Valdes vs. La Colina Development Corporation

A profit-sharing scheme in a contract of sale, where one party's share in proceeds serves as the mode of payment for the purchase price, does not convert the transaction into a joint venture absent a common fund and mutual sharing of losses. Novation may be implied where the new obligation is irreconcilably incompatible with the old, provided all parties consented to the substitution.

Carlos Valdes, Sr. and his children (the Valdeses) were stockholders of Bataan Resorts Corporation (BARECO), which owned a large tract of land in Bagac, Bataan under several transfer certificates of title. In 1974, Carlos, Sr. invited Francisco Cacho and his son Jose Mari Cacho to assess the property's suitability for a beach resort project (the Montemar Project), which encompassed development of the Montemar Beach Club and the Montemar Villas residential subdivision. To implement the project, the Valdeses sold their BARECO shares to La Colina Development Corporation (LCDC), a fully-owned corporation of the Cacho family, for P20 Million. LCDC established La Colina Resorts Corporation (LCRC) to market and sell resort shares, with LCDC and Carlos, Sr. holding 70% and 30% of LCRC, respectively. LCDC obtained loans from DBP/APT, Metrobank, and General Credit Corporation to finance development; when those loans went unpaid, the mortgaged properties were foreclosed, prompting LCDC and LCRC to seek a new investor, Philippine Communication Satellite, Inc. (Philcomsat), to bail them out.

Carlos Valdes, Sr. and his children — Gabriel A.S. Valdes, Carlos J. Valdes, Antonio A.S. Valdes, Fatima de la Concepcion, Asuncion Mercado, and Virginia A.S. Valdes (collectively, the Valdeses) — were the stockholders of Bataan Resorts Corporation (BARECO), which owned a large tract of land in Bagac, Bataan under Transfer Certificates of Title Nos. 45864, 45865, 45867, 45868, and 45869. Sometime in 1974, Carlos, Sr. invited Francisco Cacho and his son Jose Mari Cacho to visit and assess the property's suitability for a beach resort project, the Montemar Project, which included development of the Montemar Beach Club and conversion of the remaining land into the Montemar Villas residential subdivision. To implement the project, the Valdeses conveyed their BARECO shares to La Colina Development Corporation (LCDC), a Cacho family corporation, through a Deed of Sale dated May 24, 1975 for a consideration of P20 Million. LCDC paid P2.5 Million in cash from February 1975 to December 1979; the remaining P17.5 Million was covered by promissory notes and settled through an Assignment of Rights dated October 30, 1975, whereby LCDC assigned to the Valdeses three million pesos worth of shares in LCRC and undertook to remit 50% (later reduced to 40%) of the net proceeds from the sale of the Montemar Villas lots. By virtue of this assignment, LCDC and Carlos, Sr. became 70% and 30% shareholders of LCRC, respectively. LCDC, as sole shareholder of BARECO, amended BARECO's Articles of Incorporation and shortened its corporate existence to June 30, 1975. Montemar Beach Club, Inc. (MBCI), a non-stock, non-profit club, was then organized to develop the project; LCRC sold proprietary shares in MBCI to the general public. LCDC obtained loans from DBP/APT, Metrobank, and General Credit Corporation to finance construction and development.

For some time, sales of MBCI proprietary shares and Montemar Villas lots generated adequate income, the loans were serviced, and remittances to the Valdeses were made regularly. However, from 1981 to 1985, remittances to the Valdeses were delayed, though records showed that P16,125,717.31 of the P20 Million purchase price was eventually paid. On July 13, 1987, Carlos, Sr. filed a Complaint for Annulment or Rescission of Contract or Specific Performance and Damages against LCDC before the RTC of Balanga, Bataan (Civil Case No. 5558). The case was settled pursuant to a letter agreement dated February 21, 1990, in which LCDC vowed to continue marketing the Montemar Villas lots and remitting the Valdeses' 40% share until full payment of the P20 Million, and was dismissed with prejudice on April 27, 1990. Meanwhile, as LCDC's loans from DBP/APT remained unpaid, the mortgaged properties of LCDC, LCRC, and MBCI were foreclosed.

Sometime in 1992, LCDC and LCRC initiated negotiations with Philcomsat, a prospective investor. Philcomsat presented a Memorandum of Intent dated August 18, 1992, under which it would settle the outstanding loans of LCDC, LCRC, and MBCI with APT, GCC, and Philcomsat; in consideration, the ownership over the properties of LCDC and LCRC, including their shares in MBCI, would be transferred to a new corporation, Montemar Resorts and Development Corporation (MRDC), which would develop the unsold Montemar Villas lots into a golf course and sports complex. Philcomsat conditioned its investment on the Valdeses giving their conformity to the new project and forgoing their claim to the proceeds from the sale of the Montemar Villas lots. To convince Gabriel, acting as attorney-in-fact of Carlos, Sr., Rafael Cacho presented two scenarios: Scenario A, in which Philcomsat would not invest and all properties would be sold at public auction leaving everyone with nothing; and Scenario B, in which Philcomsat would invest and bail out the parties, with Philcomsat owning 70% of MRDC and the balance of 30% distributed among the Valdeses (7.5%), the Cachos, and GCC (22.5%). Gabriel initially presented an unsigned draft letter asserting that the existing contract between LCDC and Carlos, Sr. remained in force, but Poblador rejected it. After that portion was deleted, a letter-conformity dated August 27, 1992 was finalized, bearing Gabriel's signature on the conforme portion, confirming his support for the new concept and indicating his preference to sell all his shareholdings in LCRC and his rights as an unpaid seller for an indicative price of P35 Million (negotiable).

Pursuant to the Memorandum of Intent and the letter-conformity, Philcomsat, LCDC, LCRC, and MBCI executed a Memorandum of Agreement dated September 3, 1992, essentially identical to the Memorandum of Intent. On August 31, 1992, LCRC and LCDC, through a Consolidated Deed of Absolute Sale, conveyed and sold to MRDC all their real and personal properties in Bagac, Bataan. Notably, on August 28, 1992, Gabriel appointed Jose Mari and Rafael to sell Carlos, Sr.'s shareholdings in LCRC and other Valdeses' real properties. On November 18, 1992, Rafael informed Gabriel that Philcomsat offered P24,771,800.00 for those shareholdings, which the Valdeses rebuffed; Gabriel's subsequent request to Poblador for a higher offer yielded nothing.

On April 6, 1993, the Valdeses filed before the RTC a Complaint for Reconveyance, Annulment and/or Rescission of Contract, Specific Performance and Damages against LCDC, LCRC, Philcomsat, MRDC, Jose Mari, Poblador, and Africa. The RTC issued a writ of preliminary injunction on May 2, 1995, enjoining respondents from alienating the subject properties, implementing the MOA, or introducing improvements thereon. After trial, the RTC, on October 26, 2009, declared the MOA and the Consolidated Deed of Sale null and void, finding that a joint venture existed between the Valdeses and LCDC, that the Valdeses' consent was not obtained, and that the respondents acted in bad faith. The RTC ordered the properties to revert to LCDC and awarded attorney's fees of 10% of any recovery. The CA, on October 31, 2012, reversed the RTC, holding that the relationship was vendor-vendee, not a joint venture, that Gabriel consented to the new concept through the August 27, 1992 letter-conformity, and that neither bad faith nor fraud attended the execution of the assailed contracts. The CA's July 16, 2013 Resolution denied reconsideration.

• Joint Venture: Petitioners contended that the original agreement required the Valdeses to contribute the BARECO properties to the Montemar Project, with LCDC to develop the properties and both parties to share proportionately in profits, constituting a joint venture reflected in the Deed of Sale dated May 24, 1975, the promissory notes, the Assignment of Rights dated October 30, 1975, and a Memorandum of Agreement.
• Recurring Promise: Petitioners emphasized that the joint venture was not a one-time transaction but a recurring promise to share in the proceeds of the sale of the Montemar Villas lots, as affirmed by the February 21, 1990 letter agreement.
• Fiduciary Relationship: Petitioners argued that LCDC, as co-venturer, could not encumber or mortgage the properties without the Valdeses' consent and approval, and that any act committed without their express authority was not binding upon them.
• Violation of Joint Venture: Petitioners insisted that the entry of Philcomsat and the execution of the September 3, 1992 MOA and the August 31, 1992 Consolidated Deed of Sale violated the joint venture's true intent — that LCDC and the Valdeses would share in the proceeds of the sale of the Montemar Villas lots in the proportion of 60% and 40%, respectively — and disregarded the Valdeses' 40% share.
• No Novation: Petitioners argued that the CA erred in concluding there was novation, as the supposed substitution of creditors — the entry of Philcomsat — was never declared in clear and unequivocal terms.
• Bad Faith of Philcomsat and MRDC: Petitioners claimed that Philcomsat and MRDC could not be considered innocent purchasers for value because they had knowledge of the Valdeses' rights and interests over the subject properties when the MOA and Consolidated Deed of Sale were consummated.
• Entitlement to Rescission: Petitioners maintained that the Valdeses were entitled to rescission of the MOA and Consolidated Deed of Sale, reconveyance of the subject properties from LCDC, and payment of their 40% share in the income derived from the sale of the Montemar Villas lots.

• Contract of Sale: Respondents LCDC, LCRC, and Cacho argued that as a lawyer and accountant, nothing should have prevented Carlos, Sr. from manifesting in unequivocal terms in any of the documents that he intended to form a joint venture; the contract executed was a contract of sale for P20 Million, giving LCDC full ownership of the BARECO properties, including the right to convey, sell, encumber, or mortgage the same.
• Novation via Letter-Conformity: Respondents argued that Gabriel's August 27, 1992 letter-conformity manifested his unqualified recognition that the Valdeses' rights as unpaid sellers were novated into participation and sharing in the new concept of the Montemar Project, confirmed by Gabriel's authorization to the Cachos to sell Carlos, Sr.'s shareholdings in LCRC and other real properties of the Valdeses.
• Gabriel's Knowledge: Respondents pointed out that Gabriel was a member of the MBCI board to whom the entry of Philcomsat as a new investor was extensively discussed during board meetings, and that Gabriel himself signed the minutes of those meetings, signifying his knowledge of the proposed new concept.
• No Right to Rescission: Respondents Philcomsat and MRDC argued that Gabriel could not avail of the remedy of rescission of the MOA and Consolidated Deed of Sale, as he failed to satisfactorily prove that the Valdeses could not, in any manner, collect the unpaid obligation of LCDC.

• Nature of the Contract: Whether there was a joint venture between LCDC and the Valdeses, or merely a contract of sale.
• Novation: Whether there was a valid novation of the May 24, 1975 Deed of Sale that extinguished LCDC's obligation to sell Montemar Villas lots and remit proceeds to the Valdeses.
• Good Faith of Purchasers: Whether Philcomsat and MRDC were purchasers in good faith and for value of the subject properties in Bataan.
• Availability of Rescission: Whether petitioners could avail of the remedy of rescission of the September 3, 1992 MOA and the August 31, 1992 Consolidated Deed of Sale.

• Nature of the Contract: No. The agreement was a contract of sale, not a joint venture, as the elements of a joint venture — contribution to a common fund and sharing of profits and losses — were absent; LCDC's obligation to remit proceeds persisted regardless of whether it incurred losses.
• Novation: Yes. There was a valid novation through Gabriel's express conformity in the August 27, 1992 letter-conformity, which extinguished LCDC's obligation to sell Montemar Villas lots and remit proceeds, the new golf course concept being irreconcilably incompatible with the old obligation.
• Good Faith of Purchasers: Yes. Philcomsat and MRDC were not in bad faith, as Philcomsat required the Valdeses' consent and stockholder approval before investing and executing the assailed contracts.
• Availability of Rescission: No. Rescission was unavailable because the Valdeses consented to the new arrangement and suffered no actionable wrong, fraud, or lesion.

• Nature of the Contract: Under Article 1370 of the Civil Code, when the terms of a contract are clear and leave no doubt as to the parties' intention, the literal meaning of the stipulations controls. The Deed of Sale dated May 24, 1975, read in conjunction with the promissory notes and the October 30, 1975 Assignment of Rights, showed an absolute transfer of ownership of 4,000 BARECO shares to LCDC for P20 Million. The Assignment of Rights expressly stated that it was accepted "in full payment of the aforementioned promissory note." A joint venture requires (1) an agreement to contribute money, property, or industry to a common fund and (2) an intent to divide profits among the contracting parties; it is akin to a partnership where parties share in both profits and losses. Here, there was no common fund, and LCDC's obligation to remit the Valdeses' 40% share persisted even if LCDC incurred losses — a feature incompatible with a partnership or joint venture. The profit-sharing scheme was merely the mode of payment for the P20 Million purchase price. As sole stockholder of BARECO, LCDC had full disposal of the properties, including the right to encumber and mortgage them. The Valdeses' rights lay only in the proceeds of the sale of the Montemar Villas lots and could not extend to questioning the mortgages constituted on the properties after titles had passed to LCDC and LCRC.

• Novation: Novation requires (1) a previous valid obligation, (2) agreement of all parties to the new contract, (3) extinguishment of the old contract, and (4) validity of the new one. Under Article 1292, novation may be express or implied, with the touchstone being irreconcilable incompatibility between old and new obligations. The new Montemar Project concept — developing a golf course and sports complex on the unsold Montemar Villas lots — was wholly incompatible with LCDC's original obligation to sell those lots and remit 40% of the proceeds, because the construction of new sports facilities would effectively halt the development and sale of the subdivision lots. Gabriel's knowledge and consent were established by three facts: (1) his signature on the conforme portion of the August 27, 1992 letter-conformity; (2) minutes of MBCI board meetings where Philcomsat's entry was discussed; and (3) notices sent to LCRC stockholders and directors regarding the new concept. Gabriel never questioned the new concept as an MBCI director, and his authorization to the Cachos to sell Carlos, Sr.'s LCRC shareholdings confirmed his recognition of the novation. The complaint was filed only after Philcomsat's offer for the shareholdings was rejected, indicating that the Valdeses' objection was motivated by dissatisfaction with the purchase price rather than lack of consent.

• Good Faith of Purchasers: Fraud that provides a basis to annul contracts must be dolo causante — fraud in obtaining consent — and must be proven by clear and convincing evidence, not merely by preponderance. Philcomsat, before investing, required (1) written stockholder and board approval of all MOA provisions by LCDC, LCRC, and MBCI and (2) the Valdeses' consent as embodied in the August 27, 1992 letter-conformity. The Memorandum of Intent dated August 18, 1992 likewise required MBCI, LCRC, and LCDC to secure explicit stockholder approval owning at least two-thirds of outstanding shares. Petitioners failed to present any evidence of fraudulent acts by Philcomsat to deceive the Valdeses or any stockholders. Philcomsat demonstrated the steps it undertook to ensure consideration of the Valdeses' rights. There was no fraud or bad faith to speak of.

• Availability of Rescission: Rescissible contracts are those rescissible due to lesion or prejudice, fraud or bad faith, or special provisions of law. None of these circumstances were present. The Valdeses, through Gabriel, expressly consented to the new concept and were aware of its effects. While they would cease receiving 40% income from lot sales, they would have maintained a share or interest in the new project, which they opted to sell — though negotiations with Philcomsat fell through. Courts cannot constitute themselves guardians of persons who are not legally incompetent; they cannot extricate parties from bad bargains, protect them from unwise investments, or relieve them from one-sided contracts absent a violation of law or an actionable wrong.

• Interpretation of Contracts (Article 1370, Civil Code) — When the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. If the words appear contrary to the evident intention, the latter prevails. Applied: The Deed of Sale, promissory notes, and Assignment of Rights, read together, unambiguously showed a contract of sale. The inquiry is not what contract the parties intended to enter into, but what contract they did enter into.

• Elements of a Contract of Sale (Article 1458, Civil Code) — A contract of sale requires (a) consent or meeting of minds to transfer ownership in exchange for price, (b) determinate subject matter, and (c) price certain in money or its equivalent. Applied: All elements were present — the Valdeses sold 4,000 BARECO shares to LCDC for P20 Million, paid partly in cash and partly through the Assignment of Rights.

• Joint Venture — A joint venture requires (1) an agreement to contribute money, property, or industry to a common fund and (2) an intent to divide profits among the contracting parties; it is akin to a partnership where parties share in both profits and losses. The main distinction from a partnership is that a joint venture is formed for a single transaction and is temporary in nature. Applied: Absent because there was no common fund and LCDC's obligation to pay persisted regardless of losses, which is incompatible with a joint venture's essential sharing of profits and losses.

• Novation (Article 1292, Civil Code) — Novation is the extinguishment of an obligation by substitution of a new one. It may be effected either expressly or impliedly; the touchstone is irreconcilable incompatibility between the old and new obligations. Requisites: (1) a previous valid obligation, (2) agreement of all parties to the new contract, (3) extinguishment of the old contract, and (4) validity of the new one. Applied: The new golf course concept was incompatible with selling subdivision lots; Gabriel's conformity in the August 27, 1992 letter satisfied the consent requirement.

• Rescission (Articles 1380–1382, Civil Code) — Rescission is a remedy to secure reparation of damages caused by a valid contract through the restoration of things to their condition prior to the contract's celebration. Rescissible contracts are those rescissible due to lesion or prejudice, fraud or bad faith, or special provisions of law. Applied: None of the grounds were present because the Valdeses consented to the new arrangement and respondents acted in good faith.

• Fraud as Ground for Annulment (Dolo Causante) — Fraud that provides a basis to annul contracts must be dolo causante — fraud in obtaining the consent of a party — and must be proven by clear and convincing evidence, not merely by preponderance. Applied: Petitioners failed to present evidence of any fraudulent act by Philcomsat.

• "Thus, in interpreting the agreement between the Valdeses and LCDC, the inquiry is not what contract the parties intended to enter into, but what contract did they enter into." — This passage articulates the Court's objective approach to contract interpretation under Article 1370, foregrounding the parties' manifested intent over their subjective expectations.

• "LCDC's obligation to pay persists as long as it is able to sell subdivision lots even if the corporation itself is experiencing losses, as what happened. x x x x Hence, there is nothing here that may be said to be akin to a joint venture in its legal definition." — This distinguishes a contract of sale from a joint venture by emphasizing the absence of shared losses, a defining feature of partnership-like relationships.

• "[T]he touchstone, however, is irreconcilable incompatibility between the old and the new obligations." — This states the canonical test for implied novation under Article 1292, frequently cited in subsequent jurisprudence on novation.

• "Courts cannot follow one every step of his life and extricate him from bad bargains, protect him from unwise investments, relieve him from one-sided contracts, or annul the effects of foolish acts." — This articulates the principle that rescission requires an actionable wrong, not merely a disadvantageous bargain; courts will not rescue parties from their own poor business decisions absent a violation of law.

• Norton Resources and Development Corporation vs. All Asia Bank Corporation, 620 Phil. 381 (2009) — Followed for the rule that when contract terms are unambiguous and can only be read one way, the court interprets the contract as a matter of law.
• Philex Mining Corp. vs. Commissioner of Internal Revenue, 574 Phil. 571 (2008) — Followed for the definition of a joint venture as akin to a partnership, requiring community of interest, sharing of profits and losses, and a mutual right of control.
• CCC Insurance Corp. vs. Kawasaki Steel Corp., 761 Phil. 1 (2015) — Followed for the definition of novation and its four requisites.
• Ever Electrical Manufacturing, Inc. vs. Philippine Bank of Communications, 792 Phil. 311 (2016) — Followed for the rule that implied novation requires incompatibility between old and new obligations, each having an independent existence.
• Ada vs. Baylon, 692 Phil. 432 (2012) — Followed for the definition and enumeration of the kinds of rescissible contracts.
• Spouses Paguyo vs. Astorga, 507 Phil. 36 (2005) — Followed for the principle that courts cannot relieve parties from bad bargains absent a violation of law or an actionable wrong.
• ECE Realty and Development, Inc. vs. Mandap, 742 Phil. 164 (2014) — Followed for the requirement that fraud annulment must be dolo causante, proven by clear and convincing evidence.
• Gatan vs. Vinarao, 820 Phil. 257 (2017) — Followed for the exception to the conclusiveness of CA factual findings where they contradict those of the RTC.

• Article 1370, Civil Code of the Philippines — Provides that when the terms of a contract are clear, the literal meaning of its stipulations controls; if words appear contrary to the evident intention, the latter prevails. Applied to determine that the Deed of Sale, promissory notes, and Assignment of Rights, read together, unambiguously established a contract of sale.
• Article 1458, Civil Code of the Philippines — Defines a contract of sale as one whereby a party obligates himself to transfer ownership of and deliver a determinate thing, and the other to pay a price certain in money or its equivalent. Applied to confirm that all elements of a sale were present in the Valdeses-LCDC transaction.
• Article 1292, Civil Code of the Philippines — Provides that for an obligation to be extinguished by another substituting it, it must be declared in unequivocal terms, or the old and new obligations must be incompatible on every point. Applied to find implied novation through the irreconcilable incompatibility between the old obligation to sell subdivision lots and the new concept of developing a golf course.
• Articles 1380–1382, Civil Code of the Philippines — Enumerate the kinds of rescissible contracts: those rescissible due to lesion or prejudice, fraud or bad faith, and those susceptible to rescission by special provisions of law. Applied to determine that none of the grounds for rescission were present.

Leonen (Chairperson), Inting, Rosario, and J. Lopez, JJ., concurred.