G.R. No. 205838 - Poole-Blunden vs. Union Bank of the Philippines

Case Summary (G.R. No. 205838)

Factual Background

Petitioner discovered an advertisement placed by Union Bank of the Philippines for the auction of Unit 2-C, T-Tower Condominium in Makati which was advertised as having an area of 95 square meters. Petitioner inspected the unit with a bank representative prior to the auction, observed physical deterioration and an irregular configuration including a circular terrace, and bid successfully at P2,650,000.00. He executed a Contract to Sell on May 7, 2001, paid the required down payment and thereafter paid the balance in instalments, completing payment by July 20, 2003. In late 2003 petitioner planned renovations and took rough measurements that suggested the unit’s interior area was about 70 square meters. After unsuccessful informal inquiries, petitioner sent a written demand for rescission on July 12, 2004. Respondent replied in December 2004 stating the 95 square meters included the terrace and adjoining common areas. Petitioner then commissioned a surveyor whose certification dated 2005 established the unit’s interior floor area as 74.4 square meters.

Trial Court Proceedings

Petitioner filed a Complaint for Rescission of Contract and Damages with the Regional Trial Court, Makati City. The trial court found against petitioner and dismissed the complaint for lack of merit in a Decision dated April 20, 2010, denying also petitioner’s counterclaims. The trial court accepted respondent’s position concerning the basis of the advertised area and the contractual stipulation that the sale was made as-is-where-is.

Court of Appeals Proceedings

On appeal, the Court of Appeals affirmed the trial court. It relied principally on Section 12 of the Contract to Sell containing an as-is-where-is clause and concluded petitioner thereby waived warranties regarding errors in boundaries or description of the property. The Court of Appeals also held that petitioner failed to establish by clear and convincing evidence dolo causante attributable to respondent and invoked Article 1542 of the Civil Code to reject a price reduction claim, reasoning that the sale was for a lump sum.

Issues Presented to the Supreme Court

The sole legal issue certified for the Supreme Court’s resolution was whether Union Bank of the Philippines committed such fraud or culpable conduct as would justify annulling the Contract to Sell for Unit 2-C, T-Tower Condominium on account that the unit’s true interior area was materially less than the area advertised and stated in the contract.

Parties’ Contentions

Petitioner asserted that the advertised 95 square meters was a decisive inducement to purchase and that respondent knowingly misrepresented the unit’s area by including common areas and terrace in the advertised figure; petitioner therefore sought rescission under Article 1390 for consent vitiated by fraud, restitution of all payments, and damages. Respondent defended on the ground that the sale was expressly made on an as-is-where-is basis pursuant to Section 12 of the Contract to Sell and that Article 1542 barred adjustment of price in lump-sum sales; respondent further contended that petitioner failed to prove causal fraud.

Legal Framework and Statutory Provisions

The Court reviewed the rules on voidable contracts and fraud under Articles 1390, 1338, 1344 of the Civil Code and the standards for hidden defects and vendor warranties under Articles 1561 and 1566. It examined Article 1542 concerning lump-sum sales and the effect of discrepancies in area on price, the Condominium Act (Republic Act No. 4726) for defining a condominium unit’s bounds and exclusion of common areas, and the heightened standard of care for banks affirmed by RA 8791 and relevant jurisprudence. The Court also considered precedent construing as-is-where-is clauses, including Hian v. Court of Tax Appeals, National Development Company v. Madrigal Wan Hai Lines Corporation, and related authorities.

Analysis — Materiality of the Misrepresentation and Dolo Causante

The Court held that the advertised area was material to petitioner’s consent and that the discrepancy between the 95 square meters advertised and the 74.4 square meters interior area was substantial. The Court applied the doctrine that dolo causante exists when fraud was the determining cause of the contract. Given petitioner’s testimony that he registered and bid because the advertised area met his residential needs, the Court found the representation of area to be a decisive inducement and therefore material to consent.

Analysis — Limits of As-Is-Where-Is Clauses and Warranty Against Hidden Defects

The Court explained that as-is-where-is stipulations pertain only to the physical condition of the thing sold that is readily perceptible to an ordinary buyer and cannot encompass latent defects or matters requiring specialized or technical scrutiny. The Court cited Article 1561 and Article 1566, noting that a seller is responsible for hidden defects unless the seller was unaware of them and the parties expressly agreed otherwise. Because respondent admitted that the 95 square meters could be accounted for only by including terrace and common areas and that its appraisers had documented this finding, the Court concluded respondent knew or should have known the unit’s true interior area. Consequently, respondent could not rely on the as-is-where-is clause to absolve itself from liability for the misrepresentation concerning the unit’s area.

Analysis — Duty of Banks, Negligence and Constructive Bad Faith

The Court emphasized that banks owe a high degree of diligence and fiduciary care under RA 8791 and established jurisprudence. It held that a bank accepting foreclosed real property must conduct standard credit and property investigations including verifying area, title authenticity, and physical condition because such properties may pass to innocent purchasers. The Court found respondent’s conduct — accepting and advertising the unit as 95 square meters without proper ascertainment and without disclosing that the figure included common areas — to be grossly negligent. That gross negligence rose to the level of constructive bad faith sufficient to constitute dolo causante because it created a situation likely to induce any reasonable buyer into the same error.

Analysis — Applicability of Article 1542

The Court rejected the Court of Appeals’ reliance on Article 1542 to bar rescission. It explained that Article 1542 addresses price adjustments for minor discrepancies in area where the vendee seeks only a proportionate reduction. The Article has no application where the vendee seeks rescission for consent vitiated by material fraud. Moreover, the Court found the 21.68% shortfall to be material and not a mere discrepancy perm

Case Syllabus (G.R. No. 205838)

Parties and Procedural Posture

Joseph Harry Walter Poole-Blunden, Petitioner, instituted a Complaint for Rescission of Contract and Damages against Union Bank of the Philippines, Respondent, in the Regional Trial Court, Makati City.
The Regional Trial Court dismissed the complaint, and the Court of Appeals affirmed the dismissal in CA-G.R. CV No. 95369.
Petitioner filed a Petition for Review on Certiorari under Rule 45, Rules of Court seeking annulment of the Contract to Sell and refund of amounts paid.
The Supreme Court granted the petition, reviewed the factual record and legal issues, and rendered the appealed decision reversing the lower courts.

Key Factual Allegations

Union Bank of the Philippines advertised for public auction a condominium unit identified as Unit 2-C of T-Tower Condominium with an advertised area of 95 square meters.
Petitioner inspected the unit before the auction and observed an irregular shape, a circular terrace, damaged ceiling, and water and floor defects, but did not doubt the advertised area.
Petitioner inspected the Master Title and UnionBank’s Condominium Certificate of Title at the auction, bid, and purchased the unit for P2,650,000.00, later entering into a Contract to Sell on May 7, 2001.
The Contract to Sell required a ten percent down payment and the balance payable over fifteen years at fifteen percent interest, and contained a "as-is-where-is" clause (Section 12).
Petitioner occupied the unit in June 2001 and fully paid P3,257,142.49 by July 20, 2003.
Years later petitioner commissioned a survey that certified the unit’s interior floor area as 74.4 square meters, a significant shortfall from the advertised 95 square meters.
UnionBank responded that the 95 square meters included the terrace and common areas and asserted confirmation from HLURB, the homeowners’ association, and the bank’s appraisers.

Issues Presented

The sole issue was whether Union Bank of the Philippines committed such fraud or gross negligence as to vitiate petitioner’s consent and entitle petitioner to annul the Contract to Sell and recover payments and damages.

Contentions of the Parties

Petitioner contended that UnionBank committed fraud by advertising a 95 square meters area while the unit’s interior area was materially smaller, that his consent was vitiated, and that the as-is-where-is clause and Article 1542 do not bar rescission.
UnionBank argued that the sale was on an as-is-where-is basis per Section 12 of the Contract to Sell, that no causal fraud was proved by clear and convincing evidence, and that Article 1542, Civil Code precluded price reduction or rescission in lump-sum sales.

Statutory Framework

Rep. Act No. 4726 (the Condominium Act), Sec. 3(b), defines a condominium unit and Sec. 6(a) establishes that common areas are not part of the unit.
Civil Code provisions invoked include Art. 1390 (contracts voidable for vitiated consent), Art. 1338 (definition of fraud), Art. 1344 (seriousness of fraud for annulment), Art. 1561 and Art. 1566 (vendor’s liability for hidden defects and exceptions), Art. 1542 (lump-sum sale rule), Art. 2232 in relation to Art. 2229 (exemplary damages), and Art. 2208 (attorney’s fees when exemplary damages are awarded).
Section 2, RA 8791 was cited for the statutory recognition of the fiduciary nature of banking that requires high standards of integrity and performance.

Findings of Fact

The Supreme Court accepted as established that the Unit’s interior area was 74.4 square meters as certified by petitioner’s surveyor.
UnionBank conceded that the only means by which the Unit could be said to total 95 square meters was by including terrace and common areas.
Testimony from Atty. Elna N. Cruz,