G.R. No. L-15657 and L-15658, November 10, 1920
MACARIO FELICIANO, plaintiff-appellant, vs. VICENTA LIMJUCO and ANTONIA CALACALZADA, defendants-appellees.
VICENTA LIMJUCO, plaintiff-appellant, vs. MACARIO FELICIANO, defendant-appellee.

FACTS:
Macario Feliciano filed an ejectment case against Vicenta Limjuco and Antonia Calacalzada in the justice of the peace court for non-payment of rent. The defendants were ordered to pay arrears and vacate. Vicenta Limjuco appealed to the Court of First Instance (CFI). While the ejectment case was pending, Limjuco filed a separate action against Feliciano seeking the annulment of the contract upon which the ejectment was based. The two cases were consolidated.

The contract in question, a notarized document dated June 3, 1913, was titled as a “Sale with Right to Repurchase.” Under its terms, Limjuco and Calacalzada sold a parcel of land to Feliciano for P500. They reserved the right to repurchase the property within a period of six months, extendible for another six months. Simultaneously, the vendors remained in possession of the land as lessees, obligated to pay a monthly rental of P7.50 to Feliciano.

In her defense and complaint, Limjuco alleged that the document was null and false. She claimed she never entered into a pacto de retro sale, and that the document she actually signed was merely a guaranty to secure a P500 loan obtained by a third party, Tan Cawa, from Juan Feliciano. The CFI ruled in favor of Limjuco, declaring the sale with right to repurchase null and void, interpreting it instead as a guaranty for Tan Cawa’s debt, and absolved the defendants in the ejectment case. Feliciano appealed.

ISSUE:
Whether the notarized contract, which on its face is a sale with pacto de retro coupled with a leaseback agreement, is valid as such or should be declared null and void as a mere equitable mortgage or guaranty.

RULING:
The Supreme Court REVERSED the decision of the CFI. The contract is a valid and enforceable sale with right to repurchase (pacto de retro).

The Court held that contracts are obligatory and must be interpreted according to the literal sense of their clear and unambiguous stipulations. The terms of the contract (Exhibit 1) were explicit: it was a sale for a price of P500, with a vendor’s right to repurchase within a stipulated period, and a concomitant lease agreement where the vendors remained as lessees. There was no ambiguity in its language.

The Court distinguished this case from previous jurisprudence where instruments were construed as equitable mortgages. In those cases, either the contractual terms were ambiguous (using words like “pledged” or describing parties as “debtor” and “creditor”), or the circumstances surrounding execution (such as gross inadequacy of price, continued possession by the “vendor,” or acceptance of partial payments after the redemption period) were inconsistent with an absolute sale. Here, Limjuco failed to present convincing evidence of any such circumstance that would justify deviating from the contract’s clear terms. Her bare allegation that it was a guaranty, unsupported by proof of surrounding circumstances incompatible with a sale, was insufficient.

Therefore, the contract was upheld as a valid pacto de retro sale. Consequently, in the annulment case (G.R. No. L-15658), Feliciano was absolved. In the ejectment case (G.R. No. L-15657), Limjuco was ordered to return the land and pay the rent in arrears in accordance with the contract.