View full case

CKH INDUSTRIAL v. CA

FACTS:

The case involves a civil action filed by petitioners CKH Industrial and Development Corporation (CKH) and Rubi Saw against Century-Well Phil. Corporation (Century-Well) and other defendants. The petitioners claimed that they entered into a Deed of Absolute Sale for two parcels of land with Century-Well. The agreed purchase price was P800,000, to be paid through a Manager's Check. However, despite several demands, Century-Well did not pay the consideration. As a result, the petitioners sought the annulment or rescission of the Deed of Absolute Sale and requested a writ of preliminary injunction to prevent the registration of the Certificates of Title in Century-Well's name.

The petitioners alleged that Rubi Saw went to Uy Chi Kim's residence and business address on the agreed date for the execution of the Deed of Sale. However, Uy Chi Kim presented a Deed of Absolute Sale in favor of Century-Well for Rubi Saw to sign. Rubi Saw inquired about the payment of P800,000 and insisted that it should be in the form of a Manager's Check. Uy Chi Kim explained that they were unable to obtain a Manager's Check because it was a Sunday but assured Rubi Saw he had enough cash. Uy Chi Kim left to retrieve the money and convinced Rubi Saw to sign the Deed of Absolute Sale and give it to Lourdes Chong along with the Certificates of Title. When Uy Chi Kim returned, he informed Rubi Saw that he only had P20,000. He assured her that he would have the full amount the next day when the banks would be open. Rubi Saw trusted Uy Chi Kim and did not insist on the return of the signed Deed of Absolute Sale. However, when she tried to contact Lourdes Chong and Uy Chi Kim, she could not find them. Rubi Saw then proceeded to write a letter to Century-Well to cancel the Deed of Absolute Sale due to lack of consideration, but Lourdes Chong refused to receive it. Numerous demand letters were sent, but the defendants refused to pay. Rubi Saw also wrote to the Register of Deeds to prevent the registration of the sale and filed an Affidavit of Adverse Claim. However, the defendants made representations to register the Deed of Absolute Sale.

In response, the private respondents alleged that the consideration for the sale was paid through legal compensation and promissory notes, as well as a cash payment of P100,000. They claimed that CKH borrowed money from Chong Tak Choi and Chong Tak Kei and made payments and paid interest on the loan.

The pertinent facts show that CKH borrowed P700,000 from Chong Tak Choi and Chong Tak Kei, with P300,000 bearing interest and the remaining P400,000 interest-free. After CKH's death, the payments stopped. Uy Chi Kim claimed that the source of the P700,000 was Hung Yuk Wah, who sent the money via a bank draft from Hong Kong to the defendants. Uy Chi Kim also acted as a mediator between the parties due to family differences. During the scheduled execution of the Deed of Absolute Sale, Uy Chi Kim gave Rubi Saw P100,000 in cash as part of the payment for the land. However, Rubi Saw refused to pay the capital gains tax during the registration, which led to the dispute. The trial court denied the petitioners' request for a preliminary injunction and ultimately annulled the Deed of Absolute Sale.

ISSUES:

  1. Whether there was valid consideration for the sale of the real properties involved.

  2. Whether off-setting a portion of the purchase price with the outstanding obligation of Cheng Kim Heng to his sons Chong Tak Choi and Chong Tak Kei is valid.

  3. Whether there was payment of the consideration for the sale of the real property.

  4. Whether there was a valid compensation of the obligations of Cheng Kim Heng to his sons with the purchase price of the sale.

  5. Whether there was valid compensation of the purchase price with the obligations of Cheng Kim Heng to his sons Choi and Kei.

  6. Whether the promissory notes indicate Cheng Kim Heng's indebtedness to Century-Well.

  7. Whether the interest of Choi and Kei in Century-Well can be offset against the obligations between CKH and Century-Well arising from the deed of absolute sale.

  8. Whether the doctrine of piercing the corporate veil applies to the present case.

RULING:

  1. The court found that there was no valid consideration for the sale of the real properties involved. The Deed of Sale did not provide for payment by off-setting a portion of the purchase price with the outstanding obligation of Cheng Kim Heng to his sons. The evidence presented did not disclose that payment of the stipulated amount had ever been made by the buyer. The rescission of the contract was called for.

  2. The court ruled that there cannot be any valid off-setting or compensation in this case as stated in Article 1278 of the Civil Code. The parties were not mutually bound principally as creditors and debtors, which is a prerequisite for compensation.

  3. The Court held that there was payment of the consideration for the sale of the real property and that there was a valid compensation of the obligations of Cheng Kim Heng to his sons with the purchase price of the sale. The Court found that the parties had reached an agreement where the purchase price would be partially paid in cash and partially by offsetting the debt of Cheng Kim Heng to his sons. The mode of payment through compensation is recognized under Article 1249 of the Civil Code. The Court also ruled that the Deed of Absolute Sale expressed the true agreement of the parties, as it was unchallenged and fell within the purview of the parol evidence rule. Hence, the rescission or annulment of the document was not warranted, and the appellees were not entitled to their requested reliefs.

  4. The Court held that there can be no valid compensation of the purchase price with the obligations of Cheng Kim Heng to his sons Choi and Kei. The principal contracting parties, CKH and Century-Well, are not mutually bound as creditors and debtors in their own name. The promissory notes reflect Cheng Kim Heng's indebtedness to his sons, Chong Tak Choi and Chong Tak Kei, and not to Century-Well. Without the confluence of the characters of mutual debtors and creditors, the parties cannot stipulate to the compensation of their obligations.

  5. The Court found that the promissory notes do not indicate Cheng Kim Heng's indebtedness to Century-Well. The notes specifically state CKH Industrial & Development Corporation's promise to pay the sums of money to Chong Tak Choi and Chong Tak Kei. There is no acknowledgment of any indebtedness to Century-Well by Cheng Kim Heng.

  6. The Court ruled that the interest of Choi and Kei in Century-Well cannot be offset against the obligations between CKH and Century-Well arising from the deed of absolute sale. Choi and Kei are merely stockholders of Century-Well and are not parties to the Deed of Absolute Sale. As such, they are not bound by the contract of sale, even in a representative capacity.

  7. The Court held that the doctrine of piercing the corporate veil does not apply to the present case. Under present law, corporations have personalities separate and distinct from their stockholders, except when there is a showing that the corporate fiction is being used to defeat public convenience, justify wrong, protect fraud, defend crime, or when the corporation is the mere alter ego or business conduit of a person. In this case, there was no demonstration of merit to warrant the piercing of the corporate veil.

PRINCIPLES:

  • The best evidence of the agreement between the parties is the Deed of Sale itself. (Doctrine of Best Evidence Rule)

  • Compensation or off-setting of obligations requires that the parties be mutually bound principally as creditors and debtors. (Article 1278 of the Civil Code)

  • The parol evidence rule prohibits the addition to or contradiction of the terms of a written instrument by testimony or other evidence purporting to show that, at or before the execution of the written agreement, other or different terms were agreed upon by the parties, varying the purport of the written contract.

  • There are exceptions to the parol evidence rule. A party may present evidence to modify, explain, or add to the terms of the written agreement if he puts in issue in his pleadings: (a) an intrinsic ambiguity, mistake, or imperfection in the written agreement; (b) the failure of the written agreement to express the true intent and agreement of the parties; (c) the validity of the written agreement; or (d) the existence of other terms agreed to by the parties or their successors in interest after the execution of the written agreement.

  • When an agreement has been reduced to writing, the parties cannot be permitted to adduce evidence to prove alleged practices that would alter the terms of the written agreement. Whatever is not found in the writing is understood to have been waived and abandoned.

  • Agreements affecting the civil relationship of the contracting parties must come under the scrutiny of the provisions of law existing and effective at the time of the execution of the contract.

  • Compensation as a mode of extinguishment of obligations requires the confluence of the characters of mutual debtors and creditors in their own right.

  • Legal compensation arises when two persons are creditors and debtors of each other, while conventional compensation may be agreed upon by the parties even when not all the requisites for legal compensation are present.

  • Corporations have separate and distinct legal personalities from their stockholders.

  • The doctrine of piercing the corporate veil applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, defend crime, or when the corporation is the mere alter ego or business conduit of a person.