Fraud committed during the consummation stage of a contract of sale, such as the issuance of a worthless check for payment, does not constitute causal fraud (dolo causante) that vitiates consent and annuls the contract; rather, it is incidental fraud (dolo incidente) and a substantial breach of the buyer's obligation to pay, which entitles the seller to rescind the contract under Article 1191 of the Civil Code.

The dispute arose from an agreement for the sale of a 364-square meter parcel of land in Davao City by the Spouses Tongson to Danilo R. Napala for P3,000,000. The transaction involved the execution of a Deed of Absolute Sale indicating a lower consideration, a partial cash payment, and a postdated check for the substantial balance, which was subsequently dishonored.

• In May 1992, Danilo R. Napala offered to purchase the Spouses Tongson's 364-square meter parcel of land for P3,000,000, which the Spouses accepted, leading to a Memorandum of Agreement dated 8 May 1992.
• On 2 December 1992, a Deed of Absolute Sale was prepared indicating a consideration of only P400,000; Carmen Tongson questioned this, but Napala assured her he would cover taxes and she would receive the net P3,000,000.
• Another Memorandum of Agreement was executed, allegedly replacing the first, stating the selling price as P400,000 to conform with the Deed of Absolute Sale.
• Upon signing the Deed of Absolute Sale, Napala paid P200,000 in cash and issued a postdated Philippine National Bank (PNB) check for P2,800,000 for the balance.
• The Spouses Tongson's Transfer Certificate of Title (TCT) No. 143020 was cancelled, and TCT No. T-186128 was issued in the name of Emergency Pawnshop Bula, Inc. (EPBI).
• The PNB check was dishonored upon presentment for "Drawn Against Insufficient Funds."
• Despite repeated demands, Napala failed to pay the P2,800,000 or return the land.
• Spouses Tongson filed a complaint for Annulment of Contract and Damages.

• Napala's fraudulent representations that the postdated PNB check was fully funded induced them into signing the contract of sale, vitiating their consent.
• Such fraud renders the contract of sale void (should be voidable).
• The Court of Appeals erred in reducing the amount of damages awarded by the trial court.

• Napala had already delivered the P2,800,000, as evidenced by a receipt issued by the Spouses Tongson (referring to the receipt for the check itself, not actual payment).
• The Spouses Tongson never returned the PNB check, claiming it was misplaced.
• The payment made rendered the filing of the complaint baseless.
• The Spouses Tongson willingly consented to the sale, and no fraud attended the execution of the sales contract.
• Rescission is not proper, and Napala should be given more time to pay the remaining balance.

• Whether the contract of sale can be annulled based on the fraud employed by Napala.
• Whether the Court of Appeals erred in reducing the amount of damages awarded by the trial court.

• The petition is partially granted. The Supreme Court set aside the Court of Appeals' decision except for the award of moral and exemplary damages, and ordered the rescission of the contract of sale.
• The Court found no causal fraud (dolo causante) to justify annulment. Napala's assurance that the check was funded was not the principal inducement for the Spouses Tongson to sell; they had already agreed to the sale before the check was issued. The fraud occurred in the consummation stage, not at the perfection of the contract.
• However, Napala's act of issuing a worthless check and misrepresenting it as funded constituted fraud in its general sense (dolo incidente) and a substantial breach of his obligation to pay the purchase price.
• This substantial breach entitles the Spouses Tongson to rescind the contract under Article 1191 of the Civil Code.
• Respondents must reconvey the property to the Spouses Tongson, who in turn shall refund the initial payment of P200,000 less costs of suit.
• The Court affirmed the Court of Appeals' award of P50,000 moral damages and P25,000 exemplary damages as equitable.
• The Court noted the undervaluation of the selling price in the Deed of Absolute Sale (P400,000 instead of P3,000,000) defrauded the government of taxes and ordered a copy of the Decision be forwarded to the Bureau of Internal Revenue.

• Dolo Causante (Causal Fraud) — Fraud which induces a party to enter into a contract, without which they would not have agreed to it, rendering the contract voidable. The Court found this was not present because the Spouses Tongson had already agreed to sell their property to Napala before he issued the worthless check; his assurance about the check's funding was not the primary reason for their consent to the sale itself.
• Dolo Incidente (Incidental Fraud) — Fraud which is not the principal inducement to the contract but refers to some incident or circumstance thereof, obliging the person employing it to pay damages but not causing the annulment of the contract. The Court found Napala's misrepresentation that the check was funded, when it was not, constituted dolo incidente occurring at the consummation stage of the contract.
• Rescission of Contract (Article 1191, Civil Code) — The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The Court applied this doctrine, stating that Napala's failure to pay the balance of the purchase price due to the dishonored check was a substantial breach of his reciprocal obligation, entitling the Spouses Tongson to rescind the contract of sale.
• Stages of a Contract (Negotiation, Perfection, Consummation) — Contracts undergo three stages: negotiation, perfection (birth), and consummation. The Court explained that the fraud in this case (issuance of a worthless check) occurred at the consummation stage, when parties perform their respective obligations, not at the negotiation or perfection stage.
• Moral Damages (Article 2220, Civil Code) — Awarded for willful injury to property or in breaches of contract where the defendant acted fraudulently or in bad faith. The Court affirmed the award of moral damages because Napala acted fraudulently in issuing a worthless check and representing it as funded, constituting a substantial breach.
• Exemplary Damages (Articles 2232 & 2234, Civil Code) — May be awarded in contracts if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner, and the plaintiff is entitled to moral, temperate, or compensatory damages. The Court affirmed the award of exemplary damages due to Napala's fraudulent acts.

• "In order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of the contract."
• "Napala's assurance that the check he issued was fully funded was not the principal inducement for the Spouses Tongson to sign the Deed of Absolute Sale. Even before Napala issued the check, the parties had already consented and agreed to the sale transaction."
• "Rather, the fraud existed in the consummation stage of the sale when the parties are in the process of performing their respective obligations under the perfected contract of sale."
• "Clearly, respondents committed a substantial breach of their reciprocal obligation, entitling the Spouses Tongson to the rescission of the sales contract."

• Woodhouse v. Halili, 93 Phil. 526 (1953) — Cited for the principle that for fraud to vitiate consent, it must be dolo causante, not dolo incidente.
• Swedish Match, AB v. Court of Appeals, 483 Phil. 735 (2004) — Cited to explain the three distinct stages of a contract: negotiation, perfection, and consummation, and to situate Napala's fraud within the consummation stage.
• Archipelago Management and Marketing Corp. v. CA, 359 Phil. 363 (1998) — Cited as an instance where causal fraud was found (seller tricked into believing signed papers were for title reconstitution, not a deed of sale).
• Sanchez v. Mapalad, G.R. No. 148516, 27 December 2007, 541 SCRA 397 — Cited as an instance where causal fraud was found (forgery of authorized corporate officer's signature).
• Paragas v. Heirs of Balacano, G.R. No. 168220, 31 August 2005, 468 SCRA 717 — Cited as an instance where causal fraud was found (seller seriously ill, died a week after signing, raising doubts on understanding).
• Luzon Brokerage v. Maritime Building Co., Inc., 150 Phil. 114 (1972) — Cited to support the argument that a party acting fraudulently in performing an obligation is not entitled to more time to pay and erase the default.

• Article 1305, Civil Code — Definition of a contract as a meeting of minds.
• Article 1318, Civil Code — Requisites of a contract: consent, object certain, and cause.
• Article 1458, Civil Code — Definition of a contract of sale.
• Article 1338, Civil Code — Definition of fraud (insidious words or machinations inducing consent).
• Article 1344, Civil Code — Requirement that fraud must be serious and not employed by both parties to make a contract voidable; incidental fraud only obliges payment of damages.
• Article 1191, Civil Code — The power to rescind obligations is implied in reciprocal ones for non-compliance.
• Article 1385, Civil Code — Effects of rescission, including the obligation to return things which were the object of the contract.
• Article 2220, Civil Code — Basis for awarding moral damages in breaches of contract where the defendant acted fraudulently or in bad faith.
• Article 2232, Civil Code — Basis for awarding exemplary damages in contracts if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
• Article 2234, Civil Code — Requirement that plaintiff must be entitled to moral, temperate, or compensatory damages before exemplary damages may be awarded.
• Section 39(B) and Section 6(E) of the National Internal Revenue Code (implied by reference to "the law" on capital gains tax) — Pertaining to the obligation to pay capital gains tax on the sale of real property.