The Supreme Court held that a Deed of Absolute Sale was void due to being an absolutely simulated contract, as there was no intention to transfer ownership from the seller to the buyer. This means that if the parties never intended for the sale to be real, the contract is null and void from the beginning. This decision protects individuals from losing their property based on agreements that were never meant to be binding, ensuring that the true intent of parties prevails over the written form of contracts.

A Promise of Collateral: Did It Create a Valid Sale?

This case revolves around a dispute over a parcel of land in Aklan. Dr. Lorna Formaran claimed ownership based on a donation from her relatives. However, Dr. Glenda Ong presented a Deed of Absolute Sale, arguing that Dr. Formaran had sold her half of the property years ago. Dr. Formaran contested the sale, claiming it was a simulation to help Dr. Ong secure a loan, with no actual consideration exchanged. The central legal question is whether the Deed of Absolute Sale was valid, or if it was a simulated contract without any real intent to transfer ownership.

The Regional Trial Court (RTC) initially sided with Dr. Formaran, declaring the sale null and void. The Court of Appeals (CA), however, reversed this decision, prompting Dr. Formaran to elevate the case to the Supreme Court. The Supreme Court meticulously examined the evidence presented by both parties. The Court noted several factors indicating the simulated nature of the sale. First, there was a lack of consideration. Dr. Formaran testified that no money exchanged hands during the execution of the Deed of Sale.

Second, the timing of the sale raised suspicion. The Deed was executed shortly after Dr. Formaran received the land as a donation from Dr. Ong’s parents. It seemed unusual for Dr. Formaran to sell the land so soon after acquiring it. Third, Dr. Formaran remained in actual possession of the property even after the alleged sale. This is inconsistent with a genuine transfer of ownership, where the buyer would typically take possession. Fourth, Dr. Formaran mortgaged the land to Aklan Development Bank years after the supposed sale, further suggesting that she still considered herself the owner. Lastly, the registration of the sale occurred 24 years after its execution. This delay raised doubts about the true intent of the parties.

The Supreme Court gave weight to the RTC’s observations, quoting:

“The amplitude of foregoing undisputed facts and circumstances clearly shows that the sale of the land in question was purely simulated. It is void from the very beginning (Article 1346, New Civil Code). If the sale was legitimate, defendant Glenda should have immediately taken possession of the land, declared in her name for taxation purposes, registered the sale, paid realty taxes, introduced improvements therein and should not have allowed plaintiff to mortgage the land. These omissions properly militated against defendant Glenda’s submission that the sale was legitimate and the consideration was paid.”

Based on these factors, the Supreme Court concluded that the Deed of Sale was indeed simulated. Article 1345 of the Civil Code defines simulation of a contract, stating:

ART. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement.

Article 1346 further clarifies the effect of simulated contracts:

ART. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement.

In this case, the Supreme Court determined that the simulation was absolute, meaning the parties never intended to be bound by the sale. The lack of consideration, coupled with the other suspicious circumstances, pointed to a complete absence of intent to transfer ownership. The Court emphasized that while a notarized Deed of Absolute Sale carries a presumption of regularity, this presumption can be overturned by clear and convincing evidence of simulation. The Court cited previous cases, such as Suntay vs. Court of Appeals, which held that notarization does not validate an instrument that was never intended to have binding legal effect.

The Supreme Court’s decision highlights the importance of proving the true intention of parties in a contract. While the written document is a primary source of evidence, courts are not bound to accept it at face value. They will consider surrounding circumstances, the conduct of the parties, and any other relevant evidence to determine whether the contract reflects the true agreement and intent of the parties. This principle is particularly important in cases involving allegations of fraud, mistake, or simulation, where one party claims that the written contract does not accurately reflect the reality of the situation.

The ruling serves as a warning against entering into simulated contracts, even if they seem harmless at the time. Such contracts can have serious legal consequences, including the loss of property and exposure to litigation. It also underscores the need for careful documentation and adherence to legal formalities when entering into any contractual agreement. Parties should ensure that the terms of the contract accurately reflect their intentions and that all necessary steps are taken to make the contract legally binding.

This case provides a clear example of how the Supreme Court applies the principles of contract law to protect individuals from unfair or fraudulent transactions. It demonstrates the Court’s willingness to look beyond the written document and consider the totality of the circumstances in determining the validity of a contract.

FAQs

What was the key issue in this case?	The key issue was whether the Deed of Absolute Sale between Dr. Formaran and Dr. Ong was valid, or if it was a simulated contract without any real intent to transfer ownership. The court needed to determine if the sale was genuine or merely a fictitious agreement.
What is a simulated contract?	A simulated contract is one where the parties do not intend to be bound by the terms of the agreement. It can be absolute, where the parties intend no contract at all, or relative, where they conceal their true agreement.
What factors did the Supreme Court consider in determining that the sale was simulated?	The Court considered the lack of consideration, the timing of the sale shortly after the donation, Dr. Formaran’s continued possession of the land, the mortgage of the land by Dr. Formaran, and the late registration of the sale. All these factors suggested that the sale was not genuine.
What is the effect of an absolutely simulated contract?	An absolutely simulated contract is void from the beginning, meaning it has no legal effect. The parties are not bound by its terms, and no rights or obligations arise from it.
Does notarization guarantee the validity of a contract?	No, notarization creates a presumption of regularity, but it does not guarantee the validity of a contract. The presumption can be overturned by clear and convincing evidence, such as evidence of simulation or fraud.
What is the significance of possession in determining ownership?	Actual possession of property is a strong indicator of ownership. In this case, Dr. Formaran’s continued possession of the land after the alleged sale suggested that she still considered herself the owner.
How does this case affect future real estate transactions?	This case highlights the importance of documenting the true intent of the parties and ensuring that all legal formalities are followed. It serves as a warning against entering into simulated contracts and underscores the need for careful consideration and legal advice.
What should parties do to avoid allegations of simulation in a sale?	Parties should ensure that the contract accurately reflects their intentions, that consideration is actually exchanged, that possession is transferred if intended, and that the sale is registered promptly. Consulting with a lawyer is also advisable.

This case underscores the importance of clear intention and genuine agreement in contractual relationships. The Supreme Court’s decision reaffirms the principle that courts will look beyond the mere form of a contract to ascertain the true intent of the parties, especially when questions of simulation arise. Ensuring transparency and adherence to legal formalities remains crucial in all transactions.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: DR. LORNA C.FORMARAN v. DR. GLENDA B. ONG, G.R. No. 186264, July 08, 2013