Rapid City Realty and Development Corp. v. Paez-Cline, G.R. No. 217148.

December 7, 2021 (Resolution)

FACTS:
This case stemmed from a complaint for the Declaration of Nullity of Subdivision,
Consolidation/Subdivision Plans and Transfer Certificate of Titles, Specific Performance,
Reformation of Deed of Sale, Quieting of Titles, Declaratory Relief, Mandamus and
Damages, filed by Sta. Lucia Realty and Rapid City Realty against Spouses Villa [,]
DPWH, Department of Environment and Natural Resources (DENR), Register of Deeds
of Antipolo and OSG [(collectively, the defendants)].
On September 4, 2007, the RTC rendered [a] decision6 in favor of xx x Sta. Lucia Realty
and Rapid City Realty due to the default of the defendants.
The CA, in its Decision dated July 1, 2014, granted the appeal of the Spouses Villa as
well as the OSG and DPWH.
The CA stated that while it was in complete agreement with the RTC's findings that all
herein respondents were properly declared in default, the CA disagreed with the RTC's
judgment because Sta. Lucia Realty and Rapid City Realty are not real parties in interest
to ask for the nullification and cancellation of titles, plans, and the Deed of Absolute Sale
dated February 26, 2003.
Hence the present Petition filed by Rapid City Realty.
While petitioner seeks the nullification of certain subdivision and/or consolidation plans
as well as certificates of title, the nexus thereof is the nullification of the Deed of Absolute
Sale dated February 26, 2003 executed by the Republic of the Philippines (Republic)
through the DPWH and Lourdes covering Lot 2, (LRC) Psd-214777 with an area of 21,437
square meters located in Barangay San Isidro (Brgy. Inarawan and Brgy. San Luis),
Antipolo City.
It is the contention of petitioner that said Lot 2 was a road lot before it was converted into
ordinary private lots by Lourdes, and, after the conversion, sold to the Republic through
the DPWH.
Petitioner claims that since said Lot 2 should be a road lot, it, together with its successors-
in-interest, the public, passing pedestrians and vehicles, has a vested right therein, and
the sale thereof to the Republic resulted to the damage and prejudice of petitioner. On
this premise, petitioner asserts that, being a party who stands to be benefited or
injured by the judgment of the suit, it is a real party in interest.

ISSUE: WON the petitioner is not a real party in interest.

RULING: Yes, the petitioner is not a real party in interest.

Based on the principle of relativity of contracts embodied in Article 131125 of the Civil
Code, a contract can only bind the parties who had entered into it, or their successors
who have assumed their personality or their juridical position; and as a consequence,
such contract can neither favor nor prejudice a third person (in conformity with the
axiom res inter alios acta aliis neque nocet prodest). Thus, generally, a contract cannot
produce any effect whatsoever as far as third persons are concerned; and he or she, who
is not a party thereto, or an assignee thereunder, has no legal capacity to challenge its
validity. This lack of capacity on the part of third persons is apparent in voidable,
unenforceable and void contracts under Articles 1397, 1408 and 1421 of the Civil Code,
which provide:

ART. 1397. The action for the annulment of contracts may be instituted by all who are
thereby obliged principally or subsidiarily. However, persons who are capable cannot
allege the incapacity of those with whom they contracted; nor can those who exerted
intimidation, violence, or undue influence, or employed fraud, or caused mistake base
their action upon these flaws of the contract. (1302a)

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ART. 1408. Unenforceable contracts cannot be assailed by third persons.

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ART. 1421. The defense of illegality of contracts is not available to third persons whose
interests are not directly affected. (n)

However, insofar as rescissible contracts are concerned, they can be attacked by a third
party who is injured or defrauded since, by nature, a rescissible contract is one which is
valid because it contains all of the essential requisites prescribed by law, but which is
defective because of injury or damage to either of the contracting parties or to third
persons.

In the present case, petitioner questions the validity of the Deed of Absolute Sale dated
February 26, 2003 and seeks its nullification, "on the ground of fraud x x x [and] Lot 2 Psd
214777 [being] a road lot."37 While a fraudulent contract is not expressly provided in
A1iicle 1409 of the Civil Code as one of those which are inexistent and void from the
beginning, "[t]hose whose object is outside the commerce of men"38 are part of the
enumeration therein. Since the issue concerns the nullity of the contract being
questioned, the applicable provision of the Civil Code is not Article 1397, but Article
1421 - "The defense of illegality of contracts is not available to third persons whose
interests are not directly affected."

While the operative phrase in Article 1397 is "obliged principally or subsidiarily" and its
precursor, Article 1302, "principally or subsidiarily obligated," and in Article 1421 "interests
not directly affected", there is no cogent reason to depart from the Court's
pronouncements in House International Building Tenants regarding "interest" as
referring to "material interest" and not mere "incidental interest" in relation to the
definition of a real party in interest under Section 2, Rule 3 of the Rules, who can
assail the illegality of the contract under Article 1421.

In Ibañez, the Court found the absence of prejudice because of the failure to show a
preferred right on the part of the third person while in Compañia General de Tabacos, the
nullity of the contract would not have created any preferential right in favor of the third
person since the subject property therein would just be reverted back to the State and the
seller would be obliged to return the purchase price to the State.

The Court notes that all the RTC found regarding the damage suffered by petitioner and
Sta. Lucia Realty "[b]ecause of all the [questioned] acts committed by respondents in
relation [to] the rights of [petitioner and Sta. Lucia Realty, their] good name and reputation
were damaged." Clearly, such damage or prejudice does not even approximate the
material interest required of a real party in interest. Neither can it be considered "an
interest directly affected" by the Deed of Absolute Sale sought to be nullified. And, it is
definitely not the interest in issue in a contract nullification suit.

If the questioned Deed of Absolute Sale were nullified, the same effect as in Compañia
General de Tabacos would result. Subject Lot 2, which is alleged as road lot, would
revert back to the State and Lourdes would return the purchase price which she
received from the Republic through the DPWH. No preferential right over Lot 2
would inure in petitioner's favor. Similarly, no direct prejudice would befall upon
petitioner with its nullification since similar to Ibañez it would not have any
preferred right over Lot 2. If at all, the interest of petitioner that might have been affected
by the questioned Deed of Absolute Sale would be merely incidental, not material,
given the absence of any direct, positive prejudice on its part. The supposed interest
of petitioner in Lot 2 is simply not in issue in resolving whether the questioned Deed is
void.