Teves vs. People's Homesite and Housing Corporation

A complaint for annulment of a contract states a cause of action even if the plaintiff is not a party to the contract, provided it alleges that the plaintiff possesses a legal right, that the defendants had a correlative obligation not to violate that right, and that the defendants performed an act or omission in violation thereof, and further avers that the contract was executed in fraud of the plaintiff’s rights or contrary to public policy, causing her detriment.

Encarnacion Teves and her husband Celestino Teves occupied Lot 9, Block K-70 of the Diliman Estate Subdivision (formerly Quezon Memorial Grove) beginning in October 1950 and built a house on the lot. The PHHC, a government instrumentality, later adopted Board Resolution No. 21 for Fiscal Year 1951–52 converting the area into a subdivision and providing that actual occupants be given the first chance to purchase the lots. After investigation, the PHHC found Celestino Teves to be the actual occupant and qualified to purchase the lot, recommending that it be awarded to him. Celestino died in a plane crash on March 17, 1957, before a sale was perfected. Encarnacion Teves thereafter filed her own application to purchase the same lot and repeatedly requested the PHHC to act on it, but PHHC officials allegedly ignored her. In February 1961, Melisenda Santos, through an agent, applied to purchase the same lot, and the PHHC sold it to her without giving notice to Teves; Santos allegedly secured the sale through the help of an influential politician. A deed of sale was executed and Transfer Certificate of Title No. 59796 was issued in Santos’ name. Teves sued to declare the sale void and to compel PHHC to sell the lot to her.

• Occupancy and Preferential Right: Plaintiff Encarnacion Teves and her husband Celestino Teves occupied Lot 9, Block K-70, of the Diliman Estate Subdivision (formerly Quezon Memorial Grove) beginning in October 1950 and built a house valued at P3,250.00 on the lot. PHHC Board Resolution No. 21, Fiscal Year 1951–52, converted the estate into a subdivision and mandated that actual occupants be given the first chance to purchase lots, subject to investigation and clearance. Following an investigation, the Chief of the Sales Division found Celestino Teves to be the actual occupant and qualified to purchase the lot, recommending that it be awarded to him.

• Application and Inaction: Celestino Teves died in a plane crash on March 17, 1957. Plaintiff, as successor-in-interest, filed an application in her own name to purchase the lot and made repeated, insistent requests for the PHHC to process and forward her application for Board approval. PHHC officials and personnel deliberately ignored these requests, failing to act on her application with knowledge of her prior occupancy and preferential right.

• Sale to Defendant Santos: On or about February 23, 1961, defendant Melisenda L. Santos, through an attorney-in-fact, applied to purchase the same lot. PHHC officials knew the lot had long been occupied and applied for by plaintiff but did not inform her of Santos’ application, depriving her of the opportunity to oppose it. Santos allegedly secured approval of her application through the assistance of an influential politician. A deed of sale was executed on January 12, 1962, and Transfer Certificate of Title No. 59796 was issued in Santos’ name on January 23, 1962.

• Complaint and Relief Sought: Plaintiff alleged that the sale was null and void because it was secured through fraud, misrepresentation, and political influence, in violation of PHHC’s established policy and rules, particularly Resolution No. 21. She sought, among other things, a declaration of nullity of the deed of sale and the TCT, an order for PHHC to execute a deed of sale in her favor, and damages.

• Motion to Dismiss and Lower Court Ruling: Defendants moved to dismiss the complaint solely on the ground that it stated no cause of action. They invoked Article 1397 of the Civil Code, arguing that an action for annulment may only be maintained by those who are principally or subsidiarily obliged under the contract. The trial court agreed and dismissed the complaint, holding that since Teves was not a party to the deed of sale, she could not maintain the action.

• Sufficiency of Cause of Action: Plaintiff-appellant maintained that her complaint stated a cause of action because it enumerated the three essential elements: (1) her legal right — a preferential right to purchase the lot as the prior actual occupant under PHHC Resolution No. 21; (2) the defendants’ correlative obligation to respect that right; and (3) defendants’ acts and omissions that violated her right, namely, selling the lot to a non-occupant without notice, through fraud and improper influence, and deliberately refusing to act on her application.

• Standing to Seek Nullity: She argued that a person who is not a party to a contract may nevertheless sue for its annulment if she is prejudiced in her rights, and that her complaint sufficiently showed detriment resulting from the deed of sale to Santos.

• Lack of Cause of Action under Article 1397: Defendants-appellees contended that the complaint failed to state a cause of action because plaintiff was not a party to the deed of sale and assumed no obligation, principal or subsidiary, under the contract. They relied on Article 1397 of the Civil Code, which provides that an action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily, and asserted that this provision barred Teves from maintaining the suit.

• Sufficiency of Complaint: Whether the complaint stated a cause of action for annulment of the deed of sale in favor of Melisenda Santos, given that plaintiff was not a contracting party, but alleged a preferential right to purchase the lot and averred that the sale was executed in fraud of her rights and in violation of public policy.

• Sufficiency of Complaint: The complaint was held sufficient to state a cause of action. A cause of action consists of a legal right of the plaintiff, a correlative obligation of the defendant, and an act or omission by the defendant in violation of that right. The complaint alleged (a) that plaintiff had acquired a preferential right to buy the lot under PHHC’s own resolution and by virtue of her long-standing prior occupancy; (b) that defendants had the corresponding obligation not to violate that right; and (c) that defendants violated this right by selling the lot to a non-occupant who applied later, without notice to plaintiff, through fraudulent means and the aid of political influence, while deliberately ignoring plaintiff’s application.

  The trial court’s reliance on Article 1397 was misplaced. While Article 1397 limits an action for annulment to those principally or subsidiarily obliged, it does not bar a person who is not a contracting party from maintaining an action for nullity if that person’s rights are prejudiced by the contract. The complaint in this case sought nullification not because plaintiff was a party to the deed, but because the deed adversely affected her interests and was allegedly executed contrary to public policy and in fraud of a third person. Prior jurisprudence establishes that a third party who would suffer detrimental consequences from a contract in which he had no intervention may sue for its annulment. The allegations, if proven, would support a finding that the sale violated the public policy of giving first preference to actual occupants — a right recognized by this Court in Huerta v. Acosta — and that the defendants’ acts transgressed the principles of human relations under Articles 19, 21, and 24 of the Civil Code. Accordingly, the complaint sufficiently set forth a cause of action and should not have been dismissed outright.

• Cause of Action Defined — A cause of action is an act or omission of one party in violation of the legal right or rights of another. Its essential elements are (1) a legal right of the plaintiff, (2) a correlative obligation of the defendant, and (3) an act or omission of the defendant in violation of that right (citing Ma-ao Sugar Central Co. v. Barrios). The Court applied this framework by examining whether the complaint alleged each element, and found that it did.

• Test of Sufficiency on Motion to Dismiss — In determining whether a complaint states a cause of action, only the facts alleged in the complaint are considered, and those facts are regarded as true. The inquiry is whether, accepting the allegations as true, a valid judgment may be rendered against the defendant as prayed for (citing Dimayuga v. Dimayuga; Amedo v. Rio y Olabarrieta, Inc.). This rule required the Court to accept Teves’ allegations of preferential right, fraud, and violation as true, leading to the conclusion that relief could be granted.

• Standing of a Non-Party to Seek Nullity — A person who is not a party obliged principally or subsidiarily under a contract may maintain an action for its nullity if he is prejudiced in his rights with respect to one of the contracting parties and can show the detriment that would positively result to him from the contract in which he had no intervention (citing Ibañez v. Hongkong & Shanghai Bank). This doctrine was dispositive; because Teves alleged she suffered detriment — the deprivation of her preferential right — she could sue even without being a signatory.

• Preferential Right of Prior Occupants of Government Lands — Under laws and policies governing the subdivision and sale of government-acquired estates, actual and bona fide prior occupants have a preferential right to purchase the lots they occupy. This principle, enforced under Republic Act No. 1162 (as amended) and applied in Huerta v. Acosta, supported Teves’ claim that she possessed a legal right that formed the basis of her cause of action.

• Human Relations Principles as Basis of Cause of Action — The provisions of the Civil Code on human relations (Articles 19, 21, and 24) require persons to act with justice, give everyone his due, and observe honesty and good faith. The complaint’s allegations that defendants acted with bad faith, caused injury, and placed plaintiff at a disadvantage through political influence invoked these provisions, which independently supplied a legal foundation for the action.

• “A cause of action is defined as ‘an act or omission of one party in violation of the legal right or rights of the other; and its essential elements are legal right of the plaintiff, correlative obligation of the defendant, and act or omission of the defendant in violation of said legal right.’” This passage sets out the operational test the Court used to evaluate the complaint.

• “This Court has held that a person who is not a party obliged principally or subsidiarily in a contract may exercise an action for nullity of the contract if he is prejudice in his rights with respect to one of the contracting parties, and can show the detriment which would positively result to him from the contract in which he had no intervention.” This excerpt encapsulates the ratio decidendi on the standing of a third party to sue for annulment, distinguishing the case from a mechanical application of Article 1397.

• “It is our considered view that the complaint in the case at bar states a cause of action, because it contains allegations clearly showing violation of plaintiff's rights by the defendants. It can be said that at least, the complaint alleges facts which show violation of plaintiff's rights under the provisions of Chapter 2 of the Preliminary Title of the Civil Code, on the subject of human relations.” The passage illustrates the Court’s conclusion that the complaint did more than merely state a cause of action; it anchored plaintiff’s claim in both specific policy and general principles of human relations.

• Ma-ao Sugar Central Co. v. Barrios, 79 Phil. 66 — cited for the definition of a cause of action and its essential elements; applied as the standard of evaluation.
• Dimayuga v. Dimayuga, 96 Phil. 859; Mindanao Realty Corporation v. Kintanar, L-17152, Nov. 30, 1962; Dalandan v. Julio, L-19107, Feb. 29, 1964; World Wide Ins. & Surety Co. v. Manuel, 51 O.G. 6214 — cited for the rule that the sufficiency of a cause of action is ascertained from the facts alleged in the complaint.
• Amedo v. Rio y Olabarrieta, Inc., 92 Phil. 214; Blay v. Batangas Transportation Co., 80 Phil. 373 — cited for the proposition that the test is whether, on the basis of the alleged facts, the court can render a valid judgment.
• Ibañez v. Hongkong & Shanghai Bank, 22 Phil. 572, 584–585 — the leading authority on the right of a non-party to sue for nullity of a contract when his rights are prejudiced; followed and directly applied.
• Huerta v. Acosta, G.R. No. L-20497, Jan. 31, 1966 — cited for the principle that a prior actual occupant of government land has a preferential right to purchase; used to support the existence of plaintiff’s legal right.

• Article 1397, Civil Code — “The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily …” Invoked by defendants but interpreted not to foreclose an action by a non-party who asserts prejudice to his own rights; the action here was grounded on fraud and public policy, not on any obligation under the contract.
• Articles 19, 21, and 24, Civil Code — These human relations provisions require every person to act with justice, give everyone his due, observe honesty and good faith, and provide that any person who wilfully causes loss or injury to another in a manner contrary to morals, good customs, or public policy shall indemnify the latter. The Court noted that the complaint’s allegations of bad faith, fraud, and political influence fell within the protection of these articles, furnishing an independent basis for relief.
• PHHC Board Resolution No. 21, Fiscal Year 1951–52 — The resolution gave actual occupants the first chance to purchase lots in the former Quezon Memorial Grove site, subject to investigation. It provided the source of plaintiff’s alleged preferential right and the public policy against which the validity of the subsequent sale was to be measured.
• Republic Act No. 1162 (as amended), Section 3 — While not directly applicable to the PHHC lot, this provision, discussed in Huerta v. Acosta, established the policy of selling subdivided government lands only to tenants or occupants; referenced to bolster the principle of preferential occupancy rights.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles, and Fernando, JJ., concurred.