SECOND DIVISION

[G.R. No. 125272. October 7, 1999]

CANDIDO AMIL, petitioner, vs. COURT OF APPEALS, and SPOUSES ERNESTO

GADOR and NILA GADOR, respondents.

DECISION
MENDOZA, J.:

This is a petition for review on certiorari of the decision[1] of the Court of Appeals, dated
January 29, 1996, affirming the decision of the Regional Trial Court, Branch 36, Dumaguete
City, Negros Oriental, dated October 26, 1993, which declared private respondents Ernesto and
Nila Gador the absolute owners of the parcel of land, covered by Transfer Certificate of Title No.
14021, in Calindagan, Dumaguete City, Negros Oriental.
The facts are as follows:
Petitioner Amil and private respondents Ernesto and Nila Gador executed a document
entitled Deed of Pacto de Retro Sale, dated November 14, 1987, involving the land in
dispute. The parties stipulated:

That Vendor A-Retro, Candido C. Amil, for and in consideration of the sum of THIRTY
THOUSAND (P30,000.00) PESOS, Philippine Currency, in hand paid to him and receipt
whereof is hereby acknowledged to his entire satisfaction, do by these presents, SELL,
TRANSFER and CONVEY, under Pacto De Retro, unto the herein Vendees A-Retro, the
spouses Ernesto T. Gador and Nila A. Gador their heirs, successors and assigns, the above
described parcel of land together with all the improvements thereon, free from all liens and
encumbrances.

That Vendor A-Retro, Candido C. Amil, reserve for himself the right to redeem or repurchase the
property herein sold, and the Vendees A-Retro, in turn, obligate themselves to resell the parcel of
land sold, within a period of THREE (3) YEARS, from and after the due execution of this
instrument, for the same price of THIRTY THOUSAND (P30,000.00) PESOS, Philippine
Currency; PROVIDED, HOWEVER, that if the Vendor A-Retro, Candido C. Amil, fails to
exercise his right to redeem or repurchase as herein granted within the period stipulated upon,
then this conveyance shall be deemed to be an absolute and irrevocable sale, without the
necessity of executing any further deed or instituting judicial action to consolidate the ownership
in the name of the Vendees A-Retro.[2]

The parties executed another document entitled Addendum to Deed of Pacto de Retro Sale,
dated December 12, 1987 which provided:
That the Party of the First Part, the spouses Ernesto T. Gador and Nila A. Gador, are the
Mortgagees of that certain parcel of land situated at Barrio Calindagan, Dumaguete City, under
Transfer Certificate of Title No. 14021 and the Party of the Second Part is the Mortagor of said
parcel of land, for and in consideration of the sum of Thirty Thousand (P30,000.00) Pesos,
Philippine Currency, per Doc. No. 3; Book No. 1; Page No. 1; Series of 1987 of Notary Public
Jose G. Hernando, Jr., dated the 14th day of November, 1987, at Dumaguete City.

That considering that the Party of the First Part has to pay an additional sum of One Thousand
and Eight Hundred (P1,800.00) Pesos, Philippine Currency, to cover costs or expenses for
Capital Gains Tax and Documentary Stamps, the Party of the Second Part hereby agrees and
covenants that his right to redeem or repurchase the parcel of land subject matter of the
Mortgage, within the period stipulated, shall cover and includes said amount of (P1,800.00) or
the total sum of Thirty One Thousand Eight Hundred (P31,800.00) Pesos, Philippine Currency.[3]

After the redemption period had expired, private respondents filed a petition for the
consolidation of their ownership over the property in question. Petitioner was declared in default
as his counsel, Atty. Reynaldo Piero, failed to file an answer to the petition. Thereafter, the case
was heard and on October 26, 1993, judgment was rendered by the court, the dispositive portion
of which states:

WHEREFORE, in view of the foregoing and considering the fact that respondent failed to file an
answer to the petition or failed to appear before this Court, in spite of the Courts efforts in
exerting all possible means to give the respondent his day in Court in order for him to be duly
heard before this Court in connection with this case, this Court hereby renders Judgment
declaring petitioners Ernesto T. Gador and Nila A. Gador as the absolute owners of the Five
Hundred (500) square meters of Lot No. 782-D-4 of the Subdivision Plan, Psd-07-03-006671,
being a portion of Lot 782-D (LRC) Psd-120931, situated in the Barrio of Calindagan, City of
Dumaguete, the same being covered by Transfer Certificate of Title No. 14021. The Register of
Deeds of Dumaguete City is hereby ordered to make the corresponding annotation of the
Consolidation of Ownership in the Vendee-A-Retro, Ernesto T. Gador and Nila A. Gador on the
Transfer Certificate of Title No. 14021 upon payment of the prescribed fees thereof.

Petitioner, through a new counsel, then filed a motion for new trial, which, however, was
denied. He appealed to the Court of Appeals, which, in its decision dated January 29, 1996,
affirmed the decision of the trial court. The Court of Appeals ruled:

We agree with the trial courts denial of respondent-appellants motion for new trial. Respondent
had been given full opportunity to answer and be heard. It is the duty of a party litigant to make
inquiries to counsel on matters concerning his case (Elino Ong Reyes vs. CA, 189 SCRA 46;
Florendo vs. Florendo, 27 SCRA 432). In fact, respondents alleged counsel never even entered
his appearance. Under these circumstances, including those earlier adverted to, We rule that
respondent did not exercise the ordinary prudence required of him by Rule 37, section 1(a) of the
Rules of Court, and his negligence is not excusable to justify a new trial.

We find likewise without merit defendant-appellants contentions that the Addendum dated
December 12, 1987 clarifies or at least engenders doubt as to the real intent of the parties and
that the contract is in reality a mortgage. The Addendum itself speaks of a capital gains tax to be
paid by the spouses Ernesto and Nila Gador. It also states that Candido C. Amil hereby agrees
and covenants (that) his right to redeem on repurchase the parcel of land x x x . Such stipulations
are distinctive indicia of a sale, transfer or exchange of real property with right to
repurchase. The two documents, read together and taken jointly, clearly evince a contract of sale
with right to repurchase. It is therefore of no moment that the words mortgage and mortgagee
were used in the Addendum. If words appear to be contrary to the evident intention of the
parties, the latter shall prevail over the former. (Article 1370, New Civil Code; Sy vs. Court of
Appeals, 131 SCRA 116).

WHEREFORE, finding no error in the judgment appealed from, the same is hereby
AFFIRMED in toto. With costs against appellant.

Hence, this petition. It is contended that-

1. The lower Court gravely erred in denying appellants motion for new trial; and
2. The lower Court gravely erred in granting consolidation of ownership in favor of
petitioners-appellees considering that by their own evidence, namely, the Addendum
to Deed of Pacto de Retro Sale dated December 12, 1987 (Exh. B, Record), it is
expressly stated that the contract is merely MORTGAGE, NOT PACTO DE RETRO
SALE.
We find the petition to be meritorious. Rule 37, 1 of the Revised Rules of Court of 1964
provides:

Within the period for perfecting appeal, the aggrieved party may move the trial court to set aside
the judgment and grant a new trial for one or more of the following causes materially affecting
the substantial rights of said party:

(a) Fraud, accident, mistake or excusable negligence which ordinary prudence could not have
guarded against and by reason of which such aggrieved party has probably been impaired in his
rights;

(b) Newly discovered evidence, which he could not, with reasonable diligence, have discovered,
and produced at the trial, and which if presented would probably alter the result;

(c) Award of excessive damages, or insufficiency of the evidence to justify the decision, or that
the decision is against the law.

As already noted, the Court of Appeals affirmed the denial of a new trial on the ground that
the failure of petitioners original counsel to file an answer within the reglementary period cannot
be considered as excusable negligence which ordinary prudence could not have guarded
against. According to the Court of Appeals, petitioner is bound by the mistakes of his former
counsel.
To be sure, as a rule, a party is bound by the mistakes of his counsel. As we explained
in Tesoro v. Court of Appeals:[4]
It has been repeatedly enunciated that a client is bound by the action of his counsel in the
conduct of a case and cannot be heard to complain that the result might have been different had
he proceeded differently. A client is bound by the mistakes of his lawyer. If such grounds were
to be admitted as reasons for reopening cases, there would never be an end to a suit so long as
new counsel could be employed who could allege and show that prior counsel had not been
sufficiently diligent or experienced or learned.

Accordingly, this Court has affirmed the denial by trial courts of motions for new trial on the
ground that the failure of counsel to file an answer within the reglementary period cannot be
considered as excusable negligence.[5]
In this case, however, there are factual considerations necessitating a different
outcome. First, an exception to the principle that a client is bound by the mistakes of his counsel
is one wherein the negligence of the latter is so gross that the former was deprived of his day in
court, as a result of which he is deprived of property without due process of law. Thus,
in Legarda v. Court of Appeals,[6] this Court ordered the restoration to petitioner of her property
sold at public auction in satisfaction of a default judgment resulting from the failure of her
counsel to submit an answer and his lack of vigilance in protecting her interests in subsequent
proceedings before the trial court and the Court of Appeals.
In the instant case, petitioner was likewise declared in default because of the failure of his
former counsel, Atty. Piero, to file within the reglementary period an answer to private
respondents' petition for consolidation of ownership. Atty. Piero likewise failed to take any
action to protect the interests of petitioner in subsequent proceedings before the trial court, such
as by filing an opposition to the motion to declare him in default or by moving to set aside the
order of default. It was Atty. Saleto J. Erasmes, the present counsel of petitioner, who filed the
motion for new trial after a judgment by default had been rendered against him. As a
consequence of his former counsels gross negligence, petitioner was deprived of his day in court.
Secondly, as we have emphasized, trial courts should be liberal in setting aside orders of
default and granting motions for new trial if the defendant appears to have a meritorious defense.
[7]
 Parties must be given every opportunity to present their sides. The issuance of orders of
default should be the exception rather than the rule, to be allowed only in clear cases of obstinate
refusal by the defendant to comply with the orders of the trial court.[8]
Thirdly, petitioner appears to have a meritorious defense. Indeed, it would appear that the
contract between petitioner and private respondents is an equitable mortgage rather than a pacto
de retro sale.Arts. 1602 and 1603 of the Civil Code provide:

ART. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following
cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the purchase price;
 (5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real intention of the parties
is that the transaction shall procure the payment of a debt or the performance of any
other obligation.

In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as
rent or other wise shall be considered as interest which shall be subject to the usury laws.

ART. 1603. In case of doubt, a contract purporting to be a sale with right to repurchase shall be
construed as an equitable mortgage.

The price of P30,000.00 for the subject property appears to be unusually

inadequate. Furthermore, the words mortgage, mortgagor, and mortgagees appear in the
Addendum to Deed of Pacto de Retro Sale. Finally, it should be noted that the Deed of Pacto de
Retro Sale provides that if the Vendor A-Retro, Candido C. Amil, fails to exercise his right to
redeem or repurchase as herein granted within the period stipulated upon, then this conveyance
shall be deemed to be an absolute and irrevocable sale, without the necessity of executing any
further deed or instituting judicial action to consolidate the ownership in he name of the Vendees
A-Retro. This stipulation is void for being a pactum commissorium.[9] Considering all these, the
trial court should have granted petitioner a new trial to enable him to present evidence on the true
nature of the contract in question.
WHEREFORE, the decision of the Court of Appeals dated January 29, 1996, is hereby
REVERSED and the case is REMANDED to the Regional Trial Court, Branch 36, Dumaguete
City, Negros Oriental for further proceedings in accordance with this decision.
SO ORDERED.
Quisumbing, and Buena, JJ., concur.
Bellosillo, (Chairman), J.,  on official leave.