Sta. Lucia Realty and Development, Inc. vs. Lumawag; AFP Retirement and Separation Benefits System vs. Lumawag

A seller who fails to deliver the lot after full payment and conceals the buyer’s encroachment problem acts in bad faith and is liable for moral and exemplary damages; a builder in good faith may still be liable for nominal damages for contributory negligence; and a final and executory judgment may no longer be altered.

AFP Retirement System was the seller of Lot 20 in Citadella Subdivision, a project developed by Sta. Lucia Realty; Edsel was the buyer of Lot 20, while Lourdes owned the adjoining Lot 21. The dispute required the SC to apply the Civil Code rules on obligations, damages, builders in good faith, and the procedural rules on final judgments and consolidation.

In August 1991, AFP Retirement System sold to Edsel B. Lumawag a 240-square meter lot, Lot 20, Block 7, Citadella Subdivision, Las Piñas City, for PHP 540,000.00 payable in 10 years. After completing payment, Edsel demanded execution of the final deed of sale, delivery of title, and turnover of possession. AFP Retirement System failed to comply. Later, Edsel discovered that Lourdes Pearce, owner of the adjoining Lot 21, had constructed her residential house on a portion of Lot 20. Unable to introduce improvements on his lot, Edsel sued AFP Retirement System and Lourdes for delivery of title, transfer of possession, and damages.

Edsel alleged that AFP Retirement System failed to stop Lourdes from building her house on his lot and tried to compel him to accept a reduced area instead of rectifying the encroachment. AFP Retirement System admitted that it failed to execute a deed of sale because of the re-mapping and re-blocking of Lot 20, which was caused by Lourdes’s wrongful construction that reduced the area of Edsel’s property by twenty square meters. AFP Retirement System denied coercing Edsel to settle with Lourdes. Upon learning from Sta. Lucia Realty, the developer of Citadella Subdivision, that Lourdes’s house encroached upon Edsel’s lot, AFP Retirement System informed Edsel and suggested the exchange of lots as a possible amicable resolution.

Lourdes alleged that she relied on Sta. Lucia Realty’s relocation survey and honestly believed that the lot where she built her house was entirely hers. After she submitted the requirements, her construction plans were cleared and she was issued a construction permit. After learning of the error, Lourdes made several follow-ups with Sta. Lucia Realty to take proper steps to correct the mistake, but to no avail. Lourdes also sent a letter to Edsel, but it was ignored. Thereafter, Lourdes filed a third-party complaint against Sta. Lucia Realty, attributing fault to the developer for the wrong location of her newly constructed house. Sta. Lucia Realty denied liability, stating that it was not privy to AFP Retirement System’s contracts of sale with Edsel and Lourdes, had no hand in building Lourdes’s house, and was not negligent; on the contrary, Lourdes failed to exercise caution or due diligence despite having an architectural plan and being assisted by an architect and engineer.

Lourdes commenced construction of her house as early as 1998. The HLURB, OP, and CA found that AFP Retirement System was informed of Lourdes’s wrongful construction before Edsel completed his payment for Lot 20, but it did not inform Edsel or investigate the circumstances; it still proceeded with the sale and received the full purchase price for the 240-square-meter lot; and when Edsel confronted it, AFP Retirement System reasoned that it feared exposure to legal complications due to the reduction of Lot 20’s area. The same tribunals found that Lourdes failed to update her relocation survey and ignored Sta. Lucia Realty’s instruction to lot owners to first consult with their surveyors before construction. The evidence also showed that Lourdes coordinated with Sta. Lucia Realty before construction, and Sta. Lucia Realty approved her construction plans and issued the permit.

• Lourdes’s Bad Faith: Sta. Lucia Realty contended that Lourdes is a builder in bad faith and should be solely blamed for the encroachment on Edsel’s lot; Lourdes knew that her 1993 relocation survey was valid only for 45 days and did not request a new one, and she failed to comply with Sta. Lucia Realty’s January 18, 1990 Memorandum directing lot owners to verify and consult first with Sta. Lucia Realty’s surveying office before construction.
• Absence of Liability: Sta. Lucia Realty denied any liability, stating that it was not privy to AFP Retirement System’s contracts of sale with Edsel and Lourdes; it had no hand in building Lourdes’s house and was not negligent; Lourdes failed to exercise caution or due diligence despite having an architectural plan and being assisted by an architect and engineer.

• AFP Retirement System’s Good Faith: AFP Retirement System argued that it did not act in evident bad faith or gross negligence or wanton disregard of its contractual obligations; its failure to execute the deed was justified because Edsel demanded that Lot 20 be stated as 240 square meters and free from lien or encumbrance, which was unreasonable since the actual area after re-mapping was 220 square meters; it immediately informed Edsel upon learning from Sta. Lucia Realty of the encroachment; the liable parties are Sta. Lucia Realty and Lourdes, since Sta. Lucia Realty is in charge of subdivision development and lot location and Lourdes should have consulted it before building.
• Lourdes’s Good Faith: Lourdes maintained that she is a builder in good faith as found by the HLURB, OP, and CA; Sta. Lucia Realty approved and issued a construction permit after she submitted detailed house plans, blueprints, a location plan signed and sealed by a licensed geodetic engineer, and a certification of a relocation survey; the issue in G.R. No. 223241 covers AFP Retirement System’s liability and does not affect her.
• Edsel’s Claims of Bad Faith: Edsel asserted that Lourdes acted in bad faith because she failed to secure a proper relocation survey with Sta. Lucia Realty before construction despite being assisted by contractors and engineers; he joined Sta. Lucia Realty in praying that Lourdes be declared a builder in bad faith and that her rights to the building and improvements be forfeited in his favor; he also claimed AFP Retirement System acted in bad faith by breaching its obligations, turning a blind eye to Lourdes’s mistake, not restraining her construction, and pressuring him to settle with Lourdes.

• AFP Retirement System’s Liability for Damages: Whether the CA correctly affirmed AFP Retirement System’s liabilities for moral and exemplary damages and attorney’s fees to Edsel for its failure to comply with its obligations as a seller in G.R. No. 223241.
• Lourdes Pearce’s Good Faith: Whether the CA correctly affirmed that Lourdes is a builder in good faith in G.R. Nos. 222897 and 223241.
• Sta. Lucia Realty’s Liability to Lourdes: Whether Sta. Lucia Realty should be held liable to Lourdes for moral and exemplary damages and attorney’s fees in G.R. No. 222897.

• AFP Retirement System’s Liability for Damages: Yes. AFP Retirement System is liable for moral and exemplary damages and attorney’s fees because it failed to comply with its obligation as seller in manifest bad faith, having failed to preserve and deliver Lot 20 after full payment and having concealed the encroachment.
• Lourdes Pearce’s Good Faith: Yes. Lourdes is a builder in good faith, but she remains liable to Edsel for nominal damages because her contributory negligence in failing to update her relocation survey and to consult Sta. Lucia Realty contributed to the damage.
• Sta. Lucia Realty’s Liability to Lourdes: No as to moral and exemplary damages; those were deleted by the final and executory April 10, 2012 CA Decision in CA-G.R. SP No. 120060. The SC did not delete the attorney’s fees affirmed in that final Decision and ordered Sta. Lucia Realty to reimburse Lourdes for expenses or losses not covered by Articles 546 and 548 of the Civil Code.

• AFP Retirement System’s Liability for Damages: Under Article 1170 of the Civil Code, delay in the performance of an obligation renders the obligor liable for damages; under Article 1163, the obligor to give something must take care of it with the proper diligence of a good father of a family. From the perfection of the contract, AFP Retirement System bound itself to preserve Lot 20 in a deliverable state or at least ensure that it could be delivered upon full payment and demand. After Edsel fully paid in 2000, he received nothing of value and was deprived of the right to enjoy the property because title remained in AFP Retirement System’s name. Bad faith under Princess Rachel Development Corporation vs. Hillview Marketing Corporation does not simply connote bad judgment or negligence; it imports a dishonest purpose or moral obliquity and conscious doing of a wrong, a breach of a known duty through motive or interest or ill-will that partakes of the nature of fraud. The HLURB, OP, and CA found that AFP Retirement System was informed of Lourdes’s wrongful construction before Edsel completed payment but did not inform Edsel or investigate; it still proceeded with the sale and received the full price for the 240-square-meter lot; and when confronted, it reasoned that it feared legal complications due to the reduced area. AFP Retirement System failed to protect Edsel’s interest as buyer. Article 2201 makes an obligor in bad faith responsible for all damages reasonably attributed to non-performance; Development Bank of the Philippines vs. Togle allows moral damages in culpa contractual where the defendant acted in bad faith or with malice; exemplary damages may be awarded under Articles 2220, 2229, and 2234. The awards were thus affirmed.
• Lourdes Pearce’s Good Faith: A builder in good faith is one who asserts title to the land on which they build, i.e., a possessor in the concept of owner who is unaware of any flaw in the title or mode of acquisition that invalidates it. Lourdes was unaware that she encroached on Edsel’s lot and believed that the location of her house was part of her lot. However, good faith does not necessarily exclude negligence under Article 456 of the Civil Code in relation to Article 2176. Lourdes failed to update her relocation survey and ignored Sta. Lucia Realty’s instruction to lot owners to first consult with their surveyors before construction; this negligence contributed to Edsel’s damage. The HLURB correctly mitigated the damages to PHP 30,000.00, but the amount is not moral damages because Article 2217 requires physical suffering, mental anguish, besmirched reputation, wounded feelings, or similar injury as the proximate result of the wrongful act or omission. Since Lourdes’s negligence was only contributory, the award is nominal damages under Articles 2221 and 2222, adjudicated to vindicate Edsel’s property right. Because Lourdes is a builder in good faith, Article 448 governs: Edsel may appropriate what was built after payment of necessary and useful expenses under Articles 546 and 548, or oblige Lourdes to pay the price of the land, but Lourdes cannot be obliged to buy if the land value is considerably more than the building, in which case she pays reasonable rent. The SC remanded to the HLURB/DHSUD to assess the fair market value of the lot, the expenses incurred in building the house, and the resulting increase in value of Edsel’s lot.
• Sta. Lucia Realty’s Liability to Lourdes: The April 10, 2012 CA Decision in CA-G.R. SP No. 120060 affirmed the HLURB and OP but deleted Sta. Lucia Realty’s liability for moral and exemplary damages because there was no convincing proof that Sta. Lucia Realty was in bad faith. It affirmed the award of attorney’s fees under Article 2208(2) because Lourdes was compelled to litigate to protect her interests. No party appealed, so the 2012 Decision became final and executory. The 2015 Decision in CA-G.R. SP No. 120161, by affirming the entire HLURB and OP Decision, conflicted with the 2012 Decision and effectively reinstated the deleted awards. The SC held that the issues of Sta. Lucia Realty’s bad faith and Lourdes’s good faith were settled in the 2012 Decision; under the principle of immutability of judgments, a final and executory decision can no longer be amended or corrected except for clerical errors or mistakes, and even if erroneous it cannot be disobeyed. Thus, Sta. Lucia Realty’s liability for moral and exemplary damages was deleted. Nonetheless, Sta. Lucia Realty remains liable to reimburse Lourdes for the construction error: even if it acted in good faith, it was not faultless as a subdivision developer because Lourdes coordinated with it, and it approved her construction plans and issued the permit. The HLURB’s order to reimburse was sustained, limited to expenses or losses not covered by Articles 546 and 548. The SC also noted that the CA should have consolidated the related cases; counsels have the duty under Rule 7, Section 5 of the Rules of Court to give prompt notice of related cases and to move for consolidation, as reiterated in Steel Corporation of the Philippines vs. Equitable PCI Bank, Inc. and IBM Daksh Business Process Services Philippines, Inc. vs. Ribas.

• Bad faith in breach of contract — Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or moral obliquity and conscious doing of a wrong, a breach of a known duty through motive or interest or ill-will that partakes of the nature of fraud. Applied to AFP Retirement System, which failed to deliver Lot 20 after full payment and concealed the encroachment.
• Builder in good faith — One who asserts title to the land on which they build, i.e., a possessor in the concept of owner who is unaware of any flaw in the title or mode of acquisition that invalidates it. Good faith is presumed. Applied to Lourdes, who believed the house location was part of her lot.
• Good faith does not necessarily exclude negligence — Under Article 456 of the Civil Code, a builder in good faith may still be liable for damages under Article 2176 for negligence. Applied to Lourdes, whose failure to update her relocation survey and to consult Sta. Lucia Realty contributed to Edsel’s damage.
• Nominal damages — Adjudicated to vindicate or recognize a right violated or invaded, not to indemnify loss. Applied to the PHP 30,000.00 awarded to Edsel against Lourdes for contributory negligence.
• Immutability of final judgments — A decision that has become final and executory can no longer be amended or corrected except for clerical errors or mistakes; even if erroneous, it cannot be disobeyed. Applied to the April 10, 2012 CA Decision in CA-G.R. SP No. 120060, which deleted Sta. Lucia Realty’s moral and exemplary damages.
• Article 448 options of landowner and builder in good faith — The landowner may appropriate the works after payment of indemnity under Articles 546 and 548, or oblige the builder to pay the price of the land; the builder cannot be obliged to buy if the land value is considerably more than the building, in which case reasonable rent is paid. Applied to Edsel and Lourdes, with remand to determine values.
• Mandatory consolidation on appeal — Where cases involve the same parties and closely related subject matters, consolidation is proper; at the appellate stage, consolidation of cases resting on the same facts or involving identical claims, interests, or parties is mandatory. Applied as an admonition because the CA did not consolidate related cases, causing conflicting dispositions.

• “bad faith[, under the law,] does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of [a] known duty through some motive or interest or ill-will that partakes of the nature of fraud.” — The SC used this definition to characterize AFP Retirement System’s failure to deliver Lot 20 and conceal the encroachment as bad faith.
• “A builder in good faith is one who asserts title to the land on which they build, i.e., that the person is a possessor in the concept of owner, and is unaware of any flaw in the title or mode of acquisition that invalidates it.” — The SC applied this definition to Lourdes, who believed the house location was part of her lot.
• “Note that a decision that has become final and executory can no longer be amended or corrected by the court except for clerical errors or mistakes. However erroneous it may be, a final judgment cannot be disobeyed, otherwise, litigation would be endless and no questions could be considered settled.” — The SC relied on this rule to uphold the final 2012 Decision deleting Sta. Lucia Realty’s moral and exemplary damages.
• ”[W]hen two or more cases involve the same parties and affect closely related subject matters, they must be consolidated and jointly tried, in order to serve the best interests of the parties and to settle expeditiously the issues involved.” — The SC reiterated the consolidation policy after noting the CA’s failure to consolidate the related cases.

• Princess Rachel Development Corporation vs. Hillview Marketing Corporation, 873 Phil. 105 (2020) — Relied on for the definition of bad faith in contractual breach.
• Development Bank of the Philippines vs. Togle, G.R. No. 224138, October 6, 2021 — Relied on to allow moral damages in culpa contractual where the defendant acted in bad faith or with malice.
• Almeda vs. Cariño, 443 Phil. 182, 191 (2003) — Cited for the purpose of nominal damages, which vindicate a violated right without indemnifying loss.
• Nieva vs. Manila Banking Corporation, 209 Phil. 361, 366 (1983) — Relied on for the rule that a final and executory judgment cannot be amended or corrected except for clerical errors.
• Steel Corporation of the Philippines vs. Equitable PCI Bank, Inc., 649 Phil. 692 (2010) — Relied on for the rule that closely related cases involving the same parties should be consolidated and jointly tried.
• IBM Daksh Business Process Services Philippines, Inc. vs. Ribas, 836 Phil. 155 (2018) — Relied on for the rule that consolidation is mandatory at the appellate stage for cases resting on the same facts or involving identical claims, interests, or parties.

• Article 1163, Civil Code — Every person obliged to give something must take care of it with the proper diligence of a good father of a family; AFP Retirement System failed to preserve Lot 20 in a deliverable state.
• Article 1170, Civil Code — Those guilty of fraud, negligence, or delay in performance, or who contravene the tenor of the obligation, are liable for damages; AFP Retirement System’s non-performance made it liable.
• Article 2201, Civil Code — An obligor in bad faith is responsible for all damages reasonably attributed to non-performance; basis for AFP Retirement System’s damages.
• Article 2220, Civil Code — Moral damages may be awarded for breach of contract where the defendant acted fraudulently or in bad faith; applied to AFP Retirement System.
• Article 2229, Civil Code — Exemplary damages are imposed by way of example or correction for the public good; applied to AFP Retirement System.
• Article 2234, Civil Code — The plaintiff must first show entitlement to moral, temperate, or compensatory damages before exemplary damages may be awarded; AFP Retirement System’s moral damages supported the exemplary award.
• Article 456, Civil Code — Good faith does not necessarily exclude negligence, which gives right to damages under Article 2176; applied to Lourdes.
• Article 2176, Civil Code — Whoever by act or omission causes damage to another through fault or negligence is obliged to pay; basis for Lourdes’s contributory negligence.
• Article 2217, Civil Code — Moral damages require physical suffering, mental anguish, besmirched reputation, wounded feelings, or similar injury as the proximate result of the wrongful act or omission; Lourdes’s contributory negligence did not support moral damages.
• Articles 2221 and 2222, Civil Code — Nominal damages are adjudicated to vindicate or recognize a violated right and may be awarded where a property right has been invaded; applied to the PHP 30,000.00 award against Lourdes.
• Article 448, Civil Code — The landowner may appropriate the works after payment of indemnity under Articles 546 and 548, or oblige the builder to pay the price of the land; the builder cannot be obliged to buy if the land value is considerably more than the building, in which case reasonable rent is paid; applied to Edsel and Lourdes and remanded for valuation.
• Articles 546 and 548, Civil Code — Necessary and useful expenses are refunded to a possessor in good faith, while luxury expenses are not; these limit Sta. Lucia Realty’s reimbursement liability to Lourdes.
• Article 2208(2), Civil Code — Attorney’s fees may be recovered when the defendant’s act or omission compelled the plaintiff to litigate with third persons or incur expenses to protect his interest; cited in the final 2012 Decision to affirm attorney’s fees to Lourdes.
• Rule 7, Section 5, Rules of Court — The certification against forum shopping and related rules impose on counsel the duty to give prompt notice of related cases and to move for consolidation; applied as an admonition.