PATERNO J. OUANO, PETITIONER, VS. COURT OF APPEALS AND FRANCISCO B. ECHAVEZ, RESPONDENTS.

The appellate proceedings at bar treat of a parcel of land with
an area of about 3,710 square meters, situated in Mandawe, Cebu, identified as
Philippine Railway Lot No. 3-A-1. It was covered by Torrens Title No. 7618 in
the name of the registered owner, Rehabilitation Finance Corporation (RFC), now
the Development Bank of the Philippines (DBP). Adjoining Lot 3-A-1 are lands belonging to Francisco Echavez, private
respondent herein, and petitioner Paterno J. Ouano. What will have to be resolved are the conflicting claims over
this lot by the vendee thereof, Echavez, and Ouano.

The property was offered for sale by public bidding by the RFC on
April 1, 1958.^[1]
Actually this was the second public bidding scheduled for the property. The
first^[2]
— in which both Ouano and Echavez participated, together with others — was
nullified on account of a protest by Ouano.^[3]

Now, it appears that prior to the second bidding, Ouano and
Echavez orally agreed that only Echavez would make a bid, and that if it was
accepted, they would divide the property in proportion to their adjoining
properties. To ensure success of their enterprise, they also agreed to induce
the only other party known to be interested in the property — a group headed
by a Mrs. Bonsucan — to desist from presenting a bid.^[4] They
broached the matter to Mrs. Bonsucan’s group. The latter agreed to withdraw, as
it did in fact withdraw from the sale; and Ouano’s wife paid it P2,000 as
reimbursement for its expenses.^[5]

As expected, the highest bid submitted, and thus accepted by the
RFC, was that of Francisco Echavez, who offered P27,826.00 for the land.^[6]
Echavez paid the sum of P5,565.00 representing 20% deposit of the proffered
price.^[7]

A week later, Echavez sent a letter to Ouano regarding the
P2,000.00 paid by the latter’s wife to the Bonsucan group.^[8] It
said:

“Because the owner of the money which I deposited for your share
has stipulated that today is the last day for the return of his money ** I
would like to request you that for the P2,000.00 which you have advanced to
Mrs. Bonsucan and company, I will just give you 250 sq. meters right in front
of your house at P8.05 per sq. meter **.” (N.B. 250 x P8.05
equals P2,012.50.)

Still later, or two weeks after Echavez won the bid, a document
simply entitled “Agreement,” was signed by him and Ouano.^[9] That document, prepared by Echavez in
his own handwriting, reads as follows:^[10]

“KNOW ALL MEN BY THESE PRESENTS:

Inasmuch as it was Francisco B. Echavez who won in the public
bidding held at the RFC office for Lot 3-A-1 last April, 1958, it is hereby
agreed between us, Francisco B. Echavez and Paterno J. Ouano, that we share the
said lot between us according to the herein sketch:

(Sketch omitted **)

That each of us takes care in paying direct to the RFC office Cebu
Branch, the installments, interests and amortizations on a ten-year plan in our
respective names, such that we would request the RFC to have the said Lot 3-A-1
subdivided into two portions: A portion
of Lot 3-A-1 for Francisco B. Echavez to contain 1882.5 sq. m. more or less
depending on the actual survey based on the above sketch, and another portion
of Lot 3-A-1 for Paterno J. Ouano to contain 1827.5 sq. m. more or less also
based on the above sketch.

That they have agreed to share proportionately all legal expenses
that may be assessed and incurred in connection with the acquisition of the
said lot in case such expenses are levied as a whole against Francisco B.
Echavez, but if such expenses are levied separately after the RFC consents to
the subdivision and registration in our respective names our share of the said
lot, then we take care individually of paying such expenses if there be any.

In witness whereof, we hereby set our hand and sign this agreement
this 15th day of April, 1958 at Mandawe, Cebu, Philippines, subject to the
approval of the RFC, Cebu Branch and Manila.”

On the same day that the “Agreement” was executed, Echavez set
down in writing a computation of the sharing of expenses of his joint venture
with Ouano, viz.:^[11]

1 827.5      – No. of sq. meters for Paterno Ouano

  7.50

91375

1­27925

P 13706.25

.20

P
2741.25

– 1016.55   – Share
of Echavez for the P2,000.00 given to Mrs. Bonsucan & Companions

P 1,724.70 – Balance payable by Mr. Ouano
to F. B. Echavez for the deposit made by the latter at the RFC. This is subject to the approval of the RFC,
Cebu Branch.

Mandawe, April 15, 1958.

(Sgd.) F. B. ECHAVEZ.

Thereafter, on various dates, Ouano and/or his wife delivered
sums of money to Echavez aggregating P1,725.00, obviously in payment of the
balance indicated in Echavez’s computation just mentioned, viz.: P500.00 on April 19, 1958, another P500.00
on April 20, and P725.00 on April 27, 1958. Receipts therefor were given by Echavez, all similarly worded to the
effect that the money was being received “as part of their reimbursement for
the deposit (of P5,565.00) I have
made with the RFC for Lot 3-A-1 which I won in the bidding and which lot I have
consented to share with Mr. Paterno J. Ouano, subject to the approval of the RFC.”^[12]

However, the RFC never approved the sharing agreement between
Echavez and Ouano concerning Lot 3-A-1. It approved the sale of the lot to Echavez only, on May 9, 1958, on the
condition that the purchase price of P27,825.00 be paid in cash. Apparently Echavez found great initial
difficulty in complying with this condition. It took all of four years, and patient negotiation and diligent effort
on his part, for him ultimately to acquire title to the property, which came
about in December, 1963. His travails
are succinctly narrated by the Trial Court as follows:^[13]

“ * * Apparently,
the successful bidder was caught flatfooted, for he was not able to comply with
this condition, notwithstanding the fact that he has been making efforts to
acquire the property (See Exhibit 21, letter of March 29, 1958; also Exhibit
22). So, he exerted much effort to
change the terms of the sale from cash to monthly amortization plan (Exhs. 24
and 10). But the Rehabilitation Finance
Corporation was adamant. The terms of
the bid giving the option to pay the balance of the purchase price either in
cash or within ten years on monthly amortization plan at 6% interest
notwithstanding, said Corporation denied defendant’s request in a letter dated
September 18, 1958 signed by Chairman Romualdez (Exh. 11). This went on for more than 4-1/2 years, with
none of the parties herein having secured the conformity of the RFC or DBP to a
novation of the original terms of the sale. Thus, the said sale was finally cancelled, and the deposit of P5,549.72
made by the defendant to the RFC forfeited as of April 4, 1962 (Exh. 12). However, on July 18, 1962, upon request of
the defendant, this cancellation was reconsidered under the condition, among
others, that the price of the sale of P27,825.00 be payable 20% down and the
balance in 5 years at 8% interest per annum on the monthly amortization plan,
commencing retroactively on June 9, 1958, and that a payment of P2,000.00 be
applied to the total arrearages of P25,799.00, which had to be paid within 90
days. The defendant paid on August 28,
1962 a further amount of P2,000.00. On
September 3, 1962, the deed of conditional sale, covering the property in
question, was entered into by the DBP and the defendant (Exh. D, same as Exh.
4), culminating in the signing of the corresponding promissory note dated
September 7, 1962 (Exh. E, same as Exh. 5). It is admitted that the defendant is now the registered owner of the
property, after having fully paid P29,3218.87 on account of the price to the
Development Bank of the Philippines, as per Deed of Absolute Sale dated
December 9, 1963 (Exhs. 14 and 34).”

It was pursuant to the absolute sale of December 9, 1963 just
mentioned, that a Torrens title (TCT No. 10776) was issued in Echavez’s name.^[14]

Ouano, in his turn, tried to have DBP either accept and implement
his sharing agreement with Echavez, or allow him to pay the full price of the
lot in Echavez’s behalf. By his own
account, he sent a letter dated June 3, 1963 to the DBP, “handcarried by his
wife,” “requesting among others, that he be permitted to pay immediately either
for his share in the aforesaid lot comprising1,828 sq. meters at the bid price
of P7.50 per sq. meter including charges, or for the whole lot;” and that he in
fact tried to make such payment but the Bank turned down his request.^[15]

Shortly after his representations with the DBP were rebuffed —
more precisely on June 24, 1963, months before the deed of absolute sale was
executed by the DBP in Echavez’s favor — Paterno J. Ouano filed suit for
“specific performance and reconveyance” in the Court of First Instance of Cebu
against Francisco Echavez and the Development Bank of the Philippines (DBP).^[16]

In his complaint,^[17]
Ouano recited substantially the facts just related, and further alleged that –

“ ** on June 3, 1963 plaintiff’s wife and
his attorney conferred with defendant ** Echavez for the purpose of again
requesting said defendant to sign a document which would be notarized and to
permit plaintiff to pay for his share direct to the defendant DBP, but said
defendant refused and instead informed them that there had been no agreement
regarding joint bidding and joint ownership of Lot 3-A-1.”

The complaint was amended a few weeks later, chiefly to allege
that DBP was on the point of rescinding its contract with Echavez; and that
Ouano’s offer to the DBP to pay in Echavez’s behalf the price of the lot in
full (P28,206.61), had been rejected; and that consequently, and “to show his
good faith,” he had consigned the amount with the Court, “for and in behalf of
defendant ** Echavez.”^[18] The
amended complaint specifically prayed that –

1)  pending trial, and upon such bond as may be
fixed by the Court, a writ of preliminary injunction issue to restrain Echavez
and RFC “from rescinding, cancelling or in any way terminating the conditional
sale contract with respect to Lot 3-A-1, TCT 7618;”

2)  after trial, Echavez be ordered “to sign an
agreement in accordance with Annex A and the foregoing allegations which should
be notarized;”

3)  by virtue of aforesaid agreement and his
deposit in Court of P28,206.61, Ouano be declared as “legally subrogated to the
rights, interest and participation of defendant ** Echavez in Lot 3-A-1 to the
extent of 1,828.5 sq. m.;”

4)  Echavez be ordered to reimburse Ouano
“P14,358.37 corresponding to defendant ** Echavez’ share of 1,882.5 sq. m.;”

5)  should Echavez be unable to pay said amount
within 15 days, Ouano be declared “legally subrogated to the rights, interest
and participation of ** Echavez in Lot 3-A-1 to the extent of 1,882.5 sq. m.;”

6)  DBP be ordered to consider the deposit made by
Ouano for and in behalf of Echavez as “complete and valid payment of Lot 3-A-1
and to execute the necessary documents of sale in (the former’s) favor ** for
1,827.5 sq. m. and in favor of
** Echavez for 1,882.5 sq. m.;”

7)  DBP be ordered to hold the deed of sale in
favor of Echavez for 1,882 sq. m. in abeyance until the latter has reimbursed
Ouano “the amount of P14,385.37 corresponding to ** Echavez’ share of 1,882.5
sq. m.,” and should Echavez be unable to do so within 15 days, DBP be ordered
to “execute said deed of sale in favor of plaintiff;” and

8)  Echavez be ordered to pay Ouano P1,000.00 as
attorney’s fees, P5,000.00 as moral damages, and P5,000.00 as exemplary
damages, as well as the costs of suit.”

The DBP moved to dismiss the amended complaint, alleging that no
cause of action was therein stated against it.^[19] The
Court found the motion to be well taken, overruled Ouano’s opposition thereto,
dismissed the amended complaint and dissolved the writ of preliminary injunction,
by Order dated August 27, 1963.^[20] It
subsequently denied Ouano’s motion for reconsideration.^[21]
Ouano appealed but on learning of the absolute sale of Lot 3-A-1 executed by
DBP in Echavez’s favor on December 9, 1963 — which according to him rendered
moot the case for legal subrogation and injunction as far as DBP was concerned
— he withdrew the appeal and moved instead for admission of a second amended
complaint,^[22]
which the Court admitted in the absence of opposition thereto. In the second amended complaint, dated
January 4, 1964,^[23]
the DBP was no longer included as a party. Echavez was the sole defendant. The second amended complaint adverted to the
dismissal of the case as against the DBP and additionally alleged that Echavez,
“in gross and evident bad faith, mortgaged the whole of Lot 3-A-1 to one Dr.
Serafica.” It prayed particularly that Echavez be commanded:

1.  To execute a public document embodying and
confirming the oral contract of joint ownership of Lot 3-A-1, TCT 7618, of April
1, 1958 between plaintiff and defendant **;

2.  To execute a deed of reconveyance of 1,827.5
sq. m. of Lot 3-A-1 ** after reimbursement of the sum of P14,821.24 by the
plaintiff;

3.  To pay plaintiff P1,000 as attorney’s fees,
P5,000.00 as moral damages, P5,000.00 as exemplary damages and the expenses of
litigation; and

4.  To pay the costs.”

Trial ensued after which the Trial Court rendered judgment on
June 29, 1968. It found that the
sharing agreement between Ouano and Echavez could not be enforced in view of
the absence of consent of the RFC (DBP) which the latter never gave; apart from
this, the agreement had an unlawful cause and hence could “produce no effect
whatever” in accordance with Article 1352 of the Civil Code, because involving
a felony defined in Article 185 of the Revised Penal Code, to wit:

“ART. 185. Machinations in public auctions. —
Any person who shall solicit any gift or promise as a consideration for
refraining from taking part in any public auction, and any person who shall attempt
to cause bidders to stay away from an auction by threats, gifts, promises, or
any other artifice, with intent to cause the reduction of the price of the
thing auctioned, shall suffer the penalty of prision correccional in its minimum period and a fine ranging from 10 to 50 per centum of the value of the thing
auctioned.”

The decision accordingly dismissed the
Second Amended Complaint, ordered Ouano “to vacate the portion of Lot No. 3-A-1
he occupied pursuant to Exhibit C,” and also dismissed Echavez’s counterclaim.

Ouano appealed to the Court of Appeals. Here he fared no better. He enjoyed initial success, to be sure. Judgment was promulgated on February 28,
1974^[24] setting aside the Trial Court’s
judgment, and directing: (a) Echavez
“to execute a deed of conveyance in favor of plaintiff for 1827.5 square meters
as the latter’s share in the property in controversy,” and (b) Ouano “to pay
defendant the amount of P14,821.24 representing the cost of his share.”
However, on a second motion for reconsideration presented by Echavez, the
Appellate Court, on November 21, 1974, reconsidered its decision of February
28, 1974 and entered another “affirming in toto the decision appealed from without
costs.”^[25]
This second decision found that the documentary evidence^[26] preponderantly established that “the
parties have manifested their intention to subordinate their agreement to the
approval of the RFC.” “Consequently,” the decision stated,

“ * * had the plaintiff’s and defendant’s
proposal been accepted by the RFC (DBP) two separate contracts, covering the
two segregated lots according to the sketch would have come into existence, to
be executed by the RFC separately in favor of the plaintiff and the defendant.
But unfortunately, the RFC disapproved
the proposal as the sale was to be for cash. As a result, the obligatory force of the ‘agreement’ or the consent of
the parties, which was subordinated to the taking effect of the suspensive
condition that the agreement be subject to the approval of the RFC never
happened. This being the case, the
agreement never became effective. The
rule is settled that:

‘When the consent of a party to a contract is given subject to the
fulfillment of a suspensive condition, the contract is not perfected unless the
condition is first complied with’ (Ruperto vs. Cosca, 26 Phil. 227).

And when the obligation assumed by a party to a contract is
expressly subjected to a condition, the obligation cannot be enforced against
him unless the condition is complied with” (Wise & Co. vs. Kelly, 37 Phil.
696; Philippine National Bank vs. Philippine Trust Co., 68 Phil. 48).

At best, the non-fulfillment of the suspensive condition has the
effect of negating the conditional obligation. It has been held that what
characterizes a conditional obligation is the fact that its efficacy or
obligatory force is subordinated to the happening of a future and uncertain
event, so that if the suspensive condition does not take place, the parties
would stand as if the conditional
obligation had never existed (Gaite vs. Fonacier, L-11827, July 31, 1961, 2
SCRA 831).”

Motions for reconsideration and for oral argument filed by Ouano
were denied by Resolutions dated February 6, February 11, and February 21,
1975, the last containing a suggestion “that appellant go to the Higher Court
for relief.”^[27]

Ouano is now before this Court, on appeal by certiorari, to seek the relief that both the
Trial Court and the Court of Appeals have declined to concede to him. In this
Court, he attempts to make the following points, to wit:

1.   The verbal agreement between the parties to
acquire and share the land in proportion to their respective abutting
properties, and executed by the immediate occupation by the parties of their
respective shares in the land, is a perfected consensual contract and not “a
mere promise to deliver something subject to a suspensive condition” (as ruled
in the second decision of the Court of Appeal); hence the petitioner is
entitled to compel private respondent to execute a public document for the
registration in his name of the petitioner’s share in the land in question
pursuant to Art. 1315 of the Civil Code (as held in the first decision of the
Court of Appeals).

2.   The agreement to acquire and share the land
was not subject to a suspensive condition.

3.   Assuming in gratia argumenti the agreement to be subject to a suspensive condition, since
the condition consisted in obtaining the approval of the RFC — a third party
who could not in any way be compelled to give such approval — the condition is
deemed constructively fulfilled because petitioner had done all in his power to
comply with the condition, and private respondent, who also had the duty to get
such approval, in effect prevented the fulfillment of the condition by doing
nothing to secure the approval.

4.   The circumstances show that Echavez clearly
acted in bad faith, and it is unjust to allow him to benefit from his bad faith
and ingenious scheme.

Two material facts, however, about which Ouano and Echavez are in
agreement, render these questions of academic interest only, said facts being
determinative of this dispute on an altogether different ground. These facts
are:

1) that they had
both orally agreed that only Echavez would make a bid at the second bidding
called by the RFC, and that if it was accepted, they would divide the property
in proportion to their adjoining properties; and

2)   that to ensure success of their scheme, they
had also agreed to induce the only other party known to be interested in the
property — a group headed by a Mrs. Bonsucan — to desist from presenting a
bid,^[28]
as they did succeed in inducing Mrs. Bonsucan’s group to withdraw from the
sale, paying said group P2,000 as reimbursement for its expenses.^[29]

These acts constitute a crime, as the Trial Court has
stressed. Ouano and Echavez had promised
to share in the property in question as a consideration for Ouano’s refraining
from taking part in the public auction, and they had attempted to cause and in
fact succeeded in causing another bidder to stay away from the auction in order
to cause reduction of the price of the property auctioned. In so doing, they committed the felony of machinations in public auctions defined
and penalized in Article 185 of the Revised Penal Code, supra.

That both Ouano and Echavez did these acts is a matter of record,
as is the fact that thereby only one bid — that of Echavez — ­was entered for
the land in consequence of which Echavez eventually acquired it. The agreement therefore being criminal in
character, the parties not only have no action against each other but are both
liable to prosecution and the things and price of their agreement subject to
disposal according to the provisions of the criminal code. This, in accordance
with the so-called pari delicto principle set out in the Civil Code.

Article 1409 of said Code declares as “inexistent and void from
the beginning” those contracts, among others, “whose cause, object or purpose
is contrary law, morals, good customs, public order or public policy,” or
“expressly prohibited ** by law.” Such contracts “cannot be ratified;” “the
right to set up the defense of illegality (cannot) be waived;” and, Article
1410 adds, the “action or defense for the declaration of the inexistence **
(thereof) does not prescribe.” Furthermore, according to Article 1411 of the
same Code^[30]
–

“ * *. When the nullity
proceeds from the illegality of the cause or object of the contract, and the
act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall
be prosecuted. Moreover, the provisions of the Penal
Code relative to the disposal of effects or instruments of a crime shall be
applicable to the things or the price of the contract.

“* * “

The dismissal of Ouano’s action by both the Trial Court and the
Court of Appeals was thus correct, being plainly in accord with the Civil Code
provisions just referred to.^[31]
Article 1411 also dictates the proper disposition of the land involved, i.e.,
“the forfeiture of the proceeds of the crime and the instruments or tools with
which it was committed,” as mandated by the provisions of Article 45 of the
Revised Penal Code, this being obviously the provision “of the Penal Code
relative to the disposal of effects or instruments of a crime” that Article
1411 makes “applicable to the things or the price of the contract.”

WHEREFORE, the appealed decision of the Court of
Appeals is MODIFIED, so that in addition to affirming the Trial Court’s
judgment dismissing Ouano’s complaint and Echavez’s counterclaim in Civil Case
No. R-8011, Lot No. 3-A-1 subject of said case is ordered FORFEITED in its
entirety in favor of the Government of the Philippines. No pronouncement as to costs. Let copy of
this Decision be furnished the Solicitor General.

SO ORDERED.

Cruz, Griño-Aquino, and Medialdea,
JJ., concur.

Gancayco, J., no part.

^[1]
The bidding on this date was in fact the second for the same
property. The first, in which
petitioner herein, Ouano, and private respondent, Echavez, paticipated, was
nullified on account of the former’s protest.

^[2]
Held on March 22, 1958

^[3]
Rollo, p. 79

^[4]
Id., p. 80

^[5]
Id., pp. 80, 160

^[6]
Ouano, it seems, also submitted a bid, but although the price offered by him,
P27,826.00, was the same as that of Echavez, his bid was inferior in that,
unlike Echavez’s offer, it was not accompanied by a deposit of P5,565.00. Rollo,
p. 159

^[7]
Rollo, p. 80

^[8]
Id., pp. 82-83; Exh. LL.

^[9]
This document was marked Exh. C for plaintiff Ouano, and Exh. 3 for defendant
Echavez

^[10]
Rollo, pp. 82-83

^[11]
Id., pp. 80-81, Exh. F (also, Exh. 6)

^[12]
Id., p. 166

^[13]
Id., p. 210: Record on Appeal
[Annex R, petition), pp. 142-143

^[14]
Id., p. 77

^[15]
Id., p. 290: Petitioner’s brief,
p. 34. He further avers [Rollo,
p. 31] that “(t)o show his further interest in the settlement of defendant’s
obligation to the Bank, plaintiff deposited the amount of P28,206.61 with the
clerk ** (of the Trial Court).”

^[16]
Docketed as Civil Case No. R-8011

^[17]
Rollo, p. 210; Record on appeal, pp. 1-10

^[18]
Id.: id., p. 14

^[19]
Id.: id., pp. 17-24

^[20]
Id.: id., pp. 43-46

^[21]
Id.: id., pp. 71

^[22]
Id.: id., pp. 71-72

^[23]
Id.: id., pp. 73-79

^[24]
Rollo, pp. 74-101. N.B. The
decision was written for the Court (Fifth Division) by Martin, J., with whom
concurred Gancayco and Serrano, JJ.

^[25]
Rollo, pp. 157-168. N.B. The
second decision was also written by Martin, J., with whom again concurred Gancayco
and Serrano, JJ.

^[26]
Exhs. F (or 6), G (or 7), H (or 8), and I (or 9)

^[27]
Rollo, p. 208

^[28]
Id., p. 80

^[29]
Id., pp. 80, 160

^[30]
Italics supplied

^[31]SEE
Paras, Civil Code of the Philippines Anno., 1989 ed., Vol. IV, pp.
736, 740 et seq., citing Cabauatan v. Uy Hoo,
88 Phil. 103; de Raquiza v. Castellvi, 77 SCRA 88; Teja Marketing, et
al. v. Nale, et al., G.R. No. 65510, Mar. 9, 1987; Padilla, Civil Code
Anno., 1974 ed., Vol. IV, pp. 993, citing Inson v. Belzunce, 32 Phil.
342; Liguez v. C.A., 102 Phil. 577;Rellosa v. Gaw Chee Hu, 93
Phil. 827, etc.; Tolentino, Civil Code, 1973 ed., Vol. IV, p 638-9 —
all cited in Compañia General de Tabacos de Filipinas
v. C.A., et al., G.R. No. 59534, May 10, 1990