FACTS:

Plaintiffs Sta. Lucia Realty and Development, Inc. and Rapid City Realty and Development Corporation filed a complaint seeking the annulment and cancellation of certain Transfer Certificates of Title (TCTs) and derivative titles, cancellation of subdivision plans, and nullification of a Deed of Absolute Sale. They claimed that the disputed property, Lot 2, is a road lot forming part of the Marikina-Infanta Road and is the point of egress and ingress to Parkehills Executive Village. Summons and copies of complaints were served on the defendants, and the Regional Trial Court (RTC) denied the Motion to Dismiss filed by defendants Department of Public Works and Highways (DPWH) and Office of the Solicitor General (OSG). Defendants Spouses Villa were declared in default by the RTC but the order was later lifted upon their motion. However, they failed to comply with the RTC's order, resulting in a second declaration of default. The plaintiffs were allowed to present their evidence ex-parte. After the presentation of evidence, the RTC rendered a decision in favor of the plaintiffs. Dissatisfied with the RTC decision, the defendants appealed to the Court of Appeals (CA).

The CA granted the appeal and reversed the RTC's decision. It held that the plaintiffs were not real parties in interest to seek nullification and cancellation of titles, plans, and the Deed of Absolute Sale. The CA also stated that the case did not involve any illegal appropriation or taxation, making a taxpayer's suit improper.

In a separate case, Sta. Lucia Realty and Rapid City Realty filed a complaint before the RTC for the declaration of nullity and/or unconstitutionality of certain provisions of Republic Act No. 8974, the law governing the acquisition of right-of-way and site or location for government infrastructure projects. The RTC dismissed the complaint, and the CA affirmed the dismissal, stating that the plaintiffs failed to establish their standing to sue. The CA also found that the Office of the Solicitor General was wrongfully impleaded in the complaint. Rapid City Realty filed a Petition before the Supreme Court, raising several issues for resolution.

ISSUES:

1. Whether petitioner is a real party in interest in the case.

2. Whether the contract of sale between the Republic and Lourdes can be challenged by a third party.

3. Whether the plaintiffs, who are not parties to the contract, have the right to bring an action for nullity of the contract.

4. Whether the plaintiffs have shown that they have been prejudiced by the contract.

5. Whether the petitioner tenants' association has the personality to sue in its own capacity or on behalf of its members who are tenants.

6. Whether the petitioner tenants' association has a cause of action against the respondents.

7. Whether the petitioner is a real party in interest to challenge the validity of the Deed of Absolute Sale.

8. Whether the petitioner can question the validity of the Deed of Absolute Sale as a taxpayer.

9. Whether or not the petitioner has the standing or locus standi to challenge the validity of the Deed of Absolute Sale.

10. Whether or not the government agencies impleaded as defendants were properly joined in the case.

RULING:

1. The petitioner is not a real party in interest. The court agrees with the CA that the grounds raised by petitioner are unmeritorious. The contract in question, the Deed of Absolute Sale, cannot bind a third party who is not a party to the contract.

2. Generally, a contract cannot prejudice or benefit a third person who is not a party to the contract. However, in cases of rescissible contracts, a third party who is injured or defrauded can challenge the contract. In this case, the contract is not rescissible, therefore, the petitioner cannot challenge its validity.

3. The plaintiffs, who are not parties to the contract, do not have the right to bring an action for nullity of the contract. Only parties to the contract or those with a cause of action or representation from the parties have the legal personality and right to challenge the validity of the contract.

4. The plaintiffs have failed to show that they have been prejudiced by the contract. There is no evidence that the contract is detrimental or prejudicial to their rights and interests.

5. The real party in interest in this case is the tenants of the House International Building, not the petitioner association. The association, being a separate legal entity from its members, does not have a real, actual, material, or substantial interest in the subject matter of the action. Therefore, the petitioner association does not have the personality to sue on behalf of its members.

6. Since the petitioner association does not have the personality to sue, it follows that it does not have a cause of action against the respondents.

7. The petitioner is not a real party in interest to challenge the validity of the Deed of Absolute Sale. The Court held that the petitioner failed to show that its interests are directly affected by the questioned Deed of Absolute Sale. The interest of the petitioner in the nullification of the Deed of Absolute Sale is merely incidental and not material. The petitioner did not prove that it would suffer direct, positive prejudice if the Deed is not nullified. Therefore, the petitioner does not have standing to challenge the validity of the Deed.

8. The petitioner can question the validity of the Deed of Absolute Sale as a taxpayer. The Court held that as long as taxes are involved, people have a right to question contracts entered into by the government. The petitioner need not be a party to the contract to challenge its validity. It must be shown that public funds derived from taxation are disbursed by a political subdivision or instrumentality, a law is violated or some irregularity is committed, and the petitioner is directly affected by the alleged act. In this case, there is government support in the amount of [P]187 million that would be spent for paying the interest of the bonds, which involves taxes. Therefore, the petitioner has standing to question the validity of the Deed of Absolute Sale as a taxpayer.

9. The Court held that the petitioner, including Sta. Lucia Realty, is not a real party in interest and does not have the standing or locus standi to challenge the validity of the Deed of Absolute Sale. The petitioner failed to prove that they have a direct, positive, material injury that was caused by the questioned act. The Court emphasized that even if "transcendental importance" is invoked, the petitioner still has to prove such importance by preponderant evidence. The damage to the reputation and good name of two private corporations cannot be equated to "transcendental importance," "paramount public interest," or "far-reaching implications" required in granting standing to taxpayers.

10. The Court ruled that the resolution of this issue, along with the rest of the issues raised in the case, is rendered superfluous because of the lack of standing of the petitioner. Consequently, the dismissal of the petitioner's Complaint before the Regional Trial Court (RTC) was affirmed.

PRINCIPLES:

• The principle of relativity of contracts, embodied in Article 1311 of the Civil Code, states that a contract can only bind the parties who entered into it or their successors. It does not favor or prejudice a third person.

• Article 1397, 1408, and 1421 of the Civil Code provide that a third person cannot challenge the validity of a contract, except for rescissible contracts, which can be attacked by an injured or defrauded third party.

• Contracts are valid only between the parties who execute them and their heirs, except in cases where the rights and obligations arising from the contract are not transmissible.

• A third person who benefits from a stipulation in a contract may demand its fulfillment if they have given notice of acceptance to the party bound before it is revoked.

• Only parties to a contract or those with a cause of action or representation from the parties have the legal personality and right to challenge the validity of the contract.

• In order to challenge the validity of a contract, a person must show that they have a preferred right that was prejudiced by the contract in which they had no participation.

• Only the real party in interest has the capacity to sue in a case. The real party in interest is the party who stands to be benefited or injured by the judgment or the party entitled to the avails of the suit.

• A person who is not a party to a contract and for whose benefit it was not expressly made cannot maintain an action thereon. The contract, if performed by the parties to it, would incidentally inure to his benefit.

• Interest in issue refers to material interest and not mere incidental interest.

• A real party in interest is a person having substantial rights in the subject matter of the case.

• The burden of proof lies on the party asserting a claim or right.

• To have standing as a taxpayer to question the validity of a contract, it must be shown that public funds derived from taxation are illegally disbursed or deflected for improper purpose, and the petitioner is directly affected by the alleged act.

• The requirement of standing or locus standi is a procedural technicality.

• The Court may relax the stringent "direct injury test" when "transcendental importance," "paramount public interest," or "far-reaching implications" are involved.

• A taxpayer's suit requires that the taxpayer must be directly affected by the questioned act.

• Damage to the reputation and good name of private corporations does not measure up to "transcendental importance," "paramount public interest," or "far-reaching implications."

• The government agencies were properly impleaded in accordance with the rules requiring mandatory notice to the Office of the Solicitor General (OSG) when a government agency is impleaded.