G.R. No. 175118 ; July 21, 2008
SOLIDSTATE MULTI-PRODUCTS CORPORATION, Petitioner, vs. SPS. ERLINDA CATIENZA-VILLAVERDE and VICTOR VILLAVERDE, Respondents.

FACTS

Petitioner Solidstate purchased a parcel of land from Julian Peñaranda, respondent Erlinda’s uncle, in 1976. Because the property was subject to a claim by the Intestate Estate of Antenor Virata, Peñaranda undertook to bear the expenses of any necessary legal action and indemnify petitioner should ownership be proven to belong to another. This undertaking was formalized in an “Agreement with Mortgage” dated July 8, 1976, wherein respondents mortgaged their own property to secure Peñaranda’s obligation. Respondents also separately agreed to shoulder 50% of the litigation expenses. Petitioner filed a quieting of title suit against the Virata Estate. While the case was pending appeal before the Supreme Court, the parties executed a “Deed of Absolute Sale” in 1989, wherein respondents sold their mortgaged property to petitioner for ₱96,000 and the cancellation of the mortgage obligation. Respondents also received an additional ₱105,000.
Seven years later, respondents filed a complaint to annul the Deed of Absolute Sale, alleging their consent was vitiated by mistake, undue influence, and fraud. They claimed petitioner misrepresented that the quieting of title case had been dismissed. The trial court ruled the sale was an absolutely simulated or fictitious contract without consideration, as its sole purpose was to guarantee the outcome of the Virata case, which petitioner ultimately won. The Court of Appeals affirmed but ordered respondents to return the ₱105,000 with interest.

ISSUE

Whether the Deed of Absolute Sale is a valid and binding contract, or a void contract for lack of cause or consideration.

RULING

The Supreme Court affirmed the Court of Appeals and declared the Deed of Absolute Sale void for lack of cause. The legal logic is anchored on Article 1352 of the Civil Code, which defines cause as the essential purpose of a contract. The Court examined the contractual nexus, finding the 1976 Agreement with Mortgage and the 1989 Deed of Absolute Sale were inextricably linked. The mortgage was a security for Peñaranda’s obligation to indemnify petitioner if it lost the Virata case. The subsequent deed of sale was not a distinct transaction but was executed as a form of indemnity, contingent upon the same potential loss. Since petitioner ultimately prevailed in the Supreme Court in 1991, the contingent event—losing the case and triggering the indemnity—never occurred. Consequently, the cause for the sale, which was the indemnity obligation, ceased to exist. The stated monetary consideration of ₱96,000 was illusory, as it was merely credited to extinguish the mortgage obligation that was itself predicated on a failed condition. The additional ₱105,000 was treated as a loan. With no lawful cause, the contract is void under Article 1409(3) of the Civil Code. The Court also held that an action to declare a void contract inexistent does not prescribe.