January 31, 1978

RAMON RALLOS, Administrator of the Estate of CONCEPCION RALLOS, petitioner, 

vs.
FELIX GO CHAN & SONS REALTY CORPORATION and COURT OF
APPEALS, respondents.

Seno, Mendoza & Associates for petitioner.

Ramon Duterte for private respondent.

MUÑOZ PALMA, J.:

This is a case of an attorney-in-fact, Simeon Rallos, who after of his death of his principal,
Concepcion Rallos, sold the latter's undivided share in a parcel of land pursuant to a power
of attorney which the principal had executed in favor. The administrator of the estate of the
went to court to have the sale declared uneanforceable and to recover the disposed share.
The trial court granted the relief prayed for, but upon appeal the Court of Appeals uphold the
validity of the sale and the complaint.

Hence, this Petition for Review on certiorari.

The following facts are not disputed. Concepcion and Gerundia both surnamed Rallos were
sisters and registered co-owners of a parcel of land known as Lot No. 5983 of the Cadastral
Survey of Cebu covered by Transfer Certificate of Title No. 11116 of the Registry of Cebu.
On April 21, 1954, the sisters executed a special power of attorney in favor of their brother,
Simeon Rallos, authorizing him to sell for and in their behalf lot 5983. On March 3, 1955,
Concepcion Rallos died. On September 12, 1955, Simeon Rallos sold the undivided shares
of his sisters Concepcion and Gerundia in lot 5983 to Felix Go Chan & Sons Realty
Corporation for the sum of P10,686.90. The deed of sale was registered in the Registry of
Deeds of Cebu, TCT No. 11118 was cancelled, and a new transfer certificate of Title No.
12989 was issued in the named of the vendee.

On May 18, 1956 Ramon Rallos as administrator of the Intestate Estate of Concepcion
Rallos filed a complaint docketed as Civil Case No. R-4530 of the Court of First Instance of
Cebu, praying (1) that the sale of the undivided share of the deceased Concepcion Rallos in
lot 5983 be d unenforceable, and said share be reconveyed to her estate; (2) that the
Certificate of 'title issued in the name of Felix Go Chan & Sons Realty Corporation be
cancelled and another title be issued in the names of the corporation and the "Intestate
estate of Concepcion Rallos" in equal undivided and (3) that plaintiff be indemnified by way
of attorney's fees and payment of costs of suit. Named party defendants were Felix Go Chan
& Sons Realty Corporation, Simeon Rallos, and the Register of Deeds of Cebu, but
subsequently, the latter was dropped from the complaint. The complaint was amended twice;
defendant Corporation's Answer contained a crossclaim against its co-defendant, Simon
Rallos while the latter filed third-party complaint against his sister, Gerundia Rallos While the
case was pending in the trial court, both Simon and his sister Gerundia died and they were
substituted by the respective administrators of their estates.

After trial the court a quo rendered judgment with the following dispositive portion:
 A. On Plaintiffs Complaint —

(1) Declaring the deed of sale, Exh. "C", null and void insofar
as the one-half pro-indiviso share of Concepcion Rallos in the
property in question, — Lot 5983 of the Cadastral Survey of
Cebu — is concerned;

(2) Ordering the Register of Deeds of Cebu City to cancel

Transfer Certificate of Title No. 12989 covering Lot 5983 and
to issue in lieu thereof another in the names of FELIX GO
CHAN & SONS REALTY CORPORATION and the Estate of
Concepcion Rallos in the proportion of one-half (1/2) share
each pro-indiviso;

(3) Ordering Felix Go Chan & Sons Realty Corporation to

deliver the possession of an undivided one-half (1/2) share of
Lot 5983 to the herein plaintiff;

(4) Sentencing the defendant Juan T. Borromeo,

administrator of the Estate of Simeon Rallos, to pay to plaintiff
in concept of reasonable attorney's fees the sum of
P1,000.00; and

(5) Ordering both defendants to pay the costs jointly and

severally.

B. On GO CHANTS Cross-Claim:

(1) Sentencing the co-defendant Juan T. Borromeo,

administrator of the Estate of Simeon Rallos, to pay to
defendant Felix Co Chan & Sons Realty Corporation the sum
of P5,343.45, representing the price of one-half (1/2) share of
lot 5983;

(2) Ordering co-defendant Juan T. Borromeo, administrator of

the Estate of Simeon Rallos, to pay in concept of reasonable
attorney's fees to Felix Go Chan & Sons Realty Corporation
the sum of P500.00.

C. On Third-Party Complaint of defendant Juan T. Borromeo administrator of

Estate of Simeon Rallos, against Josefina Rallos special administratrix of the
Estate of Gerundia Rallos:

(1) Dismissing the third-party complaint without prejudice to filing either a

complaint against the regular administrator of the Estate of Gerundia Rallos
or a claim in the Intestate-Estate of Cerundia Rallos, covering the same
subject-matter of the third-party complaint, at bar. (pp. 98-100, Record on
Appeal)

Felix Go Chan & Sons Realty Corporation appealed in due time to the Court of Appeals from
the foregoing judgment insofar as it set aside the sale of the one-half (1/2) share of
Concepcion Rallos. The appellate tribunal, as adverted to earlier, resolved the appeal on
November 20, 1964 in favor of the appellant corporation sustaining the sale in
question. 1 The appellee administrator, Ramon Rallos, moved for a reconsider of the decision
but the same was denied in a resolution of March 4, 1965. 2

What is the legal effect of an act performed by an agent after the death of his principal?
Applied more particularly to the instant case, We have the query. is the sale of the undivided
share of Concepcion Rallos in lot 5983 valid although it was executed by the agent after the
death of his principal? What is the law in this jurisdiction as to the effect of the death of the
principal on the authority of the agent to act for and in behalf of the latter? Is the fact of
knowledge of the death of the principal a material factor in determining the legal effect of an
act performed after such death?

Before proceedings to the issues, We shall briefly restate certain principles of law relevant to
the matter tinder consideration.

1. It is a basic axiom in civil law embodied in our Civil Code that no one may contract in the
name of another without being authorized by the latter, or unless he has by law a right to
represent him. 3 A contract entered into in the name of another by one who has no authority
or the legal representation or who has acted beyond his powers, shall be unenforceable,
unless it is ratified, expressly or impliedly, by the person on whose behalf it has been
executed, before it is revoked by the other contracting party. 4 Article 1403 (1) of the same
Code also provides:

ART. 1403. The following contracts are unenforceable, unless they are
justified:

(1) Those entered into in the name of another person by one who hi - been
given no authority or legal representation or who has acted beyond his
powers; ...

Out of the above given principles, sprung the creation and acceptance of the relationship of
agency whereby one party, caged the principal (mandante), authorizes another, called the
agent (mandatario), to act for and in his behalf in transactions with third persons. The
essential elements of agency are: (1) there is consent, express or implied of the parties to
establish the relationship; (2) the object is the execution of a juridical act in relation to a third
person; (3) the agents acts as a representative and not for himself, and (4) the agent acts
within the scope of his authority. 5

Agency is basically personal representative, and derivative in nature. The authority of the

agent to act emanates from the powers granted to him by his principal; his act is the act of
the principal if done within the scope of the authority. Qui facit per alium facit se. "He who
acts through another acts himself". 6

2. There are various ways of extinguishing agency, 7 but her We are concerned only with one
cause — death of the principal Paragraph 3 of Art. 1919 of the Civil Code which was taken
from Art. 1709 of the Spanish Civil Code provides:

ART. 1919. Agency is extinguished.

xxx xxx xxx

 3. By the death, civil interdiction, insanity or insolvency of the principal or of
the agent; ... (Emphasis supplied)

By reason of the very nature of the relationship between Principal and agent, agency is
extinguished by the death of the principal or the agent. This is the law in this jurisdiction. 8

Manresa commenting on Art. 1709 of the Spanish Civil Code explains that the rationale for
the law is found in thejuridical basis of agency which is representation Them being an in.
integration of the personality of the principal integration that of the agent it is not possible for
the representation to continue to exist once the death of either is establish. Pothier agrees
with Manresa that by reason of the nature of agency, death is a necessary cause for its
extinction. Laurent says that the juridical tie between the principal and the agent is severed
ipso jure upon the death of either without necessity for the heirs of the fact to notify the agent
of the fact of death of the former. 9

The same rule prevails at common law — the death of the principal effects instantaneous
and absolute revocation of the authority of the agent unless the Power be coupled with an
interest. 10 This is the prevalent rule in American Jurisprudence where it is well-settled that a
power without an interest confer. red upon an agent is dissolved by the principal's death, and
any attempted execution of the power afterward is not binding on the heirs or representatives
of the deceased. 11

3. Is the general rule provided for in Article 1919 that the death of the principal or of the
agent extinguishes the agency, subject to any exception, and if so, is the instant case within
that exception? That is the determinative point in issue in this litigation. It is the contention of
respondent corporation which was sustained by respondent court that notwithstanding the
death of the principal Concepcion Rallos the act of the attorney-in-fact, Simeon Rallos in
selling the former's sham in the property is valid and enforceable inasmuch as the
corporation acted in good faith in buying the property in question.

Articles 1930 and 1931 of the Civil Code provide the exceptions to the general rule afore-
mentioned.

ART. 1930. The agency shall remain in full force and effect even after the
death of the principal, if it has been constituted in the common interest of the
latter and of the agent, or in the interest of a third person who has accepted
the stipulation in his favor.

ART. 1931. Anything done by the agent, without knowledge of the death of
the principal or of any other cause which extinguishes the agency, is valid
and shall be fully effective with respect to third persons who may have
contracted with him in good. faith.

Article 1930 is not involved because admittedly the special power of attorney executed in
favor of Simeon Rallos was not coupled with an interest.

Article 1931 is the applicable law. Under this provision, an act done by the agent after the
death of his principal is valid and effective only under two conditions, viz: (1) that the agent
acted without knowledge of the death of the principal and (2) that the third person who
contracted with the agent himself acted in good faith. Good faith here means that the third
person was not aware of the death of the principal at the time he contracted with said agent.
These two requisites must concur the absence of one will render the act of the agent invalid
and unenforceable.

In the instant case, it cannot be questioned that the agent, Simeon Rallos, knew of the death
of his principal at the time he sold the latter's share in Lot No. 5983 to respondent
corporation. The knowledge of the death is clearly to be inferred from the pleadings filed by
Simon Rallos before the trial court. 12 That Simeon Rallos knew of the death of his sister
Concepcion is also a finding of fact of the court a quo 13 and of respondent appellate court
when the latter stated that Simon Rallos 'must have known of the death of his sister, and yet
he proceeded with the sale of the lot in the name of both his sisters Concepcion and
Gerundia Rallos without informing appellant (the realty corporation) of the death of the
former. 14

On the basis of the established knowledge of Simon Rallos concerning the death of his
principal Concepcion Rallos, Article 1931 of the Civil Code is inapplicable. The law expressly
requires for its application lack of knowledge on the part of the agent of the death of his
principal; it is not enough that the third person acted in good faith. Thus in Buason & Reyes
v. Panuyas, the Court applying Article 1738 of the old Civil rode now Art. 1931 of the new
Civil Code sustained the validity , of a sale made after the death of the principal because it
was not shown that the agent knew of his principal's demise. 15 To the same effect is the
case of Herrera, et al., v. Luy Kim Guan, et al., 1961, where in the words of Justice Jesus
Barrera the Court stated:

... even granting arguemendo that Luis Herrera did die in 1936, plaintiffs
presented no proof and there is no indication in the record, that the agent Luy
Kim Guan was aware of the death of his principal at the time he sold the
property. The death 6f the principal does not render the act of an agent
unenforceable, where the latter had no knowledge of such extinguishment of
the agency. (1 SCRA 406, 412)

4. In sustaining the validity of the sale to respondent consideration the Court of Appeals
reasoned out that there is no provision in the Code which provides that whatever is done by
an agent having knowledge of the death of his principal is void even with respect to third
persons who may have contracted with him in good faith and without knowledge of the death
of the principal. 16

We cannot see the merits of the foregoing argument as it ignores the existence of the
general rule enunciated in Article 1919 that the death of the principal extinguishes the
agency. That being the general rule it follows a fortiorithat any act of an agent after the death
of his principal is void ab initio unless the same fags under the exception provided for in the
aforementioned Articles 1930 and 1931. Article 1931, being an exception to the general rule,
is to be strictly construed, it is not to be given an interpretation or application beyond the
clear import of its terms for otherwise the courts will be involved in a process of legislation
outside of their judicial function.

5. Another argument advanced by respondent court is that the vendee acting in good faith
relied on the power of attorney which was duly registered on the original certificate of title
recorded in the Register of Deeds of the province of Cebu, that no notice of the death was
aver annotated on said certificate of title by the heirs of the principal and accordingly they
must suffer the consequences of such omission. 17
To support such argument reference is made to a portion in Manresa's Commentaries which
We quote:

If the agency has been granted for the purpose of contracting with certain
persons, the revocation must be made known to them. But if the agency is
general iii nature, without reference to particular person with whom the agent
is to contract, it is sufficient that the principal exercise due diligence to make
the revocation of the agency publicity known.

In case of a general power which does not specify the persons to whom
represents' on should be made, it is the general opinion that all acts,
executed with third persons who contracted in good faith, Without knowledge
of the revocation, are valid. In such case, the principal may exercise his right
against the agent, who, knowing of the revocation, continued to assume a
personality which he no longer had. (Manresa Vol. 11, pp. 561 and 575; pp.
15-16, rollo)

The above discourse however, treats of revocation by an act of the principal as a mode of
terminating an agency which is to be distinguished from revocation by operation of law such
as death of the principal which obtains in this case. On page six of this Opinion We stressed
that by reason of the very nature of the relationship between principal and agent, agency is
extinguished ipso jure upon the death of either principal or agent. Although a revocation of a
power of attorney to be effective must be communicated to the parties concerned, 18 yet a
revocation by operation of law, such as by death of the principal is, as a rule, instantaneously
effective inasmuch as "by legal fiction the agent's exercise of authority is regarded as an
execution of the principal's continuing will. 19With death, the principal's will ceases or is the of
authority is extinguished.

The Civil Code does not impose a duty on the heirs to notify the agent of the death of the
principal What the Code provides in Article 1932 is that, if the agent die his heirs must notify
the principal thereof, and in the meantime adopt such measures as the circumstances may
demand in the interest of the latter. Hence, the fact that no notice of the death of the principal
was registered on the certificate of title of the property in the Office of the Register of Deeds,
is not fatal to the cause of the estate of the principal

6. Holding that the good faith of a third person in said with an agent affords the former
sufficient protection, respondent court drew a "parallel" between the instant case and that of
an innocent purchaser for value of a land, stating that if a person purchases a registered
land from one who acquired it in bad faith — even to the extent of foregoing or falsifying the
deed of sale in his favor — the registered owner has no recourse against such innocent
purchaser for value but only against the forger. 20

To support the correctness of this respondent corporation, in its brief, cites the case
of Blondeau, et al., v. Nano and Vallejo, 61 Phil. 625. We quote from the brief:

In the case of Angel Blondeau et al. v. Agustin Nano et al., 61 Phil. 630, one
Vallejo was a co-owner of lands with Agustin Nano. The latter had a power of
attorney supposedly executed by Vallejo Nano in his favor. Vallejo delivered
to Nano his land titles. The power was registered in the Office of the Register
of Deeds. When the lawyer-husband of Angela Blondeau went to that Office,
he found all in order including the power of attorney. But Vallejo denied
having executed the power The lower court sustained Vallejo and the plaintiff
 Blondeau appealed. Reversing the decision of the court a quo, the Supreme
Court, quoting the ruling in the case of Eliason v. Wilborn, 261 U.S. 457,
held:

But there is a narrower ground on which the defenses of the

defendant- appellee must be overruled. Agustin Nano had
possession of Jose Vallejo's title papers. Without those title
papers handed over to Nano with the acquiescence of
Vallejo, a fraud could not have been perpetuated. When
Fernando de la Canters, a member of the Philippine Bar and
the husband of Angela Blondeau, the principal plaintiff,
searched the registration record, he found them in due form
including the power of attorney of Vallajo in favor of Nano. If
this had not been so and if thereafter the proper notation of
the encumbrance could not have been made, Angela
Blondeau would not have sent P12,000.00 to the defendant
Vallejo.' An executed transfer of registered lands placed by
the registered owner thereof in the hands of another operates
as a representation to a third party that the holder of the
transfer is authorized to deal with the land.

As between two innocent persons, one of whom must suffer

the consequence of a breach of trust, the one who made it
possible by his act of coincidence bear the loss. (pp. 19-21)

The Blondeau decision, however, is not on all fours with the case before Us because here
We are confronted with one who admittedly was an agent of his sister and who sold the
property of the latter after her death with full knowledge of such death. The situation is
expressly covered by a provision of law on agency the terms of which are clear and
unmistakable leaving no room for an interpretation contrary to its tenor, in the same manner
that the ruling in Blondeau and the cases cited therein found a basis in Section 55 of the
Land Registration Law which in part provides:

xxx xxx xxx

The production of the owner's duplicate certificate whenever any voluntary

instrument is presented for registration shall be conclusive authority from the
registered owner to the register of deeds to enter a new certificate or to make
a memorandum of registration in accordance with such instruments, and the
new certificate or memorandum Shall be binding upon the registered owner
and upon all persons claiming under him in favor of every purchaser for value
and in good faith: Provided however, That in all cases of registration provided
by fraud, the owner may pursue all his legal and equitable remedies against
the parties to such fraud without prejudice, however, to the right, of any
innocent holder for value of a certificate of title. ... (Act No. 496 as amended)

7. One last point raised by respondent corporation in support of the appealed decision is an
1842 ruling of the Supreme Court of Pennsylvania in Cassiday v. McKenzie wherein
payments made to an agent after the death of the principal were held to be "good", "the
parties being ignorant of the death". Let us take note that the Opinion of Justice Rogers was
premised on the statement that the parties were ignorant of the death of the principal. We
quote from that decision the following:
 ... Here the precise point is, whether a payment to an agent when the Parties
are ignorant of the death is a good payment. in addition to the case in
Campbell before cited, the same judge Lord Ellenboruogh, has decided in 5
Esp. 117, the general question that a payment after the death of principal is
not good. Thus, a payment of sailor's wages to a person having a power of
attorney to receive them, has been held void when the principal was dead at
the time of the payment. If, by this case, it is meant merely to decide the
general proposition that by operation of law the death of the principal is a
revocation of the powers of the attorney, no objection can be taken to it. But if
it intended to say that his principle applies where there was 110 notice of
death, or opportunity of twice I must be permitted to dissent from it.

... That a payment may be good today, or bad tomorrow, from the accident
circumstance of the death of the principal, which he did not know, and which
by no possibility could he know? It would be unjust to the agent and unjust to
the debtor. In the civil law, the acts of the agent, done bona fide in ignorance
of the death of his principal are held valid and binding upon the heirs of the
latter. The same rule holds in the Scottish law, and I cannot believe the
common law is so unreasonable... (39 Am. Dec. 76, 80, 81; emphasis
supplied)

To avoid any wrong impression which the Opinion in Cassiday v. McKenzie may evoke,
mention may be made that the above represents the minority view in American
jurisprudence. Thus in Clayton v. Merrett, the Court said.—

There are several cases which seem to hold that although, as a general
principle, death revokes an agency and renders null every act of the agent
thereafter performed, yet that where a payment has been made in ignorance
of the death, such payment will be good. The leading case so holding is that
of Cassiday v. McKenzie, 4 Watts & S. (Pa) 282, 39 Am. 76, where, in an
elaborate opinion, this view ii broadly announced. It is referred to, and seems
to have been followed, in the case of Dick v. Page,17 Mo. 234, 57 AmD 267;
but in this latter case it appeared that the estate of the deceased principal
had received the benefit of the money paid, and therefore the representative
of the estate might well have been held to be estopped from suing for it
again. . . . These cases, in so far, at least, as they announce the doctrine
under discussion, are exceptional. The Pennsylvania Case, supra (Cassiday
v. McKenzie 4 Watts & S. 282, 39 AmD 76), is believed to stand almost, if not
quite, alone in announcing the principle in its broadest scope. (52, Misc. 353,
357, cited in 2 C.J. 549)

So also in Travers v. Crane, speaking of Cassiday v. McKenzie, and pointing out that the
opinion, except so far as it related to the particular facts, was a mere dictum, Baldwin J. said:

The opinion, therefore, of the learned Judge may be regarded more as an

extrajudicial indication of his views on the general subject, than as the
adjudication of the Court upon the point in question. But accordingly all power
weight to this opinion, as the judgment of a of great respectability, it stands
alone among common law authorities and is opposed by an array too
formidable to permit us to following it. (15 Cal. 12,17, cited in 2 C.J. 549)
Whatever conflict of legal opinion was generated by Cassiday v. McKenzie in American
jurisprudence, no such conflict exists in our own for the simple reason that our statute, the
Civil Code, expressly provides for two exceptions to the general rule that death of the
principal revokes ipso jure the agency, to wit: (1) that the agency is coupled with an interest
(Art 1930), and (2) that the act of the agent was executed without knowledge of the death of
the principal and the third person who contracted with the agent acted also in good faith (Art.
1931). Exception No. 2 is the doctrine followed in Cassiday, and again We stress the
indispensable requirement that the agent acted without knowledge or notice of the death of
the principal In the case before Us the agent Ramon Rallos executed the sale
notwithstanding notice of the death of his principal Accordingly, the agent's act is
unenforceable against the estate of his principal.

IN VIEW OF ALL THE FOREGOING, We set aside the ecision of respondent appellate court,
and We affirm en toto the judgment rendered by then Hon. Amador E. Gomez of the Court of
First Instance of Cebu, quoted in pages 2 and 3 of this Opinion, with costs against
respondent realty corporation at all instances.

So Ordered.

Teehankee (Chairman), Makasiar, Fernandez and Guerrero, JJ., concur.

G.R. No. 76931 May 29, 1991

ORIENT AIR SERVICES & HOTEL REPRESENTATIVES, petitioner, 

vs.
COURT OF APPEALS and AMERICAN AIR-LINES INCORPORATED, respondents.

G.R. No. 76933 May 29, 1991

AMERICAN AIRLINES, INCORPORATED, petitioner, 

vs.
COURT OF APPEALS and ORIENT AIR SERVICES & HOTEL REPRESENTATIVES,
INCORPORATED,respondents.

Francisco A. Lava, Jr. and Andresito X. Fornier for Orient Air Service and Hotel
Representatives, Inc.

Sycip, Salazar, Hernandez & Gatmaitan for American Airlines, Inc.

PADILLA, J.:p

This case is a consolidation of two (2) petitions for review on certiorari of a decision 1 of the
Court of Appeals in CA-G.R. No. CV-04294, entitled "American Airlines, Inc. vs. Orient Air
Services and Hotel Representatives, Inc." which affirmed, with modification, the decision 2 of
the Regional Trial Court of Manila, Branch IV, which dismissed the complaint and granted
therein defendant's counterclaim for agent's overriding commission and damages.

The antecedent facts are as follows:

On 15 January 1977, American Airlines, Inc. (hereinafter referred to as American Air), an air
carrier offering passenger and air cargo transportation in the Philippines, and Orient Air
Services and Hotel Representatives (hereinafter referred to as Orient Air), entered into a
General Sales Agency Agreement (hereinafter referred to as the Agreement), whereby the
former authorized the latter to act as its exclusive general sales agent within the Philippines
for the sale of air passenger transportation. Pertinent provisions of the agreement are
reproduced, to wit:

WITNESSETH

In consideration of the mutual convenants herein contained, the parties

hereto agree as follows:

1. Representation of American by Orient Air Services

Orient Air Services will act on American's behalf as its exclusive General
Sales Agent within the Philippines, including any United States military
installation therein which are not serviced by an Air Carrier Representation
Office (ACRO), for the sale of air passenger transportation. The services to
be performed by Orient Air Services shall include:

(a) soliciting and promoting passenger traffic for the services

of American and, if necessary, employing staff competent and
sufficient to do so;

(b) providing and maintaining a suitable area in its place of

business to be used exclusively for the transaction of the
business of American;

(c) arranging for distribution of American's timetables, tariffs

and promotional material to sales agents and the general
public in the assigned territory;

(d) servicing and supervising of sales agents (including such

sub-agents as may be appointed by Orient Air Services with
the prior written consent of American) in the assigned territory
including if required by American the control of remittances
and commissions retained; and

(e) holding out a passenger reservation facility to sales

agents and the general public in the assigned territory.

In connection with scheduled or non-scheduled air passenger transportation

within the United States, neither Orient Air Services nor its sub-agents will
perform services for any other air carrier similar to those to be performed
hereunder for American without the prior written consent of American.
Subject to periodic instructions and continued consent from American, Orient
Air Services may sell air passenger transportation to be performed within the
United States by other scheduled air carriers provided American does not
provide substantially equivalent schedules between the points involved.

xxx xxx xxx

4. Remittances

Orient Air Services shall remit in United States dollars to American the ticket
stock or exchange orders, less commissions to which Orient Air Services is
entitled hereunder, not less frequently than semi-monthly, on the 15th and
last days of each month for sales made during the preceding half month.

All monies collected by Orient Air Services for transportation sold hereunder
on American's ticket stock or on exchange orders, less applicable
commissions to which Orient Air Services is entitled hereunder, are the
property of American and shall be held in trust by Orient Air Services until
satisfactorily accounted for to American.

5. Commissions

American will pay Orient Air Services commission on transportation sold

hereunder by Orient Air Services or its sub-agents as follows:

(a) Sales agency commission

American will pay Orient Air Services a sales agency commission for all sales
of transportation by Orient Air Services or its sub-agents over American's
services and any connecting through air transportation, when made on
American's ticket stock, equal to the following percentages of the tariff fares
and charges:

(i) For transportation solely between points within the United

States and between such points and Canada: 7% or such
other rate(s) as may be prescribed by the Air Traffic
Conference of America.

(ii) For transportation included in a through ticket covering

transportation between points other than those described
above: 8% or such other rate(s) as may be prescribed by the
International Air Transport Association.

(b) Overriding commission

In addition to the above commission American will pay Orient Air Services an
overriding commission of 3% of the tariff fares and charges for all sales of
transportation over American's service by Orient Air Service or its sub-
agents.

xxx xxx xxx

 10. Default

If Orient Air Services shall at any time default in observing or performing any
of the provisions of this Agreement or shall become bankrupt or make any
assignment for the benefit of or enter into any agreement or promise with its
creditors or go into liquidation, or suffer any of its goods to be taken in
execution, or if it ceases to be in business, this Agreement may, at the option
of American, be terminated forthwith and American may, without prejudice to
any of its rights under this Agreement, take possession of any ticket forms,
exchange orders, traffic material or other property or funds belonging to
American.

11. IATA and ATC Rules

The provisions of this Agreement are subject to any applicable rules or

resolutions of the International Air Transport Association and the Air Traffic
Conference of America, and such rules or resolutions shall control in the
event of any conflict with the provisions hereof.

xxx xxx xxx

13. Termination

American may terminate the Agreement on two days' notice in the event
Orient Air Services is unable to transfer to the United States the funds
payable by Orient Air Services to American under this Agreement. Either
party may terminate the Agreement without cause by giving the other 30
days' notice by letter, telegram or cable.

xxx xxx xxx 3

On 11 May 1981, alleging that Orient Air had reneged on its obligations under the
Agreement by failing to promptly remit the net proceeds of sales for the months of January to
March 1981 in the amount of US $254,400.40, American Air by itself undertook the collection
of the proceeds of tickets sold originally by Orient Air and terminated forthwith the Agreement
in accordance with Paragraph 13 thereof (Termination). Four (4) days later, or on 15 May
1981, American Air instituted suit against Orient Air with the Court of First Instance of Manila,
Branch 24, for Accounting with Preliminary Attachment or Garnishment, Mandatory
Injunction and Restraining Order 4 averring the aforesaid basis for the termination of the
Agreement as well as therein defendant's previous record of failures "to promptly settle past
outstanding refunds of which there were available funds in the possession of the defendant, .
. . to the damage and prejudice of plaintiff." 5

In its Answer 6 with counterclaim dated 9 July 1981, defendant Orient Air denied the material
allegations of the complaint with respect to plaintiff's entitlement to alleged unremitted
amounts, contending that after application thereof to the commissions due it under the
Agreement, plaintiff in fact still owed Orient Air a balance in unpaid overriding commissions.
Further, the defendant contended that the actions taken by American Air in the course of
terminating the Agreement as well as the termination itself were untenable, Orient Air
claiming that American Air's precipitous conduct had occasioned prejudice to its business
interests.
Finding that the record and the evidence substantiated the allegations of the defendant, the
trial court ruled in its favor, rendering a decision dated 16 July 1984, the dispositive portion of
which reads:

WHEREFORE, all the foregoing premises considered, judgment is hereby

rendered in favor of defendant and against plaintiff dismissing the complaint
and holding the termination made by the latter as affecting the GSA
agreement illegal and improper and order the plaintiff to reinstate defendant
as its general sales agent for passenger tranportation in the Philippines in
accordance with said GSA agreement; plaintiff is ordered to pay defendant
the balance of the overriding commission on total flown revenue covering the
period from March 16, 1977 to December 31, 1980 in the amount of
US$84,821.31 plus the additional amount of US$8,000.00 by way of proper
3% overriding commission per month commencing from January 1, 1981 until
such reinstatement or said amounts in its Philippine peso equivalent legally
prevailing at the time of payment plus legal interest to commence from the
filing of the counterclaim up to the time of payment. Further, plaintiff is
directed to pay defendant the amount of One Million Five Hundred Thousand
(Pl,500,000.00) pesos as and for exemplary damages; and the amount of
Three Hundred Thousand (P300,000.00) pesos as and by way of attorney's
fees.

Costs against plaintiff. 7

On appeal, the Intermediate Appellate Court (now Court of Appeals) in a decision

promulgated on 27 January 1986, affirmed the findings of the court a quo on their material
points but with some modifications with respect to the monetary awards granted. The
dispositive portion of the appellate court's decision is as follows:

WHEREFORE, with the following modifications —

1) American is ordered to pay Orient the sum of US$53,491.11 representing

the balance of the latter's overriding commission covering the period March
16, 1977 to December 31, 1980, or its Philippine peso equivalent in
accordance with the official rate of exchange legally prevailing on July
10, 1981, the date the counterclaim was filed;

2) American is ordered to pay Orient the sum of US$7,440.00 as the latter's

overriding commission per month starting January 1, 1981 until date of
termination, May 9, 1981 or its Philippine peso equivalent in accordance with
the official rate of exchange legally prevailing on July 10, 1981, the date the
counterclaim was filed

3) American is ordered to pay interest of 12% on said amounts from July 10,

1981 the date the answer with counterclaim was filed, until full payment;

4) American is ordered to pay Orient exemplary damages of P200,000.00;

5) American is ordered to pay Orient the sum of P25,000.00 as attorney's

fees.

the rest of the appealed decision is affirmed.

 Costs against American. 8

American Air moved for reconsideration of the aforementioned decision, assailing the
substance thereof and arguing for its reversal. The appellate court's decision was also the
subject of a Motion for Partial Reconsideration by Orient Air which prayed for the restoration
of the trial court's ruling with respect to the monetary awards. The Court of Appeals, by
resolution promulgated on 17 December 1986, denied American Air's motion and with
respect to that of Orient Air, ruled thus:

Orient's motion for partial reconsideration is denied insofar as it prays for

affirmance of the trial court's award of exemplary damages and attorney's fees,
but granted insofar as the rate of exchange is concerned. The decision of
January 27, 1986 is modified in paragraphs (1) and (2) of the dispositive part so
that the payment of the sums mentioned therein shall be at their Philippine peso
equivalent in accordance with the official rate of exchange legally prevailing on
the date of actual payment. 9

Both parties appealed the aforesaid resolution and decision of the respondent court, Orient
Air as petitioner in G.R. No. 76931 and American Air as petitioner in G.R. No. 76933. By
resolution 10 of this Court dated 25 March 1987 both petitions were consolidated, hence, the
case at bar.

The principal issue for resolution by the Court is the extent of Orient Air's right to the 3%
overriding commission. It is the stand of American Air that such commission is based only on
sales of its services actually negotiated or transacted by Orient Air, otherwise referred to as
"ticketed sales." As basis thereof, primary reliance is placed upon paragraph 5(b) of the
Agreement which, in reiteration, is quoted as follows:

5. Commissions

a) . . .

b) Overriding Commission

In addition to the above commission, American will pay Orient Air Services
an overriding commission of 3% of the tariff fees and charges for all sales of
transportation over American's services by Orient Air Services or its sub-
agents. (Emphasis supplied)

Since Orient Air was allowed to carry only the ticket stocks of American Air, and the former
not having opted to appoint any sub-agents, it is American Air's contention that Orient Air
can claim entitlement to the disputed overriding commission based only on ticketed sales.
This is supposed to be the clear meaning of the underscored portion of the above provision.
Thus, to be entitled to the 3% overriding commission, the sale must be made by Orient Air
and the sale must be done with the use of American Air's ticket stocks.

On the other hand, Orient Air contends that the contractual stipulation of a 3% overriding
commission covers the total revenue of American Air and not merely that derived from
ticketed sales undertaken by Orient Air. The latter, in justification of its submission, invokes
its designation as the exclusive General Sales Agent of American Air, with the corresponding
obligations arising from such agency, such as, the promotion and solicitation for the services
of its principal. In effect, by virtue of such exclusivity, "all sales of transportation over
American Air's services are necessarily by Orient Air." 11

It is a well settled legal principle that in the interpretation of a contract, the entirety thereof
must be taken into consideration to ascertain the meaning of its provisions. 12 The various
stipulations in the contract must be read together to give effect to all. 13 After a careful
examination of the records, the Court finds merit in the contention of Orient Air that the
Agreement, when interpreted in accordance with the foregoing principles, entitles it to the 3%
overriding commission based on total revenue, or as referred to by the parties, "total flown
revenue."

As the designated exclusive General Sales Agent of American Air, Orient Air was
responsible for the promotion and marketing of American Air's services for air passenger
transportation, and the solicitation of sales therefor. In return for such efforts and services,
Orient Air was to be paid commissions of two (2) kinds: first, a sales agency commission,
ranging from 7-8% of tariff fares and charges from sales by Orient Air when made on
American Air ticket stock; and second, an overriding commission of 3% of tariff fares and
charges for all sales of passenger transportation over American Air services. It is
immediately observed that the precondition attached to the first type of commission does not
obtain for the second type of commissions. The latter type of commissions would accrue for
sales of American Air services made not on its ticket stock but on the ticket stock of other air
carriers sold by such carriers or other authorized ticketing facilities or travel agents. To rule
otherwise, i.e., to limit the basis of such overriding commissions to sales from American Air
ticket stock would erase any distinction between the two (2) types of commissions and would
lead to the absurd conclusion that the parties had entered into a contract with meaningless
provisions. Such an interpretation must at all times be avoided with every effort exerted to
harmonize the entire Agreement.

An additional point before finally disposing of this issue. It is clear from the records that
American Air was the party responsible for the preparation of the Agreement. Consequently,
any ambiguity in this "contract of adhesion" is to be taken "contra proferentem", i.e.,
construed against the party who caused the ambiguity and could have avoided it by the
exercise of a little more care. Thus, Article 1377 of the Civil Code provides that the
interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the
obscurity. 14 To put it differently, when several interpretations of a provision are otherwise
equally proper, that interpretation or construction is to be adopted which is most favorable to
the party in whose favor the provision was made and who did not cause the ambiguity. 15 We
therefore agree with the respondent appellate court's declaration that:

Any ambiguity in a contract, whose terms are susceptible of different

interpretations, must be read against the party who drafted it. 16

We now turn to the propriety of American Air's termination of the Agreement. The respondent
appellate court, on this issue, ruled thus:

It is not denied that Orient withheld remittances but such action finds
justification from paragraph 4 of the Agreement, Exh. F, which provides for
remittances to American less commissions to which Orient is entitled, and
from paragraph 5(d) which specifically allows Orient to retain the full amount
of its commissions. Since, as stated ante, Orient is entitled to the 3%
 override. American's premise, therefore, for the cancellation of the
Agreement did not exist. . . ."

We agree with the findings of the respondent appellate court. As earlier established, Orient
Air was entitled to an overriding commission based on total flown revenue. American Air's
perception that Orient Air was remiss or in default of its obligations under the Agreement
was, in fact, a situation where the latter acted in accordance with the Agreement—that of
retaining from the sales proceeds its accrued commissions before remitting the balance to
American Air. Since the latter was still obligated to Orient Air by way of such commissions.
Orient Air was clearly justified in retaining and refusing to remit the sums claimed by
American Air. The latter's termination of the Agreement was, therefore, without cause and
basis, for which it should be held liable to Orient Air.

On the matter of damages, the respondent appellate court modified by reduction the trial
court's award of exemplary damages and attorney's fees. This Court sees no error in such
modification and, thus, affirms the same.

It is believed, however, that respondent appellate court erred in affirming the rest of the
decision of the trial court. We refer particularly to the lower court's decision ordering
American Air to "reinstate defendant as its general sales agent for passenger transportation
in the Philippines in accordance with said GSA Agreement."

By affirming this ruling of the trial court, respondent appellate court, in effect, compels
American Air to extend its personality to Orient Air. Such would be violative of the principles
and essence of agency, defined by law as a contract whereby "a person binds himself to
render some service or to do something in representation or on behalf of another, WITH THE
CONSENT OR AUTHORITY OF THE LATTER . 17 (emphasis supplied) In an agent-principal
relationship, the personality of the principal is extended through the facility of the agent. In so
doing, the agent, by legal fiction, becomes the principal, authorized to perform all acts which
the latter would have him do. Such a relationship can only be effected with the consent of the
principal, which must not, in any way, be compelled by law or by any court. The Agreement
itself between the parties states that "either party may terminate the Agreement without
cause by giving the other 30 days' notice by letter, telegram or cable." (emphasis supplied)
We, therefore, set aside the portion of the ruling of the respondent appellate court reinstating
Orient Air as general sales agent of American Air.

WHEREFORE, with the foregoing modification, the Court AFFIRMS the decision and
resolution of the respondent Court of Appeals, dated 27 January 1986 and 17 December
1986, respectively. Costs against petitioner American Air.

SO ORDERED.

Melencio-Herrera, and Regalado

[G.R. No. 120465.  September 9, 1999]

WILLIAM UY and RODEL ROXAS, petitioners, vs. COURT OF

APPEALS, HON. ROBERT BALAO and NATIONAL HOUSING
AUTHORITY, respondents.
 DECISION

KAPUNAN, J.:

Petitioners William Uy and Rodel Roxas are agents authorized to sell

eight parcels of land by the owners thereof.  By virtue of such
authority, petitioners offered to sell the lands, located in Tuba,
Tadiangan, Benguet to respondent National Housing Authority (NHA)
to be utilized and developed as a housing project.

On February 14, 1989, the NHA Board passed Resolution No. 1632
approving the acquisition of said lands, with an area of 31.8231
hectares, at the cost of P23.867 million, pursuant to which the parties
executed a series of Deeds of Absolute Sale covering the subject
lands.  Of the eight parcels of land, however, only five were paid for by
the NHA because of the report[1] it received from the Land
Geosciences Bureau of the Department of Environment and Natural
Resources (DENR) that the remaining area is located at an active
landslide area and therefore, not suitable for development into a
housing project.

On 22 November 1991, the NHA issued Resolution No. 2352 cancelling

the sale over the three parcels of land.  The NHA, through Resolution
No. 2394, subsequently offered the amount of P1.225 million to the
landowners as daños perjuicios.

On 9 March 1992, petitioners filed before the Regional Trial Court

(RTC) of Quezon City a Complaint for Damages against NHA and its
General Manager Robert Balao.

After trial, the RTC rendered a decision declaring the cancellation of

the contract to be justified.  The trial court nevertheless awarded
damages to plaintiffs in the sum of P1.255 million, the same amount
initially offered by NHA to petitioners as damages.

Upon appeal by petitioners, the Court of Appeals reversed the decision

of the trial court and entered a new one dismissing the complaint.  It
held that since there was “sufficient justifiable basis” in cancelling the
sale, “it saw no reason” for the award of damages.  The Court of
Appeals also noted that petitioners were mere attorneys-in-fact and,
therefore, not the real parties-in-interest in the action before the trial
court.
xxx In paragraph 4 of the complaint, plaintiffs alleged themselves to
be “sellers’ agents” for several owners of the 8 lots subject matter of
the case.  Obviously, William Uy and Rodel Roxas in filing this case
acted as attorneys-in-fact of the lot owners who are the real parties in
interest but who were omitted to be pleaded as party-plaintiffs in the
case.  This omission is fatal.  Where the action is brought by an
attorney-in-fact of a land owner in his name, (as in our present action)
and not in the name of his principal, the action was properly dismissed
(Ferrer vs. Villamor, 60 SCRA 406 [1974]; Marcelo vs. de Leon, 105
Phil. 1175) because the rule is that every action must be prosecuted in
the name of the real parties-in-interest (Section 2, Rule 3, Rules of
Court).

When plaintiffs Uy and Roxas sought payment of damages in their

favor in view of the partial rescission of Resolution No. 1632 and the
Deed of Absolute Sale covering TCT Nos. 10998, 10999 and 11292
(Prayer complaint, page 5, RTC records), it becomes obviously
indispensable that the lot owners be included, mentioned and named
as party-plaintiffs, being the real party-in-interest.  Uy and Roxas, as
attorneys-in-fact or apoderados, cannot by themselves lawfully
commence this action, more so, when the supposed special power of
attorney, in their favor, was never presented as an evidence in this
case.  Besides, even if herein plaintiffs Uy and Roxas were authorized
by the lot owners to commence this action, the same must still be filed
in the name of the pricipal, (Filipino Industrial Corporation vs. San
Diego, 23 SCRA 706 [1968]).  As such indispensable party, their
joinder in the action is mandatory and the complaint may be dismissed
if not so impleaded (NDC vs. CA, 211 SCRA 422 [1992]).[2]

Their motion for reconsideration having been denied, petitioners seek

relief from this Court contending that:

I.   COMPLAINT FINDING THE RESPONDENT CA ERRED IN DECLARING

THAT RESPONDENT NHA HAD ANY LEGAL BASIS FOR RESCINDING
THE SALE INVOLVING THE LAST THREE (3) PARCELS COVERED BY
NHA RESOLUTION NO. 1632.

II. GRANTING ARGUENDO THAT THE RESPONDENT NHA HAD LEGAL

BASIS TO RESCIND THE SUBJECT SALE, THE RESPONDENT CA
NONETHELESS ERRED IN DENYING HEREIN PETITIONERS’ CLAIM TO
DAMAGES, CONTRARY TO THE PROVISIONS OF ART. 1191 OF THE
CIVIL CODE.
III.            THE RESPONDENT CA ERRED IN DISMISSING THE
SUBJECT COMPLAINT FINDING THAT THE PETITIONERS FAILED TO
JOIN AS INDISPENSABLE PARTY PLAINTIFF THE SELLING LOT-
OWNERS.[3]

We first resolve the issue raised in the third assignment of error.

Petitioners claim that they lodged the complaint not in behalf of their
principles but in their own name as agents directly damaged by the
termination of the contract.  The damages prayed for were intended
not for the benefit of their principals but to indemnify petitioners for
the losses they themselves allegedly incurred as a result of such
termination.  These damages consist mainly of “unearned income” and
advances.[4] Petitioners, thus, attempt to distinguish the case at bar
from those involving agents or apoderados instituting actions in their
own name but in behalf of their principals.[5] Petitioners in this case
purportedly brought the action for damages in their own name and in
their own behalf.

We find this contention unmeritorious.

Section 2, Rule 3 of the Rules of Court requires that every action must
be prosecuted and defended in the name of the real party-in-interest. 
The real party-in-interest is the party who stands to be benefited or
injured by the judgment or the party entitled to the avails of the suit. 
“Interest,” within the meaning of the rule, means material interest, an
interest in the issue and to be affected by the decree, as distinguished
from mere interest in the question involved, or a mere incidental
interest.[6] Cases construing the real party-in-interest provision can
be more easily understood if it is borne in mind that the true meaning
of real party-in-interest may be summarized as follows:  An action
shall be prosecuted in the name of the party who, by the substantive
law, has the right sought to be enforced.[7]

Do petitioners, under substantive law, possess the right they seek to

enforce?  We rule in the negative.

The applicable substantive law in this case is Article 1311 of the Civil
Code, which states:

Contracts take effect only between the parties, their assigns,

and heirs, except in case where the rights and obligations arising from
the contract are not transmissible by their nature, or by stipulation, or
by provision of law.  x x x.
If a contract should contain some stipulation in favor of a third
person, he may demand its fulfillment provided he communicated his acceptance
to the obligor before its revocation.  A mere incidental benefit or interest of a person is not
sufficient.  The contracting parties must have clearly and deliberately conferred a favor upon a
third person.  (Underscoring supplied.)

Petitioners are not parties to the contract of sale between their

principals and NHA.  They are mere agentsin representation or on
behalf of their principals.[8] The rendering of such service did not
make them parties to the contracts of sale executed in behalf of the
latter.  Since a contract may be violated only by the parties thereto as
against each other, the real parties-in-interest, either as plaintiff or
defendant, in an action upon that contract must, generally, either be
parties to said contract.[9] of the owners of the land subject of the sale.  As agents,
they only render some service or do something

Neither has there been any allegation, much less proof, that
petitioners are the heirs of their principals.

Are petitioners assignees to the rights under the contracts of sale? 

In McMicking vs. Banco Español-Filipino,[10] we held that the rule
requiring every action to be prosecuted in the name of the real party-
in-interest

x x x recognizes the assignments of rights of action and also

recognizes that when one has a right of action assigned to him he is
then the real party in interest and may maintain an action upon such
claim or right.  The purpose of [this rule] is to require the plaintiff to
be the real party in interest, or, in other words, he must be the person
to whom the proceeds of the action shall belong, and to prevent
actions by persons who have no interest in the result of the same.  xxx

Thus, an agent, in his own behalf, may bring an action founded on a

contract made for his principal, as an assignee of such contract.  We
find the following declaration in Section 372 (1) of the Restatement of
the Law on Agency (Second):[11]

Section 372.  Agent as Owner of Contract Right

(1) Unless otherwise agreed, an agent who has or who acquires an

interest in a contract which he makes on behalf of his principal can,
although not a promisee, maintain such action thereon as might a
transferee having a similar interest.

The Comment on subsection (1) states:

a.  Agent a transferee.  One who has made a contract on behalf of
another may become an assignee of the contract and bring suit
against the other party to it, as any other transferee.  The customs of
business or the course of conduct between the principal and the agent
may indicate that an agent who ordinarily has merely a security
interest is a transferee of the principals rights under the contract and
as such is permitted to bring suit.  If the agent has settled with his
principal with the understanding that he is to collect the claim against
the obligor by way of reimbursing himself for his advances and
commissions, the agent is in the position of an assignee who is the
beneficial owner of the chose in action.  He has an irrevocable power
to sue in his principal’s name.  x x x.  And, under the statutes which
permit the real party in interest to sue, he can maintain an action in
his own name.  This power to sue is not affected by a settlement
between the principal and the obligor if the latter has notice of the
agent’s interest.  x x x.  Even though the agent has not settled with
his principal, he may, by agreement with the principal, have a right to
receive payment and out of the proceeds to reimburse himself for
advances and commissions before turning the balance over to the
principal.  In such a case, although there is no formal assignment, the
agent is in the position of a transferee of the whole claim for security;
he has an irrevocable power to sue in his principal’s name and, under
statutes which permit the real party in interest to sue, he can maintain
an action in his own name.

Petitioners, however, have not shown that they are assignees of their
principals to the subject contracts.  While they alleged that they made
advances and that they suffered loss of commissions, they have not
established any agreement granting them “the right to receive
payment and out of the proceeds to reimburse [themselves] for
advances and commissions before turning the balance over to the
principal[s].”

Finally, it does not appear that petitioners are beneficiaries of a

stipulation pour autrui under the second paragraph of Article 1311
of the Civil Code.  Indeed, there is no stipulation in any of the Deeds of
Absolute Sale “clearly and deliberately” conferring a favor to any third
person.

That petitioners did not obtain their commissions or recoup their

advances because of the non-performance of the contract did not
entitle them to file the action below against respondent NHA.  Section
372 (2) of the Restatement of the Law on Agency (Second) states:
(2)  An agent does not have such an interest in a contract as to entitle
him to maintain an action at law upon it in his own name merely
because he is entilted to a portion of the proceeds as compensation for
making it or because he is liable for its breach.

The following Comment on the above subsection is illuminating:

The fact that an agent who makes a contract for his principal will gain
or suffer loss by the performance or nonperformance of the contract
by the principal or by the other party thereto does not entitle him to
maintain an action on his own behalf against the other party for its
breach.  An agent entitled to receive a commission from his principal
upon the performance of a contract which he has made on his
principal’s account does not, from this fact alone, have any claim
against the other party for breach of the contract, either in an action
on the contract or otherwise.  An agent who is not a promisee cannot
maintain an action at law against a purchaser merely because he is
entitled to have his compensation or advances paid out of the
purchase price before payment to the principal.  x x x.

Thus, in Hopkins vs. Ives,[12] the Supreme Court of Arkansas, citing

Section 372 (2) above, denied the claim of a real estate broker to
recover his alleged commission against the purchaser in an agreement
to purchase property.

In Goduco vs. Court of Appeals,[13] this Court held that:

x x x granting that appellant had the authority to sell the property, the
same did not make the buyer liable for the commission she claimed. 
At most, the owner of the property and the one who promised to give
her a commission should be the one liable to pay the same and to
whom the claim should have been directed.  xxx

As petitioners are not parties, heirs, assignees, or beneficiaries of a

stipulation pour autrui under the contracts of sale, they do not, under
substantive law, possess the right they seek to enforce.  Therefore,
they are not the real parties-in-interest in this case.

Petitioners not being the real parties-in-interest, any decision rendered

herein would be pointless since the same would not bind
the real parties-in-interest.[14]

Nevertheless, to forestall further litigation on the substantive aspects

of this case, we shall proceed to rule on the merits.[15]
Petitioners submit that respondent NHA had no legal basis to “rescind”
the sale of the subject three parcels of land.  The existence of such
legal basis, notwithstanding, petitioners argue that they are still
entitled to an award of damages.

Petitioners confuse the cancellation of the contract by the NHA as a

rescission of the contract under Article 1191 of the Civil Code.  The
right of rescission or, more accurately, resolution, of a party to an
obligation under Article 1191 is predicated on a breach of faith by the
other party that violates the reciprocity between them.[16] The power
to rescind, therefore, is given to the injured party.[17] Article 1191
states:

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 injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in either
case.  He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.

In this case, the NHA did not rescind the contract.  Indeed, it did not
have the right to do so for the other parties to the contract, the
vendors, did not commit any breach, much less a substantial breach,
[18] of their obligation.  Their obligation was merely to deliver the
parcels of land to the NHA, an obligation that they fulfilled.  The NHA
did not suffer any injury by the performance thereof.

The cancellation, therefore, was not a rescission under Article 1191. 

Rather, the cancellation was based on the negation of the cause
arising from the realization that the lands, which were the object of
the sale, were not suitable for housing.

Cause is the essential reason which moves the contracting parties to

enter into it.[19] In other words, the cause is the immediate, direct
and proximate reason which justifies the creation of an obligation
through the will of the contracting parties.[20] Cause, which is the
essential reason for the contract, should be distinguished from motive,
which is the particular reason of a contracting party which does not
affect the other party.[21]

For example, in a contract of sale of a piece of land, such as in this

case, the cause of the vendor (petitioner’s principals) in entering into
the contract is to obtain the price.  For the vendee, NHA, it is the
acquisition of the land.[22] The motiveof the NHA, on the other hand,
is to use said lands for housing.  This is apparent from the portion of
the Deeds of Absolute Sale[23] stating:

WHEREAS, under the Executive Order No. 90 dated December 17,

1986, the VENDEE is mandated to focus and concentrate its efforts
and resources in providing housing assistance to the lowest thirty
percent (30%) of urban income earners, thru slum upgrading and
development of sites and services projects;

WHEREAS, Letters of Instructions Nos. 555 and 557 [as] amended by

Letter of Instruction No. 630, prescribed slum improvement and
upgrading, as well as the development of sites and services as the
principal housing strategy for dealing with slum, squatter and other
blighted communities;

xxx

WHEREAS, the VENDEE, in pursuit of and in compliance with the

above-stated purposes offers to buy and the VENDORS, in a gesture of
their willing to cooperate with the above policy and commitments,
agree to sell the aforesaid property together with all the existing
improvements there or belonging to the VENDORS;

NOW, THEREFORE, for and in consideration of the foregoing premises

and the terms and conditions hereinbelow stipulated, the VENDORS
hereby, sell, transfer, cede and convey unto the VENDEE, its assigns,
or successors-in-interest, a parcel of land located at Bo. Tadiangan,
Tuba, Benguet containing a total area of FIFTY SIX THOUSAND EIGHT
HUNDRED NINETEEN (56,819) SQUARE METERS, more or less x x x.

Ordinarily, a party’s motives for entering into the contract do not affect
the contract.  However, when the motive predetermines the cause, the
motive may be regarded as the cause.  In Liguez vs. Court of Appeals,
[24] this Court, speaking through Justice J.B.L. Reyes, held:

xxx It is well to note, however, that Manresa himself (Vol. 8, pp. 641-
642) while maintaining the distinction and upholding the
inoperativeness of the motives of the parties to determine the validity
of the contract, expressly excepts from the rule those contracts that
are conditioned upon the attainment of the motives of either party.
The same view is held by the Supreme Court of Spain, in its decisions
of February 4, 1941, and December 4, 1946, holding that the motive
may be regarded as causa when it predetermines the purpose of the
contract.

In this case, it is clear, and petitioners do not dispute, that NHA would
not have entered into the contract were the lands not suitable for
housing.  In other words, the quality of the land was an implied
condition for the NHA to enter into the contract.  On the part of the
NHA, therefore, the motive was the cause for its being a party to the
sale.

Were the lands indeed unsuitable for the housing as NHA claimed?

We deem the findings contained in the report of the Land Geosciences

Bureau dated 15 July 1991 sufficient basis for the cancellation of the
sale, thus:

In Tadiangan, Tuba, the housing site is situated in an area of moderate

topography.  There [are] more areas of less sloping ground apparently
habitable.  The site is underlain by x x x thick slide deposits (4-45m)
consisting of huge conglomerate boulders (see Photo No. 2) mix[ed]
with silty clay materials.  These clay particles when saturated have
some swelling characteristics which is dangerous for any civil
structures especially mass housing development.[25]

Petitioners content that the report was merely “preliminary,” and not
conclusive, as indicated in its title:

MEMORANDUM

TO:                       EDWIN G. DOMINGO

Chief, Lands Geology Division

FROM:      ARISTOTLE A. RILLON

Geologist II

SUBJECT:            Preliminary Assessment of Tadiangan Housing

Project in Tuba, Benguet[26]

Thus, page 2 of the report states in part:

xxx

Actually there is a need to conduct further geottechnical [sic] studies

in the NHA property. Standard Penetration Test (SPT) must be carried
out to give an estimate of the degree of compaction (the relative
density) of the slide deposit and also the bearing capacity of the soil
materials.  Another thing to consider is the vulnerability of the area to
landslides and other mass movements due to thick soil cover. 
Preventive physical mitigation methods such as surface and subsurface
drainage and regrading of the slope must be done in the area.[27]

We read the quoted portion, however, to mean only that further tests
are required to determine the “degree of compaction,” “the bearing
capacity of the soil materials,” and “vulnerability of the area to
landslides,” since the tests already conducted were inadequate to
ascertain such geological attributes.  It is only in this sense that the
assessment was “preliminary.”

Accordingly, we hold that the NHA was justified in cancelling the

contract.  The realization of the mistake as regards the quality of the
land resulted in the negation of the motive/cause thus rendering the
contract inexistent.[28] Article 1318 of the Civil Code states that:

Art. 1318.  There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established. (Underscoring

supplied.)

Therefore, assuming that petitioners are parties, assignees or

beneficiaries to the contract of sale, they would not be entitled to any
award of damages.

WHEREFORE, the instant petition is hereby DENIED.

SO ORDERED.

Davide, C.J., (Chairman), on leave.

Puno, Pardo, and Ynares-Santiago, JJ., concur.