor in a doctrine which
A foreclosure sale, though essentially a "forced sale," is still a sale in recognizes a better right for the innocent original registered owner
accordance with Art. 1458 of the Civil Code, under which the mortgagor in who obtained his certificate of title through perfectly legal and
default, the forced seller, becomes obliged to transfer the ownership of the regular proceedings, than one who obtains his certificate from a
thing sold to the highest bidder who, in turn, is obliged to pay therefor the totally void one, as to prevail over judicial pronouncements to the
bid price in money or its equivalent. Being a sale, the rule that the seller effect that one dealing with a registered land, such as a purchaser,
must be the owner of the thing sold also applies in a foreclosure sale. This is under no obligation to look beyond the certificate of title of the
is the reason Art. 208516 of the Civil Code, in providing for the essential vendor, for in the latter case, good faith has yet to be established
requisites of the contract of mortgage and pledge, requires, among other by the vendee or transferee, being the most essential condition,
things, that the mortgagor or pledgor be the absolute owner of the thing coupled with valuable consideration, to entitle him to respect for his
pledged or mortgaged, in anticipation of a possible foreclosure sale should newly acquired title even as against the holder of an earlier and
the mortgagor default in the payment of the loan. perfectly valid title. There might be circumstances apparent on the
face of the certificate of title which could excite suspicion as to
There is, however, a situation where, despite the fact that the mortgagor is prompt inquiry, such as when the transfer is not by virtue of a
not the owner of the mortgaged property, his title being fraudulent, the voluntary act of the original registered owner, as in the instant case,
mortgage contract and any foreclosure sale arising therefrom are given where it was by means of a self-executed deed of extra-judicial
effect by reason of public policy. This is the doctrine of "the mortgagee in settlement, a fact which should be noted on the face of Eusebia
good faith" based on the rule that all persons dealing with property covered Tomas certificate of title. Failing to make such inquiry would hardly
by a Torrens Certificate of Title, as buyers or mortgagees, are not required be consistent with any pretense of good faith, which the appellant
to go beyond what appears on the face of the title.17 The public interest in bank invokes to claim the right to be protected as a mortgagee, and
upholding the indefeasibility of a certificate of title, as evidence of the lawful for the reversal of the judgment rendered against it by the lower
ownership of the land or of any encumbrance thereon, protects a buyer or court.19
mortgagee who, in good faith, relied upon what appears on the face of the
certificate of title. In this case, there is no evidence that CDB observed its duty of diligence in
ascertaining the validity of Rodolfo Guansing's title. It appears that Rodolfo
This principle is cited by petitioners in claiming that, as a mortgagee bank, Guansing obtained his fraudulent title by executing an Extra-Judicial
it is not required to make a detailed investigation of the history of the title of Settlement of the Estate With Waiver where he made it appear that he and
the property given as security before accepting a mortgage. Perfecto Guansing were the only surviving heirs entitled to the property,
and that Perfecto had waived all his rights thereto. This self-executed deed
We are not convinced, however, that under the circumstances of this case, should have placed CDB on guard against any possible defect in or
CDB can be considered a mortgagee in good faith. While petitioners are question as to the mortgagor's title. Moreover, the alleged ocular inspection
not expected to conduct an exhaustive investigation on the history of the report20 by CDB's representative was never formally offered in evidence.
mortgagor's title, they cannot be excused from the duty of exercising the Indeed, petitioners admit that they are aware that the subject land was
due diligence required of banking institutions. In Tomas v. Tomas,18 we being occupied by persons other than Rodolfo Guansing and that said
noted that it is standard practice for banks, before approving a loan, to persons, who are the heirs of Perfecto Guansing, contest the title of
Rodolfo.21
 Page 10 of 11

II. their money, interest thereon at the legal rate should be computed from
August 29, 1989, the date of filing of Civil Case No. Q-89-2863, not June
The sale by CDB to Lim being void, the question now arises as to who, if 17, 1988, when petitioners accepted the payment. This is in accord with our
any, among the parties was at fault for the nullity of the contract. Both the ruling in Castillo v. Abalayan24 that in case of avoid sale, the seller has no
trial court and the appellate court found petitioners guilty of fraud, because right whatsoever to keep the money paid by virtue thereof and should
on June 16, 1988, when Lim was asked by CDB to pay the 10% option refund it, with interest at the legal rate, computed from the date of filing of
money, CDB already knew that it was no longer the owner of the said the complaint until fully paid. Indeed, Art. 1412(2) which provides that the
property, its title having been cancelled.22 Petitioners contend that: (1) such non-guilty party "may demand the return of what he has given" clearly
finding of the appellate court is founded entirely on speculation and implies that without such prior demand, the obligation to return what was
conjecture; (2) neither CDB nor FEBTC was a party in the case where the given does not become legally demandable.
mortgagor's title was cancelled; (3) CDB is not privy to any problem among
the Guansings; and (4) the final decision cancelling the mortgagor's title Considering CDB's negligence, we sustain the award of moral damages on
was not annotated in the latter's title. the basis of Arts. 21 and 2219 of the Civil Code and our ruling in Tan
v. Court of Appeals25 that moral damages may be recovered even if a
As a rule, only questions of law may be raised in a petition for review, bank's negligence is not attended with malice and bad faith. We find,
except in circumstances where questions of fact may be properly however, that the sum of P250,000.00 awarded by the trial court is
raised.23 Here, while petitioners raise these factual issues, they have not excessive. Moral damages are only intended to alleviate the moral suffering
sufficiently shown that the instant case falls under any of the exceptions to undergone by private respondent, not to enrich them at the expenses of the
the above rule. We are thus bound by the findings of fact of the appellate petitioners.26 Accordingly, the award of moral damages must be reduced to
court. In any case, we are convinced of petitioners' negligence in approving P50,000.00.
the mortgage application of Rodolfo Guansing.
Likewise, the award of P50,000.00 as exemplary damages, although
III. justified under Art. 2232 of the Civil Code, is excessive and should be
reduced to P30,000.00. The award of P30,000.00 attorney's fees based on
We now come to the civil effects of the void contract of sale between the Art. 2208, pars. 1, 2, 5 and 11 of the Civil Code should similarly be reduced
parties. Article 1412(2) of the Civil Code provides: to P20,000.00.

If the act in which the unlawful or forbidden cause consists does not WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the
constitute a criminal offense, the following rules shall be observed: MODIFICATION as to the award of damages as above stated. 1âwphi1.nêt

xxx xxx xxx SO ORDERED.

(2) When only one of the contracting parties is at fault, he cannot Bellosillo, Quisumbing, Buena and De Leon, Jr., JJ., concur.
recover what he has given by reason of the contract, or ask for the
fulfillment of what has been promised him. The other, who is not at
fault, may demand the return of what he has given without any
obligation to comply with his promise.
Footnotes
Private respondents are thus entitled to recover the P30,000,00 option
money paid by them. Moreover, since the filing of the action for damages
against petitioners amounted to a demand by respondents for the return of
 Page 11 of 11
1
Per Justice B.A. Adefuin-de la Cruz and concurred in by Justice Philippine National Bank v. Intermediate Appellate Court, 176
17

Fidel F. Purisima (now Associate Justice of the Supreme Court) SCRA 736 (1989), citing Quimson v. Suarez, 45 Phil 901 (1924).
and Justice Ricardo P. Galvez.
18
98 SCRA 280 (1980) (Emphasis added).
2
Exhibit 2; Records, pp. 149-151.
19
Id., at 287.
3
RTC Decision, CA Rollo, pp. 32-34.
20
TSN of the testimony of Atty. Rafael Hilao, Jr., p. 10, April 10,
4
Id., at p. 35. 1992.

5
Petition, p. 13; Rollo, p. 21. 21
Petition, p. 8; Appellant's Brief, p. 6; Rollo, pp. 6 and 16.

6
Borromeo v. Court of Appeals, 47 SCRA 65 (1972). 22
CA Decision, Rollo, p. 40.

7
Baluran v. Navarro, 79 SCRA 309 (1977). See Philippine Home Assurance Corp. v. Court of Appeals, 257
23

SCRA 468 (1996).

8
G.R. No. 127471, February 10, 1999.
24
30 SCRA 359 (1969).
9
RTC Decision, CA Rollo, p. 49.
25
239 SCRA 310 (1994).
10
CIVIL CODE, ART. 1475.
26
Zenith Insurance Corporation v. Court of Appeals, 185 SCRA 402
11
Martin v. Reyes, 91 Phil. 666 (1952). (1990).

12
158 SCRA 375 (1988).

13
Id., p. 383.

14
276 SCRA 144 (1997).

15
Id., at pp. 157-158.

16
The following requisites are essential to the contracts of pledge
and mortgage:

xxx xxx xxx

(2) That the pledgor or mortgagor be the absolute owner of

the thing pledged or mortgaged.