G.R. No. L-41233 November 21, 1979
J.M. TUASON & CO., INC., petitioner, vs. HON. COURT OF APPEALS, ALFONSO DE LEON and ROSARIO G. DE LEON, respondents.

FACTS

Petitioner J.M. Tuason & Co., Inc. entered into a contract to sell a subdivision lot to Ricardo de Leon on January 31, 1952. Both parties were aware that a portion of the lot was occupied by Ramon Rivera, but they understood the petitioner would eject him. Ricardo de Leon later transferred his rights to his parents, the private respondents Alfonso and Rosario de Leon, who fully paid the balance. A deed of absolute sale was subsequently executed and a title issued to them. However, petitioner failed to eject Rivera. In an earlier ejectment suit filed by the petitioner, the court, based on a prior compromise agreement between Tuason and third parties (the Deudors), dismissed the complaint and instead ordered Tuason to sell 1,050 square meters of the lot to Rivera at a 1958 price. This decision became final, leading to the De Leons’ eviction.
The De Leons then filed an action for warranty against eviction against Tuason. The trial court ruled in their favor, awarding the value of the lost portion at the time of eviction plus damages. The Court of Appeals affirmed with a modification reducing moral damages. Tuason appealed to the Supreme Court, arguing the De Leons were not entitled to the warranty due to their prior knowledge of Rivera’s occupancy.

ISSUE

Whether the private respondents, as vendees, are entitled to the vendor’s warranty against eviction and to recover damages.

RULING

No, the respondents are not entitled to the warranty against eviction. The Supreme Court modified the appellate court’s decision. The legal logic centers on the requirement of good faith under Article 1555 of the Civil Code for a vendee to claim warranty against eviction. The Court found that the De Leons, through their predecessor Ricardo de Leon, entered into the contract with full knowledge of Rivera’s actual occupation of a portion of the lot. This knowledge of a potential defect or obstacle to possession is equivalent to knowledge of facts that should have prompted a prudent buyer to investigate further. A purchaser cannot close his eyes to such facts and later claim good-faith status. Consequently, lacking good faith, they are not entitled to the statutory warranty or to recover damages based on it.
However, based on principles of equity and to prevent unjust enrichment, the Supreme Court held that the petitioner should not be completely absolved. The Court ordered Tuason to compensate the De Leons in the amount of P126,000.00. This sum represents the value of the 1,050 square meters, calculated by doubling the P60.00 per square meter price set in the 1958 court order (yielding P120.00/sq.m.), which the Court deemed equitable considering the reduced purchasing power of the currency. Legal interest from the filing of the complaint was also imposed.