Case Summary (G.R. No. 185184)
Facts of the Case — Advertisement, Inspection, and Auction
Union Bank advertised and offered the condominium unit for public auction with an advertised area of 95 square meters. Petitioner inspected the unit about a week before the auction, accompanied by a Union Bank representative, and observed patent defects (damaged ceiling and parquet floors) and its irregular shape with a circular terrace. Petitioner examined the master title and the condominium certificate of title at the auction and successfully bid P2,650,000.
Contract to Sell and Payments
On May 7, 2001, petitioner entered into a Contract to Sell with Union Bank, paying a 10% down payment and agreeing to a 15‑year amortization at 15% interest per annum beginning July 7, 2001. Petitioner occupied the unit from June 2001 and by July 20, 2003 had fully paid a total of P3,257,142.49.
Discovery of Area Discrepancy and Initial Communications
In late 2003, while planning renovations, petitioner took rough measurements and suspected the interior floor area was approximately 70 square meters rather than the advertised 95. Petitioner notified Union Bank and formally demanded rescission and refund if the unit’s area was conclusively shown to be under 95 square meters. Union Bank responded in December 2004 asserting, after inquiries with HLURB, the homeowners’ association, and its appraisers, that the unit’s total area equaled 95 square meters, but that figure included the terrace and surrounding common areas.
Independent Survey and Bank’s Further Explanation
Petitioner commissioned a licensed geodetic engineer who certified the unit’s total floor area as 74.4 square meters. Union Bank, in a February 1, 2006 letter, explained that HLURB‑approved unit area was 60 square meters and the bank’s records reflected a 98 square meter allocation based on ratio allocation for maintenance (60 square meters unit area plus 38 square meters share of open space), while its surveyor recorded an interior measurement of approximately 74.18 square meters. Union Bank therefore maintained different bases for its area figures.
Procedural History — Trial Court and Court of Appeals
Petitioner filed a Complaint for Rescission of Contract and Damages in the Regional Trial Court, Makati. The RTC dismissed the complaint for lack of merit. On appeal, the Court of Appeals affirmed, reasoning that the sale was expressly made on an "as‑is‑where‑is" basis (Section 12 of the Contract to Sell) and that petitioner thereby waived warranties regarding errors in bounds or description; the CA also held petitioner failed to prove causal fraud and that Article 1542 of the Civil Code precluded price reduction or rescission in lump‑sum sales.
Issue Presented to the Supreme Court
Whether Union Bank committed fraud serious enough to vitiate petitioner’s consent and permit annulment of the Contract to Sell for the condominium unit where the advertised area (95 sq. m.) did not reflect the unit’s interior area (74.4 sq. m.), and whether Union Bank’s reliance on the as‑is‑where‑is clause and Article 1542 barred rescission and damages.
Legal Standard on Fraud and Voidability of Contracts
A contract is voidable where consent is vitiated by mistake, violence, intimidation, undue influence or fraud (Art. 1390). Fraud (dolo) sufficient to annul a contract must be serious (dolo causante), such that it was the determining cause of the contract; incidental fraud (dolo incidente) is insufficient (Arts. 1338, 1344; jurisprudence). The court applied established tests: materiality of the misrepresentation and whether the defrauded party would not have contracted but for the falsity.
Materiality of Advertised Area to Buyer’s Consent
The Court recognized that the unit’s advertised area was material and decisive to petitioner’s decision to bid and purchase. In urban condominium transactions, advertised floor area is a fundamental attribute affecting the buyer’s assessment of suitability and value. Petitioner expressly relied on the 95 sq. m. figure in choosing to register and bid.
Condominium Law on Unit Boundaries and the Inclusion of Common Areas
Under RA No. 4726 (Condominium Act), the boundary of a condominium unit is defined by the interior surfaces of the perimeter walls, floors, ceilings, windows and doors; areas of common use are expressly not part of the unit (Sec. 3(b), Sec. 6(a)). Thus, including common areas in the advertised "area" of a unit runs contrary to the statutory definition adopted for condominium units.
As‑Is‑Where‑Is Clause — Scope and Limits
The Court clarified that as‑is‑where‑is stipulations pertain to the physical condition of the thing sold but cannot relieve a seller from liability for latent or technical defects known to the seller or for defects requiring specialized technical examination to reveal. An as‑is clause covers patent defects readily detectable by an ordinary buyer, not hidden or technical attributes that require expert assessment or legal interpretation (citing Hian, National Development Company, Asset Privatization, and other precedents).
Warranty Against Hidden Defects and Seller’s Knowledge
Articles 1561 and 1566 of the Civil Code make the vendor responsible for hidden defects that render the thing unfit or diminish its fitness unless the contrary has been stipulated and the vendor was unaware of the defects. A contractual stipulation disclaiming warranty is ineffective if the seller knew of the hidden defect. Here, Union Bank had knowledge (through appraisers and internal reports) that the 95 sq. m. figure included terrace/common areas and thus was not the unit’s interior area as defined by the Condominium Act.
Article 1542’s Inapplicability to Annulment for Fraud
Article 1542 (relating to lump‑sum sales and price adjustments for discrepancies in area) concerns proportionate price adjustment, not the annulment of a sale procured by causal fraud. The petitioner sought complete rescission on the ground that his consent was vitiated; Article 1542 is inapplicable where the defect is substantial (here a 21.68% shortfall from 95 to 74.4 sq. m.) and where fraud, not mere measurement variance, is alleged. The Court thus rejected reliance on Article 1542 to preclude annulment.
Banks’ Fiduciary Duty and Standard of Diligence
The Court emphasized that banks in lending and foreclosure operations owe a high degree of diligence and are fiduciaries in their dealings. Banks must exercise superior care in ascertaining the status, condition, and legal characteristics of properties taken as collateral, including title verification and accurate physical appraisals, because failure may affect innocent purchasers and the public interest. Gross negligence in this context can amount to bad faith.
Application of Law to the Facts — Fraud by Gross Negligence
Union Bank either knew that the advertised 95 sq. m. relied on inclusion of common areas or was grossly negligent in failing to determine the unit’s true interior area. The bank had appraisal reports and personnel inspections but nevertheless advertised the figure in a manner that misled prospective buyers. This level of culpable careless
...continue readingCase Syllabus (G.R. No. 185184)
Procedural History
- Petition for Review on Certiorari under Rule 45 sought reversal of the Court of Appeals' November 15, 2012 Decision and February 12, 2013 Resolution in CA-G.R. CV No. 95369.
- The Court of Appeals had affirmed the April 20, 2010 Decision of the Regional Trial Court (RTC), Branch 65, Makati City, which dismissed petitioner Poole-Blunden’s Complaint for Rescission of Contract and Damages against Union Bank of the Philippines (UnionBank).
- Following denial of his Motion for Reconsideration in the Court of Appeals, petitioner elevated the case to the Supreme Court by petition.
- The Supreme Court rendered its Decision on November 29, 2017 (G.R. No. 205838), with the formal notice of judgment received by the Clerk of Court on March 1, 2018.
Relevant Factual Background
- Sometime in March 2001 petitioner saw a UnionBank advertisement in the Manila Bulletin offering for public auction several properties, including Unit 2-C of T-Tower Condominium (the "Unit"), located at 5040 P. Burgos corner Calderon Streets, Makati City.
- UnionBank had acquired the Unit through foreclosure after the developer defaulted on its loan from UnionBank.
- The Unit was advertised as having an area of 95 square meters; petitioner considered this size sufficient and registered to bid.
- Approximately one week before the auction petitioner inspected the Unit with a UnionBank representative; he observed an irregular shape, a circular terrace, damaged parquet flooring, ceiling in bad condition and signs of water leakage, and other defects requiring substantial repairs.
- On the auction day petitioner inspected the Master Title in the name of Integrated Network (TCT No. 171433) and UnionBank’s Condominium Certificate of Title (CCT No. 36151), both displayed at the venue.
- Petitioner won the bid at P2,650,000.00 and on May 7, 2001 entered into a Contract to Sell requiring 10% down payment and the balance payable over 15 years at 15% per annum starting July 7, 2001.
- Petitioner began occupying the Unit in June 2001 and, by July 20, 2003, had fully paid a total of P3,257,142.49.
- In late 2003 petitioner decided to construct two additional bedrooms, took rough measurements, and found the Unit’s floor area appeared to be approximately 70 square meters, not the advertised 95 square meters.
- Petitioner reported the discrepancy to UnionBank; no prompt corrective action was taken by the bank.
- On July 12, 2004 petitioner wrote to UnionBank demanding rescission and refund if the Unit was conclusively shown to be less than 95 square meters.
- In a December 6, 2004 letter UnionBank informed petitioner that inquiries with the HLURB, the homeowners’ association, and its appraisers confirmed the Unit as 95 square meters, “inclusive of the terrace and the common areas surrounding it.”
- Petitioner commissioned Engr. Gayril P. Tagal to survey the Unit; Engr. Tagal certified the Unit’s total floor area as 74.4 square meters. Petitioner provided this certification to UnionBank on July 12, 2005.
- UnionBank’s February 1, 2006 letter explained that HLURB documents showed a “total area” of 98 square meters (60 square meters unit area and 38 square meters share of open space), while the bank’s surveyor measured an “actual area” of about 74.18 square meters; the bank maintained that the 95-square-meter advertisement included terrace and common area.
- UnionBank’s former Assistant Vice President of the Asset and Recovery Group, Atty. Elna N. Cruz, testified that UnionBank’s records and appraisal report showed an area of 95 square meters but that this measurement included the terrace and common areas; UnionBank did not disavow her testimony.
Legal Issues Presented
- Whether UnionBank committed fraud of such degree as to vitiate petitioner’s consent and render the Contract to Sell voidable.
- Whether the “as-is-where-is” clause in Section 12 of the Contract to Sell bars petitioner’s action for rescission and damages.
- Whether Article 1542 of the Civil Code precludes rescission and instead limits petitioner to a price reduction or other remedy under that provision.
- Whether UnionBank’s conduct as a bank failed to meet the heightened standard of diligence and thus amounted to gross negligence or bad faith warranting rescission, exemplary damages, attorney’s fees, and costs.
Evidence and Findings of Fact
- The Unit’s interior area was conclusively found to be 74.4 square meters per Engr. Tagal’s certification; UnionBank’s surveyor found 74.18 square meters.
- UnionBank had, before and during litigation, represented that the 95-square-meter figure was inclusive of the terrace and common areas; this representation was communicated in UnionBank’s December 6, 2004 letter and affirmed in Atty. Cruz’s testimony.
- Petitioner inspected and noted only those defects and physical traits readily perceptible (ceiling damage, water intrusion, parquet damage, irregular shape, circular terrace); precise area measurement required technical surveying competence.
- The Contract to Sell contained Section 12: an “as-is-where-is” clause stating buyer recognized purchase “including errors in boundaries or description of property, if any,” and that seller made no warranty as to authenticity, accuracy, or title.
Governing Statutes, Code Provisions, and Doctrines Cited
- Republic Act No. 4726 (Condominium Act): Section 3(b) defining “unit” and Section 6(a) specifying that the boundary of the unit is the interior surfaces of perimeter walls, floors, ceilings, windows and doors; common areas are expressly not part of the unit.
- Civil Code provisions:
- Article 1390 on voidable contracts where consent is vitiated by mistake, violence, intimidation, undue influence or fraud.
- Article 1338 def