G.R. No. 125272. October 7, 1999.
CANDIDO AMIL, petitioner, vs. COURT OF APPEALS, and SPOUSES ERNESTO GADOR and NILA GADOR, respondents.

FACTS

Petitioner Candido Amil and respondent spouses Ernesto and Nila Gador executed a “Deed of Pacto de Retro Sale” dated November 14, 1987, involving a parcel of land. For a consideration of P30,000.00, Amil sold the property to the Gadors with the right to repurchase it within three years. The deed stipulated that if Amil failed to redeem within the period, the sale would become absolute and irrevocable without further action. The parties also executed an “Addendum to Deed of Pacto de Retro Sale” dated December 12, 1987, stating that the Gadors paid an additional P1,800.00 for capital gains tax and documentary stamps, making the total repurchase price P31,800.00. The Addendum referred to the Gadors as “Mortgagees” and Amil as the “Mortgagor.” After the redemption period expired, the Gadors filed a petition for consolidation of ownership. Amil was declared in default because his counsel failed to file an answer. The trial court granted the petition and declared the Gadors absolute owners. Amil’s motion for new trial was denied. The Court of Appeals affirmed, ruling that Amil was bound by his counsel’s negligence and that the contract, read as a whole, was a sale with pacto de retro, not a mortgage.

ISSUE

1. Whether the trial court gravely erred in denying appellant’s motion for new trial.
2. Whether the trial court gravely erred in granting consolidation of ownership in favor of the respondents, considering that the Addendum indicated the contract might be a mortgage, not a pacto de retro sale.

RULING

The Supreme Court granted the petition, reversed the decision of the Court of Appeals, and remanded the case to the trial court for further proceedings.
On the first issue, the Court held that while a client is generally bound by the mistakes of his counsel, an exception exists when the negligence is so gross that the client is deprived of his day in court and of property without due process. Given the circumstances, the trial court should have granted a new trial to allow Amil to present his evidence.
On the second issue, the Court found that the true nature of the contract was doubtful and required further examination. The Addendum’s use of the terms “mortgage,” “mortgagor,” and “mortgagees” created ambiguity. Furthermore, the stipulation that the sale would become absolute automatically upon failure to redeem constituted a pactum commissorium, which is void. The price of P30,000.00 also appeared unusually inadequate. Under Article 1602 of the Civil Code, a contract shall be presumed an equitable mortgage when, although denominated a sale, the vendor remains in possession, the price is unusually inadequate, or the vendor binds himself to pay the taxes on the property. Under Article 1603, in case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage. Therefore, the trial court should have allowed a new trial for Amil to present evidence on the contract’s true nature.