[G.R. No. 120465.

 September 9, 1999]

WILLIAM UY and RODEL ROXAS, petitioners, vs. COURT OF

APPEALS, HON. ROBERT BALAO and NATIONAL
HOUSING AUTHORITY, respondents.

DECISION
KAPUNAN, J.:

Petitioners William Uy and Rodel Roxas are agents authorized to sell eight
parcels of land by the owners thereof. By virtue of such authority, petitioners offered
to sell the lands, located in Tuba, Tadiangan, Benguet to respondent National Housing
Authority (NHA) to be utilized and developed as a housing project.
On February 14, 1989, the NHA Board passed Resolution No. 1632 approving
the acquisition of said lands, with an area of 31.8231 hectares, at the cost of P23.867
million, pursuant to which the parties executed a series of Deeds of Absolute Sale
covering the subject lands. Of the eight parcels of land, however, only five were paid
for by the NHA because of the report [1] it received from the Land Geosciences Bureau
of the Department of Environment and Natural Resources (DENR) that the remaining
area is located at an active landslide area and therefore, not suitable for development
into a housing project.
On 22 November 1991, the NHA issued Resolution No. 2352 cancelling the sale
over the three parcels of land. The NHA, through Resolution No. 2394, subsequently
offered the amount of P1.225 million to the landowners as daos perjuicios.
On 9 March 1992, petitioners filed before the Regional Trial Court (RTC) of
Quezon City a Complaint for Damages against NHA and its General Manager Robert
Balao.
After trial, the RTC rendered a decision declaring the cancellation of the contract
to be justified. The trial court nevertheless awarded damages to plaintiffs in the sum
of P1.255 million, the same amount initially offered by NHA to petitioners as
damages.
Upon appeal by petitioners, the Court of Appeals reversed the decision of the trial
court and entered a new one dismissing the complaint. It held that since there was
sufficient justifiable basis in cancelling the sale, it saw no reason for the award of
damages. The Court of Appeals also noted that petitioners were mere attorneys-in-fact
and, therefore, not the real parties-in-interest in the action before the trial court.

xxx In paragraph 4 of the complaint, plaintiffs alleged themselves to

be sellers agents for several owners of the 8 lots subject matter of the
case. Obviously, William Uy and Rodel Roxas in filing this case acted as
attorneys-in-fact of the lot owners who are the real parties in interest but
who were omitted to be pleaded as party-plaintiffs in the case. This omission
is fatal. Where the action is brought by an attorney-in-fact of a land owner in
his name, (as in our present action) and not in the name of his principal, the
action was properly dismissed (Ferrer vs. Villamor, 60 SCRA 406 [1974];
Marcelo vs. de Leon, 105 Phil. 1175) because the rule is that every action
must be prosecuted in the name of the real parties-in-interest (Section 2,
Rule 3, Rules of Court).

When plaintiffs Uy and Roxas sought payment of damages in their favor in

view of the partial rescission of Resolution No. 1632 and the Deed of
Absolute Sale covering TCT Nos. 10998, 10999 and 11292 (Prayer
complaint, page 5, RTC records), it becomes obviously indispensable that
the lot owners be included, mentioned and named as party-plaintiffs, being
the real party-in-interest. Uy and Roxas, as attorneys-in-fact or apoderados,
cannot by themselves lawfully commence this action, more so, when the
supposed special power of attorney, in their favor, was never presented as an
evidence in this case. Besides, even if herein plaintiffs Uy and Roxas were
authorized by the lot owners to commence this action, the same must still be
filed in the name of the pricipal, (Filipino Industrial Corporation vs. San
Diego, 23 SCRA 706 [1968]). As such indispensable party, their joinder in
the action is mandatory and the complaint may be dismissed if not so
impleaded (NDC vs. CA, 211 SCRA 422 [1992]).[2]

Their motion for reconsideration having been denied, petitioners seek relief from
this Court contending that:

I. COMPLAINT FINDING THE RESPONDENT CA ERRED IN

DECLARING THAT RESPONDENT NHA HAD ANY LEGAL BASIS
FOR RESCINDING THE SALE INVOLVING THE LAST THREE (3)
PARCELS COVERED BY NHA RESOLUTION NO. 1632.

II. GRANTING ARGUENDO THAT THE RESPONDENT NHA HAD

LEGAL BASIS TO RESCIND THE SUBJECT SALE, THE
RESPONDENT CA NONETHELESS ERRED IN DENYING HEREIN
PETITIONERS CLAIM TO DAMAGES, CONTRARY TO THE
PROVISIONS OF ART. 1191 OF THE CIVIL CODE.

III. THE RESPONDENT CA ERRED IN DISMISSING THE SUBJECT

COMPLAINT FINDING THAT THE PETITIONERS FAILED TO JOIN
AS INDISPENSABLE PARTY PLAINTIFF THE SELLING LOT-
OWNERS.[3]

We first resolve the issue raised in the third assignment of error.

Petitioners claim that they lodged the complaint not in behalf of their principles
but in their own name as agents directly damaged by the termination of the
contract. The damages prayed for were intended not for the benefit of their principals
but to indemnify petitioners for the losses they themselves allegedly incurred as a
result of such termination. These damages consist mainly of unearned income and
advances.[4] Petitioners, thus, attempt to distinguish the case at bar from those
involving agents or apoderados instituting actions in their own name but in behalf of
their principals.[5] Petitioners in this case purportedly brought the action for damages
in their own name and in their own behalf.
We find this contention unmeritorious.
Section 2, Rule 3 of the Rules of Court requires that every action must be
prosecuted and defended in the name of the real party-in-interest. 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. Interest, within the meaning of the rule, means
material interest, an interest in the issue and to be affected by the decree, as
distinguished from mere interest in the question involved, or a mere incidental
interest.[6] Cases construing the real party-in-interest provision can be more easily
understood if it is borne in mind that the true meaning of real party-in-interest may be
summarized as follows: An action shall be prosecuted in the name of the party who,
by the substantive law, has the right sought to be enforced.[7]
Do petitioners, under substantive law, possess the right they seek to enforce? We
rule in the negative.
The applicable substantive law in this case is Article 1311 of the Civil Code,
which states:

Contracts take effect only between the parties, their assigns,

and heirs, except in case where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation, or by
provision of law. x x x.

If a contract should contain some stipulation in favor of a  third person, he

may demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person. (Underscoring supplied.)

Petitioners are not parties to the contract of sale between their principals and
NHA. They are mere agents of the owners of the land subject of the sale. As agents,
they only render some service or do something in representation or on behalf of their
principals.[8] The rendering of such service did not make them parties to the contracts
of sale executed in behalf of the latter.Since a contract may be violated only by the
parties thereto as against each other, the real parties-in-interest, either as plaintiff or
defendant, in an action upon that contract must, generally, either be parties to said
contract.[9]
Neither has there been any allegation, much less proof, that petitioners are
the heirs of their principals.
 Are petitioners assignees to the rights under the contracts of sale? In McMicking
vs. Banco Espaol-Filipino,[10] we held that the rule requiring every action to be
prosecuted in the name of the real party-in-interest

x x x recognizes the assignments of rights of action and also recognizes that

when one has a right of action assigned to him he is then the real party in
interest and may maintain an action upon such claim or right. The purpose
of [this rule] is to require the plaintiff to be the real party in interest, or, in
other words, he must be the person to whom the proceeds of the action shall
belong, and to prevent actions by persons who have no interest in the result
of the same. xxx

Thus, an agent, in his own behalf, may bring an action founded on a contract
made for his principal, as an assignee of such contract. We find the following
declaration in Section 372 (1) of the Restatement of the Law on Agency (Second):[11]
Section 372. Agent as Owner of Contract Right

(1) Unless otherwise agreed, an agent who has or who acquires an interest in

a contract which he makes on behalf of his principal can, although not a
promisee, maintain such action thereon as might a transferee having a
similar interest.

The Comment on subsection (1) states:

a. Agent a transferee. One who has made a contract on behalf of another

may become an assignee of the contract and bring suit against the other
party to it, as any other transferee. The customs of business or the course of
conduct between the principal and the agent may indicate that an agent who
ordinarily has merely a security interest is a transferee of the principals
rights under the contract and as such is permitted to bring suit. If the agent
has settled with his principal with the understanding that he is to collect the
claim against the obligor by way of reimbursing himself for his advances
and commissions, the agent is in the position of an assignee who is the
beneficial owner of the chose in action. He has an irrevocable power to sue
in his principals name. x x x. And, under the statutes which permit the real
party in interest to sue, he can maintain an action in his own name.This
power to sue is not affected by a settlement between the principal and the
obligor if the latter has notice of the agents interest. x x x. Even though the
agent has not settled with his principal, he may, by agreement with the
principal, have a right to receive payment and out of the proceeds to
reimburse himself for advances and commissions before turning the balance
over to the principal. In such a case, although there is no formal assignment,
the agent is in the position of a transferee of the whole claim for security; he
has an irrevocable power to sue in his principals name and, under statutes
which permit the real party in interest to sue, he can maintain an action in
his own name.

Petitioners, however, have not shown that they are assignees of their principals to
the subject contracts. While they alleged that they made advances and that they
suffered loss of commissions, they have not established any agreement granting them
the right to receive payment and out of the proceeds to reimburse [themselves] for
advances and commissions before turning the balance over to the principal[s].
Finally, it does not appear that petitioners are beneficiaries of a stipulation pour
autrui under the second paragraph of Article 1311 of the Civil Code. Indeed, there is
no stipulation in any of the Deeds of Absolute Sale clearly and deliberately conferring
a favor to any third person.
That petitioners did not obtain their commissions or recoup their advances
because of the non-performance of the contract did not entitle them to file the action
below against respondent NHA. Section 372 (2) of the Restatement of the Law on
Agency (Second) states:

(2) An agent does not have such an interest in a contract as to entitle him to
maintain an action at law upon it in his own name merely because he is
entilted to a portion of the proceeds as compensation for making it or
because he is liable for its breach.

The following Comment on the above subsection is illuminating:

The fact that an agent who makes a contract for his principal will gain or
suffer loss by the performance or nonperformance of the contract by the
principal or by the other party thereto does not entitle him to maintain an
action on his own behalf against the other party for its breach. An agent
entitled to receive a commission from his principal upon the performance of
a contract which he has made on his principals account does not, from this
fact alone, have any claim against the other party for breach of the contract,
either in an action on the contract or otherwise. An agent who is not a
promisee cannot maintain an action at law against a purchaser merely
because he is entitled to have his compensation or advances paid out of the
purchase price before payment to the principal. x x x.

Thus, in Hopkins vs. Ives,[12] the Supreme Court of Arkansas, citing Section 372
(2) above, denied the claim of a real estate broker to recover his alleged commission
against the purchaser in an agreement to purchase property.
In Goduco vs. Court of Appeals,[13] this Court held that:

x x x granting that appellant had the authority to sell the property, the same
did not make the buyer liable for the commission she claimed. At most, the
owner of the property and the one who promised to give her a commission
should be the one liable to pay the same and to whom the claim should have
been directed. xxx
 As petitioners are not parties, heirs, assignees, or beneficiaries of a
stipulation pour autrui under the contracts of sale, they do not, under substantive law,
possess the right they seek to enforce. Therefore, they are not the real parties-in-
interest in this case.
Petitioners not being the real parties-in-interest, any decision rendered herein
would be pointless since the same would not bind the real parties-in-interest.[14]
Nevertheless, to forestall further litigation on the substantive aspects of this case,
we shall proceed to rule on the merits.[15]
Petitioners submit that respondent NHA had no legal basis to rescind the sale of
the subject three parcels of land. The existence of such legal basis, notwithstanding,
petitioners argue that they are still entitled to an award of damages.
Petitioners confuse the cancellation of the contract by the NHA as a rescission of
the contract under Article 1191 of the Civil Code. The right of rescission or, more
accurately, resolution, of a party to an obligation under Article 1191 is predicated on a
breach of faith by the other party that violates the reciprocity between them.[16] The
power to rescind, therefore, is given to the injured party.[17] Article 1191 states:

The power to rescind obligations is implied in reciprocal ones, in case one

of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.

In this case, the NHA did not rescind the contract. Indeed, it did not have the
right to do so for the other parties to the contract, the vendors, did not commit any
breach, much less a substantial breach,[18] of their obligation. Their obligation was
merely to deliver the parcels of land to the NHA, an obligation that they fulfilled. The
NHA did not suffer any injury by the performance thereof.
The cancellation, therefore, was not a rescission under Article 1191. Rather, the
cancellation was based on the negation of the cause arising from the realization that
the lands, which were the object of the sale, were not suitable for housing.
Cause is the essential reason which moves the contracting parties to enter into it.
[19]
 In other words, the cause is the immediate, direct and proximate reason which
justifies the creation of an obligation through the will of the contracting parties.
[20]
 Cause, which is the essential reason for the contract, should be distinguished from
motive, which is the particular reason of a contracting party which does not affect the
other party.[21]
For example, in a contract of sale of a piece of land, such as in this case, the
cause of the vendor (petitioners principals) in entering into the contract is to obtain the
price. For the vendee, NHA, it is the acquisition of the land.[22] The motive of the
NHA, on the other hand, is to use said lands for housing. This is apparent from the
portion of the Deeds of Absolute Sale[23]stating:
WHEREAS, under the Executive Order No. 90 dated December 17, 1986,
the VENDEE is mandated to focus and concentrate its efforts and resources
in providing housing assistance to the lowest thirty percent (30%) of urban
income earners, thru slum upgrading and development of sites and services
projects;

WHEREAS, Letters of Instructions Nos. 555 and 557 [as] amended by

Letter of Instruction No. 630, prescribed slum improvement and upgrading,
as well as the development of sites and services as the principal housing
strategy for dealing with slum, squatter and other blighted communities;

xxx

WHEREAS, the VENDEE, in pursuit of and in compliance with the above-

stated purposes offers to buy and the VENDORS, in a gesture of their
willing to cooperate with the above policy and commitments, agree to sell
the aforesaid property together with all the existing improvements there or
belonging to the VENDORS;

NOW, THEREFORE, for and in consideration of the foregoing premises

and the terms and conditions hereinbelow stipulated, the VENDORS hereby,
sell, transfer, cede and convey unto the VENDEE, its assigns, or successors-
in-interest, a parcel of land located at Bo. Tadiangan, Tuba, Benguet
containing a total area of FIFTY SIX THOUSAND EIGHT HUNDRED
NINETEEN (56,819) SQUARE METERS, more or less x x x.

Ordinarily, a partys motives for entering into the contract do not affect the
contract. However, when the motive predetermines the cause, the motive may be
regarded as the cause. In Liguez vs. Court of Appeals,[24] this Court, speaking through
Justice J.B.L. Reyes, held:

xxx It is well to note, however, that Manresa himself (Vol. 8, pp. 641-642)
while maintaining the distinction and upholding the inoperativeness of the
motives of the parties to determine the validity of the contract, expressly
excepts from the rule those contracts that are conditioned upon the
attainment of the motives of either party.

The same view is held by the Supreme Court of Spain, in its decisions of
February 4, 1941, and December 4, 1946, holding that the motive may be
regarded as causa when it predetermines the purpose of the contract.

In this case, it is clear, and petitioners do not dispute, that NHA would not have
entered into the contract were the lands not suitable for housing. In other words, the
quality of the land was an implied condition for the NHA to enter into the
contract. On the part of the NHA, therefore, the motive was the cause for its being a
party to the sale.
 Were the lands indeed unsuitable for the housing as NHA claimed?
We deem the findings contained in the report of the Land Geosciences Bureau
dated 15 July 1991 sufficient basis for the cancellation of the sale, thus:

In Tadiangan, Tuba, the housing site is situated in an area of moderate

topography. There [are] more areas of less sloping ground apparently
habitable. The site is underlain by x x x thick slide deposits (4-45m)
consisting of huge conglomerate boulders (see Photo No. 2) mix[ed] with
silty clay materials. These clay particles when saturated have some swelling
characteristics which is dangerous for any civil structures especially mass
housing development.[25]

Petitioners content that the report was merely preliminary, and not conclusive, as
indicated in its title:

MEMORANDUM

TO: EDWIN G. DOMINGO

Chief, Lands Geology Division

FROM: ARISTOTLE A. RILLON

Geologist II

SUBJECT: Preliminary Assessment of Tadiangan Housing Project in Tuba,

Benguet[26]

Thus, page 2 of the report states in part:

xxx

Actually there is a need to conduct further geottechnical [sic] studies in the

NHA property. Standard Penetration Test (SPT) must be carried out to give
an estimate of the degree of compaction (the relative density) of the slide
deposit and also the bearing capacity of the soil materials. Another thing to
consider is the vulnerability of the area to landslides and other mass
movements due to thick soil cover. Preventive physical mitigation methods
such as surface and subsurface drainage and regrading of the slope must be
done in the area.[27]

We read the quoted portion, however, to mean only that further tests are required
to determine the degree of compaction, the bearing capacity of the soil materials, and
vulnerability of the area to landslides, since the tests already conducted were
inadequate to ascertain such geological attributes. It is only in this sense that the
assessment was preliminary.
 Accordingly, we hold that the NHA was justified in cancelling the contract. The
realization of the mistake as regards the quality of the land resulted in the negation of
the motive/cause thus rendering the contract inexistent. [28] Article 1318 of the Civil
Code states that:

Art. 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established. (Underscoring supplied.)

Therefore, assuming that petitioners are parties, assignees or beneficiaries to the

contract of sale, they would not be entitled to any award of damages.
WHEREFORE, the instant petition is hereby DENIED.
SO ORDERED.
Davide, C.J., (Chairman), on leave.
Puno, Pardo, and Ynares-Santiago, JJ., concur.

[1] 
Exhibit 4.
[2] 
Rollo, pp. 26-27. Underscoring in the original.
[3] 
Id., at 11.
[4] 
Petitioners alleged in their complaint:
14. Exhausted with the procrastinations and unjustified positions being assumed by the defendant
NHA, herein plaintiffs hereby acquiesce to the notice of rescission handed down by the defendant
NHA, through its General Manger Robert Balao, subject to the award of a reasonable and fair amount
of damages.
14.a. Unearned Income: Had defendant NHA paid for the last three parcels of land covered by Res. No.
1632, and the deeds of absolute sale referred to in par. 10 above, herein plaintiffs would have made an
income of approximately P6.4 Million. Defendant NHA should be held answerable to the plaintiffs for
this unearned income as shall be proven in the course of the trial.
14.b. Opportunity Loss: Had defendant NHA paid for the subject parcels of land within a reasonable
time from February 1989, herein plaintiffs could have invested their income of P6.4 Million and earn at
a conservative return on investment of 2%/year or at least P4.6 million over the last three years.Again,
defendant NHA should be required to indemnify the herein plaintiffs for this lost opportunity as shall
be proven in the course of the trial.
14.c. Expenses: Through the last three years, herein plaintiffs had consistently and unhesitantly spent
reasonable sums of money by way of representations, advances to landowners, advances for clearing of
titles subject of the herein transactions, advances to sub-agents, logistical expenses and lawyers fees; in
the process, they also incurred loans to finance these expenses-total expenses incurred prior to the
filing of the present case being estimated at P1.3 million. Defendants should be required to reimburse
the plaintiffs for these expenses as shall be proven in the course of the trial.
15. Plaintiffs had suffered and continue to suffer prolonged agony and mental anguish from the
defendant NHAs previous procrastinations and condescending approach to the herein plaintiffs plight
for which defendant NHA should be charged moral damages in favor of the plaintiffs in the amount of
P600,000.00.
16. To set an example, and to prevent the recurrence of the herein circumstances, defendant NHA
should be charged exemplary damages in the amount of P600,000.00 in favor of the herein plaintiff.
17. To vindicate their rights in the premises, plaintiffs had to contract the services of herein counsel,
and to incur cost of suit, as shall be proven in the course of the trial. Defendant NHA should be held
liable to the plaintiffs for these amounts by way of attorneys fees in the amount of P1 million.(Records,
pp. 4-5.)
[5] 
Filipinas Industrial Corp. vs. San Diego, 23 SCRA 706 (1968); Brown vs. Brown, 3 SCRA 451
(1961); Marcelo vs. De Leon, 105 Phil. 1175 (1959); Esperanza and Bullo vs. Catindig, 27 Phil. 397
(1914).
[6] 
University of the Philippines vs. Ligot-Telan, 227 SCRA 343 (1993); Ralla vs. Ralla, 199 SCRA 495
(1991); Rebollido vs. Court of Appeals, 170 SCRA 800 (1989).
[7] 
I Francisco, The Revised Rules of Court in the Phil., ed., p. 211. See also Lubbock Feed Lots, Inc. v.
Iowa Beef Processors, 630 F. 2d 250 (1980).
[8] 
Article 1868, Civil Code.
[9] 
Marimperio Compaia Naviera, S.A. vs. Court of Appeals, 156 SCRA 368 (1987). See also I Moran,
Comments on the Rules of Court, 1979 ed., p. 157.
[10] 
13 Phil. 429 (1909).
[11] 
As adopted and Promulgated by the American Law Institute at Washington, D.C., May 23, 1957.
[12] 
566 S.W. 2d 147.
[13] 
10 SCRA 275 (1964).
[14] 
Filipinas Industrial Corporation vs. San Diego, 23 SCRA 706 (1968).
[15] 
See: Arroyo and Granada and Gentero, 18 Phil. 484 (1911).
[16] 
Romero vs. Court of Appeals, 250 SCRA 223 (1995).
[17] 
Boysaw vs. Interphil Promotions, Inc., 148 SCRA 635, cited in Romero vs. Court of Appeals, supra.
[18] 
See Ocampo vs. Court of Appeals, 233 SCRA 551 (1994). See also Power Commercial and
Industrial Corp. vs. Court of Appeals, 274 SCRA 597 (1997), and Massive Construction, Inc. vs.
Intermediate Appellate Court, 223 SCRA 1 (1993).
[19] 
Basic Books (Phil.), Inc. vs. Lopez, et al, 16 SCRA 291 (1966), citing General Enterprises
Inc. vs. Lianga Bay Logging Co., 11 SCRA 733 (1964).
[20] 
Id., citing 3 Castan, 4th ed., p. 347.
[21] 
Republic vs. Cloribel, 36 SCRA 534 (1970). See also Article 1351, Civil Code.
[22] 
Article 1350, Civil Code. In onerous contracts, the cause is understood to be, for each contracting
party, the prestation or promise of a thing or service by the other. x x x.
[23] 
Exhibits B, C, and D.
[24] 
102 Phil. 577 (1957), cited in E. Razon Inc. vs. Philippine Ports Authority, 151 SCRA 233
(1987). See also Philippine National Construction Corp. vs. Court of Appeals, 272 SCRA 183 (1997),
where the Court held that xxx As a general principle, the motive or particular purpose of a party in
entering into a contract does not affect the validity nor existence of the contract; an exception is when
the realization of such motive or particular purpose has been made a condition upon which the contract
is made to depend. xxx
[25] 
Records, p. 32. Underscoring supplied.
[26] 
Id., at 31. Underscoring supplied.
[27] 
Id., at 32. Underscoring supplied.
[28] 
Note that said contract is also avoidable under Article 1331 of the Civil Code which states:
Art. 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing
which is the object of the contract, or to those conditions which have principally moved one or both
parties to enter into the contract.
xxx