wellex v u-land

8/20/2019 WELLEX v U-LAND

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THE WELLEX GROUP, INC. v. U-LAND AIRLINES, CO., LTD.

D E C I S I O N

LEONEN, J.:

This is a Petition1 for Review on Certiorari under Rule 45 of the Rules ofCourt. The Wellex Group, Inc. Wellex! pra"s that the #ecision$ dated %ul"&', $''4 of the Court of (ppeals in C()G.R. C* +o. 4-5' e reversed andset aside.&

The Court of (ppeals affir/ed the #ecision4 of the Re0ional Trial Court,ranch 2$ of 3aati Cit" in Civil Case +o. )14'. The Re0ional Trial Courtrendered 6ud0/ent in favor of 7)8and (irlines, Co., 8td. 7)8and! andordered the rescission of the 3e/orandu/ of (0ree/ent5 etween Wellexand 7)8and.2

Wellex is a corporation estalished under Philippine law and it /aintainsairline operations in the Philippines. It owns shares of stoc in severalcorporations includin0 (ir Philippines International Corporation (PIC!,Philippine 9states Corporation P9C!, and 9xpress :avin0s an 9:!.- Wellex alle0es that it owns all shares of stoc of (ir Philippines Corporation(PC!.

7)8and (irlines Co. 8td. 7)8and! ;is a corporation dul" or0ani


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Wellex and 7)8and a0reed to an initial purchase price of P'.&' per share of (PIC and P'.25 per share of P9C. Aowever, the" liewise a0reed that thefinal price of the shares of stoc would e reflected in the actual sharepurchase a0ree/ent.1

oth parties a0reed that the purchase price of (PIC shares and P9C shareswould e paid upon the execution of the share purchase a0ree/ent and

WellexEs deliver" of the stoc certificates coverin0 the shares of stoc. Thetransfer of (PIC shares and P9C shares to 7)8and was conditioned on thefull re/ittance of the final purchase price as reflected in the share purchasea0ree/ent. ?urther, the transfer was conditioned on the approval of the:ecurities and 9xchan0e Co//ission of the issuance of the shares of stocand the approval " the Taiwanese 0overn/ent of 7)8andEs acuisition ofthese shares of stoc.$'

Thus, :ection $ of the ?irst 3e/orandu/ of (0ree/ent reads@

$. (cuisition of (PIC and P9C :hares. ) Within fort" 4'! da"s fro/ datehereof unless extended " /utual a0ree/ent!, 7)8(+# and W9889D shallexecute a :hare Purchase (0ree/ent ;:AP(=! coverin0 the acuisition "7)8(+# of the (PIC :hares and P9C :hares collectivel", the ;:u6ect:hares=!. Without pre6udice to an" suseuent a0ree/ent etween theparties, the purchase price for the (PIC :hares to e reflected in the :AP(shall e TAIRTL C9+T(*>: P'.&'! per share and that for the P9C :haresat :IDTL ?I*9 C9+T(*>: P'.25! per share.

The purchase price for the :u6ect :hares as reflected in the :AP( shall epaid in full upon execution of the :AP( a0ainst deliver" of the :u6ect:hares. The parties /a" a0ree on such other ter/s and conditions0overnin0 the acuisition of the :u6ect :hares to e provided in a separateinstru/ent.

The transfer of the :u6ect :hares shall e effected to 7)8(+# providedthat@ i! the purchase price reflected in the :AP( has een full" paid ii! thePhilippine :ecurities M 9xchan0e Co//ission :9C! shall have approvedthe issuance of the :u6ect :hares and iii! an" reuired approval " theTaiwanese 0overn/ent of the acuisition " 7)8(+# of the :u6ect :haresshall liewise have een otained.$1

II. O)er"to# "#$ m"#"&eme#t of APIC*PEC*APC

7)8and was ;entitled to a proportionate representation in the oard of#irectors of (PIC and P9C in accordance with Philippine law.=$$ >perational

control of (PIC and (PC would e exercised 6ointl" " Wellex and 7)8and;on the asis of /utual a0ree/ent and consultations.=$& The parties intended

that 7)8and would 0ain pri/ar" control and responsiilit" for the internationaloperations of (PC.$4 Wellex /anifested that (PC is a susidiar" of (PIC inthe second prea/ular clause of the ?irst 3e/orandu/ of (0ree/ent.$5

:ection & of the ?irst 3e/orandu/ of (0ree/ent reads@

&. >perationB3ana0e/ent of (PICB(PC. ) 7)8(+# shall e entitled to aproportionate representation in the oard of #irectors of (PIC and P9C in

accordance with Philippine law. ?or this purpose, W9889D shall cause theresi0nation of its no/inated #irectors in (PIC and P9C to acco//odate 7)8(+#Es pro rata nu/er of #irectors. :u6ect to applicale Philippine lawand re0ulations, operational control of (PIC and (ir Philippines Corporation;(PC=! shall e lod0ed 6ointl" to W9889D and 7)8(+# on the asis of/utual a0ree/ent and consultations. ?urther, 7)8(+# /a" second technicaland other consultants into (PIC andBor (PC with the view to increasin0service, productivit" and efficienc", identif"in0 and i/ple/entin0 profit)service opportunities, developin0 technical capailit" and resources, andinstallin0 adeuate safet" s"ste/s and procedures. In addition, 7)8(+#shall arran0e for the lease " (PC of at least three &! aircrafts owned " 7)8(+# under such ter/s as the parties shall /utuall" a0ree upon. It is theintent of the parties that 7)8(+# shall have pri/ar" control and responsiilit"for (PCEs international operations.$2

III. E#ter#& #to "#$ f%#$#& " +o#t $eeo)me#t "&reeme#t

Wellex and 7)8and also a0reed to enter into a 6oint develop/ent a0ree/entsi/ultaneous with the execution of the share purchase a0ree/ent. The 6ointdevelop/ent a0ree/ent shall cover housin0 and other real estatedevelop/ent pro6ects.$

7)8and a0reed to re/it the su/ of 7:N& /illion not later than 3a" $$, 1-.This su/ was to serve as initial fundin0 for the develop/ent pro6ects that

Wellex and 7)8and were to undertae pursuant to the 6oint develop/enta0ree/ent. In exchan0e for the 7:N& /illion, Wellex would deliver stoccertificates coverin0 5,''',''' P9C shares to 7)8and.$-

The execution of a 6oint develop/ent a0ree/ent was also conditioned on theexecution of a share purchase a0ree/ent.$

:ection 4 of the ?irst 3e/orandu/ of (0ree/ent reads@

4. %oint #evelop/ent (0ree/ent with P9C. O :i/ultaneous with theexecution of the :AP(, 7)8(+# and P9C shall execute a 6oint develop/enta0ree/ent ;%#(=! to pursue propert" develop/ent pro6ects in the

Philippines. The %#( shall cover specific housin0 and other real estatedevelop/ent pro6ects as the parties shall a0ree. (ll profits derived fro/ the


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pro6ects covered " the %#( shall e shared euall" etween 7)8(+# andP9C. 7)8(+# shall, not later than 3a" $$, 1-, re/it the su/ of 7:N&.'/illion as initial fundin0 for the aforesaid develop/ent pro6ects a0ainstdeliver" " W9889D of 5,''',''' shares of P9C as securit" for saida/ount in accordance with :ection elow.&'

In case of conflict etween the provisions of the ?irst 3e/orandu/ of (0ree/ent and the provisions of the share purchase a0ree/ent or its

i/ple/entin0 a0ree/ents, the ter/s of the ?irst 3e/orandu/ of (0ree/entwould prevail, unless the parties specificall" stated otherwise or the contextof an" a0ree/ent etween the parties would reveal a different intent.&1 Thus,in :ection 2 of the ?irst 3e/orandu/ of (0ree/ent@

2. Pri/ac" of (0ree/ent. O It is a0reed that in case of conflict etween theprovisions of this (0ree/ent and those of the :AP( and the i/ple/entin0a0ree/ents of the :AP(, the provisions of this (0ree/ent shall prevail,unless the parties specificall" state otherwise, or the context clearl" reveal acontrar" intent.&$

Finally, Wellex and U-Land agreed that if they were unable to agree on theterms of the share purchase agreement and the joint developmentagreement within ! days from signing, then the First "emorandum of

#greement would cease to be effective.&&

In case no a0ree/ents were executed, the parties would e released fro/their respective undertain0s, except that Wellex would e reuired to refundwithin three &! da"s the 7:N& /illion 0iven as initial fundin0 " 7)8and forthe develop/ent pro6ects. If Wellex was unale to refund the 7:N& /illion to7)8and, 7)8and would have the ri0ht to recover on the 5,''',''' P9Cshares that would e delivered to it.&4 :ection of the ?irst 3e/orandu/ of

(0ree/ent reads@

. *alidit". ) In the event the parties are unale to a0ree on the ter/s of the:AP( andBor the %#( within fort" 4'! da"s fro/ date hereof or such periodas the parties shall /utuall" a0ree!, this 3e/orandu/ of (0ree/ent shallcease to e effective and the parties released fro/ their respectiveundertain0s herein, except that W9889D shall refund the 7:N&.' /illionprovided under :ection 4 within three &! da"s therefro/, otherwise 7)8(+#shall have the ri0ht to recover on the 5,''',''' P9C shares delivered to 7)8(+# under :ection 4.&5

The ?irst 3e/orandu/ of (0ree/ent was si0ned " Wellex Chair/an andPresident Willia/ T. Gatchalian 3r. Gatchalian! and 7)8and Chair/an Ker

Gee Wan0 3r. Wan0! on 3a" 12, 1-.&2

A##e /A0 or the Se'o#$ !emor"#$%m of A&reeme#t

(ttached and /ade an inte0ral part of the ?irst 3e/orandu/ of (0ree/entwas (nnex ;(,= as stated in the second prea/ular clause. It is a docu/entdenoted as a ;3e/orandu/ of (0ree/ent= entered into " Wellex, (PIC,and (PC.&

The :econd 3e/orandu/ of (0ree/ent states@

This 3e/orandu/ of (0ree/ent, /ade and executed this FFFth da" of FFFFFF at 3aati Cit", " and etween@

THE WELLEX GROUP, INC., a corporation dul" or0ani


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+>W, TA9R9?>R9, the parties a0ree as follows@

1. TWGI a0rees to transfer the (PC (#*(+C9: in (PIC in exchan0e for the FFFFF ille0ile in rollo! " (PIC to TWGI of invest/ent shares of (PIC in9xpress an, PetroChe/ical FFFFF ille0ile in rollo! of (sia Pacific,Repulic Resources M #evelop/ent Corporation and Philippine FFFFFille0ile in rollo! Corporation the ;(PIC I+*9:T39+T:=!.

$. TWGI liewise a0rees to transfer the (PC :A(R9: to (PIC in exchan0esolel" FFFFF ille0ile in rollo! the issuance " (PIC of >ne illion :evenAundred +inet" :even 3illion 9i0ht Aundred ?ift" :even Thousand ThreeAundred :ixt" ?our 1,,-5,&24! shares of its capital stoc of a FFFFFille0ile in rollo! value of P1.'' per share the ;(PIC :A(R9:=!, taen fro/the currentl" authorictoer 1, 1-.5$


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In addition, Wellex delivered to 7)8and Transfer Certificates of Title TCT!+os. T)$122, T)$121, T)$$-$&1, T)$$-$$, T)$11$5', and T)$125coverin0 properties owned " Westland Pacific Properties Corporation inulacan and TCT +os. T)1'&'2, T)11522, T)1'51', T)1$'$5', T)1114&-, and T)1$'$ coverin0 properties owned " Rexlon Realt" Group,Inc.5& >n >ctoer 1, 1-,54 7)8and received a letter fro/ Wellex, indicatin0a list of stoc certificates that the latter was 0ivin0 to the for/er " wa" of;securit".=55

#espite these transactions, Wellex and 7)8and still failed to enter into theshare purchase a0ree/ent and the 6oint develop/ent a0ree/ent.

In the letter 52 dated %ul" $$, 1, 1' /onths5 after the last for/alco//unication etween the two parties, 7)8and, throu0h counsel,de/anded the return of the 7:N,4,45.''.5- This letter was sent 14/onths after the si0nin0 of the ?irst 3e/orandu/ of (0ree/ent.

Counsel for 7)8and clai/ed that ;WellexJ hadJ un6ustifial" refused to enterinto the. . . :hare Purchase (0ree/ent.=5 (s far as 7)8and was concerned,the ?irst 3e/orandu/ of (0ree/ent was no lon0er in effect, pursuant to:ection .2' (s such, 7)8and offered to return all the stoc certificatescoverin0 (PIC shares and P9C shares as well as the titles to real propert"0iven " Wellex as securit" for the a/ount re/itted " 7)8and.21

Wellex sent 7)8and a letter 2$ dated (u0ust $, 1, which refuted 7)8andEsclai/s. Counsel for Wellex stated that the two parties carried out severalne0otiations that included finali


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/illion on 3a" $$, 1- was a /andator" oli0ation on the part of 7)8and.-

Wellex averred that it presented draft versions of the share purchasea0ree/ent, which were never finalifficer, as its sole witness.1'4 3r. Tsen0 testified that ;sJo/eti/e in1, 3r. Willia/ Gatchalian who was in Taiwan invited 7)8andJ to 6oin inthe operation of his airline co/pan".J=1'5 7)8and did not accept the offer atthat ti/e.1'2 #urin0 the first uarter of 1-, 3r. Gatchalian ;went to Taiwanand invited 7)8andJ to invest in (ir Philippines.J=1' This ti/e, 7)8andalle0ed that suseuent /eetin0s were held where 3r. Gatchalian,representin0 Wellex, ;clai/ed ownership of a /a6orit" of the shares of (PICand ownership " (PIC of a /a6orit" of the shares of (PC,J a do/esticcarrier in the Philippines.=1'- Wellex, throu0h 3r. Gatchalian, offered to sell to7)8and P9C shares as well.1'

(ccordin0 to 3r. Tsen0, the parties a0reed to enter into the ?irst3e/orandu/ of (0ree/ent after their second /eetin0.11' 3r. Tsen0 testifiedthat under this /e/orandu/ of a0ree/ent, the parties would enter into ashare purchase a0ree/ent ;within fort" 4'! da"s f ro/ its execution whichwouldJ put into effect the sale of the shares of stocJ of (PIC and P9C.J=111 Aowever, the ;sJhare pJurchase aJ0ree/ent was not executed within thefort")da" period despite the draft . . . 0iven " 7)8and to WellexJ.=11$

3r. Tsen0 further testified that it was onl" after the lapse of the 4')da" periodthat 7)8and discovered that Wellex needed /one" for the transfer of (PCshares to (PIC. This alle0edl" shoced 7)8and since under the ?irst3e/orandu/ of (0ree/ent, (PIC was supposed to own a /a6orit" of (PCshares. Thus, 7)8and re/itted to Wellex a total of 7:N,4,45.'' ecauseof its intent to eco/e involved in the aviation usiness in the Philippines.These re/ittances were confir/ed " Wellex throu0h a confir/ation letter.#espite the re/ittance of this a/ount, no share purchase a0ree/ent wasentered into " the parties.11&

Wellex presented its sole witness, 3s. 9lvira Tin0 3s. Tin0!, *ice Presidentof Wellex. :he ad/itted her nowled0e of the ?irst 3e/orandu/ of

(0ree/ent as she was involved in its draftin0. :he testified that the ?irst3e/orandu/ of (0ree/ent /ade reference, under its second prea/ularclause, to the :econd 3e/orandu/ of (0ree/ent entered into " Wellex,

(PIC, and (PC. :he testified that under the ?irst 3e/orandu/ of


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(0ree/ent, 7)8andEs purchase of (PIC shares and P9C shares fro/ Wellexwould tae place within 4' da"s, with the execution of a share purchasea0ree/ent.114

(ccordin0 to 3s. Tin0, after the 4')da" period lapsed, 7)8and Chair/an 3r.Wan0 reuested so/eti/e in %une of 1- for an extension for the executionof the share purchase a0ree/ent and the re/ittance of the 7:N& /illion. (sproof that 3r. Wan0 /ade this reuest, 3s. Tin0 testified that 3r. Wan0 sentseveral post)dated checs to cover the pa"/ent of the (PIC shares and P9Cshares and the initial fundin0 of 7:N& /illion for the 6oint develop/enta0ree/ent. :he testified that 3r. Wan0 presented a draft of the sharepurchase a0ree/ent, which Wellex re6ected. Wellex drafted a new version ofthe share purchase a0ree/ent.115 Aowever, the share purchase a0ree/entwas not executed ecause durin0 the period of ne0otiation, Wellex learnedfro/ other sources that 7)8and ;encountered difficulties startin0 >ctoer of1-.=112 3s. Tin0 ad/itted that 7)8and /ade the re/ittances to Wellex inthe a/ount of 7:N,4,45.''.11

3s. Tin0 testified that 7)8and was supposed to /ae an initial pa"/ent of7:N1 /illion under the ?irst 3e/orandu/ of (0ree/ent. Aowever, 7)8andonl" paid 7:N,4,45.''. The total pa"/ents should have a/ounted to7:N41 /illion.11-

?inall", 3s. Tin0 testified that Wellex tried to contact 7)8and to have a/eetin0 to thresh out the prole/s of the ?irst 3e/orandu/ of (0ree/ent,ut 7)8and did not repl". Instead, Wellex onl" received co//unication fro/7)8and re0ardin0 their suseuent ne0otiations throu0h the latterEs de/andletter dated %ul" $$, 1. In response, Wellex wrote to 7)8and reuestin0another /eetin0 to discuss the de/ands. Aowever, 7)8and alread" filed theCo/plaint for rescission and caused the attach/ent a0ainst the properties of Wellex, causin0 e/arrass/ent to Wellex.11

In the #ecision dated (pril 1', $''1, the Re0ional Trial Court of 3aati Cit"held that rescission of the ?irst 3e/orandu/ of (0ree/ent was proper@

The first issue /ust e resolved in the ne0ative. Preponderance of evidenceleans in favor of plaintiff that it is entitled to the issuance of the writ ofpreli/inar" attach/ent. PlaintiffEs evidence estalishes the facts that it isen0a0ed in the airline usiness in Taiwan, was approached " defendant,throu0h its Chair/an Willia/ Gatchalian, and was invited " the latter toinvest in an airline usiness in the Philippines, (ir Philippines Corporation(PC! that plaintiff eca/e interested in the invitation of defendant thatdurin0 the ne0otiations etween plaintiff and defendant, defendant inducedplaintiff to u" shares in (ir Philippines International Corporation (PIC!since it owns /a6orit" of the shares of (PC that defendant also induced

plaintiff to u" shares of (PIC in Philippine 9states Corporation P9C! that

the ne0otiations etween plaintiff and defendant cul/inated into the partiesexecutin0 a 3>( 9xhs. ;C= to ;C)&=, also 9xh. ;1=! that in the second;Whereas= clause of the 3>(, defendant represented that it has a currentairline operation throu0h its /a6orit")owned susidiar" (PIC, that under the3>(, the parties were supposed to enter into a :hare Purchase (0ree/ent:P(! within fort" 4'! da"s fro/ 3a" 12, 1-, the date the 3>( in order toeffect the transfer of (PIC and P9C shares of defendant to plaintiff thatplaintiff learned fro/ defendant that (PIC does not actuall" own a sin0leshare in (PC that plaintiff verified with the :ecurities and 9xchan0eCo//ission :9C!, " otainin0 a General Infor/ation :heet therefro/9xh. ;C)(ttach/ent=! that (PIC does not in fact own (PC that defendantinduced plaintiff to still re/it its invest/ent to defendant, which plaintiff did asad/itted " defendant per its Confir/ation 8etter 9xh. ;#=! in order that (PCshares could e transferred to (PIC that plaintiff re/itted a total of7:N,4,45.'' to defendant and that durin0 the fort")da" periodstipulated in the 3>( and even after the lapse of the said period, defendanthas not entered into the :P(, nor has defendant caused the transfer of (PCshares to (PIC.

In the second ;Whereas= clause of the 3>( 9xh. ;C=!, defendantEs/isrepresentation that (PIC owns (PC is /ade clear, as follows@;WA9R9(:, W9889D, on the other hand, has current airline operation in thePhilippines throu0h its /a6orit")owned susidiar" (ir Philippines InternationalCorporation 9xh. ;C=! and the latterEs susidiar", (ir Philippines Corporation,and in lie /anner also desires to expand its operation in the (sian re0ional/arets x x x= :econd Whereas of 9xh. ;C=!

>n the other hand, defendantEs evidence failed to disprove plaintiffEsevidence. The testi/on" of defendantEs sole witness 9lvira Tin0, that plaintiffnew at the ti/e of the si0nin0 of the 3>( that (PIC does not own a /a6orit"of the shares of (PC ecause another 3e/orandu/ of (0ree/ent wasattached to the 3>( 9xh ;1=! pertainin0 to the purchase of (PC shares "

(PIC is unavailin0. The second ;Whereas= clause of the 3>( leaves no

roo/ for interpretation. . . . The second 3>( purportedl" attached as (nnex;(= of this 3>( /erel" enli0htens the parties on the /anner " which (PICacuired the shares of (PC. esides, . . . the second 3>( was not acertified cop" and did not contain a /arin0 that it is an (nnex ;(= when itwas supposed to e an (nnex ;(= and a certified cop" per the 3>( etweenplaintiff and defendant. (s can e also 0athered fro/ her testi/on", 3s. Tin0does not have personal nowled0e that plaintiff was not infor/ed that (PICdid not own shares of (PC durin0 the ne0otiations as she was not presentdurin0 the ne0otiations etween plaintiff and defendantEs Willia/ Gatchalian.Aer participation in the a0ree/ent etween the parties wasJ /erel" li/itedto the preparation of the docu/ents to e si0ned. 3s. Tin0 testified, asfollows@

;Q #urin0 the ne0otiation, "ou did not now an"thin0 aout that=


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( I was not involved in the ne0otiation, sir.

Q (nd "ou are 6ust /ain0 "our state/ent that 7)8and new aout theintended transfer of shares fro/ (PC to (PIC ecause of this WA9R9(:C8(7:9 and the (nnex to this 3e/orandu/ of (0ree/ent

( Les, it was part of the contract.=T:+, 9lvira Tin0, %une 2, $''', pp. -)1'!

#efendantEs fraud in the perfor/ance of its oli0ation under the 3>( isfurther revealed when 3s. Tin0 testified on cross)exa/ination thatnotwithstandin0 the re/ittances /ade " plaintiff in the total a/ountn sicJ of7:N,4, 45.'' to partiall" defra" the cost of transferrin0 (PC shares to

(PIC even as of the "ear $''', as follows@

;Q 3s. Tin0, can "ou please tell the Court if "ou now who owns shares of (ir Philippines Corporation at this ti/e

( (ir Philippines Corporation ri0ht now is own sicJ " Wellex Group andcertain individual.

Q Aow /uch shares of (ir Philippines Corporation is owned " WellexGroup

( (round twent"...at this /o/ent around twent" five percent $5H!.

Q Can "ou tell us if "ou now who are the other owners of the shares of (irPhilippines

( There are several individual owners, I cannot recall the na/es.

Q Could sicJ "ou now if (ir Philippines IntEl. Corporation is one of theowners

( (s of this /o/ent, no sir.=

lid, p. 12!

That defendant represented to plaintiff that it needed the re/ittances ofplaintiff, even if no :P( was executed "et etween the parties, to effect thetransfer of (PC shares to (PIC is ad/itted " its sa/e witness also in thiswise@

;Q Lou said that re/ittances were /ade to the Wellex Group, Incorporated" plaintiff for the period fro/ %une 1- to :epte/er 1-,J is that

correct

( Les, :ir.

Q #urin0 all these ti/es, that re/ittances were /ade in the total a/ount of/ore than seven /illion dollars, did "ou ever now if plaintiff ased forevidence fro/ "our co/pan" that (IR PAI8IPPI+9: I+T9R+(TI>+(8C>RP>R(TI>+ has alread" acuired shares of (IR PAI8IPPI+9:C>RP>R(TI>+

( There were ueries on the /atter.

Q (nd what was "our answer to those ueries, 3ada/ Witness

( We infor/ed the/ that the decision was still in the process.

Q 9ven up to the ti/e that plaintiff 7)8and stopped the re/ittancesso/eti/e in :epte/er 1- "ou have not effected the transfer of shares of

(IR PAI8IPPI+9: C>RP>R(TI>+ to (IR PAI8IPPI+9: I+T9R+(TI>+C(8sicJ C>RP>R(TI>+,J a/ I correct

( (PC to (PIC, well at that ti/e itEs still in the process.

Q In fact, 3ada/ Witness, is it not correct for /e to sa" that one of thereasons wh" 7)8and Incorporated was convinced to re/it the a/ounts of/one" totallin0 seven /illion dollars plus, was that "our co/pan" said that itneeded funds to effect these transfers, is that correct

( Les, sir.=

lid, pp. $5)$!

(s the evidence adduced " the parties stand, plaintiff has estalished thefact that it had /ade re/ittances in the total a/ount of 7:N,4,45.'' to

defendant in order that defendant will /ae 0ood its representation that (PCis a susidiar" of (PIC. The said re/ittances are ad/itted " defendant.

3otwithstanding the said remittances, #/*0 does not own a single share of #/0. 4n the other hand, defendant could not even satisfactorily substantiateits claim that at least it had the intention to cause the transfer of #/0 sharesto #/*0 . #Jefendant oviousl" did not enter into the stipulated :P( ecauseit did not have the shares of (PC transferred to (PIC despite itsrepresentations. 7nder the circu/stances, it is clear that defendantfraudulentl" violated the provisions of the 3>(.1$' %mphasis supplied !

>n appeal, the Court of (ppeals affir/ed the rulin0 of the Re0ional Trial

Court.1$1 In its %ul" &', $''4 #ecision, the Court of (ppeals held that theRe0ional Trial Court did not err in 0rantin0 the rescission@


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Records show that in the answer filed " defendant)appellant, the latter itselfased for the rescission of the 3>(. Thus, in effect, it pra"s for the return ofwhat has een 0iven or paid under the 3>(, as the law creates saidoli0ation to return the thin0s which were the o6ect of the contract, and thesa/e could e carried out onl" when he who de/ands rescission can returnwhatever he /a" e oli0ed to restore. The law sa"s@;Rescission creates the oli0ation to return the thin0s which were the o6ectof the contract, to0ether with their fruits, and the price with its interestconseuentl", it can e carried out onl" when he who de/ands rescissioncan return whatever he /a" e oli0ed to restore.=

(ppellant, therefore, cannot as for rescission of the 3>( and "et refuse toreturn what has een paid to it. ?urther, appellantEs clai/ that the lower courterred in rulin0 for the rescission of the 3>( is asurd and ridiculous ecauserescission thereof is pra"ed for " the for/er. . . .

This Court a0rees with the lower court that appellee is the in6ured part" in thiscase, and therefore is entitled to rescission, ecause the rescission referredto here is predicated on the reach of faith " the appellant which reach isviolative of the reciprocit" etween the parties. It is noted that appellee haspartl" co/plied with its own oli0ation, while the appellant has not. It is,

therefore, the ri0ht of the in6ured part" to as for rescission ecause the 0uilt"part" cannot as for rescission.

The lower court . . . correctl" ruled that@;. . . This Court a0rees with plaintiff that defendantEs /isrepresentationsre0ardin0 (PICEs not ownin0 shares in (PC vitiates its consent to the 3>(.#efendantEs continued /isrepresentation that it will cause the transfer of

(PC shares in (PIC inducin0 plaintiff to re/it /one" despite the lapse of thestipulated fort" da" period, further estalishes plaintiffEs ri0ht to have the3>( rescinded.

:ection of the 3>( itself provides that in the event of the non)execution of

an :P( within the 4' da" period, or within the extensions thereof, thepa"/ents /ade " plaintiff shall e returned to it, to wit@

; *alidit".) In the event that the parties are unale to a0ree on the ter/s ofthe :AP( andBor %#( within fort" 4'! da"s fro/ the date hereof or suchperiod as the parties shall /utuall" a0ree!, this 3e/orandu/ of (0ree/entshall cease to e effective and the parties released fro/ their respectiveundertain0s herein, except that W9889D shall refund the 7:N&.' /illionunder :ection 4 within three &! da"s therefro/, otherwise 7)8(+# shallhave the ri0ht to recover the 5,''',''' P9C shares delivered to 7)8(+#under :ection 4.=

Clearl", the parties were not ale to a0ree on the ter/s of the :P( within andeven after the lapse of the stipulated 4' da" period. There ein0 no :P(

entered into " and etween the plaintiff and defendant, defendantEs return of the re/ittances ofJ plaintiff in the total a/ount of 7:N,4,45 is onl"proper, in the sa/e vein, plaintiff should return to defendant the titles andcertificates of stoc 0iven to it " defendant.1$$ 0itations omitted !

Aence, this Petition was filed.

Petto#er4s Ar&%me#ts

Petitioner Wellex ar0ues that contrar" to the findin0 of the Court of (ppeals,respondent 7)8and was not entitled to rescission ecause the latter itselfviolated the ?irst 3e/orandu/ of (0ree/ent. Petitioner Wellex states thatrespondent 7)8and was actuall" ound to pa" 7:N1.5 /illion for all of (PICshares and P9C shares under the ?irst 3e/orandu/ of (0ree/ent and the7:N& /illion to pursue the develop/ent pro6ects under the 6oint develop/enta0ree/ent. In su/, respondent 7)8and was liale to petitioner Wellex for thetotal a/ount of 7:N$'.5 /illion. +either the Court of (ppeals nor theRe0ional Trial Court /ade an" /ention of the le0al effect of respondent 7)8andEs failure to pa" the full purchase price.1$&

>n the share purchase a0ree/ent, petitioner Wellex asserts that itsoli0ation to deliver the totalit" of the shares of stoc would eco/ede/andale onl" upon re/ittance of the full purchase price of 7:N1.5/illion.1$4 The full re/ittance of the purchase price of the shares of stoc wasa suspensive condition for the execution of the share purchase a0ree/entand deliver" of the shares of stoc. Petitioner Wellex ar0ues that the use ofthe ter/ ;upon= in :ection $ of the ?irst 3e/orandu/ of (0ree/ent clearl"provides that the full pa"/ent of the purchase price /ust e 0iven;si/ultaneousl"= or ;concurrent= with the execution of the share purchasea0ree/ent.1$5

Petitioner Wellex raises that the Court of (ppeals erred in sa"in0 that the

rescission of the ?irst 3e/orandu/ of (0ree/ent was proper ecausepetitioner Wellex itself ased for this in its (nswer efore the trial court.1$2 Itasserts that ;there can e no rescission of a non)existent oli0ation, such asoneJ whose suspensive condition has not "et happened,J=1$ as held in/adilla v. 'pouses /aredes.1$- Citin0 7illaflor v. 0ourt of #ppeals1$ and'pouses #gustin v. 0ourt of #ppeals,1&' it ar0ues that ;the vendor. . . has nooli0ation to deliver the thin0 sold. . . if the u"er. . . fails to full" pa" the priceas reuired " the contract.=1&1 In this case, petitioner Wellex /aintains thatrespondent 7)8andEs re/ittance of 7:N,4,45.'' constituted /ere partialperfor/ance of a reciprocal oli0ation.1&$ Thus, respondent 7)8and was notentitled to rescission. The nature of this reciprocal oli0ation reuires othpartiesE si/ultaneous fulfill/ent of the totalit" of their reciprocal oli0ations

and not onl" partial perfor/ance on the part of the alle0edl" in6ured part".


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(s to the findin0 of /isrepresentations, petitioner Wellex raises that a seller/a" sell a thin0 not "et elon0in0 to hi/ at the ti/e of the transaction,provided that he will eco/e the owner at the ti/e of deliver" so that he cantransfer ownership to the u"er. Contrar" to the findin0 of the lower courts,petitioner Wellex was oli0ed to e the owner of the shares onl" when theti/e ca/e to deliver these to respondent 7)8and and not durin0 theperfection of the contract itself.1&&

?inall", petitioner Wellex ar0ues that respondent 7)8and could haverecovered throu0h the securities 0iven to the latter.1&4 Petitioner Wellexinvoes 'uria v. *ntermediate #ppellate 0ourt ,1&5 which held that an ;actionfor rescission is not a principal action that is retaliator" in character under

(rticle 111 of the Civil Code, utJ a susidiar" one which. . . is availale onl"in the asence of an" other le0al re/ed" under (rticle 1&-4 of the CivilCodeJ.=1&2

Res)o#$e#t4s Ar&%me#ts

Respondent 7)8and ar0ues that it was the execution of the share purchasea0ree/ent that would result in its purchase of the (PIC shares and P9Cshares.1& It was not the full re/ittance of the purchase price of the shares ofstoc as indicated in the ?irst 3e/orandu/ of (0ree/ent, as alle0ed "petitioner Wellex.1&- Respondent 7)8and asserts that the ?irst 3e/orandu/of (0ree/ent provides that the exact nu/er of (PIC shares and P9Cshares to e purchased under the share purchase a0ree/ent and the finalprice of these shares were not "et deter/ined " the parties.1&

Respondent 7)8and reiterates that it was petitioner Wellex that reuested for the re/ittances a/ountin0 to 7:N,4,45.'' to facilitate (PICEs purchaseof (PC shares.14' Thus, it was petitioner WellexEs refusal to enter into theshare purchase a0ree/ent that led to respondent 7)8and de/andin0rescission of the ?irst 3e/orandu/ of (0ree/ent and the return of the7:N,4,45.''.141 Respondent 7)8and further ar0ues efore this court thatpetitioner Wellex failed to present evidence as to how the /one" was spent,statin0 that 3s. Tin0 ad/itted that the :econd 3e/orandu/ of (0ree/ent;was not consu//ated at an" ti/e.=14$

Respondent 7)8and raises that petitioner Wellex was 0uilt" of fraud "/ain0 it appear that (PC was a susidiar" of (PIC.14& It reiterates that, asan airline co/pan", its pri/ar" reason for enterin0 into the ?irst3e/orandu/ of (0ree/ent was to acuire /ana0e/ent of (PC, anotherairline co/pan".144 7nder (rticle 111 of the Civil Code, respondent 7)8and,as the in6ured part", was entitled to rescission due to the fatal/isrepresentations co//itted " petitioner Wellex.145

Respondent 7)8and further asserts that the ;shareholdin0s in (PIC and (PC

were never in uestion.=142 Rather, it was petitioner WellexEs/isrepresentation that (PIC was a /a6orit" shareholder of (PC thatco/pelled it to enter into the a0ree/ent.14

(s for 'uria, respondent 7)land avers that this case was inapplicaleecause the pertinent provision in 'uria was not (rticle 111 ut rescissionunder (rticle 1&-& of the Civil Code.14- The ;rescission= referred to in (rticle111 referred to ;resolution= of a contract due to a reach of a /utualoli0ation, while (rticle 1&-4 spoe of ;rescission= ecause of lesion andda/a0e.14 Thus, the rescission that is relevant to the present case is that of

(rticle 111, which involves reach in a reciprocal oli0ation. It is, in fact,resolution, and not rescission as a result of fraud or lesion, as found in

(rticles 1&-1, 1&-&, and 1&-4 of the Civil Code.15'

The Iss%e

The uestion presented in this case is whether the Court of (ppeals erred inaffir/in0 the #ecision of the Re0ional Trial Court that 0ranted the rescissionof the ?irst 3e/orandu/ of (0ree/ent pra"ed for " 7)8and.

The Petition /ust e denied.

I

The re(%reme#t of " sh"re )%r'h"se "&reeme#t

The Civil Code provisions on the interpretation of contracts are

controllin0 to this case, particularl" (rticle 1&', which reads@

(RT. 1&'. If the ter/s of a contract are clear and leave no dout upon theintention of the contractin0 parties, the literal /eanin0 of its stipulations shallcontrol.

If the words appear to e contrar" to the evident intention of the parties, thelatter shall prevail over the for/er.

In 3orton &esources and 6evelopment 0orporation v. #ll #sia 9an0orporation@151

The cardinal rule in the interpretation of contracts is e/odied in the firstpara0raph of (rticle 1&' of the Civil Code@ ;iJf the ter/s of a contract areclear and leave no dout upon the intention of the contractin0 parties, the

literal /eanin0 of its stipulations shall control.= This provision is ain to the;plain /eanin0 rule= applied " Penns"lvania courts, which assu/es that the


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intent of the parties to an instrument is embodied in the writing itself, andwhen the words are clear and unambiguous the intent is to be discoveredonly from the express language of the agreement.1 *t also resembles thefour corners1 rule, a principle which allows courts in some cases to searchbeneath the semantic surface for clues to meaning. # court:s purpose inexamining a contract is to interpret the intent of the contracting parties, asobjectively manifested by them. (he process of interpreting a contractre+uires the court to mae a preliminary in+uiry as to whether the contractbefore it is ambiguous. # contract provision is ambiguous if it is susceptibleof two reasonable alternative interpretations. Where the written terms of thecontract are not ambiguous and can only be read one way, the court willinterpret the contract as a matter of law . If the contract is deter/ined to ea/i0uous, then the interpretation of the contract is left to the court, toresolve the a/i0uit" in the li0ht of the intrinsic evidence.15$ %mphasissupplied !

(s held in 3orton, this court /ust first deter/ine whether a provision orstipulation contained in a contract is a/i0uous. (sent an" a/i0uit", theprovision on its face will e read as it is written and treated as the indin0 lawof the parties to the contract.

The parties have differin0 interpretations of the ter/s of the ?irst3e/orandu/ of (0ree/ent. Petitioner Wellex even ad/its that ;the facts ofthe case are fairl" undisputed and thatJ iJt is onl" the partiesE respectiveunderstandin0J of these facts that are not in har/on".=15&

The second prea/ular clause of the ?irst 3e/orandu/ of (0ree/entreads@

WA9R9(:, W9889D, on the other hand, has current airline operation in thePhilippines throu0h its /a6orit")owned susidiar" (ir Philippines InternationalCorporation and the latterEs susidiar", #ir /hilippines 0orporation, and in

lie manner also desires to expand its operation in the #sian regionalmarets8 a "emorandum of #greement on ;;;;;;, a certified copy of whichis attached hereto as #nnex #1 and is hereby made an integral part hereof,which sets forth, among others, the basis for W%LL%+(8 C>RP>R(TI>+ ;(PIC=! euivalent to atleast &5H of the outstandin0 capital stoc of (PIC, ut in an" case, not lessthan 1,'5',''',''' shares the ;(PIC :hares=!.

! 7)8(+# shall acuire fro/ W9889D, shares of stoc of PAI8IPPI+99:T(T9: C>RP>R(TI>+ ;P9C=! euivalent to at least &5H of theoutstandin0 capital stoc of P9C, ut in an" case, not less than 4',''','''shares the ;P9C :hares=!.

c! 7)8(+# shall enter into a 6oint develop/ent a0ree/ent with P9C to 6ointl" pursue propert" develop/ent pro6ects in the Philippines.

d! 7)8(+# shall e 0iven the option to acuire fro/ W9889D shares ofstoc of 9DPR9:: :(*I+G: (+K ;9:=! up to 4'H of the outstandin0capital stoc of 9: the ;9: :hares=! under ter/s to e /utuall"a0reed.155

The ?irst 3e/orandu/ of (0ree/ent contained the followin0 stipulationsre0ardin0 the share purchase a0ree/ent@

$. (cuisition of (PIC and P9C :hares. ) Within forty !2 days from datehereof unless extended by mutual agreement2, U-L#36 and W%LL%< shallexecute a 'hare /urchase #greement '$/#12 covering the ac+uisition byU-L#36 of the #/*0 'hares and /%0 'hares collectively, the 'ubject'hares12. Without prejudice to any subse+uent agreement between the

parties, the purchase price for the #/*0 'hares to be reflected in the '$/#shall be ($*&(= 0%3(#74' /!.>!2 per share and that for the /%0 'haresat '*


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4. %oint #evelop/ent (0ree/ent with P9C. O 'imultaneous with theexecution of the '$/#, U-L#36 and /%0 shall execute a joint developmentagreement C6#12 to pursue property development projects in the/hilippines. The %#( shall cover specific housin0 and other real estatedevelop/ent pro6ects as the parties shall a0ree. (ll profits derived fro/ thepro6ects covered " the %#( shall e shared euall" etween 7)8(+# andP9C. U-L#36 shall, not later than "ay DD, EG, remit the sum of U'H>.!million as initial funding for the aforesaid development projects againstdelivery by W%LL%< of @I,!!!,!!! shares of /%0 as security for saidamount in accordance with 'ection below.15 9/phasis provided!

?inall", the parties included the followin0 stipulation in case of a failure toa0ree on the ter/s of the share purchase a0ree/ent or the 6ointdevelop/ent a0ree/ent@

. *alidit". ) In the event the parties are unale to a0ree on the ter/s of the:AP( andBor the %#( within fort" 4'! da"s fro/ date hereof or such periodas the parties shall /utuall" a0ree!, this 3e/orandu/ of (0ree/ent shallcease to e effective and the parties released fro/ their respectiveundertain0s herein, except that W9889D shall refund the 7:N&.' /illion

provided under :ection 4 within three &! da"s therefro/, otherwise 7)8(+#shall have the ri0ht to recover on the 5,''',''' P9C shares delivered to 7)8(+# under :ection 4.15-

:ection $ of the ?irst 3e/orandu/ of (0ree/ent clearl" provides that theexecution of a share purchase a0ree/ent containin0 /utuall" a0reealeter/s and conditions /ust first e acco/plished " the parties before respondent 7)8and purchases an" of the shares owned " petitioner Wellex.

( perusal of the stipulation on its face allows for no other interpretation.

The need for a share purchase a0ree/ent to e entered into efore pa"/entof the full purchase price can further e discerned fro/ the other stipulations

of the ?irst 3e/orandu/ of (0ree/ent.

In :ection 1, the parties a0reed to enter into a 6oint usiness venture, throu0henterin0 into two $! a0ree/ents@ a share purchase a0ree/ent and a 6ointdevelop/ent a0ree/ent. Aowever, :ection 1 provides that in the sharepurchase a0ree/ent, ;7)8(+# shall acuire fro/ W9889D, shares of stocof (IR PAI8IPPI+9: I+T9R+(TI>+(8 C>RP>R(TI>+ (PICE! euivalentto at least >@J of the outstanding capital stoc of #/*0, but in any case, notless than E,!@!,!!!,!!! shares the K#/*0 'hares52.1 15

(s for the P9C shares, :ection 1 provides that respondent 7)8and shallpurchase fro/ petitioner Wellex ;shares of stoc of PAI8IPPI+9 9:T(T9:

C>RP>R(TI>+ P9CE! euivalent to at least >@J of the outstanding capital stoc of /%0, but in any case, not less than !,!!!,!!! shares the P9C

:haresE!.=12'

The use of the ter/s ;at least &5H of the outstandin0 capital stoc of (PIC,ut in an" case, not less than 1,'5',''',''' shares= and ;at least &5H of theoutstandin0 capital stoc of P9C, ut in an" case, not less than 4',''','''shares= /eans that the parties had yet to agree on the number of shares ofstoc to be purchased.

The need to execute a share purchase a0ree/ent before pa"/ent of thepurchase price of the shares is further shown " the clause, ;wJithoutpre6udice to an" suseuent a0ree/ent etween the parties, the purchaseprice for the (PIC :hares to be reflected in the share purchase agreementM shall e... P'.&' per share and that for the P9C :hares at... P'.25 pershare.=121 This phrase clearl" shows that the final price of the shares of stocwas to e reflected in the share purchase a0ree/ent. There ein0 no sharepurchase a0ree/ent executed, respondent 7)8and was under no oli0ationto e0in pa"/ent or re/ittance of the purchase price of the shares of stoc.

Petitioner Wellex ar0ues that the use of ;upon= in :ection $12$ of the ?irst3e/orandu/ of (0ree/ent /eans that respondent 7)8and /ust pa" thepurchase price of the shares of stoc in its entiret" when the" are transferred.This ar0u/ent has no /erit.

(rticle 1&& of the Civil Code provides@

(RT. 1&&. If so/e stipulation of an" contract should ad/it of several/eanin0s, it shall e understood as earin0 that i/port which is /ostadeuate to render it effectual.

It is necessar" for the parties to first a0ree on the final purchase price andthe nu/er of shares of stoc to e purchased before respondent U-Land isobligated to pay or remit the entirety of the purchase price. Thus, petitioner

WellexEs ar0u/ent cannot e sustained since the parties to the ?irst3e/orandu/ of (0ree/ent were clearl" unale to a0ree on all the ter/sconcernin0 the share purchase a0ree/ent. It would e asurd for petitionerWellex to expect pa"/ent when respondent 7)8and did not "et a0ree to thefinal a/ount to e paid for the totalit" of an indeter/inate nu/er of sharesof stoc.

The third para0raph of :ection $12& provides that the ;transfer of the :u6ect:hares= shall tae place upon the fulfill/ent of certain conditions, such as fullpa"/ent of the purchase price ;as reflected in the share purchasea0ree/entJ.= The transfer of the shares of stoc is different fro/ theexecution of the share purchase a0ree/ent. The transfer of the shares of

stoc reuires full pa"/ent of the final purchase price. Aowever, that finalpurchase price /ust e reflected in the share purchase agreement. The


13/22

execution of the share purchase a0ree/ent will reuire the existence of afinal a0ree/ent.

In its (nswer with counterclai/ efore the trial court, petitioner Wellex ar0uedthat the pa"/ent of the shares of stoc was to e0in within the 4')da"period. Petitioner WellexEs clai/ is not in an" of the stipulations of thecontract. Its suseuent clai/ that respondent 7)8and was actuall" reuiredto re/it a total of 7:N$'.5 /illion is liewise ereft of asis since there wasno final purchase price of the shares of stoc that was agreed upon, due tothe failure of the parties to execute a share purchase a0ree/ent. In addition,the parties had "et to a0ree on the final nu/er of (PIC shares and P9Cshares that respondent 7)8and would acuire fro/ petitioner Wellex.

Therefore, the understandin0 of the parties captured in the ?irst3e/orandu/ of (0ree/ent was to continue their ne0otiation to deter/inethe price and nu/er of the shares to e purchased. Aad it een otherwise,the specific nu/er or percenta0e of shares and its price should alread"have een provided clearl" and una/i0uousl". Thus, the" a0reed to a 4')da" period of ne0otiation.

:ection of the ?irst 3e/orandu/ of (0ree/ent explicitl" provides that@

In the event the parties are unale to a0ree on the ter/s of the :AP( andBorthe %#( within fort" 4'! da"s fro/ date hereof or such period as the partiesshall /utuall" a0ree!, this 3e/orandu/ of (0ree/ent shall cease to eeffective and the parties released fro/ their respective undertain0sherein . . .124

The ?irst 3e/orandu/ of (0ree/ent was, thus, an a0ree/ent to enter intoa share purchase a0ree/ent. The share purchase a0ree/ent should haveeen executed " the parties within 4' da"s fro/ 3a" 12, 1-, the date ofthe si0nin0 of the ?irst 3e/orandu/ of (0ree/ent.

When the 4')da" period provided for in :ection lapsed, the efficac" of the?irst 3e/orandu/ of (0ree/ent ceased. The parties were ;released fromtheir respective undertaings.= Thus, fro/ %une $5, 1-, the date when the4')da" period lapsed, the parties were no lon0er oli0ed to ne0otiate witheach other in order to enter into a share purchase a0ree/ent.

Aowever, :ection provides for another period within which the parties couldstill e reuired to ne0otiate. The clause ;or such period as the parties shall/utuall" a0ree= /eans that the parties should a0ree on a period within whichto continue ne0otiations for the execution of an a0ree/ent. This /eans thatafter the 4')da" period, the parties were still allowed to ne0otiate, provided

that they could mutually agree on a new period of negotiation.

ased on the records and the findin0s of the lower courts, the parties werenever ale to arrive at a specific period within which the" would indthe/selves to enter into an a0ree/ent. There ein0 no other periodspecified, the parties were no lon0er under an" oli0ation to ne0otiate andenter into a share purchase a0ree/ent. :ection clearl" freed the/ fro/this undertain0.

II

There 5"s #o e)ress or m)e$#o"to# of the Frst !emor"#$%mof A&reeme#t

The suseuent acts of the parties after the 4')da" period were, therefore,independent of the ?irst 3e/orandu/ of (0ree/ent.

In its (ppellantEs rief efore the Court of (ppeals, petitioner Wellex/entioned that there was an ;i/plied partial o6ective or real novation=125 ofthe ?irst 3e/orandu/ of (0ree/ent. Petititoner did not raise this ar0u/entof novation efore this court. In )ayos v. )ayos,122 this court held that ;it is acherished rule of procedure that a court should alwa"s strive to settle theentire controvers" in a sin0le proceedin0 leavin0 no root or ranch to earthe seeds of future liti0ation.J=12

(rticles 1$1 and 1$$ of the Civil Code provides how oli0ations /a" e/odified@

(rticle 1$1. >li0ations /a" e /odified "@

1! Chan0in0 their o6ect or principal conditions

$! :ustitutin0 the person of the detor

&! :uro0atin0 a third person in the ri0hts of the creditor.

(rticle 1$$. In order that an oli0ation /a" e extin0uished " anotherwhich sustitute the sa/e, it is i/perative that it e so declared inuneuivocal ter/s, or that the old and the new oli0ations e on ever" pointinco/patile with each other.

In #rco /ulp and /aper 0o. v. Lim,12- this court discussed the concept ofnovation@

+ovation extin0uishes an oli0ation etween two parties when there is a

sustitution of o6ects or detors or when there is suro0ation of the creditor.It occurs onl" when the new contract declares so ;in uneuivocal ter/s= or


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that ;the old and the new oli0ations e on ever" point inco/patile witheach other.=. . . .

?or novation to tae place, the followin0 reuisites /ust concur@

1! There /ust e a previous valid oli0ation.

$! The parties concerned /ust a0ree to a new contract.

&! The old contract /ust e extin0uished.

4! There /ust e a valid new contract.

+ovation /a" also e express or i/plied. It is express when the newoli0ation declares in uneuivocal ter/s that the old oli0ation isextin0uished. It is i/plied when the new oli0ation is inco/patile with theold one on ever" point. The test of inco/patiilit" is whether the twooli0ations can stand to0ether, each one with its own independent existence.9/phasis fro/ the ori0inal o/itted!

ecause novation reuires that it e clear and uneuivocal, it is neverpresu/ed, thus@

In the civil law settin0, novatio is literall" construed as to /ae new. :o it isdeepl" rooted in the Ro/an 8aw 6urisprudence, the principle S novatio non

praesumitur S that novation is never presu/ed. (t otto/, for novation to ea 6ural realit", its animus /ust e ever present, debitum pro debito Sasicall" extin0uishin0 the old oli0ation for the new one. 12 9/phasis fro/the ori0inal o/itted, citations o/itted!

(ppl"in0 #rco, it is clear that there was no novation of the ori0inal oli0ation.

(fter the 4')da" period, the parties did not enter into an" suseuent writtena0ree/ent that was couched in uneuivocal ter/s. The transaction of the?irst 3e/orandu/ of (0ree/ent involved lar0e a/ounts of /one" fro/ othparties. The parties sou0ht to participate in the air travel industr", which hasalwa"s een hi0hl" re0ulated and su6ect to the strictest co//ercial scrutin".oth parties ad/itted that their counsels participated in the craftin0 andexecution of the ?irst 3e/orandu/ of (0ree/ent as well as in the efforts toenter into the share purchase a0ree/ent. (n" suseuent a0ree/ent woulde expected to e clearl" a0reed upon with their counselsE assistance and inwritin0, as well.

Given these circu/stances, there was no express novation.

There was also no i/plied novation of the ori0inal oli0ation. In Nuinto v./eople@1'

+Jo specific for/ is reuired for an i/plied novation, and all that isprescried " law would e an inco/patiilit" etween the two contracts.While there is reall" no hard and fast rule to deter/ine what /i0ht constituteto e a sufficient chan0e that can rin0 aout novation, the touchstone forcontrariet", however, would e an irreconcilale inco/patiilit" etween theold and the new oli0ations.

. . . .

. . . The test of inco/patiilit" is whether or not the two oli0ations can standto0ether, each one havin0 its independent existence. If the" cannot, the" areinco/patile and the latter oli0ation novates the first. Corollaril", chan0esthat reed inco/patiilit" /ust e essential in nature and not /erel"accidental. The inco/patiilit" /ust tae place in an" of the essentialele/ents of the oli0ation, such as its o6ect, cause or principal conditionsthereof otherwise, the chan0e would e /erel" /odificator" in nature andinsufficient to extin0uish the ori0inal oli0ation.11 0itations omitted !

There was no inco/patiilit" etween the ori0inal ter/s of the ?irst3e/orandu/ of (0ree/ent and the re/ittances /ade " respondent 7)8and for the shares of stoc. These re/ittances were actuall" /ade with theview that oth parties would suseuentl" enter into a share purchasea0ree/ent. It is clear that there was no suseuent a0ree/ent inconsistentwith the provisions of the ?irst 3e/orandu/ of (0ree/ent.

Thus, no i/plied novation too place. In previous cases,1$ this court hasconsistentl" ruled that presu/ed novation or i/plied novation is not dee/edfavorale. In United /ulp and /aper 0o., *nc. v. #cropolis 0entral )uaranty0orporation@1&

+either can novation e presu/ed in this case. (s explained in 6uOgo v.Lopena@

;3ovation by presumption has never been favored . To e sustained, it neede estalished that the old and new contracts are inco/patile in all points,or that the will to novate appears " express a0ree/ent of the parties or inacts of si/ilar i/port.=14 %mphasis supplied !

There ein0 no novation of the ?irst 3e/orandu/ of (0ree/ent, respondent7)8and is entitled to the return of the a/ount it re/itted to petitioner Wellex.Petitioner Wellex is liewise entitled to the return of the certificates of shares

of stoc and titles of land it delivered to respondent 7)8and. This is si/pl" an


15/22

enforce/ent of :ection of the ?irst 3e/orandu/ of (0ree/ent. Pursuantto :ection , onl" the execution of a f inal share purchase a0ree/ent withineither of the periods conte/plated " this stipulation will 6ustif" the partiesEretention of what the" received or would receive fro/ each other.

III

A))6#& Art'e 7789 of the CCo$e, the )"rtes "re o&"te$ toret%r# to e"'h other " the6 h"ere'ee$

(rticle 11-5 of the Civil Code provides that@

(RT. 11-5. The condition that so/e event will not happen at a deter/inateti/e shall render the oli0ation effective fro/ the /o/ent the ti/e indicatedhas elapsed, or if it has eco/e evident that the event cannot occur.

If no ti/e has een fixed, the condition shall e dee/ed fulfilled at such ti/eas /a" have proal" een conte/plated, earin0 in /ind the nature of theoli0ation.

(rticle 11-5 provides that if an oli0ation is conditioned on the non)occurrence of a particular event at a deter/inate ti/e, that oli0ation arisesa! at the lapse of the indicated ti/e, or ! if it has eco/e evident that theevent cannot occur.

Petitioner Wellex and respondent 7)8and ound the/selves to ne0otiatewith each other within a 4')da" period to enter into a share purchasea0ree/ent. If no share purchase a0ree/ent was entered into, oth partieswould e freed fro/ their respective undertain0s.

It is the non)occurrence or non)execution of the share purchase a0ree/entthat would 0ive rise to the oli0ation to oth parties to free each other fro/their respective undertain0s. This includes returnin0 to each other all thatthe" received in pursuit of enterin0 into the share purchase a0ree/ent.

(t the lapse of the 4')da" period, the parties failed to enter into a sharepurchase a0ree/ent. This lapse is the first circu/stance provided for in

(rticle 11-5 that 0ives rise to the oli0ation. (ppl"in0 (rticle 11-5, the partieswere then oli0ated to return to each other all that the" had received in orderto e freed fro/ their respective undertain0s.

Aowever, the parties continued their ne0otiations after the lapse of the 4')da" period. The" /ade suseuent transactions with the intention to enter

into the share purchase a0ree/ent. #espite that, the" still failed to enter intoa share purchase a0ree/ent. Co//unication etween the parties ceased,and no further transactions too place.

It eca/e evident that, once a0ain, the parties would not enter into the sharepurchase a0ree/ent. This is the second circu/stance provided for in (rticle11-5. Thus, the oli0ation to free each other fro/ their respectiveundertain0s re/ained.

(s such, petitioner Wellex is oli0ated to return the re/ittances /ade "respondent 7)8and, in the sa/e wa" that respondent 7)8and is oli0ated toreturn the certificates of shares of stoc and the land titles to petitionerWellex.

I;

Res)o#$e#t U-L"#$ s )r"6#& forres'sso# or reso%to# %#$er Art'e77


16/22

(RT. 1&-'. Contracts validl" a0reed upon /a" e rescinded in the casesestalished " law.

(RT. 1&-1. The followin0 contracts are rescissile@

1! Those which are entered into " 0uardians whenever the wards who/the" represent suffer lesion " /ore than one)fourth of the value of the thin0swhich are the o6ect thereof

$! Those a0reed upon in representation of asentees, if the latter suffer thelesion stated in the precedin0 nu/er

&! Those undertaen in fraud of creditors when the latter cannot in an" other /anner collect the clai/s due the/

4! Those which refer to thin0s under liti0ation if the" have een entered into" the defendant without the nowled0e and approval of the liti0ants or ofco/petent 6udicial authorit"

5! (ll other contracts speciall" declared " law to e su6ect to rescission.

(rticle 1&-& expressl" provides for the susidiar" nature of rescission@

(RT. 1&-&. The action for rescission is susidiar" it cannot e institutedexcept when the part" sufferin0 da/a0e has no other le0al /eans to otainreparation for the sa/e.

Rescission itself, however, is defined " (rticle 1&-5@

(RT. 1&-5. Rescission creates the oli0ation to return the thin0s which werethe o6ect of the contract, to0ether with their fruits, and the price with itsinterest conseuentl", it can e carried out onl" when he who de/ands

rescission can return whatever he /a" e oli0ed to restore.

+either shall rescission tae place when the thin0s which are the o6ect ofthe contract are le0all" in the possession of third persons who did not act inad faith.

In this case, inde/nit" for da/a0es /a" e de/anded fro/ the personcausin0 the loss.

)otesco /roperties v. Fajardo15 cate0oricall" stated that (rticle 1&-5 isapplicale to (rticle 111@

(t this 6uncture, it is noteworth" to point out that rescission does not /erel"ter/inate the contract and release the parties fro/ further oli0ations to eachother, ut aro0ates the contract fro/ its inception and restores the parties totheir ori0inal positions as if no contract has een /ade. Conseuentl",/utual restitution, which entails the return of the enefits that each part" /a"have received as a result of the contract, is thus reuired. To e sure, it haseen settled that the effects of rescission as provided for in (rticle 1&-5 ofthe Code are euall" applicale to cases under (rticle 111, to wit@

x x x x

!%t%" restt%to# s re(%re$ # '"ses #o#& res'sso# %#$erArt'e 77


17/22

reuired " the parties to do or not to do, or to 0ive.1 Parties /a" e/utuall" oli0ated to each other, ut the prestations of these oli0ations arenot necessaril" reciprocal. The reciprocal prestations /ust necessaril"e/anate fro/ the same cause that 0ave rise to the existence of the contract.This distinction is est illustrated " an estalished authorit" in civil law, thelate (rturo Tolentino@

This article applies onl" to reciprocal oli0ations. It has no application toever" case where two persons are /utuall" detor and creditor of eachother. There /ust e reciprocit" etween the/. oth relations /ust arisefro/ the sa/e cause, such that one oli0ation is correlative to the other.Thus, a person /a" e the detor of another " reason of an a0enc", and hiscreditor " reason of a loan. The" are /utuall" oli0ated, ut the oli0ationsare not reciprocal. Reciprocit" arises fro/ identit" of cause, and necessaril"the two oli0ations are created at the sa/e ti/e.1- Citation o/itted!

#ng =u #suncion v. 0ourt of #ppeals1 provides a clear necessit" of thecause in perfectin0 the existence of an oli0ation@

(n oli0ation is a 6uridical necessit" to 0ive, to do or not to do #rt. EE@?, 0ivil

0ode!. The oli0ation is constituted upon the concurrence of the essentialele/ents thereof, viP @ a! The vinculum juris or juridical tie which is theefficient cause estalished " the various sources of oli0ations law,contracts, uasi)contracts, delicts and uasi)delicts! ! the object which isthe prestation or conduct, reuired to e oserved to 0ive, to do or not todo! and c! the subject-persons who, viewed fro/ the de/andailit" of theoli0ation, are the active oli0ee! and the passive oli0or! su6ects.1-'

The cause is the vinculum juris or 6uridical tie that essentiall" inds theparties to the oli0ation. This lina0e etween the parties is a indin0 relationthat is the result of their ilateral actions, which 0ave rise to the existence ofthe contract.

The failure of one of the parties to co/pl" with its reciprocal prestation allowsthe wron0ed part" to see the re/ed" of (rticle 111. The wron0ed part" isentitled to rescission or resolution under (rticle 111, and even the pa"/entof da/a0es. It is a principal action precisel" ecause it is a violation of theori0inal reciprocal prestation.

(rticle 1&-1 and (rticle 1&-&, on the other hand, pertain to rescission wherecreditors or even third persons not priv" to the contract can file an action dueto lesion or da/a0e as a result of the contract. In 4ng v. 0ourt of #ppeals,1-1 this court defined rescission@

Rescission, as conte/plated in (rticles 1&-', et se+., of the +ew Civil Code,is a re/ed" 0ranted " law to the contractin0 parties and even to third

persons, to secure the reparation of da/a0es caused to the/ " a contract,even if this should e valid, " restoration of thin0s to their condition at the/o/ent prior to the celeration of the contract. It i/plies a contract, whicheven if initiall" valid, produces a lesion or a pecuniar" da/a0e to so/eone.1-$

0itations omitted !

4ng elaorated on the confusion etween ;rescission= or resolution under (rticle 111 and rescission under (rticle 1&-1@

>n the other hand, (rticle 111 of the +ew Civil Code refers to rescissionapplicale to reciprocal oli0ations. Reciprocal oli0ations are those whicharise fro/ the sa/e cause, and in which each part" is a detor and a creditor of the other, such that the oli0ation of one is dependent upon the oli0ationof the other. The" are to e perfor/ed si/ultaneousl" such that theperfor/ance of one is conditioned upon the si/ultaneous fulfill/ent of theother. Rescission of reciprocal oli0ations under (rticle 111 of the +ew CivilCode should e distin0uished fro/ rescission of contracts under (rticle 1&-&.

(lthou0h oth presuppose contracts validl" entered into and susistin0 andoth reuire /utual restitution when proper, the" are not entirel" identical.

While (rticle 111 uses the ter/ ;rescission,= the ori0inal ter/ which wasused in the old Civil Code, fro/ which the article was ased, was;resolution.= Resolution is a principal action which is ased on reach of apart", while rescission under (rticle 1&-& is a susidiar" action li/ited tocases of rescission for lesion under (rticle 1&-1 of the +ew Civil Code, whichexpressl" enu/erates the followin0 rescissile contracts@

1. Those which are entered into " 0uardianswhenever the wards who/ the" represent sufferlesion " /ore than one fourth of the value of thethin0s which are the o6ect thereof

$. Those a0reed upon in representation of asentees,if the latter suffer the lesion stated in the precedin0nu/er

&. Those undertaen in fraud of creditors when thelatter cannot in an" /anner collect the clai/s duethe/

4. Those which refer to thin0s under liti0ation if the"have een entered into " the defendant without thenowled0e and approval of the liti0ants or ofco/petent 6udicial authorit" andJ


18/22

5. (ll other contracts speciall" declared " law to esu6ect to rescission.1-& 0itations omitted !

When a part" sees the relief of rescission as provided in (rticle 1&-1, thereis no need for reciprocal prestations to exist etween or a/on0 the parties.

(ll that is reuired is that the contract should e a/on0 those enu/erated in (rticle 1&-1 for the contract to e considered rescissile. 7nlie (rticle 111,

rescission under (rticle 1&-1 /ust e a susidiar" action ecause of (rticle1&-&.

Contrar" to petitioner WellexEs ar0u/ent, this is not rescission under (rticle1&-1 of the Civil Code. This case does not involve pre6udicial transactionsaffectin0 0uardians, asentees, or fraud of creditors. (rticle 1&-1&! pertainsin particular to a series of fraudulent actions on the part of the detor who isin the process of transferrin0 or alienatin0 propert" that can e used tosatisf" the oli0ation of the detor to the creditor. There is no alle0ation offraud for purposes of evadin0 oli0ations to other creditors. The actions ofthe parties involvin0 the ter/s of the ?irst 3e/orandu/ of (0ree/ent do notfall under an" of the enu/erated contracts that /a" e su6ect of rescission.

?urther, respondent 7)8and is pursuin0 rescission or resolution under (rticle111, which is a principal action. %ustice %..8. Re"esE concurrin0 opinion inthe land/ar case of Universal Food 0orporation v. 0ourt of #ppeals 1-4 0avea definitive explanation on the principal character of resolution under (rticle111 and the susidiar" nature of actions under (rticle 1&-1@

The rescission on account of reach of stipulations is not predicated on in6ur"to econo/ic interests of the part" plaintiff ut on the reach of faith " thedefendant, that violates the reciprocit" etween the parties. It is not asusidiar" action, and (rticle 111 /a" e scanned without disclosin0an"where that the action for rescission thereunder is suordinated toan"thin0 other than the culpale reach of his oli0ations " the defendant.This rescission is a principal action retaliator" in character, it ein0 un6ust thata part" e held ound to fulfill his pro/ises when the other violates his. (sexpressed in the old 8atin aphoris/@ 3on servanti fidem, non est fidesservanda.= Aence, the reparation of da/a0es for the reach is purel"secondar".

>n the contrar", in the rescission " reason of lesion or econo/ic pre6udice,the cause of action is suordinated to the existence of that pre6udice,ecause it is the raison detre as well as the /easure of the ri0ht to rescind.Aence, where the defendant /aes 0ood the da/a0es caused, the actioncannot e /aintained or continued, as expressl" provided in (rticles 1&-&and 1&-4. ut the operation of these two articles is li/ited to the cases ofrescission for lesiQn enu/erated in (rticle 1&-1 of the Civil Code of thePhilippines, and does not appl" to cases under (rticle 111.1-5

Rescission or resolution under (rticle 111, therefore, is a principal actionthat is i//ediatel" availale to the part" at the ti/e that the reciprocalprestation was reached. (rticle 1&-& /andatin0 that rescission e dee/eda susidiar" action cannot e applicale to rescission or resolution under

(rticle 111.

Thus, respondent 7)8and correctl" sou0ht the principal relief of rescission orresolution under (rticle 111. The oli0ations of the parties 0ave rise toreciprocal prestations, which arose fro/ the sa/e cause@ the desire of othparties to enter into a share purchase a0ree/ent that would allow othparties to expand their respective airline operations in the Philippines and

other nei0horin0 countries.

;

The +%rs)r%$e#'e ree$ %)o# 6)etto#er Wee s #ot "))'"e

The cases that petitioner Wellex cited to advance its ar0u/ents a0ainstrespondent 7)8andEs ri0ht to rescission are not in point.

'uria v. *ntermediate #ppellate 0ourt is not applicale. In that case, this courtspecificall" stated that the parties entered into a contract of sale, and theirreciprocal oli0ations had alread" een fulfilled@1-2


19/22

There is no dispute that the parties entered into a contract of sale asdistin0uished fro/ a contract to sell.

" the contract of sale, the vendor oli0ates hi/self to transfer the ownershipof and to deliver a deter/inate thin0 to the u"er, who in turn, is oli0ated topa" a price certain in /one" or its euivalent (rt. 145-, Civil Code!. Fromthe res)o#$e#ts4 o5# "r&%me#ts, 5e #ote th"t the6 h"e f%6 'om)e$5th ther )"rt of the re')ro'" o&"to#. As " m"tter of f"'t, the6 h"e"re"$6 )"rte$ 5th the tte "s e$e#'e$ 6 the tr"#sfer 'ertf'"te oftte # the )etto#ers4 #"me "s of ?%#e @, 7


20/22

pa"/ent of the purchase price needed to execute either the share purchasea0ree/ent or the 6oint develop/ent a0ree/ent. 7pon the execution of theshare purchase, the oli0ation of petitioner Wellex to transfer the shares ofstoc and of respondent 7)8and to pa" the price of these shares would havearisen.

9nforce/ent of :ection of the ?irst 3e/orandu/ of (0ree/ent has thesa/e effect as rescission or resolution under (rticle 111 of the Civil Code.The parties are oli0ated to return to each other all that the" /a" have

received as a result of the reach " petitioner Wellex of the reciprocaloli0ation. Therefore, the Court of (ppeals did not err in affir/in0 therescission 0ranted " the trial court.

;I

Petto#er Wee 5"s #ot &%t6 offr"%$ %t of o"t#& Art'e 779<of the C Co$e

In the issuance of the Writ of Preli/inar" (ttach/ent, the lower court foundthat petitioner Wellex co//itted fraud " inducin0 respondent 7)8and to

purchase (PIC shares and P9C shares and " leadin0 the latter to elievethat (PC was a susidiar" of (PIC.

#eter/inin0 the existence of fraud is not necessar" in an action forrescission or resolution under (rticle 111. The existence of fraud /ust eestalished if the rescission pra"ed for is the rescission under (rticle 1&-1.

Aowever, the existence of fraud is a uestion that the parties have raisedefore this court. To settle this uestion with finalit", this court will exa/inethe estalished facts and deter/ine whether petitioner Wellex indeeddefrauded respondent 7)8and.

In (aneh v. 6evelopment 9an of the /hilippines,1& this court enu/eratedthe relevant provisions of the Civil Code on fraud@

?raud is defined in (rticle 1&&- of the Civil Code as@x x x fraud when, throu0h insidious words or /achinations of one of thecontractin0 parties, the other is induced to enter into a contract which,without the/, he would not have a0reed to.

This is followed " the articles which provide le0al exa/ples and illustrationsof fraud.. . . .

(rt. 1&4'. The usual exa00erations in trade, when the other part" had anopportunit" to now the facts, are not in the/selves fraudulent. n!

(rt. 1&41. ( /ere expression of an opinion does not si0nif" fraud, unless/ade " an expert and the other part" has relied on the for/erEs specialnowled0e. n!

(rt. 1&4$. 3isrepresentation " a third person does not vitiate consent,unless such /isrepresentation has created sustantial /istae and the sa/eis /utual. n!

(rt. 1&4&. 3isrepresentation /ade in 0ood faith is not fraudulent ut /a"constitute error. n!

The distinction etween fraud as a 0round for renderin0 a contract voidaleor as asis for an award of da/a0es is provided in (rticle 1&44@

In order that fraud /a" /ae a contract voidale, it should e serious andshould not have een e/plo"ed " oth contractin0 parties.

Incidental fraud onl" oli0es the person e/plo"in0 it to pa" da/a0es.1$'!14

(aneh further discussed the de0ree of evidence needed to prove theexistence of fraud@

TJhe standard of proof reuired is clear and convincin0 evidence. Thisstandard of proof is derived f ro/ (/erican co//on law. It is less than proofe"ond reasonale dout for cri/inal cases! ut 0reater thanpreponderance of evidence for civil cases!. The de0ree of elievailit" ishi0her than that of an ordinar" civil case. Civil cases onl" reuire apreponderance of evidence to /eet the reuired urden of proof. Aowever,when fraud is alle0ed in an ordinar" civil case involvin0 contractual relations,an entirel" different standard of proof needs to e satisfied. The i/putation of

fraud in a civil case reuires the presentation of clear and convincin0evidence. 3ere alle0ations will not suffice to sustain the existence of fraud.The urden of evidence rests on the part of the plaintiff or the part" alle0in0fraud. The uantu/ of evidence is such that fraud /ust e clearl" andconvincin0l" shown.15

To support its alle0ation of fraud, 3r. Tsen0, respondent 7)8andEs witnessefore the trial court, testified that 3r. Gatchalian approached respondent 7)8and on two $! separate /eetin0s to propose enterin0 into an a0ree/ent for

6oint airline operations in the Philippines. Thus, the parties entered into the?irst 3e/orandu/ of (0ree/ent. Respondent 7)8and pri/aril" anchors itsalle0ation of fraud a0ainst petitioner Wellex on the existence of the secondprea/ular clause of the ?irst 3e/orandu/ of (0ree/ent.


21/22

In its (ppellantEs rief efore the Court of (ppeals, petitioner Wellex ad/ittedthat ;tJhe a/ount of 7:N,4,45.'' was re/itted for the purchase of (PICand P9C shares.=12 In that rief, it ar0ued that the parties were alread" in theprocess of partiall" executin0 the ?irst 3e/orandu/ of (0ree/ent.

(s held in (aneh, there /ust e clear and convincin0 evidence of fraud.ased on the estalished facts, respondent 7)8and was unale to clearl"convince this court of the existence of fraud.

Respondent 7)8and had ever" reasonale opportunit" to ascertain whether (PC was indeed a susidiar" of (PIC. This is a /ulti/illion dollartransaction, and oth parties ad/itted that the share purchase a0ree/entunderwent several draft creations. oth parties ad/itted the participation oftheir respective counsels in the draftin0 of the ?irst 3e/orandu/ of

(0ree/ent. Respondent 7)8and had ever" opportunit" to ascertain theownership of the shares of stoc.

Respondent 7)8and itself ad/itted that it was not contestin0 petitionerWellexEs ownership of the (PIC shares or (PC shares hence, it was notcontestin0 the existence of the :econd 3e/orandu/ of (0ree/ent. 7pon

eco/in0 aware of petitioner WellexEs representations concernin0 (PICEsownership or control of (PC as a susidiar", respondent 7)8and continued to/ae re/ittances totallin0 the a/ount sou0ht to e rescinded. It had theoption to opt out of ne0otiations after the lapse of the 4')da" period.Aowever, it proceeded to /ae the re/ittances to petitioner Wellex andproceed with ne0otiations.

Respondent 7)8and was not defrauded " petitioner Wellex to a0ree to the?irst 3e/orandu/ of (0ree/ent. To constitute fraud under (rticle 1&&-, thewords and /achinations /ust have een so insidious or deceptive that thepart" induced to enter into the contract would not have a0reed to e ound" its ter/s if that part" had an opportunit" to e aware of the truth.1

Respondent 7)8and was alread" aware that (PC was not a susidiar" of (PIC after the 4')da" period. :till, it a0reed to e ound " the ?irst3e/orandu/ of (0ree/ent " /ain0 the re/ittances fro/ %une &' to:epte/er $5, 1-.1- Thus, petitioner WellexEs failure to infor/ respondent7)8and that (PC was not a susidiar" of (PIC when the ?irst 3e/orandu/of (0ree/ent was ein0 executed did not constitute fraud.

Aowever, the asence of fraud does not /ean that petitioner Wellex is free of culpailit". " failin0 to infor/ respondent 7)8and that (PC was not "et asusidiar" of (PIC at the ti/e of the execution of the ?irst 3e/orandu/ of

(0ree/ent, petitioner Wellex violated (rticle 115 of the Civil Code. (rticle

115 reads@

(RT. 115. >li0ations arisin0 fro/ contracts have the force of law etweenthe contractin0 parties and should e co/plied with in 0ood faith.

In 4choa v. #peta,1 this court defined 0ood faith@

Good faith is an intan0ile and astract ualit" with no technical /eanin0 orstatutor" definition, and it enco/passes, a/on0 other thin0s, an honestelief, the asence of /alice and the asence of desi0n to defraud or to see

an unconscionale advanta0e. It i/plies honest" of intention, and freedo/fro/ nowled0e of circu/stances which ou0ht to put the holder upon inuir".The essence of 0ood faith lies in an honest elief in the validit" of oneEs ri0ht,i0norance of a superior clai/ and asence of intention to overreachanother.$'' 0itations omitted !

It was incu/ent upon petitioner Wellex to ne0otiate the ter/s of thependin0 share purchase a0ree/ent in 0ood faith. This dut" includedprovidin0 a full disclosure of the nature of the ownership of (PIC in (PC.7nilaterall" co/pellin0 respondent 7)8and to re/it /one" to finali


22/22

The execution of the 6oint develop/ent a0ree/ent was contin0ent on theexecution of the share purchase a0ree/ent. This is provided for in :ection 4of the ?irst 3e/orandu/ of (0ree/ent, which stated that the execution ofthe two a0ree/ents is ;sJi/ultaneous.=$'1 Thus, the failure of the sharepurchase a0ree/entEs execution would necessaril" /ean the failure of the

6oint develop/ent a0ree/entEs execution.

:ection of the ?irst 3e/orandu/ of (0ree/ent provides that should the

parties fail to execute the a0ree/ent, the" would e released fro/ their/utual oli0ations. Aad respondent 7)8and paid the 7:N& /illion andpetitioner Wellex delivered the 5,''',''' P9C shares for the purpose of the

6oint develop/ent a0ree/ent, the" would have een oli0ated to returnthese to each other.

:ection 4 and :ection of the ?irst 3e/orandu/ of (0ree/ent /ust einterpreted to0ether. :ince the parties were unale to a0ree on a final sharepurchase a0ree/ent and there was no exchan0e of /one" or shares ofstoc due to the continuin0 ne0otiations, respondent 7)8and was no lon0eroli0ed to provide the /one" for the real estate develop/ent pro6ects. Thepa"/ent of the 7:N& /illion was for pursuin0 the real estate develop/ent

pro6ects under the 6oint develop/ent a0ree/ent. There ein0 no 6ointdevelop/ent a0ree/ent, the oli0ation to deliver the 7:N& /illion and thedeliver" of the P9C shares for that purpose were no lon0er incu/ent uponthe parties.

;III

Res)o#$e#t U-L"#$ 5"s #oto&"te$ to eh"%st the /se'%rtes0&e# 6 )etto#er Wee

Contrar" to petitioner WellexEs assertion, there is no oli0ation on the part ofrespondent 7)8and to exhaust the ;securities= 0iven " petitioner Wellex. +osuch /eetin0 of the /inds to create a 0uarantee or suret" or an" other for/of securit" exists. The principal oli0ation is not a loan or an oli0ationsu6ect to the conditions of sureties or 0uarantors under the Civil Code.Thus, there is no need to exhaust the securities 0iven to respondent 7)8and,and there is no need for a le0al condition where respondent 7)8and should

pursue other re/edies.

+either petitioner Wellex nor respondent 7)8and stated that there wasalread" a transfer of ownership of the shares of stoc or the land titles.Respondent 7)8and itself /aintained that the deliver" of the shares of stocand the land titles were not in the nature of a pled0e or /ort0a0e.$'$ Itreceived the certificates of shares of stoc and the land titles with anunderstandin0 that the parties would suseuentl" enter a share purchase

a0ree/ent. There ein0 no share purchase a0ree/ent, respondent 7)8andis oli0ated to return the certificates of shares of stoc and the land titles topetitioner Wellex.

The parties are ound " the 4')da" period provided for in the ?irst3e/orandu/ of (0ree/ent. (dherence " the parties to :ection of the?irst 3e/orandu/ of (0ree/ent has the sa/e effect as the rescission orresolution pra"ed for and 0ranted " the trial court.

Infor/al acts are prone to a/i0uous le0al interpretation. This will e asedon the sa")so of each part" and is a fra0ile settin0 for 0ood usiness

transactions. It will contriute to the unpredictailit" of the /aret as it wouldprovide courts with extraordinar" expectations to deter/ine the usinessactorEs intentions. The parties appear to e responsile usiness/en whonow that their expectations and oli0ations should e clearl" articulatedetween the/. The" have the resources to en0a0e le0al representation.Indeed, the" have reduced their a0ree/ent in writin0.

Petitioner Wellex now wants this court to define oli0ations that do notappear in these instru/ents. We cannot do so. This court cannot interfere inthe ar0ains, 0ood or ad, entered into " the parties. >ur dut" is to affir/le0al expectations, not to 0uarantee 0ood usiness 6ud0/ents.

WHEREFORE, the petition is DENIED. The #ecision of the Re0ional TrialCourt in Civil Case +o. )14' and the #ecision of the Court of (ppeals inC()G.R. C* +o. 4-5' are AFFIR!ED. Costs a0ainst petitioner The WellexGroup, Inc.

SO ORDERED.

wellex v u-land

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