G.R. No. 196419 - Pilipinas Makro, Inc. vs. Coco Charcoal Philippines, Inc.

Case Summary (G.R. No. 196419)

Factual Background: The Two Deeds of Absolute Sale and the DPWH Encroachment

In 1999, Makro sought to acquire real property in Davao City to build and operate a store, with the intent to establish its business presence in the city. After negotiations through authorized real estate agents, Makro selected two suitable parcels of land from adjacent owners. On 26 November 1999, Makro and Coco Charcoal executed a notarized Deed of Absolute Sale for a parcel with a total area of 1,000 square meters, covered by Transfer Certificate of Title (TCT) No. 208776, for the price of P8,500,000.00. On the same date, Makro executed a notarized Deed of Absolute Sale with Lim for another 1,000-square-meter parcel covered by TCT No. 282650, for the same consideration of P8,500,000.00.

The two parcels were contiguous and parallel. The deeds contained identical provisions, similar terms, conditions, and warranties, and included provisions on investigation, relocation, price adjustment, and warranties regarding encumbrances and defenses.

After the execution of the sale, Makro hired geodetic engineer Engineer Josefino M. Vedua to conduct a resurvey and relocation of the two adjacent lots. The resurvey revealed that the DPWH had encroached upon portions of each property for its road widening and drainage canal project. Specifically, 131 square meters of the Coco Charcoal lot and 130 square meters of the Lim lot were affected by the DPWH project. As a result of registration, Makro later obtained titles in January 2000 after the deeds were registered and the sellers’ prior titles were cancelled.

Makro informed the representatives of Coco Charcoal and Lim of the alleged encroachment. Makro initially offered a compromise involving a refund of seventy-five percent (75%) of the value of the encroached portions. When that effort failed, Makro issued a final demand letter to recover the refund corresponding to the encroached areas, seeking P1,113,500.00 from Coco Charcoal and P1,105,000.00 from Lim.

Proceedings in the RTC: Award of Refund and Damages

When respondents did not refund the requested amounts, Makro filed separate complaints against Coco Charcoal and Lim to collect the refund it claimed. In its 16 August 2004 Decision, the RTC granted Makro’s complaints and ordered each respondent to refund the value of the encroached area, with interest at twelve percent (12%) per annum, attorney’s fees of P200,000.00, and exemplary damages of P200,000.00, plus costs.

The RTC found that the DPWH project encroached upon the purchased properties such that Makro had to adjust its perimeter fences. It reasoned that the road right of way includes not only the paved portion but also the shoulders and gutters, and that the unpaved portion was within the area purchased. The trial court also found respondents in bad faith because they allegedly concealed from Makro that DPWH had already taken possession of a portion of the lands sold, considering that drainage pipes were already installed prior to the sale. It concluded that DPWH could not have undertaken the diggings and subsequent installation without the consent of the sellers, as the previous owners.

The RTC dispositive portion directed both Coco Charcoal and Lim to pay P1,500,000.00 each, representing the value of the encroached areas, together with attorney’s fees and exemplary damages.

CA Proceedings: Reversal and Dismissal for Lack of Cause of Action

Coco Charcoal and Lim appealed to the CA. In its 30 December 2010 Decision, the CA reversed the RTC. Although the CA agreed that the DPWH project encroached upon the frontal portions of the properties, it held that Makro was not entitled to a refund.

The CA reasoned that the warranty in Section 4(i) of the deeds of sale was akin to the warranty against eviction under Article 1548 of the Civil Code. According to the CA, only a buyer in good faith may sue for breach of a warranty against eviction. The appellate court further stated that Makro could not feign ignorance of the ongoing road widening project. It emphasized that Makro’s actual knowledge of encroachment before execution of the sale showed Makro’s lack of good faith, leading the CA to conclude that the sellers’ warranty against liens, easements, and encumbrances did not cover the portions affected by the DPWH project.

Consequently, the CA dismissed Makro’s actions for lack of cause of action. Makro moved for reconsideration, but the CA denied its motion in its 7 April 2011 Resolution.

Issues Presented to the Supreme Court

Makro raised two issues. First, Makro questioned whether the CA erred in denying its motions for extension to file a motion for reconsideration. Second, Makro contested whether the CA erred in denying a refund on the ground of bad faith.

Supreme Court Resolution on the Procedural Issue: Relief Based on Cogent Reasons

The Supreme Court found the petition meritorious and granted relief on both the procedural and substantive aspects.

As to the procedural issue, Makro filed two motions for extension to file a motion for reconsideration. Initially, it sought extension because its former lawyer withdrew after being appointed press secretary for former President Benigno Aquino III. It then sought further extension because its new counsel was confined due to dengue and typhoid fever. Ultimately, Makro filed its motion for reconsideration on 7 March 2011.

The CA denied the motions for extension, holding that the fifteen (15)-day period to file a motion for reconsideration was non-extendible and that motions for extension were prohibited. The Supreme Court clarified that while rules on procedure exist to ensure orderly resolution, they should not frustrate substantial justice. It relied on jurisprudence, particularly Gonzales v. Serrano and the earlier framework in Imperial v. Court of Appeals, which recognizes that although the prohibition on motions for extension is generally enforced, exceptions may be warranted when the petitioner shows cogent reasons for non-observance. The Court emphasized that relaxation of procedural rules requires compelling reasons or when the purpose of justice so requires.

Applying that standard, the Supreme Court held that Makro’s explanations were not intended to delay proceedings but were caused by circumstances beyond its control. It noted that counsel withdrawal was tied to cabinet appointment and that counsel illness was unavoidable. Thus, the Court held that it was prudent for the CA to relax procedural constraints so that the substantive issues could be resolved.

Governing Contract Provisions: Investigation, Price Adjustment, and Express Warranties

Turning to the merits, the Supreme Court examined provisions of the deeds that directly addressed area discrepancies and warranties.

Under Section 2 of the deeds, Makro, as buyer, would undertake at its own expense a general investigation and relocation conducted by a surveyor mutually acceptable to both parties. If there was discrepancy between the actual areas as resurveyed and the areas in the titles, the purchase price would be adjusted at a specified rate of P8,500.00 per square meter. The clause contemplated adjustment not only when actual area increased, but also when actual area decreased, and it also provided for correction of titles in case of discrepancy.

Under Section 4(i), the sellers represented and warranted that the property would be and continue to be free and clear of all easements, liens and encumbrances and would not be subject to claims or defenses that would prevent the buyer from obtaining full and absolute ownership and possession or from developing the property.

The Court recognized that Makro engaged the services of a geodetic engineer as required, discovered the DPWH encroachment, and then sought judicial redress after demand for refund remained unheeded.

Express Warranty Versus Warranty Against Eviction: The CA’s Legal Characterization Was Erroneous

A critical legal point was the CA’s characterization of Section 4(i) as resembling a warranty against eviction under Article 1548. The Supreme Court held that the CA erred.

The Court discussed the general law of warranties in sale. A warranty is a collateral undertaking in a sale. If the thing sold lacks certain incidents or qualities, the purchaser may either treat the sale accordingly or claim damages for breach. Warranties may be express or implied. An express warranty is found within the contract language and arises from the seller’s affirmation, promise, or representation, whereas an implied warranty is derived by operation of law from the nature of the transaction.

The Court ruled that Section 4(i) of the deeds contained categorical language in which the sellers assured that the properties were free from easements and encumbrances that would prevent Makro from obtaining full and absolute ownership and possession. The Court thus treated it as an express warranty, not an implied warranty akin to eviction.

Additionally, even if the provision were hypothetically treated as resembling eviction-related warranty, the Supreme Court stated that the doctrinal requisites for the enforcement of an implied warranty against eviction require, among others, a final judgment and the deprivation occurring by virtue of a prior right to the sale made by the vendor, along with a procedural requirement that the vendor be summoned and made a co-defendant in an eviction suit at the vendee’s instance. The Supreme Court emphasized that in the present case, there had been no final judgment and the sellers were not given the procedural opportunity to participate in an eviction action, because Makro had initiated no eviction suit before the present case.

Thus, the CA’s legal framework for denying refund based on good-faith limitations associated with eviction was not controlling.

Bad Faith and the Knowledge Argument: Ocular Inspection Was Not Sufficient to Establish Actual Knowledge of Encroachment Extent

The CA also denied relief based on Makro’s alleged

Case Syllabus (G.R. No. 196419)

The case involved Petition for Review on Certiorari seeking reversal of the Court of Appeals (CA) rulings that reversed the Regional Trial Court (RTC) decision in CA-G.R. CV No. 83836.
The controversy arose from two notarized Deeds of Absolute Sale executed by Pilipinas Makro, Inc. (Makro) with Coco Charcoal Philippines, Inc. (Coco Charcoal) and Lim Kim San (Lim) for contiguous parcels of land in Davao City.
The Supreme Court applied the 1987 Constitution because the decision was promulgated in 2017.
The dispositive outcome was a reversal of the CA, with an award of proportionate refund amounts to Makro.

Parties and Procedural Posture

Makro filed the petition after the CA rendered a 30 December 2010 Decision and denied reconsideration in a 7 April 2011 Resolution.
The CA had reversed an RTC Decision dated 16 August 2004 issued by RTC Branch 276, Muntinlupa City.
The RTC had granted Makro’s complaints for refund against both respondents.
The CA dismissed Makro’s action for lack of cause of action.
The Supreme Court ultimately granted the petition, thereby reinstating Makro’s right to recover the proportionate purchase-price adjustment under the parties’ contract.

Key Factual Allegations

In 1999, Makro sought to acquire real properties in Davao City to build and operate a store.
On 26 November 1999, Makro and Coco Charcoal executed a Deed of Absolute Sale over a parcel of land of one thousand square meters under TCT No. 208776 for P8,500,000.00.
On the same date, Makro and Lim executed another Deed of Absolute Sale over a one thousand square meter parcel under TCT No. 282650 for the same consideration of P8,500,000.00.
The two properties were contiguous and parallel, and the deeds contained identical provisions with substantially similar warranties and terms.
Makro engaged Engineer Josefino M. Vedua, a geodetic engineer, in December 1999 to resurvey and relocate the two lots.
The resurvey revealed that the DPWH road widening project and related drainage works had encroached upon both lots.
Coco Charcoal’s lot suffered encroachment of one hundred thirty-one (131) square meters.
Lim’s lot suffered encroachment of one hundred thirty (130) square meters.
After registration and cancellation of the previous owners’ titles, TCT Nos. T-321199 and T-321049 were issued in Makro’s favor in January 2000.
Makro informed the representatives of Coco Charcoal and Lim about the encroachment and initially offered a compromise refund of seventy-five percent (75%) of the value of the affected portions.
Makro later sent final demand letters seeking refunds corresponding to the encroached areas.
Makro filed separate complaints when its demands remained unheeded.

Contractual Provisions In Issue

The Supreme Court treated Section 2 and Section 4(i) of the deeds as pivotal contractual clauses.
Section 2 required Makro, at its own expense, to conduct a general investigation and relocation by a mutually acceptable surveyor.
Section 2 provided for purchase-price adjustment when there was a discrepancy between actual areas and title areas, including a rate of P8,500.00 per square meter.
Section 2 further required the seller to make necessary correction of title before transfer in case of discrepancies.
Section 4(i) expressly provided that the property would be free and clear of all easements, liens and encumbrances of any nature whatsoever.
Section 4(i) also assured that the property would not be subject to any claim, set-off, or defense preventing the buyer from obtaining full and absolute ownership and possession or from developing and using the property as a store-building site.
The Supreme Court characterized Section 4(i) as an express warranty drawn from the contract’s language.

Trial Court Findings

The RTC found that the DPWH project encroached on the frontal portions of the properties and also affected the unpaved portions within the purchased area.
The RTC held that the road right of way included more than the paved road, and it included shoulders and gutters.
The RTC determined that Makro had to adjust its perimeter fences, consistent with physical encroachment.
The RTC found respondents to have acted in bad faith by concealing that DPWH had already taken possession of parts of the sold lots, citing that drainage pipes had already been installed before the sale.
The RTC ordered:
- Both respondents to refund and reimburse P1,500,000.00 each, with 12% per annum interest.
- Attorney’s fees of P200,000.00 each.
- Exemplary damages of P200,000.00 each.
- Both to pay costs of litigation.

Court of Appeals Reasoning

The CA agreed that DPWH encroached upon the frontal portions of the properties.
The CA ruled that Makro was not entitled to a refund, despite the physical intrusion.
The CA analogized Section 4(i) of the deeds to the warranty against eviction under Article 1548 of the Civil Code.
Based on that analogy, the CA stated that only a buyer in good faith may sue for breach of a warranty against eviction.
The CA reasoned that Makro could not feign ignorance because it had actual knowledge of the ongoing road widening project.
The CA found that Makro’s actual knowledge before the sale meant Makro recognized that the seller’s warranty against liens, easements, and encumbrances did not extend to the portions affected by the DPWH project, but only covered the remainder of the property.
The CA dismissed Makro’s action for lack of cause of action and denied reconsideration.

Issues Raised in Petition

Makro argued that the CA erred in denying its motions for extension to file a motion for reconsideration.
Makro also argued that the CA erred in denying the refund based on an alleged bad faith finding.
The issues required the Supreme Court to address procedural flexibility on motions for extension and the substantive effect of the parties’ warranties and Makro’s knowledge.

Supreme Court Ruling on Extensions

The Supreme Court held