CIVIL PROCEDURE Cases 65-66

FULL TEXT (DIGEST IS NEXT TO THE FULL TEXT)

FIRST DIVISION

[G.R. No. 136913. May 12, 2000]

ANITA C. BUCE, petitioner, vs. THE HONORABLE COURT OF APPEALS, SPS. BERNARDO C. TIONGCO and
ARACELI TIONGCO, SPS. DIONISIO TIONGCO and LUCILA TIONGCO, and JOSE M. TIONGCO,
respondents.

DECISION

DAVIDE, JR., C.J.: Ncm

The basic issue in this petition is whether the parties intended an automatic renewal of the lease
contract when they agreed that the lease shall be for a period of fifteen years "subject to renewal for
another ten (10) years."

Petitioner leased a 56-square meter parcel of land located at 2068 Quirino Avenue, Pandacan, Manila.
The lease contract was for a period of fifteen years to commence on 1 June 1979 and to end on 1 June
1994 "subject to renewal for another ten (10) years, under the same terms and conditions ." Petitioner
then constructed a building and paid the required monthly rental of P200. Private respondents, through
their administrator Jose Tiongco, later demanded a gradual increase in the rental until it reached P400 in
1985. For July and August 1991, petitioner paid private respondents P1,000 as monthly rental.

On 6 December 1991, private respondents counsel wrote petitioner informing her of the increase in the
rent to P1,576.58 effective January 1992 pursuant to the provisions of the Rent Control Law. Petitioner,
however, tendered checks dated 5 October 1991 5 November 1991, 5 December 1991, 5 January 1992,
31 May 1992, and 2 January 1993 for only P400 each, payable to Jose Tiongco as administrator. As might
be expected, private respondents refused to accept the same.

On 9 August 1993, petitioner filed with the Regional Trial Court of Manila a complaint for specific
performance with prayer for consignation, which was docketed as Civil Case No. 93-67135. She prayed
that private respondents be ordered to accept the rentals in accordance with the lease contract and to
respect the lease of fifteen years, which was renewable for another ten years, at the rate of P200 a
month.

In their Answer, private respondents countered that petitioner had already paid the monthly rent of
P1,000 for July and August 1991. Under Republic Act No. 877, as amended, rental payments should
already be P1,576.58 per month; hence, they were justified in refusing the checks for P400 that
petitioner tendered. Moreover, the phrase in the lease contract authorizing renewal for another ten
years does not mean automatic renewal; rather, it contemplates a mutual agreement between the
parties.

During the pendency of the controversy, counsel for private respondents wrote petitioner reminding her
that the contract expired on 1 June 1994 and demanding that she pay the rentals in arrears, which then
amounted to P33,000.

On 29 August 1995, the RTC declared the lease contract automatically renewed for ten years and
considered as evidence thereof (a) the stipulations in the contract giving the lessee the right to construct
buildings and improvements and (b) the filing by petitioner of the complaint almost one year before the
expiration of the initial term of fifteen years . It then fixed the monthly rent at P400 from 1 June 1990 to
1 June 1994; P1,000 from 1 June 1994 until 1 June 1999; and P1,500 for the rest of the period or from 1
June 2000 to 1 June 2004, reasoning that the continuous increase of rent from P200 to P250 then P300,
P400 and finally P1,000 caused "an inevitable novation of their contract."
On appeal, the Court of Appeals reversed the decision of the RTC , and ordered petitioner to immediately
vacate the leased premises on the ground that the contract expired on 1 June 1994 without being
renewed and to pay the rental arrearages at the rate of P1,000 monthly.

According to the Court of Appeals, the phrase in the contract "this lease shall be for a period of fifteen
(15) years effective June 1, 1979, subject to renewal for another ten (10) years, under the same terms
and conditions" is unclear as to who may exercise the option to renew. The stipulation allowing the
construction of a building and other improvements and the fact that the complaint was filed a year
before the expiration of the contract are not indicative of automatic renewal. It applied the ruling in
Fernandez v. Court of Appeals that without a stipulation that the option to renew the lease is solely for
the benefit of one party any renewal of a lease contract must be upon the agreement of the parties.
Since private respondents were not agreeable to an extension, the original term of the lease ended on 1
June 1994. Private respondents refusal to accept petitioners checks for P400 was justified because
although the original contract specified a monthly rental of P200, the tender and acceptance of the
increased rental of P1,000 novated the contract of lease; thus, petitioner was estopped from claiming
that the monthly rental is otherwise.

The Court of Appeals denied petitioners motion for reconsideration. Hence this petition.

Petitioner contends that by ordering her to vacate the premises, the Appellate Court went beyond the
bounds of its authority because the case she filed before the RTC was for "Specific Performance" not
unlawful detainer. The power to order the lessee to vacate the leased premises is lodged in another
forum. Additionally, private respondents did not pray for the ejectment of petitioners from the leased
premises in their Answer with Counterclaim; well-settled is the rule that a court cannot award relief not
prayed for in the complaint or compulsory counterclaim.

Petitioner further maintains that the phrase "renewable for another ten years at the option of both
parties" in the Fernandez case clearly indicated the intention of the parties to renew the contract only
upon mutual agreement. Whereas in this case the contract states, "[T]his lease shall be for a period of
fifteen (15) years effective June 1, 1979, subject to renewal for another ten (10) years, under the same
terms and conditions," making this stipulation subject to interpretation with due regard to the
contemporaneous and subsequent acts of the parties. The stipulation in the contract allowing the lessee
to construct buildings and improvements; her filing of the complaint a year before the expiration of the
initial 15-year term; and private respondents acceptance of the increased rental are contemporaneous
and subsequent acts that signify the intention of the parties to renew the contract.

On the other hand, private respondents aver that even if the original petition filed before the RTC was
not for unlawful detainer, the order of the Court of Appeals requiring petitioner to vacate the premises
is but a logical consequence of its finding that the lease contract had expired. To require another
litigation would constitute multiplicity of suits; besides, petitioner has no other reason to stay in the
premises. There is no basis why Fernandez should not be applied to the case at bar. Absent contrary
stipulation in reciprocal contracts, the period of lease is deemed to be for the benefit of both parti

Private respondents argue that the alleged contemporaneous and subsequent acts do not determine
the real intention of the parties as regards renewal of the lease contract. Had they intended an
automatic renewal of the lease contract they would have agreed on a 25-year period instead.
Correlatively, private respondents letter reminding petitioner of the expiration of the contract on 1 June
1994 and demanding payment of the rentals in arrears signifies that they are no longer interested in
renewing the contract. Also petitioners refusal to pay the increased rental of P1,000 as early as 1991 and
private respondents refusal to accept the P400 tendered constituted a disagreement on the rate of
rental; hence, any renewal is out of the question.

The basic issue, as agreed upon by the parties, is the correct interpretation of the contract provision
"this lease shall be for a period of fifteen (15) years effective June 1, 1979, subject to renewal for
another ten (10) years, under the same terms and conditions."

The literal meaning of the stipulations shall control if the terms of the contract are clear and leave no
doubt upon the intention of the contracting parties. However, if the terms of the agreement are
ambiguous resort is made to contract interpretation which is the determination of the meaning attached
to written or spoken words that make the contract. Also, to ascertain the true intention of the parties,
their actions, subsequent or contemporaneous, must be principally considered.

The phrase "subject to renewal for another ten (10) years" is unclear on whether the parties
contemplated an automatic renewal or extension of the term, or just an option to renew the contract;
and if what exists is the latter, who may exercise the same or for whose benefit it was stipulated.

In this jurisdiction, a fine delineation exists between renewal of the contract and extension of its period.
Generally, the renewal of a contract connotes the death of the old contract and the birth or emergence
of a new one. A clause in a lease providing for an extension operates of its own force to create an
additional term, but a clause providing for a renewal merely creates an obligation to execute a new
lease contract for the additional term. As renewal of the contract contemplates the cessation of the old
contract, then it is necessary that a new one be executed between the parties.

There is nothing in the stipulations in the contract and the parties actuation that shows that the parties
intended an automatic renewal or extension of the term of the contract. Even the RTC conceded that
the issue of automatic renewal is debatable. The fact that the lessee was allowed to introduce
improvements on the property is not indicative of the intention of the lessors to automatically extend
the contract. Considering the original 15-year duration of the contract, structures would have
necessarily been constructed, added, or built on the property, which in its previous state was an idle 56-
square meter lot in the heart of Manila. Petitioner leased the property for the purpose of turning it into
a commercial establishment and to which it has been transformed as Anitas Grocery and Store. Neither
the filing of the complaint a year before the expiration of the 15-year term nor private respondents
acceptance of the increased rentals has any bearing on the intention of the parties regarding renewal. It
must be recalled that the filing of the complaint was even spawned by private respondents refusal to
accept the payment of monthly rental in the amount of only P400.

Now on the applicability of Fernandez v. Court of Appeals to the case at bar. Although the factual
scenario in that case with regard to the renewal option is slightly off-tangent to the case under
consideration because the intention of the parties therein for future mutual agreement was clearly
discernible in their contract, we cannot completely disregard the pronouncement of this Court in that
case; thus:

[I]n a reciprocal contract like a lease, the period must be deemed to have been agreed
upon for the benefit of both parties, absent language showing that the term was
deliberately set for the benefit of the lessee or lessor alone. We are not aware of any
presumption in law that the term was deliberately set for the benefit of the lessee
alone. Koh and Cruz in effect rested upon such a presumption. But that presumption
cannot reasonably be indulged in casually in an era of rapid economic change, marked
by, among other things, volatile costs of living and fluctuations in the value of domestic
currency. The longer the period the more clearly unreasonable such a presumption
would be. In an age like that we live in, very specific language is necessary to show an
intent to grant a unilateral faculty to extend or renew a contract of lease to the lessee
alone or to the lessor alone for that matter.

In the case at bar, it was not specifically indicated who may exercise the option to renew, neither was it
stated that the option was given for the benefit of herein petitioner. Thus, pursuant to the Fernandez
ruling and Article 1196 of the Civil Code, the period of the lease contract is deemed to have been set for
the benefit of both parties. Renewal of the contract may be had only upon their mutual agreement or at
the will of both of them. Since the private respondents were not amenable to a renewal, they cannot be
compelled to execute a new contract when the old contract terminated on 1 June 1994. It is the owner-
lessors prerogative to terminate the lease at its expiration. The continuance, effectivity and fulfillment of
a contract of lease cannot be made to depend exclusively upon the free and uncontrolled choice of the
lessee between continuing the payment of the rentals or not, completely depriving the owner of any say
in the matter. Mutuality does not obtain in such a contract of lease and no equality exists between the
lessor and the lessee since the life of the contract would be dictated solely by the lessee.
After the lease terminated on 1 June 1994 without any agreement for renewal being reached, petitioner
became subject to ejectment from the premises. It must be noted, however, that private respondents
did not include in their Answer with Counterclaim a prayer for the restoration of possession of the
leased premises. Neither did they file with the proper Metropolitan Trial Court an unlawful detainer suit
against petitioner after the expiration of the lease contact. Moreover, the issues agreed upon by the
parties to be resolved during the pre-trial were the correct interpretation of the contract and the validity
of private respondents refusal to accept petitioners payment of P400 as monthly rental. They later
limited the issue to the first, i.e., the correct interpretation of the contract. The issue of possession of
the leased premises was not among the issues agreed upon by the parties or threshed out before the
court a quo. Neither was it raised by private respondents on appeal.

Accordingly, as correctly contended by the petitioner, the Court of Appeals went beyond the bounds of
its authority when after interpreting the questioned provision of the lease contract in favor of the
private respondents it proceeded to order petitioner to vacate the subject premises.

WHEREFORE, the instant petition is partly GRANTED. The assailed decision of the Court of Appeals is
REVERSED insofar as it ordered the petitioner to immediately vacate the leased premises, without
prejudice, however, to the filing by the private respondents of an action for the recovery of possession
of the subject property.

No costs.

SO ORDERED. DAVIDE, JR.

DIGEST

TOPIC COVERED: Manner of Acquiring Jurisdiction over the issues

ANITA C. BUCE, petitioner, vs. THE HONORABLE COURT OF APPEALS, SPS. BERNARDO C. TIONGCO and
ARACELI TIONGCO, SPS. DIONISIO TIONGCO and LUCILA TIONGCO, and JOSE M. TIONGCO,
respondents.

FACTS:

 Petitioner leased a 56-square meter parcel of land located at 2068 Quirino Avenue, Pandacan,
Manila. The lease contract was for a period of fifteen years to commence on June 1979 to June
1994 "subject to renewal for another ten (10) years, under the same terms and conditions."
 In December 1991, private respondents counsel wrote petitioner informing her of the increase
in the rent to P1,576.58 effective January 1992 pursuant to the provisions of the Rent Control
Law. Petitioner, tendered checks dated 5 October 1991 5 November 1991, 5 December 1991, 5
January
1992, 31 May 1992, and 2 January 1993 for only P400 each, payable to Jose Tiongco as
administrator, which private respondents refused to accept the same.
 Petitioner filed with the Regional Trial Court of Manila a complaint for specific performance with
prayer for consignation for private respondents to accept the rentals in accordance with the
lease contract and to respect the lease of fifteen years, which was renewable for another ten
years, at the rate of P200 a month.
 In their Answer, private respondents countered that petitioner had already paid the monthly
rent of P1,000 for July and August 1991. Under Republic Act No. 877, as amended, rental
payments should already be P1,576.58 per month; hence, they were justified in refusing the
checks for P400 that petitioner tendered and that the phrase in the lease contract authorizing
renewal for another ten years does not mean automatic renewal; rather, it contemplates a
mutual agreement between the parties.
 Counsel for private respondents wrote petitioner reminding her that the contract expired on 1
June 1994 and demanding that she pay the rentals in arrears, which then amounted to P33,000.
 RTC declared the lease contract automatically renewed for ten years and considered as evidence
thereof (a) the stipulations in the contract giving the lessee the right to construct buildings and
improvements and (b) the filing by petitioner of the complaint almost one year before the
 expiration of the initial term of fifteen years; the Court of Appeals reversed, and ordered
petitioner to immediately vacate the leased premises on the ground that the contract expired
on 1 June 1994 without being renewed and to pay the rental arrearages at the rate of P1,000
monthly.
 Petitioner contends that by ordering her to vacate the premises, the Appellate Court went
beyond the bounds of its authority because the case she filed before the RTC was for "Specific
Performance" not unlawful detainer. The power to order the lessee to vacate the leased
premises is lodged in another forum.
 Private respondents did not pray for the ejectment of petitioners from the leased premises in
their Answer with Counterclaim; well-settled is the rule that a court cannot award relief not
prayed for in the complaint or compulsory counterclaim.
 Private respondents aver that even if the original petition filed before the RTC was not for
unlawful detainer, the order of the Court of Appeals requiring petitioner to vacate the premises
is but a logical consequence of its finding that the lease contract had expired. To require another
litigation would constitute multiplicity of suits; besides, petitioner has no other reason to stay in
the premises

ISSUE:

Whether or not the Court of Appeals has authority to order the petitioner to vacate the leased premises
even if it’s not stated in the prayer.

RULING:

 After the lease terminated on June 1994 without any agreement for renewal being reached,
petitioner became subject to ejectment from the premises. It must be noted, however, that
private respondents did not include in their Answer with Counterclaim a prayer for the
restoration of possession of the leased premises. Neither did they file with the proper
Metropolitan Trial Court an unlawful detainer suit against petitioner after the expiration of the
lease contact. Moreover, the issues agreed upon by the parties to be resolved during the pre-
trial were the correct interpretation of the contract and the validity of private respondents
refusal to accept petitioners payment of P400 as monthly rental. They later limited the issue to
the first, i.e., the correct interpretation of the contract. The issue of possession of the leased
premises was not among the issues agreed upon by the parties or threshed out before the court
a quo. Neither was it raised by private respondents on appeal.
 Accordingly, as correctly contended by the petitioner, the Court of Appeals went beyond the
bounds of its authority when after interpreting the questioned provision of the lease contract in
favor of the private respondents it proceeded to order petitioner to vacate the subject premises.
 WHEREFORE, the instant petition is partly GRANTED. The assailed decision of the Court of
Appeals is REVERSED insofar as it ordered the petitioner to immediately vacate the leased
premises, without prejudice, however, to the filing by the private respondents of an action for
the recovery of possession of the subject property.

SUMMARY OF THE CASE (for additional notes ONLY)

ANITA BUCE VS. CA

G.R. NO. 136913 (2000)

Facts: D leased to P a parcel of land. The lease terminated without any agreement for renewal being
reached. P, however, still tendered checks representing rentals to D which the latter refused to accept. P
filed with the RTC a complaint for specific performance with prayer for consignation. In his Answer with
counterclaim, D did not include a prayer for the restoration of possession of the leased premises. The
RTC ordered the ejectment of D in its Decision.
Issue: Whether the order of the RTC is correct

Held: No. True, after the lease terminated without any agreement for renewal being reached, P became
subject to ejectment from the premises. However, D did not include in their Answer with counterclaim a
prayer for the restoration of possession of leased premises. Neither did they file with the proper MTC an
unlawful detainer suit against P after the expiration of the lease contract. Moreover, the issue of
possession of the lease premises was not among the issues agreed upon by the parties.
FULL TEXT (Digest is on the next page)
[G.R. No. 130699. May 12, 2000]

SPOUSES BERNARDO MERCADER and FLORINA M. MERCADER, and DR. JUAN Y. MADERAZO,
petitioners, vs. DEVELOPMENT BANK OF THE PHILIPPINES (CEBU BRANCH), GELACIO, FELIPE,
OSMUNDO all surnamed MANREAL, and RUFINA MANREAL VDA. DE ABALO, respondents.

DECISION

DAVIDE, JR., C.J.:

In this petition for review, petitioners spouses Florina Maderazo-Mercader and Bernardo Mercader
(hereafter MERCADERs) and Juan Y. Mederazo impugn the Court of Appeals 5 February 1997 decision in
CA-GR-CV No. 218461[1] ordering them to deliver the possession of Lot No. 2985 to the Development
Bank of the Philippines, Cebu Branch (hereafter DBP) without right of reimbursements for the
improvements introduced thereon, and the 13 August 1997 resolution denying the motion for
reconsideration. Said decision and resolution reversed and set aside the 6 September 1988 decision 2[2]
of the Regional Trial Court of Cebu, Branch 15, in Civil Case No. R-18521. 3[3]

Civil Case No. R-18521 was for specific performance filed on 28 September 1979. In their complaint, 4[4]
the MERCADERs alleged that: Scedp

(1) In 1966, Juan Maderazo applied for a loan at the DBP secured by interior Lots Nos.
2993 and 2994 (Talisay-Minglanilla estate); Calrspped

(2) The DPB required Maderazo to construct a five (5) -meter wide road right of way
over the adjoining Lot No. 2985;

(3) The DBP approved Maderazos loan application upon his submission of a copy of the
lease contract for a right of way over the adjoining Lot No. 2985;

(4) The lease contract for the right of way was for a twenty-year period commencing on
20 October 1966 which Maderazo executed with the spouses Gelacio and Vicenta
Manreal, then the registered owners of Lot No. 2985;

(5) Maderazo expended P10,000 for the construction of the five (5) - meter right of way;

(6) This lease contract was however not registered for Gelacio Manreals failure, "for one
reason or another," to deliver the Certificate of Title (TCT) of Lot No. 2985 to Maderazo;

(7) About nine years later or on 6 January 1976, Maderazo's children, the spouses
Florina Maderazo-Mercader and Bernardo Mercader executed a contract of lease with

4
 the Manreals for a period of twenty years and four months over the remaining portion
of Lot No. 2985;

(8) Despite repeated requests for the delivery of the TCT of Lot No. 2985 for the purpose
of annotating the lease contract, the Manreals, "for one reason or another," failed to do
so; however, the Manreals assured the Mercaders "not to worry since nothing will go
wrong";

(9) Believing in the Manreals assurances, Bernardo Mercader intensively cultivated Lot
No. 2985, "planted in good faith 600 calamansi fruit trees, fenced the lot with barbed
wires, constructed canals and drainages, spent wages for several farm workers and
introduced several improvements including a vegetable garden - all in the sum of not
less that P25,000";

(10) The MERCADERs subsequently discovered that the reason why the Manreals failed
to deliver the TCT of Lot No. 2985 [now registered in the names of spouses Felipe and
Florentina Manreal, children of Gelacio and Vicenta Manreal] was because they offered
said lot including the improvements introduced by the former thereon as "collateral" for
a P150,000 deep-sea fishing loan with the DBP;

(11) That despite the lack of registration and/or annotation of the respective interests of
the MERCADERs on the TCT over Lot No. 2985, the DBP knew and should know of their
existence considering the several ocular inspection and investigation conducted over
the property; the DBP's actual knowledge of these unregistered interests has the effect
of registration.5[5]

Since the Manreals defaulted in the payment of their obligation to the DBP, and that the latter had
taken steps to foreclose Lot No. 2985 including all the improvements thereon, the MERCADERs prayed
among others, for the DBP to "respect their interests by excluding these from the foreclosure
proceedings, or if the foreclosure takes place, declare the same null and void or in the alternative, order
the DBP to reimburse them the cost of the improvements and loss of expected income amounting to
P210,000 for the duration of the unexpired term of their respective contracts." The MERCADERs also
prayed for the annotation of their interests in the TCT of Lot No. 2985. Sccalr

In their answer, the Manreals only admitted the existence of the two unregistered contracts of lease and
the calamansi trees planted on Lot No. 2985. They then denied any knowledge or information sufficient
to form a belief on the other allegations of the MERCADERs. They then claimed that Felipe Manreal
informed Juan Maderazo of the intention to offer as security Lot No. 2985 for the deep sea-fishing loan
with the DBP. They also justified their inability to present to the MERCADERs the TCT over Lot No. 2985
on the fact that at the time the latter were soliciting the titles delivery, it was still in the hands of the
lawyer who was preparing the Extrajudicial Settlement and Partition of the Estate left by the deceased
Vicenta Manreal. The Manreals then prayed for the dismissal of the complaint for being utterly
groundless.6[6]

In its answer, the DBP admitted:

(1) the loan of spouses Juan and Juana Maderazo; and

(2) the deep-sea fishing loan of spouses Felipe and Florentina Manreal which was
secured among others, by a first mortgage over Lot No. 2985 evidenced by a TCT already
registered in their names, free from any lien or encumbrance.

It denied any knowledge or information of: (1) any flaw or infirmity in the TCT over Lot No. 2985; (2) any
interest in Lot No. 2985 other than and adverse to the spouses Felipe and Florentina Manreal as
registered owners and mortgagors; and (3) the existence of the lease contract for right of way over a

6
portion of Lot No. 2985 because it was not registered and that the spouses Gelacio and Vicenta Manreal
were not the ones who mortgaged said Lot No. 2985 to the DBP but their children, the spouses Felipe
and Florentina Manreal. Calrsc

The DBP maintained that the alleged unregistered interests of the MERCADERs did not and could not
bind the DBP per Art. 1648 of the Civil Code 7[7] and Section 64 of Act 496.8[8] It then prayed for the
dismissal of the complaint for being premature and for lack of cause of action as it never dealt with
Gelacio Manreal and there was as yet no foreclosure. Besides, the DBP was a mortgagee in good faith. 9
[9]

In the meantime or on 26 November 1979, Lot No. 2985 was sold, among the other mortgaged lots, on
public auction to the DBP as the highest bidder. 10[10]

During the pre-trial stage, the trial court acknowledged the possibility of a compromise agreement, gave
time to the parties to study their proposals and counterproposals and ordered the documents pertinent
thereto deemed parts of the record of the case. 11[11] Orders were further issued "giving the parties
more time to continue with their negotiations and re-setting the hearing of the case." 12[12] Several
communications were thereafter exchanged, to wit:

(1) a letter dated 24 June 1981 wherein the MERCADERs proposed that Maderazos
contract of lease for right of way be registered, and respect be accorded to the contract
of lease the MERCADERs executed with the Manreals, or as an alternative allow the
MERCADERs to purchase Lot No. 2985 on installment basis at the price of P6.00 per
square meter;13[13]

(2) a letter dated 22 July 1982 wherein the DBP through its Manager (Mr. Manuel Roa)
offered the MERCADERs three options by which they could amicably settle subject to
the approval of the Board of Governors of the Bank to wit: 14[14]

a. First Option - Sale

P96,200.00 - Purchase price

19,200.00 - Down payment

77,000.00 - Balance payable in 10 years at 15% interest per

annum

1, 242.28 - Monthly amortization

b. Second Option - Lease-Purchase

P132,598.84 - Consideration

1,105.00 - Monthly lease-purchase for 10 years

10

11

12

13

14
 c. Third Option - Lease

P14,430.00 - Equivalent to 15% annual interest of P96,200

1,202.50 - Monthly lease

(3) a letter dated 18 November 1982 whereby the MERCADERs chose option 2 (lease-
purchase);15[15]

(4) a letter dated 23 November 1982 whereby the MERCADERs informed the DBPs
Manager that they were "depositing P3,315.00 with the bank" pursuant to said
Managers proposal that a three-month advance payment should be deposited while the
MERCADERs await the final decision of the bank on the proposed settlement. 16[16]

The DBP issued an official receipt for the payment of P3,315 as "earnest money, deposit to purchase lot
2985."17[17]

With this development, on 9 December 1982, the trial court directed the parties to submit "their
compromise agreement which required the approval of the Board of Governors." 18[18]

The DBP and the MERCADERs thereafter again exchanged a series of correspondences. In his 13 January
1983 letter to the DBP (through Mr. Ruben Carpio), Bernardo Mercader requested for a grace period in
the payment of the amortization for the lease-purchase option. 19[19] In response, the DBP wrote a letter
dated 19 January 1983 informing Bernardo Mercader that it had already "prepared [its]
recommendation to the head office, xxx rejected the request for a grace period but informed [him] to
respond soon or visit the bank for a possible conference." 20[20] Bernardo Mercader replied through a
letter dated 5 October 1983 reiterating his accord to the lease-purchase option but suggesting this time
that the amortization be paid on a quarterly basis. 21[21] In its 29 February 1984 letter, the DBP "noted"
Mercaders suggestion as "counter-proposals or counter-offers which [it find un]acceptable and made
dimmer the realization of [their] mutual desire for an early amicable settlement." The DBP reasoned that
"the original conditions packaged in [its] proposal [were] no longer applicable" considering that the
market value of the property increased. 22[22]

With this, the trial court ordered the termination of the pre-trial and set the case for hearing in its 18
September 1995 order, thus:

As manifested by the plaintiffs, they have alread[y] agreed with the defendant bank that
they will pay the property at P132, 598 payable in ten (10) years in quarterly basis.
However, the counsel of defendant manifested that it was only a proposal. The plaintiff
spouses requested for a longer period of fifteen (15) years which the bank did not agree.

The only issue[s] to be resolved in this case are as follows:

1. Whether the plaintiff [are] entitled to specific performance of said agreement;

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 2. Whether the defendant bank can be compelled to recognize the lease contract
entered into between the spouses plaintiff Bernardo Mercader and Gelacio Manreal;
and

3. Whether the foreclosure proceedings of the contract between the defendant bank is
null and void.

The pre-trial in this case is already closed and terminated. 23[23]

On 7 November 1985, the MERCADERs filed a Supplemental Pleading insisting the consummation of the
lease-purchase option with the payment of the earnest money. 24[24] The DBP filed its Opposition to the
Supplemental Pleading.25[25]

Trial proceeded with the parties presenting evidence tending to establish their respective allegations.
On 29 May 1987, the trial court ordered the Manreals dropped from the case. The MERCADERs offered
no objection. Sppedsc

In its decision of 6 September 1988, the trial court reiterated the three issues ascertained in the pre-trial
order and resolved all of them in favor of the MERCADERs. On the first issue, the trial court found that
the "DBP had unnecessarily and unjustifiably made xxx [Bernardo] Mercader understand that his second
option [lease-purchase] would be more or less approved, except that the approval will come from
Manila."26[26] Anent the second issue, the trial court also believed "quite firmly" that the "DBP could not
have escaped having a foreknowledge of the existence of the prior unrecorded lease" as the "possession
and cultivation of Bernardo Mercader xxx [was] a matter of open, notorious and public knowledge in the
area." In resolving the third issue, the court first acknowledged that it is a "court of equity and not
merely a court of law" and the "DBP is not authorized to keep real propert[y] longer than ten years or
so;" then the court "required [the] DBP to set aside the area affected by the prior unregistered lease,
known to [it], when [it] accepted the mortgage." 27[27] It then decreed as follows:

WHEREFORE, finding the preponderance of evidence to be in favor of plaintiffs,

judgment is hereby rendered as follows:

1) ordering the defendant DBP and its successors-in-interest to respect and preserve the
Contracts of Lease between the Manreals and the Mercaders until December 31, 1994;

2) ordering the DBP to exclude from the foreclosure proceedings the rights of the
plaintiffs as covered by the Contract of Lease;

3) requiring the defendant DBP to cause the annotation of the Contracts of Lease of
plaintiffs on TCT No. T-40396 of xxx Lot No. 2985 xxx and amend Entry No. 4980-V-14-D-
B, by excluding the improvements of Mercader as guarantee or collateral for defendant
Felipe Manreal's deep-sea fishing loan;

4) ordering the DBP to execute the deed of sale subject to the approval of the Manila
Office of the DBP as to the mode of payment, there being no agreement thereon;

5) requiring the defendant DBP to pay attorney's fees of P5,000, for making it necessary
for the plaintiffs to litigate, in order to protect their rights to the Lease Contract with the
Manreals and to compel DBP to act on the proposals of Mercader as promised by DBP. 28
[28]

23

24

25

26

27
On appeal, the Court of Appeals found that the trial court erred in treating the lease-purchase option as
a controversial issue considering that it was "outside the parties' pleadings." But invoking the Supreme
Court's decision in Castro v. Court of Appeals29[29] in that "the improvements introduced [into the
mortgaged property] are to be considered so incorporated [in the mortgage] only if so owned by the
mortgagor," the Court of Appeals declared that the improvements introduced on Lot No. 2985 had been
improperly included in the foreclosure sale since they were not owned by the mortgagors. But since the
improvements were already included in the foreclosure sale and the MERCADERs continued the
possession and collection of income from the lot, the Court of Appeals, as already earlier adverted to,
reversed and set aside the appealed judgment. It entered a new one declaring that the MERCADERs
were not entitled to any compensation from the DBP. It also ordered the MERCADERs to immediately
turn over the possession of Lot No. 2985 to the DBP. 30[30]

In this petition for review, the MERCADERs assert that in issuing the challenged decision, the Court of
Appeals contravened Section 4, Rule 20 and Section 5, Rule 10 of the Rules of Court by holding that the
trial court should not have taken cognizance of the lease-purchase option as a controversial issue since it
was not raised in the pleadings. They maintain that the trial court correctly took cognizance of the lease-
purchase option because it was part and parcel of the pre-trial stages, the determination of which will
prevent future litigation thereon. They also pray that in the event of a favorable judgment, this Court
should refer the case back to the Court of Appeals for a determination of whether the trial court erred in
finding that the lease-purchase option was already consummated. Sdjad

For its part, the DBP contends that the MERCADERs raise questions of facts which are not reviewable on
appeal and that it had opposed and objected to in and at all stages of the trial, all attempts by the
MERCADERs to introduce evidence on the lease-purchase option.

This Court agrees with the MERCADERs and finds that the Court of Appeals erred in disregarding as
material the lease-purchase option on the ground that it was not raised in the pleadings. If the Court of
Appeals adverts to the lack of reference to the lease-purchase option in the initiatory pleadings, this can
be simply explained by the fact that the trial court only took cognizance thereof when it became an
integral component of the pre-trial proceedings. That is why the lease-purchase option was included
firstly, in the pre-trial order as one of the issues to be resolved at trial and secondly, in the supplemental
pleading subsequently filed by the MERCADERs on 7 November 1985. 31[31] As a supplemental pleading,
it served to aver supervening facts which were then not ripe for judicial relief when the original pleading
was filed. As such, it was meant to supply deficiencies in aid of the original pleading, and not to dispense
with the latter.32[32] Hence, it was patently erroneous for the Court of Appeals to pronounce that the
lease-purchase option was not raised in the pleadings. The DBP was even quite aware and
knowledgeable of the supplemental pleading because it filed an opposition thereto. 33[33]

The records however reveal that the trial court did not promptly rule on the motion to admit the
supplemental pleading. And during trial, the trial court also failed to rule on the prompt objection
interposed by the DBPs counsel to the MERCADERs introduction of evidence relative to said lease-
purchase option. But undisputed is the trial court's eventual admission in open court of the MERCADERs
supplemental pleading, thus:

ATTY. GARLITOS

28

29

30

31

32

33
 Probably, I did not make myself quite clear, Your honor. What I mean is during the pre-
trial stage the parties were encourage to negotiate for a settlement. So they made an
offer to DBP and DBP gave them an option.

COURT

Those three options and chose the second one.

ATTY. GARLITOSMisact

We interposed an objection on this option, Your Honor, because any evidence which will
be presented or which transpired during the pre-trial is objectionable. So we interposed
an objection to prevent the witness from testifying on transactions which were referred
to while the parties were negotiating during the pre-trial stage.

ATTY. MERCADER

I wish to correct counsel. Records will show that there was no objection on what
transpired during the pre-trial. As a matter of fact the pre-trial order is very material to
the case. There is a pre-trial that such an offer and three options made by DBP, and that
plaintiff selected the second option and that he deposited earnest money with the bank.

COURT

In other words there is no supplemental complaint.

ATTY. GARLITOS

It is good that they brought that out because we had an opposition and this is what I am
referring to.

COURT

What is your opposition, the price agreed upon?

ATTY. GARLITOS

We objected to the filing of the supplemental complaint and to all evidence presented
in regard to that supplemental complaint.

COURT

Its too late now for you to make an objection. This supplemental pleading has been
admitted by the court. That has become final.

ATTY. GARLITOS.

There is no showing that it has been admitted by the court.

COURT

It has been admitted by the court. 34[34] (Emphasis supplied)

The records also show that not only did the DBPs counsel began to rigorously cross-examine Bernardo
Mercader on the lease-purchase option, he also subjected his witness Mr. Ruben Carpio, then Chief of

34
the Collection Department, DBP to an intensive direct examination covering said subject matter. 35[35]
He also offered as evidence the DBPs letter indicating the three options to the MERCADERs as Exhibit "1"
and the lease-purchase option contained therein as Exhibit "1-A." 36[36]

The DBP is undoubtedly estopped from questioning the trial courts inclusion of the lease-purchase
option as a controversial issue. This action of the trial court finds anchor on Section 4, Rule 20 of the
Rules of Court which reads: Acctmis

Section 4. Record of pre-trial results. -- After the pre-trial the court shall make an order
which recites the action taken at the conference, the amendments allowed to the
pleadings, and the agreements made by the parties as to any of the matters considered.
Such order shall limit the issues for trial to those not disposed of by admissions or
agreements of counsel and when entered controls the subsequent course of the action,
unless modified before trial to prevent manifest injustice.

Indeed, the pre-trial is primarily intended to make certain that all issues necessary to the disposition of a
case are properly raised. The purpose is to obviate the element of surprise, hence, the parties are
expected to disclose at the pre-trial conference all issues of law and fact which they intend to raise at
the trial, except such as may involve privileged or impeaching matter. 37[37] In the case at bar, the pre-
trial order included as integral to the complete adjudication of the case the issue of whether the
MERCADERs can demand specific performance from the DBP relative to the lease-purchase option.
Thus, the element of surprise that the provision on pre-trial attempts to preclude was satisfied. The
surprise factor was further eliminated, as already earlier mentioned and merely to reiterate here, with
the DBP's (1) motion to oppose the supplemental pleading, (2) objection to the introduction of evidence
connected thereto, (3) later information from the trial court of its definitive ruling admitting the
supplemental pleading, (4) own introduction of evidence related thereto, and finally, by its (5) intensive
participation in the direct and cross-examination of witnesses whose testimonies included said topic. In
any case, the filing and consequent admission of the supplemental pleading by the trial court validated
the issues embraced in the pre-trial order. Newmiso

Assuming arguendo that the MERCADERs failed to file the supplemental pleading, evidence relative to
the lease-purchase option may be legitimately admitted by the trial court in conformity with Section 5,
Rule 10 of the Rules of Court which states: Jjlex

Section 5. Amendment to conform to or authorize presentation of evidence. -- When

issues not raised by the pleadings are tried by express or implied consent of the parties,
they shall be treated in all respects, as if they had been raised in the pleadings. Such
amendment of the pleadings as may be necessary to cause them to conform to the
evidence and to raise these issues may be made upon motion of any party at any time,
even after judgment; but failure so to amend does not affect the result of the trial of
these issues. If evidence is objected to at the trial on the ground that it is not within
the issues made by the pleadings, the court may allow the pleadings to be amended
and shall do so freely when the presentation of the merits of the action will be
subserved thereby and the objecting party fails to satisfy the court that the admission
of such evidence would prejudice him in maintaining his action or defense upon the
merits. The court may grant a continuance to enable the objecting party to meet such
evidence. (emphasis supplied)

This provision envisions two scenarios -- first, when evidence is introduced on an issue not alleged in the
pleadings and no objection was interjected and second, when evidence is offered again, on an issue not
alleged in the pleadings but this time an objection was interpolated. We are concerned with the second
scenario. In Co Tiamco v. Diaz, the Court held that "when evidence is offered on a matter not alleged in
the pleadings, the court may admit it even against the objection of the adverse party, where the latter

35

36

37
fails to satisfy the court that the admission of the evidence would prejudice him in maintaining his
defense upon the merits, and the court may grant him a continuance to enable him to meet the new
situation created by the evidence. Of course, the court, before allowing the evidence, as a matter of
formality, should allow an amendment of the pleading, xxx And, furthermore, where the failure to order
an amendment does not appear to have caused surprise or prejudice to the objecting party, it may be
allowed as a harmless error. Well-known is the rule that departures from procedure may be forgiven
where they do not appear to have impaired the substantial rights of the parties." 38[38]

More recently, in Bank of America v. American Realty Corporation 39[39] citing Talisay-Silay Milling Co.,
Inc. v. Asociacion de Agricultores de Talisay-Silay, Inc.,40[40] the Court reinforces the Co Tiamco ruling on
the application of Section 5, Rule 10 of the Rules of Court in this wise: Misjuris

The failure of a party to amend a pleading to conform to the evidence adduced during
trial does not preclude adjudication by the court on the basis of such evidence which
may embody new issues not raised in the pleadings. x x x Although, the pleading may
not have been amended to conform to the evidence submitted during trial, judgment
may nonetheless be rendered, not simply on the basis of the issues alleged but also on
the issues discussed and the assertions of fact proved in the course of the trial. The
court may treat the pleading as if it had been amended to conform to the evidence,
although it had not been actually amended. xxx Clearly, a court may rule and render
judgment on the basis of the evidence before it even though the relevant pleading had
not been previously amended, so long as no surprise or prejudice is thereby caused to
the adverse party. Put a little differently, so long as the basic requirements of fair play
had been met, as where the litigants were given full opportunity to support their
respective contentions and to object to or refute each other's evidence, the court may
validly treat the pleadings as if they had been amended to conform to the evidence and
proceed to adjudicate on the basis of all the evidence before it.

As already enunciated, the DBP was not and would not be prejudiced by the incorporation of the lease-
purchase option as one of the controverted issues. Moreover, it had been afforded ample opportunity
to refute and object to the evidence germane thereto, thus, the rudiments of fair play had been
properly observed. Jurissc

Since we agree with the MERCADERs contention that the Court of Appeals contravened Section 4, Rule
20 and Section 5, Rule 10 of the Rules of Court in promulgating the questioned decision, we have to
grant their prayer to refer the matter back to said court for a determination of the question of whether
the lease-purchase option was already consummated and for a complete ascertainment of the rights
and obligations of the parties.

WHEREFORE, IN VIEW OF ALL THE FOREGOING, the instant petition is GRANTED DUE COURSE and the 5
February 1997 judgment and 13 August 1995 resolution of the Court of Appeals in CA-GR-CV No. 21846
are hereby SET ASIDE. The case is REFERRED BACK to the Court of Appeals for a determination of
whether the lease-purchase option was consummated with the end view of ascertaining the rights and
obligations of the parties. Scjuris

SO ORDERED.

DIGEST

TOPIC COVERED: Manner of Acquiring Jurisdiction over the issues

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SPOUSES BERNARDO MERCADER and FLORINA M. MERCADER, and DR. JUAN Y. MADERAZO,
petitioners, vs. DEVELOPMENT BANK OF THE PHILIPPINES (CEBU BRANCH), GELACIO, FELIPE,
OSMUNDO all surnamed MANREAL, and RUFINA MANREAL VDA. DE ABALO, respondents.

FACTS:

 The Mercaders, as lessees of a parcels of land owned by the Manreals, introduced

improvements thereon. They later discovered that the Manreals offered the lot and the
improvements for a deep sea fishing loan with DBP.
 Manreals defaulted in the payment of their obligation, so DBP took steps to foreclose
the property.

 Mercaders filed for specific performance before RTC to compel DBP to respect their
interests by excluding the improvements in the foreclosure or to reimburse them, and
to cause annotation of their interests in the TCT.

 During the pretrial, court acknowledged the possibility of a compromise agreement.

DBP, thru its manager, offered 3 options to Mercaders.

 Mercaders chose the lease-purchase option whereby they would pay 1000/month for
10 years.
 They paid 3000 pursuant to the Manager’s proposal that a 3-month advance payment be
deposited while they await the final decision of the bank on the proposed settlement.

 RTC directed parties to submit their compromise agreement but parties could not
because DBP is now contending that the options were merely proposals while
Mercaders argue that they already entered into an agreement.

 RTC ordered the termination of the pre-trial and set the case for hearing.

 Mercaders filed a Supplemental Pleading insisting the consummation of the lease-

purchase option with the payment of the earnest money. The DBP filed its Opposition to
the Supplemental Pleading.

 RTC considered the lease-purchase option, and ruled in favor of the Mercaders. It held
that DBP had made the Mercaders believe that the lease-purchase option would be
more or less approved.
ISSUE:
Whether or not the Regional Trial Court correctly took cognizance of the lease-purchase option not
raised in the pleadings?

RULING:
 YES. The lease-purchase option was an integral component of the pretrial proceedings. It was also
included in the supplemental pleading. Assuming arguendo that the MERCADERs failed to file the
supplemental pleading, evidence relative to the lease-purchase option may be legitimately admitted by
the trial court in conformity with Section 5, Rule 10 which provides 2 scenarios: 1.
 
When evidence is introduced on an issue not alleged in the pleadings and no objection was interjected
2. When evidence is offered again, on an issue not alleged in the pleadings but this time an objection
was interpolated. We are concerned with the second scenario. Co Tiamco v. Diaz: the Court may admit
evidence even against the objection of the adverse party where the latter fails to prove that the
admission would prejudice him.

Other issues from the net (for additional notes ONLY)

BERNARDO MERCADER VS. DBP

G.R. NO. 130699 (2000)

Facts: During the trial, the counsel of D participated in the direct and cross-examination of witnesses
whose testimonies included an issue not among those appearing in the Pre-Trial Order. The RTC ruled on
the said issue. D questions the RTC’s inclusion of the said issue in its ruling.

Issue: Whether the said issue should be decided by the RTC

Held: Yes. D is estopped from questioning the RTC’s inclusion of said issue by its participation in the
direct and cross-examination of witnesses whose testimonies included said topic.

BERNARDO MERCADER VS. DBP

G.R. NO. 130699 (2000)

Facts: During the trial, the counsel of D participated in the direct and cross-examination of witnesses
whose testimonies included an issue not among those appearing in the Pre-Trial Order. The RTC ruled on
the said issue. D questions the RTC’s inclusion of the said issue in its ruling.

Issue: Whether the said issue should be decided by the RTC

Held: Yes. D is estopped from questioning the RTC’s inclusion of said issue by its participation in the
direct and cross-examination of witnesses whose testimonies included said topic.

BERNARDO MERCADER VS. DBP

G.R. NO. 130699 (2000)

Facts: During the trial, P offered evidence on an issue not alleged in the pleadings. D objected to the
introduction of such evidence.

Issue: Whether the RTC may admit the evidence

Held: Yes. When evidence is offered on a matter not alleged in the pleadings, the court may admit it
even against the objection of the adverse party, where the latter fails to satisfy the court that the
admission of the evidence would prejudice him in maintaining his defense upon the merits, and the
court may grant him a continuance to enable him to meet the new situation created by the evidence. Of
course, the court, before allowing the evidence, as a matter of formality, should allow an amendment of
the pleading.

***END***