Philippine Free Press, Inc. vs. Court of Appeals

The four-year period to annul a contract based on intimidation, violence, or undue influence runs from the cessation of the defect, but martial law is not per se force majeure; the party invoking it must prove that the regime made it impossible to sue. Relatedly, gross inadequacy of price does not per se affect a contract of sale, and tacit ratification results from using the proceeds of the sale.

Philippine Free Press, Inc. was a domestic corporation publishing the Philippine Free Press Magazine, with a 5,000-square-meter property and office building on Pasong Tamo Street, Makati. Liwayway Publishing, Inc. was the corporate entity that later acquired petitioner's land, building, and machinery through Gen. Hans Menzi. The transaction occurred during the martial law administration of President Ferdinand Marcos, and the governing legal backdrop included the Civil Code provisions on voidable contracts, the four-year prescriptive period for annulment based on vitiated consent, and the rules on ratification and gross inadequacy of price.

Petitioner Philippine Free Press, Inc. was a domestic corporation engaged in publishing the Philippine Free Press Magazine, which had attained wide circulation and prestige before Martial Law. Sometime in 1963, it purchased a 5,000-square-meter parcel of land at No. 2249 Pasong Tamo Street, Makati, covered by TCT No. 109767, and constructed an office building thereon to house its machineries, equipment, office furniture, and fixtures, making it the company's main office. During the 1965 presidential elections, petitioner supported then President Diosdado Macapagal against then Senate President Ferdinand Marcos. After Marcos's election and before the imposition of Martial Law on September 21, 1972, petitioner printed numerous articles critical of the Marcos administration, exposing corruption and abuses and warning of a plan to impose dictatorship through Martial Law.

In the evening of September 20, 1972, soldiers surrounded the Free Press Building, forced out its employees at gunpoint, and padlocked the establishment. The soldier in charge informed Teodoro Locsin, Jr., son of petitioner's president Teodoro Locsin, Sr., that Martial Law had been declared and that they were instructed by Marcos to take over the building and close the printing press. On September 21, 1972, Locsin, Sr. was arrested, brought to Camp Crame, and later transferred to the maximum security block at Fort Bonifacio. Sometime in December 1972, he was informed that no charges would be filed and that he would be provisionally released subject to conditions, including that he remain under city arrest and that he not publish the Philippine Free Press or do, say, or write anything critical of the Marcos administration. Consequently, publication ceased, the building remained padlocked under heavy military guard, and petitioner suffered financial ruin; its employees demanded separation pay and its minority stockholders demanded that Locsin, Sr. buy out their shares.

On separate occasions in 1973, Locsin, Sr. was approached by the late Atty. Crispin Baizas with offers from then President Marcos to acquire petitioner, but Locsin, Sr. refused, stating that petitioner was not for sale. A few months later, the late Secretary Guillermo De Vega reiterated Marcos's offer to purchase the name and assets of petitioner. Sometime in the middle of 1973, Brig. Gen. Hans Menzi, Marcos's former aide-de-camp, contacted Locsin, Sr. about the sale; a meeting was arranged inside the petitioner's building. During that meeting, Menzi reiterated Marcos's offer to purchase both the name and assets of petitioner, adding that "Marcos cannot be denied." Locsin, Sr. refused, but Menzi insisted that he had no choice but to sell. Locsin, Sr. then countered that he would sell the land, building, and all machineries and equipment but would keep the name of petitioner. Menzi promised to clear the matter with Marcos and later informed Locsin, Sr. that Marcos was amenable to the counteroffer and was offering P5,750,000 for the land, building, machineries, office furnishing, and fixtures on a take-it-or-leave-it basis.

On August 22, 1973, Menzi tendered to Locsin, Sr. a check for P1,000,000 as downpayment for the sale; Locsin, Sr. accepted it subject to the condition that he would refund the amount if the sale did not push through. On August 23, 1973, petitioner's Board of Directors held a meeting and reluctantly passed a resolution authorizing Locsin, Sr. to sell petitioner's assets to Menzi minus the name "Philippine Free Press." On October 23, 1973, the parties met and executed two notarized Deeds of Sale covering the land, building, and machineries of petitioner, with petitioner as vendor and private respondent, represented by Menzi, as vendee. Menzi paid the balance of the purchase price in the amount of P4,750,000. Locsin, Sr. thereafter used the proceeds of the sale to pay the separation pay of petitioner's employees, buy out the shares of the minority stockholders, and settle all of petitioner's obligations.

On February 26, 1987, petitioner filed a complaint for annulment of sale against private respondent Liwayway and the PCGG before the Regional Trial Court of Makati, Branch 146, on the grounds of vitiated consent and gross inadequacy of purchase price. The complaint against the PCGG was dismissed on October 22, 1987. The trial court dismissed petitioner's complaint for lack of merit and granted private respondent's counterclaim for attorney's fees; the Court of Appeals affirmed with modification, deleting the attorney's fees. The lower courts found that the price paid was not unreasonable, that petitioner's own audited balance sheet valued the properties at less than the sale price, and that petitioner used the sale proceeds to settle employee claims, redeem stockholders, and finance money-market and fishpond activities. The Court of Appeals also found the Locsins' testimony regarding alleged threats by Menzi, Baizas, and De Vega to be hearsay because those alleged declarants were already deceased.

• Prescription: Petitioner argued that the four-year prescriptive period under Article 1391 did not commence on October 23, 1973 because martial law was then in full swing; the continuing threats and menacing effects of martial law, as force majeure, ceased only after the February 25, 1986 People Power uprising, making its February 26, 1987 complaint timely.
• Vitiated Consent / Hearsay: Petitioner maintained that the Court of Appeals erred in treating as hearsay the testimonies of Teodoro Locsin, Sr. and Teodoro Locsin, Jr., which established the threats, the closure of the publication, the arrest and detention of Locsin, Sr., the conditions of his release, and the use of Liwayway as a corporate vehicle; the Locsins testified to matters of their own personal knowledge as parties to or present at the conversations.
• Martial Law as Consent-Vitiating: Petitioner argued that the Court of Appeals erred in concluding that the acts of then President Marcos during martial law did not constitute force, intimidation, duress, and undue influence that vitiated petitioner's consent.
• Surmises and Speculations: Petitioner argued that the Court of Appeals resolved the case on mere surmises and speculations instead of the undisputed evidence on record.
• Gross Inadequacy of Price: Petitioner argued that the price paid did not approximate the actual market value of the assets and was much less than the P18 Million offered by Eugenio Lopez; reliance on book value was misplaced because book value bears little correlation with actual market value.
• Implied Ratification: Petitioner argued that its use of the proceeds of the sale did not constitute implied ratification because such use was a matter of financial survival.
• Exclusion of Evidence: Petitioner argued that the Court of Appeals erred in excluding Exhibits "X-6" to "X-7" and "Y-3," which were admissible and proved that then President Marcos owned private respondent Liwayway, used as the corporate vehicle for the acquisition of petitioner's properties.

• Prescription: Whether the four-year prescriptive period for annulment based on intimidation, violence, or undue influence commenced on October 23, 1973 or was suspended by martial law as force majeure until February 25, 1986.
• Vitiated Consent / Hearsay: Whether the Court of Appeals erred in treating as hearsay the Locsins' testimonies regarding alleged threats and statements by deceased intermediaries, and in finding no force, intimidation, duress, or undue influence vitiated petitioner's consent.
• Gross Inadequacy of Price: Whether gross inadequacy of the purchase price indicated a defect in consent warranting annulment.
• Ratification: Whether petitioner's use of the sale proceeds constituted implied ratification of the contracts of sale under Article 1393.
• Exclusion of Evidence: Whether the Court of Appeals erred in excluding Exhibits "X-6" to "X-7" and "Y-3" offered to prove that Marcos owned Liwayway.

• Prescription: No. The action prescribed. The four-year period under Article 1391 began when the defect of consent ceased; martial law is not per se force majeure, and petitioner failed to prove impossibility of suit. The complaint filed on February 26, 1987 was late.
• Vitiated Consent / Hearsay: No. The Court of Appeals correctly ruled the testimonies hearsay; no vitiation was established. Alleged statements by deceased Menzi, Baizas, and De Vega could not be cross-examined; the declaration-against-interest exception did not apply; martial law is not per se consent-vitiating.
• Gross Inadequacy of Price: No. Gross inadequacy does not per se affect a contract of sale under Article 1470; absent proof of a defect in consent, it cannot justify annulment. Petitioner was estopped by its own books.
• Ratification: Yes. Petitioner's use of the proceeds constituted tacit ratification under Article 1393; ratification cleanses defects under Article 1396.
• Exclusion of Evidence: No. The excluded exhibits were of little relevance; the issue was the voidability of the contracts, not the ownership of Liwayway.

• Prescription: Article 1391 provides that an action for annulment shall be brought within four years, and in cases of intimidation, violence, or undue influence, the period begins from the time the defect of consent ceases. The deeds sought to be annulled were executed on October 23, 1973. The Court of Appeals, citing Development Bank of the Philippines vs. Pundogar, held that the four-year period ended in late 1977. Petitioner contended that martial law tolled the period under Article 1154 as force majeure until February 25, 1986. The Court rejected this. DBP vs. Pundogar and Tan vs. Court of Appeals held that the period from September 21, 1972 through February 25, 1986 is not a universal force majeure; claims must be taken on a case-to-case basis. While Locsin, Sr. and petitioner may have been true oppositionists, petitioner failed to prove that it was impossible to commence and succeed in an annulment suit during the entire regime. Shortly after his arrest, Locsin, Sr. and other journalists filed suits challenging the legality of martial law, consolidated in Aquino vs. Enrile, and he was released despite refusing to withdraw from his petition. His mistrust of the courts was no excuse for non-observance of the prescriptive period. Thus, the action filed on February 26, 1987 was barred.

• Vitiated Consent / Hearsay: The hearsay rule provides that a witness can testify only to those facts which he knows of his own knowledge. Evidence of a statement is hearsay if offered against a party who has no opportunity to cross-examine the person to whom the statement is attributed. Menzi, Baizas, and De Vega were already deceased and could not cross-examine the Locsins. The Locsins' testimonies regarding the alleged threats and statements of these deceased intermediaries were therefore hearsay. The declaration-against-interest exception under Section 38, Rule 130 did not apply: Menzi's supposed statement that he was acting for Marcos was not contrary to his own interest, and the Locsins were not disinterested witnesses because they stood to gain from annulment. Allegations of duress or coercion are viewed with utmost caution, especially when they rest on statements attributed to deceased persons. Petitioner's witnesses could not testify as to what Marcos said to Menzi because none of them heard that conversation. Moreover, martial law is not per se a consent-vitiating phenomenon; the act of the government in declaring martial law cannot be considered intimidation by a third person under Article 1336. Petitioner needed clear and convincing evidence that Marcos, through Menzi, abused martial law powers to force the sale, and the hearsay evidence failed to establish this. The Court of Appeals' alternative scenario—that Menzi convinced the Locsins to sell by pointing out the financial straits of Free Press, its employee claims, minority stockholders, and creditors—was equally plausible. Locsin, Sr. had rejected earlier offers and secured a compromise that only the assets would be sold, which argued against vitiation of consent.

• Gross Inadequacy of Price: Article 1470 provides that gross inadequacy of price does not affect a contract of sale, except as it may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract. Petitioner therefore had to first prove a defect in consent. It failed to do so. Petitioner was also effectively estopped from disregarding its own books of account, which assigned the property a value less than what was paid. Private respondent's evidence, cited with approval by the Court of Appeals, showed that the net book value of the properties was P994,723.66 as appearing in Free Press's audited Balance Sheet as of November 30, 1972, and that Free Press realized a profit of P4,755,276.34 from the sale. The Court of Appeals' factual determination that the price was not unreasonable was predicated on offered evidence and must be accorded great weight, if not finality.

• Ratification: Article 1393 provides that ratification may be effected expressly or tacitly, and there is tacit ratification if, with knowledge of the reason rendering the contract voidable and such reason having ceased, the person who has a right to invoke it executes an act which necessarily implies an intention to waive his right. Petitioner's own witnesses admitted that the proceeds of the 1973 sale were used to settle the claims of its employees, redeem the shares of its stockholders, and finance the company's entry into money-market shareholdings and fishpond business activities. By using the proceeds in this manner, petitioner confirmed the voluntariness of its consent and ratified the sale. Article 1396 provides that ratification cleanses the contract from any alleged defects from the moment it was constituted. Petitioner's claim that the use was a matter of financial survival was untenable because Article 1393 is concerned with the act that constitutes ratification, not the reason that actuated the ratifying person.

• Exclusion of Evidence: The excluded exhibits, apparently found in the presidential palace or turned over by the US Government to the PCGG, included what appeared to be private respondent's Certificate of Stock for 24,502 shares in the name of Gen. Menzi but endorsed in blank. The proffer was intended to show that then President Marcos owned private respondent Liwayway Publishing, Inc. The exhibits were of little relevance to the main issue. The issue was whether the contracts of sale were voidable, not the ownership of Liwayway Publishing, Inc.

• Prescription of action for annulment based on vitiated consent — Under Article 1391 of the Civil Code, an action for annulment shall be brought within four years; in cases of intimidation, violence, or undue influence, the period begins from the time the defect of consent ceases. The Court held that martial law is not per se a force majeure that suspends prescription. Claims must be taken on a case-to-case basis, and the party invoking martial law as force majeure must establish that it was a true oppositionist and that it was impossible to commence, continue, or resist an action during the regime. Applied to petitioner, the action filed in 1987 to annul 1973 deeds had prescribed.
• Hearsay rule and declaration against interest — A witness can testify only to those facts which he knows of his own knowledge. Hearsay evidence, whether objected to or not, has no probative value unless it falls within an exception. The declaration-against-interest exception under Section 38, Rule 130 requires that the declaration be against the declarant's interest at the time it was made. The Court applied the rule to reject the Locsins' testimony about alleged threats by deceased intermediaries; Menzi's statement that he acted for Marcos was not against his interest.
• Gross inadequacy of price — Under Article 1470 of the Civil Code, gross inadequacy of price does not per se affect a contract of sale, except as it may indicate a defect in consent or that the parties intended a donation or some other act or contract. The Court applied this rule to hold that petitioner's claim of gross inadequacy could not justify annulment absent proof of a defect in consent.
• Tacit ratification of voidable contracts — Under Article 1393 of the Civil Code, ratification may be express or tacit; there is tacit ratification if, with knowledge of the reason rendering the contract voidable and such reason having ceased, the person entitled to invoke it executes an act implying an intention to waive the right. Article 1396 provides that ratification cleanses the contract from defects from the moment it was constituted. The Court applied this doctrine to petitioner's use of the sale proceeds.
• Martial law as not per se consent-vitiating — The act of the government in declaring martial law cannot be considered an act of intimidation by a third person under Article 1336 of the Civil Code. A party claiming that martial law vitiated consent must present clear and convincing evidence that the regime abused its powers to force the sale. The Court found the evidence insufficient.
• Estoppel — Under Article 1431 of the Civil Code, an admission or representation is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying thereon. The Court applied estoppel to prevent petitioner from disregarding its own books of account, which valued the property at less than the sale price.

• "It strains credulity to believe that petitioner found it impossible to commence and succeed in an annulment suit during the entire stretch of the dictatorial regime." — This passage states the Court's ratio for rejecting petitioner's claim that martial law suspended the prescriptive period; it places the burden on the claimant to prove impossibility of suit.
• "The all too familiar rule is that 'a witness can testify only to those facts which he knows of his own knowledge'." — This passage articulates the hearsay rule applied to the Locsins' testimony regarding statements made by deceased intermediaries, which the Court held inadmissible to prove vitiated consent.
• "Gross inadequacy of the purchase price does not, as a matter of civil law, per se affect a contract of sale. Article 1470 of the Civil Code says so." — This passage states the controlling rule on price inadequacy and explains why petitioner's annulment claim could not rest on price alone.
• "It need not be overemphasized that by using the proceeds in this manner, Free Press only too clearly confirmed the voluntaries of its consent and ratified the sale." — This passage, quoted from the Court of Appeals and adopted by the Court, is the basis for the holding that petitioner tacitly ratified the contracts of sale.

• Development Bank of the Philippines vs. Pundogar, 218 SCRA 118 [1993] — Cited by the Court of Appeals and relied upon by the Supreme Court; held that the martial law period is not a universal force majeure and that claims must be taken on a case-to-case basis.
• Tan vs. Court of Appeals, 195 SCRA 355 [1991] — Reiterated in DBP vs. Pundogar; established that martial law may be treated as force majeure only on a case-to-case basis, provided the party is a true oppositionist and was so circumstanced that it was impossible to sue.
• National Development Company vs. Court of Appeals, 211 SCRA 422, 435 [1992] — Cited as reiterating the Tan doctrine on martial law and prescription.
• Aquino vs. Enrile, 59 SCRA 183, 184 [1974] — Cited to show that Locsin, Sr. and other journalists filed suits challenging martial law shortly after his arrest, undermining petitioner's claim that it was impossible to seek judicial relief.
• Philippine Home Assurance Corp. vs. Court of Appeals, 257 SCRA 468 [1996] — Cited for the hearsay rule; evidence is hearsay if offered against a party who has no opportunity to cross-examine the person to whom the statement is attributed.
• Baguio vs. Court of Appeals, 226 SCRA 366 [1993] — Cited with Philippine Home Assurance Corp. for the same hearsay principle.
• Rodriguez vs. Rodriguez, 20 SCRA 908 [1967] — Cited for the rule that allegations of duress or coercion should be viewed with utmost caution.
• IFC Leasing & Acceptance Corporation vs. Sarmiento Distributors Corporation — Cited by the Court of Appeals for the proposition that the act of the ruling power in declaring martial law is not a mere trespass but a trespass in law, justified as an act of government in legitimate self-defense.
• Caltex (Phils.) vs. Reyes, 84 Phil. 654 [1949] — Cited in the Court of Appeals' discussion of martial law as an act of government rather than mere intimidation.
• Chan vs. Court of Appeals, 298 SCRA 713 — Cited for the rule that factual findings of the Court of Appeals, predicated on offered evidence, must be accorded great weight if not finality.
• Ibay vs. Court of Appeals, 212 SCRA 160 [1992] — Cited with Chan for the same rule on factual findings.
• Tecson vs. COMELEC, 424 SCRA 277, 439 [2004] — Cited for the legal maxim ubi lex non distinguit nec nos distinguere debemus.

• Article 1391, Civil Code — Provides that the action for annulment shall be brought within four years, and in cases of intimidation, violence, or undue influence, from the time the defect of consent ceases. Applied to bar petitioner's action filed on February 26, 1987 for deeds executed on October 23, 1973.
• Article 1154, Civil Code — Provides that the period during which the obligee was prevented by a fortuitous event from enforcing his right is not reckoned against him. Petitioner invoked this provision, but the Court held that martial law was not a force majeure in this case.
• Article 1330, Civil Code — Provides that a contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. This was the basis of petitioner's annulment claim.
• Article 1336, Civil Code — Cited in the Court of Appeals' ruling that the act of the Philippine Government in declaring martial law cannot be considered an act of intimidation by a third person who did not take part in the contract.
• Article 1470, Civil Code — Provides that gross inadequacy of price does not affect a contract of sale, except as it may indicate a defect in consent or that the parties intended a donation or some other act or contract. Applied to reject petitioner's gross-inadequacy argument.
• Article 1393, Civil Code — Provides that ratification may be express or tacit, and that there is tacit ratification if, with knowledge of the reason rendering the contract voidable and such reason having ceased, the person entitled to invoke it executes an act implying an intention to waive the right. Applied to petitioner's use of the sale proceeds.
• Article 1396, Civil Code — Provides that ratification cleanses the contract from defects from the moment it was constituted. Cited in the ratification discussion.
• Article 1431, Civil Code — Provides that through estoppel an admission or representation is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying thereon. Applied to prevent petitioner from disregarding its own books of account.
• Section 36, Rule 130, Rules of Court — Provides that a witness can testify only to those facts which he knows of his own knowledge. Applied to reject the Locsins' testimony about statements made by deceased intermediaries.
• Section 38, Rule 130, Rules of Court — Provides the declaration-against-interest exception to the hearsay rule. The Court held the exception inapplicable because Menzi's statement that he acted for Marcos was not against his interest.

Artemio V. Panganiban (Chairman), Angelina Sandoval-Gutierrez, Renato C. Corona, and Conchita Carpio Morales concurred. No separate concurring opinions are summarized in the text.