Pilipinas Makro, Inc. vs. Coco Charcoal Philippines, Inc. and Lim Kim San

An express warranty in a deed of sale that the property is free from all easements, liens, and encumbrances is not equivalent to an implied warranty against eviction, and the buyer's mere ocular inspection of visible nearby construction does not constitute actual knowledge of the precise extent of encroachment sufficient to bar enforcement of the warranty or the contractual price-adjustment clause.

Pilipinas Makro, Inc. is a domestic corporation that, in 1999, sought to acquire real property in Davao City for the construction and operation of a store. Through authorized real estate agents, it identified two contiguous 1,000-square-meter parcels — one owned by Coco Charcoal Philippines, Inc. (covered by TCT No. 208776) and the other by Lim Kim San (covered by TCT No. 282650). The parties executed separate but identically worded notarized deeds of absolute sale on 26 November 1999, each for P8,500,000.00. Both deeds contained a general investigation and relocation clause (Section 2) providing for a proportional adjustment of the purchase price at P8,500.00 per square meter if the resurveyed area differed from the titled area, and a representations and warranties clause (Section 4(i)) guaranteeing that the property was free and clear of all easements, liens, and encumbrances.

Pilipinas Makro, Inc., a domestic corporation, sought in 1999 to acquire real property in Davao City to establish a store. After consulting authorized real estate agents, it identified two contiguous, parallel parcels of land, each measuring 1,000 square meters — one owned by Coco Charcoal Philippines, Inc. under TCT No. 208776 and the other by Lim Kim San under TCT No. 282650. On 26 November 1999, Makro executed separate notarized deeds of absolute sale with each seller, purchasing each lot for P8,500,000.00. Both deeds contained identical terms, conditions, warranties, and technical descriptions. Section 2 of each deed provided for a general investigation and relocation survey by the buyer at its own expense, with a corresponding adjustment of the purchase price at P8,500.00 per square meter in case of any discrepancy between the resurveyed area and the titled area. Section 4(i) warranted that the property was and would continue to be free and clear of all easements, liens, and encumbrances of any nature whatsoever, and not subject to any claim that would prevent the buyer from obtaining full and absolute ownership and possession or from developing the property as a store site.

In December 1999, Makro engaged Engineer Josefino M. Vedua, a geodetic engineer, to conduct a resurvey and relocation of the two adjacent lots. The survey revealed that 131 square meters of the lot purchased from Coco Charcoal and 130 square meters of the lot purchased from Lim had been encroached upon by a DPWH road widening project and drainage canal construction along the Davao-Cotabato National Highway. New titles (TCT Nos. T-321199 and T-321049) were issued in Makro's name in January 2000 after registration of the deeds and cancellation of the previous owners' titles.

Makro informed the representatives of Coco Charcoal and Lim of the encroachment and initially offered a compromise seeking a refund of 75% of the value of the affected portions. When that was rejected, Makro sent a final demand letter seeking to recover P1,113,500.00 from Coco Charcoal and P1,105,000.00 from Lim, corresponding to the purchase price of the encroached areas. After the demand went unheeded, Makro filed separate complaints for collection of the refund. The RTC found that the DPWH project had encroached upon the purchased properties, that the road right of way included not only the paved road but also shoulders and gutters, and that the unpaved portion was within the area Makro had purchased. The RTC also found respondents in bad faith for concealing the encroachment, noting that drainage pipes had already been installed prior to the sale and that the DPWH could not have undertaken the work without the previous owners' consent. The CA agreed that the encroachment existed but denied recovery, reasoning that Makro had actual knowledge of the road widening project and could not enforce the warranty against eviction as a buyer in bad faith.

• Procedural Relaxation: Petitioner argued that the CA erred in denying its motions for extension to file a motion for reconsideration, asserting that cogent reasons justified the relaxation of the procedural rule — namely, the withdrawal of its former counsel due to his appointment as a cabinet secretary and the serious illness (dengue and typhoid fever) of its new counsel, neither of which was intended to delay proceedings.
• Entitlement to Refund: Petitioner maintained that it was entitled to a refund under Section 2 of the deeds of sale, which provided for a proportional price adjustment upon any discrepancy between the resurveyed area and the titled area, and under Section 4(i), which expressly warranted that the properties were free from all encumbrances. Petitioner argued that the CA erred in treating the express warranty as an implied warranty against eviction and in concluding that it acted in bad faith, since a mere ocular inspection could not have revealed the exact extent of the encroachment.

• Procedural Issue — Motion for Extension: Whether the Court of Appeals erred in denying Makro's motions for extension to file a motion for reconsideration.
• Substantive Issue — Entitlement to Refund: Whether the Court of Appeals erred in denying Makro a refund on the ground of bad faith.

• Procedural Issue — Motion for Extension: Yes. The CA erred in denying the motions for extension, as cogent reasons beyond Makro's control justified relaxation of the rule prohibiting motions for extension to file a motion for reconsideration.
• Substantive Issue — Entitlement to Refund: Yes. The CA erred in denying the refund. Section 4(i) of the deeds of sale constituted an express warranty, not an implied warranty against eviction, and Makro's ocular inspection did not constitute actual knowledge of the precise encroachment. Makro was entitled to a proportionate refund under Section 2, but the RTC's award of P1,500,000.00 to each respondent was incorrect, as was the award of attorney's fees and exemplary damages.

• Procedural Issue — Motion for Extension: The general rule, established in Habaluyas Enterprises vs. Japson and codified in the 2002 Internal Rules of the Court of Appeals, is that no motion for extension of time to file a motion for reconsideration may be filed with the CA; the 15-day period is non-extendible, and a prohibited motion does not toll the running of the period. This rule, however, admits of exceptions based on a liberal reading where cogent reasons excuse non-observance. The emerging trend of jurisprudence favors the liberal and flexible application of procedural rules when the purpose of justice requires it. Makro's former counsel withdrew due to his appointment as press secretary, and its new counsel was afflicted with dengue and typhoid fever — circumstances beyond Makro's control and not intended to delay. More importantly, the liberal application was imperative because Makro's position was meritorious on the substantive issues.

• Substantive Issue — Entitlement to Refund: The CA erred in treating Section 4(i) of the deeds of sale as akin to an implied warranty against eviction. A warranty may be express (found within the language of the contract) or implied (derived by operation of law). Section 4(i) was an express warranty because the deeds categorically stated that the sellers assured the properties were free from any encumbrance preventing full and absolute possession. An implied warranty against eviction, by contrast, requires the concurrence of four requisites: (a) a final judgment; (b) deprivation of the whole or part of the thing sold; (c) deprivation by virtue of a prior right to the sale made by the vendor; and (d) the vendor summoned as co-defendant in the eviction suit. None of these requisites were present, as there was no final judgment and no eviction suit. Even assuming arguendo that Section 4(i) was similar to an implied warranty against eviction, the CA erred in concluding that Makro acted in bad faith. While the warranty against eviction cannot be enforced if the buyer knew of the risk and assumed its consequences, Makro's ocular inspection before the sale revealed only noticeable works and constructions near the properties — insufficient to charge it with actual knowledge that the DPWH project had encroached upon the lots. The dimensions of the properties in relation to the DPWH project could not be accurately ascertained through the naked eye; only a relocation survey by a geodetic engineer disclosed the exact extent of the encroachment. The fact of encroachment was undisputed, as even the CA acknowledged it. Under Section 2, the purchase price must be adjusted at P8,500.00 per square meter for any discrepancy. Applying this formula, Makro was entitled to P1,113,500.00 from Coco Charcoal (131 sq m × P8,500.00) and P1,105,000.00 from Lim (130 sq m × P8,500.00). The RTC's award of P1,500,000.00 to each was without sufficient factual basis. The awards of attorney's fees and exemplary damages were also deleted: attorney's fees require factual, legal, and equitable justification beyond the mere fact of being compelled to litigate, and exemplary damages require a showing of wanton, fraudulent, reckless, oppressive, or malevolent conduct — bad faith involving a conscious and intentional design to do a wrongful act, which was not sufficiently established given that the road widening project was already visible and in progress before the sale.

• Express Warranty vs. Implied Warranty in Sales — An express warranty is found within the very language of the contract, taking the form of an affirmation, promise, or representation by the seller relating to the thing sold. An implied warranty is derived by operation of law from the nature of the transaction or the relative circumstances of the parties, irrespective of the seller's intention. The Court applied this distinction to hold that Section 4(i) of the deeds of sale — warranting that the property was free and clear of all easements, liens, and encumbrances — was an express warranty, not an implied warranty against eviction, and was therefore enforceable without the requisites required for the latter.

• Requisites of Implied Warranty Against Eviction — The implied warranty against eviction is enforceable only when the following concur: (a) there must be a final judgment; (b) the purchaser has been deprived of the whole or part of the thing sold; (c) the deprivation was by virtue of a prior right to the sale made by the vendor; and (d) the vendor has been summoned and made co-defendant in the suit for eviction at the instance of the vendee. The Court found none present, reinforcing that the CA's analogy to this warranty was misplaced.

• Exception to the Prohibition on Motions for Extension to File a Motion for Reconsideration — The general rule that no motion for extension of time to file a motion for reconsideration may be filed with the CA admits of exceptions based on a liberal reading of the rule, where the petitioner proves cogent reasons to excuse non-observance. Relaxation is warranted by compelling reasons or when the purpose of justice requires it, particularly where the delay was caused by circumstances beyond the party's control and the substantive position is meritorious.

• Award of Attorney's Fees and Exemplary Damages — Attorney's fees cannot be recovered as a matter of course; Article 2208 of the Civil Code demands factual, legal, and equitable justification, and the mere fact that a party was compelled to litigate does not warrant the award. Exemplary damages under Article 2232 require that the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Bad faith involves a state of mind dominated by ill will or a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity. Mere omission to mention an ongoing, visible public project is insufficient to establish such bad faith.

• "An express warranty is different from an implied warranty in that the former is found within the very language of the contract while the latter is by operation of law. Thus, the CA erred in treating Section 4(i) of the deeds of sale as akin to an implied warranty against eviction." — This passage articulates the ratio decidendi on the distinction between express and implied warranties, the central legal basis for reversing the CA.

• "The dimensions of the properties in relation to the DPWH project could have not been accurately ascertained through the naked eye. A mere ocular inspection could not have possibly determined the exact extent of the encroachment." — This passage establishes that actual knowledge of encroachment cannot be imputed from a visual inspection alone, defeating the CA's bad-faith rationale.

• "The relaxation or suspension of procedural rules, or exemption of a case from their operation is warranted only by compelling reasons or when the purpose of justice requires it." — This formulation of the exception to the prohibition on motions for extension is frequently cited in procedural-relaxation jurisprudence.

• Gonzales vs. Serrano, 755 Phil. 513 (2015) — Cited for the doctrine that the prohibition on motions for extension to file a motion for reconsideration is not absolute and admits of exceptions based on cogent reasons; followed.
• Imperial vs. Court of Appeals, 606 Phil. 391 (2009) — Cited for the rule that the Court may, in its sound discretion, suspend the prohibition against motions for extension in the interest of justice; followed.
• Habaluyas Enterprises vs. Japson, 226 Phil. 144 (1986) — Originating precedent for the rule that no motion for extension to file a motion for reconsideration may be filed with lower courts and the CA; acknowledged as the general rule.
• Ang vs. Court of Appeals, 588 Phil. 366 (2008) — Cited for the definition of implied warranty as one derived by operation of law from the nature of the transaction or circumstances of the parties; followed.
• Escaler et al. vs. Court of Appeals, 222 Phil. 320 (1985) — Cited for the four requisites of the implied warranty against eviction; applied to show that none were present.
• Luzon Development Bank vs. Enriquez, 654 Phil. 315 (2011) — Cited for the rule that the warranty against eviction cannot be enforced if the buyer knew of the risk of eviction and assumed its consequences; distinguished, as actual knowledge was not established.
• ABS-CBN Broadcasting Corporation vs. Court of Appeals, 361 Phil. 499 (1999) — Cited for the principle that attorney's fees require factual, legal, and equitable justification and are not awarded merely because a party was compelled to litigate; followed.
• Philippine National Construction Corporation vs. APAC Marketing Corporation, 710 Phil. 389 (2013) — Cited for the policy that no premium should be placed on the right to litigate; followed.
• Gatmaitan vs. Gonzales, 525 Phil. 658 (2006) — Cited for the definition of bad faith as a state of mind dominated by ill will or a conscious and intentional design to do a wrongful act; applied to find insufficient evidence of bad faith.

• Article 1546, Civil Code — Defines express warranty as any affirmation of fact or promise by the seller relating to the thing, the natural tendency of which is to induce the buyer to purchase. Applied to characterize Section 4(i) of the deeds of sale as an express warranty.
• Article 1548, Civil Code — Governs the implied warranty against eviction. The CA invoked it by analogy, but the Court held that the requisites were absent and that the express warranty in the deeds controlled.
• Article 2208, Civil Code — Provides the circumstances under which attorney's fees may be recovered as actual or compensatory damages in the absence of stipulation. Applied to delete the RTC's award of attorney's fees for lack of justification.
• Article 2232, Civil Code — Allows exemplary damages when the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Applied to delete the RTC's award for insufficiency of evidence of bad faith.
• Section 2, Deeds of Absolute Sale — The price-adjustment clause providing for a proportional adjustment at P8,500.00 per square meter upon any discrepancy between the resurveyed and titled areas. Applied to compute the correct refund amounts.
• Section 4(i), Deeds of Absolute Sale — The express warranty that the property was free and clear of all easements, liens, and encumbrances. Applied as the contractual basis for Makro's entitlement to refund.

Velasco Jr. (Chairperson), Bersamin, Leonen, and Gesmundo, JJ., concurred.