Spouses Mercader v. Development Bank of the Philippines
REITERATIONFacts
The Antecedents: Juan Maderazo obtained a loan from DBP secured by Lots Nos. 2993 and 2994. DBP required a five-meter road right of way over adjoining Lot No. 2985. Maderazo executed a 20-year lease contract for this right of way with the registered owners, spouses Gelacio and Vicenta Manreal, in 1966, spending P10,000 for its construction. The lease contract was not registered due to the Manreals' failure to deliver the Certificate of Title (TCT). In 1976, Maderazo's children, Spouses Bernardo and Florina Mercader, executed a 20-year and 4-month lease contract with the Manreals for the remaining portion of Lot No. 2985. The Manreals again failed to deliver the TCT despite assurances. Believing the Manreals, Bernardo Mercader introduced P25,000 worth of improvements on Lot No. 2985, including planting 600 calamansi trees, fencing, and constructing canals. The Mercaders later discovered the Manreals had mortgaged Lot No. 2985, including the improvements, to DBP for a P150,000 loan. Despite the unregistered interests, the Mercaders claimed DBP had actual knowledge due to ocular inspections. Procedural History: The Mercaders filed a complaint for specific performance on September 28, 1979, praying that DBP respect their interests, exclude the improvements from foreclosure, or reimburse them, and annotate their leases on the TCT. The Manreals admitted the unregistered leases and calamansi trees but denied other allegations. DBP admitted the loans but denied knowledge of any flaw in the TCT or adverse interests, asserting it was a mortgagee in good faith and that the unregistered leases were not binding. Lot No. 2985 was sold at public auction to DBP on November 26, 1979. The trial court ordered the Manreals dropped from the case. The trial court ruled in favor of the Mercaders, ordering DBP to respect the leases, exclude improvements from foreclosure, annotate the leases, and execute a deed of sale subject to DBP's approval. The Court of Appeals reversed, holding the lease-purchase option was outside the pleadings and that the improvements, being owned by the mortgagors, were validly included in the foreclosure sale, ordering the Mercaders to deliver possession without reimbursement. The Petition: The Spouses Mercader and Dr. Juan Y. Maderazo filed a petition for review, assailing the Court of Appeals' decision and resolution, arguing that the appellate court erred in disregarding the lease-purchase option as an issue not raised in the pleadings, as it was part of the pre-trial proceedings and a supplemental pleading. They contend the trial court correctly took cognizance of it. They pray for the case to be referred back to the Court of Appeals for determination of whether the lease-purchase option was consummated.
Issue(s)
Whether the Court of Appeals erred in disregarding the lease-purchase option as an issue not raised in the pleadings. Whether the trial court correctly took cognizance of the lease-purchase option as an issue, and whether evidence related to it was properly admitted even if not initially pleaded. Whether the lease-purchase option was consummated. Whether the improvements introduced by the Mercaders were validly included in the foreclosure sale. Whether the DBP had actual knowledge of the unregistered lease contracts and improvements.
Ruling
The Supreme Court granted the petition, set aside the Court of Appeals' decision and resolution, and referred the case back to the Court of Appeals for a determination of whether the lease-purchase option was consummated, with the end view of ascertaining the rights and obligations of the parties.
Ratio Decidendi
On the Court of Appeals' disregard of the lease-purchase option: The Supreme Court held that the Court of Appeals erred in disregarding the lease-purchase option on the ground that it was not raised in the pleadings. The Court explained that the lease-purchase option became an integral component of the pre-trial proceedings, as evidenced by its inclusion in the pre-trial order as an issue to be resolved. Furthermore, the Mercaders filed a supplemental pleading to aver supervening facts related to this option, which the DBP opposed, demonstrating their awareness and participation. The Court emphasized that Section 4, Rule 20 of the Rules of Court mandates that the pre-trial order controls the subsequent course of the action, limiting the issues for trial to those not disposed of by agreements. The DBP's active participation in discussions, objections, and even introduction of evidence related to the lease-purchase option estopped them from questioning its inclusion as an issue. On the admission of evidence on issues not raised in the pleadings: The Supreme Court further clarified that even if the lease-purchase option had not been properly pleaded or included in the pre-trial order, evidence relative to it could still be legitimately admitted under Section 5, Rule 10 of the Rules of Court. This provision allows for the amendment of pleadings to conform to or authorize the presentation of evidence when issues not raised in the pleadings are tried by the express or implied consent of the parties. The Court cited Co Tiamco v. Diaz and Bank of America v. American Realty Corporation, stating that a court may rule on the basis of evidence presented even if the relevant pleading has not been amended, provided no surprise or prejudice is caused to the adverse party and fair play is observed. In this case, the DBP was not prejudiced and had ample opportunity to refute the evidence, thus satisfying the requirements of fair play. On the consummation of the lease-purchase option: The Supreme Court found that the Court of Appeals did not determine whether the lease-purchase option was consummated. Given that the appellate court's decision was based on the premise that the issue should not have been considered, it did not delve into the merits of whether the option was indeed concluded. Therefore, the Supreme Court deemed it necessary to refer the case back to the Court of Appeals for a proper determination of this crucial question, which would then allow for the ascertainment of the parties' respective rights and obligations. On the inclusion of improvements in the foreclosure sale: While the Court of Appeals reversed the trial court's ruling on the improvements, the Supreme Court's decision to remand the case implies that the issue of whether the improvements were validly included in the foreclosure sale, and consequently, whether the Mercaders were entitled to compensation, remains to be fully resolved pending the determination of the lease-purchase option's consummation. On DBP's knowledge of unregistered interests: The Supreme Court's decision to remand the case suggests that the issue of DBP's alleged actual knowledge of the unregistered lease contracts and improvements, which the trial court found to be a basis for its ruling, was not definitively resolved by the Court of Appeals. The remand allows for a comprehensive review of all aspects of the case, including the factual determination of DBP's knowledge.
Main Doctrine
The Court of Appeals erred in disregarding the lease-purchase option as a material issue because it was included in the pre-trial order and subsequently in a supplemental pleading, and the opposing party participated in discussions and evidence presentation concerning it, thus estopping them from questioning its inclusion. Furthermore, even if not properly pleaded, evidence on new issues may be admitted under Section 5, Rule 10 of the Rules of Court if tried with the implied consent of the parties and no prejudice is caused.