ROMULO A. CORONEL, ALARICO A.
Received from Miss Ramona Patricia Alcaraz
CORONEL, ANNETTE A. CORONEL,
ANNABELLE C. GONZALES (for herself and
on behalf of Floraida C. Tupper, as attorney-
in-fact), CIELITO A. CORONEL, FLORAIDA A.
ALMONTE, and CATALINA BALAIS MABANAG,
petitioners, vs. THE COURT OF APPEALS,
CONCEPCION D. ALCARAZ and RAMONA
PATRICIA ALCARAZ, assisted by GLORIA F.
NOEL as attorney-in-fact, respondents.
DECISION
MELO, J.:
The petition before us has its roots in a
complaint for specific performance to
compel herein petitioners (except the last
named, Catalina Balais Mabanag) to
consummate the sale of a parcel of land
with its improvements located along
Roosevelt Avenue in Quezon City entered
into by the parties sometime in January
1985 for the price of P1,240,000.00.
The undisputed facts of the case were
summarized by respondent court in this
wise:
On January 19, 1985, defendants-
appellants Romulo Coronel, et. al.
(hereinafter referred to as Coronels)
executed a document entitled Receipt of
Down Payment (Exh. A) in favor of plaintiff
Ramona Patricia Alcaraz (hereinafter
referred to as Ramona) which is reproduced
hereunder:
RECEIPT OF DOWN PAYMENT
P1,240,000.00 - Total amount
50,000.00 - Down payment
------------------------------------------
P1,190,000.00 - Balance
of 146 Timog, Quezon City, the sum of Fifty
Thousand Pesos purchase price of our
inherited house and lot, covered by TCT No.
119627 of the Registry of Deeds of Quezon
City, in the total amount of P1,240,000.00.
We bind ourselves to effect the transfer in
our names from our deceased father,
Constancio P. Coronel, the transfer
certificate of title immediately upon receipt
of the down payment above-stated.
On our presentation of the TCT already in or
name, We will immediately execute the
deed of absolute sale of said property and
Miss Ramona Patricia Alcaraz shall
immediately pay the balance of the
P1,190,000.00.
Clearly, the conditions appurtenant to the
sale are the following:
1. Ramona will make a down payment of
Fifty Thousand (P50,000.00) pesos upon
execution of the document aforestated;
2. The Coronels will cause the transfer in
their names of the title of the property
registered in the name of their deceased
father upon receipt of the Fifty Thousand
(P50,000.00) Pesos down payment;
3. Upon the transfer in their names of the
subject property, the Coronels will execute
the deed of absolute sale in favor of
Ramona and the latter will pay the former
the whole balance of One Million One
Hundred Ninety Thousand (P1,190,000.00)
Pesos.
On the same date (January 15, 1985),
plaintiff-appellee Concepcion D. Alcaraz
(hereinafter referred to as Concepcion),
mother of Ramona, paid the down payment
of Fifty Thousand (P50,000.00) Pesos (Exh.
B, Exh. 2).
On February 6, 1985, the property originally
registered in the name of the Coronels
father was transferred in their names under
TCT No. 327043 (Exh. D; Exh 4)
On February 18, 1985, the Coronels sold
the property covered by TCT No. 327043 to
intervenor-appellant Catalina B. Mabanag
(hereinafter referred to as Catalina) for One
Million Five Hundred Eighty Thousand
(P1,580,000.00) Pesos after the latter has
paid Three Hundred Thousand
(P300,000.00) Pesos (Exhs. F-3; Exh. 6-C)
For this reason, Coronels canceled and
rescinded the contract (Exh. A) with
Ramona by depositing the down payment
paid by Concepcion in the bank in trust for
Ramona Patricia Alcaraz.
On February 22, 1985, Concepcion, et. al.,
filed a complaint for a specific performance
against the Coronels and caused the
annotation of a notice of lis pendens at the
back of TCT No. 327403 (Exh. E; Exh. 5).
On April 2, 1985, Catalina caused the
annotation of a notice of adverse claim
covering the same property with the
Registry of Deeds of Quezon City (Exh. F;
Exh. 6).
On April 25, 1985, the Coronels executed a
Deed of Absolute Sale over the subject
property in favor of Catalina (Exh. G; Exh.
7).
On June 5, 1985, a new title over the
subject property was issued in the name of
Catalina under TCT No. 351582 (Exh. H;
Exh. 8).
(Rollo, pp. 134-136)
In the course of the proceedings before the
trial court (Branch 83, RTC, Quezon City)
the parties agreed to submit the case for
decision solely on the basis of documentary
exhibits. Thus, plaintiffs therein (now
private respondents) proffered their
documentary evidence accordingly marked
as Exhibits A through J, inclusive of their
corresponding submarkings. Adopting these
same exhibits as their own, then
defendants (now petitioners) accordingly
offered and marked them as Exhibits 1
through 10, likewise inclusive of their
corresponding submarkings. Upon motion
of the parties, the trial court gave them
thirty (30) days within which to
simultaneously submit their respective
memoranda, and an additional 15 days
within which to submit their corresponding
comment or reply thereto, after which, the
case would be deemed submitted for
resolution.
On April 14, 1988, the case was submitted
for resolution before Judge Reynaldo Roura,
who was then temporarily detailed to
preside over Branch 82 of the RTC of
Quezon City. On March 1, 1989, judgment
was handed down by Judge Roura from his
regular bench at Macabebe, Pampanga for
the Quezon City branch, disposing as
follows:
WHEREFORE, judgment for specific
performance is hereby rendered ordering
defendant to execute in favor of plaintiffs a
deed of absolute sale covering that parcel
of land embraced in and covered by
Transfer Certificate of Title No. 327403
(now TCT No. 331582) of the Registry of
Deeds for Quezon City, together with all the
improvements existing thereon free from all
liens and encumbrances, and once
accomplished, to immediately deliver the
said document of sale to plaintiffs and upon
receipt thereof, the plaintiffs are ordered to
pay defendants the whole balance of the
purchase price amounting to P1,190,000.00
in cash. Transfer Certificate of Title No.
331582 of the Registry of Deeds for Quezon
City in the name of intervenor is hereby
canceled and declared to be without force
and effect. Defendants and intervenor and
all other persons claiming under them are
hereby ordered to vacate the subject
property and deliver possession thereof to
plaintiffs. Plaintiffs claim for damages and
attorneys fees, as well as the counterclaims
of defendants and intervenors are hereby
dismissed.
No pronouncement as to costs.
So Ordered.
Macabebe, Pampanga for Quezon City,
March 1, 1989.
(Rollo, p. 106)
A motion for reconsideration was filed by
petitioners before the new presiding judge
of the Quezon City RTC but the same was
denied by Judge Estrella T. Estrada, thusly:
The prayer contained in the instant motion,
i.e., to annul the decision and to render
anew decision by the undersigned Presiding
Judge should be denied for the following
reasons: (1) The instant case became
submitted for decision as of April 14, 1988
when the parties terminated the
presentation of their respective
documentary evidence and when the
Presiding Judge at that time was Judge
Reynaldo Roura. The fact that they were
allowed to file memoranda at some future
date did not change the fact that the
hearing of the case was terminated before
Judge Roura and therefore the same should
be submitted to him for decision; (2) When
the defendants and intervenor did not
object to the authority of Judge Reynaldo
Roura to decide the case prior to the
rendition of the decision, when they met for
the first time before the undersigned
Presiding Judge at the hearing of a pending
incident in Civil Case No. Q-46145 on
November 11, 1988, they were deemed to
have acquiesced thereto and they are now
estopped from questioning said authority of
Judge Roura after they received the
decision in question which happens to be
adverse to them; (3) While it is true that
Judge Reynaldo Roura was merely a Judge-
on-detail at this Branch of the Court, he
was in all respects the Presiding Judge with
full authority to act on any pending incident
submitted before this Court during his
incumbency. When he returned to his
Official Station at Macabebe, Pampanga, he
did not lose his authority to decide or
resolve cases submitted to him for decision
or resolution because he continued as
Judge of the Regional Trial Court and is of
co-equal rank with the undersigned
Presiding Judge. The standing rule and
supported by jurisprudence is that a Judge
to whom a case is submitted for decision
has the authority to decide the case
notwithstanding his transfer to another
branch or region of the same court (Sec. 9,
Rule 135, Rule of Court).
Coming now to the twin prayer for
reconsideration of the Decision dated
March 1, 1989 rendered in the instant case,
resolution of which now pertains to the
undersigned Presiding Judge, after a
meticulous examination of the
documentary evidence presented by the
parties, she is convinced that the Decision
of March 1, 1989 is supported by evidence
and, therefore, should not be disturbed.
IN VIEW OF THE FOREGOING, the Motion for
Reconsideration and/or to Annul Decision
and Render Anew Decision by the
Incumbent Presiding Judge dated March 20,
1989 is hereby DENIED.
SO ORDERED.
Quezon City, Philippines, July 12, 1989.
(Rollo, pp. 108-109)
Petitioners thereupon interposed an appeal,
but on December 16, 1991, the Court of
Appeals (Buena, Gonzaga-Reyes, Abad-
Santos (P), JJ.) rendered its decision fully
agreeing with the trial court.
Hence, the instant petition which was filed
on March 5, 1992. The last pleading,
private respondents Reply Memorandum,
was filed on September 15, 1993. The case
was, however, re-raffled to undersigned
ponente only on August 28, 1996, due to
the voluntary inhibition of the Justice to
whom the case was last assigned.
While we deem it necessary to introduce
certain refinements in the disquisition of
respondent court in the affirmance of the
trial courts decision, we definitely find the
instant petition bereft of merit.
The heart of the controversy which is the
ultimate key in the resolution of the other
issues in the case at bar is the precise
determination of the legal significance of
the document entitled Receipt of Down
Payment which was offered in evidence by
both parties. There is no dispute as to the
fact that the said document embodied the
binding contract between Ramona Patricia
Alcaraz on the one hand, and the heirs of
Constancio P. Coronel on the other,
pertaining to a particular house and lot
covered by TCT No. 119627, as defined in
Article 1305 of the Civil Code of the
Philippines which reads as follows:
Art. 1305. A contract is a meeting of minds
between two persons whereby one binds
himself, with respect to the other, to give
something or to render some service.
While, it is the position of private
respondents that the Receipt of Down
Payment embodied a perfected contract of
sale, which perforce, they seek to enforce
by means of an action for specific
performance, petitioners on their part insist
that what the document signified was a
mere executory contract to sell, subject to
certain suspensive conditions, and because
of the absence of Ramona P. Alcaraz, who
left for the United States of America, said
contract could not possibly ripen into a
contract of absolute sale.
Plainly, such variance in the contending
parties contention is brought about by the
way each interprets the terms and/or
conditions set forth in said private
instrument. Withal, based on whatever
relevant and admissible evidence may be
available on record, this Court, as were the
courts below, is now called upon to adjudge
what the real intent of the parties was at
the time the said document was executed.
The Civil Code defines a contract of sale,
thus:
Art. 1458. By the contract of sale one of the
contracting parties obligates himself to
transfer the ownership of and to deliver a
determinate thing, and the other to pay
therefor a price certain in money or its
equivalent.
Sale, by its very nature, is a consensual
contract because it is perfected by mere
consent. The essential elements of a
contract of sale are the following:
a) Consent or meeting of the minds, that is,
consent to transfer ownership in exchange
for the price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.
Under this definition, a Contract to Sell may
not be considered as a Contract of Sale
because the first essential element is
lacking. In a contract to sell, the
prospective seller explicitly reserves the
transfer of title to the prospective buyer,
meaning, the prospective seller does not as
yet agree or consent to transfer ownership
of the property subject of the contract to
sell until the happening of an event, which
for present purposes we shall take as the
full payment of the purchase price. What
the seller agrees or obliges himself to do is
to fulfill his promise to sell the subject
property when the entire amount of the
purchase price is delivered to him. In other
words the full payment of the purchase
price partakes of a suspensive condition,
the non-fulfillment of which prevents the
obligation to sell from arising and thus,
ownership is retained by the prospective
seller without further remedies by the
prospective buyer. In Roque vs. Lapuz (96
SCRA 741 [1980]), this Court had occasion
to rule:
Hence, We hold that the contract between
the petitioner and the respondent was a
contract to sell where the ownership or title
is retained by the seller and is not to pass
until the full payment of the price, such
payment being a positive suspensive
condition and failure of which is not a
breach, casual or serious, but simply an
event that prevented the obligation of the
vendor to convey title from acquiring
binding force.
Stated positively, upon the fulfillment of the
suspensive condition which is the full
payment of the purchase price, the
prospective sellers obligation to sell the
subject property by entering into a contract
of sale with the prospective buyer becomes
demandable as provided in Article 1479 of
the Civil Code which states:

Art. 1479. A promise to buy and sell a
determinate thing for a price certain is
reciprocally demandable.
An accepted unilateral promise to buy or to
sell a determinate thing for a price certain
is binding upon the promissor of the
promise is supported by a consideration
distinct from the price.
A contract to sell may thus be defined as a
bilateral contract whereby the prospective
seller, while expressly reserving the
ownership of the subject property despite
delivery thereof to the prospective buyer,
binds himself to sell the said property
exclusively to the prospective buyer upon
fulfillment of the condition agreed upon,
that is, full payment of the purchase price.
A contract to sell as defined hereinabove,
may not even be considered as a
conditional contract of sale where the seller
may likewise reserve title to the property
subject of the sale until the fulfillment of a
suspensive condition, because in a
conditional contract of sale, the first
element of consent is present, although it is
conditioned upon the happening of a
contingent event which may or may not
occur. If the suspensive condition is not
fulfilled, the perfection of the contract of
sale is completely abated (cf. Homesite and
Housing Corp. vs. Court of Appeals, 133
SCRA 777 [1984]). However, if the
suspensive condition is fulfilled, the
contract of sale is thereby perfected, such
that if there had already been previous
delivery of the property subject of the sale
to the buyer, ownership thereto
automatically transfers to the buyer by
operation of law without any further act
having to be performed by the seller.
In a contract to sell, upon the fulfillment of
the suspensive condition which is the full
payment of the purchase price, ownership
will not automatically transfer to the buyer
although the property may have been
previously delivered to him. The
prospective seller still has to convey title to
the prospective buyer by entering into a
contract of absolute sale.
It is essential to distinguish between a
contract to sell and a conditional contract
of sale specially in cases where the subject
property is sold by the owner not to the
party the seller contracted with, but to a
third person, as in the case at bench. In a
contract to sell, there being no previous
sale of the property, a third person buying
such property despite the fulfillment of the
suspensive condition such as the full
payment of the purchase price, for
instance, cannot be deemed a buyer in bad
faith and the prospective buyer cannot
seek the relief of reconveyance of the
property. There is no double sale in such
case. Title to the property will transfer to
the buyer after registration because there
is no defect in the owner-sellers title per se,
but the latter, of course, may be sued for
damages by the intending buyer.
In a conditional contract of sale, however,
upon the fulfillment of the suspensive
condition, the sale becomes absolute and
this will definitely affect the sellers title
thereto. In fact, if there had been previous
delivery of the subject property, the sellers
ownership or title to the property is
automatically transferred to the buyer such
that, the seller will no longer have any title
to transfer to any third person. Applying
Article 1544 of the Civil Code, such second
buyer of the property who may have had
actual or constructive knowledge of such
defect in the sellers title, or at least was
charged with the obligation to discover
such defect, cannot be a registrant in good
faith. Such second buyer cannot defeat the
first buyers title. In case a title is issued to
the second buyer, the first buyer may seek
reconveyance of the property subject of the
sale.
With the above postulates as guidelines, we
now proceed to the task of deciphering the
real nature of the contract entered into by
petitioners and private respondents.
It is a canon in the interpretation of
contracts that the words used therein
should be given their natural and ordinary
meaning unless a technical meaning was
intended (Tan vs. Court of Appeals, 212
SCRA 586 [1992]). Thus, when petitioners
declared in the said Receipt of Down
Payment that they --
Received from Miss Ramona Patricia Alcaraz
of 146 Timog, Quezon City, the sum of Fifty
Thousand Pesos purchase price of our
inherited house and lot, covered by TCT No.
1199627 of the Registry of Deeds of
Quezon City, in the total amount of
P1,240,000.00.
without any reservation of title until full
payment of the entire purchase price, the
natural and ordinary idea conveyed is that
they sold their property.
When the Receipt of Down payment is
considered in its entirety, it becomes more
manifest that there was a clear intent on
the part of petitioners to transfer title to the
buyer, but since the transfer certificate of
title was still in the name of petitioners
father, they could not fully effect such
transfer although the buyer was then
willing and able to immediately pay the
purchase price. Therefore, petitioners-
sellers undertook upon receipt of the down
payment from private respondent Ramona
P. Alcaraz, to cause the issuance of a new
certificate of title in their names from that
of their father, after which, they promised
to present said title, now in their names, to
the latter and to execute the deed of
absolute sale whereupon, the latter shall, in
turn, pay the entire balance of the purchase
price.
The agreement could not have been a
contract to sell because the sellers herein
made no express reservation of ownership
or title to the subject parcel of land.
Furthermore, the circumstance which
prevented the parties from entering into an
absolute contract of sale pertained to the
sellers themselves (the certificate of title
was not in their names) and not the full
payment of the purchase price. Under the
established facts and circumstances of the
case, the Court may safely presume that,
had the certificate of title been in the
names of petitioners-sellers at that time,
there would have been no reason why an
absolute contract of sale could not have
been executed and consummated right
there and then.
Moreover, unlike in a contract to sell,
petitioners in the case at bar did not merely
promise to sell the property to private
respondent upon the fulfillment of the
suspensive condition. On the contrary,
having already agreed to sell the subject
property, they undertook to have the
certificate of title change to their names
and immediately thereafter, to execute the
written deed of absolute sale.
Thus, the parties did not merely enter into
a contract to sell where the sellers, after
compliance by the buyer with certain terms
and conditions, promised to sell the
property to the latter. What may be
perceived from the respective undertakings
of the parties to the contract is that
petitioners had already agreed to sell the
house and lot they inherited from their
father, completely willing to transfer
ownership of the subject house and lot to
the buyer if the documents were then in
order. It just so happened, however, that
the transfer certificate of title was then still
in the name of their father. It was more
expedient to first effect the change in the
certificate of title so as to bear their names.
That is why they undertook to cause the
issuance of a new transfer of the certificate
of title in their names upon receipt of the
down payment in the amount of
P50,000.00. As soon as the new certificate
of title is issued in their names, petitioners
were committed to immediately execute
the deed of absolute sale. Only then will the
obligation of the buyer to pay the
remainder of the purchase price arise.
There is no doubt that unlike in a contract
to sell which is most commonly entered
into so as to protect the seller against a
buyer who intends to buy the property in
installment by withholding ownership over
the property until the buyer effects full
payment therefor, in the contract entered
into in the case at bar, the sellers were the
ones who were unable to enter into a
contract of absolute sale by reason of the
fact that the certificate of title to the
property was still in the name of their
father. It was the sellers in this case who,
as it were, had the impediment which
prevented, so to speak, the execution of an
contract of absolute sale.
What is clearly established by the plain
language of the subject document is that
when the said Receipt of Down Payment
was prepared and signed by petitioners
Romulo A. Coronel, et. al., the parties had
agreed to a conditional contract of sale,
consummation of which is subject only to
the successful transfer of the certificate of
title from the name of petitioners father,
Constancio P. Coronel, to their names.
The Court significantly notes that this
suspensive condition was, in fact, fulfilled
on February 6, 1985 (Exh. D; Exh. 4). Thus,
on said date, the conditional contract of
sale between petitioners and private
respondent Ramona P. Alcaraz became
obligatory, the only act required for the
consummation thereof being the delivery of
the property by means of the execution of
the deed of absolute sale in a public
instrument, which petitioners unequivocally
committed themselves to do as evidenced
by the Receipt of Down Payment.
Article 1475, in correlation with Article
1181, both of the Civil Code, plainly applies
to the case at bench. Thus,
Art. 1475. The contract of sale is perfected
at the moment there is a meeting of minds
upon the thing which is the object of the
contract and upon the price.
From that moment, the parties may
reciprocally demand performance, subject
to the provisions of the law governing the
form of contracts.
Art. 1181. In conditional obligations, the
acquisition of rights, as well as the
extinguishment or loss of those already
acquired, shall depend upon the happening
of the event which constitutes the
condition.
Since the condition contemplated by the
parties which is the issuance of a certificate
of title in petitioners names was fulfilled on
February 6, 1985, the respective
obligations of the parties under the
contract of sale became mutually
demandable, that is, petitioners, as sellers,
were obliged to present the transfer
certificate of title already in their names to
private respondent Ramona P. Alcaraz, the
buyer, and to immediately execute the
deed of absolute sale, while the buyer on
her part, was obliged to forthwith pay the
balance of the purchase price amounting to
P1,190,000.00.

It is also significant to note that in the first
paragraph in page 9 of their petition,
petitioners conclusively admitted that:
3. The petitioners-sellers Coronel bound
themselves to effect the transfer in our
names from our deceased father
Constancio P. Coronel, the transfer
certificate of title immediately upon receipt
of the downpayment above-stated". The
sale was still subject to this suspensive
condition. (Emphasis supplied.)
(Rollo, p. 16)
Petitioners themselves recognized that they
entered into a contract of sale subject to a
suspensive condition. Only, they contend,
continuing in the same paragraph, that:
. . . Had petitioners-sellers not complied
with this condition of first transferring the
title to the property under their names,
there could be no perfected contract of
sale. (Emphasis supplied.)
(Ibid.)
not aware that they have set their own trap
for themselves, for Article 1186 of the Civil
Code expressly provides that:
Art. 1186. The condition shall be deemed
fulfilled when the obligor voluntarily
prevents its fulfillment.
Besides, it should be stressed and
emphasized that what is more controlling
than these mere hypothetical arguments is
the fact that the condition herein referred
to was actually and indisputably fulfilled on
February 6, 1985, when a new title was
issued in the names of petitioners as
evidenced by TCT No. 327403 (Exh. D; Exh.
4).
The inevitable conclusion is that on January
19, 1985, as evidenced by the document
denominated as Receipt of Down Payment
(Exh. A; Exh. 1), the parties entered into a
contract of sale subject to the suspensive
condition that the sellers shall effect the
issuance of new certificate title from that of
their fathers name to their names and that,
on February 6, 1985, this condition was
fulfilled (Exh. D; Exh. 4).
We, therefore, hold that, in accordance with
Article 1187 which pertinently provides -
Art. 1187. The effects of conditional
obligation to give, once the condition has
been fulfilled, shall retroact to the day of
the constitution of the obligation . . .
In obligations to do or not to do, the courts
shall determine, in each case, the
retroactive effect of the condition that has
been complied with.
the rights and obligations of the parties
with respect to the perfected contract of
sale became mutually due and demandable
as of the time of fulfillment or occurrence of
the suspensive condition on February 6,
1985. As of that point in time, reciprocal
obligations of both seller and buyer arose.
Petitioners also argue there could been no
perfected contract on January 19, 1985
because they were then not yet the
absolute owners of the inherited property.
We cannot sustain this argument.
Article 774 of the Civil Code defines
Succession as a mode of transferring
ownership as follows:
Art. 774. Succession is a mode of
acquisition by virtue of which the property,
rights and obligations to the extent and
value of the inheritance of a person are
transmitted through his death to another or
others by his will or by operation of law.
Petitioners-sellers in the case at bar being
the sons and daughters of the decedent
Constancio P. Coronel are compulsory heirs
who were called to succession by operation
of law. Thus, at the point their father drew
his last breath, petitioners stepped into his
shoes insofar as the subject property is
concerned, such that any rights or
obligations pertaining thereto became
binding and enforceable upon them. It is
expressly provided that rights to the
succession are transmitted from the
moment of death of the decedent (Article
777, Civil Code; Cuison vs. Villanueva, 90
Phil. 850 [1952]).
Be it also noted that petitioners claim that
succession may not be declared unless the
creditors have been paid is rendered moot
by the fact that they were able to effect the
transfer of the title to the property from the
decedents name to their names on
February 6, 1985.
Aside from this, petitioners are precluded
from raising their supposed lack of capacity
to enter into an agreement at that time and
they cannot be allowed to now take a
posture contrary to that which they took
when they entered into the agreement with
private respondent Ramona P. Alcaraz. The
Civil Code expressly states that:
Art. 1431. Through estoppel an admission
or representation is rendered conclusive
upon the person making it, and cannot be
denied or disproved as against the person
relying thereon.
Having represented themselves as the true
owners of the subject property at the time
of sale, petitioners cannot claim now that
they were not yet the absolute owners
thereof at that time.

Petitioners also contend that although there
was in fact a perfected contract of sale
between them and Ramona P. Alcaraz, the
latter breach her reciprocal obligation when
she rendered impossible the consummation
thereof by going to the United States of
America, without leaving her address,
telephone number, and Special Power of
Attorney (Paragraphs 14 and 15, Answer
with Compulsory Counterclaim to the
Amended Complaint, p. 2; Rollo, p. 43), for
which reason, so petitioners conclude, they
were correct in unilaterally rescinding the
contract of sale.
We do not agree with petitioners that there
was a valid rescission of the contract of
sale in the instant case. We note that these
supposed grounds for petitioners rescission,
are mere allegations found only in their
responsive pleadings, which by express
provision of the rules, are deemed
controverted even if no reply is filed by the
plaintiffs (Sec. 11, Rule 6, Revised Rules of
Court). The records are absolutely bereft of
any supporting evidence to substantiate
petitioners allegations. We have stressed
time and again that allegations must be
proven by sufficient evidence (Ng Cho Cio
vs. Ng Diong, 110 Phil. 882 [1961]; Recaro
vs. Embisan, 2 SCRA 598 [1961]). Mere
allegation is not an evidence (Lagasca vs.
De Vera, 79 Phil. 376 [1947]).
Even assuming arguendo that Ramona P.
Alcaraz was in the United States of America
on February 6, 1985, we cannot justify
petitioners-sellers act of unilaterally and
extrajudicially rescinding the contract of
sale, there being no express stipulation
authorizing the sellers to extrajudicially
rescind the contract of sale. (cf. Dignos vs.
CA, 158 SCRA 375 [1988]; Taguba vs. Vda.
De Leon, 132 SCRA 722 [1984])
Moreover, petitioners are estopped from
raising the alleged absence of Ramona P.
Alcaraz because although the evidence on
record shows that the sale was in the name
of Ramona P. Alcaraz as the buyer, the
sellers had been dealing with Concepcion
D. Alcaraz, Ramonas mother, who had
acted for and in behalf of her daughter, if
not also in her own behalf. Indeed, the
down payment was made by Concepcion D.
Alcaraz with her own personal Check (Exh.
B; Exh. 2) for and in behalf of Ramona P.
Alcaraz. There is no evidence showing that
petitioners ever questioned Concepcions
authority to represent Ramona P. Alcaraz
when they accepted her personal check.
Neither did they raise any objection as
regards payment being effected by a third
person. Accordingly, as far as petitioners
are concerned, the physical absence of
Ramona P. Alcaraz is not a ground to
rescind the contract of sale.
Corollarily, Ramona P. Alcaraz cannot even
be deemed to be in default, insofar as her
obligation to pay the full purchase price is
concerned. Petitioners who are precluded
from setting up the defense of the physical
absence of Ramona P. Alcaraz as above-
explained offered no proof whatsoever to
show that they actually presented the new
transfer certificate of title in their names
and signified their willingness and
readiness to execute the deed of absolute
sale in accordance with their agreement.
Ramonas corresponding obligation to pay
the balance of the purchase price in the
amount of P1,190,000.00 (as buyer) never
became due and demandable and,
therefore, she cannot be deemed to have
been in default.
Article 1169 of the Civil Code defines when
a party in a contract involving reciprocal
obligations may be considered in default, to
wit:
Art. 1169. Those obliged to deliver or to do
something, incur in delay from the time the
obligee judicially or extrajudicially demands
from them the fulfillment of their obligation.
xxx
In reciprocal obligations, neither party
incurs in delay if the other does not comply
or is not ready to comply in a proper
manner with what is incumbent upon him.
From the moment one of the parties fulfill
his obligation, delay by the other begins.
(Emphasis supplied.)
There is thus neither factual nor legal basis
to rescind the contract of sale between
petitioners and respondents.
With the foregoing conclusions, the sale to
the other petitioner, Catalina B. Mabanag,
gave rise to a case of double sale where
Article 1544 of the Civil Code will apply, to
wit:
Art. 1544. If the same thing should have
been sold to different vendees, the
ownership shall be transferred to the
person who may have first taken
possession thereof in good faith, if it should
be movable property.
Should it be immovable property, the
ownership shall belong to the person
acquiring it who in good faith first recorded
it in the Registry of Property.
Should there be no inscription, the
ownership shall pertain to the person who
in good faith was first in the possession;
and, in the absence thereof to the person
who presents the oldest title, provided
there is good faith.
The record of the case shows that the Deed
of Absolute Sale dated April 25, 1985 as
proof of the second contract of sale was
registered with the Registry of Deeds of
Quezon City giving rise to the issuance of a
new certificate of title in the name of
Catalina B. Mabanag on June 5, 1985. Thus,
the second paragraph of Article 1544 shall
apply.
The above-cited provision on double sale
presumes title or ownership to pass to the
buyer, the exceptions being: (a) when the
second buyer, in good faith, registers the
sale ahead of the first buyer, and (b) should
there be no inscription by either of the two
buyers, when the second buyer, in good
faith, acquires possession of the property
ahead of the first buyer. Unless, the second
buyer satisfies these requirements, title or
ownership will not transfer to him to the
prejudice of the first buyer.
In his commentaries on the Civil Code, an
accepted authority on the subject, now a
distinguished member of the Court, Justice
Jose C. Vitug, explains:
The governing principle is prius tempore,
potior jure (first in time, stronger in right).
Knowledge by the first buyer of the second
sale cannot defeat the first buyers rights
except when the second buyer first
registers in good faith the second sale
(Olivares vs. Gonzales, 159 SCRA 33).
Conversely, knowledge gained by the
second buyer of the first sale defeats his
rights even if he is first to register, since
knowledge taints his registration with bad
faith (see also Astorga vs. Court of Appeals,
G.R. No. 58530, 26 December 1984). In
Cruz vs. Cabana (G.R. No. 56232, 22 June
1984, 129 SCRA 656), it was held that it is
essential, to merit the protection of Art.
1544, second paragraph, that the second
realty buyer must act in good faith in
registering his deed of sale (citing
Carbonell vs. Court of Appeals, 69 SCRA 99,
Crisostomo vs. CA, G.R. No. 95843, 02
September 1992).
(J. Vitug, Compendium of Civil Law and
Jurisprudence, 1993 Edition, p. 604).
Petitioners point out that the notice of lis
pendens in the case at bar was annotated
on the title of the subject property only on
February 22, 1985, whereas, the second
sale between petitioners Coronels and
petitioner Mabanag was supposedly
perfected prior thereto or on February 18,
1985. The idea conveyed is that at the time
petitioner Mabanag, the second buyer,
bought the property under a clean title, she
was unaware of any adverse claim or
previous sale, for which reason she is a
buyer in good faith.
We are not persuaded by such argument.
In a case of double sale, what finds
relevance and materiality is not whether or
not the second buyer in good faith but
whether or not said second buyer registers
such second sale in good faith, that is,
without knowledge of any defect in the title
of the property sold.
As clearly borne out by the evidence in this
case, petitioner Mabanag could not have in
good faith, registered the sale entered into
on February 18, 1985 because as early as
February 22, 1985, a notice of lis pendens
had been annotated on the transfer
certificate of title in the names of
petitioners, whereas petitioner Mabanag
registered the said sale sometime in April,
1985. At the time of registration, therefore,
petitioner Mabanag knew that the same
property had already been previously sold
to private respondents, or, at least, she was
charged with knowledge that a previous
buyer is claiming title to the same property.
Petitioner Mabanag cannot close her eyes
to the defect in petitioners title to the
property at the time of the registration of
the property.
This Court had occasions to rule that:
If a vendee in a double sale registers the
sale after he has acquired knowledge that
there was a previous sale of the same
property to a third party or that another
person claims said property in a previous
sale, the registration will constitute a
registration in bad faith and will not confer
upon him any right. (Salvoro vs. Tanega, 87
SCRA 349 [1978]; citing Palarca vs. Director
of Land, 43 Phil. 146; Cagaoan vs. Cagaoan,
43 Phil. 554; Fernandez vs. Mercader, 43
Phil. 581.)
Thus, the sale of the subject parcel of land
between petitioners and Ramona P. Alcaraz,
perfected on February 6, 1985, prior to that
between petitioners and Catalina B.
Mabanag on February 18, 1985, was
correctly upheld by both the courts below.
Although there may be ample indications
that there was in fact an agency between
Ramona as principal and Concepcion, her
mother, as agent insofar as the subject
contract of sale is concerned, the issue of
whether or not Concepcion was also acting
in her own behalf as a co-buyer is not
squarely raised in the instant petition, nor
in such assumption disputed between
mother and daughter. Thus, We will not
touch this issue and no longer disturb the
lower courts ruling on this point.
WHEREFORE, premises considered, the
instant petition is hereby DISMISSED and
the appealed judgment AFFIRMED.
SO ORDERED.
VICENTE GOMEZ, as successor-in-interest of
awardee LUISA GOMEZ, petitioner, vs.
COURT OF APPEALS, City of MANILA acting
thru the City Tenants Security Committee
now the Urban Settlement Office, Register
of Deeds of Manila, respondents.
DECISION
BUENA, J.:
Sought to be reversed in this petition for
review on certiorari under Rule 45 of the
Rules of Court is the decision[1] of the
Court of Appeals in C.A. G.R. Sp. No. 32101
promulgated on 22 February 1995 which
annulled and set aside the decision of the
Regional Trial Court of Manila, Branch 12 in
Civil Case No. 51930.
Impugned similarly is the resolution[2] of
the Court of Appeals dated 29 June 1995
denying petitioners motion for
reconsideration.
From the records, we find the following
antecedents:
Pursuant to the Land for the Landless
Program of the City of Manila and in
accordance with City Ordinance No. 6880,
the Office of City Mayor issued Resolution
No. 16-A,[3] Series of 1978, dated 17 May
1978, which effectively set guidelines and
criteria for the award of city home lots to
qualified and deserving applicants.
Attached to said resolution and made as
integral part thereof was a Contract to
Sell[4] that further laid down terms and
conditions which the lot awardee must
comply with.
On 30 June 1978, the City of Manila,
through the City Tenants Security
Committee (CTSC) presently known as the
Urban Settlement Office (URBAN), passed
Resolution 17-78[5] which in effect awarded
to 46 applicants, 37 homelots in the former
Ampil-Gorospe estate located in Tondo,
Manila. Luisa Gomez, predecessor-in-
interest of herein petitioner Vicente Gomez,
was awarded Lot 4, Block 1, subject to the
provisions of Resolution No. 3-78 of the
CTSC and building, subdivision and zoning
rules and regulations.
Consequently, a certificate of
award[6]dated 02 July 1978 was granted by
the CTSC in favor of Luisa Gomez, who paid
the purchase price of the lot in the amount
of P3,556.00 on installment basis,[7] said
payments being duly covered by official
receipts.
In 1979, Luisa Gomez traveled to the Unites
States of America but returned to the
Philippines in the same year.
On 18 January 1980, Luisa Gomez finally
paid in full the P 3,556.00 purchase price of
the lot. Despite the full payment, Luisa still
paid in installment an amount of P8,244.00,
in excess of the purchase price, which the
City of Manila, through the CTSC, accepted.
Additionally, the lot was declared for
taxation purposes and the corresponding
real estate taxes thereon paid from 1980-
1988. In 1982, Luisa, together with her
spouse Daniel, left again for the United
States of America where she died[8] on 09
January 1983. She is survived by her
husband and four children, namely,
Ramona G. Takorda, Edgardo Gomez,
Erlinda G. Pena, and Rebecca G. Dizon.[9]
Subsequently, in a memorandum dated 07
February 1984, the Urban Settlements
Officer and Member-Executive Secretary of
the CTSC directed the Western Police
District, City Hall Detachment, to conduct
an investigation regarding reported
violations of the terms and conditions of
the award committed by the lot awardees.
Thus, on 23 November 1984, a team
headed by Pfc. Reynaldo Cristobal of the
Western Police District, proceeded to the
former Ampil-Gorospe estate where the
subject lots are located, and conducted an
investigation of alleged violations thereat.
On 19 December 1984, team leader Pfc.
Reynaldo Cristobal rendered an
investigation report[10] addressed to the
City Mayor of Manila, as Chairman of the
CTSC, stating, among others, the following
findings:
X X X After the said operation, it was found
out that of all the lot awardees in the said
estate, the following were confirmed to
have violated the terms and conditions of
their respective awards as indicated
opposite their names, to wit:
X X X 2. Name of awardee : Daniel Gomez
Address : No. 2557-C Juan Luna St. Tondo,
Manila
Violation: The place was found actually
occupied by Mrs. Erlinda Perez and her
family together with Mr. Mignony Lorghas
and family, who are paying monthly rentals
of P 210.00 each to Vicente Gomez, brother
of awardee. Daniel Gomez is now presently
residing in the United States of America
and only returns for vacation once in a
while as a Balikbayan X X X.
Thus, on 01 July 1986, the CTSC, headed by
then City Mayor Gemiliano Lopez, Jr. as
Chairman, issued Resolution No. 015-86,
[11] adopting the findings of the
investigation report submitted by Pfc.
Cristobal, and ordering the cancellation of
the lot awards of Daniel Gomez and other
awardees who were found to have
committed violations, and further declaring
the forfeiture of payments made by said
awardees as reasonable compensation for
the use of the homelots.
In a letter[12] dated 04 August 1986,
herein petitioner Vicente Gomez, acting as
attorney-in-fact[13] of his brother Daniel
Gomez (spouse of Luisa Gomez) asked for
reconsideration of the CTSC resolution
revoking the award of the lot.
On 28 June 1988, Daniel Gomez, spouse of
awardee Luisa Gomez, died in the United
States of America. Eventually, on 01
February 1989, the surviving children of the
deceased spouses, who were American
citizens and residents of the United States
of America, executed an affidavit of
adjudication with deed of donation[14]
disposing gratuitously Lot No. 1, Block 4, in
favor of their uncle Vicente Gomez.
On 20 February 1989, petitioner Vicente
Gomez filed a memorandum[15] before the
CTSC praying that Resolution 15-86 be set
aside and that the award of the lot be
restored to Luisa Gomez, or her heirs or
successor-in-interest , preferably Vicente
Gomez.
Thereafter, two supplemental memoranda,
dated 26 July 1989[16] and 10 January
1990,[17] were submitted by petitioner
before the CTSC reiterating the prayer in
the initial memorandum.
On 05 February 1990, herein petitioner filed
before the Regional Trial Court (RTC) of
Manila, Branch 12, a petition for certiorari,
prohibition and mandamus docketed as
Civil Case No. 90-51930, entitled Vicente
Gomez, as successor-in-interest of
Awardee, Luisa Gomez, petitioner, versus
City Tenants Security Committee (now
Urban Settlement Office) and Register of
Deeds of Manila, respondents.
In an order[18] dated 24 April 1990, the
lower court directed the petitioner to
amend its petition so as to implead the
proper government agency.
Hence, petitioner filed an amended
petition[19] impleading the City of Manila
as respondent, to which the latter
submitted an answer.[20]
Accordingly, after the presentation of
evidence, the lower court promulgated its
decision[21] dated 20 January 1993, the
decretal portion of which reads:
Wherefore, the petition is hereby granted :
1. Ordering the City of Manila through its
agency the City Tenants Security
Committee (now Urban Settlement Office)
to set aside the order of cancellation of the
award for Lot No. 4, Block 1 (formerly of the
Ampil-Gorospe estate) in favor of Luisa
Gomez, her heirs and successor-in-interest,
the herein petitioner;
2. Prohibiting the City of Manila through its
agency including the Register of Deeds of
Manila from awarding the same lot and
issuing the corresponding certificate of title
therefor to any other person;
3. Ordering the City of Manila through its
agency the City Tenants Security
Committee (now Urban Settlement Office)
to execute a Deed of Absolute Sale over the
aforementioned lot in favor of the petitioner
as successor-in-interest of the awardee and
further ordering them to stop and/or refrain
from disturbing the peaceful physical
possession thereof of (sic) the petitioner;
and
4. Ordering the City of Manila through its
agency the City Tenants Security
Committee (now Urban Settlement Office)
to refund to the petitioner his
overpayments amounting to P8,244.00 and
to pay the costs of suit.
On appeal, the Court of Appeals reversed
the lower courts decision prompting
petitioner to file a motion for
reconsideration which the appellate court
denied via its assailed resolution dated 29
June 1995.
Hence, the instant appeal where the core of
controversy revolves around the propriety
of CTSCs act of canceling the lot award,
through Resolution No. 015-86, and further
declaring the forfeiture of amounts paid by
the awardee, as reasonable compensation
for the use of the home lot.
The petition is unmeritorious.
A thorough scrutiny of the records and an
even more exhaustive perusal of the
evidence, both documentary and
testimonial, would lead to the inevitable
conclusion that the fact of cancellation of
the award covering Lot 4, Block 1, by the
City of Manila, acting through the CTSC,
was properly exercised within the bounds of
law and contractual stipulation between the
parties.
Viewed broadly, petitioner anchors his case
on the premise, albeit erroneous, that upon
full payment of the purchase price of the lot
in January 1980, Luisa Gomez, actual
awardee, already acquired a vested right
over the real property subject of the
present controversy. Thus, according to
petitioner, upon the death of Luisa Gomez
on 09 January 1983, the alleged vested
right was transmitted by operation of law to
her lawful heirs, pursuant to Article 777 of
the Civil Code. Additionally, petitioner
submits that by virtue of the affidavit of
adjudication with Deed of Donation
executed on 01 February 1989 in his favor
by the surviving children of Luisa, he, in
effect, became the successor-in-interest of
Luisa and thus entitled to whatever rights
enjoyed by the latter over the property.

In the light of existing law and
jurisprudence and based on the evidence
adduced, this Court finds difficulty giving
credence and weight to petitioners
submissions. We therefore rule that the
cancellation of the award of Lot 4, Block 1,
through the expediency of Resolution No.
015-86, was proper.
Primarily, it must be stressed that the
contract entered into between the City of
Manila and awardee Luisa Gomez was not
one of sale but a contract to sell, which,
under both statutory and case law, has its
own attributes, peculiarities and effects.
Speaking through Mr. Justice Florenz
Regalado, this Court in Adelfa Properties,
Inc. vs. Court of Appeals,[22] mapped out
the bold distinctions between these species
of contracts, to wit:
In a contract of sale, the title passes to the
vendee upon the delivery of the thing sold;
whereas in a contract to sell, by agreement,
the ownership is reserved in the vendor and
is not to pass until the full payment of the
price. In a contract of sale, the vendor has
lost and cannot recover ownership until and
unless the contract is resolved or
rescinded; whereas in a contract to sell,
title is retained by the vendor until the full
payment of the purchase price, such
payment being a positive suspensive
condition and failure of which is not a
breach but an event that prevents the
obligation of the vendor to convey title
from being effective. Thus, a deed of sale is
considered absolute in nature where there
is neither a stipulation in the deed that title
to the property sold is reserved in the seller
until the full payment of the price, nor one
giving the vendor the right to unilaterally
resolve the contract the moment the buyer
fails to pay within a fixed period.
To our mind, however, this pronouncement
should not curtail the right of the parties in
a contract to sell to provide additional
stipulations, nor bar them from imposing
conditions relative to the transfer of
ownership.
To be sure, a contract of sale may either be
absolute or conditional. One form of
conditional sales is what is now popularly
termed as a Contract to Sell, where
ownership or title is retained until the
fulfillment of a positive suspensive
condition normally the payment of the
purchase price in the manner agreed upon.
[23] (Emphasis ours)
From the above disquisition in Galang and
applying Article 1306 of the Civil Code, the
contracting parties are accorded the
liberality and freedom to establish such
stipulations, clauses, terms and conditions
as they may deem convenient, provided
the same are not contrary to law, morals,
good custom, public order or public policy.
In the law on contracts, such fundamental
principle is known as the autonomy of
contracts.
Under the present circumstances, we see
no hindrance that prohibits the parties from
stipulating other lawful conditions, aside
from full payment of the purchase price,
which they pledge to bind themselves and
upon which transfer of ownership depends.
In the instant case, we uphold the Contract
to Sell, duly annexed and attached to
Resolution 16-A, which explicitly provides
for additional terms and conditions upon
which the lot awardees are bound. Although
unsigned, the Contract to Sell, in addition
to the provisions of Resolution 16-A,
constitutes the law between the contracting
parties. After all, under the law there exists
a binding contract between the parties
whose minds have met on a certain matter
notwithstanding that they did not affix their
signatures to its written form.[24]
For a contract, like a contract to sell,
involves a meeting of minds between two
persons whereby one binds himself, with
respect to the other, to give something or
to render some service. Contracts, in
general, are perfected by mere consent,
which is manifested by the meeting of the
offer and the acceptance upon the thing
and the cause which are to constitute the
contract. The offer must be certain and the
acceptance absolute.[25]
As to the matter of acceptance, the same
may be evidenced by some acts, or
conduct, communicated to the offeror,
either in a formal or an informal manner,
that clearly manifest the intention or
determination to accept the offer to buy or
sell.[26]
In the case at bar, acceptance on the part
of the vendee was manifested through a
plethora of acts, such as payment of the
purchase price, declaration of the property
for taxation purposes, and payment of real
estate taxes thereon, and similar acts
showing vendee's assent to the contract.
Verily, Resolution 16-A and the Contract to
Sell which was annexed, attached and
made to form part of said resolution, clearly
laid down the terms and conditions which
the awardee-vendee must comply with.
Accordingly, as an awardee, Luisa Gomez,
her heirs and successors-in-interest alike,
are duty-bound to perform the correlative
obligations embodied in Resolution 16-A
and the Contract to Sell.
Resolution 16-A, Series of 1978, explicitly
provides that aside from the requirement of
Filipino citizenship and legal age, the basic
criteria for award of the lot pursuant to the
Land for the Landless Program of the City of
Manila shall be the following:
a) Occupancy - The applicant must be the
legal and actual or physical occupant of the
lot in question at the time of its acquisition
by the City. He must be the owner of the
house and lot, must be using the same for
his residential purposes, and must have
had a lessee-lessor relationship with the
previous owner of the land or landed estate
of which the subject lot is a part.
b) Non-ownership of land - The applicant
and/or his spouse, if he is married, must not
be an owner of any parcel of land in Manila,
Metropolitan Manila or elsewhere in the
Philippines. Neither must he and/or his
spouse be a prospective owner or a buyer
on installment basis of any lot other than
that which he is occupying and for which he
is applying for award from the City.
c) Capacity to pay- The applicant must
have such financial means and/or support
as will enable him to make regular
payments of amortizations or installments
for the lot if the same is awarded to him.
Of equal importance are the essential terms
and conditions embraced in the Contract to
Sell, which awardee Luisa Gomez, her heirs
and successors-in-interest, violated, to wit:
X X X Par.(3). The vendee shall occupy and
use the lot exclusively for his/her
residential purpose . X X X
X X X Par. (5). The vendee hereby warrants
and declares under oath that he/she is a
bonafide and actual occupant and tenant of
the lot; X X X and that he/she fully
understands that any false statement or
misrepresentation hereof (sic) shall be
sufficient cause for the automatic
cancellation of his/her rights under this
agreement as well as ground for criminal
prosecution.
Par. (6). Until complete payment of the
purchase price and compliance with all the
vendees obligations herein, title to the lot
remains in the name of the owner. During
the effectivity of this agreement, however,
the owner may transfer its title or assign its
rights and interest under this agreement to
any person, corporation, bank or financial
institution.
Title shall pass to the vendee upon
execution of a final deed of sale in his/her
favor. X X X
Par. (8). In order not to defeat the purpose
of this social land reform program of the
City of Manila, and to prevent real estate
speculations within twenty years from
complete payment of the purchase price
and execution of the final deed of sale, the
lot and residential house or improvement
thereon shall not be sold, transferred,
mortgaged, leased or otherwise alienated
or encumbered without the written consent
of the City Mayor.
Par. (9). During the effectivity of this
agreement, the residential house or
improvement thereon shall not be leased,
sold, transferred or otherwise alienated by
the vendee without the written consent of
the owner. X X X
Par. (14). In the event that the vendee dies
before full payment of the purchase price of
the lot, his/her surviving spouse, children
heirs and/or successors-in-interest shall
succeed in all his/her rights and interest, as
well as assume all/his/her obligations under
this agreement.
Par. (15). This agreement shall be binding
upon the heirs, executors and
administrators of the vendee. (emphasis
ours)
Petitioner urges that awardee Luisa Gomez
did not commit any violation of the lot
award. On the contrary, the records would
indubitably show that Luisa Gomez,
including her heirs and successors-in-
interest, have performed acts that
constitute gross, if not brazen, violation of
the aforementioned terms and conditions of
the award, as evidenced by the
investigation report submitted by Pfc.
Cristobal, dated 19 December 1984.
Results of the investigation conducted on
23 November 1984, reveal that the lot was
actually occupied and leased by a certain
Erlinda Perez and Mignony Lorghas,
together with their respective families, who
were paying rentals to petitioner Vicente
Gomez for the lease of the subject
premises.
Moreover, in a conference held on 13
January 1989 at the Office of the Acting
Urban Settlement Officer, Lorghas admitted
that she has been leasing the property and
paying rent to petitioner Vicente Gomez,
thus:[27]
Atty. Bernardo: Mrs. Lorghas, how long have
you been renting the property?
Mrs. Lorghas: I was living there since 1960
until today. I was renting a small room
downfloor (sic). When the family of Mr.
Gomez died, kami na ang tumira sa itaas
until now.
Atty. Bernardo : Magkano ang upa mo?
Mrs. Lorghas: P300 a month.
Atty. Bernardo: Kanino?
Mrs. Lorghas: Kay Vicente Gomez.

Atty. Bernardo: Meron bang resibo?
Mrs. Lorghas: Wala po.
Atty. Bernardo: Noong 1973, kayo na rin
ang nakatira sa lugar ni Gomez.
Mrs. Lorghas: Opo.
Certainly, said acts constitute a brazen
transgression of Resolution 16-A and clear
contravention of the Contract to Sell,
specifically par. (3), (8) and (9) thereof.
The contract provides in no uncertain
terms, that the abovementioned terms and
conditions shall bind the heirs, executors
and administrators of the vendee. The
contract further states that breach thereof
would result to the automatic cancellation
of the vendees rights thereunder.
Thus, par.(10) (b) (a) of the Contract to Sell,
which reads:
X X X any violation of the terms and
conditions of this agreement shall
automatically cause the cancellation of the
vendees rights under this agreement
without necessity of prior notice or judicial
declaration X X X.
Such kind of stipulation was upheld by this
Court in the Adelfa case where we
categorically declared that Article 1592 of
the Civil Code, which requires rescission
either by judicial action, or notarial act,
does not apply to a contract to sell.[28]
Moreover, judicial action for rescission of a
contract is not necessary where the
contract provides for automatic rescission
in case of breach,[29] as in the contract
involved in the present controversy.
Likewise, this Court sustains the forfeiture
of the payments made by awardee as
reasonable compensation for the use of the
lot. At this juncture, par. (1) of the Contract
to Sell furnishes support to this conclusion:
X X X In case of the cancellation of the
vendees rights under this agreement as
hereinafter stipulated, all payments made
by him/her shall be forfeited and
considered as rentals for the use of the lot
X X X.
Further, Article 1486 of the Civil Code
provides that a stipulation that the
installments or rents paid shall not be
returned to the vendee or lessee shall be
valid insofar as the same may not be
unconscionable under the circumstances.
[30]
Applying the foregoing, we are of the
considered view that the payment of the
purchase price of P3,556.00, constitutes
fair and reasonable rental for the period in
which said property was under the control
of awardee Luisa Gomez, her heirs and
successors-in-interest. Undeniably, the
awardee together with her heirs and
successors-in-interest, have gained
benefits, financial or otherwise, for a period
of eight years - from the time of actual
award of the lot to the time of cancellation
thereof (1978-1986).
Nonetheless, we ought to stress that in the
present case, forfeiture of the installments
paid as rentals, only applies to the
purchase price of P3,556.00 and not to the
overpayment of the amount of P8,244.00.
Under these circumstances, the vendor
should refund the amount of P8,244.00
representing the overpayment made, plus
interest, to be computed in accordance
with the rule of thumb enunciated in the
landmark case of Eastern Shipping Lines,
Inc. vs. Court of Appeals[31] and reiterated
in the case of Philippine National Bank vs.
Court of Appeals.[32]
For us to uphold the forfeiture of the
amount representing the overpayment
would be to revolt against the dictates of
justice and fairness. A contrary ruling would
unjustly enrich the vendor to the prejudice
of the vendee.
In the same vein, the provisions of Article
777 of the Civil Code notwithstanding, we
hold that the surviving children of awardee
Luisa Gomez are not qualified transferees
of Lot 4, Block 1 for failure to conform with
the prerequisites set by Resolution 16-A, to
wit, Filipino citizenship and actual
occupancy, which in the present case, are
basic criteria for the award of the lot,
pursuant to the Land for the Landless
Program of the City of Manila.
The records reveal that the children of Luisa
Gomez are American citizens and
permanent residents of the United States of
America. Notably, Resolution 16-A
specifically enumerates Filipino citizenship
and actual occupancy of the lot for
residential purposes, as qualifications for
entitlement to the lot award. For this court
to consider said surviving children as
qualified awardee-transferees would render
illusory the purposes for which Resolution
16-A and the Land for the Landless Program
of the City of Manila were adopted.
Even assuming arguendo that the surviving
children of Luisa Gomez are entitled to the
lot by virtue of Article 777 of the Civil Code,
said heirs nevertheless abandoned their
right when they violated the terms and
conditions of the award by donating the
subject property to petitioner Vicente
Gomez.
As paragraph (15) of the agreement
provides that the heirs of the vendee shall
be bound thereby, it is then incumbent
upon said heirs to render strict compliance
with the provisions thereof.

In particular, paragraph (8) of the Contract

proscribes the sale, transfer, mortgage,
lease, alienation or encumbrance of the lot,
residential house, or improvement thereon,
without the written consent of the City
Mayor, within a period of twenty (20) years
from complete payment of the purchase
price and execution of the final deed of
sale. The execution of the Deed of Donation
by the surviving children of Luisa Gomez on
February 1, 1989, in favor of Vicente
Gomez, was clearly within the prohibited
period of 20 years from the full payment of
the purchase price on January 18, 1980.

Without doubt, the prohibition applies to

them.

Furthermore, the subject lot and residential

house were occupied by, and leased to,
third persons, in crystalline and evident
derogation of the terms of the award.

WHEREFORE, premises considered, the

instant petition is DISMISSED for lack of
merit, and the assailed decision of the
Court of Appeals with respect to the
cancellation of the award of Lot 4, Block 1,
is AFFIRMED SUBJECT TO MODIFICATION as
to the forfeiture of amounts paid by the
vendee.

As modified, the City of Manila, is hereby

ordered to refund with dispatch the amount
of P8,244.00 representing the overpayment
made by petitioner plus interest.

SO ORDERED.
VIRGILIO R. ROMERO, petitioner,
vs.
HON. COURT OF APPEALS and ENRIQUETA
CHUA VDA. DE ONGSIONG, respondents.
VITUG, J.:
The parties pose this question: May the
vendor demand the rescission of a contract
for the sale of a parcel of land for a cause
traceable to his own failure to have the
squatters on the subject property evicted
within the contractually-stipulated period?
Petitioner Virgilio R. Romero, a civil
engineer, was engaged in the business of
production, manufacture and exportation of
perlite filter aids, permalite insulation and
processed perlite ore. In 1988, petitioner
and his foreign partners decided to put up a
central warehouse in Metro Manila on a
land area of approximately 2,000 square
meters. The project was made known to
several freelance real estate brokers.
A day or so after the announcement,
Alfonso Flores and his wife, accompanied
by a broker, offered a parcel of land
measuring 1,952 square meters. Located in
Barangay San Dionisio, Paraaque, Metro
Manila, the lot was covered by TCT No.
361402 in the name of private respondent
Enriqueta Chua vda. de Ongsiong.
Petitioner visited the property and, except
for the presence of squatters in the area,
he found the place suitable for a central
warehouse.
Later, the Flores spouses called on
petitioner with a proposal that should he
advance the amount of P50,000.00 which
could be used in taking up an ejectment
case against the squatters, private
respondent would agree to sell the property
for only P800.00 per square meter.
Petitioner expressed his concurrence. On 09
June 1988, a contract, denominated "Deed
of Conditional Sale," was executed between
petitioner and private respondent. The
simply-drawn contract read:
DEED OF CONDITIONAL SALE
KNOW ALL MEN BY THESE PRESENTS:
This Contract, made and executed in the
Municipality of Makati, Philippines this 9th
day of June, 1988 by and between:
ENRIQUETA CHUA VDA. DE ONGSIONG, of
legal age, widow, Filipino and residing at
105 Simoun St., Quezon City, Metro Manila,
hereinafter referred to as the VENDOR;
-and-
VIRGILIO R. ROMERO, married to Severina
L. Lat, of Legal age, Filipino, and residing at
110 San Miguel St., Plainview Subd.,
Mandaluyong Metro Manila, hereinafter
referred to as the VENDEE:
W I T N E S S E T H : That
WHEREAS, the VENDOR is the owner of One
(1) parcel of land with a total area of ONE
THOUSAND NINE HUNDRED FIFTY TWO
(1,952) SQUARE METERS, more or less,
located in Barrio San Dionisio, Municipality
of Paraaque, Province of Rizal, covered by
TCT No. 361402 issued by the Registry of
Deeds of Pasig and more particularly
described as follows:
WHEREAS, the VENDEE, for (sic) has offered
to buy a parcel of land and the VENDOR has
accepted the offer, subject to the terms
and conditions hereinafter stipulated:
NOW, THEREFORE, for and in consideration
of the sum of ONE MILLION FIVE HUNDRED
SIXTY ONE THOUSAND SIX HUNDRED
PESOS (P1,561,600.00) ONLY, Philippine
Currency, payable by VENDEE to in to (sic)
manner set forth, the VENDOR agrees to
sell to the VENDEE, their heirs, successors,
administrators, executors, assign, all her
rights, titles and interest in and to the
property mentioned in the FIRST WHEREAS
CLAUSE, subject to the following terms and
conditions:
1. That the sum of FIFTY THOUSAND
PESOS (P50,000.00) ONLY Philippine
Currency, is to be paid upon signing and
execution of this instrument.
2. The balance of the purchase price in
the amount of ONE MILLION FIVE HUNDRED
ELEVEN THOUSAND SIX HUNDRED PESOS
(P1,511,600.00) ONLY shall be paid 45 days
after the removal of all squatters from the
above described property.
3. Upon full payment of the overall
purchase price as aforesaid, VENDOR
without necessity of demand shall
immediately sign, execute, acknowledged
(sic) and deliver the corresponding deed of
absolute sale in favor of the VENDEE free
from all liens and encumbrances and all
Real Estate taxes are all paid and updated.
It is hereby agreed, covenanted and
stipulated by and between the parties
hereto that if after 60 days from the date of
the signing of this contract the VENDOR
shall not be able to remove the squatters
from the property being purchased, the
downpayment made by the buyer shall be
returned/reimbursed by the VENDOR to the
VENDEE.
That in the event that the VENDEE shall not
be able to pay the VENDOR the balance of
the purchase price of ONE MILLION FIVE
HUNDRED ELEVEN THOUSAND SIX
HUNDRED PESOS (P1,511,600.00) ONLY
after 45 days from written notification to
the VENDEE of the removal of the squatters
from the property being purchased, the
FIFTY THOUSAND PESOS (P50,000.00)
previously paid as downpayment shall be
forfeited in favor of the VENDOR.
Expenses for the registration such as
registration fees, documentary stamp,
transfer fee, assurances and such other
fees and expenses as may be necessary to
transfer the title to the name of the
VENDEE shall be for the account of the
VENDEE while capital gains tax shall be
paid by the VENDOR.
IN WITNESS WHEREOF, the parties
hereunto signed those (sic) presents in the
City of Makati MM, Philippines on this 9th
day of June, 1988.
(Sgd.) (Sgd.)
VIRGILIO R. ROMERO ENRIQUETA CHUA
VDA.
DE ONGSIONG
Vendee Vendor
SIGNED IN THE PRESENCE OF:
(Sgd.) (Sgd.)
Rowena C. Ongsiong Jack M. Cruz 1
Alfonso Flores, in behalf of private
respondent, forthwith received and
acknowledged a check for P50,000.00 2
from petitioner. 3
Pursuant to the agreement, private
respondent filed a complaint for ejectment
(Civil Case No. 7579) against Melchor Musa
and 29 other squatter families with the
Metropolitan Trial Court of Paraaque. A few
months later, or on 21 February 1989,
judgment was rendered ordering the
defendants to vacate the premises. The
decision was handed down beyond the 60-
day period (expiring 09 August 1988)
stipulated in the contract. The writ of
execution of the judgment was issued, still
later, on 30 March 1989.
In a letter, dated 07 April 1989, private
respondent sought to return the P50,000.00
she received from petitioner since, she
said, she could not "get rid of the
squatters" on the lot. Atty. Sergio A.F.
Apostol, counsel for petitioner, in his reply
of 17 April 1989, refused the tender and
stated:.
Our client believes that with the exercise of
reasonable diligence considering the
favorable decision rendered by the Court
and the writ of execution issued pursuant
thereto, it is now possible to eject the
squatters from the premises of the subject
property, for which reason, he proposes
that he shall take it upon himself to eject
the squatters, provided, that expenses
which shall be incurred by reason thereof
shall be chargeable to the purchase price of
the land. 4
Meanwhile, the Presidential Commission for
the Urban Poor ("PCUD"), through its
Regional Director for Luzon, Farley O.
Viloria, asked the Metropolitan Trial Court of
Paraaque for a grace period of 45 days
from 21 April 1989 within which to relocate
and transfer the squatter families. Acting
favorably on the request, the court
suspended the enforcement of the writ of
execution accordingly.
On 08 June 1989, Atty. Apostol reminded
private respondent on the expiry of the 45-
day grace period and his client's willingness
to "underwrite the expenses for the
execution of the judgment and ejectment of
the occupants." 5
In his letter of 19 June 1989, Atty. Joaquin
Yuseco, Jr., counsel for private respondent,
advised Atty. Apostol that the Deed of
Conditional Sale had been rendered null
and void by virtue of his client's failure to
evict the squatters from the premises
within the agreed 60-day period. He added
that private respondent had "decided to
retain the property." 6
On 23 June 1989, Atty. Apostol wrote back
to explain:
The contract of sale between the parties
was perfected from the very moment that
there was a meeting of the minds of the
parties upon the subject lot and the price in
the amount of P1,561,600.00. Moreover,
the contract had already been partially
fulfilled and executed upon receipt of the
downpayment of your client. Ms. Ongsiong
is precluded from rejecting its binding
effects relying upon her inability to eject
the squatters from the premises of subject
property during the agreed period. Suffice it
to state that, the provision of the Deed of
Conditional Sale do not grant her the option
or prerogative to rescind the contract and
to retain the property should she fail to
comply with the obligation she has
assumed under the contract. In fact, a
perusal of the terms and conditions of the
contract clearly shows that the right to
rescind the contract and to demand the
return/reimbursement of the downpayment
is granted to our client for his protection.
Instead, however, of availing himself of the
power to rescind the contract and demand
the return, reimbursement of the
downpayment, our client had opted to take
it upon himself to eject the squatters from
the premises. Precisely, we refer you to our
letters addressed to your client dated April
17, 1989 and June 8, 1989.
Moreover, it is basic under the law on
contracts that the power to rescind is given
to the injured party. Undoubtedly, under the
circumstances, our client is the injured
party.
Furthermore, your client has not complied
with her obligation under their contract in
good faith. It is undeniable that Ms.
Ongsiong deliberately refused to exert
efforts to eject the squatters from the
premises of the subject property and her
decision to retain the property was brought
about by the sudden increase in the value
of realties in the surrounding areas.
Please consider this letter as a tender of
payment to your client and a demand to
execute the absolute Deed of Sale. 7
A few days later (or on 27 June 1989),
private respondent, prompted by
petitioner's continued refusal to accept the
return of the P50,000.00 advance payment,
filed with the Regional Trial Court of Makati,
Branch 133, Civil Case No. 89-4394 for
rescission of the deed of "conditional" sale,
plus damages, and for the consignation of
P50,000.00 cash.
Meanwhile, on 25 August 1989, the
Metropolitan Trial Court issued an alias writ
of execution in Civil Case No. 7579 on
motion of private respondent but the
squatters apparently still stayed on.
Back to Civil Case No. 89-4394, on 26 June
1990, the Regional Trial Court of Makati 8
rendered decision holding that private
respondent had no right to rescind the
contract since it was she who "violated her
obligation to eject the squatters from the
subject property" and that petitioner, being
the injured party, was the party who could,
under Article 1191 of the Civil Code, rescind
the agreement. The court ruled that the
provisions in the contract relating to (a) the
return/reimbursement of the P50,000.00 if
the vendor were to fail in her obligation to
free the property from squatters within the
stipulated period or (b), upon the other
hand, the sum's forfeiture by the vendor if
the vendee were to fail in paying the
agreed purchase price, amounted to
"penalty clauses". The court added:
This Court is not convinced of the ground
relied upon by the plaintiff in seeking the
rescission, namely: (1) he (sic) is afraid of
the squatters; and (2) she has spent so
much to eject them from the premises (p.
6, tsn, ses. Jan. 3, 1990). Militating against
her profession of good faith is plaintiffs
conduct which is not in accord with the
rules of fair play and justice. Notably, she
caused the issuance of an alias writ of
execution on August 25, 1989 (Exh. 6) in
the ejectment suit which was almost two
months after she filed the complaint before
this Court on June 27, 1989. If she were
really afraid of the squatters, then she
should not have pursued the issuance of an
alias writ of execution. Besides, she did not
even report to the police the alleged phone
threats from the squatters. To the mind of
the Court, the so-called squatter factor is
simply factuitous (sic). 9
The lower court, accordingly, dismissed the
complaint and ordered, instead, private
respondent to eject or cause the ejectment
of the squatters from the property and to
execute the absolute deed of conveyance
upon payment of the full purchase price by
petitioner.
Private respondent appealed to the Court of
Appeals. On 29 May 1992, the appellate
court rendered its decision. 10 It opined
that the contract entered into by the
parties was subject to a resolutory
condition, i.e., the ejectment of the
squatters from the land, the non-
occurrence of which resulted in the failure
of the object of the contract; that private
respondent substantially complied with her
obligation to evict the squatters; that it was
petitioner who was not ready to pay the
purchase price and fulfill his part of the
contract, and that the provision requiring a
mandatory return/reimbursement of the
P50,000.00 in case private respondent
would fail to eject the squatters within the
60-day period was not a penal clause. Thus,
it concluded.
WHEREFORE, the decision appealed from is
REVERSED and SET ASIDE, and a new one
entered declaring the contract of
conditional sale dated June 9, 1988
cancelled and ordering the defendant-
appellee to accept the return of the
downpayment in the amount of P50,000.00
which was deposited in the court below. No
pronouncement as to costs. 11
Failing to obtain a reconsideration,
petitioner filed this petition for review on
certiorari raising issues that, in fine, center
on the nature of the contract adverted to
and the P50,000.00 remittance made by
petitioner.
A perfected contract of sale may either be
absolute or conditional 12 depending on
whether the agreement is devoid of, or
subject to, any condition imposed on the
passing of title of the thing to be conveyed
or on the obligation of a party thereto.
When ownership is retained until the
fulfillment of a positive condition the
breach of the condition will simply prevent
the duty to convey title from acquiring an
obligatory force. If the condition is imposed
on an obligation of a party which is not
complied with, the other party may either
refuse to proceed or waive said condition
(Art. 1545, Civil Code). Where, of course,
the condition is imposed upon the
perfection of the contract itself, the failure
of such condition would prevent the
juridical relation itself from coming into
existence. 13
In determining the real character of the
contract, the title given to it by the parties
is not as much significant as its substance.
For example, a deed of sale, although
denominated as a deed of conditional sale,
may be treated as absolute in nature, if title
to the property sold is not reserved in the
vendor or if the vendor is not granted the
right to unilaterally rescind the contract
predicated
on the fulfillment or non-fulfillment, as the
case may be, of the prescribed condition.
14
The term "condition" in the context of a
perfected contract of sale pertains, in
reality, to the compliance by one party of
an undertaking the fulfillment of which
would beckon, in turn, the demandability of
the reciprocal prestation of the other party.
The reciprocal obligations referred to would
normally be, in the case of vendee, the
payment of the agreed purchase price and,
in the case of the vendor, the fulfillment of
certain express warranties (which, in the
case at bench is the timely eviction of the
squatters on the property).
It would be futile to challenge the
agreement here in question as not being a
duly perfected contract. A sale is at once
perfected when a person (the seller)
obligates himself, for a price certain, to
deliver and to transfer ownership of a
specified thing or right to another (the
buyer) over which the latter agrees. 15
The object of the sale, in the case before
us, was specifically identified to be a 1,952-
square meter lot in San Dionisio,
Paraaque, Rizal, covered by Transfer
Certificate of Title No. 361402 of the
Registry of Deeds for Pasig and therein
technically described. The purchase price
was fixed at P1,561,600.00, of which
P50,000.00 was to be paid upon the
execution of the document of sale and the
balance of P1,511,600.00 payable "45 days
after the removal of all squatters from the
above described property."
From the moment the contract is perfected,
the parties are bound not only to the
fulfillment of what has been expressly
stipulated but also to all the consequences
which, according to their nature, may be in
keeping with good faith, usage and law.
Under the agreement, private respondent is
obligated to evict the squatters on the
property. The ejectment of the squatters is
a condition the operative act of which sets
into motion the period of compliance by
petitioner of his own obligation, i.e., to pay
the balance of the purchase price. Private
respondent's failure "to remove the
squatters from the property" within the
stipulated period gives petitioner the right
to either refuse to proceed with the
agreement or waive that condition in
consonance with Article 1545 of the Civil
Code. 16 This option clearly belongs to
petitioner and not to private respondent.
We share the opinion of the appellate court
that the undertaking required of private
respondent does not constitute a
"potestative condition dependent solely on
his will" that might, otherwise, be void in
accordance with Article 1182 of the Civil
Code 17 but a "mixed" condition
"dependent not on the will of the vendor
alone but also of third persons like the
squatters and government agencies and
personnel concerned." 18 We must hasten
to add, however, that where the so-called
"potestative condition" is imposed not on
the birth of the obligation but on its
fulfillment, only the obligation is avoided,
leaving unaffected the obligation itself.
In contracts of sale particularly, Article
1545 of the Civil Code, aforementioned,
allows the obligee to choose between
proceeding with the agreement or waiving
the performance of the condition. It is this
provision which is the pertinent rule in the
case at bench. Here, evidently, petitioner
has waived the performance of the
condition imposed on private respondent to
free the property from squatters.
In any case, private respondent's action for
rescission is not warranted. She is not the
injured party. 21 The right of resolution of a
party to an obligation under Article 1191 of
the Civil Code is predicated on a breach of
faith by the other party that violates the
reciprocity between them. 22 It is private
respondent who has failed in her obligation
under the contract. Petitioner did not
breach the agreement. He has agreed, in
fact, to shoulder the expenses of the
execution of the judgment in the ejectment
case and to make arrangements with the
sheriff to effect such execution. In his letter
of 23 June 1989, counsel for petitioner has
tendered payment and demanded forthwith
the execution of the deed of absolute sale.
Parenthetically, this offer to pay, having
been made prior to the demand for
rescission, assuming for the sake of
argument that such a demand is proper
under Article 1592 23 of the Civil Code,
would likewise suffice to defeat private
respondent's prerogative to rescind
thereunder.
There is no need to still belabor the
question of whether the P50,000.00
advance payment is reimbursable to
petitioner or forfeitable by private
respondent, since, on the basis of our
foregoing conclusions, the matter has
ceased to be an issue. Suffice it to say that
petitioner having opted to proceed with the
sale, neither may petitioner demand its
reimbursement from private respondent
nor may private respondent subject it to
forfeiture.
WHEREFORE, the questioned decision of
the Court of Appeals is hereby REVERSED
AND SET ASIDE, and another is entered
ordering petitioner to pay private
respondent the balance of the purchase
price and the latter to execute the deed of
absolute sale in favor of petitioner. No
costs.

SO ORDERED.
Spouses MARIANO Z. VELARDE and
AVELINA D. VELARDE, petitioners, vs.
COURT OF APPEALS, DAVID A. RAYMUNDO
and GEORGE RAYMUNDO, respondents.
DECISION
PANGANIBAN, J.:
A substantial breach of a reciprocal
obligation, like failure to pay the price in
the manner prescribed by the contract,
entitles the injured party to rescind the
obligation. Rescission abrogates the
contract from its inception and requires a
mutual restitution of benefits received.
The Case
Before us is a Petition for Review on
Certiorari[1] questioning the Decision[2] of
the Court of Appeals (CA) in CA-GR CV No.
32991 dated October 9, 1992, as well as its
Resolution[3] dated December 29, 1992
denying petitioners motion for
reconsideration.[4]
The dispositive portion of the assailed
Decision reads:
WHEREFORE, the Order dated May 15,
1991 is hereby ANNULLED and SET ASIDE
and the Decision dated November 14, 1990
dismissing the [C]omplaint is REINSTATED.
The bonds posted by plaintiffs-appellees
and defendants-appellants are hereby
RELEASED.[5]
The Facts
The factual antecedents of the case, as
found by the CA, are as follows:
x x x. David Raymundo [herein private
respondent] is the absolute and registered
owner of a parcel of land, together with the
house and other improvements thereon,
located at 1918 Kamias St., Dasmarias
Village, Makati and covered by TCT No.
142177. Defendant George Raymundo
[herein private respondent] is Davids father
who negotiated with plaintiffs Avelina and
Mariano Velarde [herein petitioners] for the
sale of said property, which was, however,
under lease (Exh. 6, p. 232, Record of Civil
Case No. 15952).
On August 8, 1986, a Deed of Sale with
Assumption of Mortgage (Exh. A; Exh. 1, pp.
11-12, Record) was executed by defendant
David Raymundo, as vendor, in favor of
plaintiff Avelina Velarde, as vendee, with
the following terms and conditions:
xxxxxxxxx
That for and in consideration of the amount
of EIGHT HUNDRED THOUSAND PESOS
(P800,000.00), Philippine currency, receipt
of which in full is hereby acknowledged by
the VENDOR from the VENDEE, to his entire
and complete satisfaction, by these
presents the VENDOR hereby SELLS,
CEDES, TRANSFERS, CONVEYS AND
DELIVERS, freely and voluntarily, with full
warranty of a legal and valid title as
provided by law, unto the VENDEE, her
heirs, successors and assigns, the parcel of
land mentioned and described above,
together with the house and other
improvements thereon.
That the aforesaid parcel of land, together
with the house and other improvements
thereon, were mortgaged by the VENDOR
to the BANK OF THE PHILIPPINE ISLANDS,
Makati, Metro Manila, to secure the
payment of a loan of ONE MILLION EIGHT
HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, as
evidenced by a Real Estate Mortgage
signed and executed by the VENDOR in
favor of the said Bank of the Philippine
Islands, on______ and which Real Estate
Mortgage was ratified before Notary Public
for Makati, _______, as Doc. No. ____, Page
No. ___, Book No. ___, Series of 1986 of his
Notarial Register.
That as part of the consideration of this
sale, the VENDEE hereby assumes to pay
the mortgage obligations on the property
herein sold in the amount of ONE MILLION
EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, in
favor of Bank of the Philippine Islands, in
the name of the VENDOR, and further
agrees to strictly and faithfully comply with
all the terms and conditions appearing in
the Real Estate Mortgage signed and
executed by the VENDOR in favor of BPI,
including interests and other charges for
late payment levied by the Bank, as if the
same were originally signed and executed
by the VENDEE.
It is further agreed and understood by the
parties herein that the capital gains tax and
documentary stamps on the sale shall be
for the account of the VENDOR; whereas,
the registration fees and transfer tax
thereon shall be for the account of the
VENDEE. (Exh. A, pp. 11-12, Record).
On the same date, and as part of the
above-document, plaintiff Avelina Velarde,
with the consent of her husband, Mariano,
executed an Undertaking (Exh. C, pp. 13-
14, Record), the pertinent portions of which
read, as follows:
xxxxxxxxx
Whereas, as per Deed of Sale with
Assumption of Mortgage, I paid Mr. David A.
Raymundo the sum of EIGHT HUNDRED
THOUSAND PESOS (P800,000.00),
Philippine currency, and assume the
mortgage obligations on the property with
the Bank of the Philippine Islands in the
amount of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00),
Philippine currency, in accordance with the
terms and conditions of the Deed of Real
Estate Mortgage dated _________, signed
and executed by Mr. David A. Raymundo
with the said Bank, acknowledged before
Notary Public for Makati, _____, as Doc. No.
___, Page No. ___, Book No. __, Series of
1986 of his Notarial Register.
WHEREAS, while my application for the
assumption of the mortgage obligations on
the property is not yet approved by the
mortgagee Bank, I have agreed to pay the
mortgage obligations on the property with
the Bank in the name of Mr. David A.
Raymundo, in accordance with the terms
and conditions of the said Deed of Real
Estate Mortgage, including all interests and
other charges for late payment.
WHEREAS, this undertaking is being
executed in favor of Mr. David A.
Raymundo, for purposes of attesting and
confirming our private understanding
concerning the said mortgage obligations
to be assumed.
NOW, THEREFORE, for and in consideration
of the foregoing premises, and the
assumption of the mortgage obligations of
ONE MILLION EIGHT HUNDRED THOUSAND
PESOS (P1,800,000.00), Philippine
currency, with the Bank of the Philippine
islands, I, Mrs. Avelina D. Velarde, with the
consent of my husband, Mariano Z. Velarde,
do hereby bind and obligate myself, my
heirs, successors and assigns, to strictly
and faithfully comply with the following
terms and conditions:
1. That until such time as my assumption of
the mortgage obligations on the property
purchased is approved by the mortgagee
bank, the Bank of the Philippine Islands, I
shall continue to pay the said loan in
accordance with the terms and conditions
of the Deed of Real Estate Mortgage in the
name of Mr. David A. Raymundo, the
original Mortgagor.
2. That, in the event I violate any of the
terms and conditions of the said Deed of
Real Estate Mortgage, I hereby agree that
my downpayment of P800,000.00, plus all
payments made with the Bank of the
Philippine Islands on the mortgage loan,
shall be forfeited in favor of Mr. David A.
Raymundo, as and by way of liquidated
damages, without necessity of notice or
any judicial declaration to that effect, and
Mr. David A Raymundo shall resume total
and complete ownership and possession of
the property sold by way of Deed of Sale
with Assumption of Mortgage, and the
same shall be deemed automatically
cancelled and be of no further force or
effect, in the same manner as if (the) same
had never been executed or entered into.
3. That I am executing this Undertaking for
purposes of binding myself, my heirs,
successors and assigns, to strictly and
faithfully comply with the terms and
conditions of the mortgage obligations with
the Bank of the Philippine Islands, and the
covenants, stipulations and provisions of
this Undertaking.
That, David A. Raymundo, the vendor of the
property mentioned and identified above,
[does] hereby confirm and agree to the
undertakings of the Vendee pertinent to the
assumption of the mortgage obligations by
the Vendee with the Bank of the Philippine
Islands. (Exh. C, pp. 13-14, Record).
This undertaking was signed by Avelina and
Mariano Velarde and David Raymundo.
It appears that the negotiated terms for the
payment of the balance of P1.8 million was
from the proceeds of a loan that plaintiffs
were to secure from a bank with
defendants help. Defendants had a
standing approved credit line with the Bank
of the Philippine Islands (BPI). The parties
agreed to avail of this, subject to BPIs
approval of an application for assumption of
mortgage by plaintiffs. Pending BPIs
approval o[f] the application, plaintiffs were
to continue paying the monthly interests of
the loan secured by a real estate mortgage.
Pursuant to said agreements, plaintiffs paid
BPI the monthly interest on the loan
secured by the aforementioned mortgage
for three (3) months as follows: September
19, 1986 at P27,225.00; October 20, 1986
at P23,000.00; and November 19, 1986 at
P23,925.00 (Exh. E, H & J, pp. 15, 17 and
18, Record).
On December 15, 1986, plaintiffs were
advised that the Application for Assumption
of Mortgage with BPI was not approved
(Exh. J, p. 133, Record). This prompted
plaintiffs not to make any further payment.
On January 5, 1987, defendants, thru
counsel, wrote plaintiffs informing the latter
that their non-payment to the mortgage
bank constitute[d] non-performance of their
obligation (Exh. 3, p. 220, Record).
In a Letter dated January 7, 1987, plaintiffs,
thru counsel, responded, as follows:
This is to advise you, therefore, that our
client is willing to pay the balance in cash
not later than January 21, 1987 provided:
(a) you deliver actual possession of the
property to her not later than January 15,
1987 for her immediate occupancy; (b) you
cause the release of title and mortgage
from the Bank of P.I. and make the title
available and free from any liens and
encumbrances; and (c) you execute an
absolute deed of sale in her favor free from
any liens or encumbrances not later than
January 21, 1987. (Exhs. K, 4, p. 223,
Record).

On January 8, 1987, defendants sent
plaintiffs a notarial notice of
cancellation/rescission of the intended sale
of the subject property allegedly due to the
latters failure to comply with the terms and
conditions of the Deed of Sale with
Assumption of Mortgage and the
Undertaking (Exh. 5, pp. 225-226, Record).
[6]
Consequently, petitioners filed on February
9, 1987 a Complaint against private
respondents for specific performance,
nullity of cancellation, writ of possession
and damages. This was docketed as Civil
Case No. 15952 at the Regional Trial Court
of Makati, Branch 149. The case was tried
and heard by then Judge Consuelo Ynares-
Santiago (now an associate justice of this
Court), who dismissed the Complaint in a
Decision dated November 14, 1990.[7]
Thereafter, petitioners filed a Motion for
Reconsideration.[8]
Meanwhile, then Judge Ynares-Santiago was
promoted to the Court of Appeals and Judge
Salvador S. A. Abad Santos was assigned to
the sala she vacated. In an Order dated
May 15, 1991,[9] Judge Abad Santos
granted petitioners Motion for
Reconsideration and directed the parties to
proceed with the sale. He instructed
petitioners to pay the balance of P1.8
million to private respondents who, in turn,
were ordered to execute a deed of absolute
sale and to surrender possession of the
disputed property to petitioners.
Private respondents appealed to the CA.
Ruling of the Court of Appeals
The CA set aside the Order of Judge Abad
Santos and reinstated then Judge Ynares-
Santiagos earlier Decision dismissing
petitioners Complaint. Upholding the
validity of the rescission made by private
respondents, the CA explained its ruling in
this wise:
In the Deed of Sale with Assumption of
Mortgage, it was stipulated that as part of
the consideration of this sale, the VENDEE
(Velarde) would assume to pay the
mortgage obligation on the subject
property in the amount of P1.8 million in
favor of BPI in the name of the Vendor
(Raymundo). Since the price to be paid by
the Vendee Velarde includes the
downpayment of P800,000.00 and the
balance of P1.8 million, and the balance of
P1.8 million cannot be paid in cash, Vendee
Velarde, as part of the consideration of the
sale, had to assume the mortgage
obligation on the subject property. In other
words, the assumption of the mortgage
obligation is part of the obligation of
Velarde, as vendee, under the contract.
Velarde further agreed to strictly and
faithfully comply with all the terms and
conditions appearing in the Real Estate
Mortgage signed and executed by the
VENDOR in favor of BPI x x x as if the same
were originally signed and executed by the
Vendee. (p.2, thereof, p.12, Record). This
was reiterated by Velarde in the document
entitled Undertaking wherein the latter
agreed to continue paying said loan in
accordance with the terms and conditions
of the Deed of Real Estate Mortgage in the
name of Raymundo. Moreover, it was
stipulated that in the event of violation by
Velarde of any terms and conditions of said
deed of real estate mortgage, the
downpayment of P800,000.00 plus all
payments made with BPI or the mortgage
loan would be forfeited and the [D]eed of
[S]ale with [A]ssumption of [M]ortgage
would thereby be cancelled automatically
and of no force and effect (pars. 2 & 3,
thereof, pp. 13-14, Record).
From these 2 documents, it is therefore
clear that part of the consideration of the
sale was the assumption by Velarde of the
mortgage obligation of Raymundo in the
amount of P1.8 million. This would mean
that Velarde had to make payments to BPI
under the [D]eed of [R]eal [E]state
[M]ortgage in the name of Raymundo. The
application with BPI for the approval of the
assumption of mortgage would mean that,
in case of approval, payment of the
mortgage obligation will now be in the
name of Velarde. And in the event said
application is disapproved, Velarde had to
pay in full. This is alleged and admitted in
Paragraph 5 of the Complaint. Mariano
Velarde likewise admitted this fact during
the hearing on September 15, 1997 (p. 47,
t.s.n., September 15, 1987; see also pp. 16-
26, t.s.n., October 8, 1989). This being the
case, the non-payment of the mortgage
obligation would result in a violation of the
contract. And, upon Velardes failure to pay
the agreed price, the[n] Raymundo may
choose either of two (2) actions - (1)
demand fulfillment of the contract, or (2)
demand its rescission (Article 1191, Civil
Code).
The disapproval by BPI of the application
for assumption of mortgage cannot be used
as an excuse for Velardes non-payment of
the balance of the purchase price. As borne
out by the evidence, Velarde had to pay in
full in case of BPIs disapproval of the
application for assumption of mortgage.
What Velarde should have done was to pay
the balance of P1.8 million. Instead, Velarde
sent Raymundo a letter dated January 7,
1987 (Exh. K, 4) which was strongly given
weight by the lower court in reversing the
decision rendered by then Judge Ynares-
Santiago. In said letter, Velarde registered
their willingness to pay the balance in cash
but enumerated 3 new conditions which, to
the mind of this Court, would constitute a
new undertaking or new agreement which
is subject to the consent or approval of
Raymundo. These 3 conditions were not
among those previously agreed upon by
Velarde and Raymundo. These are mere
offers or, at most, an attempt to novate.
But then again, there can be no novation
because there was no agreement of all the
parties to the new contract (Garcia, Jr. vs.
Court of Appeals, 191 SCRA 493).
It was likewise agreed that in case of
violation of the mortgage obligation, the
Deed of Sale with Assumption of Mortgage
would be deemed automatically cancelled
and of no further force and effect, as if the
same had never been executed or entered
into. While it is true that even if the
contract expressly provided for automatic
rescission upon failure to pay the price, the
vendee may still pay, he may do so only for
as long as no demand for rescission of the
contract has been made upon him either
judicially or by a notarial act (Article 1592,
Civil Code). In the case at bar, Raymundo
sent Velarde a notarial notice dated January
8, 1987 of cancellation/rescission of the
contract due to the latters failure to comply
with their obligation. The rescission was
justified in view of Velardes failure to pay
the price (balance) which is substantial and
fundamental as to defeat the object of the
parties in making the agreement. As
adverted to above, the agreement of the
parties involved a reciprocal obligation
wherein the obligation of one is a resolutory
condition of the obligation of the other, the
non-fulfillment of which entitles the other
party to rescind the contract (Songcuan vs.
IAC, 191 SCRA 28). Thus, the non-payment
of the mortgage obligation by appellees
Velarde would create a right to demand
payment or to rescind the contract, or to
criminal prosecution (Edca Publishing &
Distribution Corporation vs. Santos, 184
SCRA 614). Upon appellees failure,
therefore, to pay the balance, the contract
was properly rescinded (Ruiz vs. IAC, 184
SCRA 720). Consequently, appellees
Velarde having violated the contract, they
have lost their right to its enforcement and
hence, cannot avail of the action for
specific performance (Voysaw vs. Interphil
Promotions, Inc., 148 SCRA 635).[10]
Hence, this appeal.[11]
The Issues
Petitioners, in their Memorandum,[12]
interpose the following assignment of
errors:
I.
The Court of Appeals erred in holding that
the non-payment of the mortgage
obligation resulted in a breach of the
contract.
II.
The Court of Appeals erred in holding that
the rescission (resolution) of the contract
by private respondents was justified.
III.
The Court of Appeals erred in holding that
petitioners January 7, 1987 letter gave
three new conditions constituting mere
offers or an attempt to novate
necessitating a new agreement between
the parties.
The Courts Ruling
The Petition is partially meritorious.
First Issue:
Breach of Contract
Petitioners aver that their nonpayment of
private respondents mortgage obligation
did not constitute a breach of contract,
considering that their request to assume
the obligation had been disapproved by the
mortgagee bank. Accordingly, payment of
the monthly amortizations ceased to be
their obligation and, instead, it devolved
upon private respondents again.
However, petitioners did not merely stop
paying the mortgage obligations; they also
failed to pay the balance of the purchase
price. As admitted by both parties, their
agreement mandated that petitioners
should pay the purchase price balance of
P1.8 million to private respondents in case
the request to assume the mortgage would
be disapproved. Thus, on December 15,
1986, when petitioners received notice of
the banks disapproval of their application to
assume respondents mortgage, they should
have paid the balance of the P1.8 million
loan.
Instead of doing so, petitioners sent a letter
to private respondents offering to make
such payment only upon the fulfillment of
certain conditions not originally agreed
upon in the contract of sale. Such
conditional offer to pay cannot take the
place of actual payment as would discharge
the obligation of a buyer under a contract
of sale.
In a contract of sale, the seller obligates
itself to transfer the ownership of and
deliver a determinate thing, and the buyer
to pay therefor a price certain in money or
its equivalent.[13] Private respondents had
already performed their obligation through
the execution of the Deed of Sale, which
effectively transferred ownership of the
property to petitioner through constructive
delivery. Prior physical delivery or
possession is not legally required, and the
execution of the Deed of Sale is deemed
equivalent to delivery.[14]
Petitioners, on the other hand, did not
perform their correlative obligation of
paying the contract price in the manner
agreed upon. Worse, they wanted private
respondents to perform obligations beyond
those stipulated in the contract before
fulfilling their own obligation to pay the full
purchase price.
Second Issue
Validity of the Rescission
Petitioners likewise claim that the rescission
of the contract by private respondents was
not justified, inasmuch as the former had
signified their willingness to pay the
balance of the purchase price only a little
over a month from the time they were
notified of the disapproval of their
application for assumption of mortgage.
Petitioners also aver that the breach of the
contract was not substantial as would
warrant a rescission. They cite several
cases[15] in which this Court declared that
rescission of a contract would not be
permitted for a slight or casual breach.
Finally, they argue that they have
substantially performed their obligation in
good faith, considering that they have
already made the initial payment of
P800,000 and three (3) monthly mortgage
payments.
As pointed out earlier, the breach
committed by petitioners was not so much
their nonpayment of the mortgage
obligations, as their nonperformance of
their reciprocal obligation to pay the
purchase price under the contract of sale.
Private respondents right to rescind the
contract finds basis in Article 1191 of the
Civil Code, which explicitly provides as
follows:
Art. 1191. -- 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
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.
The right of rescission of a party to an
obligation under Article 1191 of the Civil
Code is predicated on a breach of faith by
the other party who violates the reciprocity
between them.[16] The breach
contemplated in the said provision is the
obligors failure to comply with an existing
obligation.[17] When the obligor cannot
comply with what is incumbent upon it, the
obligee may seek rescission and, in the
absence of any just cause for the court to
determine the period of compliance, the
court shall decree the rescission.[18]
In the present case, private respondents
validly exercised their right to rescind the
contract, because of the failure of
petitioners to comply with their obligation
to pay the balance of the purchase price.
Indubitably, the latter violated the very
essence of reciprocity in the contract of
sale, a violation that consequently gave
rise to private respondents right to rescind
the same in accordance with law.
True, petitioners expressed their willingness
to pay the balance of the purchase price
one month after it became due; however,
this was not equivalent to actual payment
as would constitute a faithful compliance of
their reciprocal obligation. Moreover, the
offer to pay was conditioned on the
performance by private respondents of
additional burdens that had not been
agreed upon in the original contract. Thus,
it cannot be said that the breach
committed by petitioners was merely slight
or casual as would preclude the exercise of
the right to rescind.
Misplaced is petitioners reliance on the
cases[19] they cited because the factual
circumstances in those cases are not
analogous to those in the present one. In
Song Fo there was, on the part of the
buyer, only a delay of twenty (20) days to
pay for the goods delivered. Moreover, the
buyers offer to pay was unconditional and
was accepted by the seller. In Zepeda, the
breach involved a mere one-week delay in
paying the balance of P1,000, which was
actually paid. In Tan, the alleged breach
was private respondents delay of only a few
days, which was for the purpose of clearing
the title to the property; there was no
reference whatsoever to the nonpayment of
the contract price.
In the instant case, the breach committed
did not merely consist of a slight delay in
payment or an irregularity; such breach
would not normally defeat the intention of
the parties to the contract. Here,
petitioners not only failed to pay the P1.8
million balance, but they also imposed
upon private respondents new obligations
as preconditions to the performance of
their own obligation. In effect, the qualified
offer to pay was a repudiation of an existing
obligation, which was legally due and
demandable under the contract of sale.
Hence, private respondents were left with
the legal option of seeking rescission to
protect their own interest.
Mutual Restitution
Required in Rescission
As discussed earlier, the breach committed
by petitioners was the nonperformance of a
reciprocal obligation, not a violation of the
terms and conditions of the mortgage
contract. Therefore, the automatic
rescission and forfeiture of payment
clauses stipulated in the contract does not
apply. Instead, Civil Code provisions shall
govern and regulate the resolution of this
controversy.
Considering that the rescission of the
contract is based on Article 1191 of the
Civil Code, mutual restitution is required to
bring back the parties to their original
situation prior to the inception of the
contract. Accordingly, the initial payment of
P800,000 and the corresponding mortgage
payments in the amounts of P27,225,
P23,000 and P23,925 (totaling
P874,150.00) advanced by petitioners
should be returned by private respondents,
lest the latter unjustly enrich themselves at
the expense of the former.
fulfillment of their obligation, which had
become due.
WHEREFORE, the assailed Decision is
hereby AFFIRMED with the MODIFICATION
that private respondents are ordered to
return to petitioners the amount of
P874,150, which the latter paid as a
consequence of the rescinded contract,
with legal interest thereon from January 8,
1987, the date of rescission. No
pronouncement as to costs.
SO ORDERED.

Rescission creates the obligation to return

the object of the contract. It can be carried
out only when the one who demands
rescission can return whatever he may be
obliged to restore.[20] To rescind is to
declare a contract void at its inception and
to put an end to it as though it never was. It
is not merely to terminate it and release
the parties from further obligations to each
other, but to abrogate it from the beginning
and restore the parties to their relative
positions as if no contract has been made.
[21]

Third Issue
Attempt to Novate

In view of the foregoing discussion, the

Court finds it no longer necessary to
discuss the third issue raised by petitioners.
Suffice it to say that the three conditions
appearing on the January 7, 1987 letter of
petitioners to private respondents were not
part of the original contract. By that time, it
was already incumbent upon the former to
pay the balance of the sale price. They had
no right to demand preconditions to the
EODORO ACAP, petitioner,
vs.
COURT OF APPEALS and EDY DE LOS REYES,
respondents.
PADILLA, J.:
This is a petition for review on certiorari of
the decision 1 of the Court of Appeals, 2nd
Division, in CA-G.R. No. 36177, which
affirmed the decision 2 of the Regional Trial
Court of Himamaylan, Negros Occidental
holding that private respondent Edy de los
Reyes had acquired ownership of Lot No.
1130 of the Cadastral Survey of Hinigaran,
Negros Occidental based on a document
entitled "Declaration of Heirship and Waiver
of Rights", and ordering the dispossession
of petitioner as leasehold tenant of the land
for failure to pay rentals.
The facts of the case are as follows:
The title to Lot No. 1130 of the Cadastral
Survey of Hinigaran, Negros Occidental was
evidenced by OCT No. R-12179. The lot has
an area of 13,720 sq. meters. The title was
issued and is registered in the name of
spouses Santiago Vasquez and Lorenza
Oruma. After both spouses died, their only
son Felixberto inherited the lot. In 1975,
Felixberto executed a duly notarized
document entitled "Declaration of Heirship
and Deed of Absolute Sale" in favor of
Cosme Pido.
The evidence before the court a quo
established that since 1960, petitioner
Teodoro Acap had been the tenant of a
portion of the said land, covering an area of
nine thousand five hundred (9,500) meters.
When ownership was transferred in 1975 by
Felixberto to Cosme Pido, Acap continued to
be the registered tenant thereof and
religiously paid his leasehold rentals to Pido
and thereafter, upon Pido's death, to his
widow Laurenciana.
The controversy began when Pido died
intestate and on 27 November 1981, his
surviving heirs executed a notarized
document denominated as "Declaration of
Heirship and Waiver of Rights of Lot No.
1130 Hinigaran Cadastre," wherein they
declared; to quote its pertinent portions,
that:
. . . Cosme Pido died in the Municipality of
Hinigaran, Negros Occidental, he died
intestate and without any known debts and
obligations which the said parcel of land is
(sic) held liable.
That Cosme Pido was survived by his/her
legitimate heirs, namely: LAURENCIANA
PIDO, wife, ELY, ERVIN, ELMER, and
ELECHOR all surnamed PIDO; children;
That invoking the provision of Section 1,
Rule 74 of the Rules of Court, the above-
mentioned heirs do hereby declare unto
[sic] ourselves the only heirs of the late
Cosme Pido and that we hereby adjudicate
unto ourselves the above-mentioned parcel
of land in equal shares.
Now, therefore, We LAURENCIANA 3, ELY,
ELMER, ERVIN and ELECHOR all surnamed
PIDO, do hereby waive, quitclaim all our
rights, interests and participation over the
said parcel of land in favor of EDY DE LOS
REYES, of legal age, (f)ilipino, married to
VIRGINIA DE LOS REYES, and resident of
Hinigaran, Negros Occidental,
Philippines. . . . 4 (Emphasis supplied)
The document was signed by all of Pido's
heirs. Private respondent Edy de los Reyes
did not sign said document.
It will be noted that at the time of Cosme
Pido's death, title to the property continued
to be registered in the name of the Vasquez
spouses. Upon obtaining the Declaration of
Heirship with Waiver of Rights in his favor,
private respondent Edy de los Reyes filed
the same with the Registry of Deeds as part
of a notice of an adverse claim against the
original certificate of title.
Thereafter, private respondent sought for
petitioner (Acap) to personally inform him
that he (Edy) had become the new owner of
the land and that the lease rentals thereon
should be paid to him. Private respondent
further alleged that he and petitioner
entered into an oral lease agreement
wherein petitioner agreed to pay ten (10)
cavans of palay per annum as lease rental.
In 1982, petitioner allegedly complied with
said obligation. In 1983, however,
petitioner refused to pay any further lease
rentals on the land, prompting private
respondent to seek the assistance of the
then Ministry of Agrarian Reform (MAR) in
Hinigaran, Negros Occidental. The MAR
invited petitioner to a conference
scheduled on 13 October 1983. Petitioner
did not attend the conference but sent his
wife instead to the conference. During the
meeting, an officer of the Ministry informed
Acap's wife about private respondent's
ownership of the said land but she stated
that she and her husband (Teodoro) did not
recognize private respondent's claim of
ownership over the land.
On 28 April 1988, after the lapse of four (4)
years, private respondent filed a complaint
for recovery of possession and damages
against petitioner, alleging in the main that
as his leasehold tenant, petitioner refused
and failed to pay the agreed annual rental
of ten (10) cavans of palay despite
repeated demands.
During the trial before the court a quo,
petitioner reiterated his refusal to recognize
private respondent's ownership over the
subject land. He averred that he continues
to recognize Cosme Pido as the owner of
the said land, and having been a registered
tenant therein since 1960, he never
reneged on his rental obligations. When
Pido died, he continued to pay rentals to
Pido's widow. When the latter left for
abroad, she instructed him to stay in the
landholding and to pay the accumulated
rentals upon her demand or return from
abroad.
Petitioner further claimed before the trial
court that he had no knowledge about any
transfer or sale of the lot to private
respondent in 1981 and even the following
year after Laurenciana's departure for
abroad. He denied having entered into a
verbal lease tenancy contract with private
respondent and that assuming that the said
lot was indeed sold to private respondent
without his knowledge, R.A. 3844, as
amended, grants him the right to redeem
the same at a reasonable price. Petitioner
also bewailed private respondent's
ejectment action as a violation of his right
to security of tenure under P.D. 27.
On 20 August 1991, the lower court
rendered a decision in favor of private
respondent, the dispositive part of which
reads:
WHEREFORE, premises considered, the
Court renders judgment in favor of the
plaintiff, Edy de los Reyes, and against the
defendant, Teodoro Acap, ordering the
following, to wit:
1. Declaring forfeiture of defendant's
preferred right to issuance of a Certificate
of Land Transfer under Presidential Decree
No. 27 and his farmholdings;
2. Ordering the defendant Teodoro
Acap to deliver possession of said farm to
plaintiff, and;
3. Ordering the defendant to pay
P5,000.00 as attorney's fees, the sum of
P1,000.00 as expenses of litigation and the
amount of P10,000.00 as actual damages.
5 of Heirship and Waiver of Rights (Exhibit
In arriving at the above-mentioned
judgment, the trial court stated that the
evidence had established that the subject
land was "sold" by the heirs of Cosme Pido
to private respondent. This is clear from the
following disquisitions contained in the trial
court's six (6) page decision:
There is no doubt that defendant is a
registered tenant of Cosme Pido. However,
when the latter died their tenancy relations
changed since ownership of said land was
passed on to his heirs who, by executing a
Deed of Sale, which defendant admitted in
his affidavit, likewise passed on their
ownership of Lot 1130 to herein plaintiff
(private respondent). As owner hereof,
plaintiff has the right to demand payment
of rental and the tenant is obligated to pay
rentals due from the time demand is
made. . . . 6
Certainly, the sale of the Pido family of Lot
1130 to herein plaintiff does not of itself
extinguish the relationship. There was only
a change of the personality of the lessor in
the person of herein plaintiff Edy de los
Reyes who being the purchaser or
transferee, assumes the rights and
obligations of the former landowner to the
tenant Teodoro Acap, herein defendant. 7
Aggrieved, petitioner appealed to the Court
of Appeals, imputing error to the lower
court when it ruled that private respondent
acquired ownership of Lot No. 1130 and
that he, as tenant, should pay rentals to
private respondent and that failing to pay
the same from 1983 to 1987, his right to a
certificate of land transfer under P.D. 27
was deemed forfeited.
The Court of Appeals brushed aside
petitioner's argument that the Declaration
"D"), the document relied upon by private
respondent to prove his ownership to the
lot, was excluded by the lower court in its
order dated 27 August 1990. The order
indeed noted that the document was not
identified by Cosme Pido's heirs and was
not registered with the Registry of Deeds of
Negros Occidental. According to respondent
court, however, since the Declaration of
Heirship and Waiver of Rights appears to
have been duly notarized, no further proof
of its due execution was necessary. Like the
trial court, respondent court was also
convinced that the said document stands
as prima facie proof of appellee's (private
respondent's) ownership of the land in
dispute.
With respect to its non-registration,
respondent court noted that petitioner had
actual knowledge of the subject sale of the
land in dispute to private respondent
because as early as 1983, he (petitioner)
already knew of private respondent's claim
over the said land but which he thereafter
denied, and that in 1982, he (petitioner)
actually paid rent to private respondent.
Otherwise stated, respondent court
considered this fact of rental payment in
1982 as estoppel on petitioner's part to
thereafter refute private respondent's claim
of ownership over the said land. Under
these circumstances, respondent court
ruled that indeed there was deliberate
refusal by petitioner to pay rent for a
continued period of five years that merited
forfeiture of his otherwise preferred right to
the issuance of a certificate of land transfer.
In the present petition, petitioner impugns
the decision of the Court of Appeals as not
in accord with the law and evidence when it
rules that private respondent acquired
ownership of Lot No. 1130 through the
aforementioned Declaration of Heirship and
Waiver of Rights.
Hence, the issues to be resolved presently
are the following:
1. WHETHER OR NOT THE SUBJECT
DECLARATION OF HEIRSHIP AND WAIVER
OF RIGHTS IS A RECOGNIZED MODE OF
ACQUIRING OWNERSHIP BY PRIVATE
RESPONDENT OVER THE LOT IN QUESTION.
2. WHETHER OR NOT THE SAID
DOCUMENT CAN BE CONSIDERED A DEED
OF SALE IN FAVOR OF PRIVATE
RESPONDENT OF THE LOT IN QUESTION.
Petitioner argues that the Regional Trial
Court, in its order dated 7 August 1990,
explicitly excluded the document marked
as Exhibit "D" (Declaration of Heirship, etc.)
as private respondent's evidence because it
was not registered with the Registry of
Deeds and was not identified by anyone of
the heirs of Cosme Pido. The Court of
Appeals, however, held the same to be
admissible, it being a notarized document,
hence, a prima facie proof of private
respondents' ownership of the lot to which
it refers.
Petitioner points out that the Declaration of
Heirship and Waiver of Rights is not one of
the recognized modes of acquiring
ownership under Article 712 of the Civil
Code. Neither can the same be considered
a deed of sale so as to transfer ownership
of the land to private respondent because
no consideration is stated in the contract
(assuming it is a contract or deed of sale).
Private respondent defends the decision of
respondent Court of Appeals as in accord
with the evidence and the law. He posits
that while it may indeed be true that the
trial court excluded his Exhibit "D" which is
the Declaration of Heirship and Waiver of
Rights as part of his evidence, the trial
court declared him nonetheless owner of
the subject lot based on other evidence
adduced during the trial, namely, the notice
of adverse claim (Exhibit "E") duly
registered by him with the Registry of
Deeds, which contains the questioned
Declaration of Heirship and Waiver of
Rights as an integral part thereof.
We find the petition impressed with merit.
In the first place, an asserted right or claim
to ownership or a real right over a thing
arising from a juridical act, however
justified, is not per se sufficient to give rise
to ownership over the res. That right or title
must be completed by fulfilling certain
conditions imposed by law. Hence,
ownership and real rights are acquired only
pursuant to a legal mode or process. While
title is the juridical justification, mode is the
actual process of acquisition or transfer of
ownership over a thing in question. 8
Under Article 712 of the Civil Code, the
modes of acquiring ownership are generally
classified into two (2) classes, namely, the
original mode (i.e., through occupation,
acquisitive prescription, law or intellectual
creation) and the derivative mode (i.e.,
through succession mortis causa or
tradition as a result of certain contracts,
such as sale, barter, donation, assignment
or mutuum).
In the case at bench, the trial court was
obviously confused as to the nature and
effect of the Declaration of Heirship and
Waiver of Rights, equating the same with a
contract (deed) of sale. They are not the
same.
In a Contract of Sale, one of the contracting
parties obligates himself to transfer the
ownership of and to deliver a determinate
thing, and the other party to pay a price
certain in money or its equivalent. 9
Upon the other hand, a declaration of
heirship and waiver of rights operates as a
public instrument when filed with the
Registry of Deeds whereby the intestate
heirs adjudicate and divide the estate left
by the decedent among themselves as they
see fit. It is in effect an extrajudicial
settlement between the heirs under Rule 74
of the Rules of Court. 10
Hence, there is a marked difference
between a sale of hereditary rights and a
waiver of hereditary rights. The first
presumes the existence of a contract or
deed of sale between the parties. 11 The
second is, technically speaking, a mode of
extinction of ownership where there is an
abdication or intentional relinquishment of
a known right with knowledge of its
existence and intention to relinquish it, in
favor of other persons who are co-heirs in
the succession. 12 Private respondent,
being then a stranger to the succession of
Cosme Pido, cannot conclusively claim
ownership over the subject lot on the sole
basis of the waiver document which neither
recites the elements of either a sale, 13 or
a donation, 14 or any other derivative
mode of acquiring ownership.
Quite surprisingly, both the trial court and
public respondent Court of Appeals
concluded that a "sale" transpired between
Cosme Pido's heirs and private respondent
and that petitioner acquired actual
knowledge of said sale when he was
summoned by the Ministry of Agrarian
Reform to discuss private respondent's
claim over the lot in question. This
conclusion has no basis both in fact and in
law.
On record, Exhibit "D", which is the
"Declaration of Heirship and Waiver of
Rights" was excluded by the trial court in
its order dated 27 August 1990 because the
document was neither registered with the
Registry of Deeds nor identified by the heirs
of Cosme Pido. There is no showing that
private respondent had the same document
attached to or made part of the record.
What the trial court admitted was Annex
"E", a notice of adverse claim filed with the
Registry of Deeds which contained the
Declaration of Heirship with Waiver of rights
and was annotated at the back of the
Original Certificate of Title to the land in
question.
A notice of adverse claim, by its nature,
does not however prove private
respondent's ownership over the tenanted
lot. "A notice of adverse claim is nothing
but a notice of a claim adverse to the
registered owner, the validity of which is
yet to be established in court at some
future date, and is no better than a notice
of lis pendens which is a notice of a case
already pending in court." 15
It is to be noted that while the existence of
said adverse claim was duly proven, there
is no evidence whatsoever that a deed of
sale was executed between Cosme Pido's
heirs and private respondent transferring
the rights of Pido's heirs to the land in favor
of private respondent. Private respondent's
right or interest therefore in the tenanted
lot remains an adverse claim which cannot
by itself be sufficient to cancel the OCT to
the land and title the same in private
respondent's name.
Consequently, while the transaction
between Pido's heirs and private
respondent may be binding on both parties,
the right of petitioner as a registered tenant
to the land cannot be perfunctorily forfeited
on a mere allegation of private
respondent's ownership without the
corresponding proof thereof.
possession of his farmholdings should not
Petitioner had been a registered tenant in be applied against petitioners, since private
the subject land since 1960 and religiously respondent has not established a cause of
paid lease rentals thereon. In his mind, he action for recovery of possession against
continued to be the registered tenant of petitioner.
Cosme Pido and his family (after Pido's
death), even if in 1982, private respondent WHEREFORE, premises considered, the
allegedly informed petitioner that he had Court hereby GRANTS the petition and the
become the new owner of the land. decision of the Court of Appeals dated 1
May 1994 which affirmed the decision of
Under the circumstances, petitioner may the RTC of Himamaylan, Negros Occidental
have, in good faith, assumed such dated 20 August 1991 is hereby SET ASIDE.
statement of private respondent to be true The private respondent's complaint for
and may have in fact delivered 10 cavans recovery of possession and damages
of palay as annual rental for 1982 to private against petitioner Acap is hereby
respondent. But in 1983, it is clear that DISMISSED for failure to properly state a
petitioner had misgivings over private cause of action, without prejudice to private
respondent's claim of ownership over the respondent taking the proper legal steps to
said land because in the October 1983 MAR establish the legal mode by which he
conference, his wife Laurenciana claims to have acquired ownership of the
categorically denied all of private land in question.
respondent's allegations. In fact, petitioner
even secured a certificate from the MAR SO ORDERED.
dated 9 May 1988 to the effect that he
continued to be the registered tenant of
Cosme Pido and not of private respondent.
The reason is that private respondent never
registered the Declaration of Heirship with
Waiver of Rights with the Registry of Deeds
or with the MAR. Instead, he (private
respondent) sought to do indirectly what
could not be done directly, i.e., file a notice
of adverse claim on the said lot to establish
ownership thereover.
It stands to reason, therefore, to hold that
there was no unjustified or deliberate
refusal by petitioner to pay the lease
rentals or amortizations to the
landowner/agricultural lessor which, in this
case, private respondent failed to establish
in his favor by clear and convincing
evidence. 16
Consequently, the sanction of forfeiture of
his preferred right to be issued a Certificate
of Land Transfer under P.D. 27 and to the
ALFONSO QUIJADA, CRESENTE QUIJADA,
REYNELDA QUIJADA, DEMETRIO QUIJADA,
ELIUTERIA QUIJADA, EULALIO QUIJADA, and
WARLITO QUIJADA, petitioners, vs. COURT
OF APPEALS, REGALADO MONDEJAR,
RODULFO GOLORAN, ALBERTO ASIS,
SEGUNDINO RAS, ERNESTO GOLORAN,
CELSO ABISO, FERNANDO BAUTISTA,
ANTONIO MACASERO, and NESTOR
MAGUINSAY, respondents.
DECISION
MARTINEZ, J.:
Petitioners, as heirs of the late Trinidad
Quijada, filed a complaint against private
respondents for quieting of title, recovery
of possession and ownership of parcels of
land with claim for attorney's fees and
damages. The suit was premised on the
following facts found by the Court of
Appeals, which is materially the same as
that found by the trial court:
"Plaintiffs-appellees (petitioners) are the
children of the late Trinidad Corvera Vda. de
Quijada. Trinidad was one of the heirs of the
late Pedro Corvera and inherited from the
latter the two-hectare parcel of land subject
of the case, situated in the barrio of San
Agustin, Talacogon, Agusan del Sur. On
April 5, 1956, Trinidad Quijada together
with her sisters Leonila Corvera Vda. de
Sequea and Paz Corvera Cabiltes and
brother Epapiadito Corvera executed a
conditional deed of donation (Exh. C) of the
two-hectare parcel of land subject of the
case in favor of the Municipality of
Talacogon, the condition being that the
parcel of land shall be used solely and
exclusively as part of the campus of the
proposed provincial high school in
Talacogon. Apparently, Trinidad remained in
possession of the parcel of land despite the
donation. On July 29, 1962, Trinidad sold
one (1) hectare of the subject parcel of land
to defendant-appellant Regalado Mondejar
(Exh. 1). Subsequently, Trinidad verbally
sold the remaining one (1) hectare to
defendant-appellant (respondent) Regalado
Mondejar without the benefit of a written
deed of sale and evidenced solely by
receipts of payment. In 1980, the heirs of
Trinidad, who at that time was already
dead, filed a complaint for forcible entry
(Exh. E) against defendant-appellant
(respondent) Regalado Mondejar, which
complaint was, however, dismissed for
failure to prosecute (Exh. F). In 1987, the
proposed provincial high school having
failed to materialize, the Sangguniang
Bayan of the municipality of Talacogon
enacted a resolution reverting the two (2)
hectares of land donated back to the
donors (Exh. D). In the meantime,
defendant-appellant (respondent) Regalado
Mondejar sold portions of the land to
defendants-appellants (respondents)
Fernando Bautista (Exh. 5), Rodolfo Goloran
(Exh. 6), Efren Guden (Exh. 7) and Ernesto
Goloran (Exh. 8).
"On July 5, 1988, plaintiffs-appellees
(petitioners) filed this action against
defendants-appellants (respondents). In the
complaint, plaintiffs-appellees (petitioners)
alleged that their deceased mother never
sold, conveyed, transferred or disposed of
the property in question to any person or
entity much less to Regalado Mondejar
save the donation made to the Municipality
of Talacogon in 1956; that at the time of the
alleged sale to Regalado Mondejar by
Trinidad Quijada, the land still belongs to
the Municipality of Talacogon, hence, the
supposed sale is null and void.
"Defendants-appellants (respondents), on
the other hand, in their answer claimed
that the land in dispute was sold to
Regalado Mondejar, the one (1) hectare on
July 29, 1962, and the remaining one (1)
hectare on installment basis until fully paid.
As affirmative and/or special defense,
defendants-appellants (respondents)
alleged that plaintiffs' action is barred by
laches or has prescribed.
"The court a quo rendered judgment in
favor of plaintiffs-appellees (petitioners):
firstly because 'Trinidad Quijada had no
legal title or right to sell the land to
defendant Mondejar in 1962, 1966, 1967
and 1968, the same not being hers to
dispose of because ownership belongs to
the Municipality of Talacogon' (Decision, p.
4; Rollo, p. 39) and, secondly, that the deed
of sale executed by Trinidad Quijada in
favor of Mondejar did not carry with it the
conformity and acquiescence of her
children, more so that she was already 63
years old at the time, and a widow
(Decision, p. 6; Rollo, p. 41)."[1]
The dispositive portion of the trial court's
decision reads:
"WHEREFORE, viewed from the above
perceptions, the scale of justice having
tilted in favor of the plaintiffs, judgment is,
as it is hereby rendered:
1) ordering the Defendants to return and
vacate the two (2) hectares of land to
Plaintiffs as described in Tax Declaration
No. 1209 in the name of Trinidad Quijada;
2) ordering any person acting in
Defendants' behalf to vacate and restore
the peaceful possession of the land in
question to Plaintiffs;
3) ordering the cancellation of the Deed of
Sale executed by the late Trinidad Quijada
in favor of Defendant Regalado Mondejar as
well as the Deeds of Sale/Relinquishments
executed by Mondejar in favor of the other
Defendants;
4) ordering Defendants to remove their
improvements constructed on the
questioned lot;

5) ordering the Defendants to pay Plaintiffs,
jointly and severally, the amount of
P10,000.00 representing attorney's fees;
6) ordering Defendants to pays the amount
of P8,000.00 as expenses of litigation; and
7) ordering Defendants to pay the sum of
P30,000.00 representing moral damages.
SO ORDERED."[2]
On appeal, the Court of Appeals reversed
and set aside the judgment a quo[3] ruling
that the sale made by Trinidad Quijada to
respondent Mondejar was valid as the4
former retained an inchoate interest on the
lots by virtue of the automatic reversion
clause in the deed of donation.[4]
Thereafter, petitioners filed a motion for
reconsideration. When the CA denied their
motion,[5] petitioners instituted a petition
for review to this Court arguing principally
that the sale of the subject property made
by Trinidad Quijada to respondent Mondejar
is void, considering that at that time,
ownership was already transferred to the
Municipality of Talacogon. On the contrary,
private respondents contend that the sale
was valid, that they are buyers in good
faith, and that petitioners' case is barred by
laches.[6]
We affirm the decision of the respondent
court.
The donation made on April 5, 1956 by
Trinidad Quijada and her brother and
sisters[7] was subject to the condition that
the donated property shall be "used solely
and exclusively as a part of the campus of
the proposed Provincial High School in
Talacogon."[8] The donation further
provides that should "the proposed
Provincial High School be discontinued or if
the same shall be opened but for some
reason or another, the same may in the
future be closed" the donated property
shall automatically revert to the donor.[9]
Such condition, not being contrary to law,
morals, good customs, public order or
public policy was validly imposed in the
donation.[10]
When the Municipality's acceptance of the
donation was made known to the donor,
the former became the new owner of the
donated property -- donation being a mode
of acquiring and transmitting ownership[11]
- notwithstanding the condition imposed by
the donee. The donation is perfected once
the acceptance by the donee is made
known to the donor.[12] Accordingly,
ownership is immediately transferred to the
latter and that ownership will only revert to
the donor if the resolutory condition is not
fulfilled.
In this case, that resolutory condition is the
construction of the school. It has been ruled
that when a person donates land to another
on the condition that the latter would build
upon the land a school, the condition
imposed is not a condition precedent or a
suspensive condition but a resolutory one.
[13] Thus, at the time of the sales made in
1962 towards 1968, the alleged seller
(Trinidad) could not have sold the lots since
she had earlier transferred ownership
thereof by virtue of the deed of donation.
So long as the resolutory condition subsists
and is capable of fulfillment, the donation
remains effective and the donee continues
to be the owner subject only to the rights of
the donor or his successors-in-interest
under the deed of donation. Since no period
was imposed by the donor on when must
the donee comply with the condition, the
latter remains the owner so long as he has
tried to comply with the condition within a
reasonable period. Such period, however,
became irrelevant herein when the donee-
Municipality manifested through a
resolution that it cannot comply with the
condition of building a school and the same
was made known to the donor. Only then -
when the non-fulfillment of the resolutory
condition was brought to the donor's
knowledge - that ownership of the donated
property reverted to the donor as provided
in the automatic reversion clause of the
deed of donation.
The donor may have an inchoate interest in
the donated property during the time that
ownership of the land has not reverted to
her. Such inchoate interest may be the
subject of contracts including a contract of
sale. In this case, however, what the donor
sold was the land itself which she no longer
owns. It would have been different if the
donor-seller sold her interests over the
property under the deed of donation which
is subject to the possibility of reversion of
ownership arising from the non-fulfillment
of the resolutory condition.
As to laches, petitioners' action is not yet
barred thereby. Laches presupposes failure
or neglect for an unreasonable and
unexplained length of time, to do that
which, by exercising due diligence, could or
should have been done earlier;[14] "it is
negligence or omission to assert a right
within a reasonable time, thus, giving rise
to a presumption that the party entitled to
assert it either has abandoned or declined
to assert it."[15] Its essential elements of:
a) Conduct on the part of the defendant, or
of one under whom he claims, giving rise to
the situation complained of;
b) Delay in asserting complainant's right
after he had knowledge of the defendant's
conduct and after he has an opportunity to
sue;
c) Lack of knowledge or notice on the part
of the defendant that the complainant
would assert the right on which he bases
his suit; and,
d) Injury or prejudice to the defendant in
the event relief is accorded to the
complainant."[16]
are absent in this case. Petitioners' cause of
action to quiet title commenced only when
the property reverted to the donor and/or
his successors-in-interest in 1987.
Certainly, when the suit was initiated the
following year, it cannot be said that
petitioners had slept on their rights for a
long time. The 1960's sales made by
Trinidad Quijada cannot be the reckoning
point as to when petitioners' cause of
action arose. They had no interest over the
property at that time except under the
deed of donation to which private
respondents were not privy. Moreover,
petitioners had previously filed an
ejectment suit against private respondents
only that it did not prosper on a
technicality.
Be that at it may, there is one thing which
militates against the claim of petitioners.
Sale, being a consensual contract, is
perfected by mere consent, which is
manifested the moment there is a meeting
of the minds[17] as to the offer and
acceptance thereof on three (3) elements:
subject matter, price and terms of payment
of the price.[18] ownership by the seller on
the thing sold at the time of the perfection
of the contract of sale is not an element for
its perfection. What the law requires is that
the seller has the right to transfer
ownership at the time the thing sold is
delivered.[19] Perfection per se does not
transfer ownership which occurs upon the
actual or constructive delivery of the thing
sold.[20] A perfected contract of sale
cannot be challenged on the ground of non-
ownership on the part of the seller at the
time of its perfection; hence, the sale is still
valid.
The consummation, however, of the
perfected contract is another matter. It
occurs upon the constructive or actual
delivery of the subject matter to the buyer
when the seller or her successors-in-
interest subsequently acquires ownership
thereof. Such circumstance happened in
this case when petitioners -- who are
Trinidad Quijada's heirs and successors-in-
interest -- became the owners of the
subject property upon the reversion of the
ownership of the land to them.
Consequently, ownership is transferred to
respondent Mondejar ands those who claim
their right from him. Article 1434 of the
New Civil Code supports the ruling that the
seller's "title passes by operation of law to
the buyer."[21] This rule applies not only
when the subject matter of the contract of
sale is goods,[22] but also to other kinds of
property, including real property.[23]
There is also no merit in petitioners'
contention that since the lots were owned
by the municipality at the time of the sale,
they were outside the commerce of men
under Article 1409 (4) of the NCC;[24] thus,
the contract involving the same is
inexistent and void from the beginning.
However, nowhere in Article 1409 (4) is it
provided that the properties of a
municipality, whether it be those for public
use or its patrimonial property[25] are
outside the commerce of men. Besides, the
lots in this case were conditionally owned
by the municipality. To rule that the
donated properties are outside the
commerce of men would render nugatory
the unchallenged reasonableness and
justness of the condition which the donor
has the right to impose as owner thereof.
Moreover, the objects referred to as
outsides the commerce of man are those
which cannot be appropriated, such as the
open seas and the heavenly bodies.
With respect to the trial courts award of
attorneys fees, litigation expenses and
moral damages, there is neither factual nor
legal basis thereof. Attorneys fees and
expenses of litigation cannot, following the
general rule in Article 2208 of the New Civil
Code, be recovered in this case, there
being no stipulation to that effect and the
case does not fall under any of the
exceptions.[26] It cannot be said that
private respondents had compelled
petitioners to litigate with third persons.
Neither can it be ruled that the former
acted in gross and evident bad faith in
refusing to satisfy the latters claims
considering that private respondents were
under an honest belief that they have a
legal right over the property by virtue of
the deed of sale. Moral damages cannot
likewise be justified as none of the
circumstances enumerated under Articles
2219[27] and 2220[28] of the New Civil
Code concur in this case.
WHEREFORE, by virtue of the foregoing, the
assailed decision of the Court of Appeals is
AFFIRMED.
SO ORDERED.
GREGORIO FULE, petitioner, vs. COURT OF
APPEALS, NINEVETCH CRUZ and JUAN
BELARMINO, respondents.
DECISION
ROMERO, J.:
This petition for review on certiorari
questions the affirmance by the Court of
Appeals of the decision[1] of the Regional
Trial Court of San Pablo City, Branch 30,
dismissing the complaint that prayed for
the nullification of a contract of sale of a
10-hectare property in Tanay, Rizal in
consideration of the amount of P40,000.00
and a 2.5 carat emerald-cut diamond (Civil
Case No. SP-2455). The lower courts
decision disposed of the case as follows:
WHEREFORE, premises considered, the
Court hereby renders judgment dismissing
the complaint for lack of merit and ordering
plaintiff to pay:
1. Defendant Dra. Ninevetch M. Cruz the
sum of P300,000.00 as and for moral
damages and the sum of P100,000.00 as
and for exemplary damages;
2. Defendant Atty. Juan Belarmino the sum
of P250,000.00 as and for moral damages
and the sum of P150,000.00 as and for
exemplary damages;
3. Defendant Dra. Cruz and Atty. Belarmino
the sum of P25,000.00 each as and for
attorneys fees and litigation expenses; and
4. The costs of suit.
SO ORDERED.
As found by the Court of Appeals and the
lower court, the antecedent facts of this
case are as follows:
Petitioner Gregorio Fule, a banker by
profession and a jeweler at the same time,
acquired a 10-hectare property in Tanay,
Rizal (hereinafter Tanay property), covered
by Transfer Certificate of Title No. 320725
which used to be under the name of Fr.
Antonio Jacobe. The latter had mortgaged it
earlier to the Rural Bank of Alaminos (the
Bank), Laguna, Inc. to secure a loan in the
amount of P10,000.00, but the mortgage
was later foreclosed and the property
offered for public auction upon his default.
In July 1984, petitioner, as corporate
secretary of the bank, asked Remelia
Dichoso and Oliva Mendoza to look for a
buyer who might be interested in the Tanay
property. The two found one in the person
of herein private respondent Dr. Ninevetch
Cruz. It so happened that at the time,
petitioner had shown interest in buying a
pair of emerald-cut diamond earrings
owned by Dr. Cruz which he had seen in
January of the same year when his mother
examined and appraised them as genuine.
Dr. Cruz, however, declined petitioners offer
to buy the jewelry for P100,000.00.
Petitioner then made another bid to buy
them for US$6,000.00 at the exchange rate
of $1.00 to P25.00. At this point, petitioner
inspected said jewelry at the lobby of the
Prudential Bank branch in San Pablo City
and then made a sketch thereof. Having
sketched the jewelry for twenty to thirty
minutes, petitioner gave them back to Dr.
Cruz who again refused to sell them since
the exchange rate of the peso at the time
appreciated to P19.00 to a dollar.
Subsequently, however, negotiations for
the barter of the jewelry and the Tanay
property ensued. Dr. Cruz requested herein
private respondent Atty. Juan Belarmino to
check the property who, in turn, found out
that no sale or barter was feasible because
the one-year period for redemption of the
said property had not yet expired at the
time.
In an effort to cut through any legal
impediment, petitioner executed on
October 19, 1984, a deed of redemption on
behalf of Fr. Jacobe purportedly in the
amount of P15,987.78, and on even date,
Fr. Jacobe sold the property to petitioner for
P75,000.00. The haste with which the two
deeds were executed is shown by the fact
that the deed of sale was notarized ahead
of the deed of redemption. As Dr. Cruz had
already agreed to the proposed barter,
petitioner went to Prudential Bank once
again to take a look at the jewelry.
In the afternoon of October 23, 1984,
petitioner met Atty. Belarmino at the latters
residence to prepare the documents of
sale.[2] Dr. Cruz herself was not around but
Atty. Belarmino was aware that she and
petitioner had previously agreed to
exchange a pair of emerald-cut diamond
earrings for the Tanay property. Atty.
Belarmino accordingly caused the
preparation of a deed of absolute sale while
petitioner and Dr. Cruz attended to the
safekeeping of the jewelry.
The following day, petitioner, together with
Dichoso and Mendoza, arrived at the
residence of Atty. Belarmino to finally
execute a deed of absolute sale. Petitioner
signed the deed and gave Atty. Belarmino
the amount of P13,700.00 for necessary
expenses in the transfer of title over the
Tanay property. Petitioner also issued a
certification to the effect that the actual
consideration of the sale was P200,000.00
and not P80,000.00 as indicated in the
deed of absolute sale. The disparity
between the actual contract price and the
one indicated on the deed of absolute sale
was purportedly aimed at minimizing the
amount of the capital gains tax that
petitioner would have to shoulder. Since the
jewelry was appraised only at P160,000.00,
the parties agreed that the balance of
P40,000.00 would just be paid later in cash.

As pre-arranged, petitioner left Atty.
Belarminos residence with Dichoso and
Mendoza and headed for the bank, arriving
there at past 5:00 p.m. Dr. Cruz also arrived
shortly thereafter, but the cashier who kept
the other key to the deposit box had
already left the bank. Dr. Cruz and Dichoso,
therefore, looked for said cashier and found
him having a haircut. As soon as his haircut
was finished, the cashier returned to the
bank and arrived there at 5:48 p.m., ahead
of Dr. Cruz and Dichoso who arrived at 5:55
p.m. Dr. Cruz and the cashier then opened
the safety deposit box, the former
retrieving a transparent plastic or
cellophane bag with the jewelry inside and
handing over the same to petitioner. The
latter took the jewelry from the bag, went
near the electric light at the banks lobby,
held the jewelry against the light and
examined it for ten to fifteen minutes. After
a while, Dr. Cruz asked, Okay na ba iyan?
Petitioner expressed his satisfaction by
nodding his head.
For services rendered, petitioner paid the
agents, Dichoso and Mendoza, the amount
of US$300.00 and some pieces of jewelry.
He did not, however, give them half of the
pair of earrings in question which he had
earlier promised.
Later, at about 8:00 oclock in the evening
of the same day, petitioner arrived at the
residence of Atty. Belarmino complaining
that the jewelry given to him was fake. He
then used a tester to prove the alleged
fakery. Meanwhile, at 8:30 p.m., Dichoso
and Mendoza went to the residence of Dr.
Cruz to borrow her car so that, with Atty.
Belarmino, they could register the Tanay
property. After Dr. Cruz had agreed to lend
her car, Dichoso called up Atty. Belarmino.
The latter, however, instructed Dichoso to
proceed immediately to his residence
because petitioner was there. Believing
that petitioner had finally agreed to give
them half of the pair of earrings, Dichoso
went posthaste to the residence of Atty.
Belarmino only to find petitioner already
demonstrating with a tester that the
earrings were fake. Petitioner then accused
Dichoso and Mendoza of deceiving him
which they, however, denied. They
countered that petitioner could not have
been fooled because he had vast
experience regarding jewelry. Petitioner
nonetheless took back the US$300.00 and
jewelry he had given them.
Thereafter, the group decided to go to the
house of a certain Macario Dimayuga, a
jeweler, to have the earrings tested.
Dimayuga, after taking one look at the
earrings, immediately declared them
counterfeit. At around 9:30 p.m., petitioner
went to one Atty. Reynaldo Alcantara
residing at Lakeside Subdivision in San
Pablo City, complaining about the fake
jewelry. Upon being advised by the latter,
petitioner reported the matter to the police
station where Dichoso and Mendoza
likewise executed sworn statements.
On October 26, 1984, petitioner filed a
complaint before the Regional Trial Court of
San Pablo City against private respondents
praying, among other things, that the
contract of sale over the Tanay property be
declared null and void on the ground of
fraud and deceit.
On October 30, 1984, the lower court
issued a temporary restraining order
directing the Register of Deeds of Rizal to
refrain from acting on the pertinent
documents involved in the transaction. On
November 20, 1984, however, the same
court lifted its previous order and denied
the prayer for a writ of preliminary
injunction.
After trial, the lower court rendered its
decision on March 7, 1989. Confronting the
issue of whether or not the genuine pair of
earrings used as consideration for the sale
was delivered by Dr. Cruz to petitioner, the
lower court said:
The Court finds that the answer is definitely
in the affirmative. Indeed, Dra. Cruz
delivered (the) subject jewelries (sic) into
the hands of plaintiff who even raised the
same nearer to the lights of the lobby of
the bank near the door. When asked by
Dra. Cruz if everything was in order,
plaintiff even nodded his satisfaction
(Hearing of Feb. 24, 1988). At that instance,
plaintiff did not protest, complain or beg for
additional time to examine further the
jewelries (sic). Being a professional banker
and engaged in the jewelry business
plaintiff is conversant and competent to
detect a fake diamond from the real thing.
Plaintiff was accorded the reasonable time
and opportunity to ascertain and inspect
the jewelries (sic) in accordance with Article
1584 of the Civil Code. Plaintiff took
delivery of the subject jewelries (sic) before
6:00 p.m. of October 24, 1984. When he
went at 8:00 p.m. that same day to the
residence of Atty. Belarmino already with a
tester complaining about some fake
jewelries (sic), there was already undue
delay because of the lapse of a
considerable length of time since he got
hold of subject jewelries (sic). The lapse of
two (2) hours more or less before plaintiff
complained is considered by the Court as
unreasonable delay.[3]
The lower court further ruled that all the
elements of a valid contract under Article
1458 of the Civil Code were present,
namely: (a) consent or meeting of the
minds; (b) determinate subject matter, and
(c) price certain in money or its equivalent.
The same elements, according to the lower
court, were present despite the fact that
the agreement between petitioner and Dr.
Cruz was principally a barter contract. The
lower court explained thus:
x x x. Plaintiffs ownership over the Tanay
property passed unto Dra. Cruz upon the
constructive delivery thereof by virtue of
the Deed of Absolute Sale (Exh. D). On the
other hand, the ownership of Dra. Cruz over
the subject jewelries (sic) transferred to the
plaintiff upon her actual personal delivery
to him at the lobby of the Prudential Bank.
It is expressly provided by law that the
thing sold shall be understood as delivered,
when it is placed in the control and
possession of the vendee (Art. 1497, Civil
Code; Kuenzle & Straff vs. Watson & Co. 13
Phil. 26). The ownership and/or title over
the jewelries (sic) was transmitted
immediately before 6:00 p.m. of October
24, 1984. Plaintiff signified his approval by
nodding his head. Delivery or tradition, is
one of the modes of acquiring ownership
(Art. 712, Civil Code).
Similarly, when Exhibit D was executed, it
was equivalent to the delivery of the Tanay
property in favor of Dra. Cruz. The
execution of the public instrument (Exh. D)
operates as a formal or symbolic delivery of
the Tanay property and authorizes the
buyer, Dra. Cruz to use the document as
proof of ownership (Florendo v. Foz, 20 Phil.
399). More so, since Exhibit D does not
contain any proviso or stipulation to the
effect that title to the property is reserved
with the vendor until full payment of the
purchase price, nor is there a stipulation
giving the vendor the right to unilaterally
rescind the contract the moment the
vendee fails to pay within a fixed period
(Taguba v. Vda. De Leon, 132 SCRA 722;
Luzon Brokerage Co. Inc. vs. Maritime
Building Co. Inc. 86 SCRA 305; Froilan v. Pan
Oriental Shipping Co. et al. 12 SCRA 276).
[4]
Aside from concluding that the contract of
barter or sale had in fact been
consummated when petitioner and Dr. Cruz
parted ways at the bank, the trial court
likewise dwelt on the unexplained delay
with which petitioner complained about the
alleged fakery. Thus:
x x x. Verily, plaintiff is already estopped to
come back after the lapse of considerable
length of time to claim that what he got
was fake. He is a Business Management
graduate of La Salle University, Class 1978-
79, a professional banker as well as a
jeweler in his own right. Two hours is more
than enough time to make a switch of a
Russian diamond with the real diamond. It
must be remembered that in July 1984
plaintiff made a sketch of the subject
jewelries (sic) at the Prudential Bank.
Plaintiff had a tester at 8:00 p.m. at the
residence of Atty. Belarmino. Why then did
he not bring it out when he was examining
the subject jewelries (sic) at about 6:00
p.m. in the banks lobby? Obviously, he had
no need for it after being satisfied of the
genuineness of the subject jewelries (sic).
When Dra. Cruz and plaintiff left the bank
both of them had fully performed their
respective prestations. Once a contract is
shown to have been consummated or fully
performed by the parties thereto, its
existence and binding effect can no longer
be disputed. It is irrelevant and immaterial
to dispute the due execution of a contract if
both of them have in fact performed their
obligations thereunder and their respective
signatures and those of their witnesses
appear upon the face of the document
(Weldon Construction v. CA G.R. No. L-
35721, Oct. 12, 1987).[5]
Finally, in awarding damages to the
defendants, the lower court remarked:
The Court finds that plaintiff acted in
wanton bad faith. Exhibit 2-Belarmino
purports to show that the Tanay property is
worth P25,000.00. However, also on that
same day it was executed, the propertys
worth was magnified at P75,000.00 (Exh. 3-
Belarmino). How could in less than a day
(Oct. 19, 1984) the value would (sic) triple
under normal circumstances? Plaintiff, with
the assistance of his agents, was able to
exchange the Tanay property which his
bank valued only at P25,000.00 in
exchange for a genuine pair of emerald cut
diamond worth P200,000.00 belonging to
Dra. Cruz. He also retrieved the US$300.00
and jewelries (sic) from his agents. But he
was not satisfied in being able to get
subject jewelries for a song. He had to file a
malicious and unfounded case against Dra.
Cruz and Atty. Belarmino who are well
known, respected and held in high esteem
in San Pablo City where everybody
practically knows everybody. Plaintiff came
to Court with unclean hands dragging the
defendants and soiling their clean and good
name in the process. Both of them are near
the twilight of their lives after maintaining
and nurturing their good reputation in the
community only to be stunned with a court
case. Since the filing of this case on
October 26, 1984 up to the present they
were living under a pall of doubt. Surely,
this affected not only their earning capacity
in their practice of their respective
professions, but also they suffered
besmirched reputations. Dra. Cruz runs her
own hospital and defendant Belarmino is a
well respected legal practitioner.
The length of time this case dragged on
during which period their reputation were
(sic) tarnished and their names maligned
by the pendency of the case, the Court is of
the belief that some of the damages they
prayed for in their answers to the complaint
are reasonably proportionate to the
sufferings they underwent (Art. 2219, New
Civil Code). Moreover, because of the
falsity, malice and baseless nature of the
complaint defendants were compelled to
litigate. Hence, the award of attorneys fees
is warranted under the circumstances (Art.
2208, New Civil Code).[6]
From the trial courts adverse decision,
petitioner elevated the matter to the Court
of Appeals. On October 20, 1992, the Court
of Appeals, however, rendered a
decision[7]affirming in toto the lower courts
decision. His motion for reconsideration
having been denied on October 19, 1993,
petitioner now files the instant petition
alleging that:
I. THE TRIAL COURT ERRED IN DISMISSING
PLAINTIFFS COMPLAINT AND IN HOLDING
THAT THE PLAINTIFF ACTUALLY RECEIVED A
GENUINE PAIR OF EMERALD CUT DIAMOND
EARRING(S) FROM DEFENDANT CRUZ x x x;
II. THE TRIAL COURT ERRED IN AWARDING
MORAL AND EXEMPLARY DAMAGES AND
ATTORNEYS FEES IN FAVOR OF
DEFENDANTS AND AGAINST THE PLAINTIFF
IN THIS CASE; and
III.THE TRIAL COURT ERRED IN NOT
DECLARING THE DEED OF SALE OF THE
TANAY PROPERTY (EXH. `D) AS NULL AND
VOID OR IN NOT ANNULLING THE SAME,
AND IN FAILING TO GRANT REASONABLE
DAMAGES IN FAVOR OF THE PLAINTIFF.[8]
As to the first allegation, the Court
observes that petitioner is essentially
raising a factual issue as it invites us to
examine and weigh anew the facts
regarding the genuineness of the earrings
bartered in exchange for the Tanay
property. This, of course, we cannot do
without unduly transcending the limits of
our review power in petitions of this nature
which are confined merely to pure
questions of law. We accord, as a general
rule, conclusiveness to a lower courts
findings of fact unless it is shown, inter alia,
that: (1) the conclusion is a finding
grounded on speculations, surmises or
conjectures; (2) the inference is manifestly
mistaken, absurd and impossible; (3) when
there is a grave abuse of discretion; (4)
when the judgment is based on a
misapprehension of facts; (5) when the
findings of fact are conflicting; and (6)
when the Court of Appeals, in making its
findings, went beyond the issues of the
case and the same is contrary to the
admission of both parties.[9] We find
nothing, however, that warrants the
application of any of these exceptions.
Consequently, this Court upholds the
appellate courts findings of fact especially
because these concur with those of the trial
court which, upon a thorough scrutiny of
the records, are firmly grounded on
evidence presented at the trial.[10] To
reiterate, this Courts jurisdiction is only
limited to reviewing errors of law in the
absence of any showing that the findings
complained of are totally devoid of support
in the record or that they are glaringly
erroneous as to constitute serious abuse of
discretion.[11]
Nonetheless, this Court has to closely delve
into petitioners allegation that the lower
courts decision of March 7, 1989 is a ready-
made one because it was handed down a
day after the last date of the trial of the
case.[12] Petitioner, in this regard, finds it
incredible that Judge J. Ausberto Jaramillo
was able to write a 12-page single-spaced
decision, type it and release it on March 7,
1989, less than a day after the last hearing
on March 6, 1989. He stressed that Judge
Jaramillo replaced Judge Salvador de
Guzman and heard only his rebuttal
testimony.
This allegation is obviously no more than a
desperate effort on the part of petitioner to
disparage the lower courts findings of fact
in order to convince this Court to review the
same. It is noteworthy that Atty. Belarmino
clarified that Judge Jaramillo had issued the
first order in the case as early as March 9,
1987 or two years before the rendition of
the decision. In fact, Atty. Belarmino
terminated presentation of evidence on
October 13, 1987, while Dr. Cruz finished
hers on February 4, 1989, or more than a
month prior to the rendition of the
judgment. The March 6, 1989 hearing was
conducted solely for the presentation of
petitioner's rebuttal testimony.[13] In other
words, Judge Jaramillo had ample time to
study the case and write the decision
because the rebuttal evidence would only
serve to confirm or verify the facts already
presented by the parties.
The Court finds nothing anomalous in the
said situation. No proof has been adduced
that Judge Jaramillo was motivated by a
malicious or sinister intent in disposing of
the case with dispatch. Neither is there
proof that someone else wrote the decision
for him. The immediate rendition of the
decision was no more than Judge Jaramillos
compliance with his duty as a judge to
dispose of the courts business promptly
and decide cases within the required
periods.[14] The two-year period within
which Judge Jaramillo handled the case
provided him with all the time to study it
and even write down its facts as soon as
these were presented to court. In fact, this
Court does not see anything wrong in the
practice of writing a decision days before
the scheduled promulgation of judgment
and leaving the dispositive portion for
typing at a time close to the date of
promulgation, provided that no malice or
any wrongful conduct attends its adoption.
[15] The practice serves the dual purposes
of safeguarding the confidentiality of draft
decisions and rendering decisions with
promptness. Neither can Judge Jaramillo be
made administratively answerable for the
immediate rendition of the decision. The
acts of a judge which pertain to his judicial
functions are not subject to disciplinary
power unless they are committed with
fraud, dishonesty, corruption or bad faith.
[16] Hence, in the absence of sufficient
proof to the contrary, Judge Jaramillo is
presumed to have performed his job in
accordance with law and should instead be
commended for his close attention to duty.
Having disposed of petitioners first
contention, we now come to the core issue
of this petition which is whether the Court
of Appeals erred in upholding the validity of
the contract of barter or sale under the
circumstances of this case.
The Civil Code provides that contracts are
perfected by mere consent. From this
moment, the parties are bound not only to
the fulfillment of what has been expressly
stipulated but also to all the consequences
which, according to their nature, may be in
keeping with good faith, usage and law.[17]
A contract of sale is perfected at the
moment there is a meeting of the minds
upon the thing which is the object of the
contract and upon the price.[18] Being
consensual, a contract of sale has the force
of law between the contracting parties and
they are expected to abide in good faith by
their respective contractual commitments.
Article 1358 of the Civil Code which
requires the embodiment of certain
contracts in a public instrument, is only for
convenience,[19] and registration of the
instrument only adversely affects third
parties.[20] Formal requirements are,
therefore, for the benefit of third parties.
Non-compliance therewith does not
adversely affect the validity of the contract
nor the contractual rights and obligations of
the parties thereunder.
It is evident from the facts of the case that
there was a meeting of the minds between
petitioner and Dr. Cruz. As such, they are
bound by the contract unless there are
reasons or circumstances that warrant its
nullification. Hence, the problem that
should be addressed in this case is whether
or not under the facts duly established
herein, the contract can be voided in
accordance with law so as to compel the
parties to restore to each other the things
that have been the subject of the contract
with their fruits, and the price with interest.
[21]
Contracts that are voidable or annullable,
even though there may have been no
damage to the contracting parties are: (1)
those where one of the parties is incapable
of giving consent to a contract; and (2)
those where the consent is vitiated by
mistake, violence, intimidation, undue
influence or fraud.[22] Accordingly,
petitioner now stresses before this Court
that he entered into the contract in the
belief that the pair of emerald-cut diamond
earrings was genuine. On the pretext that
those pieces of jewelry turned out to be
counterfeit, however, petitioner
subsequently sought the nullification of
said contract on the ground that it was, in
fact, tainted with fraud[23] such that his
consent was vitiated.
There is fraud when, through the insidious
words or machinations of one of the
contracting parties, the other is induced to
enter into a contract which, without them,
he would not have agreed to.[24] The
records, however, are bare of any evidence
manifesting that private respondents
employed such insidious words or
machinations to entice petitioner into
entering the contract of barter. Neither is
there any evidence showing that Dr. Cruz
induced petitioner to sell his Tanay property
or that she cajoled him to take the earrings
in exchange for said property. On the
contrary, Dr. Cruz did not initially accede to
petitioners proposal to buy the said jewelry.
Rather, it appears that it was petitioner,
through his agents, who led Dr. Cruz to
believe that the Tanay property was worth
exchanging for her jewelry as he
represented that its value was P400,000.00
or more than double that of the jewelry
which was valued only at P160,000.00. If
indeed petitioners property was truly worth
that much, it was certainly contrary to the
nature of a businessman-banker like him to
have parted with his real estate for half its
price. In short, it was in fact petitioner who
resorted to machinations to convince Dr.
Cruz to exchange her jewelry for the Tanay
property.
Moreover, petitioner did not clearly allege
mistake as a ground for nullification of the
contract of sale. Even assuming that he did,
petitioner cannot successfully invoke the
same. To invalidate a contract, mistake
must refer to the substance of the thing
that is the object of the contract, or to
those conditions which have principally
moved one or both parties to enter into the
contract.[25] An example of mistake as to
the object of the contract is the substitution
of a specific thing contemplated by the
parties with another.[26] In his allegations
in the complaint, petitioner insinuated that
an inferior one or one that had only Russian
diamonds was substituted for the jewelry
he wanted to exchange with his 10-hectare
land. He, however, failed to prove the fact
that prior to the delivery of the jewelry to
him, private respondents endeavored to
make such substitution.
Likewise, the facts as proven do not
support the allegation that petitioner
himself could be excused for the mistake.
On account of his work as a banker-jeweler,
it can be rightfully assumed that he was an
expert on matters regarding gems. He had
the intellectual capacity and the business
acumen as a banker to take precautionary
measures to avert such a mistake,
considering the value of both the jewelry
and his land. The fact that he had seen the
jewelry before October 24, 1984 should not
have precluded him from having its
genuineness tested in the presence of Dr.
Cruz. Had he done so, he could have
avoided the present situation that he
himself brought about. Indeed, the finger of
suspicion of switching the genuine jewelry
for a fake inevitably points to him. Such a
mistake caused by manifest negligence
cannot invalidate a juridical act.[27] As the
Civil Code provides, (t)here is no mistake if
the party alleging it knew the doubt,
contingency or risk affecting the object of
the contract.[28]
Furthermore, petitioner was afforded the
reasonable opportunity required in Article
1584 of the Civil Code within which to
examine the jewelry as he in fact accepted
them when asked by Dr. Cruz if he was
satisfied with the same.[29] By taking the
jewelry outside the bank, petitioner
executed an act which was more consistent
with his exercise of ownership over it. This
gains credence when it is borne in mind
that he himself had earlier delivered the
Tanay property to Dr. Cruz by affixing his
signature to the contract of sale. That after
two hours he later claimed that the jewelry
was not the one he intended in exchange
for his Tanay property, could not sever the
juridical tie that now bound him and Dr.
Cruz. The nature and value of the thing he
had taken preclude its return after that
supervening period within which anything
could have happened, not excluding the
alteration of the jewelry or its being
switched with an inferior kind.
Both the trial and appellate courts,
therefore, correctly ruled that there were no
legal bases for the nullification of the
contract of sale. Ownership over the parcel
of land and the pair of emerald-cut
diamond earrings had been transferred to
Dr. Cruz and petitioner, respectively, upon
the actual and constructive delivery
thereof.[30] Said contract of sale being
absolute in nature, title passed to the
vendee upon delivery of the thing sold
since there was no stipulation in the
contract that title to the property sold has
been reserved in the seller until full
payment of the price or that the vendor has
the right to unilaterally resolve the contract
the moment the buyer fails to pay within a
fixed period.[31] Such stipulations are not
manifest in the contract of sale.
While it is true that the amount of
P40,000.00 forming part of the
consideration was still payable to
petitioner, its nonpayment by Dr. Cruz is
not a sufficient cause to invalidate the
contract or bar the transfer of ownership
and possession of the things exchanged
considering the fact that their contract is
silent as to when it becomes due and
demandable.[32]
Neither may such failure to pay the balance
of the purchase price result in the payment
of interest thereon. Article 1589 of the Civil
Code prescribes the payment of interest by
the vendee for the period between the
delivery of the thing and the payment of
the price in the following cases:
(1) Should it have been so stipulated;
(2) Should the thing sold and delivered
produce fruits or income;
(3) Should he be in default, from the time of
judicial or extrajudicial demand for the
payment of the price.
Not one of these cases obtains here. This
case should, of course, be distinguished
from De la Cruz v. Legaspi,[33] where the
court held that failure to pay the
consideration after the notarization of the
contract as previously promised resulted in
the vendees liability for payment of
interest. In the case at bar, there is no
stipulation for the payment of interest in
the contract of sale nor proof that the Tanay
property produced fruits or income. Neither
did petitioner demand payment of the price
as in fact he filed an action to nullify the
contract of sale.
All told, petitioner appears to have elevated
this case to this Court for the principal
reason of mitigating the amount of
damages awarded to both private
respondents which petitioner considers as
exorbitant. He contends that private
respondents do not deserve at all the
award of damages. In fact, he pleads for
the total deletion of the award as regards
private respondent Belarmino whom he
considers a mere nominal party because no
specific claim for damages against him was
alleged in the complaint. When he filed the
case, all that petitioner wanted was that
Atty. Belarmino should return to him the
owners duplicate copy of TCT No. 320725,
the deed of sale executed by Fr. Antonio
Jacobe, the deed of redemption and the
check alloted for expenses. Petitioner
alleges further that Atty. Belarmino should
not have delivered all those documents to
Dr. Cruz because as the lawyer for both the
seller and the buyer in the sale contract, he
should have protected the rights of both
parties. Moreover, petitioner asserts that
there was no firm basis for damages except
for Atty. Belarminos uncorroborated
testimony.[34]
Moral and exemplary damages may be
awarded without proof of pecuniary loss. In
awarding such damages, the court shall
take into account the circumstances
obtaining in the case and assess damages
according to its discretion.[35] To warrant
the award of damages, it must be shown
that the person to whom these are awarded
has sustained injury. He must likewise
establish sufficient data upon which the
court can properly base its estimate of the
amount of damages.[36] Statements of
facts should establish such data rather than
mere conclusions or opinions of witnesses.
[37] Thus:
x x x. For moral damages to be awarded, it
is essential that the claimant must have
satisfactorily proved during the trial the
existence of the factual basis of the
damages and its causal connection with the
adverse partys acts. If the court has no
proof or evidence upon which the claim for
moral damages could be based, such
indemnity could not be outrightly awarded.
The same holds true with respect to the
award of exemplary damages where it must
be shown that the party acted in a wanton,
oppressive or malevolent manner.[38]
In this regard, the lower court appeared to
have awarded damages on a ground
analogous to malicious prosecution under
Article 2219(8) of the Civil Code[39] as
shown by (1) petitioners wanton bad faith
in bloating the value of the Tanay property
which he exchanged for a genuine pair of
emerald-cut diamond worth P200,000.00;
and (2) his filing of a malicious and
unfounded case against private
respondents who were well known,
respected and held in high esteem in San
Pablo City where everybody practically
knows everybody and whose good names
in the twilight of their lives were soiled by
petitioners coming to court with unclean
hands, thereby affecting their earning
capacity in the exercise of their respective
professions and besmirching their
reputation.
For its part, the Court of Appeals affirmed
the award of damages to private
respondents for these reasons:
The malice with which Fule filed this case is
apparent. Having taken possession of the
genuine jewelry of Dra. Cruz, Fule now
wishes to return a fake jewelry to Dra. Cruz
and, more than that, get back the real
property, which his bank owns. Fule has
obtained a genuine jewelry which he could
sell anytime, anywhere and to anybody,
without the same being traced to the
original owner for practically nothing. This
is plain and simple, unjust enrichment.[40]
While, as a rule, moral damages cannot be
recovered from a person who has filed a
complaint against another in good faith
because it is not sound policy to place a
penalty on the right to litigate,[41] the
same, however, cannot apply in the case at
bar. The factual findings of the courts a quo
to the effect that petitioner filed this case
because he was the victim of fraud; that he
could not have been such a victim because
he should have examined the jewelry in
question before accepting delivery thereof,
considering his exposure to the banking
and jewelry businesses; and that he filed
the action for the nullification of the
contract of sale with unclean hands, all
deserve full faith and credit to support the
conclusion that petitioner was motivated
more by ill will than a sincere attempt to
protect his rights in commencing suit
against respondents.
As pointed out earlier, a closer scrutiny of
the chain of events immediately prior to
and on October 24, 1984 itself would amply
demonstrate that petitioner was not simply
negligent in failing to exercise due diligence
to assure himself that what he was taking
in exchange for his property were genuine
diamonds. He had rather placed himself in
a situation from which it preponderantly
appears that his seeming ignorance was
actually just a ruse. Indeed, he had
unnecessarily dragged respondents to face
the travails of litigation in speculating at
the possible favorable outcome of his
complaint when he should have realized
that his supposed predicament was his own
making. We, therefore, see here no
semblance of an honest and sincere belief
on his part that he was swindled by
respondents which would entitle him to
redress in court. It must be noted that
before petitioner was able to convince Dr.
Cruz to exchange her jewelry for the Tanay
property, petitioner took pains to
thoroughly examine said jewelry, even
going to the extent of sketching their
appearance. Why at the precise moment
when he was about to take physical
possession thereof he failed to exert extra
efforts to check their genuineness despite
the large consideration involved has never
been explained at all by petitioner. His acts
thus failed to accord with what an ordinary
prudent man would have done in the same
situation. Being an experienced banker and
a businessman himself who deliberately
skirted a legal impediment in the sale of
the Tanay property and to minimize the
capital gains tax for its exchange, it was
actually gross recklessness for him to have
merely conducted a cursory examination of
the jewelry when every opportunity for
doing so was not denied him. Apparently,
he carried on his person a tester which he
later used to prove the alleged fakery but
which he did not use at the time when it
was most needed. Furthermore, it took him
two more hours of unexplained delay
before he complained that the jewelry he
received were counterfeit. Hence, we
stated earlier that anything could have
happened during all the time that petitioner
was in complete possession and control of
the jewelry, including the possibility of
substituting them with fake ones, against
which respondents would have a great deal
of difficulty defending themselves. The
truth is that petitioner even failed to
successfully prove during trial that the
jewelry he received from Dr. Cruz were not SO ORDERED.
genuine. Add to that the fact that he had
been shrewd enough to bloat the Tanay
propertys price only a few days after he
purchased it at a much lower value. Thus, it
is our considered view that if this slew of
circumstances were connected, like pieces
of fabric sewn into a quilt, they would
sufficiently demonstrate that his acts were
not merely negligent but rather studied and
deliberate.

We do not have here, therefore, a situation

where petitioners complaint was simply
found later to be based on an erroneous
ground which, under settled jurisprudence,
would not have been a reason for awarding
moral and exemplary damages.[42]
Instead, the cause of action of the instant
case appears to have been contrived by
petitioner himself. In other words, he was
placed in a situation where he could not
honestly evaluate whether his cause of
action has a semblance of merit, such that
it would require the expertise of the courts
to put it to a test. His insistent pursuit of
such case then coupled with circumstances
showing that he himself was guilty in
bringing about the supposed wrongdoing
on which he anchored his cause of action
would render him answerable for all
damages the defendant may suffer
because of it. This is precisely what took
place in the petition at bar and we find no
cogent reason to disturb the findings of the
courts below that respondents in this case
suffered considerable damages due to
petitioners unwarranted action.

WHEREFORE, the decision of the Court of

Appeals dated October 20, 1992 is hereby
AFFIRMED in toto. Dr. Cruz, however, is
ordered to pay petitioner the balance of the
purchase price of P40,000.00 within ten
(10) days from the finality of this decision.
Costs against petitioner.
POLYTECHNIC UNIVERSITY OF THE
PHILIPPINES, petitioner, vs. COURT OF
APPEALS and FIRESTONE CERAMICS, INC.,
respondents.
[G.R. No. 143590. November 14, 2001]
NATIONAL DEVELOPMENT CORPORATION,
petitioner, vs. FIRESTONE CERAMICS, INC.,
respondents.
DECISION
BELLOSILLO, J.:
A litigation is not simply a contest of
litigants before the bar of public opinion;
more than that, it is a pursuit of justice
through legal and equitable means. To
prevent the search for justice from evolving
into a competition for public approval,
society invests the judiciary with complete
independence thereby insulating it from
demands expressed through any medium,
the press not excluded. Thus, if the court
would merely reflect, and worse, succumb
to the great pressures of the day, the end
result, it is feared, would be a travesty of
justice.
In the early sixties, petitioner National
Development Corporation (NDC), a
government owned and controlled
corporation created under CA 182 as
amended by CA 311 and PD No. 668, had in
its disposal a ten (10)-hectare property
located along Pureza St., Sta. Mesa, Manila.
The estate was popularly known as the NDC
compound and covered by Transfer
Certificates of Title Nos. 92885, 110301 and
145470.
Sometime in May 1965 private respondent
Firestone Ceramics Inc. (FIRESTONE)
manifested its desire to lease a portion of
the property for its ceramic manufacturing
business. On 24 August 1965 NDC and
FIRESTONE entered into a contract of lease
denominated as Contract No. C-30-65
covering a portion of the property
measured at 2.90118 hectares for use as a
manufacturing plant for a term of ten (10)
years, renewable for another ten (10) years
under the same terms and conditions.[1] In
consequence of the agreement, FIRESTONE
constructed on the leased premises several
warehouses and other improvements
needed for the fabrication of ceramic
products.
Three and a half (3-1/2) years later, or on 8
January 1969, FIRESTONE entered into a
second contract of lease with NDC over the
latter's four (4)-unit pre-fabricated
reparation steel warehouse stored in
Daliao, Davao. FIRESTONE agreed to ship
the warehouse to Manila for eventual
assembly within the NDC compound. The
second contract, denominated as Contract
No. C-26-68, was for similar use as a
ceramic manufacturing plant and was
agreed expressly to be "co-extensive with
the lease of LESSEE with LESSOR on the
2.60 hectare-lot."[2]
On 31 July 1974 the parties signed a similar
contract concerning a six (6)-unit pre-
fabricated steel warehouse which, as
agreed upon by the parties, would expire
on 2 December 1978.[3] Prior to the
expiration of the aforementioned contract,
FIRESTONE wrote NDC requesting for an
extension of their lease agreement.
Consequently on 29 November 1978 the
Board of Directors of NDC adopted
Resolution No. 11-78-117 extending the
term of the lease, subject to several
conditions among which was that in the
event NDC "with the approval of higher
authorities, decide to dispose and sell these
properties including the lot, priority should
be given to the LESSEE"[4] (underscoring
supplied). On 22 December 1978, in
pursuance of the resolution, the parties
entered into a new agreement for a ten-
year lease of the property, renewable for
another ten (10) years, expressly granting
FIRESTONE the first option to purchase the
leased premises in the event that it decided
"to dispose and sell these properties
including the lot . . . . "[5]
The contracts of lease conspicuously
contain an identically worded provision
requiring FIRESTONE to construct buildings
and other improvements within the leased
premises worth several hundred thousands
of pesos.[6]
The parties' lessor-lessee relationship went
smoothly until early 1988 when FIRESTONE,
cognizant of the impending expiration of
their lease agreement with NDC, informed
the latter through several letters and
telephone calls that it was renewing its
lease over the property. While its letter of
17 March 1988 was answered by Antonio A.
Henson, General Manager of NDC, who
promised immediate action on the matter,
the rest of its communications remained
unacknowledged.[7] FIRESTONE's
predicament worsened when rumors of
NDC's supposed plans to dispose of the
subject property in favor of petitioner
Polytechnic University of the Philippines
(PUP) came to its knowledge. Forthwith,
FIRESTONE served notice on NDC
conveying its desire to purchase the
property in the exercise of its contractual
right of first refusal.
Apprehensive that its interest in the
property would be disregarded, FIRESTONE
instituted an action for specific
performance to compel NDC to sell the
leased property in its favor. FIRESTONE
averred that it was pre-empting the
impending sale of the NDC compound to
petitioner PUP in violation of its leasehold
rights over the 2.60-hectare[8] property
and the warehouses thereon which would
expire in 1999. FIRESTONE likewise prayed
for the issuance of a writ of preliminary
injunction to enjoin NDC from disposing of
the property pending the settlement of the
controversy.[9]
In support of its complaint, FIRESTONE
adduced in evidence a letter of Antonio A.
Henson dated 15 July 1988 addressed to
Mr. Jake C. Lagonera, Director and Special
Assistant to Executive Secretary Catalino
Macaraeg, reviewing a proposed
memorandum order submitted to then
President Corazon C. Aquino transferring
the whole NDC compound, including the
leased property, in favor of petitioner PUP.
Attached to the letter was a draft of the
proposed memorandum order as well as a
summary of existing leases on the subject
property. The survey listed FIRESTONE as
lessee of a portion of the property, placed
at 29,000[10] square meters, whose
contract with NDC was set to expire on 31
December 1989[11] renewable for another
ten (10) years at the option of the lessee.
The report expressly recognized
FIRESTONE's right of first refusal to
purchase the leased property "should the
lessor decide to sell the same."[12]
Meanwhile, on 21 February 1989 PUP
moved to intervene and asserted its
interest in the subject property, arguing
that a "purchaser pendente lite of property
which is subject of a litigation is entitled to
intervene in the proceedings."[13] PUP
referred to Memorandum Order No. 214
issued by then President Aquino ordering
the transfer of the whole NDC compound to
the National Government, which in turn
would convey the aforementioned property
in favor of PUP at acquisition cost. The
issuance was supposedly made in
recognition of PUP's status as the "Poor
Man's University" as well as its serious
need to extend its campus in order to
accommodate the growing student
population. The order of conveyance of the
10.31-hectare property would automatically
result in the cancellation of NDC's total
obligation in favor of the National
Government in the amount of
P57,193,201.64.
Convinced that PUP was a necessary party
to the controversy that ought to be joined
as party defendant in order to avoid
multiplicity of suits, the trial court granted
PUP's motion to intervene. FIRESTONE
moved for reconsideration but was denied.
On certiorari, the Court of Appeals affirmed
the order of the trial court. FIRESTONE
came to us on review but in a Resolution
dated 11 July 1990 we upheld PUP's
inclusion as party-defendant in the present
controversy.
Following the denial of its petition,
FIRESTONE amended its complaint to
include PUP and Executive Secretary
Catalino Macaraeg, Jr., as party-defendants,
and sought the annulment of Memorandum
Order No. 214. FIRESTONE alleged that
although Memorandum Order No. 214 was
issued "subject to such liens/leases existing
[on the subject property]," PUP disregarded
and violated its existing lease by increasing
the rental rate at P200,000.00 a month
while demanding that it vacated the
premises immediately.[14] FIRESTONE
prayed that in the event Memorandum
Order No. 214 was not declared
unconstitutional, the property should be
sold in its favor at the price for which it was
sold to PUP - P554.74 per square meter or
for a total purchase price of
P14,423,240.00.[15]
Petitioner PUP, in its answer to the
amended complaint, argued in essence that
the lease contract covering the property
had expired long before the institution of
the complaint, and that further, the right of
first refusal invoked by FIRESTONE applied
solely to the six-unit pre-fabricated
warehouse and not the lot upon which it
stood.
After trial on the merits, judgment was
rendered declaring the contracts of lease
executed between FIRESTONE and NDC
covering the 2.60-hectare property and the
warehouses constructed thereon valid and
existing until 2 June 1999. PUP was ordered
and directed to sell to FIRESTONE the "2.6
hectare leased premises or as may be
determined by actual verification and
survey of the actual size of the leased
properties where plaintiff's fire brick factory
is located" at P1,500.00 per square meter
considering that, as admitted by
FIRESTONE, such was the prevailing market
price thereof.
The trial court ruled that the contracts of
lease executed between FIRESTONE and
NDC were interrelated and inseparable
because "each of them forms part of the
integral system of plaintiff's brick
manufacturing plant x x x if one of the
leased premises will be taken apart or
otherwise detached from the two others,
the purpose of the lease as well as
plaintiff's business operations would be
rendered useless and inoperative."[16] It
thus decreed that FIRESTONE could
exercise its option to purchase the property
until 2 June 1999 inasmuch as the 22
December 1978 contract embodied a
covenant to renew the lease for another ten
(10) years at the option of the lessee as
well as an agreement giving the lessee the
right of first refusal.
The trial court also sustained the
constitutionality of Memorandum Order No.
214 which was not per se hostile to
FIRESTONE's property rights, but deplored
as prejudicial thereto the "very manner
with which defendants NDC and PUP
interpreted and applied the same, ignoring
in the process that plaintiff has existing
contracts of lease protectable by express
provisions in the Memorandum No. 214
itself."[17] It further explained that the
questioned memorandum was issued
"subject to such liens/leases existing
thereon"[18] and petitioner PUP was under
express instructions "to enter, occupy and
take possession of the transferred property
subject to such leases or liens and
encumbrances that may be existing
thereon"[19] (underscoring supplied).
Petitioners PUP, NDC and the Executive
Secretary separately filed their Notice of
Appeal, but a few days thereafter, or on 3
September 1996, perhaps realizing the
groundlessness and the futility of it all, the
Executive Secretary withdrew his appeal.
[20]
Subsequently, the Court of Appeals
affirmed the decision of the trial court
ordering the sale of the property in favor of
FIRESTONE but deleted the award of
attorney's fees in the amount of Three
Hundred Thousand Pesos (P300,000.00).
Accordingly, FIRESTONE was given a grace
period of six (6) months from finality of the
court's judgment within which to purchase
the property in questioned in the exercise
of its right of first refusal. The Court of
Appeals observed that as there was a sale
of the subject property, NDC could not
excuse itself from its obligation TO OFFER
THE PROPERTY FOR SALE FIRST TO
FIRESTONE BEFORE IT COULD TO OTHER
PARTIES. The Court of Appeals held: "NDC
cannot look to Memorandum Order No. 214
to excuse or shield it from its contractual
obligations to FIRESTONE. There is nothing
therein that allows NDC to disavow or
repudiate the solemn engagement that it
freely and voluntarily undertook, or agreed
to undertake."[21]
PUP moved for reconsideration asserting
that in ordering the sale of the property in
favor of FIRESTONE the courts a quo
unfairly created a contract to sell between
the parties. It argued that the "court cannot
substitute or decree its mind or consent for
that of the parties in determining whether
or not a contract (has been) perfected
between PUP and NDC."[22] PUP further
contended that since "a real property
located in Sta. Mesa can readily command
a sum of P10,000.00 per square (meter),"
the lower court gravely erred in ordering
the sale of the property at only P1,500.00
per square meter. PUP also advanced the
theory that the enactment of Memorandum
Order No. 214 amounted to a withdrawal of
the option to purchase the property
granted to FIRESTONE. NDC, for its part,
vigorously contended that the contracts of
lease executed between the parties had
expired without being renewed by
FIRESTONE; consequently, FIRESTONE was
no longer entitled to any preferential right
in the sale or disposition of the leased
property.
We do not see it the way PUP and NDC did.
It is elementary that a party to a contract
cannot unilaterally withdraw a right of first
refusal that stands upon valuable
consideration. That principle was clearly
upheld by the Court of Appeals when it
denied on 6 June 2000 the twin motions for
reconsideration filed by PUP and NDC on
the ground that the appellants failed to
advance new arguments substantial
enough to warrant a reversal of the
Decision sought to be reconsidered.[23] On
28 June 2000 PUP filed an urgent motion for
an additional period of fifteen (15) days
from 29 June 2000 or until 14 July 2000
within which to file a Petition for Review on
Certiorari of the Decision of the Court of
Appeals.
On the last day of the extended period PUP
filed its Petition for Review on Certiorari
assailing the Decision of the Court of
Appeals of 6 December 1999 as well as the
Resolution of 6 June 2000 denying
reconsideration thereof. PUP raised two
issues: (a) whether the courts a quo erred
when they "conjectured" that the transfer
of the leased property from NDC to PUP
amounted to a sale; and, (b) whether
FIRESTONE can rightfully invoke its right of
first refusal. Petitioner posited that if we
were to place our imprimatur on the
decisions of the courts a quo, "public
welfare or specifically the constitutional
priority accorded to education" would
greatly be prejudiced.[24]
Paradoxically, our paramount interest in
education does not license us, or any party
for that matter, to destroy the sanctity of
binding obligations. Education may be
prioritized for legislative or budgetary
purposes, but we doubt if such importance
can be used to confiscate private property
such as FIRESTONE's right of first refusal.
On 17 July 2000 we denied PUP's motion for
extension of fifteen (15) days within which
to appeal inasmuch as the aforesaid
pleading lacked an affidavit of service of
copies thereof on the Court of Appeals and
the adverse party, as well as written
explanation for not filing and serving the
pleading personally.[25]
Accordingly, on 26 July 2000 we issued a
Resolution dismissing PUP's Petition for
Review for having been filed out of time.
PUP moved for reconsideration imploring a
resolution or decision on the merits of its
petition. Strangely, about the same time,
several articles came out in the
newspapers assailing the denial of the
petition. The daily papers reported that we
unreasonably dismissed PUP's petition on
technical grounds, affirming in the process
the decision of the trial court to sell the
disputed property to the prejudice of the
government in the amount of
P1,000,000,000.00.[26] Counsel for
petitioner PUP, alleged that the trial court
and the Court of Appeals "have decided a
question of substance in a way definitely
not in accord with law or
jurisprudence."[27]
At the outset, let it be noted that the
amount of P1,000,000,000.00 as reported
in the papers was way too exaggerated, if
not fantastic. We stress that NDC itself sold
the whole 10.31-hectare property to PUP at
only P57,193,201.64 which represents
NDC's obligation to the national
government that was, in exchange, written
off. The price offered per square meter of
the property was pegged at P554.74.
FIRESTONE's leased premises would
therefore be worth only P14,423,240.00.
From any angle, this amount is certainly far
below the ballyhooed price of
P1,000,000,000.00.
On 4 October 2000 we granted PUP's
Motion for Reconsideration to give it a
chance to ventilate its right, if any it still
had in the leased premises, thereby paving
the way for a reinstatement of its Petition
for Review.[28] In its appeal, PUP took to
task the courts a quo for supposedly
"substituting or decreeing its mind or
consent for that of the parties (referring to
NDC and PUP) in determining whether or
not a contract of sale was perfected." PUP
also argued that inasmuch as "it is the
parties alone whose minds must meet in
reference to the subject matter and cause,"
it concluded that it was error for the lower
courts to have decreed the existence of a
sale of the NDC compound thus allowing
FIRESTONE to exercise its right of first
refusal.
On the other hand, NDC separately filed its
own Petition for Review and advanced
arguments which, in fine, centered on
whether or not the transaction between
petitioners NDC and PUP amounted to a
sale considering that ownership of the
property remained with the government.
[29] Petitioner NDC introduced the novel
proposition that if the parties involved are
both government entities the transaction
cannot be legally called a sale.
In due course both petitions were
consolidated.[30]
We believe that the courts a quo did not
hypothesize, much less conjure, the sale of
the disputed property by NDC in favor of
petitioner PUP. Aside from the fact that the
intention of NDC and PUP to enter into a
contract of sale was clearly expressed in
the Memorandum Order No. 214,[31] a
close perusal of the circumstances of this
case strengthens the theory that the
conveyance of the property from NDC to
PUP was one of absolute sale, for a valuable
consideration, and not a mere paper
transfer as argued by petitioners.
A contract of sale, as defined in the Civil
Code, is a contract where one of the parties
obligates himself to transfer the ownership
of and to deliver a determinate thing to the
other or others who shall pay therefore a
sum certain in money or its equivalent.[32]
It is therefore a general requisite for the
existence of a valid and enforceable
contract of sale that it be mutually
obligatory, i.e., there should be a
concurrence of the promise of the vendor to
sell a determinate thing and the promise of
the vendee to receive and pay for the
property so delivered and transferred. The
Civil Code provision is, in effect, a "catch-
all" provision which effectively brings within
its grasp a whole gamut of transfers
whereby ownership of a thing is ceded for a
consideration.
Contrary to what petitioners PUP and NDC
propose, there is not just one party
involved in the questioned transaction.
Petitioners NDC and PUP have their
respective charters and therefore each
possesses a separate and distinct individual
personality.[33] The inherent weakness of
NDCs proposition that there was no sale as
it was only the government which was
involved in the transaction thus reveals
itself. Tersely put, it is not necessary to
write an extended dissertation on
government owned and controlled
corporations and their legal personalities.
Beyond cavil, a government owned and
controlled corporation has a personality of
its own, distinct and separate from that of
the government.[34] The intervention in
the transaction of the Office of the
President through the Executive Secretary
did not change the independent existence
of these entities. The involvement of the
Office of the President was limited to
brokering the consequent relationship
between NDC and PUP. But the withdrawal
of the appeal by the Executive Secretary is
considered significant as he knew, after a
review of the records, that the transaction
was subject to existing liens and
encumbrances, particularly the priority to
purchase the leased premises in favor of
FIRESTONE.
True that there may be instances when a
particular deed does not disclose the real
intentions of the parties, but their action
may nevertheless indicate that a binding
obligation has been undertaken. Since the
conduct of the parties to a contract may be
sufficient to establish the existence of an
agreement and the terms thereof, it
becomes necessary for the courts to
examine the contemporaneous behavior of
the parties in establishing the existence of
their contract.
The preponderance of evidence shows that
NDC sold to PUP the whole NDC compound,
including the leased premises, without the
knowledge much less consent of private
respondent FIRESTONE which had a valid
and existing right of first refusal.
All three (3) essential elements of a valid
sale, without which there can be no sale,
were attendant in the "disposition" and
"transfer" of the property from NDC to PUP -
consent of the parties, determinate subject
matter, and consideration therefor.
Consent to the sale is obvious from the
prefatory clauses of Memorandum Order
No. 214 which explicitly states the
acquiescence of the parties to the sale of
the property -
WHEREAS, PUP has expressed its
willingness to acquire said NDC properties
and NDC has expressed its willingness to
sell the properties to PUP (underscoring
supplied).[35]
Furthermore, the cancellation of NDC's
liabilities in favor of the National
Government in the amount of
P57,193,201.64 constituted the
"consideration" for the sale. As correctly
observed by the Court of Appeals-
The defendants-appellants' interpretation
that there was a mere transfer, and not a
sale, apart from being specious sophistry
and a mere play of words, is too strained
and hairsplitting. For it is axiomatic that
every sale imposes upon the vendor the
obligation to transfer ownership as an
essential element of the contract. Transfer
of title or an agreement to transfer title for
a price paid, or promised to be paid, is the
very essence of sale (Kerr & Co. v. Lingad,
38 SCRA 524; Schmid & Oberly, Inc., v. RJL
Martinez Fishing Corp., 166 SCRA 493). At
whatever legal angle we view it, therefore,
the inescapable fact remains that all the
requisites of a valid sale were attendant in
the transaction between co-defendants-
appellants NDC and PUP concerning the
realities subject of the present suit.[36]
What is more, the conduct of petitioner PUP
immediately after the transaction is in itself
an admission that there was a sale of the
NDC compound in its favor. Thus, after the
issuance of Memorandum Order No. 214
petitioner PUP asserted its ownership over
the property by posting notices within the
compound advising residents and
occupants to vacate the premises.[37] In its
Motion for Intervention petitioner PUP also
admitted that its interest as a "purchaser
pendente lite" would be better protected if
it was joined as party-defendant in the
controversy thereby confessing that it
indeed purchased the property.
In light of the foregoing disquisition, we
now proceed to determine whether
FIRESTONE should be allowed to exercise
its right of first refusal over the property.
Such right was expressly stated by NDC
and FIRESTONE in par. XV of their third
contract denominated as A-10-78 executed
on 22 December 1978 which, as found by
the courts a quo, was interrelated to and
inseparable from their first contract
denominated as C-30-65 executed on 24
August 1965 and their second contract
denominated as C-26-68 executed on 8
January 1969. Thus -
Should the LESSOR desire to sell the leased
premises during the term of this
Agreement, or any extension thereof, the
LESSOR shall first give to the LESSEE,
which shall have the right of first option to
purchase the leased premises subject to
mutual agreement of both parties.[38]
In the instant case, the right of first refusal
is an integral and indivisible part of the
contract of lease and is inseparable from
the whole contract. The consideration for
the right is built into the reciprocal
obligations of the parties. Thus, it is not
correct for petitioners to insist that there
was no consideration paid by FIRESTONE to
entitle it to the exercise of the right,
inasmuch as the stipulation is part and
parcel of the contract of lease making the
consideration for the lease the same as
that for the option.
It is a settled principle in civil law that when
a lease contract contains a right of first
refusal, the lessor is under a legal duty to
the lessee not to sell to anybody at any
price until after he has made an offer to sell
to the latter at a certain price and the
lessee has failed to accept it.[39] The
lessee has a right that the lessor's first offer
shall be in his favor.
The option in this case was incorporated in
the contracts of lease by NDC for the
benefit of FIRESTONE which, in view of the
total amount of its investments in the
property, wanted to be assured that it
would be given the first opportunity to buy
the property at a price for which it would be
offered. Consistent with their agreement, it
was then implicit for NDC to have first
offered the leased premises of 2.60
hectares to FIRESTONE prior to the sale in
favor of PUP. Only if FIRESTONE failed to
exercise its right of first priority could NDC
lawfully sell the property to petitioner PUP.
It now becomes apropos to ask whether the
courts a quo were correct in fixing the
proper consideration of the sale at
P1,500.00 per square meter. In contracts of
sale, the basis of the right of first refusal
must be the current offer of the seller to
sell or the offer to purchase of the
prospective buyer. Only after the lessee-
grantee fails to exercise its right under the
same terms and within the period
contemplated can the owner validly offer to
sell the property to a third person, again,
under the same terms as offered to the
grantee.[40] It appearing that the whole
NDC compound was sold to PUP for P554.74
per square meter, it would have been more
proper for the courts below to have ordered
the sale of the property also at the same
price. However, since FIRESTONE never
raised this as an issue, while on the other
hand it admitted that the value of the
property stood at P1,500.00 per square
meter, then we see no compelling reason to
modify the holdings of the courts a quo that
the leased premises be sold at that price.
Our attention is invited by petitioners to
Ang Yu Asuncion v. CA[41] in concluding
that if our holding in Ang Yu would be
applied to the facts of this case then
FIRESTONE's "option, if still subsisting, is
not enforceable," the option being merely a
preparatory contract which cannot be
enforced.
The contention has no merit. At the heels of
Ang Yu came Equatorial Realty
Development, Inc., v. Mayfair Theater, Inc.,
[42] where after much deliberation we
declared, and so we hold, that a right of
first refusal is neither "amorphous nor
merely preparatory" and can be enforced
and executed according to its terms. Thus,
in Equatorial we ordered the rescission of
the sale which was made in violation of the
lessee's right of first refusal and further
ordered the sale of the leased property in
favor of Mayfair Theater, as grantee of the
right. Emphatically, we held that "(a right of
first priority) should be enforced according
to the law on contracts instead of the
panoramic and indefinite rule on human
relations." We then concluded that the
execution of the right of first refusal
consists in directing the grantor to comply
with his obligation according to the terms
at which he should have offered the
property in favor of the grantee and at that
price when the offer should have been
made.
One final word. Petitioner PUP should be
cautioned against bidding for public
sympathy by bewailing the dismissal of its
petition before the press. Such advocacy is
not likely to elicit the compassion of this
Court or of any court for that matter. An
entreaty for a favorable disposition of a
case not made directly through pleadings
and oral arguments before the courts do
not persuade us, for as judges, we are ruled
only by our forsworn duty to give justice
where justice is due.
WHEREFORE, the petitions in G.R. No.
143513 and G.R. No. 143590 are DENIED.
Inasmuch as the first contract of lease fixed
the area of the leased premises at 2.90118
hectares while the second contract placed
it at 2.60 hectares, let a ground survey of
the leased premises be immediately
conducted by a duly licensed, registered
surveyor at the expense of private
respondent FIRESTONE CERAMICS, INC.,
within two (2) months from finality of the
judgment in this case. Thereafter, private
respondent FIRESTONE CERAMICS, INC.,
shall have six (6) months from receipt of
the approved survey within which to
exercise its right to purchase the leased
property at P1,500.00 per square meter,
and petitioner Polytechnic University of the
Philippines is ordered to reconvey the
property to FIRESTONE CERAMICS, INC., in
the exercise of its right of first refusal upon
payment of the purchase price thereof.
SO ORDERED.
ERNANDO A. GAITE, plaintiff-appellee,
vs.
ISABELO FONACIER, GEORGE KRAKOWER,
LARAP MINES & SMELTING CO., INC.,
SEGUNDINA VIVAS, FRNACISCO DANTE,
PACIFICO ESCANDOR and FERNANDO TY,
defendants-appellants.
Alejo Mabanag for plaintiff-appellee.
Simplicio U. Tapia, Antonio Barredo and
Pedro Guevarra for defendants-appellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the
Court of First Instance because the claims
involved aggregate more than P200,000.00.
Defendant-appellant Isabelo Fonacier was
the owner and/or holder, either by himself
or in a representative capacity, of 11 iron
lode mineral claims, known as the Dawahan
Group, situated in the municipality of Jose
Panganiban, province of Camarines Norte.
By a "Deed of Assignment" dated
September 29, 1952(Exhibit "3"), Fonacier
constituted and appointed plaintiff-appellee
Fernando A. Gaite as his true and lawful
attorney-in-fact to enter into a contract with
any individual or juridical person for the
exploration and development of the mining
claims aforementioned on a royalty basis of
not less than P0.50 per ton of ore that
might be extracted therefrom. On March
19, 1954, Gaite in turn executed a general
assignment (Record on Appeal, pp. 17-19)
conveying the development and
exploitation of said mining claims into the
Larap Iron Mines, a single proprietorship
owned solely by and belonging to him, on
the same royalty basis provided for in
Exhibit "3". Thereafter, Gaite embarked
upon the development and exploitation of
the mining claims in question, opening and
paving roads within and outside their
boundaries, making other improvements
and installing facilities therein for use in the
development of the mines, and in time
extracted therefrom what he claim and
estimated to be approximately 24,000
metric tons of iron ore.
For some reason or another, Isabelo
Fonacier decided to revoke the authority
granted by him to Gaite to exploit and
develop the mining claims in question, and
Gaite assented thereto subject to certain
conditions. As a result, a document entitled
"Revocation of Power of Attorney and
Contract" was executed on December 8,
1954 (Exhibit "A"),wherein Gaite
transferred to Fonacier, for the
consideration of P20,000.00, plus 10% of
the royalties that Fonacier would receive
from the mining claims, all his rights and
interests on all the roads, improvements,
and facilities in or outside said claims, the
right to use the business name "Larap Iron
Mines" and its goodwill, and all the records
and documents relative to the mines. In the
same document, Gaite transferred to
Fonacier all his rights and interests over the
"24,000 tons of iron ore, more or less" that
the former had already extracted from the
mineral claims, in consideration of the sum
of P75,000.00, P10,000.00 of which was
paid upon the signing of the agreement,
and
b. The balance of SIXTY-FIVE THOUSAND
PESOS (P65,000.00) will be paid from and
out of the first letter of credit covering the
first shipment of iron ores and of the first
amount derived from the local sale of iron
ore made by the Larap Mines & Smelting
Co. Inc., its assigns, administrators, or
successors in interests.
To secure the payment of the said balance
of P65,000.00, Fonacier promised to
execute in favor of Gaite a surety bond, and
pursuant to the promise, Fonacier delivered
to Gaite a surety bond dated December 8,
1954 with himself (Fonacier) as principal
and the Larap Mines and Smelting Co. and
its stockholders George Krakower,
Segundina Vivas, Pacifico Escandor,
Francisco Dante, and Fernando Ty as
sureties (Exhibit "A-1"). Gaite testified,
however, that when this bond was
presented to him by Fonacier together with
the "Revocation of Power of Attorney and
Contract", Exhibit "A", on December 8,
1954, he refused to sign said Exhibit "A"
unless another bond under written by a
bonding company was put up by
defendants to secure the payment of the
P65,000.00 balance of their price of the iron
ore in the stockpiles in the mining claims.
Hence, a second bond, also dated
December 8, 1954 (Exhibit "B"),was
executed by the same parties to the first
bond Exhibit "A-1", with the Far Eastern
Surety and Insurance Co. as additional
surety, but it provided that the liability of
the surety company would attach only
when there had been an actual sale of iron
ore by the Larap Mines & Smelting Co. for
an amount of not less then P65,000.00, and
that, furthermore, the liability of said surety
company would automatically expire on
December 8, 1955. Both bonds were
attached to the "Revocation of Power of
Attorney and Contract", Exhibit "A", and
made integral parts thereof.
On the same day that Fonacier revoked the
power of attorney he gave to Gaite and the
two executed and signed the "Revocation of
Power of Attorney and Contract", Exhibit
"A", Fonacier entered into a "Contract of
Mining Operation", ceding, transferring, and
conveying unto the Larap Mines and
Smelting Co., Inc. the right to develop,
exploit, and explore the mining claims in
question, together with the improvements
therein and the use of the name "Larap Iron
Mines" and its good will, in consideration of
certain royalties. Fonacier likewise
transferred, in the same document, the
complete title to the approximately 24,000
tons of iron ore which he acquired from
Gaite, to the Larap & Smelting Co., in
consideration for the signing by the
company and its stockholders of the surety
bonds delivered by Fonacier to Gaite
(Record on Appeal, pp. 82-94).
Up to December 8, 1955, when the bond
Exhibit "B" expired with respect to the Far
Eastern Surety and Insurance Company, no
sale of the approximately 24,000 tons of
iron ore had been made by the Larap Mines
& Smelting Co., Inc., nor had the
P65,000.00 balance of the price of said ore
been paid to Gaite by Fonacier and his
sureties payment of said amount, on the
theory that they had lost right to make use
of the period given them when their bond,
Exhibit "B" automatically expired (Exhibits
"C" to "C-24"). And when Fonacier and his
sureties failed to pay as demanded by
Gaite, the latter filed the present complaint
against them in the Court of First Instance
of Manila (Civil Case No. 29310) for the
payment of the P65,000.00 balance of the
price of the ore, consequential damages,
and attorney's fees.
All the defendants except Francisco Dante
set up the uniform defense that the
obligation sued upon by Gaite was subject
to a condition that the amount of
P65,000.00 would be payable out of the
first letter of credit covering the first
shipment of iron ore and/or the first amount
derived from the local sale of the iron ore
by the Larap Mines & Smelting Co., Inc.;
that up to the time of the filing of the
complaint, no sale of the iron ore had been
made, hence the condition had not yet
been fulfilled; and that consequently, the
obligation was not yet due and
demandable. Defendant Fonacier also
contended that only 7,573 tons of the
estimated 24,000 tons of iron ore sold to
him by Gaite was actually delivered, and
counterclaimed for more than P200,000.00
damages.
At the trial of the case, the parties agreed
to limit the presentation of evidence to two
issues:
(1) Whether or not the obligation of
Fonacier and his sureties to pay Gaite
P65,000.00 become due and demandable
when the defendants failed to renew the
surety bond underwritten by the Far
Eastern Surety and Insurance Co., Inc.
(Exhibit "B"), which expired on December 8,
1955; and
(2) Whether the estimated 24,000 tons of
iron ore sold by plaintiff Gaite to defendant
Fonacier were actually in existence in the
mining claims when these parties executed
the "Revocation of Power of Attorney and
Contract", Exhibit "A."
On the first question, the lower court held
that the obligation of the defendants to pay
plaintiff the P65,000.00 balance of the price
of the approximately 24,000 tons of iron
ore was one with a term: i.e., that it would
be paid upon the sale of sufficient iron ore
by defendants, such sale to be effected
within one year or before December 8,
1955; that the giving of security was a
condition precedent to Gait's giving of
credit to defendants; and that as the latter
failed to put up a good and sufficient
security in lieu of the Far Eastern Surety
bond (Exhibit "B") which expired on
December 8, 1955, the obligation became
due and demandable under Article 1198 of
the New Civil Code.
As to the second question, the lower court
found that plaintiff Gaite did have
approximately 24,000 tons of iron ore at
the mining claims in question at the time of
the execution of the contract Exhibit "A."
Judgment was, accordingly, rendered in
favor of plaintiff Gaite ordering defendants
to pay him, jointly and severally,
P65,000.00 with interest at 6% per annum
from December 9, 1955 until payment, plus
costs. From this judgment, defendants
jointly appealed to this Court.
During the pendency of this appeal, several
incidental motions were presented for
resolution: a motion to declare the
appellants Larap Mines & Smelting Co., Inc.
and George Krakower in contempt, filed by
appellant Fonacier, and two motions to
dismiss the appeal as having become
academic and a motion for new trial and/or
to take judicial notice of certain documents,
filed by appellee Gaite. The motion for
contempt is unmeritorious because the
main allegation therein that the appellants
Larap Mines & Smelting Co., Inc. and
Krakower had sold the iron ore here in
question, which allegedly is "property in
litigation", has not been substantiated; and
even if true, does not make these
appellants guilty of contempt, because
what is under litigation in this appeal is
appellee Gaite's right to the payment of the
balance of the price of the ore, and not the
iron ore itself. As for the several motions
presented by appellee Gaite, it is
unnecessary to resolve these motions in
view of the results that we have reached in
this case, which we shall hereafter discuss.
The main issues presented by appellants in
this appeal are:
(1) that the lower court erred in holding
that the obligation of appellant Fonacier to
pay appellee Gaite the P65,000.00 (balance
of the price of the iron ore in question)is
one with a period or term and not one with
a suspensive condition, and that the term
expired on December 8, 1955; and
(2) that the lower court erred in not holding
that there were only 10,954.5 tons in the
stockpiles of iron ore sold by appellee Gaite
to appellant Fonacier.
The first issue involves an interpretation of
the following provision in the contract
Exhibit "A":
7. That Fernando Gaite or Larap Iron Mines
hereby transfers to Isabelo F. Fonacier all
his rights and interests over the 24,000
tons of iron ore, more or less, above-
referred to together with all his rights and
interests to operate the mine in
consideration of the sum of SEVENTY-FIVE
THOUSAND PESOS (P75,000.00) which the
latter binds to pay as follows:
a. TEN THOUSAND PESOS (P10,000.00) will
be paid upon the signing of this agreement.
b. The balance of SIXTY-FIVE THOUSAND
PESOS (P65,000.00)will be paid from and
out of the first letter of credit covering the
first shipment of iron ore made by the
Larap Mines & Smelting Co., Inc., its
assigns, administrators, or successors in
interest.
We find the court below to be legally
correct in holding that the shipment or local
sale of the iron ore is not a condition
precedent (or suspensive) to the payment
of the balance of P65,000.00, but was only
a suspensive period or term. What
characterizes a conditional obligation is the
fact that its efficacy or obligatory force (as
distinguished from its demandability) is
subordinated to the happening of a future
and uncertain event; so that if the
suspensive condition does not take place,
the parties would stand as if the conditional
obligation had never existed. That the
parties to the contract Exhibit "A" did not
intend any such state of things to prevail is
supported by several circumstances:
1) The words of the contract express no
contingency in the buyer's obligation to
pay: "The balance of Sixty-Five Thousand
Pesos (P65,000.00) will be paid out of the
first letter of credit covering the first
shipment of iron ores . . ." etc. There is no
uncertainty that the payment will have to
be made sooner or later; what is
undetermined is merely the exact date at
which it will be made. By the very terms of
the contract, therefore, the existence of the
obligation to pay is recognized; only its
maturity or demandability is deferred.
2) A contract of sale is normally
commutative and onerous: not only does
each one of the parties assume a
correlative obligation (the seller to deliver
and transfer ownership of the thing sold
and the buyer to pay the price),but each
party anticipates performance by the other
from the very start. While in a sale the
obligation of one party can be lawfully
subordinated to an uncertain event, so that
the other understands that he assumes the
risk of receiving nothing for what he gives
(as in the case of a sale of hopes or
expectations, emptio spei), it is not in the
usual course of business to do so; hence,
the contingent character of the obligation
must clearly appear. Nothing is found in the
record to evidence that Gaite desired or
assumed to run the risk of losing his right
over the ore without getting paid for it, or
that Fonacier understood that Gaite
assumed any such risk. This is proved by
the fact that Gaite insisted on a bond a to
guarantee payment of the P65,000.00, an
not only upon a bond by Fonacier, the
Larap Mines & Smelting Co., and the
company's stockholders, but also on one by
a surety company; and the fact that
appellants did put up such bonds indicates
that they admitted the definite existence of
their obligation to pay the balance of
P65,000.00.
3) To subordinate the obligation to pay the
remaining P65,000.00 to the sale or
shipment of the ore as a condition
precedent, would be tantamount to leaving
the payment at the discretion of the debtor,
for the sale or shipment could not be made
unless the appellants took steps to sell the
ore. Appellants would thus be able to
postpone payment indefinitely. The
desireability of avoiding such a construction
of the contract Exhibit "A" needs no
stressing.
4) Assuming that there could be doubt
whether by the wording of the contract the
parties indented a suspensive condition or
a suspensive period (dies ad quem) for the
payment of the P65,000.00, the rules of
interpretation would incline the scales in
favor of "the greater reciprocity of
interests", since sale is essentially onerous.
The Civil Code of the Philippines, Article
1378, paragraph 1, in fine, provides:
If the contract is onerous, the doubt shall
be settled in favor of the greatest
reciprocity of interests.
and there can be no question that greater
reciprocity obtains if the buyer' obligation is
deemed to be actually existing, with only
its maturity (due date) postponed or
deferred, that if such obligation were
viewed as non-existent or not binding until
the ore was sold.
The only rational view that can be taken is
that the sale of the ore to Fonacier was a
sale on credit, and not an aleatory contract
where the transferor, Gaite, would assume
the risk of not being paid at all; and that
the previous sale or shipment of the ore
was not a suspensive condition for the
payment of the balance of the agreed price,
but was intended merely to fix the future
date of the payment.

This issue settled, the next point of inquiry
is whether appellants, Fonacier and his
sureties, still have the right to insist that
Gaite should wait for the sale or shipment
of the ore before receiving payment; or, in
other words, whether or not they are
entitled to take full advantage of the period
granted them for making the payment.
We agree with the court below that the
appellant have forfeited the right court
below that the appellants have forfeited the
right to compel Gaite to wait for the sale of
the ore before receiving payment of the
balance of P65,000.00, because of their
failure to renew the bond of the Far Eastern
Surety Company or else replace it with an
equivalent guarantee. The expiration of the
bonding company's undertaking on
December 8, 1955 substantially reduced
the security of the vendor's rights as
creditor for the unpaid P65,000.00, a
security that Gaite considered essential and
upon which he had insisted when he
executed the deed of sale of the ore to
Fonacier (Exhibit "A"). The case squarely
comes under paragraphs 2 and 3 of Article
1198 of the Civil Code of the Philippines:
"ART. 1198. The debtor shall lose every
right to make use of the period:
(1) . . .
(2) When he does not furnish to the creditor
the guaranties or securities which he has
promised.
(3) When by his own acts he has impaired
said guaranties or securities after their
establishment, and when through fortuitous
event they disappear, unless he
immediately gives new ones equally
satisfactory.
Appellants' failure to renew or extend the
surety company's bond upon its expiration
plainly impaired the securities given to the
creditor (appellee Gaite), unless
immediately renewed or replaced.
There is no merit in appellants' argument
that Gaite's acceptance of the surety
company's bond with full knowledge that
on its face it would automatically expire
within one year was a waiver of its renewal
after the expiration date. No such waiver
could have been intended, for Gaite stood
to lose and had nothing to gain barely; and
if there was any, it could be rationally
explained only if the appellants had agreed
to sell the ore and pay Gaite before the
surety company's bond expired on
December 8, 1955. But in the latter case
the defendants-appellants' obligation to
pay became absolute after one year from
the transfer of the ore to Fonacier by virtue
of the deed Exhibit "A.".
All the alternatives, therefore, lead to the
same result: that Gaite acted within his
rights in demanding payment and
instituting this action one year from and
after the contract (Exhibit "A") was
executed, either because the appellant
debtors had impaired the securities
originally given and thereby forfeited any
further time within which to pay; or
because the term of payment was originally
of no more than one year, and the balance
of P65,000.00 became due and payable
thereafter.
Coming now to the second issue in this
appeal, which is whether there were really
24,000 tons of iron ore in the stockpiles
sold by appellee Gaite to appellant
Fonacier, and whether, if there had been a
short-delivery as claimed by appellants,
they are entitled to the payment of
damages, we must, at the outset, stress
two things: first, that this is a case of a sale
of a specific mass of fungible goods for a
single price or a lump sum, the quantity of
"24,000 tons of iron ore, more or less,"
stated in the contract Exhibit "A," being a
mere estimate by the parties of the total
tonnage weight of the mass; and second,
that the evidence shows that neither of the
parties had actually measured of weighed
the mass, so that they both tried to arrive
at the total quantity by making an estimate
of the volume thereof in cubic meters and
then multiplying it by the estimated weight
per ton of each cubic meter.
The sale between the parties is a sale of a
specific mass or iron ore because no
provision was made in their contract for the
measuring or weighing of the ore sold in
order to complete or perfect the sale, nor
was the price of P75,000,00 agreed upon
by the parties based upon any such
measurement.(see Art. 1480, second par.,
New Civil Code). The subject matter of the
sale is, therefore, a determinate object, the
mass, and not the actual number of units or
tons contained therein, so that all that was
required of the seller Gaite was to deliver in
good faith to his buyer all of the ore found
in the mass, notwithstanding that the
quantity delivered is less than the amount
estimated by them (Mobile Machinery &
Supply Co., Inc. vs. York Oilfield Salvage
Co., Inc. 171 So. 872, applying art. 2459 of
the Louisiana Civil Code). There is no
charge in this case that Gaite did not
deliver to appellants all the ore found in the
stockpiles in the mining claims in
questions; Gaite had, therefore, complied
with his promise to deliver, and appellants
in turn are bound to pay the lump price.
But assuming that plaintiff Gaite undertook
to sell and appellants undertook to buy, not
a definite mass, but approximately 24,000
tons of ore, so that any substantial
difference in this quantity delivered would
entitle the buyers to recover damages for
the short-delivery, was there really a short-
delivery in this case?
We think not. As already stated, neither of
the parties had actually measured or
weighed the whole mass of ore cubic meter
by cubic meter, or ton by ton. Both parties
predicate their respective claims only upon
an estimated number of cubic meters of ore
multiplied by the average tonnage factor
per cubic meter.
Now, appellee Gaite asserts that there was
a total of 7,375 cubic meters in the
stockpiles of ore that he sold to Fonacier,
while appellants contend that by actual
measurement, their witness Cirpriano
Manlagit found the total volume of ore in
the stockpiles to be only 6.609 cubic
meters. As to the average weight in tons
per cubic meter, the parties are again in
disagreement, with appellants claiming the
correct tonnage factor to be 2.18 tons to a
cubic meter, while appellee Gaite claims
that the correct tonnage factor is about 3.7.
In the face of the conflict of evidence, we
take as the most reliable estimate of the
tonnage factor of iron ore in this case to be
that made by Leopoldo F. Abad, chief of the
Mines and Metallurgical Division of the
Bureau of Mines, a government pensionado
to the States and a mining engineering
graduate of the Universities of Nevada and
California, with almost 22 years of
experience in the Bureau of Mines. This
witness placed the tonnage factor of every
cubic meter of iron ore at between 3 metric
tons as minimum to 5 metric tons as
maximum. This estimate, in turn, closely
corresponds to the average tonnage factor
of 3.3 adopted in his corrected report
(Exhibits "FF" and FF-1") by engineer
Nemesio Gamatero, who was sent by the
Bureau of Mines to the mining claims
involved at the request of appellant
Krakower, precisely to make an official
estimate of the amount of iron ore in
Gaite's stockpiles after the dispute arose.
Even granting, then, that the estimate of
6,609 cubic meters of ore in the stockpiles
made by appellant's witness Cipriano
Manlagit is correct, if we multiply it by the
average tonnage factor of 3.3 tons to a
cubic meter, the product is 21,809.7 tons,
which is not very far from the estimate of
24,000 tons made by appellee Gaite,
considering that actual weighing of each
unit of the mass was practically impossible,
so that a reasonable percentage of error
should be allowed anyone making an
estimate of the exact quantity in tons found
in the mass. It must not be forgotten that
the contract Exhibit "A" expressly stated
the amount to be 24,000 tons, more or less.
(ch. Pine River Logging & Improvement Co.
vs U.S., 279, 46 L. Ed. 1164).
There was, consequently, no short-delivery
in this case as would entitle appellants to
the payment of damages, nor could Gaite
have been guilty of any fraud in making
any misrepresentation to appellants as to
the total quantity of ore in the stockpiles of
the mining claims in question, as charged
by appellants, since Gaite's estimate
appears to be substantially correct.
WHEREFORE, finding no error in the
decision appealed from, we hereby affirm
the same, with costs against appellants.
COMMISSIONER OF INTERNAL REVENUE,
petitioner, vs. THE COURT OF APPEALS, THE
COURT OF TAX APPEALS and ATENEO DE
MANILA UNIVERSITY, respondents.
DECISION
PANGANIBAN, J.:
In conducting researches and studies of
social organizations and cultural values
thru its Institute of Philippine Culture, is the
Ateneo de Manila University performing the
work of an independent contractor and thus
taxable within the purview of then Section
205 of the National Internal Revenue Code
levying a three percent contractors tax?
This question is answered by the Court in
the negative as it resolves this petition
assailing the Decision[1] of the Respondent
Court of Appeals[2] in CA-G.R. SP No. 31790
promulgated on April 27, 1994 affirming
that of the Court of Tax Appeals.[3]
The Antecedent Facts
The antecedents as found by the Court of
Appeals are reproduced hereinbelow, the
same being largely undisputed by the
parties.
Private respondent is a non-stock, non-
profit educational institution with auxiliary
units and branches all over the Philippines.
One such auxiliary unit is the Institute of
Philippine Culture (IPC), which has no legal
personality separate and distinct from that
of private respondent. The IPC is a
Philippine unit engaged in social science
studies of Philippine society and culture.
Occasionally, it accepts sponsorships for its
research activities from international
organizations, private foundations and
government agencies.
On July 8, 1983, private respondent
received from petitioner Commissioner of
Internal Revenue a demand letter dated
June 3, 1983, assessing private respondent
the sum of P174,043.97 for alleged
deficiency contractors tax, and an
assessment dated June 27, 1983 in the sum
of P1,141,837 for alleged deficiency income
tax, both for the fiscal year ended March
31, 1978. Denying said tax liabilities,
private respondent sent petitioner a letter-
protest and subsequently filed with the
latter a memorandum contesting the
validity of the assessments.
On March 17, 1988, petitioner rendered a
letter-decision canceling the assessment for
deficiency income tax but modifying the
assessment for deficiency contractors tax
by increasing the amount due to
P193,475.55. Unsatisfied, private
respondent requested for a reconsideration
or reinvestigation of the modified
assessment. At the same time, it filed in
the respondent court a petition for review
of the said letter-decision of the petitioner.
While the petition was pending before the
respondent court, petitioner issued a final
decision dated August 3, 1988 reducing the
assessment for deficiency contractors tax
from P193,475.55 to P46,516.41, exclusive
of surcharge and interest.
On July 12, 1993, the respondent court
rendered the questioned decision which
dispositively reads:
WHEREFORE, in view of the foregoing,
respondents decision is SET ASIDE. The
deficiency contractors tax assessment in
the amount of P46,516.41 exclusive of
surcharge and interest for the fiscal year
ended March 31, 1978 is hereby
CANCELED. No pronouncement as to cost.
SO ORDERED.
Not in accord with said decision, petitioner
has come to this Court via the present
petition for review raising the following
issues:
1)WHETHER OR NOT PRIVATE RESPONDENT
FALLS UNDER THE PURVIEW OF
INDEPENDENT CONTRACTOR PURSUANT TO
SECTION 205 OF THE TAX CODE; and
2) WHETHER OR NOT PRIVATE
RESPONDENT IS SUBJECT TO 3%
CONTRACTORS TAX UNDER SECTION 205
OF THE TAX CODE.
The pertinent portions of Section 205 of the
National Internal Revenue Code, as
amended, provide:
Sec. 205. Contractor, proprietors or
operators of dockyards, and others. - A
contractors tax of three per centum of the
gross receipts is hereby imposed on the
following:
xxxxxxxxx
(16) Business agents and other
independent contractors except persons,
associations and corporations under
contract for embroidery and apparel for
export, as well as their agents and
contractors and except gross receipts of or
from a pioneer industry registered with the
Board of Investments under Republic Act
No. 5186:
xxxxxxxxx
The term independent contractors include
persons (juridical or natural) not
enumerated above (but not including
individuals subject to the occupation tax
under Section 12 of the Local Tax Code)
whose activity consists essentially of the
sale of all kinds of services for a fee
regardless of whether or not the
performance of the service calls for the
exercise or use of the physical or mental
faculties of such contractors or their
employees.

xxxxxxxxx
Petitioner contends that the respondent
court erred in holding that private
respondent is not an independent
contractor within the purview of Section
205 of the Tax Code. To petitioner, the term
independent contractor, as defined by the
Code, encompasses all kinds of services
rendered for a fee and that the only
exceptions are the following:
a. Persons, association and corporations
under contract for embroidery and apparel
for export and gross receipts of or from
pioneer industry registered with the Board
of Investment under R.A. No. 5186;
b. Individuals occupation tax under Section
12 of the Local Tax Code (under the old
Section 182 [b] of the Tax Code); and
c. Regional or area headquarters
established in the Philippines by
multinational corporations, including their
alien executives, and which headquarters
do not earn or derive income from the
Philippines and which act as supervisory,
communication and coordinating centers
for their affiliates, subsidiaries or branches
in the Asia Pacific Region (Section 205 of
the Tax Code).
Petitioner thus submits that since private
respondent falls under the definition of an
independent contractor and is not among
the aforementioned exceptions, private
respondent is therefore subject to the 3%
contractors tax imposed under the same
Code.[4]
The Court of Appeals disagreed with the
Petitioner Commissioner of Internal
Revenue and affirmed the assailed decision
of the Court of Tax Appeals. Unfazed,
petitioner now asks us to reverse the CA
through this petition for review.
The Issues
Petitioner submits before us the following
issues:
1) Whether or not private respondent falls
under the purview of independent
contractor pursuant to Section 205 of the
Tax Code
2) Whether or not private respondent is
subject to 3% contractors tax under Section
205 of the Tax Code.[5]
In fine, these may be reduced to a single
issue: Is Ateneo de Manila University,
through its auxiliary unit or branch -- the
Institute of Philippine Culture -- performing
the work of an independent contractor and,
thus, subject to the three percent
contractors tax levied by then Section 205
of the National Internal Revenue Code?
The Courts Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the
National Internal Revenue Code germane to
the case before us read:
SEC. 205. Contractors, proprietors or
operators of dockyards, and others. -- A
contractors tax of three per centum of the
gross receipts is hereby imposed on the
following:
xxxxxxxxx
(16) Business agents and other
independent contractors, except persons,
associations and corporations under
contract for embroidery and apparel for
export, as well as their agents and
contractors, and except gross receipts of or
from a pioneer industry registered with the
Board of Investments under the provisions
of Republic Act No. 5186;
xxxxxxxxx
The term independent contractors include
persons (juridical or natural) not
enumerated above (but not including
individuals subject to the occupation tax
under Section 12 of the Local Tax Code)
whose activity consists essentially of the
sale of all kinds of services for a fee
regardless of whether or not the
performance of the service calls for the
exercise or use of the physical or mental
faculties of such contractors or their
employees.
The term independent contractor shall not
include regional or area headquarters
established in the Philippines by
multinational corporations, including their
alien executives, and which headquarters
do not earn or derive income from the
Philippines and which act as supervisory,
communications and coordinating centers
for their affiliates, subsidiaries or branches
in the Asia-Pacific Region.
The term gross receipts means all amounts
received by the prime or principal
contractor as the total contract price,
undiminished by amount paid to the
subcontractor, shall be excluded from the
taxable gross receipts of the subcontractor.
Petitioner Commissioner of Internal
Revenue contends that Private Respondent
Ateneo de Manila University falls within the
definition of an independent contractor and
is not one of those mentioned as excepted;
hence, it is properly a subject of the three
percent contractors tax levied by the
foregoing provision of law.[6] Petitioner
states that the term independent
contractor is not specifically defined so as
to delimit the scope thereof, so much so
that any person who x x x renders physical
and mental service for a fee, is now
indubitably considered an independent
contractor liable to 3% contractors tax.[7]
according to petitioner, Ateneo has the
burden of proof to show its exemption from
the coverage of the law.
We disagree. Petitioner Commissioner of
Internal Revenue erred in applying the
principles of tax exemption without first
applying the well-settled doctrine of strict
interpretation in the imposition of taxes. It
is obviously both illogical and impractical to
determine who are exempted without first
determining who are covered by the
aforesaid provision. The Commissioner
should have determined first if private
respondent was covered by Section 205,
applying the rule of strict interpretation of
laws imposing taxes and other burdens on
the populace, before asking Ateneo to
prove its exemption therefrom. The Court
takes this occasion to reiterate the
hornbook doctrine in the interpretation of
tax laws that (a) statute will not be
construed as imposing a tax unless it does
so clearly, expressly, and unambiguously. x
x x (A) tax cannot be imposed without clear
and express words for that purpose.
Accordingly, the general rule of requiring
adherence to the letter in construing
statutes applies with peculiar strictness to
tax laws and the provisions of a taxing act
are not to be extended by implication.[8]
Parenthetically, in answering the question
of who is subject to tax statutes, it is basic
that in case of doubt, such statutes are to
be construed most strongly against the
government and in favor of the subjects or
citizens because burdens are not to be
imposed nor presumed to be imposed
beyond what statutes expressly and clearly
import.[9]
To fall under its coverage, Section 205 of
the National Internal Revenue Code
requires that the independent contractor be
engaged in the business of selling its
services. Hence, to impose the three
percent contractors tax on Ateneos
Institute of Philippine Culture, it should be
sufficiently proven that the private
respondent is indeed selling its services for
a fee in pursuit of an independent business.
And it is only after private respondent has
been found clearly to be subject to the
provisions of Sec. 205 that the question of
exemption therefrom would arise. Only
after such coverage is shown does the rule
of construction -- that tax exemptions are
to be strictly construed against the
taxpayer -- come into play, contrary to
petitioners position. This is the main line of
reasoning of the Court of Tax Appeals in its
decision,[10] which was affirmed by the CA.
The Ateneo de Manila University Did Not
Contract
for the Sale of the Services of its Institute of
Philippine Culture
After reviewing the records of this case, we
find no evidence that Ateneos Institute of
Philippine Culture ever sold its services for
a fee to anyone or was ever engaged in a
business apart from and independently of
the academic purposes of the university.
Stressing that it is not the Ateneo de Manila
University per se which is being taxed,
Petitioner Commissioner of Internal
Revenue contends that the tax is due on its
activity of conducting researches for a fee.
The tax is due on the gross receipts made
in favor of IPC pursuant to the contracts the
latter entered to conduct researches for the
benefit primarily of its clients. The tax is
imposed on the exercise of a taxable
activity. x x x [T]he sale of services of
private respondent is made under a
contract and the various contracts entered
into between private respondent and its
clients are almost of the same terms,
showing, among others, the compensation
and terms of payment.[11] (Underscoring
supplied.)
In theory, the Commissioner of Internal
Revenue may be correct. However, the
records do not show that Ateneos IPC in
fact contracted to sell its research services
for a fee. Clearly then, as found by the
Court of Appeals and the Court of Tax
Appeals, petitioners theory is inapplicable
to the established factual milieu obtaining
in the instant case.
In the first place, the petitioner has
presented no evidence to prove its bare
contention that, indeed, contracts for sale
of services were ever entered into by the
private respondent. As appropriately
pointed out by the latter:
An examination of the Commissioners
Written Formal Offer of Evidence in the
Court of Tax Appeals shows that only the
following documentary evidence was
presented:
Exhibit 1 BIR letter of authority no. 331844
2 Examiners Field Audit Report
3 Adjustments to Sales/Receipts
4 Letter-decision of BIR Commissioner
Bienvenido A. Tan Jr.
None of the foregoing evidence even comes
close to purport to be contracts between
private respondent and third parties.[12]
Moreover, the Court of Tax Appeals
accurately and correctly declared that the
funds received by the Ateneo de Manila
University are technically not a fee. They
may however fall as gifts or donations
which are tax-exempt as shown by private
respondents compliance with the
requirement of Section 123 of the National
Internal Revenue Code providing for the
exemption of such gifts to an educational
institution.[13]
Respondent Court of Appeals elucidated on
the ruling of the Court of Tax Appeals:
To our mind, private respondent hardly fits
into the definition of an independent
contractor.
For one, the established facts show that
IPC, as a unit of the private respondent, is
not engaged in business. Undisputedly,
private respondent is mandated by law to
undertake research activities to maintain its
university status. In fact, the research
activities being carried out by the IPC is
focused not on business or profit but on
social sciences studies of Philippine society
and culture. Since it can only finance a
limited number of IPCs research projects,
private respondent occasionally accepts
sponsorship for unfunded IPC research
projects from international organizations,
private foundations and governmental
agencies. However, such sponsorships are
subject to private respondents terms and
conditions, among which are, that the
research is confined to topics consistent
with the private respondents academic
agenda; that no proprietary or commercial
purpose research is done; and that private
respondent retains not only the absolute
right to publish but also the ownership of
the results of the research conducted by
the IPC. Quite clearly, the aforementioned
terms and conditions belie the allegation
that private respondent is a contractor or is
engaged in business.
For another, it bears stressing that private
respondent is a non-stock, non-profit
educational corporation. The fact that it
accepted sponsorship for IPCs unfunded
projects is merely incidental. For, the main
function of the IPC is to undertake research
projects under the academic agenda of the
private respondent. Moreover, the records
do not show that in accepting sponsorship
of research work, IPC realized profits from
such work. On the contrary, the evidence
shows that for about 30 years, IPC had
continuously operated at a loss, which
means that sponsored funds are less than
actual expenses for its research projects.
That IPC has been operating at a loss loudly
bespeaks of the fact that education and not
profit is the motive for undertaking the
research projects.
Then, too, granting arguendo that IPC made
profits from the sponsored research
projects, the fact still remains that there is
no proof that part of such earnings or
profits was ever distributed as dividends to
any stockholder, as in fact none was so
distributed because they accrued to the
benefit of the private respondent which is a
non-profit educational institution.[14]
Therefore, it is clear that the funds received
by Ateneos Institute of Philippine Culture
are not given in the concept of a fee or
price in exchange for the performance of a
service or delivery of an object. Rather, the
amounts are in the nature of an
endowment or donation given by IPCs
benefactors solely for the purpose of
sponsoring or funding the research with no
strings attached. As found by the two
courts below, such sponsorships are subject
to IPCs terms and conditions. No
proprietary or commercial research is done,
and IPC retains the ownership of the results
of the research, including the absolute right
to publish the same. The copyrights over
the results of the research are owned by
Ateneo and, consequently, no portion
thereof may be reproduced without its
permission.[15] The amounts given to IPC,
therefore, may not be deemed, it bears
stressing, as fees or gross receipts that can
be subjected to the three percent
contractors tax.
It is also well to stress that the questioned
transactions of Ateneos Institute of
Philippine Culture cannot be deemed either
as a contract of sale or a contract for a
piece of work. By the contract of sale, one
of the contracting parties obligates himself
to transfer the ownership of and to deliver
a determinate thing, and the other to pay
therefor a price certain in money or its
equivalent.[16] By its very nature, a
contract of sale requires a transfer of
ownership. Thus, Article 1458 of the Civil
Code expressly makes the obligation to
transfer ownership as an essential element
of the contract of sale, following modern
codes, such as the German and the Swiss.
Even in the absence of this express
requirement, however, most writers,
including Sanchez Roman, Gayoso,
Valverde, Ruggiero, Colin and Capitant,
have considered such transfer of ownership
as the primary purpose of sale. Perez and
Alguer follow the same view, stating that
the delivery of the thing does not mean a
mere physical transfer, but is a means of
transmitting ownership. Transfer of title or
an agreement to transfer it for a price paid
or promised to be paid is the essence of
sale.[17] In the case of a contract for a
piece of work, the contractor binds himself
to execute a piece of work for the
employer, in consideration of a certain
price or compensation. x x x If the
contractor agrees to produce the work from
materials furnished by him, he shall deliver
the thing produced to the employer and
transfer dominion over the thing. x x x.[18]
Ineludably, whether the contract be one of
sale or one for a piece of work, a transfer of
ownership is involved and a party
necessarily walks away with an object.[19]
In the case at bench, it is clear from the
evidence on record that there was no sale
either of objects or services because, as
adverted to earlier, there was no transfer of
ownership over the research data obtained
or the results of research projects
undertaken by the Institute of Philippine
Culture.
Furthermore, it is clear that the research
activity of the Institute of Philippine Culture
is done in pursuance of maintaining
Ateneos university status and not in the
course of an independent business of
selling such research with profit in mind.
This is clear from a reading of the
regulations governing universities:
31.In addition to the legal requisites an
institution must meet, among others, the
following requirements before an
application for university status shall be
considered:
xxxxxxxxx
(e) The institution must undertake research
and operate with a competent qualified
staff at least three graduate departments in
accordance with the rules and standards for
graduate education. One of the
departments shall be science and
technology. The competence of the staff
shall be judged by their effective teaching,
scholarly publications and research
activities published in its school journal as
well as their leadership activities in the
profession.
(f) The institution must show evidence of
adequate and stable financial resources
and support, a reasonable portion of which
should be devoted to institutional
development and research. (underscoring
supplied)
xxxxxxxxx
32. University status may be withdrawn,
after due notice and hearing, for failure to
maintain satisfactorily the standards and
requirements therefor.[20]
Petitioners contention that it is the Institute
of Philippine Culture that is being taxed and
not the Ateneo is patently erroneous
because the former is not an independent
juridical entity that is separate and distinct
from the latter.
Factual Findings and Conclusions of the
Court of Tax Appeals
Affirmed by the Court of Appeals Generally
Conclusive
In addition, we reiterate that the Court of
Tax Appeals is a highly specialized body
specifically created for the purpose of
reviewing tax cases. Through its expertise,
it is undeniably competent to determine the
issue of whether[21] Ateneo de Manila
University may be deemed a subject of the
three percent contractors tax through the
evidence presented before it.
Consequently, as a matter of principle, this
Court will not set aside the conclusion
reached by x x x the Court of Tax Appeals
which is, by the very nature of its function,
dedicated exclusively to the study and
consideration of tax problems and has
necessarily developed an expertise on the
subject unless there has been an abuse or
improvident exercise of authority x x x.[22]
This point becomes more evident in the
case before us where the findings and
conclusions of both the Court of Tax
Appeals and the Court of Appeals appear
untainted by any abuse of authority, much
less grave abuse of discretion. Thus, we
find the decision of the latter affirming that
of the former free from any palpable error.
Public Service, Not Profit, is the Motive
The records show that the Institute of
Philippine Culture conducted its research
activities at a huge deficit of P1,624,014.00
as shown in its statements of fund and
disbursements for the period 1972 to 1985.
[23] In fact, it was Ateneo de Manila
University itself that had funded the
research projects of the institute, and it was
only when Ateneo could no longer produce
the needed funds that the institute sought
funding from outside. The testimony of
Ateneos Director for Accounting Services,
Ms. Leonor Wijangco, provides significant
insight on the academic and nonprofit
nature of the institutes research activities
done in furtherance of the universitys
purposes, as follows:
Q Now it was testified to earlier by Miss
Thelma Padero (Office Manager of the
Institute of Philippine Culture) that as far as
grants from sponsored research it is
possible that the grant sometimes is less
than the actual cost. Will you please tell us
in this case when the actual cost is a lot
less than the grant who shoulders the
additional cost?
A The University.
Q Now, why is this done by the University?
A Because of our faculty development
program as a university, because a
university has to have its own research
institute.[24]
So, why is it that Ateneo continues to
operate and conduct researches through its
Institute of Philippine Culture when it
undisputedly loses not an insignificant
amount in the process? The plain and
simple answer is that private respondent is
not a contractor selling its services for a fee
but an academic institution conducting
these researches pursuant to its
commitments to education and, ultimately,
to public service. For the institute to have
tenaciously continued operating for so long
despite its accumulation of significant
losses, we can only agree with both the
Court of Tax Appeals and the Court of
Appeals that education and not profit is
[IPCs] motive for undertaking the research
projects.[25]

WHEREFORE, premises considered, the

petition is DENIED and the assailed
Decision of the Court of Appeals is hereby
AFFIRMED in full.

SO ORDERED.
INCHAUSTI & CO., Plaintiff-Appellant, v.
ELLIS CROMWELL, Collector of Internal
Revenue, Defendant-Appellee.
Haussermann, Cohn & Fisher, for Appellant.
Acting Attorney-General Harvey, for
Appellee.
SYLLABUS
1. TAXATION; SALE OF HEMP; TAXABLE
VALUE. Where it is admitted by the
parties that it is customary to sell hemp in
the market baled and not loose, it will be
presumed that the price at which hemp is
quoted in the market is the price of baled
hemp; and that prices stipulated in
contracts for the purchase and sale of
hemp include the cost and expense of
baling where the contracts are silent upon
that subject.
2. ID.; ID.; ID.; BALING EXPENSE PART OF
PRICE. Under such conditions the cost
and expense of baling the hemp is a part of
the purchase price and subject to a tax
imposed by law on the gross amount of
sales of the dealers, and is not a sum paid
for work, labor, and materials performed
and furnished by the vendor for the
vendee.
3. ID.; ID.; ID.; "PRICE" DEFINED. The
word "price" signifies the sum stipulated as
the equivalent of the thing sold and also
every incident taken into consideration for
the fixing of the price put to the debit of the
vendee and agreed to by him.
4. ID.; ID.; ID.; DISTINCTION BETWEEN SALE
AND CONTRACT FOR LABOR AND
MATERIALS. The distinction between a
contract of sale and one for work, labor,
and materials, is tested by the inquiry
whether the thing transferred is one not in
existence and which would never have
existed but for the order of the party
desiring to acquire it, or a thing which
would have existed and been the subject of
sale to some other person, even if the order
had not been given.
5. ID.; ID.; ID.; FUTURE SALES. When a
person stipulates for the future sale of
articles which he is habitually making, and
which at the time are not made or finished,
it is essentially a contract of sale and not a
contract for labor. It is otherwise where the
article would not have been made but for
the agreement; and where the article
ordered by the purchase is exactly such as
the vendor makes and keeps on hand for
sale to anyone, and no change or
modification of it is made at the vendees
request, it is a contract of sale even though
it be entirely made after and in
consequence of the vendees order for it.
6. ID.; ID.; ID.; BALING FOR GENERAL
MARKET. In this case the baling was done
for the general market and was not
something done by the plaintiff as a result
of the particular contract between him and
his vendee.
DECISION
MORELAND, J.:
This is an appeal by the plaintiff from a
judgment of the Court of First Instance of
the city of Manila, the Hon. Simplicio del
Rosario presiding, dismissing the complaint
upon the merits after trial, without costs.
The facts presented to this court are agreed
upon by both parties, consisting, in so far
as they are material to a decision of the
case, in the
following:jgc:chanrobles.com.ph
"III. That the plaintiff firm for many years
past has been and now is engaged in the
business of buying and selling at wholesale
hemp, both for its own account and on
commission.
"IV. That it is customary to sell hemp in
bales which are made by compressing the
loose fiber by means of presses, covering
two sides of the bale with matting, and
fastening it by means of strips of rattan;
that the operation of baling hemp is
designated among merchants by the word
prensaje.
"V. That in all sales of hemp by the plaintiff
firm, whether for its own account or on
commission for others, the price is quoted
to the buyer at so much per picul, no
mention being made of baling; but with the
tacit understanding, unless otherwise
expressly agreed, that the hemp will be
delivered in bales and that, according to
the custom prevailing among hemp
merchants and dealers in the Philippine
Islands, a charge, the amount of which
depends upon the then prevailing rate, is to
be made against the buyer under the
denomination of prensaje. That this
charge is made in the same manner in all
cases, even when the operation of baling
was performed by the plaintiff or by its
principal long before the contract of sale
was made. Two specimens of the ordinary
form of account used in these operations
are hereunto appended, marked Exhibits A
and B, respectively, and made a part
hereof.
"VI. That the amount of the charge made
against hemp buyers by the plaintiff firm
and other sellers of hemp under the
denomination of prensaje during the
period involved in this litigation was P1.75
per bale; that the average cost of the
rattan and matting used on each bale of
hemp is fifteen (15) centavos and that the
average total cost of baling hemp is one (1)
peso per bale.
"VII. That insurance companies in the
Philippine Islands, in estimating the
insurable value of hemp always add to the
quoted price of same the charge made by
the seller under the denomination of
prensaje.
"VIII. That the average weight of a bale of
hemp is two (2) piculs (126.5 kilograms).
"IX. That between the first day of January,
1905, and the 31st day of March, 1910, the
plaintiff firm, in accordance with the custom
mentioned in paragraph V hereof, collected
and received, under the denomination of
prensaje, from purchasers of hemp sold by
the said firm for its own account, in addition
to the price expressly agreed upon for the
said hemp, sums aggregating P380,124.35;
and between the 1st day of October, 1908,
and the 1st day of March, 1910, collected
for the account of the owners of hemp sold
by the plaintiff firm in Manila on
commission, and under the said
denomination of prensaje, in addition to
the price expressly agreed upon for said
hemp, sums aggregating P31,080.
"X. That the plaintiff firm in estimating the
amount due it as commissions on sales of
hemp made by it for its principals has
always based the said amount on the total
sum collected from the purchasers of the
hemp, including the charge made in each
case under the denomination of prensaje.
"XI. That the plaintiff has always paid to the
defendant or to his predecessor in the
office of the Collector of Internal Revenue
the tax collectible under the provisions of
section 139 of Act No. 1189 upon the
selling price expressly agreed upon for all
hemp sold by the plaintiff firm both for its
own account and on commission, but has
not, until compelled to do so as hereinafter
stated, paid the said tax upon sums
received from the purchaser of such hemp
under the denomination of prensaje.
"XII. That on the 29th day of April, 1910,
the defendant, acting in his official capacity
as Collector of Internal Revenue of the
Philippine Islands, made demand in writing
upon the plaintiff firm for the payment
within the period of five (5) days of the sum
of P1,370.68 as a tax of one-third of one
per cent on the sums of money mentioned
in Paragraph IX hereof, and which the said
defendant claimed to be entitled to receive,
under the provisions of the said section 139
of Act No. 1189, upon the said sums of
money so collected from purchasers of
hemp under the denomination of prensaje.
"XIII. That on the 4th day of May, 1910, the
plaintiff firm paid to the defendant under
protest the said sum of P1,370.69, and on
the same date appealed to the defendant
as Collector of Internal Revenue, against
the ruling by which the plaintiff firm was
required to make said payment, but
defendant overruled said protest and
adversely decided said appeal, and refused
and still refuses to return to plaintiff the
said sum of P1,370.68 or any part thereof.
"XIV. Upon the facts above set forth it is
contended by the plaintiff that the tax of
P1,370.68 assessed by the defendant upon
the aggregate sum of said charges made
against said purchasers of hemp by the
plaintiff during the period in question,
under the denomination of prensaje as
aforesaid, namely, P411,204.35, is illegal
upon the ground that the said charge does
not constitute a part of the selling price of
the hemp, but is a charge made for the
service of baling the hemp, and that the
plaintiff firm is therefore entitled to recover
of the defendant the said sum of P1,370.68
paid to him under protest, together with all
interest thereon at the legal rate since its
payment. and the costs of this action.
"Upon the facts above stated it is the
contention of the defendant that the said
charge made under the denomination of
prensaje is in truth and in fact a part of
the gross value of the hemp sold and of its
actual selling price, and that therefore the
tax imposed by section 139 of Act No. 1189
lawfully accrued on said sums, that the
collection thereof was lawfully and properly
made and that therefore the plaintiff is not
entitled to recover back said sum or any
part thereof; and that the defendant should
have judgment against plaintiff for his
costs."cralaw virtua1aw library
Under these facts we are of the opinion that
the judgment of the court below was right.
It is one of the stipulations in the statement
of facts that it is customary to sell hemp in
bales, and that the price quoted in the
market for hemp per picul is the price for
the hemp baled. The fact is that among
large dealers like the plaintiff in this case it
is practically impossible to handle hemp
without its being baled, and it is admitted
by the statement of facts, as well as
demonstrated by the documentary proof
introduced in the case, that if the plaintiff
sold a quantity of hemp it would be the
understanding, without words, that such
hemp would be delivered in bales, and that
the purchase price would include the cost
and expense of baling. In other words, it is
the fact as stipulated, as well as it would be
the fact of necessity, that in all dealings in
hemp in the general market the selling
price consists of the value of the hemp
loose plus the cost and expense of putting
it into marketable form. In the sales made
by the plaintiff, which are the basis of the
controversy here, there were no services
performed by him for his vendee. There
was agreement that services should be
performed. Indeed, at the time of such
sales it was not known by the vendee
whether the hemp was then actually baled
or not. All that he knew and all that
concerned him was that the hemp should
be delivered to him baled. He did not ask
the plaintiff to perform services for him, nor
did the plaintiff agree to do so. The contract
was single and consisted solely in the sale
and purchase of hemp. The purchaser
contracted for nothing else and the vendor
agreed to deliver nothing else.
The word "price" signifies the sum
stipulated as the equivalent of the thing
sold and also every incident taken into
consideration for the fixing of the price, put
to the debit of the vendee and agreed to by
him. It is quite possible that the plaintiff, in
this case in connection with the hemp
which he sold, had himself already paid the
additional expense of baling as a part of
the purchase price which he paid and that
he himself had received the hemp baled
from his vendor. It is quite possible also
that such vendor of the plaintiff may have
received the same hemp from his vendor in
baled form, that he paid the additional cost
of baling as a part of the purchase price
which he paid. In such case the plaintiff
performed no service whatever for his
vendee, nor did, the plaintiffs vendor
perform any service for him.
The distinction between a contract of sale
and one for work, labor, and materials is
tested by the inquiry whether the thing
transferred is one not in existence and
which never would have existed but for the
order of the party desiring to acquire it, or a
thing which would have existed and been
the subject of sale to some other person.
even if the order had not been given.
(Groves v. Buck, 3 Maule & S., 178; Towers
v. Osborne, 1 Strange, 506; Benjamin on
Sales, 90.) It is clear that in the case at bar
the hemp was in existence in baled form
before the agreements of sale were made,
or, at least, would have been in existence
even if none of the individual sales here in
question had been consummated. It would
have been baled, nevertheless, for sale to
someone else, since, according to the
agreed statement of facts, it is customary
to sell hemp in bales. When a person
stipulates for the future sale of articles
which he is habitually making, and which at
the time are not made or finished, it is
essentially a contract of sale and not a
contract for labor. It is otherwise when the
article is made pursuant to agreement.
(Lamb v. Crafts, 12 Met., 353; Smith v. N. Y.
C. Ry. Co., 4 Keyes, 180; Benjamin on Sales,
98.) Where labor is employed on the
materials of the seller he can not maintain
an action for work and labor. (Atkinson v.
Bell, 8 Barn. & C., 277; Lee v. Griffin, 30 L. J.
N. S. Q. B., 252; Prescott v. Locke, 51 N. H.,
94.) If the article ordered by the purchaser
is exactly such as the plaintiff makes and
keeps on hand for sale to anyone, and no
change or modification of it is made at the
defendants request, it is a contract of sale,
even though it may be entirely made after,
and in consequence of, the defendants
order for it. (Garbutt v. Watson, 5 Barn. &
Ald., 613; Gardner v. Joy, 9 Met., 177; Lamb
v. Crafts, 12 Met., 353; Waterman v. Meiks,
4 Cush., 497; Clark v. Nichols, 107 Mass.,
547; May v. Ward, 134 Mass., 127; Abbott v.
Gilchrist, 38 Me., 260; Crocket v. Scribner,
64 Me., 105; Pitkin v. Noyes, 48 N. H., 294;
Prescott v. Locke, 51 N. H., 94; Ellison v.
Brigham, 38 Vt., 64.) It has been held in
Massachusetts that a contract to make is a
contract of sale if the article ordered is
already substantially in existence at the
time of the order and merely requires some
alteration, modification, or adaptation to
the buyers wishes or purposes. (Mixer v.
Howarth, 21 Pick., 205.) It is also held in
that state that a contract for the sale of an
article which the vendor in the ordinary
course of his business manufactures or
procures for the general market, whether
the same is on hand at the time or not, is a
contract for the sale of goods to which the
statute of frauds applies. But if the goods
are to be manufactured especially for the
purchaser and upon his special order, and
not for the general market, the case is not
within the statute. (Goddard v. Binney, 115
Mass., 450.)
It is clear to our minds that in the case at
bar the baling was performed for the
general market and was not something
done by plaintiff which was a result of any
peculiar wording of the particular contract
between him and his vendee. It is
undoubted that the plaintiff prepared his
hemp for the general market. This would be
necessary One who exposes goods for sale
in the market must have them in
marketable form. The hemp in question
would not have been in that condition if it
had not been baled. The baling, therefore,
was nothing peculiar to the contract
between the plaintiff and his vendee. It was
precisely the same contract that was made
by every other seller of hemp, engaged as
was the plaintiff, and resulted simply in the
transfer of title to goods already prepared
for the general market. The method of
bookkeeping and form of the account
rendered is not controlling as to the nature
of the contract made. It is conceded in the
case that a separate entry and charge
would have been made for the baling even
if the plaintiff had not been the one who
baled the hemp but, instead, had received
it already baled from his vendor. This
indicates of necessity that the mere fact of
entering a separate item for the baling of
the hemp is formal rather than essential
and in no sense indicates in this case the
real transaction between the parties. It is
indisputable that, if the plaintiff had bought
the hemp in question already baled, and
that that was the hemp the sale of which
formed the subject of this controversy, then
the plaintiff would have performed no
service for his vendee and could not,
therefore, lawfully charge for the rendition
of such service. It is, nevertheless,
admitted that in spite of that fact he would
still have made the double entry in his
invoice of sale to such vendee. This
demonstrates the nature of the transaction
and discloses, as we have already said, that
the entry of a separate charge for baling
does not accurately describe the
transaction between the parties.
Section 139 [Act No. 1189] of the Internal
Revenue Law provides
that:jgc:chanrobles.com.ph
"There shall be paid by each merchant and
manufacturer a tax at the rate of one-third
of one per centum on the gross value in
money of all goods, wares and merchandise
sold, bartered or exchanged in the
Philippine Islands, and that this tax shall be
assessed on the actual selling price at
which every such merchant or
manufacturer disposes of his
commodities."cralaw virtua1aw library
The operation of baling undoubtedly
augments the value of the goods. We agree
that there can be no question that, if the
value of the hemp were not augmented to
the amount of P1.75 per bale by said
operation, the purchaser would not pay
that sum. If one buys a bale of hemp at a
stipulated price of P20, well knowing that
there is an agreement on his part, express
or implied, to pay an additional amount of
P1.75 for that bale, he considers the bale of
hemp worth P21.75. It is agreed, as we
have before stated, that hemp is sold in
bales. Therefore, baling is performed before
the sale. The purchaser of hemp owes to
the seller nothing whatever by reason of
their contract except the value of the hemp
delivered. That value, that sum which the
purchaser pays to the vendee, is the true
selling price of the hemp, and every item
which enters into such price is a part of
such selling price. By force of the custom
prevailing among hemp dealers in the
Philippine Islands, a purchaser of hemp in
the market, unless he expressly stipulates
that it shall be delivered to him in loose
form, obligates himself to purchase and pay
for baled hemp. Whether or not such
agreement is express or implied, whether it
is actual or tacit, it has the same force.
After such an agreement has once been
made by the purchaser, he has no right to
insist thereafter that the seller shall furnish
him with unbaled hemp. It is undoubted
that the vendees, in the sales referred to in
the case at bar, would have had no right,
after having made their contracts, to insist
on the delivery of loose hemp with the
purpose in view themselves to perform the
baling and thus save 75 centavos per bale.
It is unquestioned that the seller, the
plaintiff, would have stood upon his original
contract of sale, that is, the obligation to
deliver baled hemp, and would have forced
his vendees to accept baled hemp, he
himself retaining among his own profits
those which accrued from the process of
baling.
We are of the opinion that the judgment
appealed from must be affirmed, without
special finding as to costs, and it is so
ordered.
CELESTINO CO & COMPANY, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE,
respondent.
Office of the Solicitor General Ambrosio
Padilla, Fisrt Assistant Solicitor General
Guillermo E. Torres and Solicitor Federico V.
Sian for respondent.
BENGZON, J.:
Appeal from a decision of the Court of Tax
Appeals.
Celestino Co & Company is a duly
registered general copartnership doing
business under the trade name of "Oriental
Sash Factory". From 1946 to 1951 it paid
percentage taxes of 7 per cent on the gross
receipts of its sash, door and window
factory, in accordance with section one
hundred eighty-six of the National Revenue
Code imposing taxes on sale of
manufactured articles. However in 1952 it
began to claim liability only to the
contractor's 3 per cent tax (instead of 7 per
cent) under section 191 of the same Code;
and having failed to convince the Bureau of
Internal Revenue, it brought the matter to
the Court of Tax Appeals, where it also
failed. Said the Court:
To support his contention that his client is
an ordinary contractor . . . counsel
presented . . . duplicate copies of letters,
sketches of doors and windows and price
quotations supposedly sent by the manager
of the Oriental Sash Factory to four
customers who allegedly made special
orders to doors and window from the said
factory. The conclusion that counsel would
like us to deduce from these few exhibits is
that the Oriental Sash Factory does not
manufacture ready-made doors, sash and
windows for the public but only upon
special order of its select customers. . . . I
cannot believe that petitioner company
would take, as in fact it has taken, all the
trouble and expense of registering a special
trade name for its sash business and then
orders company stationery carrying the
bold print "Oriental Sash Factory (Celestino
Co & Company, Prop.) 926 Raon St. Quiapo,
Manila, Tel. No. 33076, Manufacturers of all
kinds of doors, windows, sashes, furniture,
etc. used season-dried and kiln-dried
lumber, of the best quality workmanships"
solely for the purpose of supplying the
needs for doors, windows and sash of its
special and limited customers. One ill note
that petitioner has chosen for its
tradename and has offered itself to the
public as a "Factory", which means it is out
to do business, in its chosen lines on a big
scale. As a general rule, sash factories
receive orders for doors and windows of
special design only in particular cases but
the bulk of their sales is derived from a
ready-made doors and windows of standard
sizes for the average home. Moreover, as
shown from the investigation of petitioner's
book of accounts, during the period from
January 1, 1952 to September 30, 1952, it
sold sash, doors and windows worth
P188,754.69. I find it difficult to believe that
this amount which runs to six figures was
derived by petitioner entirely from its few
customers who made special orders for
these items.
Even if we were to believe petitioner's
claim that it does not manufacture ready-
made sash, doors and windows for the
public and that it makes these articles only
special order of its customers, that does not
make it a contractor within the purview of
section 191 of the national Internal
Revenue Code. there are no less than fifty
occupations enumerated in the aforesaid
section of the national Internal Revenue
Code subject to percentage tax and after
reading carefully each and every one of
them, we cannot find under which the
business of manufacturing sash, doors and
windows upon special order of customers
fall under the category of "road, building,
navigation, artesian well, water workers
and other construction work contractors"
are those who alter or repair buildings,
structures, streets, highways, sewers,
street railways railroads logging roads,
electric lines or power lines, and includes
any other work for the construction,
altering or repairing for which machinery
driven by mechanical power is used.
(Payton vs. City of Anadardo 64 P. 2d 878,
880, 179 Okl. 68).
Having thus eliminated the feasibility off
taxing petitioner as a contractor under 191
of the national Internal Revenue Code, this
leaves us to decide the remaining issue
whether or not petitioner could be taxed
with lesser strain and more accuracy as
seller of its manufactured articles under
section 186 of the same code, as the
respondent Collector of Internal Revenue
has in fact been doing the Oriental Sash
Factory was established in 1946.
The percentage tax imposed in section 191
of our Tax Code is generally a tax on the
sales of services, in contradiction with the
tax imposed in section 186 of the same
Code which is a tax on the original sales of
articles by the manufacturer, producer or
importer. (Formilleza's Commentaries and
Jurisprudence on the National Internal
Revenue Code, Vol. II, p. 744). The fact that
the articles sold are manufactured by the
seller does not exchange the contract from
the purview of section 186 of the National
Internal Revenue Code as a sale of articles.
There was a strong dissent; but upon
careful consideration of the whole matter
are inclines to accept the above statement
of the facts and the law. The important
thing to remember is that Celestino Co &
Company habitually makes sash, windows
and doors, as it has represented in its
stationery and advertisements to the
public. That it "manufactures" the same is
practically admitted by appellant itself. The
fact that windows and doors are made by it
only when customers place their orders,
does not alter the nature of the
establishment, for it is obvious that it only
accepted such orders as called for the
employment of such material-moulding,
frames, panels-as it ordinarily
manufactured or was in a position
habitually to manufacture.
Perhaps the following paragraph represents
in brief the appellant's position in this
Court:
Since the petitioner, by clear proof of facts
not disputed by the respondent,
manufacturers sash, windows and doors
only for special customers and upon their
special orders and in accordance with the
desired specifications of the persons
ordering the same and not for the general
market: since the doors ordered by Don
Toribio Teodoro & Sons, Inc., for instance,
are not in existence and which never would
have existed but for the order of the party
desiring it; and since petitioner's
contractual relation with his customers is
that of a contract for a piece of work or
since petitioner is engaged in the sale of
services, it follows that the petitioner
should be taxed under section 191 of the
Tax Code and NOT under section 185 of the
same Code." (Appellant's brief, p. 11-12).
But the argument rests on a false
foundation. Any builder or homeowner, with
sufficient money, may order windows or
doors of the kind manufactured by this
appellant. Therefore it is not true that it
serves special customers only or confines
its services to them alone. And anyone who
sees, and likes, the doors ordered by Don
Toribio Teodoro & Sons Inc. may purchase
from appellant doors of the same kind,
provided he pays the price. Surely, the
appellant will not refuse, for it can easily
duplicate or even mass-produce the same
doors-it is mechanically equipped to do so.
That the doors and windows must meet
desired specifications is neither here nor
there. If these specifications do not happen
to be of the kind habitually manufactured
by appellant special forms for sash,
mouldings of panels it would not accept
the order and no sale is made. If they do,
the transaction would be no different from
a purchasers of manufactured goods held is
stock for sale; they are bought because
they meet the specifications desired by the
purchaser.

Nobody will say that when a sawmill cuts
lumber in accordance with the peculiar
specifications of a customer-sizes not
previously held in stock for sale to the
public-it thereby becomes an employee or
servant of the customer,1 not the seller of
lumber. The same consideration applies to
this sash manufacturer.
The Oriental Sash Factory does nothing
more than sell the goods that it mass-
produces or habitually makes; sash, panels,
mouldings, frames, cutting them to such
sizes and combining them in such forms as
its customers may desire.
On the other hand, petitioner's idea of
being a contractor doing construction jobs
is untenable. Nobody would regard the
doing of two window panels a construction
work in common parlance.2
Appellant invokes Article 1467 of the New
Civil Code to bolster its contention that in
filing orders for windows and doors
according to specifications, it did not sell,
but merely contracted for particular pieces
of work or "merely sold its services".
Said article reads as follows:
A contract for the delivery at a certain price
of an article which the vendor in the
ordinary course of his business
manufactures or procures for the general
market, whether the same is on hand at the
time or not, is a contract of sale, but if the
goods are to be manufactured specially for
the customer and upon his special order,
and not for the general market, it is
contract for a piece of work.
It is at once apparent that the Oriental Sash
Factory did not merely sell its services to
Don Toribio Teodoro & Co. (To take one
instance) because it also sold the materials.
The truth of the matter is that it sold
materials ordinarily manufactured by it The appealed decision is consequently
sash, panels, mouldings to Teodoro & affirmed. So ordered.
Co., although in such form or combination
as suited the fancy of the purchaser. Such
new form does not divest the Oriental Sash
Factory of its character as manufacturer.
Neither does it take the transaction out of
the category of sales under Article 1467
above quoted, because although the
Factory does not, in the ordinary course of
its business, manufacture and keep on
stock doors of the kind sold to Teodoro, it
could stock and/or probably had in stock
the sash, mouldings and panels it used
therefor (some of them at least).
In our opinion when this Factory accepts a
job that requires the use of extraordinary or
additional equipment, or involves services
not generally performed by it-it thereby
contracts for a piece of work filing
special orders within the meaning of Article
1467. The orders herein exhibited were not
shown to be special. They were merely
orders for work nothing is shown to call
them special requiring extraordinary
service of the factory.
The thought occurs to us that if, as alleged-
all the work of appellant is only to fill orders
previously made, such orders should not be
called special work, but regular work.
Would a factory do business performing
only special, extraordinary or peculiar
merchandise?
Anyway, supposing for the moment that the
transactions were not sales, they were
neither lease of services nor contract jobs
by a contractor. But as the doors and
windows had been admittedly
"manufactured" by the Oriental Sash
Factory, such transactions could be, and
should be taxed as "transfers" thereof
under section 186 of the National Revenue
Code.
THE COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
ENGINEERING EQUIPMENT AND SUPPLY
COMPANY AND THE COURT OF TAX
APPEALS, respondents.
G.R. No. L-27452 June 30, 1975
ENGINEERING EQUIPMENT AND SUPPLY
COMPANY, petitioner,
vs.
THE COMMISSIONER OF INTERNAL
REVENUE AND THE COURT OF TAX
APPEALS, respondent.
Office of the Solicitor General Antonio P.
Barredo, Assistant Solicitor General
Felicisimo R. Rosete, Solicitor Lolita O. Gal-
lang, and Special Attorney Gemaliel H.
Montalino for Commissioner of Internal
Revenue, etc.
Melquides C. Gutierrez, Jose U. Ong, Juan G.
Collas, Jr., Luis Ma. Guerrero and J.R.
Balonkita for Engineering and Supply
Company.
ESGUERRA, J.:
Petition for review on certiorari of the
decision of the Court of Tax Appeals in CTA
Case No. 681, dated November 29, 1966,
assessing a compensating tax of
P174,441.62 on the Engineering Equipment
and Supply Company.
As found by the Court of Tax Appeals, and
as established by the evidence on record,
the facts of this case are as follows:
Engineering Equipment and Supply Co.
(Engineering for short), a domestic
corporation, is an engineering and
machinery firm. As operator of an
integrated engineering shop, it is engaged,
among others, in the design and installation
of central type air conditioning system,
pumping plants and steel fabrications. (Vol.
I pp. 12-16 T.S.N. August 23, 1960)
On July 27, 1956, one Juan de la Cruz, wrote
the then Collector, now Commissioner, of
Internal Revenue denouncing Engineering
for tax evasion by misdeclaring its imported
articles and failing to pay the correct
percentage taxes due thereon in
connivance with its foreign suppliers (Exh.
"2" p. 1 BIR record Vol. I). Engineering was
likewise denounced to the Central Bank
(CB) for alleged fraud in obtaining its dollar
allocations. Acting on these denunciations,
a raid and search was conducted by a joint
team of Central Bank, (CB), National
Bureau of Investigation (NBI) and Bureau of
Internal Revenue (BIR) agents on
September 27, 1956, on which occasion
voluminous records of the firm were seized
and confiscated. (pp. 173-177 T.S.N.)
On September 30, 1957, revenue
examiners Quesada and Catudan reported
and recommended to the then Collector,
now Commissioner, of Internal Revenue
(hereinafter referred to as Commissioner)
that Engineering be assessed for
P480,912.01 as deficiency advance sales
tax on the theory that it misdeclared its
importation of air conditioning units and
parts and accessories thereof which are
subject to tax under Section 185(m) 1 of
the Tax Code, instead of Section 186 of the
same Code. (Exh. "3" pp. 59-63 BIR rec. Vol.
I) This assessment was revised on January
23, 1959, in line with the observation of the
Chief, BIR Law Division, and was raised to
P916,362.56 representing deficiency
advance sales tax and manufacturers sales
tax, inclusive of the 25% and 50%
surcharges. (pp. 72-80 BIR rec. Vol. I)
On March 3, 1959. the Commissioner
assessed against, and demanded upon,
Engineering payment of the increased
amount and suggested that P10,000 be
paid as compromise in extrajudicial
settlement of Engineering's penal liability
for violation of the Tax Code. The firm,
however, contested the tax assessment
and requested that it be furnished with the
details and particulars of the
Commissioner's assessment. (Exh. "B" and
"15", pp. 86-88 BIR rec. Vol. I) The
Commissioner replied that the assessment
was in accordance with law and the facts of
the case.
On July 30, 1959, Engineering appealed the
case to the Court of Tax Appeals and during
the pendency of the case the investigating
revenue examiners reduced Engineering's
deficiency tax liabilities from P916,362.65
to P740,587.86 (Exhs. "R" and "9" pp. 162-
170, BIR rec.), based on findings after
conferences had with Engineering's
Accountant and Auditor.
On November 29, 1966, the Court of Tax
Appeals rendered its decision, the
dispositive portion of which reads as
follows:
For ALL THE FOREGOING CONSIDERATIONS,
the decision of respondent appealed from is
hereby modified, and petitioner, as a
contractor, is declared exempt from the
deficiency manufacturers sales tax
covering the period from June 1, 1948. to
September 2, 1956. However, petitioner is
ordered to pay respondent, or his duly
authorized collection agent, the sum of
P174,141.62 as compensating tax and 25%
surcharge for the period from 1953 to
September 1956. With costs against
petitioner.
The Commissioner, not satisfied with the
decision of the Court of Tax Appeals,
appealed to this Court on January 18, 1967,
(G.R. No. L-27044). On the other hand,
Engineering, on January 4, 1967, filed with
the Court of Tax Appeals a motion for
reconsideration of the decision
abovementioned. This was denied on April
6, 1967, prompting Engineering to file also
with this Court its appeal, docketed as G.R.
No. L-27452.
Since the two cases, G.R. No. L-27044 and
G.R. No. L-27452, involve the same parties
and issues, We have decided to consolidate
and jointly decide them.
Engineering in its Petition claims that the
Court of Tax Appeals committed the
following errors:
1. That the Court of Tax Appeals erred
in holding Engineering Equipment & Supply
Company liable to the 30% compensating
tax on its importations of equipment and
ordinary articles used in the central type air
conditioning systems it designed,
fabricated, constructed and installed in the
buildings and premises of its customers,
rather than to the compensating tax of only
7%;
2. That the Court of Tax Appeals erred
in holding Engineering Equipment & Supply
Company guilty of fraud in effecting the
said importations on the basis of
incomplete quotations from the contents of
alleged photostat copies of documents
seized illegally from Engineering Equipment
and Supply Company which should not
have been admitted in evidence;
3. That the Court of Tax Appeals erred
in holding Engineering Equipment & Supply
Company liable to the 25% surcharge
prescribed in Section 190 of the Tax Code;
4. That the Court of Tax Appeals erred
in holding the assessment as not having
prescribed;
5. That the Court of Tax Appeals erred
in holding Engineering Equipment & Supply
Company liable for the sum of P174,141.62
as 30% compensating tax and 25%
surcharge instead of completely absolving
it from the deficiency assessment of the
Commissioner.
The Commissioner on the other hand
claims that the Court of Tax Appeals erred:
1. In holding that the respondent
company is a contractor and not a
manufacturer.
2. In holding respondent company
liable to the 3% contractor's tax imposed
by Section 191 of the Tax Code instead of
the 30% sales tax prescribed in Section
185(m) in relation to Section 194(x) both of
the same Code;
3. In holding that the respondent
company is subject only to the 30%
compensating tax under Section 190 of the
Tax Code and not to the 30% advance sales
tax imposed by section 183 (b), in relation
to section 185(m) both of the same Code,
on its importations of parts and accessories
of air conditioning units;
4. In not holding the company liable to
the 50% fraud surcharge under Section 183
of the Tax Code on its importations of parts
and accessories of air conditioning units,
notwithstanding the finding of said court
that the respondent company fraudulently
misdeclared the said importations;
5. In holding the respondent company
liable for P174,141.62 as compensating tax
and 25% surcharge instead of P740,587.86
as deficiency advance sales tax, deficiency
manufacturers tax and 25% and 50%
surcharge for the period from June 1, 1948
to December 31, 1956.
The main issue revolves on the question of
whether or not Engineering is a
manufacturer of air conditioning units
under Section 185(m), supra, in relation to
Sections 183(b) and 194 of the Code, or a
contractor under Section 191 of the same
Code.
The Commissioner contends that
Engineering is a manufacturer and seller of
air conditioning units and parts or
accessories thereof and, therefore, it is
subject to the 30% advance sales tax
prescribed by Section 185(m) of the Tax
Code, in relation to Section 194 of the
same, which defines a manufacturer as
follows:
Section 194. Words and Phrases Defined.
In applying the provisions of this Title,
words and phrases shall be taken in the
sense and extension indicated below:
xxx xxx xxx
(x) "Manufacturer" includes every
person who by physical or chemical process
alters the exterior texture or form or inner
substance of any raw material or
manufactured or partially manufactured
products in such manner as to prepare it for
a special use or uses to which it could not
have been put in its original condition, or
who by any such process alters the quality
of any such material or manufactured or
partially manufactured product so as to
reduce it to marketable shape, or prepare it
for any of the uses of industry, or who by
any such process combines any such raw
material or manufactured or partially
manufactured products with other
materials or products of the same or of
different kinds and in such manner that the
finished product of such process of
manufacture can be put to special use or
uses to which such raw material or
manufactured or partially manufactured
products in their original condition could
not have been put, and who in addition
alters such raw material or manufactured
or partially manufactured products, or
combines the same to produce such
finished products for the purpose of their
sale or distribution to others and not for his
own use or consumption.
In answer to the above contention,
Engineering claims that it is not a
manufacturer and setter of air-conditioning
units and spare parts or accessories thereof
subject to tax under Section 185(m) of the
Tax Code, but a contractor engaged in the
design, supply and installation of the
central type of air-conditioning system
subject to the 3% tax imposed by Section
191 of the same Code, which is essentially
a tax on the sale of services or labor of a
contractor rather than on the sale of
articles subject to the tax referred to in
Sections 184, 185 and 186 of the Code.
The arguments of both the Engineering and
the Commissioner call for a clarification of
the term contractor as well as the
distinction between a contract of sale and
contract for furnishing services, labor and
materials. The distinction between a
contract of sale and one for work, labor and
materials is tested by the inquiry whether
the thing transferred is one not in existence
and which never would have existed but for
the order of the party desiring to acquire it,
or a thing which would have existed and
has been the subject of sale to some other
persons even if the order had not been
given. 2 If the article ordered by the
purchaser is exactly such as the plaintiff
makes and keeps on hand for sale to
anyone, and no change or modification of it
is made at defendant's request, it is a
contract of sale, even though it may be
entirely made after, and in consequence of,
the defendants order for it. 3
Our New Civil Code, likewise distinguishes a
contract of sale from a contract for a piece
of work thus:
Art. 1467. A contract for the delivery at
a certain price of an article which the
vendor in the ordinary course of his
business manufactures or procures for the
general market, whether the same is on
hand at the time or not, is a contract of
sale, but if the goods are to be
manufactured specially for the customer
and upon his special order and not for the
general market, it is a contract for a piece
of work.
The word "contractor" has come to be used
with special reference to a person who, in
the pursuit of the independent business,
undertakes to do a specific job or piece of
work for other persons, using his own
means and methods without submitting
himself to control as to the petty details.
(Araas, Annotations and Jurisprudence on
the National Internal Revenue Code, p. 318,
par. 191 (2), 1970 Ed.) The true test of a
contractor as was held in the cases of
Luzon Stevedoring Co., vs. Trinidad, 43,
Phil. 803, 807-808, and La Carlota Sugar
Central vs. Trinidad, 43, Phil. 816, 819,
would seem to be that he renders service in
the course of an independent occupation,
representing the will of his employer only
as to the result of his work, and not as to
the means by which it is accomplished.
With the foregoing criteria as guideposts,
We shall now examine whether Engineering
really did "manufacture" and sell, as
alleged by the Commissioner to hold it
liable to the advance sales tax under
Section 185(m), or it only had its services
"contracted" for installation purposes to
hold it liable under section 198 of the Tax
Code.
I
After going over the three volumes of
stenographic notes and the voluminous
record of the BIR and the CTA as well as the
exhibits submitted by both parties, We find
that Engineering did not manufacture air
conditioning units for sale to the general
public, but imported some items (as
refrigeration compressors in complete set,
heat exchangers or coils, t.s.n. p. 39) which
were used in executing contracts entered
into by it. Engineering, therefore, undertook
negotiations and execution of individual
contracts for the design, supply and
installation of air conditioning units of the
central type (t.s.n. pp. 20-36; Exhs. "F",
"G", "H", "I", "J", "K", "L", and "M"), taking
into consideration in the process such
factors as the area of the space to be air
conditioned; the number of persons
occupying or would be occupying the
premises; the purpose for which the various
air conditioning areas are to be used; and
the sources of heat gain or cooling load on
the plant such as sun load, lighting, and
other electrical appliances which are or
may be in the plan. (t.s.n. p. 34, Vol. I)
Engineering also testified during the
hearing in the Court of Tax Appeals that
relative to the installation of air
conditioning system, Engineering designed
and engineered complete each particular
plant and that no two plants were identical
but each had to be engineered separately.
As found by the lower court, which finding 4
We adopt
Engineering, in a nutshell, fabricates,
assembles, supplies and installs in the
buildings of its various customers the
central type air conditioning system;
prepares the plans and specifications
therefor which are distinct and different
from each other; the air conditioning units
and spare parts or accessories thereof used
by petitioner are not the window type of air
conditioner which are manufactured,
assembled and produced locally for sale to
the general market; and the imported air
conditioning units and spare parts or
accessories thereof are supplied and
installed by petitioner upon previous orders
of its customers conformably with their
needs and requirements.
The facts and circumstances aforequoted
support the theory that Engineering is a
contractor rather than a manufacturer.
The Commissioner in his Brief argues that
"it is more in accord with reason and sound
business management to say that anyone
who desires to have air conditioning units
installed in his premises and who is in a
position and willing to pay the price can
order the same from the company
(Engineering) and, therefore, Engineering
could have mass produced and stockpiled
air conditioning units for sale to the public
or to any customer with enough money to
buy the same." This is untenable in the
light of the fact that air conditioning units,
packaged, or what we know as self-
contained air conditioning units, are distinct
from the central system which Engineering
dealt in. To Our mind, the distinction as
explained by Engineering, in its Brief,
quoting from books, is not an idle play of
words as claimed by the Commissioner, but
a significant fact which We just cannot
ignore. As quoted by Engineering
Equipment & Supply Co., from an
Engineering handbook by L.C. Morrow, and
which We reproduce hereunder for easy
reference:
... there is a great variety of equipment in
use to do this job (of air conditioning).
Some devices are designed to serve a
specific type of space; others to perform a
specific function; and still others as
components to be assembled into a tailor-
made system to fit a particular building.
Generally, however, they may be grouped
into two classifications unitary and
central system.
The unitary equipment classification
includes those designs such as room air
conditioner, where all of the functional
components are included in one or two
packages, and installation involves only
making service connection such as
electricity, water and drains. Central-station
systems, often referred to as applied or
built-up systems, require the installation of
components at different points in a building
and their interconnection.
The room air conditioner is a unitary
equipment designed specifically for a room
or similar small space. It is unique among
air conditioning equipment in two respects:
It is in the electrical appliance
classification, and it is made by a great
number of manufacturers.
There is also the testimony of one Carlos
Navarro, a licensed Mechanical and
Electrical Engineer, who was once the
Chairman of the Board of Examiners for
Mechanical Engineers and who was
allegedly responsible for the preparation of
the refrigeration and air conditioning code
of the City of Manila, who said that "the
central type air conditioning system is an
engineering job that requires planning and
meticulous layout due to the fact that
usually architects assign definite space and
usually the spaces they assign are very
small and of various sizes. Continuing
further, he testified:
I don't think I have seen central type of air
conditioning machinery room that are
exactly alike because all our buildings here
are designed by architects dissimilar to
existing buildings, and usually they don't
coordinate and get the advice of air
conditioning and refrigerating engineers so
much so that when we come to design, we
have to make use of the available space
that they are assigning to us so that we
have to design the different component
parts of the air conditioning system in such
a way that will be accommodated in the
space assigned and afterwards the system
may be considered as a definite portion of
the building. ...
Definitely there is quite a big difference in
the operation because the window type air
conditioner is a sort of compromise. In fact
it cannot control humidity to the desired
level; rather the manufacturers, by hit and
miss, were able to satisfy themselves that
the desired comfort within a room could be
made by a definite setting of the machine
as it comes from the factory; whereas the
central type system definitely requires an
intelligent operator. (t.s.n. pp. 301-305, Vol.
II)
The point, therefore, is this Engineering
definitely did not and was not engaged in
the manufacture of air conditioning units
but had its services contracted for the
installation of a central system. The cases
cited by the Commissioner (Advertising
Associates, Inc. vs. Collector of Customs,
97, Phil. 636; Celestino Co & Co. vs.
Collector of Internal Revenue, 99 Phil. 841
and Manila Trading & Supply Co. vs. City of
Manila, 56 O.G. 3629), are not in point.
Neither are they applicable because the
facts in all the cases cited are entirely
different. Take for instance the case of
Celestino Co where this Court held the
taxpayer to be a manufacturer rather than
a contractor of sash, doors and windows
manufactured in its factory. Indeed, from
the very start, Celestino Co intended itself
to be a manufacturer of doors, windows,
sashes etc. as it did register a special trade
name for its sash business and ordered
company stationery carrying the bold print
"ORIENTAL SASH FACTORY (CELESTINO CO
AND COMPANY, PROP.) 926 Raon St.,
Quiapo, Manila, Tel. No. etc., Manufacturers
of All Kinds of Doors, Windows ... ."
Likewise, Celestino Co never put up a
contractor's bond as required by Article
1729 of the Civil Code. Also, as a general
rule, sash factories receive orders for doors
and windows of special design only in
particular cases, but the bulk of their sales
is derived from ready-made doors and
windows of standard sizes for the average
home, which "sales" were reflected in their
books of accounts totalling P118,754.69 for
the period from January, 1952 to
September 30, 1952, or for a period of only
nine (9) months. This Court found said sum
difficult to have been derived from its few
customers who placed special orders for
these items. Applying the abovestated facts
to the case at bar, We found them to he
inapposite. Engineering advertised itself as
Engineering Equipment and Supply
Company, Machinery Mechanical Supplies,
Engineers, Contractors, 174 Marques de
Comillas, Manila (Exh. "B" and "15" BIR rec.
p. 186), and not as manufacturers. It
likewise paid the contractors tax on all the
contracts for the design and construction of
central system as testified to by Mr. Rey
Parker, its President and General Manager.
(t.s.n. p. 102, 103) Similarly, Engineering
did not have ready-made air conditioning
units for sale but as per testimony of Mr.
Parker upon inquiry of Judge Luciano of the
CTA
Q Aside from the general components,
which go into air conditioning plant or
system of the central type which your
company undertakes, and the procedure
followed by you in obtaining and executing
contracts which you have already testified
to in previous hearing, would you say that
the covering contracts for these different
projects listed ... referred to in the list, Exh.
"F" are identical in every respect? I mean
every plan or system covered by these
different contracts are identical in standard
in every respect, so that you can reproduce
them?
A No, sir. They are not all standard. On
the contrary, none of them are the same.
Each one must be designed and
constructed to meet the particular
requirements, whether the application is to
be operated. (t.s.n. pp. 101-102)
What We consider as on all fours with the
case at bar is the case of S.M. Lawrence Co.
vs. McFarland, Commissioner of Internal
Revenue of the State of Tennessee and
McCanless, 355 SW 2d, 100, 101, "where
the cause presents the question of whether
one engaged in the business of contracting
for the establishment of air conditioning
system in buildings, which work requires, in
addition to the furnishing of a cooling unit,
the connection of such unit with electrical
and plumbing facilities and the installation
of ducts within and through walls, ceilings
and floors to convey cool air to various
parts of the building, is liable for sale or use
tax as a contractor rather than a retailer of
tangible personal property. Appellee took
the Position that appellant was not engaged
in the business of selling air conditioning
equipment as such but in the furnishing to
its customers of completed air conditioning
systems pursuant to contract, was a
contractor engaged in the construction or
improvement of real property, and as such
was liable for sales or use tax as the
consumer of materials and equipment used
in the consummation of contracts,
irrespective of the tax status of its
contractors. To transmit the warm or cool
air over the buildings, the appellant
installed system of ducts running from the
basic units through walls, ceilings and
floors to registers. The contract called for
completed air conditioning systems which
became permanent part of the buildings
and improvements to the realty." The Court
held the appellant a contractor which used
the materials and the equipment upon the
value of which the tax herein imposed was
levied in the performance of its contracts
with its customers, and that the customers
did not purchase the equipment and have
the same installed.
Applying the facts of the aforementioned
case to the present case, We see that the
supply of air conditioning units to
Engineer's various customers, whether the
said machineries were in hand or not, was
especially made for each customer and
installed in his building upon his special
order. The air conditioning units installed in
a central type of air conditioning system
would not have existed but for the order of
the party desiring to acquire it and if it
existed without the special order of
Engineering's customer, the said air
conditioning units were not intended for
sale to the general public. Therefore, We
have but to affirm the conclusion of the
Court of Tax Appeals that Engineering is a
contractor rather than a manufacturer,
subject to the contractors tax prescribed by
Section 191 of the Code and not to the
advance sales tax imposed by Section
185(m) in relation to Section 194 of the
same Code. Since it has been proved to Our
satisfaction that Engineering imported air
conditioning units, parts or accessories
thereof for use in its construction business
and these items were never sold, resold,
bartered or exchanged, Engineering should
be held liable to pay taxes prescribed under
Section 190 5 of the Code. This
compensating tax is not a tax on the
importation of goods but a tax on the use
of imported goods not subject to sales tax.
Engineering, therefore, should be held
liable to the payment of 30% compensating
tax in accordance with Section 190 of the
Tax Code in relation to Section 185(m) of
the same, but without the 50% mark up
provided in Section 183(b).
II
We take up next the issue of fraud. The
Commissioner charged Engineering with
misdeclaration of the imported air
conditioning units and parts or accessories
thereof so as to make them subject to a
lower rate of percentage tax (7%) under
Section 186 of the Tax Code, when they are
allegedly subject to a higher rate of tax
(30%) under its Section 185(m). This
charge of fraud was denied by Engineering
but the Court of Tax Appeals in its decision
found adversely and said"
... We are amply convinced from the
evidence presented by respondent that
petitioner deliberately and purposely
misdeclared its importations. This evidence
consists of letters written by petitioner to
its foreign suppliers, instructing them on
how to invoice and describe the air
conditioning units ordered by petitioner. ...
(p. 218 CTA rec.)
Despite the above findings, however, the
Court of Tax Appeals absolved Engineering
from paying the 50% surcharge prescribe
by Section 183(a) of the Tax Code by
reasoning out as follows:
The imposition of the 50% surcharge
prescribed by Section 183(a) of the Tax
Code is based on willful neglect to file the
monthly return within 20 days after the end
of each month or in case a false or
fraudulent return is willfully made, it can
readily be seen, that petitioner cannot
legally be held subject to the 50%
surcharge imposed by Section 183(a) of the
Tax Code. Neither can petitioner be held
subject to the 50% surcharge under Section
190 of the Tax Code dealing on
compensating tax because the provisions
thereof do not include the 50% surcharge.
Where a particular provision of the Tax
Code does not impose the 50% surcharge
as fraud penalty we cannot enforce a non-
existing provision of law notwithstanding
the assessment of respondent to the
contrary. Instances of the exclusion in the
Tax Code of the 50% surcharge are those
dealing on tax on banks, taxes on receipts
of insurance companies, and franchise tax.
However, if the Tax Code imposes the 50%
surcharge as fraud penalty, it expressly so
provides as in the cases of income tax,
estate and inheritance taxes, gift taxes,
mining tax, amusement tax and the
monthly percentage taxes. Accordingly, we
hold that petitioner is not subject to the
50% surcharge despite the existence of
fraud in the absence of legal basis to
support the importation thereof. (p. 228
CTA rec.)
We have gone over the exhibits submitted
by the Commissioner evidencing fraud
committed by Engineering and We
reproduce some of them hereunder for
clarity.
As early as March 18, 1953, Engineering in
a letter of even date wrote to Trane Co.
(Exh. "3-K" pp. 152-155, BIR rec.) viz:
Your invoices should be made in the name
of Madrigal & Co., Inc., Manila, Philippines,
c/o Engineering Equipment & Supply Co.,
Manila, Philippines forwarding all
correspondence and shipping papers
concerning this order to us only and not to
the customer.
When invoicing, your invoices should be
exactly as detailed in the customer's Letter
Order dated March 14th, 1953 attached.
This is in accordance with the Philippine
import licenses granted to Madrigal & Co.,
Inc. and such details must only be shown
on all papers and shipping documents for
this shipment. No mention of words air
conditioning equipment should be made on
any shipping documents as well as on the
cases. Please give this matter your careful
attention, otherwise great difficulties will be
encountered with the Philippine Bureau of
Customs when clearing the shipment on its
arrival in Manila. All invoices and cases
should be marked "THIS EQUIPMENT FOR
RIZAL CEMENT CO."
The same instruction was made to Acme
Industries, Inc., San Francisco, California in
a letter dated March 19, 1953 (Exh. "3-J-1"
pp. 150-151, BIR rec.)
On April 6, 1953, Engineering wrote to
Owens-Corning Fiberglass Corp., New York,
U.S.A. (Exh. "3-1" pp. 147-149, BIR rec.)
also enjoining the latter from mentioning or
referring to the term 'air conditioning' and
to describe the goods on order as
Fiberglass pipe and pipe fitting insulation
instead. Likewise on April 30, 1953,
Engineering threatened to discontinue the
forwarding service of Universal
Transcontinental Corporation when it wrote
Trane Co. (Exh. "3-H" p. 146, BIR rec.):
It will be noted that the Universal
Transcontinental Corporation is not
following through on the instructions which
have been covered by the above
correspondence, and which indicates the
necessity of discontinuing the use of the
term "Air conditioning Machinery or Air
Coolers". Our instructions concerning this
general situation have been sent to you in
ample time to have avoided this error in
terminology, and we will ask that on receipt
of this letter that you again write to
Universal Transcontinental Corp. and inform
them that, if in the future, they are unable
to cooperate with us on this requirement,
we will thereafter be unable to utilize their
forwarding service. Please inform them that
we will not tolerate another failure to follow
our requirements.
And on July 17, 1953 (Exh- "3-g" p. 145, BIR
rec.) Engineering wrote Trane Co. another
letter, viz:
In the past, we have always paid the air
conditioning tax on climate changers and
that mark is recognized in the Philippines,
as air conditioning equipment. This matter
of avoiding any tie-in on air conditioning is
very important to us, and we are asking
that from hereon that whoever takes care
of the processing of our orders be carefully
instructed so as to avoid again using the
term "Climate changers" or in any way
referring to the equipment as "air
conditioning."
And in response to the aforequoted letter,
Trane Co. wrote on July 30, 1953,
suggesting a solution, viz:
We feel that we can probably solve all the
problems by following the procedure
outlined in your letter of March 25, 1953
wherein you stated that in all future jobs
you would enclose photostatic copies of
your import license so that we might make
up two sets of invoices: one set describing
equipment ordered simply according to the
way that they are listed on the import
license and another according to our
ordinary regular methods of order write-up.
We would then include the set made up
according to the import license in the
shipping boxes themselves and use those
items as our actual shipping documents
and invoices, and we will send the other
regular invoice to you, by separate
correspondence. (Exh- No. "3-F-1", p. 144
BIR rec.)
Another interesting letter of Engineering is
one dated August 27, 1955 (Exh. "3-C" p.
141 BIR rec.)
In the process of clearing the shipment
from the piers, one of the Customs
inspectors requested to see the packing
list. Upon presenting the packing list, it was
discovered that the same was prepared on
a copy of your letterhead which indicated
that the Trane Co. manufactured air
conditioning, heating and heat transfer
equipment. Accordingly, the inspectors
insisted that this equipment was being
imported for air conditioning purposes. To
date, we have not been able to clear the
shipment and it is possible that we will be
required to pay heavy taxes on equipment.
The purpose of this letter is to request that
in the future, no documents of any kind
should be sent with the order that indicate
in any way that the equipment could
possibly be used for air conditioning.
It is realized that this a broad request and
fairly difficult to accomplish and administer,
but we believe with proper caution it can be
executed. Your cooperation and close
supervision concerning these matters will
be appreciated. (Emphasis supplied)
The aforequoted communications are
strongly indicative of the fraudulent intent
of Engineering to misdeclare its importation
of air conditioning units and spare parts or
accessories thereof to evade payment of
the 30% tax. And since the commission of
fraud is altogether too glaring, We cannot
agree with the Court of Tax Appeals in
absolving Engineering from the 50% fraud
surcharge, otherwise We will be giving
premium to a plainly intolerable act of tax
evasion. As aptly stated by then Solicitor
General, now Justice, Antonio P. Barredo:
'this circumstance will not free it from the
50% surcharge because in any case
whether it is subject to advance sales tax
or compensating tax, it is required by law
to truly declare its importation in the import
entries and internal revenue declarations
before the importations maybe released
from customs custody. The said entries are
the very documents where the nature,
quantity and value of the imported goods
declared and where the customs duties,
internal revenue taxes, and other fees or
charges incident to the importation are
computed. These entries, therefore, serve
the same purpose as the returns required
by Section 183(a) of the Code.'
Anent the 25% delinquency surcharge, We
fully agree to the ruling made by the Court
of Tax Appeals and hold Engineering liable
for the same. As held by the lower court:
At first blush it would seem that the
contention of petitioner that it is not
subject to the delinquency, surcharge of
25% is sound, valid and tenable. However,
a serious study and critical analysis of the
historical provisions of Section 190 of the
Tax Code dealing on compensating tax in
relation to Section 183(a) of the same
Code, will show that the contention of
petitioner is without merit. The original text
of Section 190 of Commonwealth Act 466,
otherwise known as the National Internal
Revenue Code, as amended by
Commonwealth Act No. 503, effective on
October 1, 1939, does not provide for the
filing of a compensation tax return and
payment of the 25 % surcharge for late
payment thereof. Under the original text of
Section 190 of the Tax Code as amended by
Commonwealth Act No. 503, the contention
of the petitioner that it is not subject to the
25% surcharge appears to be legally
tenable. However, Section 190 of the Tax
Code was subsequently amended by the
Republic Acts Nos. 253, 361, 1511 and
1612 effective October 1, 1946, July 1,
1948, June 9, 1949, June 16, 1956 and
August 24, 1956 respectively, which
invariably provides among others, the
following:

... If any article withdrawn from the
customhouse or the post office without
payment of the compensating tax is
subsequently used by the importer for
other purposes, corresponding entry should
be made in the books of accounts if any are
kept or a written notice thereof sent to the
Collector of Internal Revenue and payment
of the corresponding compensating tax
made within 30 days from the date of such
entry or notice and if tax is not paid within
such period the amount of the tax shall be
increased by 25% the increment to be a
part of the tax.
Since the imported air conditioning units-
and spare parts or accessories thereof are
subject to the compensating tax of 30% as
the same were used in the construction
business of Engineering, it is incumbent
upon the latter to comply with the
aforequoted requirement of Section 190 of
the Code, by posting in its books of
accounts or notifying the Collector of
Internal Revenue that the imported articles
were used for other purposes within 30
days. ... Consequently; as the 30%
compensating tax was not paid by
petitioner within the time prescribed by
Section 190 of the Tax Code as amended, it
is therefore subject to the 25% surcharge
for delinquency in the payment of the said
tax. (pp. 224-226 CTA rec.)
III
Lastly the question of prescription of the
tax assessment has been put in issue.
Engineering contends that it was not guilty
of tax fraud in effecting the importations
and, therefore, Section 332(a) prescribing
ten years is inapplicable, claiming that the
pertinent prescriptive period is five years
from the date the questioned importations
were made. A review of the record however
reveals that Engineering did file a tax
return or declaration with the Bureau of
Customs before it paid the advance sales
tax of 7%. And the declaration filed reveals
that it did in fact misdeclare its
importations. Section 332 of the Tax Code
which provides:
Section 332. Exceptions as to period of
limitation of assessment and collection of
taxes.
(a) In the case of a false or fraudulent
return with intent to evade tax or of a
failure to file a return, the tax may be
assessed, or a proceeding in court for the
collection of such tax may be begun
without assessment at any time within ten
years after the discovery of the falsity,
fraud or omission.
is applicable, considering the
preponderance of evidence of fraud with
the intent to evade the higher rate of
percentage tax due from Engineering. The,
tax assessment was made within the period
prescribed by law and prescription had not
set in against the Government.
WHEREFORE, the decision appealed from is
affirmed with the modification that
Engineering is hereby also made liable to
pay the 50% fraud surcharge.
SO ORDERED.
ANDRES QUIROGA, plaintiff-appellant,
vs.
PARSONS HARDWARE CO., defendant-
appellee.
Alfredo Chicote, Jose Arnaiz and Pascual B.
Azanza for appellant.
Crossfield & O'Brien for appellee.
AVANCEA, J.:
On January 24, 1911, in this city of manila,
a contract in the following tenor was
entered into by and between the plaintiff,
as party of the first part, and J. Parsons (to
whose rights and obligations the present
defendant later subrogated itself), as party
of the second part:
CONTRACT EXECUTED BY AND BETWEEN
ANDRES QUIROGA AND J. PARSONS, BOTH
MERCHANTS ESTABLISHED IN MANILA, FOR
THE EXCLUSIVE SALE OF "QUIROGA" BEDS
IN THE VISAYAN ISLANDS.
ARTICLE 1. Don Andres Quiroga grants
the exclusive right to sell his beds in the
Visayan Islands to J. Parsons under the
following conditions:
(A) Mr. Quiroga shall furnish beds of his
manufacture to Mr. Parsons for the latter's
establishment in Iloilo, and shall invoice
them at the same price he has fixed for
sales, in Manila, and, in the invoices, shall
make and allowance of a discount of 25 per
cent of the invoiced prices, as commission
on the sale; and Mr. Parsons shall order the
beds by the dozen, whether of the same or
of different styles.
(B) Mr. Parsons binds himself to pay Mr.
Quiroga for the beds received, within a
period of sixty days from the date of their
shipment.
(C) The expenses for transportation and
shipment shall be borne by M. Quiroga, and
the freight, insurance, and cost of
unloading from the vessel at the point
where the beds are received, shall be paid
by Mr. Parsons.
(D) If, before an invoice falls due, Mr.
Quiroga should request its payment, said
payment when made shall be considered as
a prompt payment, and as such a
deduction of 2 per cent shall be made from
the amount of the invoice.
The same discount shall be made on the
amount of any invoice which Mr. Parsons
may deem convenient to pay in cash.
(E) Mr. Quiroga binds himself to give
notice at least fifteen days before hand of
any alteration in price which he may plan to
make in respect to his beds, and agrees
that if on the date when such alteration
takes effect he should have any order
pending to be served to Mr. Parsons, such
order shall enjoy the advantage of the
alteration if the price thereby be lowered,
but shall not be affected by said alteration
if the price thereby be increased, for, in this
latter case, Mr. Quiroga assumed the
obligation to invoice the beds at the price
at which the order was given.
(F) Mr. Parsons binds himself not to sell
any other kind except the "Quiroga" beds.
ART. 2. In compensation for the expenses of
advertisement which, for the benefit of
both contracting parties, Mr. Parsons may
find himself obliged to make, Mr. Quiroga
assumes the obligation to offer and give
the preference to Mr. Parsons in case
anyone should apply for the exclusive
agency for any island not comprised with
the Visayan group.
ART. 3. Mr. Parsons may sell, or establish
branches of his agency for the sale of
"Quiroga" beds in all the towns of the
Archipelago where there are no exclusive
agents, and shall immediately report such
action to Mr. Quiroga for his approval.
ART. 4. This contract is made for an
unlimited period, and may be terminated
by either of the contracting parties on a
previous notice of ninety days to the other
party.
Of the three causes of action alleged by the
plaintiff in his complaint, only two of them
constitute the subject matter of this appeal
and both substantially amount to the
averment that the defendant violated the
following obligations: not to sell the beds at
higher prices than those of the invoices; to
have an open establishment in Iloilo; itself
to conduct the agency; to keep the beds on
public exhibition, and to pay for the
advertisement expenses for the same; and
to order the beds by the dozen and in no
other manner. As may be seen, with the
exception of the obligation on the part of
the defendant to order the beds by the
dozen and in no other manner, none of the
obligations imputed to the defendant in the
two causes of action are expressly set forth
in the contract. But the plaintiff alleged that
the defendant was his agent for the sale of
his beds in Iloilo, and that said obligations
are implied in a contract of commercial
agency. The whole question, therefore,
reduced itself to a determination as to
whether the defendant, by reason of the
contract hereinbefore transcribed, was a
purchaser or an agent of the plaintiff for the
sale of his beds.
In order to classify a contract, due regard
must be given to its essential clauses. In
the contract in question, what was
essential, as constituting its cause and
subject matter, is that the plaintiff was to
furnish the defendant with the beds which
the latter might order, at the price
stipulated, and that the defendant was to
pay the price in the manner stipulated. The
price agreed upon was the one determined
by the plaintiff for the sale of these beds in
Manila, with a discount of from 20 to 25 per
cent, according to their class. Payment was
to be made at the end of sixty days, or
before, at the plaintiff's request, or in cash,
if the defendant so preferred, and in these
last two cases an additional discount was to
be allowed for prompt payment. These are
precisely the essential features of a
contract of purchase and sale. There was
the obligation on the part of the plaintiff to
supply the beds, and, on the part of the
defendant, to pay their price. These
features exclude the legal conception of an
agency or order to sell whereby the
mandatory or agent received the thing to
sell it, and does not pay its price, but
delivers to the principal the price he
obtains from the sale of the thing to a third
person, and if he does not succeed in
selling it, he returns it. By virtue of the
contract between the plaintiff and the
defendant, the latter, on receiving the
beds, was necessarily obliged to pay their
price within the term fixed, without any
other consideration and regardless as to
whether he had or had not sold the beds.
It would be enough to hold, as we do, that
the contract by and between the defendant
and the plaintiff is one of purchase and
sale, in order to show that it was not one
made on the basis of a commission on
sales, as the plaintiff claims it was, for
these contracts are incompatible with each
other. But, besides, examining the clauses
of this contract, none of them is found that
substantially supports the plaintiff's
contention. Not a single one of these
clauses necessarily conveys the idea of an
agency. The words commission on sales
used in clause (A) of article 1 mean nothing
else, as stated in the contract itself, than a
mere discount on the invoice price. The
word agency, also used in articles 2 and 3,
only expresses that the defendant was the
only one that could sell the plaintiff's beds
in the Visayan Islands. With regard to the
remaining clauses, the least that can be
said is that they are not incompatible with
the contract of purchase and sale.
The plaintiff calls attention to the testimony
of Ernesto Vidal, a former vice-president of
the defendant corporation and who
established and managed the latter's
business in Iloilo. It appears that this
witness, prior to the time of his testimony,
had serious trouble with the defendant, had
maintained a civil suit against it, and had
even accused one of its partners, Guillermo
Parsons, of falsification. He testified that it
was he who drafted the contract Exhibit A,
and, when questioned as to what was his
purpose in contracting with the plaintiff,
replied that it was to be an agent for his
beds and to collect a commission on sales.
However, according to the defendant's
evidence, it was Mariano Lopez Santos, a
director of the corporation, who prepared
Exhibit A. But, even supposing that Ernesto
Vidal has stated the truth, his statement as
to what was his idea in contracting with the
plaintiff is of no importance, inasmuch as
the agreements contained in Exhibit A
which he claims to have drafted, constitute,
as we have said, a contract of purchase and
sale, and not one of commercial agency.
This only means that Ernesto Vidal was
mistaken in his classification of the
contract. But it must be understood that a
contract is what the law defines it to be,
and not what it is called by the contracting
parties.
The plaintiff also endeavored to prove that
the defendant had returned beds that it
could not sell; that, without previous notice,
it forwarded to the defendant the beds that
it wanted; and that the defendant received
its commission for the beds sold by the
plaintiff directly to persons in Iloilo. But all
this, at the most only shows that, on the
part of both of them, there was mutual
tolerance in the performance of the
contract in disregard of its terms; and it
gives no right to have the contract
considered, not as the parties stipulated it,
but as they performed it. Only the acts of
the contracting parties, subsequent to, and
in connection with, the execution of the
contract, must be considered for the
purpose of interpreting the contract, when
such interpretation is necessary, but not
when, as in the instant case, its essential
agreements are clearly set forth and plainly
show that the contract belongs to a certain
kind and not to another. Furthermore, the
return made was of certain brass beds, and
was not effected in exchange for the price
paid for them, but was for other beds of
another kind; and for the letter Exhibit L-1,
requested the plaintiff's prior consent with
respect to said beds, which shows that it
was not considered that the defendant had
a right, by virtue of the contract, to make
this return. As regards the shipment of beds
without previous notice, it is insinuated in
the record that these brass beds were
precisely the ones so shipped, and that, for
this very reason, the plaintiff agreed to
their return. And with respect to the so-
called commissions, we have said that they
merely constituted a discount on the
invoice price, and the reason for applying
this benefit to the beds sold directly by the
plaintiff to persons in Iloilo was because, as
the defendant obligated itself in the
contract to incur the expenses of
advertisement of the plaintiff's beds, such
sales were to be considered as a result of
that advertisement.
In respect to the defendant's obligation to
order by the dozen, the only one expressly
imposed by the contract, the effect of its
breach would only entitle the plaintiff to
disregard the orders which the defendant
might place under other conditions; but if
the plaintiff consents to fill them, he waives
his right and cannot complain for having
acted thus at his own free will.

For the foregoing reasons, we are of opinion

that the contract by and between the
plaintiff and the defendant was one of
purchase and sale, and that the obligations
the breach of which is alleged as a cause of
action are not imposed upon the defendant,
either by agreement or by law.

The judgment appealed from is affirmed,

with costs against the appellant. So
ordered.
GONZALO PUYAT & SONS, INC., petitioner,
vs.
ARCO AMUSEMENT COMPANY (formerly
known as Teatro Arco), respondent.
Feria & Lao for petitioner.
J. W. Ferrier and Daniel Me. Gomez for
respondent.
LAUREL, J.:
This is a petition for the issuance of a writ
of certiorari to the Court of Appeals for the
purpose of reviewing its Amusement
Company (formerly known as Teatro Arco),
plaintiff-appellant, vs. Gonzalo Puyat and
Sons. Inc., defendant-appellee."
It appears that the respondent herein
brought an action against the herein
petitioner in the Court of First Instance of
Manila to secure a reimbursement of
certain amounts allegedly overpaid by it on
account of the purchase price of sound
reproducing equipment and machinery
ordered by the petitioner from the Starr
Piano Company of Richmond, Indiana,
U.S.A. The facts of the case as found by the
trial court and confirmed by the appellate
court, which are admitted by the
respondent, are as follows:
In the year 1929, the "Teatro Arco", a
corporation duly organized under the laws
of the Philippine Islands, with its office in
Manila, was engaged in the business of
operating cinematographs. In 1930, its
name was changed to Arco Amusement
Company. C. S. Salmon was the president,
while A. B. Coulette was the business
manager. About the same time, Gonzalo
Puyat & Sons, Inc., another corporation
doing business in the Philippine Islands,
with office in Manila, in addition to its other
business, was acting as exclusive agents in
the Philippines for the Starr Piano Company
of Richmond, Indiana, U.S. A. It would seem
that this last company dealt in
cinematographer equipment and
machinery, and the Arco Amusement
Company desiring to equipt its
cinematograph with sound reproducing
devices, approached Gonzalo Puyat & Sons,
Inc., thru its then president and acting
manager, Gil Puyat, and an employee
named Santos. After some negotiations, it
was agreed between the parties, that is to
say, Salmon and Coulette on one side,
representing the plaintiff, and Gil Puyat on
the other, representing the defendant, that
the latter would, on behalf of the plaintiff,
order sound reproducing equipment from
the Starr Piano Company and that the
plaintiff would pay the defendant, in
addition to the price of the equipment, a 10
per cent commission, plus all expenses,
such as, freight, insurance, banking
charges, cables, etc. At the expense of the
plaintiff, the defendant sent a cable, Exhibit
"3", to the Starr Piano Company, inquiring
about the equipment desired and making
the said company to quote its price without
discount. A reply was received by Gonzalo
Puyat & Sons, Inc., with the price, evidently
the list price of $1,700 f.o.b. factory
Richmond, Indiana. The defendant did not
show the plaintiff the cable of inquiry nor
the reply but merely informed the plaintiff
of the price of $1,700. Being agreeable to
this price, the plaintiff, by means of Exhibit
"1", which is a letter signed by C. S. Salmon
dated November 19, 1929, formally
authorized the order. The equipment
arrived about the end of the year 1929, and
upon delivery of the same to the plaintiff
and the presentation of necessary papers,
the price of $1.700, plus the 10 per cent
commission agreed upon and plus all the
expenses and charges, was duly paid by
the plaintiff to the defendant.
Sometime the following year, and after
some negotiations between the same
parties, plaintiff and defendants, another
order for sound reproducing equipment was
placed by the plaintiff with the defendant,
on the same terms as the first order. This
agreement or order was confirmed by the
plaintiff by its letter Exhibit "2", without
date, that is to say, that the plaintiff would
pay for the equipment the amount of
$1,600, which was supposed to be the price
quoted by the Starr Piano Company, plus
10 per cent commission, plus all expenses
incurred. The equipment under the second
order arrived in due time, and the
defendant was duly paid the price of
$1,600 with its 10 per cent commission,
and $160, for all expenses and charges.
This amount of $160 does not represent
actual out-of-pocket expenses paid by the
defendant, but a mere flat charge and
rough estimate made by the defendant
equivalent to 10 per cent of the price of
$1,600 of the equipment.
About three years later, in connection with
a civil case in Vigan, filed by one Fidel
Reyes against the defendant herein
Gonzalo Puyat & Sons, Inc., the officials of
the Arco Amusement Company discovered
that the price quoted to them by the
defendant with regard to their two orders
mentioned was not the net price but rather
the list price, and that the defendants had
obtained a discount from the Starr Piano
Company. Moreover, by reading reviews
and literature on prices of machinery and
cinematograph equipment, said officials of
the plaintiff were convinced that the prices
charged them by the defendant were much
too high including the charges for out-of-
pocket expense. For these reasons, they
sought to obtain a reduction from the
defendant or rather a reimbursement, and
failing in this they brought the present
action.
The trial court held that the contract
between the petitioner and the respondent
was one of outright purchase and sale, and
absolved that petitioner from the
complaint. The appellate court, however,
by a division of four, with one justice
dissenting held that the relation between
petitioner and respondent was that of
agent and principal, the petitioner acting as
agent of the respondent in the purchase of
the equipment in question, and sentenced
the petitioner to pay the respondent
alleged overpayments in the total sum of
$1,335.52 or P2,671.04, together with legal
interest thereon from the date of the filing
of the complaint until said amount is fully
paid, as well as to pay the costs of the suit
in both instances. The appellate court
further argued that even if the contract
between the petitioner and the respondent
was one of purchase and sale, the
petitioner was guilty of fraud in concealing
the true price and hence would still be
liable to reimburse the respondent for the
overpayments made by the latter.
The petitioner now claims that the following
errors have been incurred by the appellate
court:
I. El Tribunal de Apelaciones incurrio en
error de derecho al declarar que, segun
hechos, entre la recurrente y la recurrida
existia una relacion implicita de mandataria
a mandante en la transaccion de que se
trata, en vez de la de vendedora a
compradora como ha declarado el Juzgado
de Primera Instncia de Manila, presidido
entonces por el hoy Magistrado Honorable
Marcelino Montemayor.
II. El Tribunal de Apelaciones incurrio en
error de derecho al declarar que,
suponiendo que dicha relacion fuerra de
vendedora a compradora, la recurrente
obtuvo, mediante dolo, el consentimiento
de la recurrida en cuanto al precio de
$1,700 y $1,600 de las maquinarias y
equipos en cuestion, y condenar a la
recurrente ha obtenido de la Starr Piano
Company of Richmond, Indiana.
We sustain the theory of the trial court that
the contract between the petitioner and the
respondent was one of purchase and sale,
and not one of agency, for the reasons now
to be stated.
In the first place, the contract is the law
between the parties and should include all
the things they are supposed to have been
agreed upon. What does not appear on the
face of the contract should be regarded
merely as "dealer's" or "trader's talk",
which can not bind either party. (Nolbrook
v. Conner, 56 So., 576, 11 Am. Rep., 212;
Bank v. Brosscell, 120 III., 161; Bank v.
Palmer, 47 III., 92; Hosser v. Copper, 8
Allen, 334; Doles v. Merrill, 173 Mass., 411.)
The letters, Exhibits 1 and 2, by which the
respondent accepted the prices of $1,700
and $1,600, respectively, for the sound
reproducing equipment subject of its
contract with the petitioner, are clear in
their terms and admit no other
interpretation that the respondent in
question at the prices indicated which are
fixed and determinate. The respondent
admitted in its complaint filed with the
Court of First Instance of Manila that the
petitioner agreed to sell to it the first sound
reproducing equipment and machinery. The
third paragraph of the respondent's cause
of action states:
3. That on or about November 19, 1929,
the herein plaintiff (respondent) and
defendant (petitioner) entered into an
agreement, under and by virtue of which
the herein defendant was to secure from
the United States, and sell and deliver to
the herein plaintiff, certain sound
reproducing equipment and machinery, for
which the said defendant, under and by
virtue of said agreement, was to receive
the actual cost price plus ten per cent
(10%), and was also to be reimbursed for
all out of pocket expenses in connection
with the purchase and delivery of such
equipment, such as costs of telegrams,
freight, and similar expenses. (Emphasis
ours.)
We agree with the trial judge that
"whatever unforseen events might have
taken place unfavorable to the defendant
(petitioner), such as change in prices,
mistake in their quotation, loss of the goods
not covered by insurance or failure of the
Starr Piano Company to properly fill the
orders as per specifications, the plaintiff
(respondent) might still legally hold the
defendant (petitioner) to the prices fixed of
$1,700 and $1,600." This is incompatible
with the pretended relation of agency
between the petitioner and the respondent,
because in agency, the agent is exempted
from all liability in the discharge of his
commission provided he acts in accordance
with the instructions received from his
principal (section 254, Code of Commerce),
and the principal must indemnify the agent
for all damages which the latter may incur
in carrying out the agency without fault or
imprudence on his part (article 1729, Civil
Code).
While the latters, Exhibits 1 and 2, state
that the petitioner was to receive ten per
cent (10%) commission, this does not
necessarily make the petitioner an agent of
the respondent, as this provision is only an
additional price which the respondent
bound itself to pay, and which stipulation is
not incompatible with the contract of
purchase and sale. (See Quiroga vs.
Parsons Hardware Co., 38 Phil., 501.)
In the second place, to hold the petitioner
an agent of the respondent in the purchase
of equipment and machinery from the Starr
Piano Company of Richmond, Indiana, is
incompatible with the admitted fact that
the petitioner is the exclusive agent of the
same company in the Philippines. It is out
of the ordinary for one to be the agent of
both the vendor and the purchaser. The
facts and circumstances indicated do not
point to anything but plain ordinary
transaction where the respondent enters
into a contract of purchase and sale with
the petitioner, the latter as exclusive agent
of the Starr Piano Company in the United
States.
It follows that the petitioner as vendor is
not bound to reimburse the respondent as
vendee for any difference between the cost
price and the sales price which represents
the profit realized by the vendor out of the
transaction. This is the very essence of
commerce without which merchants or
middleman would not exist.
The respondents contends that it merely
agreed to pay the cost price as
distinguished from the list price, plus ten
per cent (10%) commission and all out-of-
pocket expenses incurred by the petitioner.
The distinction which the respondents
seeks to draw between the cost price and
the list price we consider to be spacious. It
is to be observed that the twenty-five per
cent (25%) discount granted by the Starr
piano Company to the petitioner is
available only to the latter as the former's
exclusive agent in the Philippines. The
respondent could not have secured this
discount from the Starr Piano Company and
neither was the petitioner willing to waive
that discount in favor of the respondent. As
a matter of fact, no reason is advanced by
the respondent why the petitioner should
waive the 25 per cent discount granted it
by the Starr Piano Company in exchange for
the 10 percent commission offered by the
respondent. Moreover, the petitioner was
not duty bound to reveal the private
arrangement it had with the Starr Piano
Company relative to such discount to its
prospective customers, and the respondent (formerly known as Teatro Arco), plaintiff-
was not even aware of such an appellant, vs. Gonzalo Puyat & Sons, Inc.,
arrangement. The respondent, therefore, defendants-appellee," without
could not have offered to pay a 10 per cent pronouncement regarding costs. So
commission to the petitioner provided it ordered.
was given the benefit of the 25 per cent
discount enjoyed by the petitioner. It is well
known that local dealers acting as agents
of foreign manufacturers, aside from
obtaining a discount from the home office,
sometimes add to the list price when they
resell to local purchasers. It was apparently
to guard against an exhorbitant additional
price that the respondent sought to limit it
to 10 per cent, and the respondent is
estopped from questioning that additional
price. If the respondent later on discovers
itself at the short end of a bad bargain, it
alone must bear the blame, and it cannot
rescind the contract, much less compel a
reimbursement of the excess price, on that
ground alone. The respondent could not
secure equipment and machinery
manufactured by the Starr Piano Company
except from the petitioner alone; it willingly
paid the price quoted; it received the
equipment and machinery as represented;
and that was the end of the matter as far
as the respondent was concerned. The fact
that the petitioner obtained more or less
profit than the respondent calculated
before entering into the contract or
reducing the price agreed upon between
the petitioner and the respondent. Not
every concealment is fraud; and short of
fraud, it were better that, within certain
limits, business acumen permit of the
loosening of the sleeves and of the
sharpening of the intellect of men and
women in the business world.
The writ of certiorari should be, as it is
hereby, granted. The decision of the
appellate court is accordingly reversed and
the petitioner is absolved from the
respondent's complaint in G. R. No. 1023,
entitled "Arco Amusement Company
PHILIPPINE LAWIN BUS, CO., MASTER
TOURS & TRAVEL CORP., MARCIANO TAN,
ISIDRO TAN, ESTEBAN TAN and HENRY TAN,
petitioners, vs. COURT OF APPEALS and
ADVANCE CAPITAL CORPORATION,
respondents.
DECISION
PARDO, J.:
The Case
The case is a petition for review via
certiorari of the decision of the Court of
Appeals,[1] reversing that of the trial
court[2] and sentencing petitioners as
follows:
WHEREFORE, the appealed decision should
be, as it is hereby REVERSED and SET
ASIDE. In lieu thereof, a new one is hereby
rendered ordering the defendants-appellees
to pay, jointly and solidarily, in favor of
plaintiff-appellant Advance Capital
Corporation, the following amounts:
1. P16,484,994.42, the principal obligation
under the two promissory note Nos. 003
and 00037 plus interest and penalties;
2. P100,000.00 for loss of goodwill and
good reputation;
3. An amount equivalent to 10% of the
collectible amount, plus P50,000, as
acceptance fee and P500 per appearance,
as and for attorneys fees: and
4. P100,000 as litigation expenses.
Costs shall be taxed against defendant-
appellees.
SO ORDERED.[3]
The Facts
The facts, as found by the Court of Appeals,
are as follows:
On 7 August 1990 plaintiff Advance Capital
Corporation, a licensed lending investor,
extended a loan to defendant Philippine
Lawin Bus Company (hereafter referred to
as LAWIN), in the amount of P8,000,000.00
payable within a period of one (1) year, as
evidenced by a Credit Agreement (Exhibits
B to B-4-B). The defendant, through
Marciano Tan, its Executive Vice President,
executed Promissory Note No. 003, for the
amount of P8,000,000.00 (Exhs. C to C-1).
To guarantee payment of the loan,
defendant Lawin executed in favor of
plaintiff the following documents: (1) A
Deed of Chattel Mortgage wherein 9 units
of buses were constituted as collaterals
(Exhibits F to F-7): (2) A joint and several
UNDERTAKING of defendant Master Tours
and Travel Corporation dated 07 August
1990, signed by Isidro Tan and Marciano
Tan (Exhs. H to H-1): and (3) A joint and
several UNDERTAKING dated 21 August
1990, executed and signed by Esteban,
Isidro, Marciano and Henry, all surnamed
Tan (Exhs. I to I-6).
Out of the P8,000,000.00 loan,
P1,800,000.00 was paid. Thus, on 02
November 1990, defendant Bus Company
was able to avail an additional loan of
P2,000,000.00 for one (1) month under
Promissory Note 00028 (Exhs. J-J-1).
Defendant LAWIN failed to pay the
aforementioned promissory note and the
same was renewed on 03 December 1990
to become due on or before 01 February
1991, under Promissory Note 00037 (Exh.
K).
On 15 May 1991 for failure to pay the two
promissory notes, defendant LAWIN was
granted a loan re-structuring for two (2)
months to mature on 31 July 1991.
Despite the restructuring, defendant LAWIN
failed to pay. Thus, plaintiff foreclosed the
mortgaged buses and as the sole bidder
thereof, the amount of P2,000,000.00 was
accepted by the deputy sheriff conducting
the sale and credited to the account of
defendant LAWIN.
Thereafter, on 27 May 1992, identical
demand letters were sent to the defendants
to pay their obligation (Exhs. X to CC).
Despite repeated demands, the defendants
failed to pay their indebtedness which
totaled of P16,484,992.42 as of 31 July
1992 (Exhs. DD-DD-1).
Thus, the suit for sum of money, wherein
the plaintiff prays that defendants solidarily
pay plaintiff as of July 31, 1992 the sum of
(a) P16,484,994.12 as principal obligation
under the two promissory notes Nos. 003
and 00037, plus interests and penalties: (b)
P300,000.00 for loss of good will and good
business reputation: (c) attorneys fees
amounting to P100,000.00 as acceptance
fee and a sum equivalent to 10% of the
collectible amount, and P500.00 as
appearance fee; (d) P200,000.00 as
litigation expenses; (e) exemplary damages
in an amount to be awarded at the courts
discretion; and (f) the costs.
On 04 September 1993, a writ of
preliminary injunction was issued with
respect to movable and immovable
properties of the defendants.
In answer to the complaint, defendants-
appellees assert by way of special and
affirmative defense, that there was already
an arrangement as to the full settlement of
the loan obligation by way of:
17.A. Sale of the nine (9) units passenger
buses the proceeds of which will be
credited against the loan amount as full
payment thereof; or in the alternative.
17.B. Plaintiff will shoulder and bear the
cost of rehabilitating the buses, with the
amount thereof to be included in the total
obligation of defendant Lawin and the bus
operated, with the earnings thereof to be
applied to the loan obligation of defendant
Lawin. (p. 4 Answer; p. 166, rec.)
Defendants further assert that the
foreclosure sale was in violation of the
aforequoted arrangement and prayed for
the nullification of the same and the
dismissal of the complaint.[4]
On 28 June 1995, the trial court rendered a
decision dismissing the complaint, as
follows:
WHEREFORE, judgment is rendered as
follows:
1. Dismissing the complaint for lack of
merit;
2. Declaring the foreclosure and auction
sale null and void;
3. Declaring the obligation or indebtedness
of defendants EXTINGUISHED;
4. Declaring the writ of attachment issued
in this case null and void and, therefore, is
hereby declared dissolved; and
5. Ordering the Sheriff of this Branch or
whoever is in possession, to return all the
personal properties attached in this case to
the owner/s thereof within one (1) week
from the finality of this decision;
6. Dismissing defendants counterclaim for
lack of sufficient merit.
No pronouncement as to costs.
SO ORDERED.[5]
In time, respondent Advance Capital
Corporation appealed from the decision to
the Court of Appeals.[6]
On 30 September 1997, the Court of
Appeals promulgated a decision reversing
that of the trial court, the dispositive
portion of which is set out in the opening
paragraph of this decision.
Hence, this appeal.[7]
The Issue
The issue raised is whether there was
dacion en pago between the parties upon
the surrender or transfer of the mortgaged
buses to the respondent.[8]
The Courts Ruling
We deny the petition, with modification.
The issue raised is factual. In an appeal via
certiorari, we may not review the factual
findings of the Court of Appeals.[9] When
supported by substantial evidence, the
findings of fact of the Court of Appeals are
conclusive and binding on the parties and
are not reviewable by this Court,[10] unless
the case falls under any of the recognized
exceptions to the rule.[11]
Petitioner failed to prove that the case falls
within the exceptions.[12] The Supreme
Court is not a trier of facts.[13] It is not our
function to review, examine and evaluate
or weigh the probative value of the
evidence presented.[14] A question of fact
would arise in such event.[15]
Nonetheless, we agree with the Court of
Appeals that there was no dacion en pago
that took place between the parties.
In dacion en pago, property is alienated to
the creditor in satisfaction of a debt in
money.[16] It is the delivery and
transmission of ownership of a thing by the
debtor to the creditor as an accepted
equivalent of the performance of the
obligation.[17] It extinguishes the
obligation to the extent of the value of the
thing delivered, either as agreed upon by
the parties or as may be proved, unless the
parties by agreement, express or implied,
or by their silence, consider the thing as
equivalent to the obligation, in which case
the obligation is totally extinguished."[18]
Article 1245 of the Civil Code provides that
the law on sales shall govern an agreement
of dacion en pago. A contract of sale is
perfected at the moment there is a meeting
of the minds of the parties thereto upon the
thing which is the object of the contract
and upon the price.[19] In Filinvest Credit
Corporation v. Philippine Acetylene Co.,
Inc., we said:
x x x. In dacion en pago, as a special mode
of payment, the debtor offers another thing
to the creditor who accepts it as equivalent
of payment of an outstanding obligation.
The undertaking really partakes in one
sense of the nature of sale, that is, the
creditor is really buying the thing or
property of the debtor, payment for which
is to be charged against the debtors debt.
As such, the essential elements of a
contract of sale, namely, consent, object
certain, and cause or consideration must be
present. In its modern concept, what
actually takes place in dacion en pago is an
objective novation of the obligation where
the thing offered as an accepted equivalent
of the performance of an obligation is
considered as the object of the contract of
sale, while the debt is considered as the IN VIEW WHEREOF, the Court DENIES the
purchase price. In any case, common petition and AFFIRMS the decision of the
consent is an essential prerequisite, be it Court of Appeals[23] with MODIFICATION as
sale or novation, to have the effect of follows:
totally extinguishing the debt or obligation.
[20] WHEREFORE, the appealed decision is
hereby REVERSED and SET ASIDE. In lieu
In this case, there was no meeting of the thereof, judgment is hereby rendered
minds between the parties on whether the ordering defendants-appellees to pay,
loan of the petitioners would be jointly and severally, plaintiff-appellant
extinguished by dacion en pago. The Advance Capital Corp. the following
petitioners anchor their claim solely on the amounts:
testimony of Marciano Tan that he proposed (1) P16,484,994.42, the principal obligation
to extinguish petitioners obligation by the under the two promissory notes plus 12%
surrender of the nine buses to the per annum from the finality of this decision
respondent acceded to as shown by until fully paid;
receipts its representative made.[21] (2) P50,000.00 as attorneys fees;
However, the receipts executed by (3) Costs of suit.
respondents representative as proof of an
agreement of the parties that delivery of All other monetary awards are deleted.
the buses to private respondent would
result in extinguishing petitioners obligation SO ORDERED.
do not in any way reflect the intention of
the parties that ownership thereof by
respondent would be complete and
absolute. The receipts show that the two
buses were delivered to respondent in
order that it would take custody for the
purpose of selling the same. The receipts
themselves in fact show that petitioners
deemed respondent as their agent in the
sale of the two vehicles whereby the
proceeds thereof would be applied in
payment of petitioners indebtedness to
respondent. Such an agreement negates
transfer of absolute ownership over the
property to respondent, as in a sale. Thus,
in Philippine National Bank v. Pineda[22] we
held that where machinery and equipment
were repossessed to secure the payment of
a loan obligation and not for the purpose of
transferring ownership thereof to the
creditor in satisfaction of said loan, no
dacion en pago was ever accomplished.

The Fallo
FILINVEST CREDIT CORPORATION,
petitioner,
vs.
THE COURT OF APPEALS, JOSE SY BANG and
ILUMINADA TAN SY BANG,*respondents.
Labaquis, Loyola, Angara and Associates for
petitioner.
Alfredo 1. Raya for private respondents.
SARMIENTO, J.:
This is a petition for review on certiorari of
the decision, 1 dated March 17, 1988, of
the Court of Appeals which affirmed with
modification the decision 2 of the Regional
Trial Court of Quezon, Branch LIX, Lucena
City. The controversy stemmed from the
following facts: The private respondents,
the spouses Jose Sy Bang and Iluminada
Tan, were engaged in the sale of gravel
produced from crushed rocks and used for
construction purposes. In order to increase
their production, they engaged the services
of Mr. Ruben Mercurio, the proprietor of
Gemini Motor Sales in Lucena City, to look
for a rock crusher which they could buy. Mr.
Mercurio referred the private respondents
to the Rizal Consolidated Corporation which
then had for sale one such machinery
described as:
ONE UNIT LIPPMAN PORTABLE CRUSHING
PLANT (RECONDITIONED) [sic]
JAW CRUSHER-10xl6 DOUBLE ROLL
CRUSHER 16x16
3 UNITS PRODUCT CONVEYOR
75 HP ELECTRIC MOTOR
8 PCS. BRAND NEW TIRES CHASSIS NO.
19696 GOOD RUNNING CONDITION 3
Oscar Sy Bang, a brother of private
respondent Jose Sy Bang, went to inspect
the machine at the Rizal Consolidated's
plant site. Apparently satisfied with the
machine, the private respondents signified
their intent to purchase the same. They
were however confronted with a problem-
the rock crusher carried a cash price tag of
P 550,000.00. Bent on acquiring the
machinery, the private respondents applied
for financial assistance from the petitioner,
Filinvest Credit Corporation. The petitioner
agreed to extend to the private
respondents financial aid on the following
conditions: that the machinery be
purchased in the petitioner's name; that it
be leased (with option to purchase upon
the termination of the lease period) to the
private respondents; and that the private
respondents execute a real estate
mortgage in favor of the petitioner as
security for the amount advanced by the
latter. Accordingly, on May 18,1981, a
contract of lease of machinery (with option
to purchase) was entered into by the
parties whereby the private respondents
agreed to lease from the petitioner the rock
crusher for two years starting from July 5, 1
981 payable as follows:
P10,000.00 - first 3 months
23,000.00 - next 6 months
24,800.00 - next 15 months
The contract likewise stipulated that at the
end of the two-year period, the machine
would be owned by the private
respondents. Thus, the private respondents
issued in favor of the petitioner a check for
P150,550.00, as initial rental (or guaranty
deposit), and twenty-four (24) postdated
checks corresponding to the 24 monthly
rentals. In addition, to guarantee their
compliance with the lease contract, the
private respondents executed a real estate
mortgage over two parcels of land in favor
of the petitioner. The rock crusher was
delivered to the private respondents on
June 9, 1981. Three months from the date
of delivery, or on September 7, 1981,
however, the private respondents, claiming
that they had only tested the machine that
month, sent a letter-complaint to the
petitioner, alleging that contrary to the 20
to 40 tons per hour capacity of the machine
as stated in the lease contract, the machine
could only process 5 tons of rocks and
stones per hour. They then demanded that
the petitioner make good the stipulation in
the lease contract. They followed that up
with similar written complaints to the
petitioner, but the latter did not, however,
act on them. Subsequently, the private
respondents stopped payment on the
remaining checks they had issued to the
petitioner. 5
As a consequence of the non-payment by
the private respondents of the rentals on
the rock crusher as they fell due despite
the repeated written demands, the
petitioner extrajudicially foreclosed the real
estate mortgage. 6 On April 18, 1983, the
private respondents received a Sheriff s
Notice of Auction Sale informing them that
their mortgaged properties were going to
be sold at a public auction on May 25, 1983
at 10:00 o'clock in the morning at the
Office of the Provincial Sheriff in Lucena
City to satisfy their indebtedness to the
petitioner. 7 To thwart the impending
auction of their properties, the private
respondents filed before the Regional Trial
Court of Quezon, on May 4, 1983, 8 a
complaint against the petitioner, for the
rescission of the contract of lease,
annullment of the real estate mortgage,
and for injunction and damages, with
prayer for the issuance of a writ of
preliminary injunction. 9 On May 23, 1983,
three days before the scheduled auction
sale, the trial court issued a temporary
restraining order commanding the
Provincial Sheriff of Quezon, and the
petitioner, to refrain and desist from
proceeding with the public auction. 10 Two
years later, on September 4, 1985, the trial
court rendered a decision in favor of the
private respondents, the dispositive portion
of which reads:
WHEREFORE, PREMISES CONSIDERED,
judgment is hereby rendered:
1. making the injunction permanent;
2. rescinding the contract of lease of the
machinery and equipment and ordering the
plaintiffs to return to the defendant
corporation the machinery subject of the
lease contract, and the defendant
corporation to return to plaintiffs the sum of
P470,950.00 it received from the latter as
guaranty deposit and rentals with legal
interest thereon until the amount is fully
restituted;
3. annulling the real estate mortgage
constituted over the properties of the
plaintiffs covered by Transfer Certificate of
Title Nos. T32480 and T-5779 of the
Registry of Deeds of Lucena City;
4. ordering the defendant corporation to
pay plaintiffs P30,000.00 as attorney's fees
and the costs of the suit.
SO ORDERED. 11
Dissatisfied with the trial court's decision,
the petitioner elevated the case to the
respondent Court of Appeals.
On March 17, 1988, the appellate court,
finding no error in the appealed judgment,
affirmed the same in toto. 12 Hence, this
petition.
Before us, the petitioner reasserts that the
private respondents' cause of action is not
against it (the petitioner), but against
either the Rizal Consolidated Corporation,
the original owner-seller of the subject rock
crusher, or Gemini Motors Sales which
served as a conduit facilitator of the
purchase of the said machine. The
petitioner argues that it is a financing
institution engaged in quasi-banking
activities, primarily the lending of money to
entrepreneurs such as the private
respondents and the general public, but
certainly not the leasing or selling of heavy
machineries like the subject rock crusher.
The petitioner denies being the seller of the
rock crusher and only admits having
financed its acquisition by the private
respondents. Further, the petitioner
absolves itself of any liability arising out of
the lease contract it signed with the private
respondents due to the waiver of warranty
made by the latter. The petitioner likewise
maintains that the private respondents
being presumed to be knowledgeable about
machineries, should be held responsible for
the detection of defects in the machine
they had acquired, and on account of that,
they are estopped from claiming any
breach of warranty. Finally, the petitioner
interposed the defense of prescription,
invoking Article 1571 of the Civil Code,
which provides:
Art. 1571. Actions arising from the
provisions of the preceding ten articles
shall be barred after six months, from the
delivery of the thing sold.
We find the petitioner's first contention
untenable. While it is accepted that the
petitioner is a financing institution, it is not,
however, immune from any recourse by the
private respondents. Notwithstanding the
testimony of private respondent Jose Sy
Bang that he did not purchase the rock
crusher from the petitioner, the fact that
the rock crusher was purchased from Rizal
Consolidated Corporation in the name and
with the funds of the petitioner proves
beyond doubt that the ownership thereof
was effectively transferred to it. It is
precisely this ownership which enabled the
petitioner to enter into the "Contract of
Lease of Machinery and Equipment" with
the private respondents.
Be that as it may, the real intention of the
parties should prevail. The nomenclature of
the agreement cannot change its true
essence, i.e., a sale on installments. It is
basic that a contract is what the law
defines it and the parties intend it to be,
not what it is called by the parties. 13 It is
apparent here thatthe intent of the parties
to the subject contract is for the so-called
rentals to be the installment payments.
Upon the completion of the payments, then
the rock crusher, subject matter of the
contract, would become the property of the
private respondents. This form of
agreement has been criticized as a lease
only in name. Thus in Vda. de Jose v.
Barrueco 14 we stated:
Sellers desirous of making conditional sales
of their goods, but who do not wish openly
to make a bargain in that form, for one
reason or another, have frequently resorted
to the device of making contracts in the
form of leases either with options to the
buyer to purchase for a small consideration
at the end of term, provided the so-called
rent has been duly paid, or with stipulations
that if the rent throughout the term is paid,
title shall thereupon vest in the lessee. It is
obvious that such transactions are leases
only in name. The so-called rent must
necessarily be regarded as payment of the
price in installments since the due payment
of the agreed amount results, by the terms
of bargain, in the transfer of title to the
lessee. 15
The importance of the criticism is
heightened in the light of Article 1484 of
the new Civil Code which provides for the
remedies of an unpaid seller of movables
on installment basis.
Article 1484. In a contract of sale of
personal property the price of which is
payable in installments, the vendor may
exercise any of the following remedies:
(1) Exact fulfillment of the obligation,
should the vendee fail to pay;
(2) Cancel the sale, should the vendee's
failure to pay cover two or more
installments;
(3) Foreclose the chattel mortgage or the
thing sold, if one has been constituted,
should the vendee's failure to pay cover
two or more installments. In this case, he
shall have no further action against the
purchaser to recover any unpaid balance of
the price. Any agreement to the contrary
shall be void.
Under the aforequoted provision, the seller
of movables in installments, in case the
buyer fails to pay two or more installments
may elect to pursue either of the following
remedies: (1) exact fulfillment by the
purchaser of the obligation; (2) cancel the
sale; or (3) foreclose the mortgage on the
purchased property if one was constituted
thereon. It is now settled that the said
remedies are alternative and not
cumulative and therefore, the exercise of
one bars the exercise of the others.
Indubitably, the device contract of lease
with option to buy is at times resorted to as
a means to circumvent Article 1484,
particularly paragraph (3) thereof.Through
the set-up, the vendor, by retaining
ownership over the property in the guise of
being the lessor, retains, likewise, the right
to repossess the same, without going
through the process of foreclosure, in the
event the vendee-lessee defaults in the
payment of the installments. There arises
therefore no need to constitute a chattel
mortgage over the movable sold. More
important, the vendor, after repossessing
the property and, in effect, canceling the
contract of sale, gets to keep all the
installments-cum-rentals already paid. It is
thus for these reasons that Article 1485 of
the new Civil Code provides that:
Article 1485. The preceding article shall be
applied to contracts purporting to be leases
of personal property with option to buy,
when the lessor has deprived the lessee of
possession or enjoyment of the thing.
(Emphasis ours.)
Unfortunately, even with the foregoing
findings, we however fail to find any reason
to hold the petitioner liable for the rock
crusher's failure to produce in accordance
with its described capacity. According to the
petitioner, it was the private respondents
who chose, inspected, and tested the
subject machinery. It was only after they
had inspected and tested the machine, and
found it to their satisfaction, that the
private respondents sought financial aid
from the petitioner. These allegations of the
petitioner had never been rebutted by the
private respondents. In fact, they were
even admitted by the private respondents
in the contract they signed. Thus:
LESSEE'S SELECTION, INSPECTION AND
VERIFICATION.-The LESSEE hereby confirms
and acknowledges that he has
independently inspected and verified the
leased property and has selected and
received the same from the Dealer of his
own choosing in good order and excellent
running and operating condition and on the
basis of such verification, etc. the LESSEE
has agreed to enter into this Contract." 16
Moreover, considering that between the
parties, it is the private respondents, by
reason of their business, who are presumed
to be more knowledgeable, if not experts,
on the machinery subject of the contract,
they should not therefore be heard now to
complain of any alleged deficiency of the
said machinery. It is their failure or neglect
to exercise the caution and prudence of an
expert, or, at least, of a prudent man, in the
selection, testing, and inspection of the
rock crusher that gave rise to their difficulty
and to this conflict. A well- established
principle in law is that between two parties,
he, who by his negligence caused the loss,
shall bear the same.
At any rate, even if the private respondents
could not be adjudged as negligent, they
still are precluded from imputing any
liability on the petitioner. One of the
stipulations in the contract they entered
into with the petitioner is an express waiver
of warranties in favor of the latter. By so
signing the agreement, the private
respondents absolved the petitioner from
any liability arising from any defect or
deficiency of the machinery they bought.
The stipulation on the machine's production
capacity being "typewritten" and that of the
waiver being "printed" does not militate
against the latter's effectivity. As such,
whether "a capacity of 20 to 40 tons per
hour" is a condition or a description is of no
moment. What stands is that the private
respondents had expressly exempted the
petitioner from any warranty whatsoever.
Their Contract of Lease Of Machinery And
Equipment states:
WARRANTY-LESSEE absolutely releases the
lessor from any liability whatsoever as to
any and all matters in relation to warranty
in accordance with the provisions
hereinafter stipulated. 17
Taking into account that due to the nature
of its business and its mode of providing
financial assistance to clients, the
petitioner deals in goods over which it has
no sufficient know-how or expertise, and
the selection of a particular item is left to
the client concerned, the latter, therefore,
shoulders the responsibility of protecting
himself against product defects. This is
where the waiver of warranties is of
paramount importance. Common sense
dictates that a buyer inspects a product
before purchasing it (under the principle of
caveat emptor or "buyer beware") and does
not return it for defects discovered later on,
particularly if the return of the product is
not covered by or stipulated in a contract or
warranty. In the case at bar, to declare the
waiver as non-effective, as the lower courts
did, would impair the obligation of
contracts. Certainly, the waiver in question
could not be considered a mere surplusage
in the contract between the parties.
Moreover, nowhere is it shown in the
records of the case that the private
respondent has argued for its nullity or
illegality. In any event, we find no
ambiguity in the language of the waiver or
the release of warranty. There is therefore
no room for any interpretation as to its
effect or applicability vis-a- vis the deficient
output of the rock crusher. Suffice it to say
that the private respondents have validly
excused the petitioner from any warranty
on the rock crusher. Hence, they should
bear the loss for any defect found therein.
WHEREFORE, the Petition is GRANTED; the
Decision of the Court of Appeals dated
March 17, 1988 is hereby REVERSED AND
SET ASIDE, and another one rendered
DISMISSING the complaint. Costs against
the private respondents.
SO ORDERED.