G.R. No.

118114 December 7, 1995

TEODORO 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

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

xxx xxx xxx

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 of
Heirship and Waiver of Rights (Exhibit "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.

Petitioner had been a registered tenant in the subject land since 1960 and religiously
paid lease rentals thereon. In his mind, he continued to be the registered tenant of
Cosme Pido and his family (after Pido's death), even if in 1982, private respondent
allegedly informed petitioner that he had become the new owner of the land.
Under the circumstances, petitioner may have, in good faith, assumed such statement of
private respondent to be true and may have in fact delivered 10 cavans of palay as annual
rental for 1982 to private respondent. But in 1983, it is clear that petitioner had
misgivings over private respondent's claim of ownership over the said land because in the
October 1983 MAR conference, his wife Laurenciana categorically denied all of private
respondent's allegations. In fact, petitioner even secured a certificate from the MAR
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 possession of his farmholdings
should not be applied against petitioners, since private respondent has not established a
cause of action for recovery of possession against petitioner.

WHEREFORE, premises considered, the Court hereby GRANTS the petition and the
decision of the Court of Appeals dated 1 May 1994 which affirmed the decision of the
RTC of Himamaylan, Negros Occidental dated 20 August 1991 is hereby SET ASIDE. The
private respondent's complaint for recovery of possession and damages against
petitioner Acap is hereby DISMISSED for failure to properly state a cause of action,
without prejudice to private respondent taking the proper legal steps to establish the
legal mode by which he claims to have acquired ownership of the land in question.

SO ORDERED.

G.R. No. L-116650 May 23, 1995

TOYOTA SHAW, INC., petitioner,

vs.
COURT OF APPEALS and LUNA L. SOSA, respondents.
DAVIDE, JR., J.:

At the heart of the present controversy is the document marked Exhibit "A" 1 for the
private respondent, which was signed by a sales representative of Toyota Shaw, Inc.
named Popong Bernardo. The document reads as follows:

AGREEMENTS BETWEEN MR. SOSA

& POPONG BERNARDO OF TOYOTA
SHAW, INC.

1. all necessary documents will be submitted to TOYOTA SHAW, INC.

(POPONG BERNARDO) a week after, upon arrival of Mr. Sosa from the
Province (Marinduque) where the unit will be used on the 19th of June.

2. the downpayment of P100,000.00 will be paid by Mr. Sosa on June 15,

1989.

3. the TOYOTA SHAW, INC. LITE ACE yellow, will be pick-up [sic] and
released by TOYOTA SHAW, INC. on the 17th of June at 10 a.m.
 (
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.

Was this document, executed and signed by the petitioner's sales representative, a
perfected contract of sale, binding upon the petitioner, breach of which would entitle
the private respondent to damages and attorney's fees? The trial court and the Court of
Appeals took the affirmative view. The petitioner disagrees. Hence, this petition for
review on certiorari.

The antecedents as disclosed in the decisions of both the trial court and the Court of
Appeals, as well as in the pleadings of petitioner Toyota Shaw, Inc. (hereinafter Toyota)
and respondent Luna L. Sosa (hereinafter Sosa) are as follows. Sometime in June of
1989, Luna L. Sosa wanted to purchase a Toyota Lite Ace. It was then a seller's market
and Sosa had difficulty finding a dealer with an available unit for sale. But upon
contacting Toyota Shaw, Inc., he was told that there was an available unit. So on 14 June
1989, Sosa and his son, Gilbert, went to the Toyota office at Shaw Boulevard, Pasig,
Metro Manila. There they met Popong Bernardo, a sales representative of Toyota.
Sosa emphasized to Bernardo that he needed the Lite Ace not later than 17 June 1989
because he, his family, and a balikbayan guest would use it on 18 June 1989 to go to
Marinduque, his home province, where he would celebrate his birthday on the 19th of
June. He added that if he does not arrive in his hometown with the new car, he would
become a "laughing stock." Bernardo assured Sosa that a unit would be ready for pick up
at 10:00 a.m. on 17 June 1989. Bernardo then signed the aforequoted "Agreements
Between Mr. Sosa & Popong Bernardo of Toyota Shaw, Inc." It was also agreed upon by
the parties that the balance of the purchase price would be paid by credit financing
through B.A. Finance, and for this Gilbert, on behalf of his father, signed the documents
of Toyota and B.A. Finance pertaining to the application for financing.

The next day, 15 June 1989, Sosa and Gilbert went to Toyota to deliver the
downpayment of P100,000.00. They met Bernardo who then accomplished a printed
Vehicle Sales Proposal (VSP) No. 928, 2 on which Gilbert signed under the subheading
CONFORME. This document shows that the customer's name is "MR. LUNA SOSA" with
home address at No. 2316 Guijo Street, United Paraaque II; that the model series of
the vehicle is a "Lite Ace 1500" described as "4 Dr minibus"; that payment is by
"installment," to be financed by "B.A.," 3 with the initial cash outlay of P100,000.00
broken down as follows:

a) downpayment P 53,148.00
b) insurance P 13,970.00
c) BLT registration fee P 1,067.00
CHMO fee P 2,715.00
service fee P 500.00
accessories P 29,000.00

and that the "BALANCE TO BE FINANCED" is "P274,137.00." The spaces provided for
"Delivery Terms" were not filled-up. It also contains the following pertinent provisions:

CONDITIONS OF SALES

1. This sale is subject to availability of unit.

2. Stated Price is subject to change without prior notice, Price prevailing

and in effect at time of selling will apply. . . .

Rodrigo Quirante, the Sales Supervisor of Bernardo, checked and approved the VSP.
On 17 June 1989, at around 9:30 a.m., Bernardo called Gilbert to inform him that the
vehicle would not be ready for pick up at 10:00 a.m. as previously agreed upon but at 2:00
p.m. that same day. At 2:00 p.m., Sosa and Gilbert met Bernardo at the latter's office.
According to Sosa, Bernardo informed them that the Lite Ace was being readied for
delivery. After waiting for about an hour, Bernardo told them that the car could not be
delivered because "nasulot ang unit ng ibang malakas."

Toyota contends, however, that the Lite Ace was not delivered to Sosa because of the
disapproval by B.A. Finance of the credit financing application of Sosa. It further alleged
that a particular unit had already been reserved and earmarked for Sosa but could not
be released due to the uncertainty of payment of the balance of the purchase price.
Toyota then gave Sosa the option to purchase the unit by paying the full purchase price
in cash but Sosa refused.

After it became clear that the Lite Ace would not be delivered to him, Sosa asked that
his downpayment be refunded. Toyota did so on the very same day by issuing a Far East
Bank check for the full amount of P100,000.00, 4 the receipt of which was shown by a
check voucher of Toyota, 5 which Sosa signed with the reservation, "without prejudice to
our future claims for damages."

Thereafter, Sosa sent two letters to Toyota. In the first letter, dated 27 June 1989
and signed by him, he demanded the refund, within five days from receipt, of the
downpayment of P100,000.00 plus interest from the time he paid it and the payment of
damages with a warning that in case of Toyota's failure to do so he would be constrained
to take legal action. 6 The second, dated 4 November 1989 and signed by M. O. Caballes,
Sosa's counsel, demanded one million pesos representing interest and damages, again,
with a warning that legal action would be taken if payment was not made within three
days. 7 Toyota's counsel answered through a letter dated 27 November 1989 8 refusing
to accede to the demands of Sosa. But even before this answer was made and received
by Sosa, the latter filed on 20 November 1989 with Branch 38 of the Regional Trial
Court (RTC) of Marinduque a complaint against Toyota for damages under Articles 19 and
21 of the Civil Code in the total amount of P1,230,000.00. 9 He alleges, inter alia, that:

9. As a result of defendant's failure and/or refusal to deliver the

vehicle to plaintiff, plaintiff suffered embarrassment, humiliation,
ridicule, mental anguish and sleepless nights because: (i) he and his
family were constrained to take the public transportation from Manila to
Lucena City on their way to Marinduque; (ii) his balikbayan-guest
canceled his scheduled first visit to Marinduque in order to avoid the
inconvenience of taking public transportation; and (iii) his relatives,
friends, neighbors and other provincemates, continuously irked him
 about "his Brand-New Toyota Lite Ace that never was." Under the
circumstances, defendant should be made liable to the plaintiff for
moral damages in the amount of One Million Pesos (P1,000,000.00). 10

In its answer to the complaint, Toyota alleged that no sale was entered into between it
and Sosa, that Bernardo had no authority to sign Exhibit "A" for and in its behalf, and
that Bernardo signed Exhibit "A" in his personal capacity. As special and affirmative
defenses, it alleged that: the VSP did not state date of delivery; Sosa had not completed
the documents required by the financing company, and as a matter of policy, the vehicle
could not and would not be released prior to full compliance with financing requirements,
submission of all documents, and execution of the sales agreement/invoice; the
P100,000.00 was returned to and received by Sosa; the venue was improperly laid; and
Sosa did not have a sufficient cause of action against it. It also interposed compulsory
counterclaims.

After trial on the issues agreed upon during the pre-trial session, 11 the trial court
rendered on 18 February 1992 a decision in favor of Sosa. 12 It ruled that Exhibit "A,"
the "AGREEMENTS BETWEEN MR. SOSA AND POPONG BERNARDO," was a valid
perfected contract of sale between Sosa and Toyota which bound Toyota to deliver the
vehicle to Sosa, and further agreed with Sosa that Toyota acted in bad faith in selling to
another the unit already reserved for him.

As to Toyota's contention that Bernardo had no authority to bind it through Exhibit "A,"
the trial court held that the extent of Bernardo's authority "was not made known to
plaintiff," for as testified to by Quirante, "they do not volunteer any information as to
the company's sales policy and guidelines because they are internal
matters." 13 Moreover, "[f]rom the beginning of the transaction up to its consummation
when the downpayment was made by the plaintiff, the defendants had made known to
the plaintiff the impression that Popong Bernardo is an authorized sales executive as it
permitted the latter to do acts within the scope of an apparent authority holding him out
to the public as possessing power to do these acts." 14 Bernardo then "was an agent of
the defendant Toyota Shaw, Inc. and hence bound the defendants." 15

The court further declared that "Luna Sosa proved his social standing in the community
and suffered besmirched reputation, wounded feelings and sleepless nights for which he
ought to be compensated." 16 Accordingly, it disposed as follows:

WHEREFORE, viewed from the above findings, judgment is hereby

rendered in favor of the plaintiff and against the defendant:
 1. ordering the defendant to pay to the plaintiff the sum
of P75,000.00 for moral damages;

2. ordering the defendant to pay the plaintiff the sum

of P10,000.00 for exemplary damages;

3. ordering the defendant to pay the sum of P30,000.00

attorney's fees plus P2,000.00 lawyer's transportation
fare per trip in attending to the hearing of this case;

4. ordering the defendant to pay the plaintiff the sum

of P2,000.00 transportation fare per trip of the
plaintiff in attending the hearing of this case; and

5. ordering the defendant to pay the cost of suit.

SO ORDERED.

Dissatisfied with the trial court's judgment, Toyota appealed to the Court of Appeals.
The case was docketed as CA-G.R. CV No. 40043. In its decision promulgated on 29 July
1994, 17 the Court of Appeals affirmed in toto the appealed decision.

Toyota now comes before this Court via this petition and raises the core issue stated at
the beginning of the ponencia and also the following related issues: (a) whether or not
the standard VSP was the true and documented understanding of the parties which
would have led to the ultimate contract of sale, (b) whether or not Sosa has any legal and
demandable right to the delivery of the vehicle despite the non-payment of the
consideration and the non-approval of his credit application by B.A. Finance, (c) whether
or not Toyota acted in good faith when it did not release the vehicle to Sosa, and (d)
whether or not Toyota may be held liable for damages.

We find merit in the petition.

Neither logic nor recourse to one's imagination can lead to the conclusion that Exhibit
"A" is a perfected contract of sale.

Article 1458 of the Civil Code defines a contract of sale as follows:

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.

A contract of sale may be absolute or conditional.

and Article 1475 specifically provides when it is deemed perfected:

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.

What is clear from Exhibit "A" is not what the trial court and the Court of Appeals
appear to see. It is not a contract of sale. No obligation on the part of Toyota to
transfer ownership of a determinate thing to Sosa and no correlative obligation on the
part of the latter to pay therefor a price certain appears therein. The provision on the
downpayment of P100,000.00 made no specific reference to a sale of a vehicle. If it was
intended for a contract of sale, it could only refer to a sale on installment basis, as the
VSP executed the following day confirmed. But nothing was mentioned about the full
purchase price and the manner the installments were to be paid.

This Court had already ruled that a definite agreement on the manner of payment of the
price is an essential element in the formation of a binding and enforceable contract of
sale. 18 This is so because the agreement as to the manner of payment goes into the
price such that a disagreement on the manner of payment is tantamount to a failure to
agree on the price. Definiteness as to the price is an essential element of a binding
agreement to sell personal property. 19

Moreover, Exhibit "A" shows the absence of a meeting of minds between Toyota and
Sosa. For one thing, Sosa did not even sign it. For another, Sosa was well aware from its
title, written in bold letters, viz.,

AGREEMENTS BETWEEN MR. SOSA & POPONG

BERNARDO OF TOYOTA SHAW, INC.

that he was not dealing with Toyota but with Popong Bernardo and that the latter did not
misrepresent that he had the authority to sell any Toyota vehicle. He knew that
Bernardo was only a sales representative of Toyota and hence a mere agent of the
latter. It was incumbent upon Sosa to act with ordinary prudence and reasonable
diligence to know the extent of Bernardo's authority as an
agent 20 in respect of contracts to sell Toyota's vehicles. A person dealing with an agent
is put upon inquiry and must discover upon his peril the authority of the agent. 21

At the most, Exhibit "A" may be considered as part of the initial phase of the generation
or negotiation stage of a contract of sale. There are three stages in the contract of
sale, namely:

(a) preparation, conception, or generation, which is the period of

negotiation and bargaining, ending at the moment of agreement of the
parties;

(b) perfection or birth of the contract, which is the moment when the
parties come to agree on the terms of the contract; and

(c) consummation or death, which is the fulfillment or performance of

the terms agreed upon in the contract. 22

The second phase of the generation or negotiation stage in this case was the execution
of the VSP. It must be emphasized that thereunder, the downpayment of the purchase
price was P53,148.00 while the balance to be paid on installment should be financed by
B.A. Finance Corporation. It is, of course, to be assumed that B.A. Finance Corp. was
acceptable to Toyota, otherwise it should not have mentioned B.A. Finance in the VSP.

Financing companies are defined in Section 3(a) of R.A. No. 5980, as amended by P.D. No.
1454 and P.D. No. 1793, as "corporations or partnerships, except those regulated by the
Central Bank of the Philippines, the Insurance Commission and the Cooperatives
Administration Office, which are primarily organized for the purpose of extending
credit facilities to consumers and to industrial, commercial, or agricultural enterprises,
either by discounting or factoring commercial papers or accounts receivables, or by
buying and selling contracts, leases, chattel mortgages, or other evidence of
indebtedness, or by leasing of motor vehicles, heavy equipment and industrial machinery,
business and office machines and equipment, appliances and other movable property." 23

Accordingly, in a sale on installment basis which is financed by a financing company, three

parties are thus involved: the buyer who executes a note or notes for the unpaid balance
of the price of the thing purchased on installment, the seller who assigns the notes or
discounts them with a financing company, and the financing company which is subrogated
in the place of the seller, as the creditor of the installment buyer. 24 Since B.A. Finance
did not approve Sosa's application, there was then no meeting of minds on the sale on
installment basis.
We are inclined to believe Toyota's version that B.A. Finance disapproved Sosa's
application for which reason it suggested to Sosa that he pay the full purchase price.
When the latter refused, Toyota cancelled the VSP and returned to him his P100,000.00.
Sosa's version that the VSP was cancelled because, according to Bernardo, the vehicle
was delivered to another who was "mas malakas" does not inspire belief and was obviously
a delayed afterthought. It is claimed that Bernardo said, "Pasensiya kayo, nasulot ang
unit ng ibang malakas," while the Sosas had already been waiting for an hour for the
delivery of the vehicle in the afternoon of 17 June 1989. However, in paragraph 7 of his
complaint, Sosa solemnly states:

On June 17, 1989 at around 9:30 o'clock in the morning, defendant's

sales representative, Mr. Popong Bernardo, called plaintiff's house and
informed the plaintiff's son that the vehicle will not be ready for pick-
up at 10:00 a.m. of June 17, 1989 but at 2:00 p.m. of that day
instead. Plaintiff and his son went to defendant's office on June 17 1989
at 2:00 p.m. in order to pick-up the vehicle but the defendant for
reasons known only to its representatives, refused and/or failed to
release the vehicle to the plaintiff. Plaintiff demanded for an
explanation, but nothing was given; . . . (Emphasis supplied). 25

The VSP was a mere proposal which was aborted in lieu of subsequent events. It follows
that the VSP created no demandable right in favor of Sosa for the delivery of the
vehicle to him, and its non-delivery did not cause any legally indemnifiable injury.

The award then of moral and exemplary damages and attorney's fees and costs of suit is
without legal basis. Besides, the only ground upon which Sosa claimed moral damages is
that since it was known to his friends, townmates, and relatives that he was buying a
Toyota Lite Ace which they expected to see on his birthday, he suffered humiliation,
shame, and sleepless nights when the van was not delivered. The van became the subject
matter of talks during his celebration that he may not have paid for it, and this created
an impression against his business standing and reputation. At the bottom of this claim is
nothing but misplaced pride and ego. He should not have announced his plan to buy a
Toyota Lite Ace knowing that he might not be able to pay the full purchase price. It was
he who brought embarrassment upon himself by bragging about a thing which he did not
own yet.

Since Sosa is not entitled to moral damages and there being no award for temperate,
liquidated, or compensatory damages, he is likewise not entitled to exemplary damages.
Under Article 2229 of the Civil Code, exemplary or corrective damages are imposed by
way of example or correction for the public good, in addition to moral, temperate,
liquidated, or compensatory damages.
Also, it is settled that for attorney's fees to be granted, the court must explicitly state
in the body of the decision, and not only in the dispositive portion thereof, the legal
reason for the award of attorney's fees. 26 No such explicit determination thereon was
made in the body of the decision of the trial court. No reason thus exists for such an
award.

WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of
Appeals in CA-G.R. CV NO. 40043 as well as that of Branch 38 of the Regional Trial
Court of Marinduque in Civil Case No. 89-14 are REVERSED and SET ASIDE and the
complaint in Civil Case No. 89-14 is DISMISSED. The counterclaim therein is likewise
DISMISSED.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 143513 November 14, 2001

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and FIRESTONE CERAMICS, INC., respondents.

x---------------------------------------------------------x

G.R. No. 143590 November 14, 2001

NATIONAL DEVELOPMENT CORPORATION, petitioner,

vs.
FIRESTONE CERAMICS, INC., respondents.

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-
hectare8 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 29,00010 square meters, whose contract with NDC was set to
expire on 31 December 198911 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 (italics 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 NDC's 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. CA41 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.

G.R. No. 166862 December 20, 2006

MANILA METAL CONTAINER CORPORATION, petitioner,

REYNALDO C. TOLENTINO, intervenor,
vs.
PHILIPPINE NATIONAL BANK, respondent,
DMCI-PROJECT DEVELOPERS, INC., intervenor.
 DECISION

CALLEJO, SR., J.:

Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals
(CA) in CA-G.R. No. 46153 which affirmed the decision2 of the Regional Trial Court
(RTC), Branch 71, Pasig City, in Civil Case No. 58551, and its Resolution 3 denying the
motion for reconsideration filed by petitioner Manila Metal Container Corporation
(MMCC).

The Antecedents

Petitioner was the owner of a 8,015 square meter parcel of land located in Mandaluyong
(now a City), Metro Manila. The property was covered by Transfer Certificate of Title
(TCT) No. 332098 of the Registry of Deeds of Rizal. To secure a P900,000.00 loan it
had obtained from respondent Philippine National Bank (PNB), petitioner executed a real
estate mortgage over the lot. Respondent PNB later granted petitioner a new credit
accommodation of P1,000,000.00; and, on November 16, 1973, petitioner executed an
Amendment4 of Real Estate Mortgage over its property. On March 31, 1981, petitioner
secured another loan of P653,000.00 from respondent PNB, payable in quarterly
installments of P32,650.00, plus interests and other charges. 5

On August 5, 1982, respondent PNB filed a petition for extrajudicial foreclosure of the
real estate mortgage and sought to have the property sold at public auction
for P911,532.21, petitioner's outstanding obligation to respondent PNB as of June 30,
1982,6 plus interests and attorney's fees.

After due notice and publication, the property was sold at public auction on September
28, 1982 where respondent PNB was declared the winning bidder for P1,000,000.00. The
Certificate of Sale7 issued in its favor was registered with the Office of the Register of
Deeds of Rizal, and was annotated at the dorsal portion of the title on February 17,
1983. Thus, the period to redeem the property was to expire on February 17, 1984.

Petitioner sent a letter dated August 25, 1983 to respondent PNB, requesting that it be
granted an extension of time to redeem/repurchase the property. 8 In its reply dated
August 30, 1983, respondent PNB informed petitioner that the request had been
referred to its Pasay City Branch for appropriate action and recommendation. 9

In a letter10 dated February 10, 1984, petitioner reiterated its request for a one year
extension from February 17, 1984 within which to redeem/repurchase the property on
installment basis. It reiterated its request to repurchase the property on
installment.11 Meanwhile, some PNB Pasay City Branch personnel informed petitioner that
as a matter of policy, the bank does not accept "partial redemption." 12

Since petitioner failed to redeem the property, the Register of Deeds cancelled TCT No.
32098 on June 1, 1984, and issued a new title in favor of respondent PNB. 13 Petitioner's
offers had not yet been acted upon by respondent PNB.

Meanwhile, the Special Assets Management Department (SAMD) had prepared a

statement of account, and as of June 25, 1984 petitioner's obligation amounted
to P1,574,560.47. This included the bid price of P1,056,924.50, interest, advances of
insurance premiums, advances on realty taxes, registration expenses, miscellaneous
expenses and publication cost. 14 When apprised of the statement of account, petitioner
remitted P725,000.00 to respondent PNB as "deposit to repurchase," and Official
Receipt No. 978191 was issued to it. 15

In the meantime, the SAMD recommended to the management of respondent PNB that
petitioner be allowed to repurchase the property for P1,574,560.00. In a letter dated
November 14, 1984, the PNB management informed petitioner that it was rejecting the
offer and the recommendation of the SAMD. It was suggested that petitioner purchase
the property for P2,660,000.00, its minimum market value. Respondent PNB gave
petitioner until December 15, 1984 to act on the proposal; otherwise, its P725,000.00
deposit would be returned and the property would be sold to other interested buyers.16

Petitioner, however, did not agree to respondent PNB's proposal. Instead, it wrote
another letter dated December 12, 1984 requesting for a reconsideration. Respondent
PNB replied in a letter dated December 28, 1984, wherein it reiterated its proposal that
petitioner purchase the property for P2,660,000.00. PNB again informed petitioner that
it would return the deposit should petitioner desire to withdraw its offer to purchase
the property.17 On February 25, 1985, petitioner, through counsel, requested that PNB
reconsider its letter dated December 28, 1984. Petitioner declared that it had already
agreed to the SAMD's offer to purchase the property for P1,574,560.47, and that was
why it had paid P725,000.00. Petitioner warned respondent PNB that it would seek
judicial recourse should PNB insist on the position. 18
On June 4, 1985, respondent PNB informed petitioner that the PNB Board of Directors
had accepted petitioner's offer to purchase the property, but for P1,931,389.53 in cash
less the P725,000.00 already deposited with it. 19 On page two of the letter was a space
above the typewritten name of petitioner's President, Pablo Gabriel, where he was to
affix his signature. However, Pablo Gabriel did not conform to the letter but merely
indicated therein that he had received it. 20 Petitioner did not respond, so PNB requested
petitioner in a letter dated June 30, 1988 to submit an amended offer to repurchase.

Petitioner rejected respondent's proposal in a letter dated July 14, 1988. It maintained
that respondent PNB had agreed to sell the property for P1,574,560.47, and that since
its P725,000.00 downpayment had been accepted, respondent PNB was proscribed from
increasing the purchase price of the property. 21 Petitioner averred that it had a net
balance payable in the amount of P643,452.34. Respondent PNB, however, rejected
petitioner's offer to pay the balance of P643,452.34 in a letter dated August 1, 1989. 22

On August 28, 1989, petitioner filed a complaint against respondent PNB for "Annulment
of Mortgage and Mortgage Foreclosure, Delivery of Title, or Specific Performance with
Damages." To support its cause of action for specific performance, it alleged the
following:

34. As early as June 25, 1984, PNB had accepted the down payment from Manila
Metal in the substantial amount of P725,000.00 for the redemption/repurchase
price of P1,574,560.47 as approved by its SMAD and considering the reliance
made by Manila Metal and the long time that has elapsed, the approval of the
higher management of the Bank to confirm the agreement of its SMAD is clearly
a potestative condition which cannot legally prejudice Manila Metal which has
acted and relied on the approval of SMAD. The Bank cannot take advantage of a
condition which is entirely dependent upon its own will after accepting and
benefiting from the substantial payment made by Manila Metal.

35. PNB approved the repurchase price of P1,574,560.47 for which it

accepted P725,000.00 from Manila Metal. PNB cannot take advantage of its own
delay and long inaction in demanding a higher amount based on unilateral
computation of interest rate without the consent of Manila Metal.

Petitioner later filed an amended complaint and supported its claim for damages with the
following arguments:

36. That in order to protect itself against the wrongful and malicious acts of the
defendant Bank, plaintiff is constrained to engage the services of counsel at an
agreed fee of P50,000.00 and to incur litigation expenses of at
 least P30,000.00, which the defendant PNB should be condemned to pay the
plaintiff Manila Metal.

37. That by reason of the wrongful and malicious actuations of defendant PNB,
plaintiff Manila Metal suffered besmirched reputation for which defendant PNB
is liable for moral damages of at least P50,000.00.

38. That for the wrongful and malicious act of defendant PNB which are highly
reprehensible, exemplary damages should be awarded in favor of the plaintiff by
way of example or correction for the public good of at least P30,000.00.23

Petitioner prayed that, after due proceedings, judgment be rendered in its favor, thus:

a) Declaring the Amended Real Estate Mortgage (Annex "A") null and void and
without any legal force and effect.

b) Declaring defendant's acts of extra-judicially foreclosing the mortgage over

plaintiff's property and setting it for auction sale null and void.

c) Ordering the defendant Register of Deeds to cancel the new title issued in
the name of PNB (TCT NO. 43792) covering the property described in paragraph
4 of the Complaint, to reinstate TCT No. 37025 in the name of Manila Metal and
to cancel the annotation of the mortgage in question at the back of the TCT
No. 37025 described in paragraph 4 of this Complaint.

d) Ordering the defendant PNB to return and/or deliver physical possession of

the TCT No. 37025described in paragraph 4 of this Complaint to the plaintiff
Manila Metal.

e) Ordering the defendant PNB to pay the plaintiff Manila Metal's actual
damages, moral and exemplary damages in the aggregate amount of not less
than P80,000.00 as may be warranted by the evidence and fixed by this
Honorable Court in the exercise of its sound discretion, and attorney's fees
of P50,000.00 and litigation expenses of at least P30,000.00 as may be proved
during the trial, and costs of suit.

Plaintiff likewise prays for such further reliefs which may be deemed just and
equitable in the premises.24

In its Answer to the complaint, respondent PNB averred, as a special and affirmative
defense, that it had acquired ownership over the property after the period to redeem
had elapsed. It claimed that no contract of sale was perfected between it and petitioner
after the period to redeem the property had expired.

During pre-trial, the parties agreed to submit the case for decision, based on their
stipulation of facts.25 The parties agreed to limit the issues to the following:

1. Whether or not the June 4, 1985 letter of the defendant approving/accepting

plaintiff's offer to purchase the property is still valid and legally enforceable.

2. Whether or not the plaintiff has waived its right to purchase the property
when it failed to conform with the conditions set forth by the defendant in its
letter dated June 4, 1985.

3. Whether or not there is a perfected contract of sale between the parties. 26

While the case was pending, respondent PNB demanded, on September 20, 1989, that
petitioner vacate the property within 15 days from notice, 27 but petitioners refused to
do so.

On March 18, 1993, petitioner offered to repurchase the property

for P3,500,000.00.28 The offer was however rejected by respondent PNB, in a letter
dated April 13, 1993. According to it, the prevailing market value of the property was
approximately P30,000,000.00, and as a matter of policy, it could not sell the property
for less than its market value. 29 On June 21, 1993, petitioner offered to purchase the
property for P4,250,000.00 in cash.30The offer was again rejected by respondent PNB
on September 13, 1993.31

On May 31, 1994, the trial court rendered judgment dismissing the amended complaint
and respondent PNB's counterclaim. It ordered respondent PNB to refund
the P725,000.00 deposit petitioner had made. 32 The trial court ruled that there was no
perfected contract of sale between the parties; hence, petitioner had no cause of action
for specific performance against respondent. The trial court declared that respondent
had rejected petitioner's offer to repurchase the property. Petitioner, in turn, rejected
the terms and conditions contained in the June 4, 1985 letter of the SAMD. While
petitioner had offered to repurchase the property per its letter of July 14, 1988, the
amount of P643,422.34 was way below the P1,206,389.53 which respondent PNB had
demanded. It further declared that the P725,000.00 remitted by petitioner to
respondent PNB on June 4, 1985 was a "deposit," and not a downpayment or earnest
money.

On appeal to the CA, petitioner made the following allegations:

 I

THE LOWER COURT ERRED IN RULING THAT DEFENDANT-APPELLEE'S

LETTER DATED 4 JUNE 1985 APPROVING/ACCEPTING PLAINTIFF-
APPELLANT'S OFFER TO PURCHASE THE SUBJECT PROPERTY IS NOT
VALID AND ENFORCEABLE.

II

THE LOWER COURT ERRED IN RULING THAT THERE WAS NO PERFECTED

CONTRACT OF SALE BETWEEN PLAINTIFF-APPELLANT AND DEFENDANT-
APPELLEE.

III

THE LOWER COURT ERRED IN RULING THAT PLAINTIFF-APPELLLANT

WAIVED ITS RIGHT TO PURCHASE THE SUBJECT PROPERTY WHEN IT
FAILED TO CONFORM WITH CONDITIONS SET FORTH BY DEFENDANT-
APPELLEE IN ITS LETTER DATED 4 JUNE 1985.

IV

THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT IT WAS

THE DEFENDANT-APPELLEE WHICH RENDERED IT DIFFICULT IF NOT
IMPOSSIBLE FOR PLAINTIFF-APPELLANT TO COMPLETE THE BALANCE OF
THEIR PURCHASE PRICE.

THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT THERE

WAS NO VALID RESCISSION OR CANCELLATION OF SUBJECT CONTRACT
OF REPURCHASE.

VI

THE LOWER COURT ERRED IN DECLARING THAT PLAINTIFF FAILED AND

REFUSED TO SUBMIT THE AMENDED REPURCHASE OFFER.

VII
 THE LOWER COURT ERRED IN DISMISSING THE AMENDED COMPLAINT
OF PLAINTIFF-APPELLANT.

VIII

THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF-APPELLANT

ACTUAL, MORAL AND EXEMPLARY DAMAGES, ATTOTRNEY'S FEES AND
LITIGATION EXPENSES.33

Meanwhile, on June 17, 1993, petitioner's Board of Directors approved Resolution No. 3-
004, where it waived, assigned and transferred its rights over the property covered by
TCT No. 33099 and TCT No. 37025 in favor of Bayani Gabriel, one of its
Directors.34 Thereafter, Bayani Gabriel executed a Deed of Assignment over 51% of the
ownership and management of the property in favor of Reynaldo Tolentino, who later
moved for leave to intervene as plaintiff-appellant. On July 14, 1993, the CA issued a
resolution granting the motion,35 and likewise granted the motion of Reynaldo Tolentino
substituting petitioner MMCC, as plaintiff-appellant, and his motion to withdraw as
intervenor.36

The CA rendered judgment on May 11, 2000 affirming the decision of the RTC. 37 It
declared that petitioner obviously never agreed to the selling price proposed by
respondent PNB (P1,931,389.53) since petitioner had kept on insisting that the selling
price should be lowered to P1,574,560.47. Clearly therefore, there was no meeting of
the minds between the parties as to the price or consideration of the sale.

The CA ratiocinated that petitioner's original offer to purchase the subject property
had not been accepted by respondent PNB. In fact, it made a counter-offer through its
June 4, 1985 letter specifically on the selling price; petitioner did not agree to the
counter-offer; and the negotiations did not prosper. Moreover, petitioner did not pay
the balance of the purchase price within the sixty-day period set in the June 4, 1985
letter of respondent PNB. Consequently, there was no perfected contract of sale, and as
such, there was no contract to rescind.

According to the appellate court, the claim for damages and the counterclaim were
correctly dismissed by the court a quo for no evidence was presented to support it.
Respondent PNB's letter dated June 30, 1988 cannot revive the failed negotiations
between the parties. Respondent PNB merely asked petitioner to submit an amended
offer to repurchase. While petitioner reiterated its request for a lower selling price and
that the balance of the repurchase be reduced, however, respondent rejected the
proposal in a letter dated August 1, 1989.
Petitioner filed a motion for reconsideration, which the CA likewise denied.

Thus, petitioner filed the instant petition for review on certiorari, alleging that:

I. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT

RULED THAT THERE IS NO PERFECTED CONTRACT OF SALE BETWEEN THE
PETITIONER AND RESPONDENT.

II. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT

RULED THAT THE AMOUNT OF PHP725,000.00 PAID BY THE PETITIONER
IS NOT AN EARNEST MONEY.

III. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT

RULED THAT THE FAILURE OF THE PETITIONER-APPELLANT TO SIGNIFY
ITS CONFORMITY TO THE TERMS CONTAINED IN PNB'S JUNE 4, 1985
LETTER MEANS THAT THERE WAS NO VALID AND LEGALLY ENFORCEABLE
CONTRACT OF SALE BETWEEN THE PARTIES.

IV. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW THAT NON-

PAYMENT OF THE PETITIONER-APPELLANT OF THE BALANCE OF THE
OFFERED PRICE IN THE LETTER OF PNB DATED JUNE 4, 1985, WITHIN
SIXTY (60) DAYS FROM NOTICE OF APPROVAL CONSTITUTES NO VALID
AND LEGALLY ENFORCEABLE CONTRACT OF SALE BETWEEN THE PARTIES.

V. THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT HELD THAT THE

LETTERS OF PETITIONER-APPELLANT DATED MARCH 18, 1993 AND JUNE
21, 1993, OFFERING TO BUY THE SUBJECT PROPERTY AT DIFFERENT
AMOUNT WERE PROOF THAT THERE IS NO PERFECTED CONTRACT OF
SALE.38

The threshold issue is whether or not petitioner and respondent PNB had entered into a
perfected contract for petitioner to repurchase the property from respondent.

Petitioner maintains that it had accepted respondent's offer made through the SAMD,
to sell the property for P1,574,560.00. When the acceptance was made in its letter
dated June 25, 1984; it then deposited P725,000.00 with the SAMD as partial payment,
evidenced by Receipt No. 978194 which respondent had issued. Petitioner avers that the
SAMD's acceptance of the deposit amounted to an acceptance of its offer to
repurchase. Moreover, as gleaned from the letter of SAMD dated June 4, 1985, the PNB
Board of Directors had approved petitioner's offer to purchase the property. It claims
that this was the suspensive condition, the fulfillment of which gave rise to the contract.
Respondent could no longer unilaterally withdraw its offer to sell the property
for P1,574,560.47, since the acceptance of the offer resulted in a perfected contract
of sale; it was obliged to remit to respondent the balance of the original purchase price
of P1,574,560.47, while respondent was obliged to transfer ownership and deliver the
property to petitioner, conformably with Article 1159 of the New Civil Code.

Petitioner posits that respondent was proscribed from increasing the interest rate after
it had accepted respondent's offer to sell the property for P1,574,560.00. Consequently,
respondent could no longer validly make a counter-offer of P1,931,789.88 for the
purchase of the property. It likewise maintains that, although the P725,000.00 was
considered as "deposit for the repurchase of the property" in the receipt issued by the
SAMD, the amount constitutes earnest money as contemplated in Article 1482 of the
New Civil Code. Petitioner cites the rulings of this Court in Villonco v.
Bormaheco39 and Topacio v. Court of Appeals.40

Petitioner avers that its failure to append its conformity to the June 4, 1984 letter of
respondent and its failure to pay the balance of the price as fixed by respondent within
the 60-day period from notice was to protest respondent's breach of its obligation to
petitioner. It did not amount to a rejection of respondent's offer to sell the property
since respondent was merely seeking to enforce its right to pay the balance
of P1,570,564.47. In any event, respondent had the option either to accept the balance
of the offered price or to cause the rescission of the contract.

Petitioner's letters dated March 18, 1993 and June 21, 1993 to respondent during the
pendency of the case in the RTC were merely to compromise the pending lawsuit, they
did not constitute separate offers to repurchase the property. Such offer to
compromise should not be taken against it, in accordance with Section 27, Rule 130 of
the Revised Rules of Court.

For its part, respondent contends that the parties never graduated from the
"negotiation stage" as they could not agree on the amount of the repurchase price of the
property. All that transpired was an exchange of proposals and counter-proposals,
nothing more. It insists that a definite agreement on the amount and manner of payment
of the price are essential elements in the formation of a binding and enforceable
contract of sale. There was no such agreement in this case. Primarily, the concept of
"suspensive condition" signifies a future and uncertain event upon the fulfillment of
which the obligation becomes effective. It clearly presupposes the existence of a valid
and binding agreement, the effectivity of which is subordinated to its fulfillment. Since
there is no perfected contract in the first place, there is no basis for the application of
the principles governing "suspensive conditions."
According to respondent, the Statement of Account prepared by SAMD as of June 25,
1984 cannot be classified as a counter-offer; it is simply a recital of its total monetary
claims against petitioner. Moreover, the amount stated therein could not likewise be
considered as the counter-offer since as admitted by petitioner, it was only
recommendation which was subject to approval of the PNB Board of Directors.

Neither can the receipt by the SAMD of P725,000.00 be regarded as evidence of a

perfected sale contract. As gleaned from the parties' Stipulation of Facts during the
proceedings in the court a quo, the amount is merely an acknowledgment of the receipt
of P725,000.00 as deposit to repurchase the property. The deposit of P725,000.00 was
accepted by respondent on the condition that the purchase price would still be approved
by its Board of Directors. Respondent maintains that its acceptance of the amount was
qualified by that condition, thus not absolute. Pending such approval, it cannot be legally
claimed that respondent is already bound by any contract of sale with petitioner.

According to respondent, petitioner knew that the SAMD has no capacity to bind
respondent and that its authority is limited to administering, managing and preserving
the properties and other special assets of PNB. The SAMD does not have the power to
sell, encumber, dispose of, or otherwise alienate the assets, since the power to do so
must emanate from its Board of Directors. The SAMD was not authorized by
respondent's Board to enter into contracts of sale with third persons involving corporate
assets. There is absolutely nothing on record that respondent authorized the SAMD, or
made it appear to petitioner that it represented itself as having such authority.

Respondent reiterates that SAMD had informed petitioner that its offer to repurchase
had been approved by the Board subject to the condition, among others, "that the selling
price shall be the total bank's claim as of documentation date x x x payable in cash
(P725,000.00 already deposited)

within 60 days from notice of approval." A new Statement of Account was attached
therein indicating the total bank's claim to be P1,931,389.53 less deposit
of P725,000.00, or P1,206,389.00. Furthermore, while respondent's Board of Directors
accepted petitioner's offer to repurchase the property, the acceptance was qualified, in
that it required a higher sale price and subject to specified terms and conditions
enumerated therein. This qualified acceptance was in effect a counter-offer,
necessitating petitioner's acceptance in return.

The Ruling of the Court

The ruling of the appellate court that there was no perfected contract of sale between
the parties on June 4, 1985 is correct.
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. 41 Under Article 1318
of the New Civil Code, there is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

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

(3) Cause of the obligation which is established.

Contracts 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.42 Once perfected, they bind other contracting parties and the obligations
arising therefrom have the form of law between the parties and should be complied with
in good faith. The parties are bound not only to the fulfillment of what has been
expressly stipulated but also to the consequences which, according to their nature, may
be in keeping with good faith, usage and law. 43

By the contract of sale, one of the contracting parties obligates himself to transfer the
ownership of and deliver a determinate thing, and the other to pay therefor a price
certain in money or its equivalent.44 The absence of any of the essential elements will
negate the existence of a perfected contract of sale. As the Court ruled in Boston Bank
of the Philippines v. Manalo:45

A definite agreement as to the price is an essential element of a binding

agreement to sell personal or real property because it seriously affects the
rights and obligations of the parties. Price is an essential element in the
formation of a binding and enforceable contract of sale. The fixing of the price
can never be left to the decision of one of the contracting parties. But a price
fixed by one of the contracting parties, if accepted by the other, gives rise to a
perfected sale.46

A contract of sale is consensual in nature and is perfected upon mere meeting of the
minds. When there is merely an offer by one party without acceptance of the other,
there is no contract.47 When the contract of sale is not perfected, it cannot, as an
independent source of obligation, serve as a binding juridical relation between the
parties.48

In San Miguel Properties Philippines, Inc. v. Huang,49 the Court ruled that the stages of a
contract of sale are as follows: (1) negotiation, covering the period from the time the
prospective contracting parties indicate interest in the contract to the time the
contract is perfected; (2) perfection, which takes place upon the concurrence of the
essential elements of the sale which are the meeting of the minds of the parties as to
the object of the contract and upon the price; and (3) consummation, which begins when
the parties perform their respective undertakings under the contract of sale,
culminating in the extinguishment thereof.

A negotiation is formally initiated by an offer, which, however, must be certain. 50 At any

time prior to the perfection of the contract, either negotiating party may stop the
negotiation. At this stage, the offer may be withdrawn; the withdrawal is effective
immediately after its manifestation. To convert the offer into a contract, the
acceptance must be absolute and must not qualify the terms of the offer; it must be
plain, unequivocal, unconditional and without variance of any sort from the proposal.
In Adelfa Properties, Inc. v. Court of Appeals,51 the Court ruled that:

x x x The rule is that except where a formal acceptance is so required, although

the acceptance must be affirmatively and clearly made and must be evidenced by
some acts or conduct communicated to the offeror, it may be shown by acts,
conduct, or words of the accepting party that clearly manifest a present
intention or determination to accept the offer to buy or sell. Thus, acceptance
may be shown by the acts, conduct, or words of a party recognizing the
existence of the contract of sale. 52

A qualified acceptance or one that involves a new proposal constitutes a counter-offer

and a rejection of the original offer. A counter-offer is considered in law, a rejection of
the original offer and an attempt to end the negotiation between the parties on a
different basis.53 Consequently, when something is desired which is not exactly what is
proposed in the offer, such acceptance is not sufficient to guarantee consent because
any modification or variation from the terms of the offer annuls the offer. 54 The
acceptance must be identical in all respects with that of the offer so as to produce
consent or meeting of the minds.

In this case, petitioner had until February 17, 1984 within which to redeem the property.
However, since it lacked the resources, it requested for more time to
redeem/repurchase the property under such terms and conditions agreed upon by the
parties.55 The request, which was made through a letter dated August 25, 1983, was
referred to the respondent's main branch for appropriate action. 56 Before respondent
could act on the request, petitioner again wrote respondent as follows:

1. Upon approval of our request, we will pay your goodselves ONE HUNDRED &
FIFTY THOUSAND PESOS (P150,000.00);
 2. Within six months from date of approval of our request, we will pay another
FOUR HUNDRED FIFTY THOUSAND PESOS (P450,000.00); and

3. The remaining balance together with the interest and other expenses that will
be incurred will be paid within the last six months of the one year grave period
requested for.57

When the petitioner was told that respondent did not allow "partial redemption,"58 it
sent a letter to respondent's President reiterating its offer to purchase the
property.59 There was no response to petitioner's letters dated February 10 and 15,
1984.

The statement of account prepared by the SAMD stating that the net claim of
respondent as of June 25, 1984 was P1,574,560.47 cannot be considered an unqualified
acceptance to petitioner's offer to purchase the property. The statement is but a
computation of the amount which petitioner was obliged to pay in case respondent would
later agree to sell the property, including interests, advances on insurance premium,
advances on realty taxes, publication cost, registration expenses and miscellaneous
expenses.

There is no evidence that the SAMD was authorized by respondent's Board of Directors
to accept petitioner's offer and sell the property for P1,574,560.47. Any acceptance by
the SAMD of petitioner's offer would not bind respondent. As this Court ruled in AF
Realty Development, Inc. vs. Diesehuan Freight Services, Inc.:60

Section 23 of the Corporation Code expressly provides that the corporate

powers of all corporations shall be exercised by the board of directors. Just as
a natural person may authorize another to do certain acts in his behalf, so may
the board of directors of a corporation validly delegate some of its functions to
individual officers or agents appointed by it. Thus, contracts or acts of a
corporation must be made either by the board of directors or by a corporate
agent duly authorized by the board. Absent such valid delegation/authorization,
the rule is that the declarations of an individual director relating to the affairs
of the corporation, but not in the course of, or connected with the performance
of authorized duties of such director, are held not binding on the corporation.

Thus, a corporation can only execute its powers and transact its business through its
Board of Directors and through its officers and agents when authorized by a board
resolution or its by-laws.61
It appears that the SAMD had prepared a recommendation for respondent to accept
petitioner's offer to repurchase the property even beyond the one-year period; it
recommended that petitioner be allowed to redeem the property and pay P1,574,560.00
as the purchase price. Respondent later approved the recommendation that the property
be sold to petitioner. But instead of the P1,574,560.47 recommended by the SAMD and
to which petitioner had previously conformed, respondent set the purchase price
at P2,660,000.00. In fine, respondent's acceptance of petitioner's offer was qualified,
hence can be at most considered as a counter-offer. If petitioner had accepted this
counter-offer, a perfected contract of sale would have arisen; as it turns out, however,
petitioner merely sought to have the counter-offer reconsidered. This request for
reconsideration would later be rejected by respondent.

We do not agree with petitioner's contention that the P725,000.00 it had remitted to
respondent was "earnest money" which could be considered as proof of the perfection of
a contract of sale under Article 1482 of the New Civil Code. The provision reads:

ART. 1482. Whenever earnest money is given in a contract of sale, it shall be

considered as part of the price and as proof of the perfection of the contract.

This contention is likewise negated by the stipulation of facts which the parties entered
into in the trial court:

8. On June 8, 1984, the Special Assets Management Department (SAMD) of PNB

prepared an updated Statement of Account showing MMCC's total liability to
PNB as of June 25, 1984 to be P1,574,560.47 and recommended this amount as
the repurchase price of the subject property.

9. On June 25, 1984, MMCC paid P725,000.00 to PNB as deposit to repurchase

the property. The deposit of P725,000 was accepted by PNB on the condition
that the purchase price is still subject to the approval of the PNB Board.62

Thus, the P725,000.00 was merely a deposit to be applied as part of the purchase price
of the property, in the event that respondent would approve the recommendation of
SAMD for respondent to accept petitioner's offer to purchase the property
for P1,574,560.47. Unless and until the respondent accepted the offer on these terms,
no perfected contract of sale would arise. Absent proof of the concurrence of all the
essential elements of a contract of sale, the giving of earnest money cannot establish
the existence of a perfected contract of sale. 63

It appears that, per its letter to petitioner dated June 4, 1985, the respondent had
decided to accept the offer to purchase the property for P1,931,389.53. However, this
amounted to an amendment of respondent's qualified acceptance, or an amended
counter-offer, because while the respondent lowered the purchase price, it still declared
that its acceptance was subject to the following terms and conditions:

1. That the selling price shall be the total Bank's claim as of documentation date
(pls. see attached statement of account as of 5-31-85), payable in cash
(P725,000.00 already deposited) within sixty (60) days from notice of approval;

2. The Bank sells only whatever rights, interests and participation it may have in
the property and you are charged with full knowledge of the nature and extent
of said rights, interests and participation and waive your right to warranty
against eviction.

3. All taxes and other government imposts due or to become due on the
property, as well as expenses including costs of documents and science stamps,
transfer fees, etc., to be incurred in connection with the execution and
registration of all covering documents shall be borne by you;

4. That you shall undertake at your own expense and account the ejectment of
the occupants of the property subject of the sale, if there are any;

5. That upon your failure to pay the balance of the purchase price within sixty
(60) days from receipt of advice accepting your offer, your deposit shall be
forfeited and the Bank is thenceforth authorized to sell the property to other
interested parties.

6. That the sale shall be subject to such other terms and conditions that the
Legal Department may impose to protect the interest of the Bank. 64

It appears that although respondent requested petitioner to conform to its amended

counter-offer, petitioner refused and instead requested respondent to reconsider its
amended counter-offer. Petitioner's request was ultimately rejected and respondent
offered to refund its P725,000.00 deposit.

In sum, then, there was no perfected contract of sale between petitioner and
respondent over the subject property.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED.

The assailed decision is AFFIRMED. Costs against petitioner Manila Metal Container
Corporation.
SO ORDERED.

G.R. No. 108346 July 11, 2001

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners,

vs.
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE
RAYMUNDO, respondents.

PANGANIBAN, J.:

A substantial breach of a reciprocal obligation, like failure to pay the price in the manner
prescribed by the contract, entitled 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 Certiorari1 questioning the Decision2 of the Court of
Appeals (CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its
Resolution3 dated December 29, 1992 denying petitioner's motion for reconsideration.4

The dispositive portion of the assailed Decision reads:

"WHEREFORES the Order dated May 15, 1991 is hereby ANNULLED and SET
ASIDE and the Decision dated November 14, 1990 dismissing the [C]omplaint is
RESINSTATED. 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
petitioners] is David's 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:

'x x x xxx xxx

'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 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 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).'

'x x x xxx xxx

'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. Velardo, 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 it (the) same
had never been executed or entered into.

'3. That I am executing the 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 defendant's 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 BPI's approval of an application for assumption of mortgage by
plaintiffs. Pending BPI's 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, 17and 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 re- lease 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 latter's 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 petitioner's 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 Appeal

The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-
Santiago's 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 P 1.8
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 Pl.8 million, and the balance of Pl.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 Pl.8 million. This would mean that Velarde had to make payments
to BPI under the [D]eed of [R]eal [E]state [M]ortgage 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 Velarde's 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 Velarde's non-payment of the balance of the purchase
price. As borne out by the evidence, Velarde had to pay in full in case of BPI's
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 notarial notice
dated January 8, 1987 of cancellation/rescission of the contract due to the
latter's failure to comply with their obligation. The rescission was justified in
view of Velarde's 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 appellee's 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

11
Hence, this appeal.

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 Court's Ruling

The Petition is partially meritorious.

First Issue:

Breach of Contract
Petitioner 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 bank's
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 things, 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 cases15 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 obligor's 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
respondent's 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 cases19 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 buyer's 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 1,000
which was actually paid.

In Tan, the alleged breach was private respondent's 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.

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 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.1wphi1.nt

G.R. No. 137290 July 31, 2000

SAN MIGUEL PROPERTIES PHILIPPINES, INC., petitioner,

vs.
SPOUSES ALFREDO HUANG and GRACE HUANG, respondents.

DECISION

MENDOZA, J.:

This is a petition for review of the decision,1 dated April 8, 1997, of the Court of
Appeals which reversed the decision of the Regional Trial Court, Branch 153, Pasig City
dismissing the complaint brought by respondents against petitioner for enforcement of a
contract of sale.
The facts are not in dispute.

Petitioner San Miguel Properties Philippines, Inc. is a domestic corporation engaged in

the purchase and sale of real properties. Part of its inventory are two parcels of land
totalling 1, 738 square meters at the corner of Meralco Avenue and General Capinpin
Street, Barrio Oranbo, Pasig City, which are covered by TCT Nos. PT-82395 and PT-
82396 of the Register of Deeds of Pasig City.

On February 21, 1994, the properties were offered for sale for P52,140,000.00 in cash.
The offer was made to Atty. Helena M. Dauz who was acting for respondent spouses as
undisclosed principals. In a letter2 dated March 24, 1994, Atty. Dauz signified her
clients interest in purchasing the properties for the amount for which they were
offered by petitioner, under the following terms: the sum of P500,000.00 would be given
as earnest money and the balance would be paid in eight equal monthly installments from
May to December, 1994. However, petitioner refused the counter-offer.

On March 29, 1994, Atty. Dauz wrote another letter3 proposing the following terms for
the purchase of the properties, viz:

This is to express our interest to buy your-above-mentioned property with an area of 1,

738 sq. meters. For this purpose, we are enclosing herewith the sum of P1,000,000.00
representing earnest-deposit money, subject to the following conditions.

1. We will be given the exclusive option to purchase the property within the 30
days from date of your acceptance of this offer.

2. During said period, we will negotiate on the terms and conditions of the
purchase; SMPPI will secure the necessary Management and Board approvals;
and we initiate the documentation if there is mutual agreement between us.

3. In the event that we do not come to an agreement on this transaction, the

said amount of P1,000,000.00 shall be refundable to us in full upon demand. . . .

Isidro A. Sobrecarey, petitioners vice-president and operations manager for corporate

real estate, indicated his conformity to the offer by affixing his signature to the letter
and accepted the "earnest-deposit" of P1 million. Upon request of respondent spouses,
Sobrecarey ordered the removal of the "FOR SALE" sign from the properties.

Atty. Dauz and Sobrecarey then commenced negotiations. During their meeting on April
8, 1994, Sobrecarey informed Atty. Dauz that petitioner was willing to sell the subject
properties on a 90-day term. Atty. Dauz countered with an offer of six months within
which to pay.

On April 14, 1994, the parties again met during which Sobrecarey informed Atty. Dauz
that petitioner had not yet acted on her counter-offer. This prompted Atty. Dauz to
propose a four-month period of amortization.

On April 25, 1994, Atty. Dauz asked for an extension of 45 days from April 29, 1994 to
June 13, 1994 within which to exercise her option to purchase the property, adding that
within that period, "[we] hope to finalize [our] agreement on the matter."4 Her request
was granted.

On July 7, 1994, petitioner, through its president and chief executive officer, Federico
Gonzales, wrote Atty. Dauz informing her that because the parties failed to agree on the
terms and conditions of the sale despite the extension granted by petitioner, the latter
was returning the amount of P1 million given as "earnest-deposit."5

On July 20, 1994, respondent spouses, through counsel, wrote petitioner demanding the
execution within five days of a deed of sale covering the properties. Respondents
attempted to return the "earnest-deposit" but petitioner refused on the ground that
respondents option to purchase had already expired.

On August 16, 1994, respondent spouses filed a complaint for specific performance
against petitioner before the Regional Trial Court, Branch 133, Pasig City where it was
docketed as Civil Case No. 64660.

Within the period for filing a responsive pleading, petitioner filed a motion to dismiss
the complaint alleging that (1) the alleged "exclusive option" of respondent spouses
lacked a consideration separate and distinct from the purchase price and was thus
unenforceable and (2) the complaint did not allege a cause of action because there was
no "meeting of the minds" between the parties and, therefore, no perfected contract of
sale. The motion was opposed by respondents.

On December 12, 1994, the trial court granted petitioners motion and dismissed the
action. Respondents filed a motion for reconsideration, but it was denied by the trial
court. They then appealed to the Court of Appeals which, on April 8, 1997, rendered a
decision6 reversing the judgment of the trial court. The appellate court held that all the
requisites of a perfected contract of sale had been complied with as the offer made on
March 29, 1994, in connection with which the earnest money in the amount of P1 million
was tendered by respondents, had already been accepted by petitioner. The court cited
Art. 1482 of the Civil Code which provides that "[w]henever earnest money is given in a
contract of sale, it shall be considered as part of the price and as proof of the
perfection of the contract." The fact the parties had not agreed on the mode of
payment did not affect the contract as such is not an essential element for its validity.
In addition, the court found that Sobrecarey had authority to act in behalf of petitioner
for the sale of the properties. 7

Petitioner moved for reconsideration of the trial courts decision, but its motion was
denied. Hence, this petition.

Petitioner contends that the Court of Appeals erred in finding that there was a
perfected contract of sale between the parties because the March 29, 1994 letter of
respondents, which petitioner accepted, merely resulted in an option contract, albeit it
was unenforceable for lack of a distinct consideration. Petitioner argues that the
absence of agreement as to the mode of payment was fatal to the perfection of the
contract of sale. Petitioner also disputes the appellate courts ruling that Isidro A.
Sobrecarey had authority to sell the subject real properties. 8

Respondents were required to comment within ten (10) days from notice. However,
despite 13 extensions totalling 142 days which the Court had given to them, respondents
failed to file their comment. They were thus considered to have waived the filing of a
comment.

The petition is meritorious.

In holding that there is a perfected contract of sale, the Court of Appeals relied on the
following findings: (1) earnest money was allegedly given by respondents and accepted by
petitioner through its vice-president and operations manager, Isidro A. Sobrecarey; and
(2) the documentary evidence in the records show that there was a perfected contract
of sale.

With regard to the alleged payment and acceptance of earnest money, the Court holds
that respondents did not give the P1 million as "earnest money" as provided by Art. 1482
of the Civil Code. They presented the amount merely as a deposit of what would
eventually become the earnest money or downpayment should a contract of sale be made
by them. The amount was thus given not as a part of the purchase price and as proof of
the perfection of the contract of sale but only as a guarantee that respondents would
not back out of the sale. Respondents in fact described the amount as an "earnest-
deposit." In Spouses Doromal, Sr. v. Court of Appeals,9it was held:

. . . While the P5,000 might have indeed been paid to Carlos in October, 1967, there is
nothing to show that the same was in the concept of the earnest money contemplated in
Art. 1482 of the Civil Code, invoked by petitioner, as signifying perfection of the
sale. Viewed in the backdrop of the factual milieu thereof extant in the record, We are
more inclined to believe that the said P5,000.00 were paid in the concept of earnest
money as the term was understood under the Old Civil Code, that is, as a guarantee that
the buyer would not back out, considering that it is not clear that there was already a
definite agreement as to the price then and that petitioners were decided to buy 6/7
only of the property should respondent Javellana refuse to agree to part with her 1/7
share.10

In the present case, the P1 million "earnest-deposit" could not have been given as
earnest money as contemplated in Art. 1482 because, at the time when petitioner
accepted the terms of respondents offer of March 29, 1994, their contract had not yet
been perfected. This is evident from the following conditions attached by respondents
to their letter, to wit: (1) that they be given the exclusive option to purchase the
property within 30 days from acceptance of the offer; (2) that during the option period,
the parties would negotiate the terms and conditions of the purchase; and (3) petitioner
would secure the necessary approvals while respondents would handle the documentation.

The first condition for an option period of 30 days sufficiently shows that a sale was
never perfected.1wphi1 As petitioner correctly points out, acceptance of this condition
did not give rise to a perfected sale but merely to an option or an accepted unilateral
promise on the part of respondents to buy the subject properties within 30 days from
the date of acceptance of the offer. Such option giving respondents the exclusive right
to buy the properties within the period agreed upon is separate and distinct from the
contract of sale which the parties may enter. 11 All that respondents had was just the
option to buy the properties which privilege was not, however, exercised by them
because there was a failure to agree on the terms of payment. No contract of sale may
thus be enforced by respondents.

Furthermore, even the option secured by respondents from petitioner was fatally
defective. Under the second paragraph of Art. 1479, an accepted unilateral promise to
buy or sell a determinate thing for a price certain is binding upon the promisor only if
the promise is supported by a distinct consideration. Consideration in an option contract
may be anything of value, unlike in sale where it must be the price certain in money or its
equivalent. There is no showing here of any consideration for the option. Lacking any
proof of such consideration, the option is unenforceable.

Equally compelling as proof of the absence of a perfected sale is the second condition
that, during the option period, the parties would negotiate the terms and conditions of
the purchase. The stages of a contract of sale are as follows: (1) negotiation, covering
the period from the time the prospective contracting parties indicate interest in the
contract to the time the contract is perfected; (2) perfection, which takes place upon
the concurrence of the essential elements of the sale which are the meeting of the
minds of the parties as to the object of the contract and upon the price; and
(3) consummation, which begins when the parties perform their respective undertakings
under the contract of sale, culminating in the extinguishment thereof. 12 In the present
case, the parties never got past the negotiation stage. The alleged "indubitable
evidence"13 of a perfected sale cited by the appellate court was nothing more than
offers and counter-offers which did not amount to any final arrangement containing the
essential elements of a contract of sale. While the parties already agreed on the real
properties which were the objects of the sale and on the purchase price, the fact
remains that they failed to arrive at mutually acceptable terms of payment, despite the
45-day extension given by petitioner.

The appellate court opined that the failure to agree on the terms of payment was no bar
to the perfection of the sale because Art. 1475 only requires agreement by the parties
as to the price of the object. This is error. In Navarro v. Sugar Producers Cooperative
Marketing Association, Inc.,14 we laid down the rule that the manner of payment of the
purchase price is an essential element before a valid and binding contract of sale can
exist. Although the Civil Code does not expressly state that the minds of the parties
must also meet on the terms or manner of payment of the price, the same is needed,
otherwise there is no sale. As held in Toyota Shaw, Inc. v. Court of Appeals,15 agreement
on the manner of payment goes into the price such that a disagreement on the manner of
payment is tantamount to a failure to agree on the price.16 In Velasco v. Court of
Appeals,17 the parties to a proposed sale had already agreed on the object of sale and on
the purchase price. By the buyers own admission, however, the parties still had to agree
on how and when the downpayment and the installments were to be paid. It was held:

. . . Such being the situation, it can not, therefore, be said that a definite and firm sales
agreement between the parties had been perfected over the lot in question. Indeed, this
Court has already ruled before that a definite agreement on the manner of payment of
the purchase price is an essential element in the formation of a binding and enforceable
contract of sale. The fact, therefore, that the petitioners delivered to the respondent
the sum of P10,000 as part of the down-payment that they had to pay cannot be
considered as sufficient proof of the perfection of any purchase and sale agreement
between the parties herein under Art. 1482 of the new Civil Code, as the petitioners
themselves admit that some essential matter - the terms of the payment - still had to be
mutually covenanted.18

Thus, it is not the giving of earnest money, but the proof of the concurrence of all the
essential elements of the contract of sale which establishes the existence of a
perfected sale.
In the absence of a perfected contract of sale, it is immaterial whether Isidro A.
Sobrecarey had the authority to enter into a contract of sale in behalf of petitioner.
This issue, therefore, needs no further discussion.

WHEREFORE, the decision of the Court of Appeals is REVERSED and respondents

complaint is DISMISSED.

SO ORDERED.

G.R. No. 154493 December 6, 2006

REYNALDO VILLANUEVA, petitioner,

vs.
PHILIPPINE NATIONAL BANK (PNB), respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

The Petition for Review on Certiorari under Rule 45 before this Court assails the
January 29, 2002 Decision1 and June 27, 2002 Resolution2 of the Court of Appeals (CA)
in CA-G.R. CV No. 520083 which reversed and set aside the September 14, 1995
Decision4 of the Regional Trial Court, Branch 22, General Santos City (RTC) in Civil Case
No. 4553.

As culled from the records, the facts are as follows:

The Special Assets Management Department (SAMD) of the Philippine National Bank
(PNB) issued an advertisement for the sale thru bidding of certain PNB properties in
Calumpang, General Santos City, including Lot No. 17, covered by TCT No. T-15042,
consisting of 22,780 square meters, with an advertised floor price of P1,409,000.00, and
Lot No. 19, covered by TCT No. T-15036, consisting of 41,190 square meters, with an
advertised floor price of P2,268,000.00.5 Bidding was subject to the following
conditions: 1) that cash bids be submitted not later than April 27, 1989; 2) that said bids
be accompanied by a 10% deposit in managers or cashiers check; and 3) that all
acceptable bids be subject to approval by PNB authorities.

In a June 28, 1990 letter6 to the Manager, PNB-General Santos Branch, Reynaldo
Villanueva (Villanueva) offered to purchase Lot Nos. 17 and 19 for P3,677,000.00. He
also manifested that he was depositing P400,000.00 to show his good faith but with the
understanding that said amount may be treated as part of the payment of the purchase
price only when his offer is accepted by PNB. At the bottom of said letter there appears
an unsigned marginal note stating that P400,000.00 was deposited into Villanuevas
account (Savings Account No. 43612) with PNB-General Santos Branch. 7

PNB-General Santos Branch forwarded the June 28, 1990 letter of Villanueva to Ramon
Guevara (Guevara), Vice President, SAMD. 8 On July 6, 1990, Guevara informed Villanueva
that only Lot No. 19 is available and that the asking price therefor
is P2,883,300.00.9 Guevara further wrote:

If our quoted price is acceptable to you, please submit a revised offer to

purchase. Sale shall be subject to our Board of Directors approval and to other
terms and conditions imposed by the Bank on sale of acquired
assets. 10 (Emphasis ours)

Instead of submitting a revised offer, Villanueva merely inserted at the bottom of

Guevaras letter a July 11, 1990 marginal note, which reads:

C O N F O R M E:

PRICE OF P2,883,300.00 (downpayment of P600,000.00 and the balance

payable in two (2) years at quarterly amortizations.) 11

Villanueva paid P200,000.00 to PNB which issued O.R. No. 16997 to acknowledge receipt
of the "partial payment deposit on offer to purchase." 12 On the dorsal portion of Official
Receipt No. 16997, Villanueva signed a typewritten note, stating:

This is a deposit made to show the sincerity of my purchase offer with the
understanding that it shall be returned without interest if my offer is not
favorably considered or be forfeited if my offer is approved but I fail/refuse
to push through the purchase.13

Also, on July 24, 1990, P380,000.00 was debited from Villanuevas Savings Account No.
43612 and credited to SAMD.14
On October 11, 1990, however, Guevara wrote Villanueva that, upon orders of the PNB
Board of Directors to conduct another appraisal and public bidding of Lot No. 19, SAMD
is deferring negotiations with him over said property and returning his deposit
of P580,000.00.15 Undaunted, Villanueva attempted to deliver postdated checks covering
the balance of the purchase price but PNB refused the same.

Hence, Villanueva filed with the RTC a Complaint16 for specific performance and damages
against PNB. In its September 14, 1995 Decision, the RTC granted the Complaint, thus:

WHEREFORE, judgment is rendered in favor of the plaintiff and against the

defendant directing it to do the following:

1. To execute a deed of sale in favor of the plaintiff over Lot 19 comprising

41,190 square meters situated at Calumpang, General Santos City covered by
TCT No. T-15036 after payment of the balance in cash in the amount
of P2,303,300.00;

2. To pay the plaintiff P1,000,000.00 as moral damages; P500,000.00 as

attorneys fees, plus litigation expenses and costs of the suit.

SO ORDERED.17

The RTC anchored its judgment on the finding that there existed a perfected contract
of sale between PNB and Villanueva. It found:

The following facts are either admitted or undisputed:

xxx

The defendant through Vice-President Guevara negotiated with the plaintiff in

connection with the offer of the plaintiff to buy Lots 17 & 19. The offer of
plaintiff to buy, however, was accepted by the defendant only insofar as Lot 19
is concerned as exemplified by its letter dated July 6, 1990 where the plaintiff
signified his concurrence after conferring with the defendants vice-president.
The conformity of the plaintiff was typewritten by the defendants own people
where the plaintiff accepted the price of P2,883,300.00. The defendant also
issued a receipt to the plaintiff on the same day when the plaintiff paid the
amount of P200,000.00 to complete the downpayment of P600,000.00 (Exhibit
"F" & Exhibit "I"). With this development, the plaintiff was also given the go
signal by the defendant to improve Lot 19 because it was already in effect sold
 to him and because of that the defendant fenced the lot and completed his two
houses on the property.18

The RTC also pointed out that Villanuevas P580,000.00 downpayment was actually in the
nature of earnest money acceptance of which by PNB signified that there was already a
sale.19 The RTC further cited contemporaneous acts of PNB purportedly indicating that,
as early as July 25, 1990, it considered Lot 19 already sold, as shown by Guevaras July
25, 1990 letter (Exh. "H")20 to another interested buyer.

PNB appealed to the CA which reversed and set aside the September 14, 1995 RTC
Decision, thus:

WHEREFORE, the appealed decision is REVERSED and SET ASIDE and another
rendered DISMISSING the complaint.

SO ORDERED.21

According to the CA, there was no perfected contract of sale because the July 6, 1990
letter of Guevara constituted a qualified acceptance of the June 28, 1990 offer of
Villanueva, and to which Villanueva replied on July 11, 1990 with a modified offer. The CA
held:

In the case at bench, consent, in respect to the price and manner of its payment,
is lacking. The record shows that appellant, thru Guevaras July 6, 1990 letter,
made a qualified acceptance of appellees letter-offer dated June 28, 1990 by
imposing an asking price of P2,883,300.00 in cash for Lot 19. The letter dated
July 6, 1990 constituted a counter-offer (Art. 1319, Civil Code), to which
appellee made a new proposal, i.e., to pay the amount of P2,883,300.00 in
staggered amounts, that is, P600,000.00 as downpayment and the balance within
two years in quarterly amortizations.

A qualified acceptance, or one that involves a new proposal, constitutes a

counter-offer and a rejection of the original offer (Art. 1319, id.). Consequently,
when something is desired which is not exactly what is proposed in the offer,
such acceptance is not sufficient to generate consent because any modification
or variation from the terms of the offer annuls the offer (Tolentino,
Commentaries and Jurisprudence on the Civil Code of the Philippines, 6th ed.,
1996, p. 450, cited in ABS-CBN Broadcasting Corporation v. Court of Appeals, et
al., 301 SCRA 572).
 Appellees new proposal, which constitutes a counter-offer, was not accepted by
appellant, its board having decided to have Lot 19 reappraised and sold thru
public bidding.

Moreover, it was clearly stated in Guevaras July 6, 1990 letter that "the sale
shall be subject to our Board of Directors approval and to other terms and
conditions imposed by the Bank on sale of acquired assets." 22

Villanuevas Motion for Reconsideration23 was denied by the CA in its Resolution of June
27, 2002.

Petitioner Villanueva now assails before this Court the January 29, 2002 Decision and
June 27, 2002 Resolution of the CA. He assigns five issues which may be condensed into
two: first, whether a perfected contract of sale exists between petitioner and
respondent PNB; and second, whether the conduct and actuation of respondent
constitutes bad faith as to entitle petitioner to moral and exemplary damages and
attorneys fees.

The Court sustains the CA on both issues.

Contracts of sale are perfected by mutual consent whereby the seller obligates himself,
for a price certain, to deliver and transfer ownership of a specified thing or right to the
buyer over which the latter agrees. 24 Mutual consent being a state of mind, its existence
may only be inferred from the confluence of two acts of the parties: an offer certain as
to the object of the contract and its consideration, and an acceptance of the offer
which is absolute in that it refers to the exact object and consideration embodied in
said offer.25 While it is impossible to expect the acceptance to echo every nuance of the
offer, it is imperative that it assents to those points in the offer which, under the
operative facts of each contract, are not only material but motivating as well. Anything
short of that level of mutuality produces not a contract but a mere counter-offer
awaiting acceptance.26 More particularly on the matter of the consideration of the
contract, the offer and its acceptance must be unanimous both on the rate of the
payment and on its term. An acceptance of an offer which agrees to the rate but varies
the term is ineffective. 27

To determine whether there was mutual consent between the parties herein, it is
necessary to retrace each offer and acceptance they made.

Respondent began with an invitation to bid issued in April 1989 covering several of its
acquired assets in Calumpang, General Santos City, including Lot No. 19 for which the
floor price was P2,268,000.00. The offer was subject to the condition that sealed bids,
accompanied by a 10% deposit in managers or cashiers check, be submitted not later
than 10 oclock in the morning of April 27, 1989.

On June 28, 1990, petitioner made an offer to buy Lot No. 17 and Lot No. 19 for an
aggregate price of P3,677,000.00. It is noted that this offer exactly corresponded to
the April 1989 invitation to bid issued by respondent in that the proposed aggregate
purchase price for Lot Nos. 17 and 19 matched the advertised floor prices for the same
properties. However, it cannot be said that the June 28, 1990 letter of petitioner was an
effective acceptance of the April 1989 invitation to bid for, by its express terms, said
invitation lapsed on April 27, 1989. 28 More than that, the April 1989 invitation was
subject to the condition that all sealed bids submitted and accepted be approved by
respondents higher authorities.

Thus, the June 28, 1990 letter of petitioner was an offer to buy independent of the
April 1989 invitation to bid. It was a definite offer as it identified with certainty the
properties sought to be purchased and fixed the contract price.

However, respondent replied to the June 28, 1990 offer with a July 6, 1990 letter that
only Lot No. 19 is available and that the price therefor is now P2,883,300.00. As the CA
pointed out, this reply was certainly not an acceptance of the June 28, 1990 offer but a
mere counter-offer. It deviated from the original offer on three material points: first,
the object of the proposed sale is now only Lot No. 19 rather than Lot Nos. 17 and 19;
second, the area of the property to be sold is still 41,190 sq. m but an 8,797-sq. m
portion is now part of a public road; and third, the consideration is P2,883,300 for one
lot rather than P3,677,000.00 for two lots. More important, this July 6, 1990 counter-
offer imposed two conditions: one, that petitioner submit a revised offer to purchase
based on the quoted price; and two, that the sale of the property be approved by the
Board of Directors and subjected to other terms and conditions imposed by the Bank on
the sale of acquired assets.

In reply to the July 6, 1990 counter-offer, petitioner signed his July 11, 1990
conformity to the quoted price of P2,883,300.00 but inserted the term "downpayment
of P600,000.00 and the balance payable in two years at quarterly amortization." The CA
viewed this July 11, 1990 conformity not as an acceptance of the July 6, 1990 counter-
offer but a further counter-offer for, while petitioner accepted the P2,883,300.00
price for Lot No. 19, he qualified his acceptance by proposing a two-year payment term.

Petitioner does not directly impugn such reasoning of the CA. He merely questions it for
taking up the issue of whether his July 11, 1990 conformity modified the July 6, 1990
counter-offer as this was allegedly never raised during the trial nor on appeal. 29
Such argument is not well taken. From beginning to end, respondent denied that a
contract of sale with petitioner was ever perfected. 30 Its defense was broad enough to
encompass every issue relating to the concurrence of the elements of contract,
specifically on whether it consented to the object of the sale and its consideration.
There was nothing to prevent the CA from inquiring into the offers and counter-offers
of the parties to determine whether there was indeed a perfected contract between
them.

Moreover, there is merit in the ruling of the CA that the July 11, 1990 marginal note was
a further counter-offer which did not lead to the perfection of a contract of sale
between the parties. Petitioners own June 28, 1990 offer quoted the price
of P3,677,000.00 for two lots but was silent on the term of payment. Respondents July
6, 1990 counter-offer quoted the price of P2,833,300.00 and was also silent on the term
of payment. Up to that point, the term or schedule of payment was not on the
negotiation table. Thus, when petitioner suddenly introduced a term of payment in his
July 11, 1990 counter-offer, he interjected into the negotiations a new substantial
matter on which the parties had no prior discussion and over which they must yet
agree.31 Petitioners July 11, 1990 counter-offer, therefore, did not usher the parties
beyond the negotiation stage of contract making towards its perfection. He made a
counter-offer that required acceptance by respondent.

As it were, respondent, through its Board of Directors, did not accept this last counter-
offer. As stated in its October 11, 1990 letter to petitioner, respondent ordered the
reappraisal of the property, in clear repudiation not only of the proposed price but also
the term of payment thereof.

Petitioner insists, however, that the October 11, 1990 repudiation was belated as
respondent had already agreed to his July 11, 1990 counter-offer when it accepted his
"downpayment" or "earnest money" of P580,000.00.32 He cites Article 1482 of the Civil
Code where it says that acceptance of "downpayment" or "earnest money" presupposes
the perfection of a contract.

Not so. Acceptance of petitioners payments did not amount to an implied acceptance of
his last counter-offer.

To begin with, PNB-General Santos Branch, which accepted petitioners P380,000.00

payment, and PNB-SAMD, which accepted his P200,000.00 payment, had no authority to
bind respondent to a contract of sale with petitioner. 33 Petitioner is well aware of this.
To recall, petitioner sent his June 28, 1990 offer to PNB-General Santos Branch. Said
branch did not act on his offer except to endorse it to Guevarra. Thereafter, petitioner
transacted directly with Guevarra. Petitioner then cannot pretend that PNB-General
Santos Branch had authority to accept his July 11, 1990 counter-offer by merely
accepting his P380,000.00 payment.

Neither did SAMD have authority to bind PNB. In its April 1989 invitation to bid, as well
as its July 6, 1990 counter-offer, SAMD was always careful to emphasize that whatever
offer is made and entertained will be subject to the approval of respondents higher
authorities. This is a reasonable disclaimer considering the corporate nature of
respondent. 34

Moreover, petitioners payment of P200,000.00 was with the clear understanding that
his July 11, 1990 counter-offer was still subject to approval by respondent. This is borne
out by respondents Exhibits "2-a" and "2-b", which petitioner never controverted, where
it appears on the dorsal portion of O.R. No. 16997 that petitioner acceded that the
amount he paid was a mere "x x x deposit made to show the sincerity of [his] purchase
offer with the understanding that it shall be returned without interest if [his] offer is
not favorably considered x x x."35 This was a clear acknowledgment on his part that
there was yet no perfected contract with respondent and that even with the payments
he had advanced, his July 11, 1990 counter-offer was still subject to consideration by
respondent.

Not only that, in the same Exh. "2-a" as well as in his June 28, 1990 offer, petitioner
referred to his payments as mere "deposits." Even O.R. No. 16997 refers to petitioners
payment as mere deposit. It is only in the debit notice issued by PNB-General Santos
Branch where petitioners payment is referred to as "downpayment". But then, as we
said, PNB-General Santos Branch has no authority to bind respondent by its
interpretation of the nature of the payment made by petitioner.

In sum, the amounts paid by petitioner were not in the nature of downpayment or
earnest money but were mere deposits or proof of his interest in the purchase of Lot
No. 19. Acceptance of said amounts by respondent does not presuppose perfection of any
contract.36

It must be noted that petitioner has expressly admitted that he had withdrawn the
entire amount of P580,000.00 deposit from PNB-General Santos Branch.37

With the foregoing disquisition, the Court foregoes resolution of the second issue as it
is evident that respondent acted well within its rights when it rejected the last counter-
offer of petitioner.

In fine, petitioners petition lacks merit.

WHEREFORE, the petition is DENIED. The Decision dated January 29, 2002 and
Resolution dated June 27, 2002 of the Court of Appeals are AFFIRMED.

No costs.

SO ORDERED.

G.R. No. 126444 December 4, 1998

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.

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.
 2
SO ORDERED.

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 the 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 According, 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. Petioners' 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 petioners 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. 18Ownership 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. 20A 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 and 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 court's award of attorney's fees, litigation expenses and moral
damages, there is neither factual nor legal basis thereof. Attorney's 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 latter's 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 28of 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

G.R. No. 133638 April 15, 2005

PERPETUA VDA. DE APE, Petitioner,

vs.
THE HONORABLE COURT OF APPEALS and GENOROSA CAWIT VDA. DE
LUMAYNO, Respondents.

DECISION

CHICO-NAZARIO, J.:

Before Us is a petition for review on certiorari of the Decision1 of the Court of Appeals
in CA-G.R. CV No. 45886 entitled, "Generosa Cawit de Lumayno, accompanied by her
husband Braulio Lumayno v. Fortunato Ape, including his wife Perpetua de Ape."

The pertinent facts are as follows:

Cleopas Ape was the registered owner of a parcel of land particularly known as Lot No.
2319 of the Escalante Cadastre of Negros Occidental and covered by Original
Certificate of Title (OCT) No. RP 1379 (RP-154 [300]).2Upon Cleopas Ape's death
sometime in 1950, the property passed on to his wife, Maria Ondoy, and their eleven (11)
children, namely: Fortunato, Cornelio, Bernalda, Bienvenido, Encarnacion, Loreta,
Lourdes, Felicidad, Adela, Dominador, and Angelina, all surnamed Ape.

On 15 March 1973, Generosa Cawit de Lumayno (private respondent herein), joined by

her husband, Braulio,3instituted a case for "Specific Performance of a Deed of Sale with
Damages" against Fortunato and his wife Perpetua (petitioner herein) before the then
Court of First Instance of Negros Occidental. It was alleged in the complaint that on 11
April 1971, private respondent and Fortunato entered into a contract of sale of land
under which for a consideration of P5,000.00, Fortunato agreed to sell his share in Lot
No. 2319 to private respondent. The agreement was contained in a receipt prepared by
private respondent's son-in-law, Andres Flores, at her behest. Said receipt was
attached to the complaint as Annex "A" thereof and later marked as Exhibit "G" for
private respondent. The receipt states:

April 11, 1971

TO WHOM IT MAY CONCERN:

This date received from Mrs. Generosa Cawit de Lumayno the sum of THIRTY
PESOS ONLY as Advance Payment of my share in Land Purchased, for FIVE
THOUSAND PESOS LOT #2319.

(Signed)
FORTUNATO APE

P30.00 WITNESS:
(Illegible)4

As private respondent wanted to register the claimed sale transaction, she supposedly
demanded that Fortunato execute the corresponding deed of sale and to receive the
balance of the consideration. However, Fortunato unjustifiably refused to heed her
demands. Private respondent, therefore, prayed that Fortunato be ordered to execute
and deliver to her "a sufficient and registrable deed of sale involving his one-eleventh
(1/11) share or participation in Lot No. 2319 of the Escalante Cadastre; to pay P5,000.00
in damages; P500.00 reimbursement for litigation expenses as well as additional P500.00
for every appeal made; P2,000.00 for attorney's fees; and to pay the costs. 5
Fortunato and petitioner denied the material allegations of the complaint and claimed
that Fortunato never sold his share in Lot No. 2319 to private respondent and that his
signature appearing on the purported receipt was forged. By way of counterclaim, the
defendants below maintained having entered into a contract of lease with respondent
involving Fortunato's portion of Lot No. 2319. This purported lease contract commenced
in 1960 and was supposed to last until 1965 with an option for another five (5)
years. The annual lease rental was P100.00 which private respondent and her husband
allegedly paid on installment basis. Fortunato and petitioner also assailed private
respondent and her husband's continued possession of the rest of Lot No. 2319 alleging
that in the event they had acquired the shares of Fortunato's co-owners by way of sale,
he was invoking his right to redeem the same. Finally, Fortunato and petitioner prayed
that the lease contract between them and respondent be ordered annulled; and that
respondent be ordered to pay them attorney's fees; moral damages; and exemplary
damages.6

In their reply,7 the private respondent and her husband alleged that they had purchased
from Fortunato's co-owners, as evidenced by various written instruments,8 their
respective portions of Lot No. 2319. By virtue of these sales, they insisted that
Fortunato was no longer a co-owner of Lot No. 2319 thus, his right of redemption no
longer existed.

Prior to the resolution of this case at the trial court level, Fortunato died and was
substituted in this action by his children named Salodada, Clarita, Narciso, Romeo,
Rodrigo, Marieta, Fortunato, Jr., and Salvador, all surnamed Ape. 9

During the trial, private respondent testified that she and her husband acquired the
various portions of Lot No. 2319 belonging to Fortunato's co-owners. Thereafter, her
husband caused the annotation of an adverse claim on the certificate of title of Lot No.
2319.10 The annotation states:

Entry No. 123539 Adverse claim filed by Braulio Lumayno. Notice of adverse claim
filed by Braulio Lumayno affecting the lot described in this title to the extent of
77511.93 square meters, more or less, the aggregate area of shares sold to him on the
basis of (alleged) sales in his possession. Doc. No. 157, Page No. 33, Book No. XI, Series
of 1967 of Alexander Cawit of Escalante, Neg. Occ. Date of instrument. June 22, 1967
at 8:30 a.m. (SGD) FEDENCIORRAZ, Actg. Register of Deeds. 11

In addition, private respondent claimed that after the acquisition of those shares, she
and her husband had the whole Lot No. 2319 surveyed by a certain Oscar Mascada who
came up with a technical description of said piece of land. 12 Significantly, private
respondent alleged that Fortunato was present when the survey was conducted. 13
Also presented as evidence for private respondent were pictures taken of some parts of
Lot No. 2319 purportedly showing the land belonging to Fortunato being bounded by a
row of banana plants thereby separating it from the rest of Lot No. 2319. 14

As regards the circumstances surrounding the sale of Fortunato's portion of the land,
private respondent testified that Fortunato went to her store at the time when their
lease contract was about to expire. He allegedly demanded the rental payment for his
land but as she was no longer interested in renewing their lease agreement, they agreed
instead to enter into a contract of sale which Fortunato acceded to provided private
respondent bought his portion of Lot No. 2319 for P5,000.00. Thereafter, she asked
her son-in-law Flores to prepare the aforementioned receipt. Flores read the document
to Fortunato and asked the latter whether he had any objection thereto. Fortunato
then went on to affix his signature on the receipt.

For her part, petitioner insisted that the entire Lot No. 2319 had not yet been formally
subdivided;15 that on 11 April 1971 she and her husband went to private respondent's
house to collect past rentals for their land then leased by the former, however, they
managed to collect only thirty pesos;16 that private respondent made her (petitioner's)
husband sign a receipt acknowledging the receipt of said amount of money; 17 and that the
contents of said receipt were never explained to them.18 She also stated in her
testimony that her husband was an illiterate and only learned how to write his name in
order to be employed in a sugar central. 19 As for private respondent's purchase of the
shares owned by Fortunato's co-owners, petitioner maintained that neither she nor her
husband received any notice regarding those sales transactions. 20 The testimony of
petitioner was later on corroborated by her daughter-in-law, Marietta Ape Dino. 21

After due trial, the court a quo rendered a decision22 dismissing both the complaint and
the counterclaim. The trial court likewise ordered that deeds or documents
representing the sales of the shares previously owned by Fortunato's co-owners be
registered and annotated on the existing certificate of title of Lot No. 2319. According
to the trial court, private respondent failed to prove that she had actually paid the
purchase price of P5,000.00 to Fortunato and petitioner. Applying, therefore, the
provision of Article 1350 of the Civil Code,23 the trial court concluded that private
respondent did not have the right to demand the delivery to her of the registrable deed
of sale over Fortunato's portion of the Lot No. 2319.

The trial court also rejected Fortunato and petitioner's claim that they had the right of
redemption over the shares previously sold to private respondent and the latter's
husband, reasoning as follows:
Defendants in their counterclaim invoke their right of legal redemption under Article
1623 of the New Civil Code in view of the alleged sale of the undivided portions of the
lot in question by their co-heirs and co-owners as claimed by the plaintiffs in their
complaint. They have been informed by the plaintiff about said sales upon the filing of
the complaint in the instant case as far back as March 14, 1973. Defendant themselves
presented as their very own exhibits copies of the respective deeds of sale or
conveyance by their said co-heirs and co-owners in favor of the plaintiffs or their
predecessors-in-interest way back on January 2, 1992 when they formally offered their
exhibits in the instant case; meaning, they themselves acquired possession of said
documentary exhibits even before they formally offered them in evidence. Under Art.
1623 of the New Civil Code, defendants have only THIRTY (30) DAYS counted from
their actual knowledge of the exact terms and conditions of the deeds of sale or
conveyance of their co-heirs' and co-owners' share within which to exercise their right
of legal redemption.24

Within the reglementary period, both parties filed their respective notices of appeal
before the trial court with petitioner and her children taking exception to the finding of
the trial court that the period within which they could invoke their right of redemption
had already lapsed.25 For her part, private respondent raised as errors the trial court's
ruling that there was no contract of sale between herself and Fortunato and the
dismissal of their complaint for specific performance. 26

The Court of Appeals, in the decision now assailed before us, reversed and set aside the
trial court's dismissal of the private respondent's complaint but upheld the portion of
the court a quo's decision ordering the dismissal of petitioner and her children's
counterclaim. The dispositive portion of the appellate court's decision reads:

WHEREFORE, the decision dated March 11, 1994, is hereby REVERSED and SET
ASIDE insofar as the dismissal of plaintiffs-appellants' complaint is concerned,
and another one is entered ordering the defendant-appellant Fortunato Ape
and/or his wife Perpetua de Ape and successors-in-interest to execute in favor
of plaintiff-appellant Generosa Cawit de Lumayno a Deed of Absolute Sale
involving the one-eleventh (1/11) share or participation of Fortunato Ape in Lot
No. 2319, Escalante Cadastre, containing an area of 12,527.19 square meters,
more or less, within (30) days from finality of this decision, and in case of non-
compliance with this Order, that the Clerk of Court of said court is ordered to
execute the deed on behalf of the vendor. The decision is AFFIRMED insofar as
the dismissal of defendants-appellants' counterclaim is concerned.

Without pronouncement as to costs. 27

The Court of Appeals upheld private respondent's position that Exhibit "G" had all the
earmarks of a valid contract of sale, thus:

Exhibit G is the best proof that the P5,000.00 representing the purchase price of the
1/11th share of Fortunato Ape was not paid by the vendee on April 11, 1971, and/or up to
the present, but that does not affect the binding force and effect of the
document. The vendee having paid the vendor an advance payment of the agreed
purchase price of the property, what the vendor can exact from the vendee is full
payment upon his execution of the final deed of sale. As is shown, the vendee precisely
instituted this action to compel the vendor Fortunato Ape to execute the final
document, after she was informed that he would execute the same upon arrival of his
daughter "Bala" from Mindanao, but afterwards failed to live up to his contractual
obligation (TSN, pp. 11-13, June 10, 1992).

It is not right for the trial court to expect plaintiff-appellant to pay the balance of the
purchase price before the final deed is executed, or for her to deposit the equivalent
amount in court in the form of consignation. Consignation comes into fore in the case of
a creditor to whom tender of payment has been made and refuses without just cause to
accept it (Arts. 1256 and 1252, N.C.C.; Querino vs. Pelarca, 29 SCRA 1). As vendee,
plaintiff-appellant Generosa Cawit de Lumayno does not fall within the purview of a
debtor.

We, therefore, find and so hold that the trial court should have found that exhibit G
bears all the earmarks of a private deed of sale which is valid, binding and enforceable
between the parties, and that as a consequence of the failure and refusal on the part of
the vendor Fortunato Ape to live up to his contractual obligation, he and/or his heirs and
successors-in-interest can be compelled to execute in favor of, and to deliver to the
vendee, plaintiff-appellant Generosa Cawit de Lumayno a registerable deed of absolute
sale involving his one-eleventh (1/11th) share or participation in Lot No. 2319, Escalante
Cadastre, containing an area of 12,527.19 square meters, more or less, within 30 days
from finality of this decision, and, in case of non-compliance within said period, this
Court appoints the Clerk of Court of the trial court to execute on behalf of the vendor
the said document.28

The Court of Appeals, however, affirmed the trial court's ruling on the issue of
petitioner and her children's right of redemption. It ruled that Fortunato's receipt of
the Second Owner's Duplicate of OCT (RP) 1379 (RP-154 ([300]), containing the adverse
claim of private respondent and her husband, constituted a sufficient compliance with
the written notice requirement of Article 1623 of the Civil Code and the period of
redemption under this provision had long lapsed.
Aggrieved by the decision of the appellate court, petitioner is now before us raising,
essentially, the following issues: whether Fortunato was furnished with a written notice
of sale of the shares of his co-owners as required by Article 1623 of the Civil Code; and
whether the receipt signed by Fortunato proves the existence of a contract of sale
between him and private respondent.

In her memorandum, petitioner claimed that the Court of Appeals erred in sustaining the
court a quo's pronouncement that she could no longer redeem the portion of Lot No.
2319 already acquired by private respondent for no written notice of said sales was
furnished them. According to her, the Court of Appeals unduly expanded the scope of
the law by equating Fortunato's receipt of Second Owner's Duplicate of OCT (RP) 1379
(RP-154 ([300]) with the written notice requirement of Article 1623. In addition, she
argued that Exhibit "G" could not possibly be a contract of sale of Fortunato's share in
Lot No. 2319 as said document does not contain "(a) definite agreement on the manner of
payment of the price."29 Even assuming that Exhibit "G" is, indeed, a contract of sale
between private respondent and Fortunato, the latter did not have the obligation to
deliver to private respondent a registrable deed of sale in view of private respondent's
own failure to pay the full purchase price of Fortunato's portion of Lot No.
2319. Petitioner is also of the view that, at most, Exhibit "G" merely contained a
unilateral promise to sell which private respondent could not enforce in the absence of a
consideration distinct from the purchase price of the land. Further, petitioner
reiterated her claim that due to the illiteracy of her husband, it was incumbent upon
private respondent to show that the contents of Exhibit "G" were fully explained to
him. Finally, petitioner pointed out that the Court of Appeals erred when it took into
consideration the same exhibit despite the fact that only its photocopy was presented
before the court.

On the other hand, private respondent argued that the annotation on the second owner's
certificate over Lot No. 2319 constituted constructive notice to the whole world of
private respondent's claim over the majority of said parcel of land. Relying on our
decision in the case of Cabrera v. Villanueva,30 private respondent insisted that when
Fortunato received a copy of the second owner's certificate, he became fully aware of
the contracts of sale entered into between his co-owners on one hand and private
respondent and her deceased husband on the other.

Private respondent also averred that "although (Lot No. 2319) was not actually
partitioned in a survey after the death of Cleopas Ape, the land was partitioned in a
'hantal-hantal' manner by the heirs. Each took and possessed specific portion or
premises as his/her share in land, farmed their respective portion or premises, and
improved them, each heir limiting his/her improvement within the portion or premises
which were his/her respective share."31 Thus, when private respondent and her husband
purchased the other parts of Lot No. 2319, it was no longer undivided as petitioner
claims.

The petition is partly meritorious.

Article 1623 of the Civil Code provides:

The right of legal pre-emption or redemption shall not be exercised except within thirty
days from the notice in writing by the prospective vendor, or by the vendor, as the case
may be. The deed of sale shall not be recorded in the Registry of Property, unless
accompanied by an affidavit of the vendor that he has given written notice thereof to all
possible redemptioners.

Despite the plain language of the law, this Court has, over the years, been tasked to
interpret the "written notice requirement" of the above-quoted provision. In the
case Butte v. Manuel Uy & Sons, Inc.,32 we declared that

In considering whether or not the offer to redeem was timely, we think that the notice
given by the vendee (buyer) should not be taken into account. The text of Article 1623
clearly and expressly prescribes that the thirty days for making the redemption are to
be counted from notice in writing by the vendor. Under the old law (Civ. Code of 1889,
Art. 1524), it was immaterial who gave the notice; so long as the redeeming co-owner
learned of the alienation in favor of the stranger, the redemption period began to
run. It is thus apparent that the Philippine legislature in Article 1623 deliberately
selected a particular method of giving notice, and that method must be deemed
exclusive. (39 Am. Jur., 237; Payne vs. State, 12 S.W. 2(d) 528). As ruled in Wampler vs.
Lecompte, 150 Atl. 458 (affd. in 75 Law Ed. [U.S.] 275)

why these provisions were inserted in the statute we are not informed, but we
may assume until the contrary is shown, that a state of facts in respect thereto
existed, which warranted the legislature in so legislating.

The reasons for requiring that the notice should be given by the seller, and not by the
buyer, are easily divined. The seller of an undivided interest is in the best position to
know who are his co-owners that under the law must be notified of the sale. Also, the
notice by the seller removes all doubts as to fact of the sale, its perfection; and its
validity, the notice being a reaffirmation thereof, so that the party notified need not
entertain doubt that the seller may still contest the alienation. This assurance would not
exist if the notice should be given by the buyer. 33
The interpretation was somehow modified in the case of De Conejero, et al. v. Court of
Appeals, et al.34 wherein it was pointed out that Article 1623 "does not prescribe a
particular form of notice, nor any distinctive method for notifying the redemptioner"
thus, as long as the redemptioner was notified in writing of the sale and the particulars
thereof, the redemption period starts to run. This view was reiterated in Etcuban v. The
Honorable Court of Appeals, et al.,35 Cabrera v. Villanueva,36 Garcia, et al. v. Calaliman, et
al.,37 Distrito, et al. v. The Honorable Court of Appeals, et al.,38 and Mariano, et al. v. Hon.
Court of Appeals, et al.39

However, in the case of Salatandol v. Retes,40 wherein the plaintiffs were not furnished
any written notice of sale or a copy thereof by the vendor, this Court again referred to
the principle enunciated in the case of Butte. As observed by Justice Vicente Mendoza,
such reversion is only sound, thus:

Art. 1623 of the Civil Code is clear in requiring that the written notification should
come from the vendor or prospective vendor, not from any other person. There is,
therefore, no room for construction. Indeed, the principal difference between Art.
1524 of the former Civil Code and Art. 1623 of the present one is that the former did
not specify who must give the notice, whereas the present one expressly says the notice
must be given by the vendor. Effect must be given to this change in statutory
language.41

In this case, the records are bereft of any indication that Fortunato was given any
written notice of prospective or consummated sale of the portions of Lot No. 2319 by
the vendors or would-be vendors. The thirty (30)-day redemption period under the law,
therefore, has not commenced to run.

Despite this, however, we still rule that petitioner could no longer invoke her right to
redeem from private respondent for the exercise of this right "presupposes the
existence of a co-ownership at the time the conveyance is made by a co-owner and when
it is demanded by the other co-owner or co-owners."42 The regime of co-ownership
exists when ownership of an undivided thing or right belongs to different persons. 43 By
the nature of a co-ownership, a co-owner cannot point to specific portion of the property
owned in common as his own because his share therein remains intangible. 44 As legal
redemption is intended to minimize co-ownership,45 once the property is subdivided and
distributed among the co-owners, the community ceases to exist and there is no more
reason to sustain any right of legal redemption. 46

In this case, records reveal that although Lot No. 2319 has not yet been formally
subdivided, still, the particular portions belonging to the heirs of Cleopas Ape had
already been ascertained and they in fact took possession of their respective
parts. This can be deduced from the testimony of petitioner herself, thus:

Q When the plaintiffs leased the share of your husband, were there any
metes and bounds?

A It was not formally subdivided. We have only a definite portion. (hantal-

hantal)

Q This hantal-hantal of your husband, was it also separate and distinct

from the hantal-hantal or the share of the brothers and sisters of your
husband?

A Well, this property in question is a common property.

Q To the north, whose share was that which is adjacent to your husband's
assumed partition?

A I do not know what [does] this "north" [mean].

COURT

(To Witness)

Q To the place from where the sun rises, whose share was that?

A The shares of Cornelia, Loreta, Encarnacion and Adela.

Q How could you determine their own shares?

A They were residing in their respective assumed portions.

Q How about determining their respective boundaries?

A It could be determined by stakes and partly a row of banana plantations

planted by my son-in-law.

Q Who is this son-in-law you mentioned?

A Narciso Ape.
ATTY. CAWIT

(Continuing)

Q You said that there were stakes to determine the hantal-hantal of your
husband and the hantal-hantal of the other heirs, did I get you right?

ATTY. TAN

Admitted, Your Honor.

ATTY. CAWIT

Q Mrs. Ape, in 1960, Cleopas Ape was already dead, is that correct?

A Certainly, since he died in 1950.

Q By the manifestation of your counsel that the entire land (13 hectares)
of your father-in-law, Cleopas Ape, was leased to Generosa Lumayno, is this
correct?

A No, it is only the assumed portion of my husband [which] was leased to

Generosa Lumayno.

Q For clarification, it was only the share of your husband [which] was
leased to Generosa Cawit Lumayno?

A Yes.47

ATTY. CAWIT

Q My question: is that portion which you said was leased by your husband to
the Lumayno[s] and which was included to the lease by your mother-in-law to the
Lumayno[s], when the Lumayno[s] returned your husband['s] share, was that the
same premises that your husband leased to the Lumayno[s]?

A The same.
 Q In re-possessing this portion of the land corresponding to the share of
your husband, did your husband demand that they should re-possess the land
from the Lumayno[s] or did the Lumayno[s] return them to your husband
voluntarily?

A They just returned to us without paying the rentals.

COURT

Q Was the return the result of your husband's request or just voluntarily
they returned it to your husband?

A No, sir, it was just returned voluntarily, and they abandoned the area but
my husband continued farming. 48

Similarly telling of the partition is the stipulation of the parties during the pre-trial
wherein it was admitted that Lot No. 2319 had not been subdivided nevertheless,
"Fortunato Ape had possessed a specific portion of the land ostensibly corresponding to
his share."49

From the foregoing, it is evident that the partition of Lot No. 2319 had already been
effected by the heirs of Cleopas Ape. Although the partition might have been informal
is of no moment for even an oral agreement of partition is valid and binding upon the
parties.50 Likewise, the fact that the respective shares of Cleopas Ape's heirs are still
embraced in one and the same certificate of title and have not been technically
apportioned does not make said portions less determinable and identifiable from one
another nor does it, in any way, diminish the dominion of their respective owners. 51

Turning now to the second issue of the existence of a contract of sale, we rule that the
records of this case betray the stance of private respondent that Fortunato Ape
entered into such an agreement with her.

A contract of sale is a consensual contract, thus, it is perfected by mere consent of the

parties. It is born from the moment there is a meeting of minds upon the thing which is
the object of the sale and upon the price.52 Upon its perfection, the parties may
reciprocally demand performance, that is, the vendee may compel the transfer of the
ownership and to deliver the object of the sale while the vendor may demand the vendee
to pay the thing sold.53For there to be a perfected contract of sale, however, the
following elements must be present: consent, object, and price in money or its
equivalent. In the case of Leonardo v. Court of Appeals, et al.,54 we explained the
element of consent, to wit:
The essence of consent is the agreement of the parties on the terms of the contract,
the acceptance by one of the offer made by the other. It is the concurrence of the
minds of the parties on the object and the cause which constitutes the contract. The
area of agreement must extend to all points that the parties deem material or there is
no consent at all.

To be valid, consent must meet the following requisites: (a) it should be intelligent, or
with an exact notion of the matter to which it refers; (b) it should be free and (c) it
should be spontaneous. Intelligence in consent is vitiated by error; freedom by violence,
intimidation or undue influence; spontaneity by fraud.55

In this jurisdiction, the general rule is that he who alleges fraud or mistake in a
transaction must substantiate his allegation as the presumption is that a person takes
ordinary care for his concerns and that private dealings have been entered into fairly
and regularly.56 The exception to this rule is provided for under Article 1332 of the Civil
Code which provides that "[w]hen one of the parties is unable to read, or if the contract
is in a language not understood by him, and mistake or fraud is alleged, the person
enforcing the contract must show that the terms thereof have been fully explained to
the former."

In this case, as private respondent is the one seeking to enforce the claimed contract of
sale, she bears the burden of proving that the terms of the agreement were fully
explained to Fortunato Ape who was an illiterate. This she failed to do. While she
claimed in her testimony that the contents of the receipt were made clear to Fortunato,
such allegation was debunked by Andres Flores himself when the latter took the witness
stand. According to Flores:

ATTY. TAN

Q Mr. Witness, that receipt is in English, is it not?

A Yes, sir.

Q When you prepared that receipt, were you aware that Fortunato Ape
doesn't know how to read and write English?

A Yes, sir, I know.

Q Mr. Witness, you said you were present at the time of the signing of that
alleged receipt of P30.00, correct?
A Yes, sir.

Q Where, in what place was this receipt signed?

A At the store.

Q At the time of the signing of this receipt, were there other person[s]
present aside from you, your mother-in-law and Fortunato Ape?

A In the store, yes, sir.

Q When you signed that document of course you acted as witness upon
request of your mother-in-law?

A No, this portion, I was the one who prepared that document.

Q Without asking of (sic) your mother-in-law, you prepared that document

or it was your mother-in-law who requested you to prepare that document and
acted as witness?

A She requested me to prepare but does not instructed (sic) me to act as

witness. It was our opinion that whenever I prepared the document, I signed it
as a witness.

Q Did it not occur to you to ask other witness to act on the side of
Fortunato Ape who did not know how to read and write English?

A It occurred to me.

Q But you did not bother to request a person who is not related to your
mother-in-law, considering that Fortunato Ape did not know how to read and
write English?

A The one who represented Fortunato Ape doesn't know also how to read
and write English. One a maid.

Q You mentioned that there [was another] person inside the store, under
your previous statement, when the document was signed, there [was another]
person in the store aside from you, your mother-in-law and Fortunato Ape, is not
true?
 A That is true, there is one person, but that person doesn't know how to
read also.

Q Of course, Mr. Witness, since it occurred to you that there was need for
other witness to sign that document for Fortunato Ape, is it not a fact that the
Municipal Building is very near your house?

A Quite (near).

Q But you could readily proceed to the Municipal Building and request one
who is knowledgeable in English to act as witness?

A I think there is no need for that small receipt. So I don't bother myself
to go.

Q You did not consider that receipt very important because you said that
small receipt?

A Yes, I know.57

As can be gleaned from Flores's testimony, while he was very much aware of Fortunato's
inability to read and write in the English language, he did not bother to fully explain to
the latter the substance of the receipt (Exhibit "G"). He even dismissed the idea of
asking somebody else to assist Fortunato considering that a measly sum of thirty pesos
was involved. Evidently, it did not occur to Flores that the document he himself
prepared pertains to the transfer altogether of Fortunato's property to his mother-in-
law. It is precisely in situations such as this when the wisdom of Article 1332 of the
Civil Code readily becomes apparent which is "to protect a party to a contract
disadvantaged by illiteracy, ignorance, mental weakness or some other handicap." 58

In sum, we hold that petitioner is no longer entitled to the right of redemption under
Article 1632 of the Civil Code as Lot No. 2319 had long been partitioned among its co-
owners. This Court likewise annuls the contract of sale between Fortunato and private
respondent on the ground of vitiated consent.

WHEREFORE, premises considered, the decision dated 25 March 1998 of the Court of
Appeals is hereby REVERSED and SET ASIDE and the decision dated 11 March 1994 of
the Regional Trial Court, Branch 58, San Carlos City, Negros Occidental, dismissing both
the complaint and the counterclaim, is hereby REINSTATED. No costs.
SO ORDERED.

G.R. No. 137552 June 16, 2000

ROBERTO Z. LAFORTEZA, GONZALO Z. LAFORTEZA, MICHAEL Z. LAFORTEZA,

DENNIS Z. LAFORTEZA, and LEA Z. LAFORTEZA, petitioners,
vs.
ALONZO MACHUCA, respondent.

GONZAGA-REYES, J.:

This Petition for Review on Certiorari seeks the reversal of the Decision of the Court of
Appeals 1 in CA G.R. CV No. 147457 entitled "ALONZO MACHUCA versus ROBERTO Z.
LAFORTEZA, GONZALO Z. LAFORTEZA, LEA ZULUETA-LAFORTEZA, MICHAEL Z.
LAFORTEZA, and DENNIS Z. LAFORTEZA".

The following facts as found by the Court of Appeals are undisputed:

The property involved consists of a house and lot located at No. 7757 Sherwood
Street, Marcelo Green Village, Paraaque, Metro Manila, covered by Transfer
Certificate of Title (TCT) No. (220656) 8941 of the Registered of Deeds of
Paraaque (Exhibit "D", Plaintiff, record, pp. 331-332). The subject property is
registered in the name of the late Francisco Q. Laforteza, although it is conjugal
in nature (Exhibit "8", Defendants, record pp. 331-386).

On August 2, 1988, defendant Lea Zulueta-Laforteza executed a Special Power

of Attorney in favor of defendants Roberto Z. Laforteza and Gonzalo Z.
Laforteza, Jr., appointing both as her Attorney-in-fact authorizing them jointly
to sell the subject property and sign any document for the settlement of the
estate of the late Francisco Q. Laforteza (Exh. "A", Plaintiff, record, pp. 323-
325).

Likewise on the same day, defendant Michael Z. Laforteza executed a Special

Power of Attorney in favor of defendants Roberto Z. Laforteza and Gonzalo
Laforteza, Jr., likewise, granting the same authority (Exh. "B", record, pp. 326-
328) Both agency instruments contained a provision that in any document or
paper to exercise authority granted, the signature of both attorneys- in-fact
must be affixed.

On October 27, 1988, defendant Dennis Z. Laforteza executed a Special Power

of Attorney in favor of defendant Roberto Z. Laforteza for the purpose of
selling the subject property (Exh. "C", Plaintiff, record, pp. 329-330). A year
later, on October 30, 1989, Dennis Z. Laforteza executed another Special Power
of Attorney in favor of defendants Roberto Z. Laforteza and Gonzalo Laforteza,
Jr. naming both attorneys-in-fact for the purpose of selling the subject
property and signing any document for the settlement of the estate of the late
Francisco Q. Laforteza. The subsequent agency instrument (Exh, "2", record, pp.
371-373) contained similar provisions that both attorneys-in-fact should sign any
document or paper executed in the exercise of their authority.1wphi1.nt

In the exercise of the above authority, on January 20, 1989, the heirs of the
late Francisco Q. Laforteza represented by Roberto Z. Laforteza and Gonzalo Z.
Laforteza, Jr. entered into a Memorandum of Agreement (Contract to Sell) with
the plaintiff 2 over the subject property for the sum of SIX HUNDRED THIRTY
THOUSAND PESOS (P630,000.00) payable as follows:

(a) P30,000.00 as earnest money, to be forfeited in favor of the

defendants if the sale is not effected due to the fault of the plaintiff;

(b) P600,000.00 upon issuance of the new certificate of title in the

name of the late Francisco Q. Laforteza and upon execution of an extra-
judicial settlement of the decedent's estate with sale in favor of the
plaintiff (Par. 2, Exh. "E", record, pp. 335-336).

Significantly, the fourth paragraph of the Memorandum of Agreement (Contract

to Sell) dated January 20, 1989 (Exh. "E", supra.) contained a provision as
follows:

. . . . Upon issuance by the proper Court of the new title, the BUYER-
LESSEE shall be notified in writing and said BUYER-LESSEE shall have
thirty (30) days to produce the balance of P600,000.00 which shall be
paid to the SELLER-LESSORS upon the execution of the Extrajudicial
Settlement with sale.

On January 20, 1989, plaintiff paid the earnest money of THIRTY THOUSAND
PESOS (P30,000.00), plus rentals for the subject property (Exh. "F", Plaintiff,
record, p. 339).

On September 18, 1998 3, defendant heirs, through their counsel wrote a letter
(Exh. 1, Defendants, record, p. 370) to the plaintiff furnishing the latter a copy
of the reconstituted title to the subject property, advising him that he had
thirty (3) days to produce the balance of SIX HUNDRED PESOS (sic)
(P600,000.00) under the Memorandum of Agreement which plaintiff received on
the same date.

On October 18, 1989, plaintiff sent the defendant heirs a letter requesting for
an extension of the THIRTY (30) DAYS deadline up to November 15, 1989 within
which to produce the balance of SIX HUNDRED THOUSAND PESOS
(P600,000.00) (Exh. "G", Plaintiff, record, pp. 341-342). Defendant Roberto Z.
Laforteza, assisted by his counsel Atty. Romeo L. Gutierrez, signed his
conformity to the plaintiff's letter request (Exh. "G-1 and "G-2", Plaintiff,
record, p. 342). The extension, however, does not appear to have been approved
by Gonzalo Z. Laforteza, the second attorney-in-fact as his conformity does not
appear to have been secured.

On November 15, 1989, plaintiff informed the defendant heirs, through

defendant Roberto Z. Laforteza, that he already had the balance of SIX
HUNDRED THOUSAND PESOS (P600,000.00) covered by United Coconut
Planters Bank Manager's Check No. 000814 dated November 15, 1989 (TSN,
August 25, 1992, p. 11; Exhs. "H", record, pp. 343-344; "M", records p. 350; and
"N", record, p. 351). However, the defendants, refused to accept the balance
(TSN, August 24, 1992, p. 14; Exhs. "M-1", Plaintiff, record, p. 350; and "N-1",
Plaintiff, record, p. 351). Defendant Roberto Z. Laforteza had told him that the
subject property was no longer for sale (TSN, October 20, 1992, p. 19; Exh. "J",
record, p. 347).

On November 20, 1998 4, defendants informed plaintiff that they were canceling
the Memorandum of Agreement (Contract to Sell) in view of the plaintiff's
failure to comply with his contractual obligations (Exh. "3").

Thereafter, plaintiff reiterated his request to tender payment of the balance of

SIX HUNDRED THOUSAND PESOS (P600,000.00). Defendants, however,
insisted on the rescission of the Memorandum of Agreement. Thereafter,
plaintiff filed the instant action for specific performance. The lower court
rendered judgment on July 6, 1994 in favor of the plaintiff, the dispositive
portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff Alonzo

Machuca and against the defendant heirs of the late Francisco Q.
Laforteza, ordering the said defendants.

(a) To accept the balance of P600,000.00 as full payment of the

consideration for the purchase of the house and lot located at
 No. 7757 Sherwood Street, Marcelo Green Village, Paraaque,
Metro Manila, covered by Transfer Certificate of Title No.
(220656) 8941 of the Registry of Deeds of Rizal Paraaque,
Branch;

(b) To execute a registrable deed of absolute sale over the

subject property in favor of the plaintiff;

(c) Jointly and severally to pay the plaintiff the sum of

P20,000.00 as attorney's fees plus cost of suit.

5
SO ORDERED. (Rollo, pp. 74-75).

Petitioners appealed to the Court of Appeals, which affirmed with modification

the decision of the lower court; the dispositive portion of the Decision reads:

WHEREFORE, the questioned decision of the lower court is hereby

AFFIRMED with the MODIFICATION that defendant heirs Lea
Zulueta-Laforteza, Michael Z. Laforteza, Dennis Z. Laforteza and
Roberto Z. Laforteza including Gonzalo Z. Laforteza, Jr. are hereby
ordered to pay jointly and severally the sum of FIFTY THOUSAND
PESOS (P50,000.00) as moral damages.

6
SO ORDERED.

Motion for Reconsideration was denied but the Decision was modified so as to
absolve Gonzalo Z. Laforteza, Jr. from liability for the payment of moral
damages. 7 Hence this petition wherein the petitioners raise the following issues:

I. WHETHER THE TRIAL AND APPELLATE COURTS CORRECTLY

CONSTRUED THE MEMORANDUM OF AGREEMENT AS IMPOSING
RECIPROCAL OBLIGATIONS.

II. WHETHER THE COURTS A QUO CORRECTLY RULED THAT

RESCISSION WILL NOT LIE IN THE INSTANT CASE.

III. WHETHER THE RESPONDENT IS UNDER ESTOPPEL FROM

RAISING THE ALLEGED DEFECT IN THE SPECIAL POWER OF
ATTORNEY DATED 30 OCTOBER 1989 EXECUTED BY DENNIS
LAFORTEZA.
 IV. SUPPOSING EX GRATIA ARGUMENTI THE MEMORANDUM OF
AGREEMENT IMPOSES RECIPROCAL OBLIGATIONS, WHETHER THE
PETITIONERS MAY BE COMPELLED TO SELL THE SUBJECT
PROPERTY WHEN THE RESPONDENT FAILED TO MAKE A JUDICIAL
CONSIGNATION OF THE PURCHASE PRICE?

V. WHETHER THE PETITIONERS ARE IN BAD FAITH SO TO AS

MAKE THEM LIABLE FOR MORAL DAMAGES? 8

The petitioners contend that the Memorandum of Agreement is merely a lease

agreement with "option to purchase". As it was merely an option, it only gave the
respondent a right to purchase the subject property within a limited period
without imposing upon them any obligation to purchase it. Since the respondent's
tender of payment was made after the lapse of the option agreement, his tender
did not give rise to the perfection of a contract of sale.

It is further maintained by the petitioners that the Court of Appeals erred in

ruling that rescission of the contract was already out of the question. Rescission
implies that a contract of sale was perfected unlike the Memorandum of
Agreement in question which as previously stated is allegedly only an option
contract.

Petitioner adds that at most, the Memorandum of Agreement (Contract to Sell)

is a mere contract to sell, as indicated in its title. The obligation of the
petitioners to sell the property to the respondent was conditioned upon the
issuance of a new certificate of title and the execution of the extrajudicial
partition with sale and payment of the P600,000.00. This is why possession of
the subject property was not delivered to the respondent as the owner of the
property but only as the lessee thereof. And the failure of the respondent to
pay the purchase price in full prevented the petitioners' obligation to convey
title from acquiring obligatory force.

Petitioners also allege that assuming for the sake of argument that a contract of
sale was indeed perfected, the Court of Appeals still erred in holding that
respondent's failure to pay the purchase price of P600,000.00 was only a "slight
or casual breach".

The petitioners also claim that the Court of Appeals erred in ruling that they
were not ready to comply with their obligation to execute the extrajudicial
settlement. The Power of Attorney to execute a Deed of Sale made by Dennis Z.
Laforteza was sufficient and necessarily included the power to execute an
extrajudicial settlement. At any rate, the respondent is estopped from claiming
that the petitioners were not ready to comply with their obligation for he
acknowledged the petitioners' ability to do so when he requested for an
extension of time within which to pay the purchase price. Had he truly believed
that the petitioners were not ready, he would not have needed to ask for said
extension.

Finally, the petitioners allege that the respondent's uncorroborated testimony

that third persons offered a higher price for the property is hearsay and should
not be given any evidentiary weight. Thus, the order of the lower court awarding
moral damages was without any legal basis.

The appeal is bereft of merit.

A perusal of the Memorandum Agreement shows that the transaction between

the petitioners and the respondent was one of sale and lease. The terms of the
agreement read:

1. For and in consideration of the sum of PESOS: SIX HUNDRED

THIRTY THOUSAND (P630,000.00) payable in a manner herein below
indicated, SELLER-LESSOR hereby agree to sell unto BUYER-LESSEE
the property described in the first WHEREAS of this Agreement within
six (6) months from the execution date hereof, or upon issuance by the
Court of a new owner's certificate of title and the execution of
extrajudicial partition with sale of the estate of Francisco Laforteza,
whichever is earlier;

2. The above-mentioned sum of PESOS: SIX HUNDRED THIRTY

THOUSAND (P630,000.00) shall be paid in the following manner:

P30,000.00 as earnest money and as consideration for this

Agreement, which amount shall be forfeited in favor of SELLER-
LESSORS if the sale is not effected because of the fault or
option of BUYER-LESSEE;

P600,000.00 upon the issuance of the new certificate of title

in the name of the late Francisco Laforteza and upon the
execution of an Extrajudicial Settlement of his estate with sale
in favor of BUYER-LESSEE free from lien or any encumbrances.
 3. Parties reasonably estimate that the issuance of a new title in place
of the lost one, as well as the execution of extrajudicial settlement of
estate with sale to herein BUYER-LESSEE will be completed within six
(6) months from the execution of this Agreement. It is therefore
agreed that during the six months period, BUYER-LESSEE will be leasing
the subject property for six months period at the monthly rate of
PESOS: THREE THOUSAND FIVE HUNDRED
(P3,500.00). Provided however, that if the issuance of new title and the
execution of Extrajudicial Partition is completed prior to the expiration
of the six months period, BUYER-LESSEE shall only be liable for rentals
for the corresponding period commencing from his occupancy of the
premises to the execution and completion of the Extrajudicial
Settlement of the estate, provided further that if after the expiration
of six (6) months, the lost title is not yet replaced and the extra judicial
partition is not executed, BUYER-LESSEE shall no longer be required to
pay rentals and shall continue to occupy, and use the premises until
subject condition is complied by SELLER-LESSOR;

4. It is hereby agreed that within reasonable time from the execution of

this Agreement and the payment by BUYER-LESSEE of the amount of
P30,000.00 as herein above provided, SELLER-LESSORS shall
immediately file the corresponding petition for the issuance of a new
title in lieu of the lost one in the proper Courts. Upon issuance by the
proper Courts of the new title, the BUYER-LESSEE shall have thirty
(30) days to produce the balance of P600,000.00 which shall be paid to
the SELLER-LESSORS upon the execution of the Extrajudicial
Settlement with sale. 9

A contract of sale is a consensual contract and 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. 10 From that moment the parties may reciprocally
demand performance subject to the provisions of the law governing the form of
contracts. 11The elements of a valid contract of sale under Article 1458 of the
Civil Code are (1) consent or meeting of the minds; (2) determinate subject
matter and (3) price certain money or its equivalent. 12

In the case at bench, there was a perfected agreement between the petitioners
and the respondent whereby the petitioners obligated themselves to transfer
the ownership of and deliver the house and lot located at 7757 Sherwood St.,
Marcelo Green Village, Paraaque and the respondent to pay the price amounting
to six hundred thousand pesos (P600,000.00). All the elements of a contract of
sale were thus present. However, the balance of the purchase price was to be
paid only upon the issuance of the new certificate of title in lieu of the one in
the name of the late Francisco Laforteza and upon the execution of an
extrajudicial settlement of his estate. Prior to the issuance of the
"reconstituted" title, the respondent was already placed in possession of the
house and lot as lessee thereof for six months at a monthly rate of three
thousand five hundred pesos (P3,500.00). It was stipulated that should the
issuance of the new title and the execution of the extrajudicial settlement be
completed prior to expiration of the six-month period, the respondent would be
liable only for the rentals pertaining to the period commencing from the date of
the execution of the agreement up to the execution of the extrajudicial
settlement. It was also expressly stipulated that if after the expiration of the
six month period, the lost title was not yet replaced and the extrajudicial
partition was not yet executed, the respondent would no longer be required to
pay rentals and would continue to occupy and use the premises until the subject
condition was complied with the petitioners.

The six-month period during which the respondent would be in possession of the
property as lessee, was clearly not a period within which to exercise an option.
An option is a contract granting a privilege to buy or sell within an agreed time
and at a determined price. An option contract is a separate and distinct contract
from that which the parties may enter into upon the consummation of the
option. 13 An option must be supported by consideration. 14 An option contract is
governed by the second paragraph of Article 1479 of the Civil Code 15, which
reads:

Art. 1479. . . .

An accepted unilateral promise to buy or to sell a determinate thing for

a price certain is binding upon the promissor if the promise is supported
by a consideration distinct from the price.

In the present case, the six-month period merely delayed the demandability of
the contract of sale and did not determine its perfection for after the
expiration of the six-month period, there was an absolute obligation on the part
of the petitioners and the respondent to comply with the terms of the sale. The
parties made a "reasonable estimate" that the reconstitution the lost title of
the house and lot would take approximately six months and thus presumed that
after six months, both parties would be able to comply with what was
reciprocally incumbent upon them. The fact that after the expiration of the six-
month period, the respondent would retain possession of the house and lot
 without need of paying rentals for the use therefor, clearly indicated that the
parties contemplated that ownership over the property would already be
transferred by that time.

The issuance of the new certificate of title in the name of the late Francisco Laforteza
and the execution of an extrajudicial settlement of his estate was not a condition which
determined the perfection of the contract of sale. Petitioners' contention that since the
condition was not met, they no longer had an obligation to proceed with the sale of the
house and lot is unconvincing. The petitioners fail to distinguish between a condition
imposed upon the perfection of the contract and a condition imposed on the performance
of an obligation. Failure to comply with the first condition results in the failure of a
contract, while the failure to comply with the second condition only gives the other party
the option either to refuse to proceed with the sale or to waive the condition. Thus, Art.
1545 of the Civil Code states:

Art. 1545. Where the obligation of either party to a contract of sale is subject
to any condition which is not performed, such party may refuse to proceed with
the contract or he may waive performance of the condition. If the other party
has promised that the condition should happen or be performed, such first
mentioned party may also treat the nonperformance of the condition as a breach
of warranty.

Where the ownership in the things has not passed, the buyer may treat the
fulfillment by the seller of his obligation to deliver the same as described and as
warranted expressly or by implication in the contract of sale as a condition of
the obligation of the buyer to perform his promise to accept and pay for the
thing. 16

In the case at bar, there was already a perfected contract. The condition was imposed
only on the performance of the obligations contained therein. Considering however that
the title was eventually "reconstituted" and that the petitioners admit their ability to
execute the extrajudicial settlement of their father's estate, the respondent had a
right to demand fulfillment of the petitioners' obligation to deliver and transfer
ownership of the house and lot.

What further militates against petitioners' argument that they did not enter into a
contract or sale is the fact that the respondent paid thirty thousand pesos (P30,000.00)
as earnest money. Earnest money is something of value to show that the buyer was really
in earnest, and given to the seller to bind the bargain. 17 Whenever earnest money is given
in a contract of sale, it is considered as part of the purchase price and proof of the
perfection of the contract. 18
We do not subscribe to the petitioners' view that the Memorandum Agreement was a
contract to sell. There is nothing contained in the Memorandum Agreement from which it
can reasonably be deduced that the parties intended to enter into a contract to sell, i.e.
one whereby the prospective seller would explicitly reserve 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 full payment
of the price, such payment being a positive suspensive condition, the failure of which is
not considered a breach, casual or serious, but simply an event which prevented the
obligation from acquiring any obligatory force. 19 There is clearly no express reservation
of title made by the petitioners over the property, or any provision which would impose
non-payment of the price as a condition for the contract's entering into force. Although
the memorandum agreement was also denominated as a "Contract to Sell", we hold that
the parties contemplated a contract of sale. A deed of sale is absolute in nature
although denominated a conditional sale in the absence of a stipulation reserving title in
the petitioners until full payment of the purchase price. 20 In such cases, ownership of
the thing sold passes to the vendee upon actual or constructive delivery thereof. 21 The
mere fact that the obligation of the respondent to pay the balance of the purchase price
was made subject to the condition that the petitioners first deliver the reconstituted
title of the house and lot does not make the contract a contract to sell for such
condition is not inconsistent with a contract of sale. 22

The next issue to be addressed is whether the failure of the respondent to pay the
balance of the purchase price within the period allowed is fatal to his right to enforce
the agreement.

We rule in the negative.

Admittedly, the failure of the respondent to pay the balance of the purchase price was a
breach of the contract and was a ground for rescission thereof. The extension of thirty
(30) days allegedly granted to the respondent by Roberto Z. Laforteza (assisted by his
counsel Attorney Romeo Gutierrez) was correctly found by the Court of Appeals to be
ineffective inasmuch as the signature of Gonzalo Z. Laforteza did not appear thereon as
required by the Special Powers of Attorney. 23 However, the evidence reveals that after
the expiration of the six-month period provided for in the contract, the petitioners
were not ready to comply with what was incumbent upon them, i.e. the delivery of the
reconstituted title of the house and lot. It was only on September 18, 1989 or nearly
eight months after the execution of the Memorandum of Agreement when the
petitioners informed the respondent that they already had a copy of the reconstituted
title and demanded the payment of the balance of the purchase price. The respondent
could not therefore be considered in delay for in reciprocal obligations, neither party
incurs in delay if the other party does not comply or is not ready to comply in a proper
manner with what was incumbent upon him. 24

Even assuming for the sake of argument that the petitioners were ready to comply with
their obligation, we find that rescission of the contract will still not prosper. The
rescission of a sale of an immovable property is specifically governed by Article 1592 of
the New Civil Code, which reads:

In the sale of immovable property, even though it may have been stipulated that
upon failure to pay the price at the time agreed upon the rescission of the
contract shall of right take place, the vendee may pay, even after the expiration
of the period, as long as no demand for rescission of the contract has been made
upon him either judicially or by a notarial act. After the demand, the court may
not grant him a new term. 25

It is not disputed that the petitioners did not make a judicial or notarial demand for
rescission.1avvphi1 The November 20, 1989 letter of the petitioners informing the
respondent of the automatic rescission of the agreement did not amount to a demand for
rescission, as it was not notarized. 26 It was also made five days after the respondent's
attempt to make the payment of the purchase price. This offer to pay prior to the
demand for rescission is sufficient to defeat the petitioners' right under article 1592 of
the Civil Code. 27 Besides, the Memorandum Agreement between the parties did not
contain a clause expressly authorizing the automatic cancellation of the contract without
court intervention in the event that the terms thereof were violated. A seller cannot
unilaterally and extrajudicially rescind a contract or sale where there is no express
stipulation authorizing him to extrajudicially rescind. 28 Neither was there a judicial
demand for the rescission thereof. Thus, when the respondent filed his complaint for
specific performance, the agreement was still in force inasmuch as the contract was not
yet rescinded. At any rate, considering that the six-month period was merely an
approximation of the time if would take to reconstitute the lost title and was not a
condition imposed on the perfection of the contract and considering further that the
delay in payment was only thirty days which was caused by the respondents justified but
mistaken belief that an extension to pay was granted to him, we agree with the Court of
Appeals that the delay of one month in payment was a mere casual breach that would not
entitle the respondents to rescind the contract. Rescission of a contract will not be
permitted for a slight or casual breach, but only such substantial and fundamental
breach as would defeat the very object of the parties in making the agreemant. 29

Petitioners' insistence that the respondent should have consignated the amount is not
determinative of whether respondent's action for specific performance will lie.
Petitioners themselves point out that the effect of cansignation is to extinguish the
obligation. It releases the debtor from responsibility therefor. 30 The failure of the
respondent to consignate the P600,000.00 is not tantamount to a breach of the contract
for by the fact of tendering payment, he was willing and able to comply with his
obligation.

The Court of Appeals correctly found the petitioners guilty of bad faith and
awarded moral damages to the respondent. As found by the said Court, the
petitioners refused to comply with, their obligation for the reason that they
were offered a higher price therefor and the respondent was even offered
P100,000.00 by the petitioners' lawyer, Attorney Gutierrez, to relinquish his
rights over the property. The award of moral damages is in accordance with
Article 1191 31 of the Civil Code pursuant to Article 2220 which provides that
moral damages may be awarded in case of breach of contract where the
defendant acted in bad faith. The amount awarded depends on the discretion of
the court based on the circumstances of each
case. 32 Under the circumstances, the award given by the Court of Appeals
amounting to P50,000.00 appears to us to be fair and reasonable.

ACCORDINGLY, the decision of the Court of Appeals in CA G.R. CV No. 47457 is

AFFIRMED and the instant petition is hereby DENIED.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 126083 July 12, 2006

ANTONIO R. CORTES (in his capacity as Administrator of the estate of Claro S.

Cortes), petitioner,
vs.
HON. COURT OF APPEALS and VILLA ESPERANZA DEVELOPMENT
CORPORATION, respondents.

DECISION

YNARES-SANTIAGO, J.:

The instant petition for review seeks the reversal of the June 13, 1996 Decision 1 of the
Court of Appeals in CA-G.R. CV No. 47856, setting aside the June 24, 1993 Decision2 of
the Regional Trial Court of Makati, Branch 138, which rescinded the contract of sale
entered into by petitioner Antonio Cortes (Cortes) and private respondent Villa
Esperanza Development Corporation (Corporation).

The antecedents show that for the purchase price of P3,700,000.00, the Corporation as
buyer, and Cortes as seller, entered into a contract of sale over the lots covered by
Transfer Certificate of Title (TCT) No. 31113-A, TCT No. 31913-A and TCT No. 32013-
A, located at Baclaran, Paraaque, Metro Manila. On various dates in 1983, the
Corporation advanced to Cortes the total sum of P1,213,000.00. Sometime in September
1983, the parties executed a deed of absolute sale containing the following terms: 3

1. Upon execution of this instrument, the Vendee shall pay unto the Vendor sum
of TWO MILLION AND TWO HUNDRED THOUSAND (P2,200,000.00) PESOS,
Philippine Currency, less all advances paid by the Vendee to the Vendor in
connection with the sale;

2. The balance of ONE MILLION AND FIVE HUNDRED THOUSAND

[P1,500,000.00] PESOS, Phil. Currency shall be payable within ONE (1) YEAR
from date of execution of this instrument, payment of which shall be secured by
an irrevocable standby letter of credit to be issued by any reputable local
banking institution acceptable to the Vendor.

xxxx

4. All expense for the registration of this document with the Register of Deeds
concerned, including the transfer tax, shall be divided equally between the
Vendor and the Vendee. Payment of the capital gains shall be exclusively for the
account of the Vendor; 5% commission of Marcosa Sanchez to be deducted upon
signing of sale.4

Said Deed was retained by Cortes for notarization.

On January 14, 1985, the Corporation filed the instant case5 for specific performance
seeking to compel Cortes to deliver the TCTs and the original copy of the Deed of
Absolute Sale. According to the Corporation, despite its readiness and ability to pay the
purchase price, Cortes refused delivery of the sought documents. It thus prayed for the
award of damages, attorney's fees and litigation expenses arising from Cortes' refusal
to deliver the same documents.

In his Answer with counterclaim,6 Cortes claimed that the owner's duplicate copy of the
three TCTs were surrendered to the Corporation and it is the latter which refused to
pay in full the agreed down payment. He added that portion of the subject property is
occupied by his lessee who agreed to vacate the premises upon payment of disturbance
fee. However, due to the Corporation's failure to pay in full the sum of P2,200,000.00,
he in turn failed to fully pay the disturbance fee of the lessee who now refused to pay
monthly rentals. He thus prayed that the Corporation be ordered to pay the outstanding
balance plus interest and in the alternative, to cancel the sale and forfeit the
P1,213,000.00 partial down payment, with damages in either case.

On June 24, 1993, the trial court rendered a decision rescinding the sale and directed
Cortes to return to the Corporation the amount of P1,213,000.00, plus interest. It ruled
that pursuant to the contract of the parties, the Corporation should have fully paid the
amount of P2,200,000.00 upon the execution of the contract. It stressed that such is
the law between the parties because the Corporation failed to present evidence that
there was another agreement that modified the terms of payment as stated in the
contract. And, having failed to pay in full the amount of P2,200,000.00 despite Cortes'
delivery of the Deed of Absolute Sale and the TCTs, rescission of the contract is
proper.

In its motion for reconsideration, the Corporation contended that the trial court failed
to consider their agreement that it would pay the balance of the down payment when
Cortes delivers the TCTs. The motion was, however, denied by the trial court holding
that the rescission should stand because the Corporation did not act on the offer of
Cortes' counsel to deliver the TCTs upon payment of the balance of the down payment.
Thus:

The Court finds no merit in the [Corporation's] Motion for Reconsideration. As

stated in the decision sought to be reconsidered, [Cortes'] counsel at the pre-
trial of this case, proposed that if [the Corporation] completes the down
payment agreed upon and make arrangement for the payment of the balances of
the purchase price, [Cortes] would sign the Deed of Sale and turn over the
certificate of title to the [Corporation]. [The Corporation] did nothing to comply
with its undertaking under the agreement between the parties.

WHEREFORE, in view of the foregoing considerations, the Motion for

Reconsideration is hereby DENIED.

SO ORDERED.7

On appeal, the Court of Appeals reversed the decision of the trial court and directed
Cortes to execute a Deed of Absolute Sale conveying the properties and to deliver the
same to the Corporation together with the TCTs, simultaneous with the Corporation's
payment of the balance of the purchase price of P2,487,000.00. It found that the
parties agreed that the Corporation will fully pay the balance of the down payment upon
Cortes' delivery of the three TCTs to the Corporation. The records show that no such
delivery was made, hence, the Corporation was not remiss in the performance of its
obligation and therefore justified in not paying the balance. The decretal portion
thereof, provides:

WHEREFORE, premises considered, [the Corporation's] appeal is GRANTED. The

decision appealed from is hereby REVERSED and SET ASIDE and a new
judgment rendered ordering [Cortes] to execute a deed of absolute sale
conveying to [the Corporation] the parcels of land subject of and described in
the deed of absolute sale, Exhibit D. Simultaneously with the execution of the
deed of absolute sale and the delivery of the corresponding owner's duplicate
copies of TCT Nos. 31113-A, 31931-A and 32013-A of the Registry of Deeds for
the Province of Rizal, Metro Manila, District IV, [the Corporation] shall pay
[Cortes] the balance of the purchase price of P2,487,000.00. As agreed upon in
paragraph 4 of the Deed of Absolute Sale, Exhibit D, under terms and
conditions, "All expenses for the registration of this document (the deed of
sale) with the Register of Deeds concerned, including the transfer tax, shall be
divided equally between [Cortes and the Corporation]. Payment of the capital
gains shall be exclusively for the account of the Vendor; 5% commission of
Marcosa Sanchez to be deducted upon signing of sale." There is no
pronouncement as to costs.

SO ORDERED.8

Cortes filed the instant petition praying that the decision of the trial court rescinding
the sale be reinstated.

There is no doubt that the contract of sale in question gave rise to a reciprocal
obligation of the parties. Reciprocal obligations are those which arise from the same
cause, and which each party is a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of the other. They are to be
performed simultaneously, so that the performance of one is conditioned upon the
simultaneous fulfillment of the other.9

Article 1191 of the Civil Code, states:

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.

xxxx
As to when said failure or delay in performance arise, Article 1169 of the same Code
provides that

ART. 1169

xxxx

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 fulfills his obligation, delay by the
other begins. (Emphasis supplied)

The issue therefore is whether there is delay in the performance of the parties'
obligation that would justify the rescission of the contract of sale. To resolve this issue,
we must first determine the true agreement of the parties.

The settled rule is that the decisive factor in evaluating an agreement is the intention of
the parties, as shown not necessarily by the terminology used in the contract but by
their conduct, words, actions and deeds prior to, during and immediately after executing
the agreement. As such, therefore, documentary and parol evidence may be submitted
and admitted to prove such intention. 10

In the case at bar, the stipulation in the Deed of Absolute Sale was that the Corporation
shall pay in full the P2,200,000.00 down payment upon execution of the contract.
However, as correctly noted by the Court of Appeals, the transcript of stenographic
notes reveal Cortes' admission that he agreed that the Corporation's full payment of the
sum of P2,200,000.00 would depend upon his delivery of the TCTs of the three lots. In
fact, his main defense in the Answer is that, he performed what is incumbent upon him
by delivering to the Corporation the TCTs and the carbon duplicate of the Deed of
Absolute Sale, but the latter refused to pay in full the down payment. 11 Pertinent portion
of the transcript, reads:

[Q] Now, why did you deliver these three titles to the plaintiff despite the fact
that it has not been paid in full the agreed down payment?

A Well, the broker told me that the down payment will be given if I surrender
the titles.

Q Do you mean to say that the plaintiff agreed to pay in full the down payment
of P2,200,000.00 provided you surrender or entrust to the plaintiff the titles?
 A Yes, sir.12

What further confirmed the agreement to deliver the TCTs is the testimony of Cortes
that the title of the lots will be transferred in the name of the Corporation upon full
payment of the P2,200,000.00 down payment. Thus

ATTY. ANTARAN

Q Of course, you have it transferred in the name of the plaintiff, the title?

A Upon full payment.

xxxx

ATTY. SARTE

Q When you said upon full payment, are you referring to the agreed down
payment of P2,200,000.00?

A Yes, sir.13

By agreeing to transfer title upon full payment of P2,200,000.00, Cortes' impliedly

agreed to deliver the TCTs to the Corporation in order to effect said transfer. Hence,
the phrase "execution of this instrument" 14 as appearing in the Deed of Absolute Sale,
and which event would give rise to the Corporation's obligation to pay in full the amount
of P2,200,000.00, can not be construed as referring solely to the signing of the deed.
The meaning of "execution" in the instant case is not limited to the signing of a contract
but includes as well the performance or implementation or accomplishment of the
parties' agreement.15 With the transfer of titles as the corresponding reciprocal
obligation of payment, Cortes' obligation is not only to affix his signature in the Deed,
but to set into motion the process that would facilitate the transfer of title of the
lots, i.e., to have the Deed notarized and to surrender the original copy thereof to the
Corporation together with the TCTs.

Having established the true agreement of the parties, the Court must now determine
whether Cortes delivered the TCTs and the original Deed to the Corporation. The Court
of Appeals found that Cortes never surrendered said documents to the Corporation.
Cortes testified that he delivered the same to Manny Sanchez, the son of the broker,
and that Manny told him that her mother, Marcosa Sanchez, delivered the same to the
Corporation.
Q Do you have any proof to show that you have indeed surrendered these titles
to the plaintiff?

A Yes, sir.

Q I am showing to you a receipt dated October 29, 1983, what relation has this
receipt with that receipt that you have mentioned?

A That is the receipt of the real estate broker when she received the titles.

Q On top of the printed name is Manny Sanchez, there is a signature, do you

know who is that Manny Sanchez?

A That is the son of the broker.

xxxx

Q May we know the full name of the real estate broker?

A Marcosa Sanchez

xxxx

Q Do you know if the broker or Marcosa Sanchez indeed delivered the titles to
the plaintiff?

A That is what [s]he told me. She gave them to the plaintiff.

x x x x.16

ATTY. ANTARAN

Q Are you really sure that the title is in the hands of the plaintiff?

xxxx

Q It is in the hands of the broker but there is no showing that it is in the hands
of the plaintiff?

A Yes, sir.
 COURT

Q How do you know that it was delivered to the plaintiff by the son of the
broker?

A The broker told me that she delivered the title to the plaintiff.

ATTY. ANTARAN

Q Did she not show you any receipt that she delivered to [Mr.] Dragon 17 the title
without any receipt?

A I have not seen any receipt.

Q So, therefore, you are not sure whether the title has been delivered to the
plaintiff or not. It is only upon the allegation of the broker?

A Yes, sir.18

However, Marcosa Sanchez's unrebutted testimony is that, she did not receive the
TCTs. She also denied knowledge of delivery thereof to her son, Manny, thus:

Q The defendant, Antonio Cortes testified during the hearing on March 11, 1986
that he allegedly gave you the title to the property in question, is it true?

A I did not receive the title.

Q He likewise said that the title was delivered to your son, do you know about
that?

A I do not know anything about that.19

What further strengthened the findings of the Court of Appeals that Cortes did not
surrender the subject documents was the offer of Cortes' counsel at the pre-trial to
deliver the TCTs and the Deed of Absolute Sale if the Corporation will pay the balance
of the down payment. Indeed, if the said documents were already in the hands of the
Corporation, there was no need for Cortes' counsel to make such offer.

Since Cortes did not perform his obligation to have the Deed notarized and to surrender
the same together with the TCTs, the trial court erred in concluding that he performed
his part in the contract of sale and that it is the Corporation alone that was remiss in
the performance of its obligation. Actually, both parties were in delay. Considering that
their obligation was reciprocal, performance thereof must be simultaneous. The mutual
inaction of Cortes and the Corporation therefore gave rise to a compensation morae or
default on the part of both parties because neither has completed their part in their
reciprocal obligation.20 Cortes is yet to deliver the original copy of the notarized Deed
and the TCTs, while the Corporation is yet to pay in full the agreed down payment of
P2,200,000.00. This mutual delay of the parties cancels out the effects of
default,21 such that it is as if no one is guilty of delay. 22

We find no merit in Cortes' contention that the failure of the Corporation to act on the
proposed settlement at the pre-trial must be construed against the latter. Cortes
argued that with his counsel's offer to surrender the original Deed and the TCTs, the
Corporation should have consigned the balance of the down payment. This argument
would have been correct if Cortes actually surrendered the Deed and the TCTs to the
Corporation. With such delivery, the Corporation would have been placed in default if it
chose not to pay in full the required down payment. Under Article 1169 of the Civil Code,
from the moment one of the parties fulfills his obligation, delay by the other begins.
Since Cortes did not perform his part, the provision of the contract requiring the
Corporation to pay in full the down payment never acquired obligatory force. Moreover,
the Corporation could not be faulted for not automatically heeding to the offer of
Cortes. For one, its complaint has a prayer for damages which it may not want to waive
by agreeing to the offer of Cortes' counsel. For another, the previous representation of
Cortes that the TCTs were already delivered to the Corporation when no such delivery
was in fact made, is enough reason for the Corporation to be more cautious in dealing
with him.

The Court of Appeals therefore correctly ordered the parties to perform their
respective obligation in the contract of sale, i.e., for Cortes to, among others, deliver the
necessary documents to the Corporation and for the latter to pay in full, not only the
down payment, but the entire purchase price. And since the Corporation did not question
the Court of Appeal's decision and even prayed for its affirmance, its payment should
rightfully consist not only of the amount of P987,000.00, representing the balance of
the P2,200,000.00 down payment, but the total amount of P2,487,000.00, the remaining
balance in the P3,700,000.00 purchase price.

WHEREFORE, the petition is DENIED and the June 13, 1996 Decision of the Court of
Appeals in CA-G.R. CV No. 47856, is AFFIRMED.

SO ORDERED.

G.R. No. L-11827 July 31, 1961

FERNANDO 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.

G.R. No. L-11827 July 31, 1961

FERNANDO 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.

G.R. No. 126376 November 20, 2003

SPOUSES BERNARDO BUENAVENTURA and CONSOLACION JOAQUIN, SPOUSES

JUANITO EDRA and NORA JOAQUIN, SPOUSES RUFINO VALDOZ and EMMA
JOAQUIN, and NATIVIDAD JOAQUIN, petitioners,
vs.
COURT OF APPEALS, SPOUSES LEONARDO JOAQUIN and FELICIANA
LANDRITO, SPOUSES FIDEL JOAQUIN and CONCHITA BERNARDO, SPOUSES
TOMAS JOAQUIN and SOLEDAD ALCORAN, SPOUSES ARTEMIO JOAQUIN and
SOCORRO ANGELES, SPOUSES ALEXANDER MENDOZA and CLARITA JOAQUIN,
SPOUSES TELESFORO CARREON and FELICITAS JOAQUIN, SPOUSES DANILO
VALDOZ and FE JOAQUIN, and SPOUSES GAVINO JOAQUIN and LEA
ASIS, respondents.

DECISION

CARPIO, J.:

The Case

This is a petition for review on certiorari1 to annul the Decision2 dated 26 June 1996 of
the Court of Appeals in CA-G.R. CV No. 41996. The Court of Appeals affirmed the
Decision3 dated 18 February 1993 rendered by Branch 65 of the Regional Trial Court of
Makati ("trial court") in Civil Case No. 89-5174. The trial court dismissed the case after
it found that the parties executed the Deeds of Sale for valid consideration and that
the plaintiffs did not have a cause of action against the defendants.

The Facts
The Court of Appeals summarized the facts of the case as follows:

Defendant spouses Leonardo Joaquin and Feliciana Landrito are the parents of plaintiffs
Consolacion, Nora, Emma and Natividad as well as of defendants Fidel, Tomas, Artemio,
Clarita, Felicitas, Fe, and Gavino, all surnamed JOAQUIN. The married Joaquin children
are joined in this action by their respective spouses.

Sought to be declared null and void ab initio are certain deeds of sale of real property
executed by defendant parents Leonardo Joaquin and Feliciana Landrito in favor of their
co-defendant children and the corresponding certificates of title issued in their names,
to wit:

1. Deed of Absolute Sale covering Lot 168-C-7 of subdivision plan (LRC) Psd-
256395 executed on 11 July 1978, in favor of defendant Felicitas Joaquin, for a
consideration of P6,000.00 (Exh. "C"), pursuant to which TCT No. [36113/T-172]
was issued in her name (Exh. "C-1");

2. Deed of Absolute Sale covering Lot 168-I-3 of subdivision plan (LRC) Psd-
256394 executed on 7 June 1979, in favor of defendant Clarita Joaquin, for a
consideration of P1[2],000.00 (Exh. "D"), pursuant to which TCT No. S-109772
was issued in her name (Exh. "D-1");

3 Deed of Absolute Sale covering Lot 168-I-1 of subdivision plan (LRC) Psd-
256394 executed on 12 May 1988, in favor of defendant spouses Fidel Joaquin
and Conchita Bernardo, for a consideration of P54,[3]00.00 (Exh. "E"), pursuant
to which TCT No. 155329 was issued to them (Exh. "E-1");

4. Deed of Absolute Sale covering Lot 168-I-2 of subdivision plan (LRC) Psd-
256394 executed on 12 May 1988, in favor of defendant spouses Artemio
Joaquin and Socorro Angeles, for a consideration of P[54,3]00.00 (Exh. "F"),
pursuant to which TCT No. 155330 was issued to them (Exh. "F-1"); and

5. Absolute Sale of Real Property covering Lot 168-C-4 of subdivision plan (LRC)
Psd-256395 executed on 9 September 1988, in favor of Tomas Joaquin, for a
consideration of P20,000.00 (Exh. "G"), pursuant to which TCT No. 157203 was
issued in her name (Exh. "G-1").

6. Deed of Absolute Sale covering Lot 168-C-1 of subdivision plan (LRC) Psd-
256395 executed on 7 October 1988, in favor of Gavino Joaquin, for a
consideration of P25,000.00 (Exh. "K"), pursuant to which TCT No. 157779 was
issued in his name (Exh. "K-1").]
In seeking the declaration of nullity of the aforesaid deeds of sale and certificates of
title, plaintiffs, in their complaint, aver:

- XX-

The deeds of sale, Annexes "C," "D," "E," "F," and "G," [and "K"] are simulated as they
are, are NULL AND VOID AB INITIO because

a) Firstly, there was no actual valid consideration for the deeds of sale xxx over
the properties in litis;

b) Secondly, assuming that there was consideration in the sums reflected in the
questioned deeds, the properties are more than three-fold times more valuable
than the measly sums appearing therein;

c) Thirdly, the deeds of sale do not reflect and express the true intent of the
parties (vendors and vendees); and

d) Fourthly, the purported sale of the properties in litis was the result of a
deliberate conspiracy designed to unjustly deprive the rest of the compulsory
heirs (plaintiffs herein) of their legitime.

- XXI -

Necessarily, and as an inevitable consequence, Transfer Certificates of Title Nos.

36113/T-172, S-109772, 155329, 155330, 157203 [and 157779] issued by the Registrar
of Deeds over the properties in litis xxx are NULL AND VOID AB INITIO.

Defendants, on the other hand aver (1) that plaintiffs do not have a cause of action
against them as well as the requisite standing and interest to assail their titles over the
properties in litis; (2) that the sales were with sufficient considerations and made by
defendants parents voluntarily, in good faith, and with full knowledge of the
consequences of their deeds of sale; and (3) that the certificates of title were issued
with sufficient factual and legal basis. 4 (Emphasis in the original)

The Ruling of the Trial Court

Before the trial, the trial court ordered the dismissal of the case against defendant
spouses Gavino Joaquin and Lea Asis. 5 Instead of filing an Answer with their co-
defendants, Gavino Joaquin and Lea Asis filed a Motion to Dismiss. 6 In granting the
dismissal to Gavino Joaquin and Lea Asis, the trial court noted that "compulsory heirs
have the right to a legitime but such right is contingent since said right commences only
from the moment of death of the decedent pursuant to Article 777 of the Civil Code of
the Philippines."7

After trial, the trial court ruled in favor of the defendants and dismissed the complaint.
The trial court stated:

In the first place, the testimony of the defendants, particularly that of the xxx father
will show that the Deeds of Sale were all executed for valuable consideration. This
assertion must prevail over the negative allegation of plaintiffs.

And then there is the argument that plaintiffs do not have a valid cause of action against
defendants since there can be no legitime to speak of prior to the death of their
parents. The court finds this contention tenable. In determining the legitime, the value
of the property left at the death of the testator shall be considered (Art. 908 of the
New Civil Code). Hence, the legitime of a compulsory heir is computed as of the time of
the death of the decedent. Plaintiffs therefore cannot claim an impairment of their
legitime while their parents live.

All the foregoing considered, this case is DISMISSED.

In order to preserve whatever is left of the ties that should bind families together, the
counterclaim is likewise DISMISSED.

No costs.

SO ORDERED.8

The Ruling of the Court of Appeals

The Court of Appeals affirmed the decision of the trial court.1wphi1 The appellate
court ruled:

To the mind of the Court, appellants are skirting the real and decisive issue in this case,
which is, whether xxx they have a cause of action against appellees.

Upon this point, there is no question that plaintiffs-appellants, like their defendant
brothers and sisters, are compulsory heirs of defendant spouses, Leonardo Joaquin and
Feliciana Landrito, who are their parents. However, their right to the properties of their
defendant parents, as compulsory heirs, is merely inchoate and vests only upon the
latters death. While still alive, defendant parents are free to dispose of their
properties, provided that such dispositions are not made in fraud of creditors.

Plaintiffs-appellants are definitely not parties to the deeds of sale in question. Neither
do they claim to be creditors of their defendant parents. Consequently, they cannot be
considered as real parties in interest to assail the validity of said deeds either for gross
inadequacy or lack of consideration or for failure to express the true intent of the
parties. In point is the ruling of the Supreme Court in Velarde, et al. vs. Paez, et al., 101
SCRA 376, thus:

The plaintiffs are not parties to the alleged deed of sale and are not principally or
subsidiarily bound thereby; hence, they have no legal capacity to challenge their validity.

Plaintiffs-appellants anchor their action on the supposed impairment of their legitime by

the dispositions made by their defendant parents in favor of their defendant brothers
and sisters. But, as correctly held by the court a quo, "the legitime of a compulsory heir
is computed as of the time of the death of the decedent. Plaintiffs therefore cannot
claim an impairment of their legitime while their parents live."

With this posture taken by the Court, consideration of the errors assigned by plaintiffs-
appellants is inconsequential.

WHEREFORE, the decision appealed from is hereby AFFIRMED, with costs against
plaintiffs-appellants.

SO ORDERED.9

Hence, the instant petition.

Issues

Petitioners assign the following as errors of the Court of Appeals:

1. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE

CONVEYANCE IN QUESTION HAD NO VALID CONSIDERATION.

2. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT EVEN

ASSUMING THAT THERE WAS A CONSIDERATION, THE SAME IS
GROSSLY INADEQUATE.
 3. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE DEEDS OF
SALE DO NOT EXPRESS THE TRUE INTENT OF THE PARTIES.

4. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE

CONVEYANCE WAS PART AND PARCEL OF A CONSPIRACY AIMED AT
UNJUSTLY DEPRIVING THE REST OF THE CHILDREN OF THE SPOUSES
LEONARDO JOAQUIN AND FELICIANA LANDRITO OF THEIR INTEREST
OVER THE SUBJECT PROPERTIES.

5. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONERS

HAVE A GOOD, SUFFICIENT AND VALID CAUSE OF ACTION AGAINST THE
PRIVATE RESPONDENTS.10

The Ruling of the Court

We find the petition without merit.

We will discuss petitioners legal interest over the properties subject of the Deeds of
Sale before discussing the issues on the purported lack of consideration and gross
inadequacy of the prices of the Deeds of Sale.

Whether Petitioners have a legal interest over the properties subject of the Deeds of
Sale

Petitioners Complaint betrays their motive for filing this case. In their Complaint,
petitioners asserted that the "purported sale of the properties in litis was the result of
a deliberate conspiracy designed to unjustly deprive the rest of the compulsory heirs
(plaintiffs herein) of their legitime." Petitioners strategy was to have the Deeds of Sale
declared void so that ownership of the lots would eventually revert to their respondent
parents. If their parents die still owning the lots, petitioners and their respondent
siblings will then co-own their parents estate by hereditary succession. 11

It is evident from the records that petitioners are interested in the properties subject
of the Deeds of Sale, but they have failed to show any legal right to the properties. The
trial and appellate courts should have dismissed the action for this reason alone. An
action must be prosecuted in the name of the real party-in-interest.12

[T]he question as to "real party-in-interest" is whether he is "the party who would be

benefitted or injured by the judgment, or the party entitled to the avails of the suit."

xxx
In actions for the annulment of contracts, such as this action, the real parties are those
who are parties to the agreement or are bound either principally or subsidiarily or are
prejudiced in their rights with respect to one of the contracting parties and can show
the detriment which would positively result to them from the contract even though they
did not intervene in it (Ibaez v. Hongkong & Shanghai Bank, 22 Phil. 572 [1912]) xxx.

These are parties with "a present substantial interest, as distinguished from a mere
expectancy or future, contingent, subordinate, or consequential interest. The phrase
present substantial interest more concretely is meant such interest of a party in the
subject matter of the action as will entitle him, under the substantive law, to recover if
the evidence is sufficient, or that he has the legal title to demand and the defendant
will be protected in a payment to or recovery by him."13

Petitioners do not have any legal interest over the properties subject of the Deeds of
Sale. As the appellate court stated, petitioners right to their parents properties is
merely inchoate and vests only upon their parents death. While still living, the parents
of petitioners are free to dispose of their properties. In their overzealousness to
safeguard their future legitime, petitioners forget that theoretically, the sale of the
lots to their siblings does not affect the value of their parents estate. While the sale of
the lots reduced the estate, cash of equivalent value replaced the lots taken from the
estate.

Whether the Deeds of Sale are void for lack of consideration

Petitioners assert that their respondent siblings did not actually pay the prices stated in
the Deeds of Sale to their respondent father. Thus, petitioners ask the court to declare
the Deeds of Sale void.

A contract of sale is not a real contract, but a consensual contract. As a consensual

contract, a contract of sale becomes a binding and valid contract upon the meeting of
the minds as to price. If there is a meeting of the minds of the parties as to the price,
the contract of sale is valid, despite the manner of payment, or even the breach of that
manner of payment. If the real price is not stated in the contract, then the contract of
sale is valid but subject to reformation. If there is no meeting of the minds of the
parties as to the price, because the price stipulated in the contract is simulated, then
the contract is void.14 Article 1471 of the Civil Code states that if the price in a contract
of sale is simulated, the sale is void.

It is not the act of payment of price that determines the validity of a contract of sale.
Payment of the price has nothing to do with the perfection of the contract. Payment of
the price goes into the performance of the contract. Failure to pay the consideration is
different from lack of consideration. The former results in a right to demand the
fulfillment or cancellation of the obligation under an existing valid contract while the
latter prevents the existence of a valid contract. 15

Petitioners failed to show that the prices in the Deeds of Sale were absolutely
simulated. To prove simulation, petitioners presented Emma Joaquin Valdozs testimony
stating that their father, respondent Leonardo Joaquin, told her that he would transfer
a lot to her through a deed of sale without need for her payment of the purchase
price.16 The trial court did not find the allegation of absolute simulation of price
credible. Petitioners failure to prove absolute simulation of price is magnified by their
lack of knowledge of their respondent siblings financial capacity to buy the questioned
lots.17 On the other hand, the Deeds of Sale which petitioners presented as evidence
plainly showed the cost of each lot sold. Not only did respondents minds meet as to the
purchase price, but the real price was also stated in the Deeds of Sale. As of the filing
of the complaint, respondent siblings have also fully paid the price to their respondent
father.18

Whether the Deeds of Sale are void for gross inadequacy of price

Petitioners ask that assuming that there is consideration, the same is grossly inadequate
as to invalidate the Deeds of Sale.

Articles 1355 of the Civil Code states:

Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not
invalidate a contract, unless there has been fraud, mistake or undue influence. (Emphasis
supplied)

Article 1470 of the Civil Code further provides:

Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as may
indicate a defect in the consent, or that the parties really intended a donation or some
other act or contract. (Emphasis supplied)

Petitioners failed to prove any of the instances mentioned in Articles 1355 and 1470 of
the Civil Code which would invalidate, or even affect, the Deeds of Sale. Indeed, there is
no requirement that the price be equal to the exact value of the subject matter of sale.
All the respondents believed that they received the commutative value of what they
gave. As we stated in Vales v. Villa:19
Courts cannot follow one every step of his life and extricate him from bad bargains,
protect him from unwise investments, relieve him from one-sided contracts, or annul the
effects of foolish acts. Courts cannot constitute themselves guardians of persons who
are not legally incompetent. Courts operate not because one person has been defeated or
overcome by another, but because he has been defeated or overcome illegally. Men may
do foolish things, make ridiculous contracts, use miserable judgment, and lose money by
them indeed, all they have in the world; but not for that alone can the law intervene
and restore. There must be, in addition, a violation of the law, the commission of what
the law knows as an actionable wrong, before the courts are authorized to lay hold of
the situation and remedy it. (Emphasis in the original)

Moreover, the factual findings of the appellate court are conclusive on the parties and
carry greater weight when they coincide with the factual findings of the trial court. This
Court will not weigh the evidence all over again unless there has been a showing that the
findings of the lower court are totally devoid of support or are clearly erroneous so as to
constitute serious abuse of discretion. 20 In the instant case, the trial court found that
the lots were sold for a valid consideration, and that the defendant children actually
paid the purchase price stipulated in their respective Deeds of Sale. Actual payment of
the purchase price by the buyer to the seller is a factual finding that is now conclusive
upon us.

WHEREFORE, we AFFIRM the decision of the Court of Appeals in toto.

SO ORDERED.

G.R. No. 124242 January 21, 2005

SAN LORENZO DEVELOPMENT CORPORATION, petitioner,

vs.
COURT OF APPEALS, PABLO S. BABASANTA, SPS. MIGUEL LU and PACITA
ZAVALLA LU, respondents.

DECISION

TINGA, J.:

From a coaptation of the records of this case, it appears that respondents Miguel Lu and
Pacita Zavalla, (hereinafter, the Spouses Lu) owned two (2) parcels of land situated in
Sta. Rosa, Laguna covered by TCT No. T-39022 and TCT No. T-39023 both measuring
15,808 square meters or a total of 3.1616 hectares.
On 20 August 1986, the Spouses Lu purportedly sold the two parcels of land to
respondent Pablo Babasanta, (hereinafter, Babasanta) for the price of fifteen pesos
(P15.00) per square meter. Babasanta made a downpayment of fifty thousand pesos
(P50,000.00) as evidenced by a memorandum receipt issued by Pacita Lu of the same
date. Several other payments totaling two hundred thousand pesos (P200,000.00) were
made by Babasanta.

Sometime in May 1989, Babasanta wrote a letter to Pacita Lu to demand the execution
of a final deed of sale in his favor so that he could effect full payment of the purchase
price. In the same letter, Babasanta notified the spouses about having received
information that the spouses sold the same property to another without his knowledge
and consent. He demanded that the second sale be cancelled and that a final deed of
sale be issued in his favor.

In response, Pacita Lu wrote a letter to Babasanta wherein she acknowledged having

agreed to sell the property to him at fifteen pesos (P15.00) per square meter. She,
however, reminded Babasanta that when the balance of the purchase price became due,
he requested for a reduction of the price and when she refused, Babasanta backed out
of the sale. Pacita added that she returned the sum of fifty thousand pesos
(P50,000.00) to Babasanta through Eugenio Oya.

On 2 June 1989, respondent Babasanta, as plaintiff, filed before the Regional Trial
Court (RTC), Branch 31, of San Pedro, Laguna, a Complaint for Specific Performance and
Damages1 against his co-respondents herein, the Spouses Lu. Babasanta alleged that the
lands covered by TCT No. T- 39022 and T-39023 had been sold to him by the spouses at
fifteen pesos (P15.00) per square meter. Despite his repeated demands for the
execution of a final deed of sale in his favor, respondents allegedly refused.

In their Answer,2 the Spouses Lu alleged that Pacita Lu obtained loans from Babasanta
and when the total advances of Pacita reached fifty thousand pesos (P50,000.00), the
latter and Babasanta, without the knowledge and consent of Miguel Lu, had verbally
agreed to transform the transaction into a contract to sell the two parcels of land to
Babasanta with the fifty thousand pesos (P50,000.00) to be considered as the
downpayment for the property and the balance to be paid on or before 31 December
1987. Respondents Lu added that as of November 1987, total payments made by
Babasanta amounted to only two hundred thousand pesos (P200,000.00) and the latter
allegedly failed to pay the balance of two hundred sixty thousand pesos (P260,000.00)
despite repeated demands. Babasanta had purportedly asked Pacita for a reduction of
the price from fifteen pesos (P15.00) to twelve pesos (P12.00) per square meter and
when the Spouses Lu refused to grant Babasantas request, the latter rescinded the
contract to sell and declared that the original loan transaction just be carried out in
that the spouses would be indebted to him in the amount of two hundred thousand pesos
(P200,000.00). Accordingly, on 6 July 1989, they purchased Interbank Managers Check
No. 05020269 in the amount of two hundred thousand pesos (P200,000.00) in the name
of Babasanta to show that she was able and willing to pay the balance of her loan
obligation.

Babasanta later filed an Amended Complaint dated 17 January 19903 wherein he prayed
for the issuance of a writ of preliminary injunction with temporary restraining order and
the inclusion of the Register of Deeds of Calamba, Laguna as party defendant. He
contended that the issuance of a preliminary injunction was necessary to restrain the
transfer or conveyance by the Spouses Lu of the subject property to other persons.

The Spouses Lu filed their Opposition4 to the amended complaint contending that it
raised new matters which seriously affect their substantive rights under the original
complaint. However, the trial court in its Order dated 17 January 1990 5 admitted the
amended complaint.

On 19 January 1990, herein petitioner San Lorenzo Development Corporation (SLDC)

filed a Motion for Intervention6 before the trial court. SLDC alleged that it had legal
interest in the subject matter under litigation because on 3 May 1989, the two parcels
of land involved, namely Lot 1764-A and 1764-B, had been sold to it in a Deed of
Absolute Sale with Mortgage. 7 It alleged that it was a buyer in good faith and for value
and therefore it had a better right over the property in litigation.

In his Opposition to SLDCs motion for intervention,8 respondent Babasanta demurred

and argued that the latter had no legal interest in the case because the two parcels of
land involved herein had already been conveyed to him by the Spouses Lu and hence, the
vendors were without legal capacity to transfer or dispose of the two parcels of land to
the intervenor.

Meanwhile, the trial court in its Order dated 21 March 1990 allowed SLDC to intervene.
SLDC filed its Complaint-in-Intervention on 19 April 1990.9 Respondent Babasantas
motion for the issuance of a preliminary injunction was likewise granted by the trial
court in its Order dated 11 January 199110 conditioned upon his filing of a bond in the
amount of fifty thousand pesos (P50,000.00).

SLDC in its Complaint-in-Intervention alleged that on 11 February 1989, the Spouses Lu

executed in its favor an Option to Buy the lots subject of the complaint. Accordingly, it
paid an option money in the amount of three hundred sixteen thousand one hundred sixty
pesos (P316,160.00) out of the total consideration for the purchase of the two lots of
one million two hundred sixty-four thousand six hundred forty pesos (P1,264,640.00).
After the Spouses Lu received a total amount of six hundred thirty-two thousand three
hundred twenty pesos (P632,320.00) they executed on 3 May 1989 a Deed of Absolute
Sale with Mortgage in its favor. SLDC added that the certificates of title over the
property were delivered to it by the spouses clean and free from any adverse claims
and/or notice of lis pendens. SLDC further alleged that it only learned of the filing of
the complaint sometime in the early part of January 1990 which prompted it to file the
motion to intervene without delay. Claiming that it was a buyer in good faith, SLDC
argued that it had no obligation to look beyond the titles submitted to it by the Spouses
Lu particularly because Babasantas claims were not annotated on the certificates of
title at the time the lands were sold to it.

After a protracted trial, the RTC rendered its Decision on 30 July 1993 upholding the
sale of the property to SLDC. It ordered the Spouses Lu to pay Babasanta the sum of
two hundred thousand pesos (P200,000.00) with legal interest plus the further sum of
fifty thousand pesos (P50,000.00) as and for attorneys fees. On the complaint-in-
intervention, the trial court ordered the Register of Deeds of Laguna, Calamba Branch to
cancel the notice of lis pendens annotated on the original of the TCT No. T-39022 (T-
7218) and No. T-39023 (T-7219).

Applying Article 1544 of the Civil Code, the trial court ruled that since both Babasanta
and SLDC did not register the respective sales in their favor, ownership of the property
should pertain to the buyer who first acquired possession of the property. The trial
court equated the execution of a public instrument in favor of SLDC as sufficient
delivery of the property to the latter. It concluded that symbolic possession could be
considered to have been first transferred to SLDC and consequently ownership of the
property pertained to SLDC who purchased the property in good faith.

Respondent Babasanta appealed the trial courts decision to the Court of Appeals alleging
in the main that the trial court erred in concluding that SLDC is a purchaser in good
faith and in upholding the validity of the sale made by the Spouses Lu in favor of SLDC.

Respondent spouses likewise filed an appeal to the Court of Appeals. They contended
that the trial court erred in failing to consider that the contract to sell between them
and Babasanta had been novated when the latter abandoned the verbal contract of sale
and declared that the original loan transaction just be carried out. The Spouses Lu
argued that since the properties involved were conjugal, the trial court should have
declared the verbal contract to sell between Pacita Lu and Pablo Babasanta null and
void ab initio for lack of knowledge and consent of Miguel Lu. They further averred that
the trial court erred in not dismissing the complaint filed by Babasanta; in awarding
damages in his favor and in refusing to grant the reliefs prayed for in their answer.
On 4 October 1995, the Court of Appeals rendered its Decision11 which set aside the
judgment of the trial court. It declared that the sale between Babasanta and the
Spouses Lu was valid and subsisting and ordered the spouses to execute the necessary
deed of conveyance in favor of Babasanta, and the latter to pay the balance of the
purchase price in the amount of two hundred sixty thousand pesos (P260,000.00). The
appellate court ruled that the Absolute Deed of Sale with Mortgage in favor of SLDC
was null and void on the ground that SLDC was a purchaser in bad faith. The Spouses Lu
were further ordered to return all payments made by SLDC with legal interest and to
pay attorneys fees to Babasanta.

SLDC and the Spouses Lu filed separate motions for reconsideration with the appellate
court.12 However, in a Manifestation dated 20 December 1995,13 the Spouses Lu
informed the appellate court that they are no longer contesting the decision dated 4
October 1995.

In its Resolution dated 11 March 1996,14 the appellate court considered as withdrawn the
motion for reconsideration filed by the Spouses Lu in view of their manifestation of 20
December 1995. The appellate court denied SLDCs motion for reconsideration on the
ground that no new or substantial arguments were raised therein which would warrant
modification or reversal of the courts decision dated 4 October 1995.

Hence, this petition.

SLDC assigns the following errors allegedly committed by the appellate court:

THE COURT OF APPEALS ERRED IN HOLDING THAT SAN LORENZO WAS NOT A
BUYER IN GOOD FAITH BECAUSE WHEN THE SELLER PACITA ZAVALLA LU
OBTAINED FROM IT THE CASH ADVANCE OF P200,000.00, SAN LORENZO WAS
PUT ON INQUIRY OF A PRIOR TRANSACTION ON THE PROPERTY.

THE COURT OF APPEALS ERRED IN FAILING TO APPRECIATE THE ESTABLISHED

FACT THAT THE ALLEGED FIRST BUYER, RESPONDENT BABASANTA, WAS NOT IN
POSSESSION OF THE DISPUTED PROPERTY WHEN SAN LORENZO BOUGHT AND
TOOK POSSESSION OF THE PROPERTY AND NO ADVERSE CLAIM, LIEN,
ENCUMBRANCE OR LIS PENDENS WAS ANNOTATED ON THE TITLES.

THE COURT OF APPEALS ERRED IN FAILING TO APPRECIATE THE FACT THAT

RESPONDENT BABASANTA HAS SUBMITTED NO EVIDENCE SHOWING THAT SAN
LORENZO WAS AWARE OF HIS RIGHTS OR INTERESTS IN THE DISPUTED
PROPERTY.
THE COURT OF APPEALS ERRED IN HOLDING THAT NOTWITHSTANDING ITS
FULL CONCURRENCE ON THE FINDINGS OF FACT OF THE TRIAL COURT, IT
REVERSED AND SET ASIDE THE DECISION OF THE TRIAL COURT UPHOLDING
THE TITLE OF SAN LORENZO AS A BUYER AND FIRST POSSESSOR IN GOOD
FAITH. 15

SLDC contended that the appellate court erred in concluding that it had prior notice of
Babasantas claim over the property merely on the basis of its having advanced the
amount of two hundred thousand pesos (P200,000.00) to Pacita Lu upon the latters
representation that she needed the money to pay her obligation to Babasanta. It argued
that it had no reason to suspect that Pacita was not telling the truth that the money
would be used to pay her indebtedness to Babasanta. At any rate, SLDC averred that the
amount of two hundred thousand pesos (P200,000.00) which it advanced to Pacita Lu
would be deducted from the balance of the purchase price still due from it and should
not be construed as notice of the prior sale of the land to Babasanta. It added that at
no instance did Pacita Lu inform it that the lands had been previously sold to Babasanta.

Moreover, SLDC stressed that after the execution of the sale in its favor it immediately
took possession of the property and asserted its rights as new owner as opposed to
Babasanta who has never exercised acts of ownership. Since the titles bore no adverse
claim, encumbrance, or lien at the time it was sold to it, SLDC argued that it had every
reason to rely on the correctness of the certificate of title and it was not obliged to go
beyond the certificate to determine the condition of the property. Invoking the
presumption of good faith, it added that the burden rests on Babasanta to prove that it
was aware of the prior sale to him but the latter failed to do so. SLDC pointed out that
the notice of lis pendens was annotated only on 2 June 1989 long after the sale of the
property to it was consummated on 3 May 1989.1awphi1.nt

Meanwhile, in an Urgent Ex-Parte Manifestation dated 27 August 1999, the Spouses Lu

informed the Court that due to financial constraints they have no more interest to
pursue their rights in the instant case and submit themselves to the decision of the
Court of Appeals.16

On the other hand, respondent Babasanta argued that SLDC could not have acquired
ownership of the property because it failed to comply with the requirement of
registration of the sale in good faith. He emphasized that at the time SLDC registered
the sale in its favor on 30 June 1990, there was already a notice of lis
pendens annotated on the titles of the property made as early as 2 June 1989. Hence,
petitioners registration of the sale did not confer upon it any right. Babasanta further
asserted that petitioners bad faith in the acquisition of the property is evident from
the fact that it failed to make necessary inquiry regarding the purpose of the issuance
of the two hundred thousand pesos (P200,000.00) managers check in his favor.

The core issue presented for resolution in the instant petition is who between SLDC and
Babasanta has a better right over the two parcels of land subject of the instant case in
view of the successive transactions executed by the Spouses Lu.

To prove the perfection of the contract of sale in his favor, Babasanta presented a
document signed by Pacita Lu acknowledging receipt of the sum of fifty thousand pesos
(P50,000.00) as partial payment for 3.6 hectares of farm lot situated at Barangay
Pulong, Sta. Cruz, Sta. Rosa, Laguna. 17 While the receipt signed by Pacita did not mention
the price for which the property was being sold, this deficiency was supplied by Pacita
Lus letter dated 29 May 198918 wherein she admitted that she agreed to sell the 3.6
hectares of land to Babasanta for fifteen pesos (P15.00) per square meter.

An analysis of the facts obtaining in this case, as well as the evidence presented by the
parties, irresistibly leads to the conclusion that the agreement between Babasanta and
the Spouses Lu is a contract to sell and not a contract of sale.

Contracts, in general, are perfected by mere consent,19 which is manifested by the

meeting of the offer and the acceptance upon the thing which are to constitute the
contract. The offer must be certain and the acceptance absolute. 20 Moreover, contracts
shall be obligatory in whatever form they may have been entered into, provided all the
essential requisites for their validity are present. 21

The receipt signed by Pacita Lu merely states that she accepted the sum of fifty
thousand pesos (P50,000.00) from Babasanta as partial payment of 3.6 hectares of farm
lot situated in Sta. Rosa, Laguna. While there is no stipulation that the seller reserves
the ownership of the property until full payment of the price which is a distinguishing
feature of a contract to sell, the subsequent acts of the parties convince us that the
Spouses Lu never intended to transfer ownership to Babasanta except upon full payment
of the purchase price.

Babasantas letter dated 22 May 1989 was quite telling. He stated therein that despite
his repeated requests for the execution of the final deed of sale in his favor so that he
could effect full payment of the price, Pacita Lu allegedly refused to do so. In effect,
Babasanta himself recognized that ownership of the property would not be transferred
to him until such time as he shall have effected full payment of the price. Moreover, had
the sellers intended to transfer title, they could have easily executed the document of
sale in its required form simultaneously with their acceptance of the partial payment,
but they did not. Doubtlessly, the receipt signed by Pacita Lu should legally be
considered as a perfected contract to sell.

The distinction between a contract to sell and a contract of sale is quite germane. In a
contract of sale, 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.22 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 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 becoming
effective.23

The perfected contract to sell imposed upon Babasanta the obligation to pay the balance
of the purchase price. There being an obligation to pay the price, Babasanta should have
made the proper tender of payment and consignation of the price in court as required by
law. Mere sending of a letter by the vendee expressing the intention to pay without the
accompanying payment is not considered a valid tender of payment. 24 Consignation of the
amounts due in court is essential in order to extinguish Babasantas obligation to pay the
balance of the purchase price. Glaringly absent from the records is any indication that
Babasanta even attempted to make the proper consignation of the amounts due, thus,
the obligation on the part of the sellers to convey title never acquired obligatory force.

On the assumption that the transaction between the parties is a contract of sale and not
a contract to sell, Babasantas claim of ownership should nevertheless fail.

Sale, being a consensual contract, is perfected by mere consent 25 and from that moment,
the parties may reciprocally demand performance. 26 The essential elements of a contract
of sale, to wit: (1) consent or meeting of the minds, that is, to transfer ownership in
exchange for the price; (2) object certain which is the subject matter of the contract;
(3) cause of the obligation which is established. 27

The perfection of a contract of sale should not, however, be confused with its
consummation. In relation to the acquisition and transfer of ownership, it should be
noted that sale is not a mode, but merely a title. A mode is the legal means by which
dominion or ownership is created, transferred or destroyed, but title is only the legal
basis by which to affect dominion or ownership. 28 Under Article 712 of the Civil Code,
"ownership and other real rights over property are acquired and transmitted by law, by
donation, by testate and intestate succession, and in consequence of certain contracts,
by tradition." Contracts only constitute titles or rights to the transfer or acquisition of
ownership, while delivery or tradition is the mode of accomplishing the
same.29 Therefore, sale by itself does not transfer or affect ownership; the most that
sale does is to create the obligation to transfer ownership. It is tradition or delivery, as
a consequence of sale, that actually transfers ownership.

Explicitly, the law provides that the ownership of the thing sold is acquired by the
vendee from the moment it is delivered to him in any of the ways specified in Article
1497 to 1501.30 The word "delivered" should not be taken restrictively to mean transfer
of actual physical possession of the property. The law recognizes two principal modes of
delivery, to wit: (1) actual delivery; and (2) legal or constructive delivery.

Actual delivery consists in placing the thing sold in the control and possession of the
vendee.31 Legal or constructive delivery, on the other hand, may be had through any of
the following ways: the execution of a public instrument evidencing the sale; 32 symbolical
tradition such as the delivery of the keys of the place where the movable sold is being
kept;33 traditio longa manu or by mere consent or agreement if the movable sold cannot
yet be transferred to the possession of the buyer at the time of the sale;34 traditio
brevi manu if the buyer already had possession of the object even before the
sale;35 and traditio constitutum possessorium, where the seller remains in possession of
the property in a different capacity.36

Following the above disquisition, respondent Babasanta did not acquire ownership by the
mere execution of the receipt by Pacita Lu acknowledging receipt of partial payment for
the property. For one, the agreement between Babasanta and the Spouses Lu, though
valid, was not embodied in a public instrument. Hence, no constructive delivery of the
lands could have been effected. For another, Babasanta had not taken possession of the
property at any time after the perfection of the sale in his favor or exercised acts of
dominion over it despite his assertions that he was the rightful owner of the lands.
Simply stated, there was no delivery to Babasanta, whether actual or constructive, which
is essential to transfer ownership of the property. Thus, even on the assumption that
the perfected contract between the parties was a sale, ownership could not have passed
to Babasanta in the absence of delivery, since in a contract of sale ownership is
transferred to the vendee only upon the delivery of the thing sold. 37

However, it must be stressed that the juridical relationship between the parties in a
double sale is primarily governed by Article 1544 which lays down the rules of
preference between the two purchasers of the same property. It provides:

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 principle of primus tempore, potior jure (first in time, stronger in right) gains
greater significance in case of double sale of immovable property. When the thing sold
twice is an immovable, the one who acquires it and first records it in the Registry of
Property, both made in good faith, shall be deemed the owner. 38 Verily, the act of
registration must be coupled with good faith that is, the registrant must have no
knowledge of the defect or lack of title of his vendor or must not have been aware of
facts which should have put him upon such inquiry and investigation as might be
necessary to acquaint him with the defects in the title of his vendor. 39

Admittedly, SLDC registered the sale with the Registry of Deeds after it had acquired
knowledge of Babasantas claim. Babasanta, however, strongly argues that the
registration of the sale by SLDC was not sufficient to confer upon the latter any title to
the property since the registration was attended by bad faith. Specifically, he points out
that at the time SLDC registered the sale on 30 June 1990, there was already a notice
of lis pendens on the file with the Register of Deeds, the same having been filed one
year before on 2 June 1989.

Did the registration of the sale after the annotation of the notice of lis
pendens obliterate the effects of delivery and possession in good faith which admittedly
had occurred prior to SLDCs knowledge of the transaction in favor of Babasanta?

We do not hold so.

It must be stressed that as early as 11 February 1989, the Spouses Lu executed

the Option to Buy in favor of SLDC upon receiving P316,160.00 as option money from
SLDC. After SLDC had paid more than one half of the agreed purchase price
of P1,264,640.00, the Spouses Lu subsequently executed on 3 May 1989 a Deed of
Absolute Sale in favor or SLDC. At the time both deeds were executed, SLDC had no
knowledge of the prior transaction of the Spouses Lu with Babasanta. Simply stated,
from the time of execution of the first deed up to the moment of transfer and delivery
of possession of the lands to SLDC, it had acted in good faith and the subsequent
annotation of lis pendens has no effect at all on the consummated sale between SLDC
and the Spouses Lu.
A purchaser in good faith is one who buys property of another without notice that some
other person has a right to, or interest in, such property and pays a full and fair price
for the same at the time of such purchase, or beforehe has notice of the claim or
interest of some other person in the property. 40 Following the foregoing definition, we
rule that SLDC qualifies as a buyer in good faith since there is no evidence extant in the
records that it had knowledge of the prior transaction in favor of Babasanta. At the
time of the sale of the property to SLDC, the vendors were still the registered owners
of the property and were in fact in possession of the lands.l^vvphi1.net Time and again,
this Court has ruled that a person dealing with the owner of registered land is not bound
to go beyond the certificate of title as he is charged with notice of burdens on the
property which are noted on the face of the register or on the certificate of title. 41 In
assailing knowledge of the transaction between him and the Spouses Lu, Babasanta
apparently relies on the principle of constructive notice incorporated in Section 52 of
the Property Registration Decree (P.D. No. 1529) which reads, thus:

Sec. 52. Constructive notice upon registration. Every conveyance, mortgage, lease, lien,
attachment, order, judgment, instrument or entry affecting registered land shall, if
registered, filed, or entered in the office of the Register of Deeds for the province or
city where the land to which it relates lies, be constructive notice to all persons from
the time of such registering, filing, or entering.

However, the constructive notice operates as suchby the express wording of Section
52from the time of the registration of the notice of lis pendens which in this case was
effected only on 2 June 1989, at which time the sale in favor of SLDC had long been
consummated insofar as the obligation of the Spouses Lu to transfer ownership over the
property to SLDC is concerned.

More fundamentally, given the superiority of the right of SLDC to the claim of
Babasanta the annotation of the notice of lis pendens cannot help Babasantas position a
bit and it is irrelevant to the good or bad faith characterization of SLDC as a purchaser.
A notice of lis pendens, as the Court held in Natao v. Esteban,42serves as a warning to a
prospective purchaser or incumbrancer that the particular property is in litigation; and
that he should keep his hands off the same, unless he intends to gamble on the results
of the litigation." Precisely, in this case SLDC has intervened in the pending litigation to
protect its rights. Obviously, SLDCs faith in the merit of its cause has been vindicated
with the Courts present decision which is the ultimate denouement on the controversy.

The Court of Appeals has made capital43 of SLDCs averment in its Complaint-in-
Intervention44 that at the instance of Pacita Lu it issued a check for P200,000.00
payable to Babasanta and the confirmatory testimony of Pacita Lu herself on cross-
examination.45 However, there is nothing in the said pleading and the testimony which
explicitly relates the amount to the transaction between the Spouses Lu and Babasanta
for what they attest to is that the amount was supposed to pay off the advances made
by Babasanta to Pacita Lu. In any event, the incident took place after the Spouses Lu had
already executed the Deed of Absolute Sale with Mortgage in favor of SLDC and
therefore, as previously explained, it has no effect on the legal position of SLDC.

Assuming ex gratia argumenti that SLDCs registration of the sale had been tainted by
the prior notice of lis pendens and assuming further for the same nonce that this is a
case of double sale, still Babasantas claim could not prevail over that of SLDCs.
In Abarquez v. Court of Appeals,46 this Court had the occasion to rule that if a vendee in
a double sale registers the sale after he has acquired knowledge of a previous sale, the
registration constitutes a registration in bad faith and does not confer upon him any
right. If the registration is done in bad faith, it is as if there is no registration at all,
and the buyer who has taken possession first of the property in good faith shall be
preferred.

In Abarquez, the first sale to the spouses Israel was notarized and registered only
after the second vendee, Abarquez, registered their deed of sale with the Registry of
Deeds, but the Israels were first in possession. This Court awarded the property to the
Israels because registration of the property by Abarquez lacked the element of good
faith. While the facts in the instant case substantially differ from that in Abarquez, we
would not hesitate to rule in favor of SLDC on the basis of its prior possession of the
property in good faith. Be it noted that delivery of the property to SLDC was
immediately effected after the execution of the deed in its favor, at which time SLDC
had no knowledge at all of the prior transaction by the Spouses Lu in favor of
Babasanta.1a\^/phi1.net

The law speaks not only of one criterion. The first criterion is priority of entry in the
registry of property; there being no priority of such entry, the second is priority of
possession; and, in the absence of the two priorities, the third priority is of the date of
title, with good faith as the common critical element. Since SLDC acquired possession of
the property in good faith in contrast to Babasanta, who neither registered nor
possessed the property at any time, SLDCs right is definitely superior to that of
Babasantas.

At any rate, the above discussion on the rules on double sale would be purely academic
for as earlier stated in this decision, the contract between Babasanta and the Spouses
Lu is not a contract of sale but merely a contract to sell. In Dichoso v. Roxas,47 we had
the occasion to rule that Article 1544 does not apply to a case where there was a sale to
one party of the land itself while the other contract was a mere promise to sell the land
or at most an actual assignment of the right to repurchase the same land. Accordingly,
there was no double sale of the same land in that case.

WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of
Appeals appealed from is REVERSED and SET ASIDE and the decision of the Regional
Trial Court, Branch 31, of San Pedro, Laguna is REINSTATED. No costs.

SO ORDERED.

G.R. No. L-18536 March 31, 1965

JOSE B. AZNAR, plaintiff-appellant,

vs.
RAFAEL YAPDIANGCO, defendant-appellee;
TEODORO SANTOS, intervenor-appellee.

Florentino M. Guanlao for plaintiff-appellant.

Rafael Yapdiangco in his own behalf as defendant-appellee.
Lorenzo Sumulong, R. B. Hilao and B. S. Felipe for intervenor-appellee.

REGALA, J.:

This is an appeal, on purely legal questions, from a decision of the Court of First
Instance of Quezon City, Branch IV, declaring the intervenor-appellee, Teodoro Santos,
entitled to the possession of the car in dispute.

The records before this Court disclose that sometime in May, 1959, Teodoro Santos
advertised in two metropolitan papers the sale of his FORD FAIRLANE 500. In the
afternoon of May 28, 1959, a certain L. De Dios, claiming to be a nephew of Vicente
Marella, went to the Santos residence to answer the ad. However, Teodoro Santos was
out during this call and only the latter's son, Irineo Santos, received and talked with De
Dios. The latter told the young Santos that he had come in behalf of his uncle, Vicente
Marella, who was interested to buy the advertised car.

On being informed of the above, Teodoro Santos instructed his son to see the said
Vicente Marella the following day at his given address: 1642 Crisostomo Street,
Sampaloc, Manila. And so, in the morning of May 29, 1959, Irineo Santos went to the
above address. At this meeting, Marella agreed to buy the car for P14,700.00 on the
understanding that the price would be paid only after the car had been registered in his
name.
Irineo Santos then fetched his father who, together with L. De Dios, went to the office
of a certain Atty. Jose Padolina where the deed of the sale for the car was executed in
Marella's favor. The parties to the contract thereafter proceeded to the Motor
Vehicles Office in Quezon City where the registration of the car in Marella's name was
effected. Up to this stage of the transaction, the purchased price had not been paid.

From the Motor Vehicles Office, Teodoro Santos returned to his house. He gave the
registration papers and a copy of the deed of sale to his son, Irineo, and instructed him
not to part with them until Marella shall have given the full payment for the car. Irineo
Santos and L. De Dios then proceeded to 1642 Crisostomo Street, Sampaloc, Manila
where the former demanded the payment from Vicente Marella. Marella said that the
amount he had on hand then was short by some P2,000.00 and begged off to be allowed
to secure the shortage from a sister supposedly living somewhere on Azcarraga Street,
also in Manila. Thereafter, he ordered L. De Dios to go to the said sister and suggested
that Irineo Santos go with him. At the same time, he requested the registration papers
and the deed of sale from Irineo Santos on the pretext that he would like to show them
to his lawyer. Trusting the good faith of Marella, Irineo handed over the same to the
latter and thereupon, in the company of L. De Dios and another unidentified person,
proceeded to the alleged house of Marella's sister.

At a place on Azcarraga, Irineo Santos and L. De Dios alighted from the car and entered
a house while their unidentified companion remained in the car. Once inside, L. De Dios
asked Irineo Santos to wait at the sala while he went inside a room. That was the last
that Irineo saw of him. For, after a considerable length of time waiting in vain for De
Dios to return, Irineo went down to discover that neither the car nor their unidentified
companion was there anymore. Going back to the house, he inquired from a woman he saw
for L. De Dios and he was told that no such name lived or was even known therein.
Whereupon, Irineo Santos rushed to 1642 Crisostomo to see Marella. He found the
house closed and Marella gone. Finally, he reported the matter to his father who
promptly advised the police authorities.

That very same day, or on the afternoon of May 29, 1959 Vicente Marella was able to
sell the car in question to the plaintiff-appellant herein, Jose B. Aznar, for P15,000.00.
Insofar as the above incidents are concerned, we are bound by the factual finding of the
trial court that Jose B. Aznar acquired the said car from Vicente Marella in good faith,
for a valuable consideration and without notice of the defect appertaining to the
vendor's title.

While the car in question was thus in the possession of Jose B. Aznar and while he was
attending to its registration in his name, agents of the Philippine Constabulary seized and
confiscated the same in consequence of the report to them by Teodoro Santos that the
said car was unlawfully taken from him.

In due time, Jose B. Aznar filed a complaint for replevin against Captain Rafael
Yapdiangco, the head of the Philippine Constabulary unit which seized the car in question
Claiming ownership of the vehicle, he prayed for its delivery to him. In the course of the
litigation, however, Teodoro Santos moved and was allowed to intervene by the lower
court.

At the end of the trial, the lower court rendered a decision awarding the disputed motor
vehicle to the intervenor-appellee, Teodoro Santos. In brief, it ruled that Teodoro
Santos had been unlawfully deprived of his personal property by Vicente Marella, from
whom the plaintiff-appellant traced his right. Consequently, although the plaintiff-
appellant acquired the car in good faith and for a valuable consideration from Vicente
Marella, the said decision concluded, still the intervenor-appellee was entitled to its
recovery on the mandate of Article 559 of the New Civil Code which provides:

ART. 559. The possession of movable property acquired in good faith is

equivalent to title. Nevertheless, one who lost any movable or has been
unlawfully deprived thereof, may recover it from the person in possession of the
same.

If the possessor of a movable lost or of which the owner has been unlawfully
deprived, has acquired it in good faith at a public sale, the owner cannot obtain
its return without reimbursing the price paid therefor.

From this decision, Jose B. Aznar appeals.

The issue at bar is one and simple, to wit: Between Teodoro Santos and the plaintiff-
appellant, Jose B. Aznar, who has a better right to the possession of the disputed
automobile?

We find for the intervenor-appellee, Teodoro Santos.

The plaintiff-appellant accepts that the car in question originally belonged to and was
owned by the intervenor-appellee, Teodoro Santos, and that the latter was unlawfully
deprived of the same by Vicente Marella. However, the appellant contends that upon the
facts of this case, the applicable provision of the Civil Code is Article 1506 and not
Article 559 as was held by the decision under review. Article 1506 provides:
 ART. 1506. Where the seller of goods has a voidable title thereto, but his, title
has not been voided at the time of the sale, the buyer acquires a good title to
the goods, provided he buys them in good faith, for value, and without notice of
the seller's defect of title.

The contention is clearly unmeritorious. Under the aforequoted provision, it is essential

that the seller should have a voidable title at least. It is very clearly inapplicable where,
as in this case, the seller had no title at all.

Vicente Marella did not have any title to the property under litigation because the same
was never delivered to him. He sought ownership or acquisition of it by virtue of the
contract. Vicente Marella could have acquired ownership or title to the subject matter
thereof only by the delivery or tradition of the car to him.

Under Article 712 of the Civil Code, "ownership and other real rights over property are
acquired and transmitted by law, by donation, by testate and intestate succession, and in
consequence of certain contracts, by tradition." As interpreted by this Court in a host of
cases, by this provision, ownership is not transferred by contract merely but by
tradition or delivery. Contracts only constitute titles or rights to the transfer or
acquisition of ownership, while delivery or tradition is the mode of accomplishing the
same (Gonzales v. Rojas, 16 Phil. 51; Ocejo, Perez and Co. v. International Bank, 37 Phil.
631, Fidelity and Deposit Co. v. Wilson, 8 Phil. 51; Kuenzle & Streiff v. Wacke & Chandler,
14 Phil. 610; Easton v. Diaz Co., 32 Phil. 180).

For the legal acquisition and transfer of ownership and other property rights,
the thing transferred must be delivered, inasmuch as, according to settled
jurisprudence, the tradition of the thing is a necessary and indispensable
requisite in the acquisition of said ownership by virtue of contract. (Walter
Laston v. E. Diaz & Co. & the Provincial Sheriff of Albay, supra.)

So long as property is not delivered, the ownership over it is not transferred by

contract merely but by delivery. Contracts only constitute titles or rights to the
transfer or acquisition of ownership, while delivery or tradition is the method of
accomplishing the same, the title and the method of acquiring it being different
in our law. (Gonzales v. Roxas, 16 Phil. 51)

In the case on hand, the car in question was never delivered to the vendee by the vendor
as to complete or consummate the transfer of ownership by virtue of the contract. It
should be recalled that while there was indeed a contract of sale between Vicente
Marella and Teodoro Santos, the former, as vendee, took possession of the subject
matter thereof by stealing the same while it was in the custody of the latter's son.
There is no adequate evidence on record as to whether Irineo Santos voluntarily
delivered the key to the car to the unidentified person who went with him and L. De Dios
to the place on Azcarraga where a sister of Marella allegedly lived. But even if Irineo
Santos did, it was not the delivery contemplated by Article 712 of the Civil Code. For
then, it would be indisputable that he turned it over to the unidentified companion only
so that he may drive Irineo Santos and De Dios to the said place on Azcarraga and not to
vest the title to the said vehicle to him as agent of Vicente Marella. Article 712 above
contemplates that the act be coupled with the intent of delivering the thing. (10
Manresa 132)

The lower court was correct in applying Article 559 of the Civil Code to the case at bar,
for under it, the rule is to the effect that if the owner has lost a thing, or if he has
been unlawfully deprived of it, he has a right to recover it, not only from the finder,
thief or robber, but also from third persons who may have acquired it in good faith from
such finder, thief or robber. The said article establishes two exceptions to the general
rule of irrevindicability, to wit, when the owner (1) has lost the thing, or (2) has been
unlawfully deprived thereof. In these cases, the possessor cannot retain the thing as
against the owner, who may recover it without paying any indemnity, except when the
possessor acquired it in a public sale. (Del Rosario v. Lucena, 8 Phil. 535; Varela v. Finnick,
9 Phil. 482; Varela v. Matute, 9 Phil. 479; Arenas v. Raymundo, 19 Phil. 46. Tolentino, id.,
Vol. II, p. 261.)

In the case of Cruz v. Pahati, et al., 52 O.G. 3053 this Court has already ruled
that

Under Article 559 of the new Civil Code, a person illegally deprived of any
movable may recover it from the person in possession of the same and the only
defense the latter may have is if he has acquired it in good faith at a public sale,
in which case, the owner cannot obtain its return without reimbursing the price
paid therefor. In the present case, plaintiff has been illegally deprived of his car
through the ingenious scheme of defendant B to enable the latter to dispose of
it as if he were the owner thereof. Plaintiff, therefore, can still recover
possession of the car even if it is in the possession of a third party who had
acquired it in good faith from defendant B. The maxim that "no man can transfer
to another a better title than he had himself" obtains in the civil as well as in
the common law. (U.S. v. Sotelo, 28 Phil. 147)

Finally, the plaintiff-appellant here contends that inasmuch as it was the intervenor-
appellee who had caused the fraud to be perpetrated by his misplaced confidence on
Vicente Marella, he, the intervenor-appellee, should be made to suffer the consequences
arising therefrom, following the equitable principle to that effect. Suffice it to say in
this regard that the right of the owner to recover personal property acquired in good
faith by another, is based on his being dispossessed without his consent. The common law
principle that where one of two innocent persons must suffer by a fraud perpetrated by
another, the law imposes the loss upon the party who, by his misplaced confidence, has
enabled the fraud to be committed, cannot be applied in a case which is covered by an
express provision of the new Civil Code, specifically Article 559. Between a common law
principle and a statutory provision, the latter must prevail in this jurisdiction. (Cruz v.
Pahati, supra)

UPON ALL THE FOREGOING, the instant appeal is hereby dismissed and the decision of
the lower court affirmed in full. Costs against the appellant.

G.R. No. 91029 February 7, 1991

NORKIS DISTRIBUTORS, INC., petitioner,

vs.
THE COURT OF APPEALS & ALBERTO NEPALES, respondents.

Jose D. Palma for petitioner.

Public Attorney's Office for private respondent.

GRIO-AQUINO, J.:

Subject of this petition for review is the decision of the Court of Appeals (Seventeenth
Division) in CA-G.R. No. 09149, affirming with modification the judgment of the Regional
Trial Court, Sixth (6th) Judicial Region, Branch LVI. Himamaylan, Negros Occidental, in
Civil Case No. 1272, which was private respondent Alberto Nepales' action for specific
performance of a contract of sale with damages against petitioner Norkis Distributors,
Inc.

The facts borne out by the record are as follows:

Petitioner Norkis Distributors, Inc. (Norkis for brevity), is the distributor of Yamaha
motorcycles in Negros Occidental with office in Bacolod City with Avelino Labajo as its
Branch Manager. On September 20, 1979, private respondent Alberto Nepales bought
from the Norkis-Bacolod branch a brand new Yamaha Wonderbike motorcycle Model
YL2DX with Engine No. L2-329401K Frame No. NL2-0329401, Color Maroon, then
displayed in the Norkis showroom. The price of P7,500.00 was payable by means of a
Letter of Guaranty from the Development Bank of the Philippines (DBP), Kabankalan
Branch, which Norkis' Branch Manager Labajo agreed to accept. Hence, credit was
extended to Nepales for the price of the motorcycle payable by DBP upon release of his
motorcycle loan. As security for the loan, Nepales would execute a chattel mortgage on
the motorcycle in favor of DBP. Branch Manager Labajo issued Norkis Sales Invoice No.
0120 (Exh.1) showing that the contract of sale of the motorcycle had been perfected.
Nepales signed the sales invoice to signify his conformity with the terms of the sale. In
the meantime, however, the motorcycle remained in Norkis' possession.

On November 6, 1979, the motorcycle was registered in the Land Transportation

Commission in the name of Alberto Nepales. A registration certificate (Exh. 2) in his
name was issued by the Land Transportation Commission on November 6, 1979 (Exh. 2-b).
The registration fees were paid by him, evidenced by an official receipt, Exhibit 3.

On January 22, 1980, the motorcycle was delivered to a certain Julian Nepales who was
allegedly the agent of Alberto Nepales but the latter denies it (p. 15, t.s.n., August 2,
1984). The record shows that Alberto and Julian Nepales presented the unit to DBP's
Appraiser-Investigator Ernesto Arriesta at the DBP offices in Kabankalan, Negros
Occidental Branch (p. 12, Rollo). The motorcycle met an accident on February 3, 1980 at
Binalbagan, Negros Occidental. An investigation conducted by the DBP revealed that the
unit was being driven by a certain Zacarias Payba at the time of the accident (p.
33, Rollo). The unit was a total wreck (p. 36, t.s.n., August 2,1984; p. 13, Rollo), was
returned, and stored inside Norkis' warehouse.

On March 20, 1980, DBP released the proceeds of private respondent's motorcycle loan
to Norkis in the total sum of P7,500. As the price of the motorcycle later increased to
P7,828 in March, 1980, Nepales paid the difference of P328 (p. 13, Rollo) and demanded
the delivery of the motorcycle. When Norkis could not deliver, he filed an action for
specific performance with damages against Norkis in the Regional Trial Court of
Himamaylan, Negros Occidental, Sixth (6th) Judicial Region, Branch LVI, where it was
docketed as Civil Case No. 1272. He alleged that Norkis failed to deliver the motorcycle
which he purchased, thereby causing him damages.

Norkis answered that the motorcycle had already been delivered to private respondent
before the accident, hence, the risk of loss or damage had to be borne by him as owner
of the unit.

After trial on the merits, the lower court rendered a decision dated August 27, 1985
ruling in favor of private respondent (p. 28, Rollo.) thus:
 WHEREFORE, judgment is rendered in favor of the plaintiff and against the
defendants. The defendants are ordered to pay solidarity to the plaintiff the
present value of the motorcycle which was totally destroyed, plus interest
equivalent to what the Kabankalan Sub-Branch of the Development Bank of the
Philippines will have to charge the plaintiff on fits account, plus P50.00 per day
from February 3, 1980 until full payment of the said present value of the
motorcycle, plus P1,000.00 as exemplary damages, and costs of the litigation. In
lieu of paying the present value of the motorcycle, the defendants can deliver to
the plaintiff a brand-new motorcycle of the same brand, kind, and quality as the
one which was totally destroyed in their possession last February 3, 1980. (pp.
28-29, Rollo.)

On appeal, the Court of appeals affirmed the appealed judgment on August 21, 1989, but
deleted the award of damages "in the amount of Fifty (P50.00) Pesos a day from
February 3, 1980 until payment of the present value of the damaged vehicle"
(p35, Rollo). The Court of Appeals denied Norkis' motion for reconsideration. Hence, this
Petition for Review.

The principal issue in this case is who should bear the loss of the motorcycle. The answer
to this question would depend on whether there had already been a transfer of
ownership of the motorcycle to private respondent at the time it was destroyed.

Norkis' theory is that:

. . . After the contract of sale has been perfected (Art. 1475) and even before
delivery, that is, even before the ownership is transferred to the vendee, the
risk of loss is shifted from the vendor to the vendee. Under Art. 1262, the
obligation of the vendor to deliver a determinate thing becomes extinguished if
the thing is lost by fortuitous event (Art. 1174), that is, without the fault or
fraud of the vendor and before he has incurred in delay (Art. 11 65, par. 3). If
the thing sold is generic, the loss or destruction does not extinguish the
obligation (Art. 1263). A thing is determinate when it is particularly designated
or physically segregated from all others of the same class (Art. 1460). Thus, the
vendor becomes released from his obligation to deliver the determinate thing
sold while the vendee's obligation to pay the price subsists. If the vendee had
paid the price in advance the vendor may retain the same. The legal effect,
therefore, is that the vendee assumes the risk of loss by fortuitous event (Art.
1262) after the perfection of the contract to the time of delivery. (Civil Code of
the Philippines, Ambrosio Padilla, Vol. 5,1987 Ed., p. 87.)
Norkis concedes that there was no "actual" delivery of the vehicle. However, it insists
that there was constructive delivery of the unit upon: (1) the issuance of the Sales
Invoice No. 0120 (Exh. 1) in the name of the private respondent and the affixing of his
signature thereon; (2) the registration of the vehicle on November 6, 1979 with the Land
Transportation Commission in private respondent's name (Exh. 2); and (3) the issuance of
official receipt (Exh. 3) for payment of registration fees (p. 33, Rollo).

That argument is not well taken. As pointed out by the private respondent, the issuance
of a sales invoice does not prove transfer of ownership of the thing sold to the buyer. An
invoice is nothing more than a detailed statement of the nature, quantity and cost of the
thing sold and has been considered not a bill of sale (Am. Jur. 2nd Ed., Vol. 67, p. 378).

In all forms of delivery, it is necessary that the act of delivery whether constructive or
actual, be coupled with the intention of delivering the thing. The act, without the
intention, is insufficient (De Leon, Comments and Cases on Sales, 1978
Ed., citing Manresa, p. 94).

When the motorcycle was registered by Norkis in the name of private respondent,
Norkis did not intend yet to transfer the title or ownership to Nepales, but only to
facilitate the execution of a chattel mortgage in favor of the DBP for the release of the
buyer's motorcycle loan. The Letter of Guarantee (Exh. 5) issued by the DBP, reveals
that the execution in its favor of a chattel mortgage over the purchased vehicle is a pre-
requisite for the approval of the buyer's loan. If Norkis would not accede to that
arrangement, DBP would not approve private respondent's loan application and,
consequently, there would be no sale.

In other words, the critical factor in the different modes of effecting delivery, which
gives legal effect to the act, is the actual intention of the vendor to deliver, and its
acceptance by the vendee. Without that intention, there is no tradition (Abuan vs.
Garcia, 14 SCRA 759).

In the case of Addison vs. Felix and Tioco (38 Phil. 404, 408), this Court held:

The Code imposes upon the vendor the obligation to deliver the thing sold. The
thing is considered to be delivered when it is "placed in the hands and possession
of the vendee." (Civil Code, Art. 1462). It is true that the same article declares
that the execution of a public instrument is equivalent to the delivery of the
thing which is the object of the contract, but, in order that this symbolic
delivery may produce the effect of tradition, it is necessary that the vendor
shall have had such control over the thing sold that, at the moment of the sale,
its material delivery could have been made. It is not enough to confer upon the
 purchaser the ownership and the right of possession. The thing sold must be
placed in his control. When there is no impediment whatever to prevent the
thing sold passing into the tenancy of the purchaser by the sole will of the
vendor, symbolic delivery through the execution of a public instrument is
sufficient. But if notwithstanding the execution of the instrument, the
purchaser cannot have the enjoyment and material tenancy of the thing and
make use of it himself or through another in his name, because such tenancy and
enjoyment are opposed by the interposition of another will, then fiction yields to
reality-the delivery has riot been effects .(Emphasis supplied.)

The Court of Appeals correctly ruled that the purpose of the execution of the sales
invoice dated September 20, 1979 (Exh. B) and the registration of the vehicle in the
name of plaintiff-appellee (private respondent) with the Land Registration Commission
(Exhibit C) was not to transfer to Nepales the ownership and dominion over the
motorcycle, but only to comply with the requirements of the Development Bank of the
Philippines for processing private respondent's motorcycle loan. On March 20, 1980,
before private respondent's loan was released and before he even paid Norkis, the
motorcycle had already figured in an accident while driven by one Zacarias Payba. Payba
was not shown by Norkis to be a representative or relative of private respondent. The
latter's supposed relative, who allegedly took possession of the vehicle from Norkis did
not explain how Payba got hold of the vehicle on February 3, 1980. Norkis' claim that
Julian Nepales was acting as Alberto's agent when he allegedly took delivery of the
motorcycle (p. 20, Appellants' Brief), is controverted by the latter. Alberto denied
having authorized Julian Nepales to get the motorcycle from Norkis Distributors or to
enter into any transaction with Norkis relative to said motorcycle. (p. 5, t.s.n., February
6, 1985). This circumstances more than amply rebut the disputable presumption of
delivery upon which Norkis anchors its defense to Nepales' action (pp. 33-34, Rollo).

Article 1496 of the Civil Code which provides that "in the absence of an express
assumption of risk by the buyer, the things sold remain at seller's risk until the
ownership thereof is transferred to the buyer," is applicable to this case, for there was
neither an actual nor constructive delivery of the thing sold, hence, the risk of loss
should be borne by the seller, Norkis, which was still the owner and possessor of the
motorcycle when it was wrecked. This is in accordance with the well-known doctrine
of res perit domino.

WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-
G.R. No. 09149, we deny the petition for review and hereby affirm the appealed decision,
with costs against the petitioner.

SO ORDERED.
G.R. No. 133879 November 21, 2001

EQUATORIAL REALTY DEVELOPMENT, INC., petitioner,

vs.
MAYFAIR THEATER, INC., respondent.

PANGANIBAN, J.:

General propositions do not decide specific cases. Rather, laws are interpreted in the
context of the peculiar factual situation of each proceeding. Each case has its own flesh
and blood and cannot be ruled upon on the basis of isolated clinical classroom principles.

While we agree with the general proposition that a contract of sale is valid until
rescinded, it is equally true that ownership of the thing sold is not acquired by mere
agreement, but by tradition or delivery. The peculiar facts of the present controversy as
found by this Court in an earlier relevant Decision show that delivery was not actually
effected; in fact, it was prevented by a legally effective impediment. Not having been
the owner, petitioner cannot be entitled to the civil fruits of ownership like rentals of
the thing sold. Furthermore, petitioner's bad faith, as again demonstrated by the
specific factual milieu of said Decision, bars the grant of such benefits. Otherwise, bad
faith would be rewarded instead of punished.

The Case

Filed before this Court is a Petition for Review1 under Rule 45 of the Rules of Court,
challenging the March 11, 1998 Order2 of the Regional Trial Court of Manila (RTC),
Branch 8, in Civil Case No. 97-85141. The dispositive portion of the assailed Order reads
as follows:

"WHEREFORE, the motion to dismiss filed by defendant Mayfair is hereby

GRANTED, and the complaint filed by plaintiff Equatorial is hereby
DISMISSED."3

Also questioned is the May 29, 1998 RTC Order4 denying petitioner's Motion for
Reconsideration.

The Facts

The main factual antecedents of the present Petition are matters of record, because it
arose out of an earlier case decided by this Court on November 21, 1996,
entitled Equatorial Realty Development, Inc. v. Mayfair Theater, Inc.5 (henceforth
referred to as the "mother case"), docketed as G.R No. 106063.

Carmelo & Bauermann, Inc. ("Camelo" ) used to own a parcel of land, together with two 2-
storey buildings constructed thereon, located at Claro M. Recto Avenue, Manila, and
covered by TCT No. 18529 issued in its name by the Register of Deeds of Manila.

On June 1, 1967, Carmelo entered into a Contract of Lease with Mayfair Theater Inc.
("Mayfair") for a period of 20 years. The lease covered a portion of the second floor and
mezzanine of a two-storey building with about 1,610 square meters of floor area, which
respondent used as a movie house known as Maxim Theater.

Two years later, on March 31, 1969, Mayfair entered into a second Contract of Lease
with Carmelo for the lease of another portion of the latter's property namely, a part
of the second floor of the two-storey building, with a floor area of about 1,064 square
meters; and two store spaces on the ground floor and the mezzanine, with a combined
floor area of about 300 square meters. In that space, Mayfair put up another movie
house known as Miramar Theater. The Contract of Lease was likewise for a period of 20
years.

Both leases contained a provision granting Mayfair a right of first refusal to purchase
the subject properties. However, on July 30, 1978 within the 20-year-lease term
the subject properties were sold by Carmelo to Equatorial Realty Development, Inc.
("Equatorial") for the total sum of P11,300,000, without their first being offered to
Mayfair.

As a result of the sale of the subject properties to Equatorial, Mayfair filed a Complaint
before the Regional Trial Court of Manila (Branch 7) for (a) the annulment of the Deed
of Absolute Sale between Carmelo and Equatorial, (b) specific performance, and (c)
damages. After trial on the merits, the lower court rendered a Decision in favor of
Carmelo and Equatorial. This case, entitled "Mayfair" Theater, Inc. v. Carmelo and
Bauermann, Inc., et al.," was docketed as Civil Case No. 118019.

On appeal (docketed as CA-GR CV No. 32918), the Court of Appeals (CA) completely
reversed and set aside the judgment of the lower court.

The controversy reached this Court via G.R No. 106063. In this mother case, it denied
the Petition for Review in this wise:

"WHEREFORE, the petition for review of the decision of the Court of Appeals,
dated June 23, 1992, in CA-G.R. CV No. 32918, is HEREBY DENIED. The Deed of
 Absolute Sale between petitioners Equatorial Realty Development, Inc. and
Carmelo & Bauermann, Inc. is hereby deemed rescinded; Carmelo & Bauermann is
ordered to return to petitioner Equatorial Realty Development the purchase
price. The latter is directed to execute the deeds and documents necessary to
return ownership to Carmelo & Bauermann of the disputed lots. Carmelo &
Bauermann is ordered to allow Mayfair Theater, Inc. to buy the aforesaid lots
for P11,300,000.00."6

The foregoing Decision of this Court became final and executory on March 17, 1997. On
April 25, 1997, Mayfair filed a Motion for Execution, which the trial court granted.

However, Carmelo could no longer be located. Thus, following the order of execution of
the trial court, Mayfair deposited with the clerk of court a quo its payment to Carmelo in
the sum of P11,300,000 less; P847,000 as withholding tax. The lower court issued a Deed
of Reconveyance in favor of Carmelo and a Deed of Sale in favor of Mayfair. On the
basis of these documents, the Registry of Deeds of Manila canceled Equatorial's titles
and issued new Certificates of Title7 in the name of Mayfair.

Ruling on Equatorial's Petition for Certiorari and Petition contesting the foregoing
manner of execution, the CA in its Resolution of November 20, 1998, explained that
Mayfair had no right to deduct the P847,000 as withholding tax. Since Carmelo could no
longer be located, the appellate court ordered Mayfair to deposit the said sum with the
Office of the Clerk of Court, Manila, to complete the full amount of P11,300,000 to be
turned over to Equatorial.

Equatorial questioned the legality of the above CA ruling before this Court in G.R No.
136221 entitled "Equatorial Realty Development, Inc. v. Mayfair Theater, Inc." In a
Decision promulgated on May 12, 2000,8 this Court directed the trial court to follow
strictly the Decision in GR. No. 106063, the mother case. It explained its ruling in these
words:

"We agree that Carmelo and Bauermann is obliged to return the entire amount of
eleven million three hundred thousand pesos (P11,300,000.00) to Equatorial. On
the other hand, Mayfair may not deduct from the purchase price the amount of
eight hundred forty-seven thousand pesos (P847,000.00) as withholding tax. The
duty to withhold taxes due, if any, is imposed on the seller Carmelo and
Bauermann, Inc."9

Meanwhile, on September 18, 1997 barely five months after Mayfair had submitted
its Motion for Execution before the RTC of Manila, Branch 7 Equatorial filed with the
Regional Trial Court of Manila, Branch 8, an action for the collection of a sum of money
against Mayfair, claiming payment of rentals or reasonable compensation for the
defendant's use of the subject premises after its lease contracts had expired. This
action was the progenitor of the present case.

In its Complaint, Equatorial alleged among other things that the Lease Contract covering
the premises occupied by Maxim Theater expired on May 31, 1987, while the Lease
Contract covering the premises occupied by Miramar Theater lapsed on March 31,
1989.10 Representing itself as the owner of the subject premises by reason of the
Contract of Sale on July 30, 1978, it claimed rentals arising from Mayfair's occupation
thereof.

Ruling of the RTC Manila, Branch 8

As earlier stated, the trial court dismissed the Complaint via the herein assailed Order
and denied the Motion for Reconsideration filed by Equatorial.11

The lower court debunked the claim of petitioner for unpaid back rentals, holding that
the rescission of the Deed of Absolute Sale in the mother case did not confer on
Equatorial any vested or residual proprietary rights, even in expectancy.

In granting the Motion to Dismiss, the court a quo held that the critical issue was
whether Equatorial was the owner of the subject property and could thus enjoy the
fruits or rentals therefrom. It declared the rescinded Deed of Absolute Sale as avoid at
its inception as though it did not happen."

The trial court ratiocinated as follows:

"The meaning of rescind in the aforequoted decision is to set aside. In the

case of Ocampo v. Court of Appeals, G.R. No. 97442, June 30, 1994, the
Supreme Court held that, 'to rescind is to declare a contract void in its inception
and to put an end as though it never were. It is not merely to terminate it and
release parties from further obligations to each other but to abrogate it from
the beginning and restore parties to relative positions which they would have
occupied had no contract ever been made.'

"Relative to the foregoing definition, the Deed of Absolute Sale between

Equatorial and Carmelo dated July 31, 1978 is void at its inception as though it
did not happen.

"The argument of Equatorial that this complaint for back rentals as 'reasonable
compensation for use of the subject property after expiration of the lease
 contracts presumes that the Deed of Absolute Sale dated July 30, 1978 from
whence the fountain of Equatorial's all rights flows is still valid and existing.

xxx xxx xxx

"The subject Deed of Absolute Sale having been rescinded by the Supreme
Court, Equatorial is not the owner and does not have any right to demand
backrentals from the subject property. . .12

The trial court added: "The Supreme Court in the Equatorial case, G.R No. 106063, has
categorically stated that the Deed of Absolute Sale dated July 31, 1978 has been
rescinded subjecting the present complaint to res judicata."13

Hence, the present recourse.14

Issues

Petitioner submits, for the consideration of this Court, the following issues: 15

"A

The basis of the dismissal of the Complaint by the Regional Trial Court not only
disregards basic concepts and principles in the law on contracts and in civil law,
especially those on rescission and its corresponding legal effects, but also
ignores the dispositive portion of the Decision of the Supreme Court in G.R. No.
106063 entitled 'Equatorial Realty Development, Inc. & Carmelo & Bauermann,
Inc. vs. Mayfair Theater, Inc.'

"B.

The Regional Trial Court erred in holding that the Deed of Absolute Sale in
favor of petitioner by Carmelo & Bauermann, Inc., dated July 31, 1978, over the
premises used and occupied by respondent, having been 'deemed rescinded' by
the Supreme Court in G.R. No. 106063, is 'void at its inception as though it did
not happen.'

"C.

The Regional Trial Court likewise erred in holding that the aforesaid Deed of
Absolute Sale, dated July 31, 1978, having been 'deemed rescinded' by the
Supreme Court in G.R. No. 106063, petitioner 'is not the owner and does not
 have any right to demand backrentals from the subject property,' and that the
rescission of the Deed of Absolute Sale by the Supreme Court does not confer
to petitioner 'any vested right nor any residual proprietary rights even in
expectancy.'

"D.

The issue upon which the Regional Trial Court dismissed the civil case, as stated
in its Order of March 11, 1998, was not raised by respondent in its Motion to
Dismiss.

"E.

The sole ground upon which the Regional Trial Court dismissed Civil Case No. 97-
85141 is not one of the grounds of a Motion to Dismiss under Sec. 1 of Rule 16 of
the 1997 Rules of Civil Procedure."

Basically, the issues can be summarized into two: (1) the substantive issue of whether
Equatorial is entitled to back rentals; and (2) the procedural issue of whether the
court a quo's dismissal of Civil Case No. 97-85141 was based on one of the grounds
raised by respondent in its Motion to Dismiss and covered by Rule 16 of the Rules of
Court.

This Court's Ruling

The Petition is not meritorious.

First Issue:
Ownership of Subject Properties

We hold that under the peculiar facts and circumstances of the case at bar, as found by
this Court en banc in its Decision promulgated in 1996 in the mother case, no right of
ownership was transferred from Carmelo to Equatorial in view of a patent failure to
deliver the property to the buyer.

Rental a Civil
Fruit of Ownership

To better understand the peculiarity of the instant case, let us begin with some basic
parameters. Rent is a civil fruit16 that belongs to the owner of the property producing
it17 by right of accession.18 Consequently and ordinarily, the rentals that fell due from
the time of the perfection of the sale to petitioner until its rescission by final judgment
should belong to the owner of the property during that period.

By a contract of sale, "one of the contracting parties obligates himself to transfer

ownership of and to deliver a determinate thing and the other to pay therefor a price
certain in money or its equivalent."19

Ownership of the thing sold is a real right,20 which the buyer acquires only upon delivery
of the thing to him "in any of the ways specified in articles 1497 to 1501, or in any other
manner signifying an agreement that the possession is transferred from the vendor to
the vendee."21 This right is transferred, not merely by contract, but also by tradition or
delivery.22 Non nudis pactis sed traditione dominia rerum transferantur. And there is
said to be delivery if and when the thing sold "is placed in the control and possession of
the vendee."23 Thus, it has been held that while the execution of a public instrument of
sale is recognized by law as equivalent to the delivery of the thing sold, 24 such
constructive or symbolic delivery, being merely presumptive, is deemed negated by the
failure of the vendee to take actual possession of the land sold.25

Delivery has been described as a composite act, a thing in which both parties must join
and the minds of both parties concur. It is an act by which one party parts with the title
to and the possession of the property, and the other acquires the right to and the
possession of the same. In its natural sense, delivery means something in addition to the
delivery of property or title; it means transfer of possession. 26 In the Law on Sales,
delivery may be either actual or constructive, but both forms of delivery contemplate
"the absolute giving up of the control and custody of the property on the part of the
vendor, and the assumption of the same by the vendee."27

Possession Never
Acquired by Petitioner

Let us now apply the foregoing discussion to the present issue. From the peculiar facts
of this case, it is clear that petitioner never took actual control and possession of the
property sold, in view of respondent's timely objection to the sale and the continued
actual possession of the property. The objection took the form of a court action
impugning the sale which, as we know, was rescinded by a judgment rendered by this
Court in the mother case. It has been held that the execution of a contract of sale as a
form of constructive delivery is a legal fiction. It holds true only when there is no
impediment that may prevent the passing of the property from the hands of the vendor
into those of the vendee.28 When there is such impediment, "fiction yields to reality
the delivery has not been effected."29
Hence, respondent's opposition to the transfer of the property by way of sale to
Equatorial was a legally sufficient impediment that effectively prevented the passing of
the property into the latter's hands.

This was the same impediment contemplated in Vda. de Sarmiento v. Lesaca,30 in which
the Court held as follows:

"The question that now arises is: Is there any stipulation in the sale in question
from which we can infer that the vendor did not intend to deliver outright the
possession of the lands to the vendee? We find none. On the contrary, it can be
clearly seen therein that the vendor intended to place the vendee in actual
possession of the lands immediately as can be inferred from the stipulation that
the vendee 'takes actual possession thereof . . . with full rights to dispose, enjoy
and make use thereof in such manner and form as would be most advantageous to
herself.' The possession referred to in the contract evidently refers to actual
possession and not merely symbolical inferable from the mere execution of the
document.

"Has the vendor complied with this express commitment? she did not. As
provided in Article 1462, the thing sold shall be deemed delivered when the
vendee is placed in the control and possession thereof, which situation does not
here obtain because from the execution of the sale up to the present the
vendee was never able to take possession of the lands due to the insistent
refusal of Martin Deloso to surrender them claiming ownership thereof. And
although it is postulated in the same article that the execution of a public
document is equivalent to delivery, this legal fiction only holds true when there
is no impediment that may prevent the passing of the property from the hands
of the vendor into those of the vendee. x x x."31

The execution of a public instrument gives rise, therefore, only to a prima facie
presumption of delivery. Such presumption is destroyed when the instrument itself
expresses or implies that delivery was not intended; or when by other means it is shown
that such delivery was not effected, because a third person was actually in possession of
the thing. In the latter case, the sale cannot be considered consummated.

However, the point may be raised that under Article 1164 of the Civil Code, Equatorial as
buyer acquired a right to the fruits of the thing sold from the time the obligation to
deliver the property to petitioner arose.32 That time arose upon the perfection of the
Contract of Sale on July 30, 1978, from which moment the laws provide that the parties
to a sale may reciprocally demand performance. 33 Does this mean that despite the
judgment rescinding the sale, the right to the fruits34 belonged to, and remained
enforceable by, Equatorial?

Article 1385 of the Civil Code answers this question in the negative, because
"[r]escission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; x x x" Not only the
land and building sold, but also the rental payments paid, if any, had to be returned by
the buyer.

Another point. The Decision in the mother case stated that "Equatorial x x x has
received rents" from Mayfair "during all the years that this controversy has been
litigated." The Separate Opinion of Justice Teodoro Padilla in the mother case also said
that Equatorial was "deriving rental income" from the disputed property. Even
herein ponente's Separate Concurring Opinion in the mother case recognized these
rentals. The question now is: Do all these statements concede actual delivery?

The answer is "No." The fact that Mayfair paid rentals to Equatorial during the litigation
should not be interpreted to mean either actual delivery or ipso facto recognition of
Equatorial's title.

The CA Records of the mother case 35 show that Equatorial as alleged buyer of the
disputed properties and as alleged successor-in-interest of Carmelo's rights as lessor
submitted two ejectment suits against Mayfair. Filed in the Metropolitan Trial Court of
Manila, the first was docketed as Civil Case No. 121570 on July 9, 1987; and the second,
as Civil Case No. 131944 on May 28, 1990. Mayfair eventually won them both. However, to
be able to maintain physical possession of the premises while awaiting the outcome of
the mother case, it had no choice but to pay the rentals.

The rental payments made by Mayfair should not be construed as a recognition of

Equatorial as the new owner. They were made merely to avoid imminent eviction. It is in
this context that one should understand the aforequoted factual statements in
the ponencia in the mother case, as well as the Separate Opinion of Mr. Justice Padilla
and the Separate Concurring Opinion of the herein ponente.

At bottom, it may be conceded that, theoretically, a rescissible contract is valid until

rescinded. However, this general principle is not decisive to the issue of whether
Equatorial ever acquired the right to collect rentals. What is decisive is the civil law rule
that ownership is acquired, not by mere agreement, but by tradition or delivery. Under
the factual environment of this controversy as found by this Court in the mother case,
Equatorial was never put in actual and effective control or possession of the property
because of Mayfair's timely objection.
As pointed out by Justice Holmes, general propositions do not decide specific cases.
Rather, "laws are interpreted in the context of the peculiar factual situation of each
case. Each case has its own flesh and blood and cannot be decided on the basis of
isolated clinical classroom principles." 36

In short, the sale to Equatorial may have been valid from inception, but it was judicially
rescinded before it could be consummated. Petitioner never acquired ownership, not
because the sale was void, as erroneously claimed by the trial court, but because the sale
was not consummated by a legally effective delivery of the property sold.

Benefits Precluded by
Petitioner's Bad Faith

Furthermore, assuming for the sake of argument that there was valid delivery,
petitioner is not entitled to any benefits from the "rescinded" Deed of Absolute Sale
because of its bad faith. This being the law of the mother case decided in 1996, it may
no longer be changed because it has long become final and executory. Petitioner's bad
faith is set forth in the following pertinent portions of the mother case:

"First and foremost is that the petitioners acted in bad faith to render
Paragraph 8 'inutile.'

xxx xxx xxx

"Since Equatorial is a buyer in bad faith, this finding renders the sale to it of
the property in question rescissible. We agree with respondent Appellate Court
that the records bear out the fact that Equatorial was aware of the lease
contracts because its lawyers had, prior to the sale, studied the said contracts.
As such, Equatorial cannot tenably claim to be a purchaser in good faith, and,
therefore, rescission lies.

xxx xxx xxx

"As also earlier emphasized, the contract of sale between Equatorial and
Carmelo is characterized by bad faith, since it was knowingly entered into in
violation of the rights of and to the prejudice of Mayfair. In fact, as correctly
observed by the Court of Appeals, Equatorial admitted that its lawyers had
studied the contract of lease prior to the sale. Equatorial's knowledge of the
stipulations therein should have cautioned it to look further into the agreement
to determine if it involved stipulations that would prejudice its own interests.
 xxx xxx xxx

"On the part of Equatorial, it cannot be a buyer in good faith because it bought
the property with notice and full knowledge that Mayfair had a right to or
interest in the property superior to its own. Carmelo and Equatorial took
unconscientious advantage of Mayfair."37 (Italics supplied)

Thus, petitioner was and still is entitled solely to he return of the purchase price it paid
to Carmelo; no more, no less. This Court has firmly ruled in the mother case that neither
of them is entitled to any consideration of equity, as both "took unconscientious
advantage of Mayfair."38

In the mother case, this Court categorically denied the payment of interest, a fruit of
ownership. By the same token, rentals, another fruit of ownership, cannot be granted
without mocking this Court's en banc Decision, which has long become final.

Petitioner's claim of reasonable compensation for respondent's use and occupation of

the subject property from the time the lease expired cannot be countenanced. If it
suffered any loss, petitioner must bear it in silence, since it had wrought that loss upon
itself. Otherwise, bad faith would be rewarded instead of punished.@lawphil.net

We uphold the trial court's disposition, not for the reason it gave, but for (a) the patent
failure to deliver the property and (b) petitioner's bad faith, as above discussed.

Second Issue:itc-alf
Ground in Motion to Dismiss

Procedurally, petitioner claims that the trial court deviated from the accepted and usual
course of judicial proceedings when it dismissed Civil Case No. 97-85141 on a ground not
raised in respondent's Motion to Dismiss. Worse, it allegedly based its dismissal on a
ground not provided for in a motion to dismiss as enunciated in the Rules of
Court.@lawphil.net

We are not convinced A review of respondent's Motion to Dismiss Civil Case No. 97-
85141 shows that there were two grounds invoked, as follows:

"(A)

Plaintiff is guilty of forum-shopping.itc-alf

"(B)
 Plaintiff's cause of action, if any, is barred by prior judgment."39

The court a quo ruled, inter alia, that the cause of action of petitioner plaintiff in the
case below) had been barred by a prior judgment of this Court in G.R No. 106063, the
mother case.

Although it erred in its interpretation of the said Decision when it argued that the
rescinded Deed of Absolute Sale was avoid," we hold, nonetheless, that petitioner's
cause of action is indeed barred by a prior judgment of this Court. As already discussed,
our Decision in G.R No. 106063 shows that petitioner is not entitled to back rentals,
because it never became the owner of the disputed properties due to a failure of
delivery. And even assuming arguendo that there was a valid delivery, petitioner's bad
faith negates its entitlement to the civil fruits of ownership, like interest and rentals.

Under the doctrine of res judicata or bar by prior judgment, a matter that has been
adjudicated by a court of competent jurisdiction must be deemed to have been finally
and conclusively settled if it arises in any subsequent litigation between the same parties
and for the same cause. 40 Thus, "[a] final judgment on the merits rendered by a court of
competent jurisdiction is conclusive as to the rights of the parties and their privies and
constitutes an absolute bar to subsequent actions involving the same claim, demand, or
cause of action."41 Res judicata is based on the ground that the "party to be affected, or
some other with whom he is in privity, has litigated the same matter in a former action in
a court of competent jurisdiction, and should not be permitted to litigate it again. 42

It frees the parties from undergoing all over again the rigors of unnecessary suits and
repetitive trials. At the same time, it prevents the clogging of court dockets. Equally
important, it stabilizes rights and promotes the rule of law.@lawphil.net

We find no need to repeat the foregoing disquisitions on the first issue to show
satisfaction of the elements of res judicata. Suffice it to say that, clearly, our ruling in
the mother case bars petitioner from claiming back rentals from respondent. Although
the court a quo erred when it declared "void from inception" the Deed of Absolute Sale
between Carmelo and petitioner, our foregoing discussion supports the grant of the
Motion to Dismiss on the ground that our prior judgment in G.R No. 106063 has already
resolved the issue of back rentals.

On the basis of the evidence presented during the hearing of Mayfair's Motion to
Dismiss, the trial court found that the issue of ownership of the subject property has
been decided by this Court in favor of Mayfair. We quote the RTC:
 "The Supreme Court in the Equatorial case, G.R. No. 106063 has categorically
stated that the Deed of Absolute Sale dated July 31, 1978 has been rescinded
subjecting the present complaint to res judicata."43(Emphasis in the original)

Hence, the trial court decided the Motion to Dismiss on the basis of res judicata, even if
it erred in interpreting the meaning of "rescinded" as equivalent to "void" In short, it
ruled on the ground raised; namely, bar by prior judgment. By granting the Motion,
it disposed correctly, even if its legal reason for nullifying the sale was wrong. The
correct reasons are given in this Decision.

WHEREFORE, the Petition is hereby DENIED. Costs against petitioner.itc-alf

SO ORDERED

G.R. No. L-6584 October 16, 1911

INCHAUSTI AND CO., plaintiff-appellant,

vs.
ELLIS CROMWELL, Collector of Internal Revenue, defendant-appellee.

Haussermann, Cohn & Fisher, for appellant.

Acting Attorney-General Harvey, for appellee.

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:

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 bailing 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 bailing; 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 bailing 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 bailing 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."

VII. 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 the 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 of 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.1awphil.net

XIV. Upon the facts above set forth t 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 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.

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 quality of hemp it would be the under standing, 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 n 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 additions 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 plaintiff's
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 no 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 vs. Buck, 3 Maule & S., 178; Towers vs. 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 vs. Crafts, 12 Met., 353; Smith vs. 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 vs. Bell, 8 Barn. & C., 277; Lee vs. Griffin, 30 L.J.N. S.Q.B.,
252; Prescott vs. 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 defendant's request, it is a contract of sale, even
though it may be entirely made after, and in consequence of, the defendant's order for
it. (Garbutt s. Watson, 5 Barn. & Ald., 613; Gardner vs. Joy, 9 Met., 177; Lamb vs. Crafts,
12 Met., 353; Waterman vs. Meigs, 4 Cush., 497., Clark vs. Nichols, 107 Mass., 547;
May vs. Ward, 134 Mass., 127; Abbott vs. Gilchrist, 38 Me., 260; Crocket vs. Scribner,
64 Me., 105; Pitkin vs. Noyes, 48 N. H., 294; Prescott vs. Locke, 51 N. H., 94;
Ellison vs. 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 adoption to
the buyer's wishes or purposes. (Mixer vs. 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 vs. 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 whose
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 tat 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 tat 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 undisputable that, if
the plaintiff had brought the hemp in question already baled, and that was the hemp the
sale 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:

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.

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. Wheher 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 insists 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
no right, after having made their contracts, to insists 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 proceed 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

G.R. No. L-8506 August 31, 1956

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 sash,
panels, mouldings to Teodoro & 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 appealed decision is consequently affirmed. So ordered.

G.R. No. 71122 March 25, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ARNOLDUS CARPENTRY SHOP, INC. and COURT OF TAX APPEALS, respondents.

The Solicitor General for petitioner.

Generoso Jacinto for respondents.

CORTES, J.:

Assailed in this petition is the decision of the Court of Tax Appeals in CTA case No.
3357 entitled "ARNOLDUS CARPENTRY SHOP, INC. v. COMMISSIONER OF
INTERNAL REVENUE."

The facts are simple.

Arnoldus Carpentry Shop, Inc. (private respondent herein) is a domestic corporation

which has been in existence since 1960. It has for its secondary purpose the "preparing,
processing, buying, selling, exporting, importing, manufacturing, trading and dealing in
cabinet shop products, wood and metal home and office furniture, cabinets, doors,
windows, etc., including their component parts and materials, of any and all nature and
description" (Rollo, pp. 160-161). These furniture, cabinets and other woodwork were sold
locally and exported abroad.

For this business venture, private respondent kept samples or models of its woodwork on
display from where its customers may refer to when placing their orders.

Sometime in March 1979, the examiners of the petitioner Commissioner of Internal

Revenue conducted an investigation of the business tax liabilities of private respondent
pursuant to Letter of Authority No. 08307 NA dated November 23, 1978. As per the
examination, the total gross sales of private respondent for the year 1977 from both its
local and foreign dealings amounted to P5,162,787.59 (Rollo. p. 60). From this amount,
private respondent reported in its quarterly percentage tax returns P2,471,981.62 for
its gross local sales. The balance of P2,690,805.97, which is 52% of the total gross
sales, was considered as its gross export sales (CTA Decision, p. 12).

Based on such an examination, BIR examiners Honesto A. Vergel de Dios and Voltaire
Trinidad made a report to the Commissioner classifying private respondent as an "other
independent contractor" under Sec. 205 (16) [now Sec. 169 (q)] of the Tax Code. The
relevant portion of the report reads:

Examination of the records show that per purchase orders, which are
hereby attached, of the taxpayer's customers during the period under
review, subject corporation should be considered a contractor and not a
manufacturer. The corporation 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, (Luzon Stevedoring Co. v. Trinidad, 43 Phil. 803). Hence, in
the computation of the percentage tax, the 3% contractor's tax should
be imposed instead of the 7% manufacturer's tax. [Rollo, p. 591
(Emphasis supplied.)

xxx xxx xxx

As a result thereof, the examiners assessed private respondent for deficiency tax in the
amount of EIGHTY EIGHT THOUSAND NINE HUNDRED SEVENTY TWO PESOS AND
TWENTY THREE CENTAVOS ( P88,972.23 ). Later, on January 31, 1981, private
respondent received a letter/notice of tax deficiency assessment inclusive of charges
and interest for the year 1977 in the amount of ONE HUNDRED EIGHT THOUSAND
SEVEN HUNDRED TWENTY PESOS AND NINETY TWO CENTAVOS ( P 108,720.92 ).
This tax deficiency was a consequence of the 3% tax imposed on private respondent's
gross export sales which, in turn, resulted from the examiners' finding that categorized
private respondent as a contractor (CTA decision, p.2).

Against this assessment, private respondent filed on February 19, 1981 a protest with
the petitioner Commissioner of Internal Revenue. In the protest letter, private
respondent's manager maintained that the carpentry shop is a manufacturer and
therefor entitled to tax exemption on its gross export sales under Section 202 (e) of
the National Internal Revenue Code. He explained that it was the 7% tax exemption on
export sales which prompted private respondent to exploit the foreign market which
resulted in the increase of its foreign sales to at least 52% of its total gross sales in
1977 (CTA decision, pp. 1213).

On June 23, 1981, private respondent received the final decision of the petitioner
stating:

It is the stand of this Office that you are considered a contractor an

not a manufacturer. Records show that you manufacture woodworks only
upon previous order from supposed manufacturers and only in
accordance with the latter's own design, model number, color, etc. [Rollo
p. 64] (Emphasis supplied.)

On July 22, 1981, private respondent appealed to the Court of Tax Appeals alleging that
the decision of the Commissioner was contrary to law and the facts of the case.

On April 22, 1985, respondent Court of Tax Appeals rendered the questioned decision
holding that private respondent was a manufacturer thereby reversing the decision of
the petitioner.

Hence, this petition for review wherein petitioner raises the sole issue of. Whether or
not the Court of Tax Appeals erred in holding that private respondent is a manufacturer
and not a contractor and therefore not liable for the amount of P108,720.92, as
deficiency contractor's tax, inclusive of surcharge and interest, for the year 1977.

The petition is without merit.

1. Private respondent is a "manufacturer" as defined in the Tax Code and not a

"contractor" under Section 205(e) of the Tax Code as petitioner would have this Court
decide.
 (a) Section 205 (16) [now Sec. 170 (q)] of the Tax Code defines
"independent contractors" as:

... persons (juridical and 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. (Emphasis supplied.)

Private respondent's business does not fall under this definition.

Petitioner contends that the fact that private respondent "designs and makes samples or
models that are 'displayed' or presented or 'submitted' to prospective buyers who
'might choose' therefrom" signifies that what private respondent is selling is a kind of
service its shop is capable of rendering in terms of woodwork skills and craftsmanship
(Brief for Petitioner, p. 6). He further stresses the point that if there are no orders
placed for goods as represented by the sample or model, the shop does not produce
anything; on the other hand, if there are orders placed, the shop goes into fall
production to fill up the quantity ordered (Petitioner's Brief, p. 7).

The facts of the case do not support petitioner's claim. Petitioner is ignoring the fact
that private respondent sells goods which it keeps in stock and not services. As the
respondent Tax Court had found:

xxx xxx xxx

Petitioner [private respondent herein] claims, and the records bear

petitioner out, that it had a ready stock of its shop products for sale to
its foreign and local buyers. As a matter of fact, the purchase orders
from its foreign buyers showed that they ordered by referring to the
models designated by petitioner. Even purchases by local buyers for
television cabinets (Exhs. '2 to13', pp. 1-13, BIR records) were by orders
for existing models except only for some adjustments in sizes and
accessories utilized.

With regard to the television cabinets, petitioner presented three

witnesses its bookkeeper, production manager and manager who
testified that samples of television cabinets were designed and made by
petitioner, from which models the television companies such as Hitachi
National and others might choose, then specified whatever innovations
 they desired. If found to be saleable, some television cabinets were
manufactured for display and sold to the general public. These cabinets
were not exported but only sold locally. (t.s.n., pp. 2235, February
18,1982; t.s.n., pp. 7-10, March 25, 1982; t.s.n., pp. 3-6, August 10, 1983.)

xxx xxx xxx

In the case of petitioner's other woodwork products such as barometer

cases, knife racks, church furniture, school furniture, knock down
chairs, etc., petitioner's above-mentioned witnesses testified that these
were manufactured without previous orders. Samples were displayed,
and if in stock, were available for immediate sale to local and foreign
customers. Such testimony was not contradicted by respondent
(petitioner herein). And in all the purchase orders presented as exhibits,
whether from foreign or local buyers, reference was made to the model
number of the product being ordered or to the sample submitted by
petitioner.

Respondent's examiners, in their memorandum to the Commissioner of

Internal Revenue, stated that petitioner manufactured only upon
previous orders from customers and "only in accordance with the
latter's own design, model number, color, etc." (Exh. '1', p. 27, BIR
records.) Their bare statement that the model numbers and designs
were the customers' own, unaccompanied by adequate evidence, is
difficult to believe. It ignores commonly accepted and recognized
business practices that it is not the customer but the manufacturer who
furnishes the samples or models from which the customers select when
placing their orders, The evidence adduced by petitioner to prove that
the model numbers and designs were its own is more convincing [CTA
decision, pp. 6-8.] (Emphasis supplied)

xxx xxx xxx

This Court finds no reason to disagree with the Tax Court's finding of fact. It has been
consistently held that while the decisions of the Court of Tax Appeals are appealable to
the Supreme Court, the former's finding of fact are entitled to the highest respect.
The factual findings can only be disturbed on the part of the tax court [Collector of
Intern. al Revenue v. Henderson, L-12954, February 28, 1961, 1 SCRA 649; Aznar v.
Court of Tax Appeals, L-20569, Aug. 23, 1974, 58 SCRA 519; Raymundo v. de Joya, L-
27733, Dec. 3, 1980, 101 SCRA 495; Industrial Textiles Manufacturing Co. of the Phils. ,
Inc. v. Commissioner of Internal Revenue, L-27718 and L-27768, May 27,1985,136 SCRA
549.]

(b) Neither can Article 1467 of the New Civil Code help petitioner's cause. Article 1467
states:

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.

Petitioner alleged that what exists prior to any order is but the sample model only,
nothing more, nothing less and the ordered quantity would never have come into
existence but for the particular order as represented by the sample or model [Brief for
Petitioner, pp. 9-101.]

Petitioner wants to impress upon this Court that under Article 1467, the true test of
whether or not the contract is a piece of work (and thus classifying private respondent
as a contractor) or a contract of sale (which would classify private respondent as a
manufacturer) is the mere existence of the product at the time of the perfection of the
contract such that if the thing already exists, the contract is of sale, if not, it is work.

This is not the test followed in this jurisdiction. As can be clearly seen from the
wordings of Art. 1467, what determines whether the contract is one of work or of sale is
whether the thing has been manufactured specially for the customer and upon his special
order." Thus, if the thing is specially done at the order of another, this is a contract for
a piece of work. If, on the other hand, the thing is manufactured or procured for the
general market in the ordinary course of one's business, it is a b contract of sale.

Jurisprudence has followed this criterion. As held in Commissioner of Internal Revenue

v. Engineering Equipment and Supply Co. (L-27044 and L-27452, June 30, 1975, 64 SCRA
590, 597), "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." (Emphasis supplied.) And in a BIR ruling,
which as per Sec. 326 (now Sec. 277) of the Tax Court the Commissioner has the power
to make and which, as per settled jurisprudence is entitled to the greatest weight as an
administrative view [National Federation of Sugar Workers (NFSW) v. Ovejera, G.R. No.
59743, May 31, 1982, 114 SCRA 354, 391; Sierra Madre Trust v. Hon. Sec. of
Agriculture and Natural Resources, Nos. 32370 and 32767, April 20, 1983,121 SCRA
384; Espanol v. Chairman and Members of the Board of Administrators, Phil. Veterans
Administration, L-44616, June 29, 1985, 137 SCRA 3141, "one who has ready for the sale
to the general public finished furniture is a manufacturer, and the mere fact that he did
not have on hand a particular piece or pieces of furniture ordered does not make him a
contractor only" (BIR Ruling No. 33-1, series of 1960). Likewise,

xxx xxx xxx

When the vendor enters into a contract for the delivery of an article
which in the ordinary course of his business he manufactures or
procures for the general market at a price certain (Art. 1458) such
contract is one of sale even if at the time of contracting he may not
have such article on hand. Such articles fall within the meaning of
"future goods" mentioned in Art. 1462, par. 1. [5 Padilla, Civil Law: Civil
Code Annotated 139 (1974)

xxx xxx xxx

These considerations were what precisely moved the respondent Court of Tax Appeals to
rule that 'the fact that [private respondent] kept models of its products... indicate that
these products were for sale to the general public and not for special orders,'
citing Celestino Co and Co. v. Collector of Internal Revenue [99 Phil, 841 (1956)]. (CTA
Decision, pp. 8-9.)

Petitioner alleges that the error of the respondent Tax Court was due to the 'heavy
albeit misplaced and indiscriminate reliance on the case of Celestino Co and Co. v.
Collector of Internal Revenue [99 Phil. 841, 842 (1956)] which is not a case in point' 1
Brief for Petitioner, pp. 14-15). The Commissioner of Internal Revenue made capital of
the difference between the kinds of business establishments involved a FACTORY in the
Celestino Co case and a CARPENTRY SHOP in this case (Brief for Petitioner, pp. 14-18).
Petitioner seems to have missed the whole point in the former case.

True, the former case did mention the fact of the business concern being a FACTORY,
Thus:

xxx xxx xxx

... 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 and 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 workmanship" solely for the purpose of
supplying the need for doors, windows and sash of its special and limited
customers. One will note that petitioner has chosen for its trade name
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 ready-made
doors and windows of standard sizes for the average home. [Emphasis
supplied.]

xxx xxx xxx

However, these findings were merely attendant facts to show what the Court was really
driving at the habituality of the production of the goods involved for the general
public.

In the instant case, it may be that what is involved is a CARPENTRY SHOP. But, in the
same vein, there are also attendant facts herein to show habituality of the production
for the general public.

In this wise, it is noteworthy to again cite the findings of fact of the respondent Tax
Court:

xxx xxx xxx

Petitioner [private respondent herein] claims, and the records bear

petitioner out, that it had a ready stock of its shop products for sale to
its foreign and local buyers. As a matter of fact, the purchase orders
from its foreign buyers showed that they ordered by referring to the
models designed by petitioner. Even purchases by local buyers for
television cabinets... were by orders for existing models. ...

With regard to the television cabinets, petitioner presented three

witnesses... who testified that samples of television cabinets were
designed and made by petitioner, from which models the television
companies ... might choose, then specified whatever innovations they
desired. If found to be saleable, some television cabinets were
manufactured for display and sold to the general public.
 xxx xxx xxx

In the case of petitioner's other woodwork products... these were

manufactured without previous orders. Samples were displayed, and if in
stock, were available for immediate sale to local and foreign
customers. (CTA decision, pp. 6-8.1 [Emphasis supplied.]

(c) The private respondent not being a "contractor" as defined by the Tax Code or of
the New Civil Code, is it a 'manufacturer' as countered by the carpentry shop?

Sec. 187 (x) [now Sec. 157 (x)] of the Tax Code defines a manufacturer' as follows:

"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 product in such
manner as to prepare it for a special use or uses to which it could not
have been in its original condition, or who by any such process alters the
quality or any such raw 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 different
kinds and in such manner that the finished product of such process or
manufacture can be put to a special use or uses to which such raw
material or manufactured or partially manufactured products in their
original condition would 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.

It is a basic rule in statutory construction that when the language of the law is clear and
unequivocal, the law must be taken to mean exactly what it says [Banawa et al. v. Mirano
et al., L-24750, May 16, 1980, 97 SCRA 517, 533].

The term "manufacturer" had been considered in its ordinary and general usage. The
term has been construed broadly to include such processes as buying and converting
duck eggs to salted eggs ('balut") [Ngo Shiek v. Collector of Internal Revenue, 100 Phil.
60 (1956)1; the processing of unhusked kapok into clean kapok fiber [Oriental Kapok
Industries v. Commissioner of Internal Revenue, L-17837, Jan. 31, 1963, 7 SCRA 132]; or
making charcoal out of firewood Bermejo v. Collector of Internal Revenue, 87 Phil. 96
(1950)].

2. As the Court of Tax Appeals did not err in holding that private respondent is a
"manufacturer," then private respondent is entitled to the tax exemption under See.
202 (d) and (e) mow Sec. 167 (d) and (e)] of the Tax Code which states:

Sec. 202. Articles not subject to percentage tax on sales. The following
shall be exempt from the percentage taxes imposed in Sections 194,
195, 196, 197, 198, 199, and 201:

xxx xxx xxx

(d) Articles shipped or exported by the manufacturer or producer,

irrespective of any shipping arrangement that may be agreed upon which
may influence or determine the transfer of ownership of the articles so
exported.

(e) Articles sold by "registered export producers" to (1) other"

registered export producers" (2) "registered export traders' or (3)
foreign tourists or travelers, which are considered as "export sales."

The law is clear on this point. It is conceded that as a rule, as argued by petitioner, any
claim for tax exemption from tax statutes is strictly construed against the taxpayer and
it is contingent upon private respondent as taxpayer to establish a clear right to tax
exemption [Brief for Petitioners, p. 181. Tax exemptions are strictly construed against
the grantee and generally in favor of the taxing authority [City of Baguio v. Busuego, L-
29772, Sept. 18, 1980, 100 SCRA 1161; they are looked upon with disfavor [Western
Minolco Corp. v. Commissioner Internal Revenue, G.R. No. 61632, Aug. 16,1983,124 1211.
They are held strictly against the taxpayer and if expressly mentioned in the law, must
at least be within its purview by clear legislative intent [Commissioner of Customs v. Phil.,
Acetylene Co., L-22443, May 29, 1971, 39 SCRA 70, Light and Power Co. v. Commissioner
of Customs, G.R. L-28739 and L-28902, March 29, 1972, 44 SCRA 122].

Conversely therefore, if there is an express mention or if the taxpayer falls within the
purview of the exemption by clear legislative intent, then the rule on strict construction
will not apply. In the present case the respondent Tax Court did not err in classifying
private respondent as a "manufacturer". Clearly, the 'latter falls with the term
'manufacturer' mentioned in Art. 202 (d) and (e) of the Tax Code. As the only question
raised by petitioner in relation to this tax exemption claim by private respondent is the
classification of the latter as a manufacturer, this Court affirms the holding of
respondent Tax Court that private respondent is entitled to the percentage tax
exemption on its export sales.

There is nothing illegal in taking advantage of tax exemptions. When the private
respondent was still exporting less and producing locally more, the petitioner did not
question its classification as a manufacturer. But when in 1977 the private respondent
produced locally less and exported more, petitioner did a turnabout and imposed the
contractor's tax. By classifying the private respondent as a contractor, petitioner would
likewise take away the tax exemptions granted under Sec. 202 for manufacturers.
Petitioner's action finds no support in the applicable law.

WHEREFORE, the Court hereby DENIES the Petition for lack of merit and AFFIRMS
the Court of Tax Appeals decision in CTA Case No. 3357.

SO ORDERED

G.R. No. 52267 January 24, 1996

ENGINEERING & MACHINERY CORPORATION, petitioner,

vs.
COURT OF APPEALS and PONCIANO L. ALMEDA, respondent.

DECISION

PANGANIBAN, J.:

Is a contract for the fabrication and installation of a central air-conditioning system in a

building, one of "sale" or "for a piece of work"? What is the prescriptive period for filing
actions for breach of the terms of such contract?

These are the legal questions brought before this Court in this Petition for review
on certiorari under Rule 45 of the Rules of Court, to set aside the Decision1 of the Court
of Appeals2 in CA-G.R. No. 58276-R promulgated on November 28, 1978 (affirming in
toto the decision3 dated April 15, 1974 of the then Court of First Instance of Rizal,
Branch II4 , in Civil Case No. 14712, which ordered petitioner to pay private respondent
the amount needed to rectify the faults and deficiencies of the air-conditioning system
installed by petitioner in private respondent's building, plus damages, attorney's fees
and costs).

By a resolution of the First Division of this Court dated November 13, 1995, this case
was transferred to the Third. After deliberating on the various submissions of the
parties, including the petition, record on appeal, private respondent's comment and
briefs for the petitioner and the private respondent, the Court assigned the writing of
this Decision to the undersigned, who took his oath as a member of the Court on
October 10, 1995.

The Facts

Pursuant to the contract dated September 10, 1962 between petitioner and private
respondent, the former undertook to fabricate, furnish and install the air-conditioning
system in the latter's building along Buendia Avenue, Makati in consideration of
P210,000.00. Petitioner was to furnish the materials, labor, tools and all services
required in order to so fabricate and install said system. The system was completed in
1963 and accepted by private respondent, who paid in full the contract price.

On September 2, 1965, private respondent sold the building to the National Investment
and Development Corporation (NIDC). The latter took possession of the building but on
account of NIDC's noncompliance with the terms and conditions of the deed of sale,
private respondent was able to secure judicial rescission thereof. The ownership of the
building having been decreed back to private respondent, he re-acquired possession
sometime in 1971. It was then that he learned from some NIDC, employees of the
defects of the air-conditioning system of the building.

Acting on this information, private respondent commissioned Engineer David R. Sapico to

render a technical evaluation of the system in relation to the contract with petitioner. In
his report, Sapico enumerated the defects of the system and concluded that it was "not
capable of maintaining the desired room temperature of 76F - 2F (Exhibit C)"5 .

On the basis of this report, private respondent filed on May 8, 1971 an action for
damages against petitioner with the then Court of First Instance of Rizal (Civil Case No.
14712). The complaint alleged that the air-conditioning system installed by petitioner did
not comply with the agreed plans and specifications. Hence, private respondent prayed
for the amount of P210,000.00 representing the rectification cost, P100,000.00 as
damages and P15,000.00 as attorney's fees.

Petitioner moved to dismiss the complaint, alleging that the prescriptive period of six
months had set in pursuant to Articles 1566 and 1567, in relation to Article 1571 of the
Civil Code, regarding the responsibility of a vendor for any hidden faults or defects in
the thing sold.

Private respondent countered that the contract dated September 10, 1962 was not a
contract for sale but a contract for a piece of work under Article 1713 of the Civil Code.
Thus, in accordance with Article 1144 (1) of the same Code, the complaint was timely
brought within the ten-year prescriptive period.

In its reply, petitioner argued that Article 1571 of the Civil Code providing for a six-
month prescriptive period is applicable to a contract for a piece of work by virtue of
Article 1714, which provides that such a contract shall be governed by the pertinent
provisions on warranty of title and against hidden defects and the payment of price in a
contract of sale6 .

The trial court denied the motion to dismiss. In its answer to the complaint, petitioner
reiterated its claim of prescription as an affirmative defense. It alleged that whatever
defects might have been discovered in the air-conditioning system could have been
caused by a variety of factors, including ordinary wear and tear and lack of proper and
regular maintenance. It pointed out that during the one-year period that private
respondent withheld final payment, the system was subjected to "very rigid inspection
and testing and corrections or modifications effected" by petitioner. It interposed a
compulsory counterclaim suggesting that the complaint was filed "to offset the adverse
effects" of the judgment in Civil Case No. 71494, Court of First Instance of Manila,
involving the same parties, wherein private respondent was adjudged to pay petitioner
the balance of the unpaid contract price for the air-conditioning system installed in
another building of private respondent, amounting to P138,482.25.

Thereafter, private respondent filed an ex-parte motion for preliminary attachment on

the strength of petitioner's own statement to the effect that it had sold its business
and was no longer doing business in Manila. The trial court granted the motion and, upon
private respondent's posting of a bond of F'50,000.00, ordered the issuance of a writ of
attachment.

In due course, the trial court rendered a decision finding that petitioner failed to install
certain parts and accessories called for by the contract, and deviated from the plans of
the system, thus reducing its operational effectiveness to the extent that 35 window-
type units had to be installed in the building to achieve a fairly desirable room
temperature. On the question of prescription, the trial court ruled that the complaint
was filed within the ten-year court prescriptive period although the contract was one
for a piece of work, because it involved the "installation of an air-conditioning system
which the defendant itself manufactured, fabricated, designed and installed."

Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial
court. Hence, it instituted the instant petition.

The Submissions of the Parties

In the instant Petition, petitioner raised three issues. First, it contended that private
respondent's acceptance of the work and his payment of the contract price extinguished
any liability with respect to the defects in the air-conditioning system. Second, it
claimed that the Court of Appeals erred when it held that the defects in the installation
were not apparent at the time of delivery and acceptance of the work considering that
private respondent was not an expert who could recognize such defects. Third, it
insisted that, assuming arguendo that there were indeed hidden defects, private
respondent's complaint was barred by prescription under Article 1571 of the Civil Code,
which provides for a six-month prescriptive period.

Private respondent, on the other hand, averred that the issues raised by petitioner, like
the question of whether there was an acceptance of the work by the owner and whether
the hidden defects in the installation could have been discovered by simple inspection,
involve questions of fact which have been passed upon by the appellate court.

The Court's Ruling

The Supreme Court reviews only errors of law in petitions for review on certiorari under
Rule 45. It is not the function of this Court to re-examine the findings of fact of the
appellate court unless said findings are not supported by the evidence on record or the
judgment is based on a misapprehension of facts7 of Appeals erred when it held that the
defects in the installation were not apparent at the time of delivery and acceptance of
the work considering that private respondent was not an expert who could recognize
such defects. Third. it insisted that, assuming arguendo that there were indeed hidden
defects, private respondent's complaint was barred by prescription under Article 1571
of the Civil Code, which provides for a six-month prescriptive period.

Private respondent, on the other hand, averred that the issues raised by petitioner, like
the question of whether here was an acceptance of the work by the owner and whether
the hidden defects in the installation could have been discovered by simple inspection,
involve questions of fact which have been passed upon by the appellate court.

The Court has consistently held that the factual findings of the trial court, as
well as the Court of Appeals, are final and conclusive and may not be reviewed on
appeal. Among the exceptional circumstances where a reassessment of facts
found by the lower courts is allowed are when the conclusion is a finding
grounded entirely on speculation, surmises or conjectures; when the inference
made is manifestly absurd, mistaken or impossible; when there is grave abuse of
discretion in the appreciation of facts; when the judgment is premised on a
misapprehension of facts; when the findings went beyond the issues of the case
and the same are contrary to the admissions of both appellant and appellee.
 After a careful study of the case at bench, we find none of the above grounds
present to justify the re-evaluation of the findings of fact made by the courts
below.8

We see no valid reason to discard the factual conclusions of the appellate court.
. . . (I)t is not the function of this Court to assess and evaluate all over again the
evidence, testimonial and documentary, adduced by the parties, particularly
where, such as here, the findings of both the trial court and the appellate court
on the matter coincide.9 (Emphasis supplied)

Hence, the first two issues will not be resolved as they raise questions of fact.

Thus, the only question left to be resolved is that of prescription. In their submissions,
the parties argued lengthily on the nature of the contract entered into by them, viz.,
whether it was one of sale or for a piece of work.

Article 1713 of the Civil Code defines a contract for a piece of work thus:

By the 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. The contractor may either employ only his labor or skill, or also
furnish the material.

A contract for a piece of work, labor and materials may be distinguished from a contract
of sale by the inquiry as to whether the thing transferred is one not in existence and
which would never have existed but for the order, of the person desiring it10 . In such
case, the contract is one for a piece of work, not a sale. On the other hand, if the thing
subject of the contract would have existed and been the subject of a sale to some other
person even if the order had not been given, then the contract is one of sale 11 .

Thus, Mr. Justice Vitug12 explains that -

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 (Art. 1467, Civil Code). The mere fact alone that certain articles are made
upon previous orders of customers will not argue against the imposition of the
sales tax if such articles are ordinarily manufactured by the taxpayer for sale
to the public (Celestino Co. vs. Collector, 99 Phil. 841).
To Tolentino, the distinction between the two contracts depends on the intention of the
parties. Thus, if the parties intended that at some future date an object has to be
delivered, without considering the work or labor of the party bound to deliver, the
contract is one of sale. But if one of the parties accepts the undertaking on the basis of
some plan, taking into account the work he will employ personally or through another,
there is a contract for a piece of work13 .

Clearly, the contract in question is one for a piece of work. It is not petitioner's line of
business to manufacture air-conditioning systems to be sold "off-the-shelf." Its
business and particular field of expertise is the fabrication and installation of such
systems as ordered by customers and in accordance with the particular plans and
specifications provided by the customers. Naturally, the price or compensation for the
system manufactured and installed will depend greatly on the particular plans and
specifications agreed upon with the customers.

The obligations of a contractor for a piece of work are set forth in Articles 1714 and
1715 of the Civil Code, which provide:

Art. 1714. If the contractor agrees to produce the work from material furnished
by him, he shall deliver the thing produced to the employer and transfer
dominion over the thing. This contract shall be governed by the following articles
as well as by the pertinent provisions on warranty of title and against hidden
defects and the payment of price in a contract of sale.

Art. 1715. The contractor shall execute the work in such a manner that it has
the qualities agreed upon and has no defects which destroy or lessen its value or
fitness for its ordinary or stipulated use. Should the work be not of such quality,
the employer may require that the contractor remove the defect or execute
another work. If the contractor fails or refuses to comply with this obligation,
the employer may have the defect removed or another work executed, at the
contractor's cost.

The provisions on warranty against hidden defects, referred to in Art. 1714 above-
quoted, are found in Articles 1561 and 1566, which read as follows:

Art. 1561. The vendor shall be responsible for warranty against the hidden
defects which the thing sold may have, should they render it unfit for the use
for which it is intended, or should they diminish its fitness for such use to such
an extent that, had the vendee been aware thereof, he would not have acquired
it or would have given a lower price for it; but said vendor shall not be
answerable for patent defects or those which may be visible, or for those which
 are not visible if the vendee is an expert who, by reason of his trade or
profession, should have known them.

xxx xxx xxx

Art. 1566. The vendor is responsible to the vendee for any hidden faults or
defects in the thing sold, even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor
was not aware of the hidden faults or defects in the thing sold.

The remedy against violations of the warranty against hidden defects is either to
withdraw from the contract (redhibitory action) or to demand a proportionate reduction
of the price (accion quanti manoris), with damages in either case14 .

In Villostas vs. Court of Appeals15 , we held that, "while it is true that Article 1571 of
the Civil Code provides for a prescriptive period of six months for a redhibitory action, a
cursory reading of the ten preceding articles to which it refers will reveal that said rule
may be applied only in case of implied warranties"; and where there is an express
warranty in the contract, as in the case at bench, the prescriptive period is the one
specified in the express warranty, and in the absence of such period, "the general rule
on rescission of contract, which is four years (Article 1389, Civil Code) shall apply" 16 .

Consistent with the above discussion, it would appear that this suit is barred by
prescription because the complaint was filed more than four years after the execution
of the contract and the completion of the air-conditioning system.

However, a close scrutiny of the complaint filed in the trial court reveals that the
original action is not really for enforcement of the warranties against hidden defects,
but one for breach of the contract itself. It alleged17 that the petitioner, "in the
installation of the air conditioning system did not comply with the specifications
provided" in the written agreement between the parties, "and an evaluation of the air-
conditioning system as installed by the defendant showed the following defects and
violations of the specifications of the agreement, to wit:

GROUND FLOOR:

"A. RIGHT WING:

Equipped with Worthington Compressor, Model 2VC4 directly driven by an Hp

Elin electric motor 1750 rmp, 3 phase, 60 cycles, 220 volts, complete with
starter evaporative condenser, circulating water pump, air handling unit air
ducts.

Defects Noted:

1. Deteriorated evaporative condenser panels, coils are full of scales and heavy
corrosion is very evident.

2. Defective gauges of compressors;

3. No belt guard on motor;

4. Main switch has no cover;

5. Desired room temperature not attained;

Aside from the above defects, the following were noted not installed although
provided in the specifications.

1. Face by-pass damper of G.I. sheets No. 16. This damper regulates the flow of
cooled air depending on room condition.

2. No fresh air intake provision were provided which is very necessary for
efficient comfort cooling..

3. No motor to regulate the face and by-pass damper.

4. Liquid level indicator for refrigerant not provided.

5. Suitable heat exchanger is not installed. This is an important component to

increase refrigeration efficiency.

6. Modulating thermostat not provided.

7. Water treatment device for evaporative condenser was not provided.

8. Liquid receiver not provided by sight glass.

B. LEFT WING:
Worthington Compressor Model 2VC4 is installed complete with 15 Hp electric
motor, 3 phase, 220 volts 60 cycles with starter.

Defects Noted:

Same as right wing. except No. 4, All other defects on right wing are common to
the left wing.

SECOND FLOOR: (Common up to EIGHT FLOORS)

Compressors installed are MELCO with 7.5 Hp V-belt driven by 1800 RPM, -220
volts, 60 cycles, 3 phase, Thrige electric motor with starters.

As stated in the specifications under, Section No. IV, the MELCO compressors
do not satisfy the conditions stated therein due to the following:

1. MELCO Compressors are not provided with automatic capacity unloader.

2. Not provided with oil pressure safety control.

3. Particular compressors do not have provision for renewal sleeves.

Out of the total 15 MELCO compressors installed to serve the 2nd floor up to
8th floors, only six (6) units are in operation and the rest were already replaced.
Of the remaining six (6) units, several of them have been replaced with bigger
crankshafts.

NINTH FLOOR:

Two (2) Worthington 2VC4 driven by 15 Hp, 3 phase, 220 volts, 60 cycles, 1750
rpm, Higgs motors with starters.

Defects Noted are similar to ground floor.

GENERAL REMARKS:

Under Section III, Design conditions of specification for air conditioning work,
and taking into account "A" & "B" same, the present systems are not capable of
maintaining the desired temperature of 76 = 2F (sic).
 The present tenant have installed 35 window type air conditioning units
distributed among the different floor levels. Temperature measurements
conducted on March 29. 1971, revealed that 78F room (sic) is only maintained
due to the additional window type units.

The trial court, after evaluating the evidence presented, held that, indeed, petitioner
failed to install items and parts required in the contract and substituted some other
items which were not in accordance with the specifications18 , thus:

From all of the foregoing, the Court is persuaded to believe the plaintiff that
not only had the defendant failed to install items and parts provided for in the
specifications of the air-conditioning system be installed, like face and by-pass
dampers and modulating thermostat and many others, but also that there are
items, parts and accessories which were used and installed on the air-
conditioning system which were not in full accord with contract specifications.
These omissions to install the equipments, parts and accessories called for in the
specifications of the contract, as well as the deviations made in putting into the
air-conditioning system equipments, parts and accessories not in full accord with
the contract specification naturally resulted to adversely affect the operational
effectiveness of the air-conditioning system which necessitated the installation
of thirty-five window type of air-conditioning units distributed among the
different floor levels in order to be able to obtain a fairly desirable room
temperature for the tenants and actual occupants of the building. The Court
opines and so holds that the failure of the defendant to follow the contract
specifications and said omissions and deviations having resulted in the
operational ineffectiveness of the system installed makes the defendant liable
to the plaintiff in the amount necessary to rectify to put the air conditioning
system in its proper operational condition to make it serve the purpose for which
the plaintiff entered into the contract with the defendant.

The respondent Court affirmed the trial court's decision thereby making the latter's
findings also its own.

Having concluded that the original complaint is one for damages arising from breach of a
written contract - and not a suit to enforce warranties against hidden defects - we here
- with declare that the governing law is Article 1715 (supra). However, inasmuch as this
provision does not contain a specific prescriptive period, the general law on prescription,
which is Article 1144 of the Civil Code, will apply. Said provision states, inter alia, that
actions "upon a written contract" prescribe in ten (10) years. Since the governing
contract was executed on September 10, 1962 and the complaint was filed on May 8,
1971, it is clear that the action has not prescribed.
What about petitioner's contention that "acceptance of the work by the employer
relieves the contractor of liability for any defect in the work"? This was answered by
respondent Court19 as follows:

As the breach of contract which gave rise to the instant case consisted in
appellant's omission to install the equipments (sic), parts and accessories not in
accordance with the plan and specifications provided for in the contract and the
deviations made in putting into the air conditioning system parts and accessories
not in accordance with the contract specifications, it is evident that the defect
in the installation was not apparent at the time of the delivery and acceptance of
the work, considering further that plaintiff is not an expert to recognize the
same. From the very nature of things, it is impossible to determine by the simple
inspection of air conditioning system installed in an 8-floor building whether it
has been furnished and installed as per agreed specifications.

Verily, the mere fact that the private respondent accepted the work does not, ipso
facto, relieve the petitioner from liability for deviations from and violations of the
written contract, as the law gives him ten (10) years within which to file an action based
on breach thereof.

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.
No costs.

SO ORDERED.

G.R. No. 113564 June 20, 2001

INOCENCIA YU DINO and her HUSBAND doing business under the trade name
"CANDY CLAIRE FASHION GARMENTS", petitioners,
vs.
COURT OF APPEALS and ROMAN SIO, doing business under the name "UNIVERSAL
TOY MASTER MANUFACTURING", respondents.

PUNO, J.:

Though people say, "better late than never", the law frowns upon those who assert their
rights past the eleventh hour. For failing to timely institute their action, the petitioners
are forever barred from claiming a sum of money from the respondent.

This is a petition for review on certiorari to annul and set aside the amended decision of
the respondent court dated January 24, 1994 reversing its April 30, 1993 decision and
dismissing the plaintiff-petitioners' Complaint on the ground of prescription.The
following undisputed facts gave rise to the case at bar:

Petitioners spouses Dino, doing business under the trade name "Candy Claire Fashion
Garment" are engaged in the business of manufacturing and selling shirts. 1 Respondent
Sio is part owner and general manager of a manufacturing corporation doing business
under the trade name "Universal Toy Master Manufacturing."2

Petitioners and respondent Sio entered into a contract whereby the latter would
manufacture for the petitioners 20,000 pieces of vinyl frogs and 20,000 pieces of vinyl
mooseheads at P7.00 per piece in accordance with the sample approved by the
petitioners. These frogs and mooseheads were to be attached to the shirts petitioners
would manufacture and sell. 3

Respondent Sio delivered in several installments the 40,000 pieces of frogs and
mooseheads. The last delivery was made on September 28, 1988. Petitioner fully paid the
agreed price.4 Subsequently, petitioners returned to respondent 29,772 pieces of frogs
and mooseheads for failing to comply with the approved sample. 5 The return was made on
different dates: the initial one on December 12, 1988 consisting of 1,720 pieces,6 the
second on January 11, 1989,7 and the last on January 17, 1989. 8

Petitioners then demanded from the respondent a refund of the purchase price of the
returned goods in the amount of P208,404.00. As respondent Sio refused to
pay,9 petitioners filed on July 24, 1989 an action for collection of a sum of money in the
Regional Trial Court of Manila, Branch 38.

The trial court ruled in favor of the petitioners, viz:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs Vicente

and Inocencia Dino and against defendant Toy Master Manufacturing, Inc.
ordering the latter to pay the former:

1. The amount of Two Hundred Eight Thousand Four Hundred Four

(P208,404.00) Pesos with legal interest thereon from July 5, 1989, until fully
paid; and

2. The amount of Twenty Thousand (P20,000.00) Pesos as attorney's fees and

the costs of this suit.

The counterclaim on the other hand is hereby dismissed for lack of merit." 10
Respondent Sio sought recourse in the Court of Appeals. In its April 30, 1993 decision,
the appellate court affirmed the trial court decision. Respondent then filed a Motion for
Reconsideration and a Supplemental Motion for Reconsideration alleging therein that the
petitioners' action for collection of sum of money based on a breach of warranty had
already prescribed. On January 24, 1994, the respondent court reversed its decision and
dismissed petitioners' Complaint for having been filed beyond the prescriptive period.
The amended decision read in part, viz:

"Even if there is failure to raise the affirmative defense of prescription in a

motion to dismiss or in an appropriate pleading (answer, amended or supplemental
answer) and an amendment would no longer be feasible, still prescription, if
apparent on the face of the complaint may be favorably considered (Spouses
Matias B. Aznar, III, et al. vs. Hon. Juanito A. Bernad, etc., supra, G.R. 81190,
May 9, 1988). The rule in Gicano vs. Gegato (supra) was reiterated in Severo v.
Court of Appeals, (G.R. No. 84051, May 19, 1989).

WHEREFORE the Motion For Reconsideration is granted. The judgment of this

Court is set aside and judgment is hereby rendered REVERSING the judgment
of the trial court and dismissing plaintiff's complaint."11

Hence, this petition with the following assignment of errors:

I.

The respondent Court of Appeals seriously erred in dismissing the complaint of

the Petitioners on the ground that the action had prescribed.

II.

The respondent Court of Appeals seriously erred in holding that the defense of
prescription would still be considered despite the fact that it was not raised in
the answer, if apparent on the face of the complaint.

We first determine the nature of the action filed in the trial court to resolve the issue
of prescription. Petitioners claim that the Complaint they filed in the trial court on July
24, 1989 was one for the collection of a sum of money. Respondent contends that it was
an action for breach of warranty as the sum of money petitioners sought to collect was
actually a refund of the purchase price they paid for the alleged defective goods they
bought from the respondent.

We uphold the respondent's contention.

The following provisions of the New Civil Code are apropos:

"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."

"Art. 1713. By the 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. The contractor may either employ only his labor or skill, or also
furnish the material."

As this Court ruled in Engineering & Machinery Corporation v. Court of Appeals, et

al.,12 "a contract for a piece of work, labor and materials may be distinguished from a
contract of sale by the inquiry as to whether the thing transferred is one not in
existence and which would never have existed but for the order of the person desiring
it. In such case, the contract is one for a piece of work, not a sale. On the other hand, if
the thing subject of the contract would have existed and been the subject of a sale to
some other person even if the order had not been given then the contract is one of
sale."13 The contract between the petitioners and respondent stipulated that respondent
would manufacture upon order of the petitioners 20,000 pieces of vinyl frogs and
20,000 pieces of vinyl mooseheads according to the samples specified and approved by
the petitioners. Respondent Sio did not ordinarily manufacture these products, but only
upon order of the petitioners and at the price agreed upon. 14Clearly, the contract
executed by and between the petitioners and the respondent was a contract for a piece
of work. At any rate, whether the agreement between the parties was one of a contract
of sale or a piece of work, the provisions on warranty of title against hidden defects in a
contract of sale apply to the case at bar, viz:

"Art. 1714. If the contractor agrees to produce the work from material
furnished by him, he shall deliver the thing produced to the employer and
transfer dominion over the thing. This contract shall be governed by the
following articles as well as by the pertinent provisions on warranty of title and
against hidden defects and the payment of price in a contract of sale."

"Art. 1561. The vendor shall be responsible for warranty against the hidden
defects which the thing sold may have, should they render it unfit for the use
for which it is intended, or should they diminish its fitness for such use to such
an extent that, had the vendee been aware thereof, he would not have acquired
 it or would have given a lower price for it; but said vendor shall not be
answerable for patent defects or those which may be visible, or for those which
are not visible if the vendee is an expert who, by reason of his trade or
profession, should have known them."

Petitioners aver that they discovered the defects in respondent's products when
customers in their (petitioners') shirt business came back to them complaining that the
frog and moosehead figures attached to the shirts they bought were torn. Petitioners
allege that they did not readily see these hidden defects upon their acceptance. A
hidden defect is one which is unknown or could not have been known to the
vendee.15 Petitioners then returned to the respondent 29,772 defective pieces of vinyl
products and demanded a refund of their purchase price in the amount of P208,404.00.
Having failed to collect this amount, they filed an action for collection of a sum of
money.

Article 1567 provides for the remedies available to the vendee in case of hidden
defects, viz:

"Art. 1567. In the cases of Articles 1561, 1562, 1564, 1565 and 1566, the
vendee may elect between withdrawing from the contract and demanding a
proportionate reduction of the price, with damages in either case."

By returning the 29,772 pieces of vinyl products to respondent and asking for a return
of their purchase price, petitioners were in effect "withdrawing from the contract" as
provided in Art. 1567. The prescriptive period for this kind of action is provided in Art.
1571 of the New Civil Code, viz:

"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." (Emphasis
supplied)

There is no dispute that respondent made the last delivery of the vinyl products to
petitioners on September 28, 1988. It is also settled that the action to recover the
purchase price of the goods petitioners returned to the respondent was filed on July 24,
1989,16 more than nine months from the date of last delivery. Petitioners having filed the
action three months after the six-month period for filing actions for breach of warranty
against hidden defects stated in Art. 1571,17 the appellate court dismissed the action.

Petitioners fault the ruling on the ground that it was too late in the day for respondent
to raise the defense of prescription. The law then applicable to the case at bar, Rule 9,
Sec. 2 of the Rules of Court, provides:
 "Defenses and objections not pleaded either in a motion to dismiss or in the
answer are deemed waived; except the failure to state a cause of action . . . "

Thus, they claim that since the respondent failed to raise the defense of prescription in
a motion to dismiss or in its answer, it is deemed waived and cannot be raised for the
first time on appeal in a motion for reconsideration of the appellate court's decision.

As a rule, the defense of prescription cannot be raised for the first time on appeal.
Thus, we held in Ramos v. Osorio,18 viz:

"It is settled law in this jurisdiction that the defense of prescription is

waivable, and that if it was not raised as a defense in the trial court, it cannot
be considered on appeal, the general rule being that the appellate court is not
authorized to consider and resolve any question not properly raised in the lower
court (Subido vs. Lacson, 55 O.G. 8281, 8285; Moran, Comments on the Rules of
Court, Vol. I, p. 784, 1947 Edition)."

However, this is not a hard and fast rule. In Gicano v. Gegato,19 we held:

". . .(T)rial courts have authority and discretion to dimiss an action on the ground
of prescription when the parties' pleadings or other facts on record show it to
be indeed time-barred; (Francisco v. Robles, Feb, 15, 1954; Sison v. McQuaid, 50
O.G. 97; Bambao v. Lednicky, Jan. 28, 1961; Cordova v. Cordova, Jan. 14, 1958;
Convets, Inc. v. NDC, Feb. 28, 1958; 32 SCRA 529; Sinaon v. Sorongan, 136 SCRA
408); and it may do so on the basis of a motion to dismiss (Sec. 1,f, Rule 16, Rules
of Court), or an answer which sets up such ground as an affirmative defense
(Sec. 5, Rule 16), or even if the ground is alleged after judgment on the merits,
as in a motion for reconsideration (Ferrer v. Ericta, 84 SCRA 705); or even if
the defense has not been asserted at all, as where no statement thereof is
found in the pleadings (Garcia v. Mathis, 100 SCRA 250; PNB v. Pacific
Commission House, 27 SCRA 766; Chua Lamco v. Dioso, et al., 97 Phil. 821); or
where a defendant has been declared in default (PNB v. Perez, 16 SCRA
270). What is essential only, to repeat, is that the facts demonstrating the lapse
of the prescriptive period be otherwise sufficiently and satisfactorily apparent
on the record; either in the averments of the plaintiff's complaint, or otherwise
established by the evidence." (emphasis supplied)

In Aldovino, et al. v. Alunan, et al.,20 the Court en banc reiterated the Garcia v.
Mathis doctrine cited in the Gicano case that when the plaintiff's own complaint shows
clearly that the action has prescribed, the action may be dismissed even if the defense
of prescription was not invoked by the defendant.
It is apparent in the records that respondent made the last delivery of vinyl products to
the petitioners on September 28, 1988. Petitioners admit this in their Memorandum
submitted to the trial court and reiterate it in their Petition for Review. 21 It is also
apparent in the Complaint that petitioners instituted their action on July 24, 1989. The
issue for resolution is whether or not the respondent Court of Appeals could dismiss the
petitioners' action if the defense of prescription was raised for the first time on appeal
but is apparent in the records.

Following the Gicano doctrine that allows dismissal of an action on the ground of
prescription even after judgment on the merits, or even if the defense was not raised at
all so long as the relevant dates are clear on the record, we rule that the action filed by
the petitioners has prescribed. The dates of delivery and institution of the action are
undisputed. There are no new issues of fact arising in connection with the question of
prescription, thus carving out the case at bar as an exception from the general rule that
prescription if not impleaded in the answer is deemed waived. 22

Even if the defense of prescription was raised for the first time on appeal in
respondent's Supplemental Motion for Reconsideration of the appellate court's decision,
this does not militate against the due process right of the petitioners. On appeal, there
was no new issue of fact that arose in connection with the question of prescription, thus
it cannot be said that petitioners were not given the opportunity to present evidence in
the trial court to meet a factual issue. Equally important, petitioners had the opportunity
to oppose the defense of prescription in their Opposition to the Supplemental Motion
for Reconsideration filed in the appellate court and in their Petition for Review in this
Court.

This Court's application of the Osorio and Gicano doctrines to the case at bar is
confirmed and now enshrined in Rule 9, Sec. 1 of the 1997 Rules of Civil Procedure, viz:

"Section 1. Defense and objections not pleaded. - Defenses and objections not
pleaded whether in a motion to dismiss or in the answer are deemed waived.
However, when it appears from the pleadings that the court has no jurisdiction
over the subject matter, that there is another action pending between the same
parties for the same cause, or that the action is barred by a prior judgment or
by statute of limitations, the court shall dismiss the claim." (Emphasis supplied)

WHEREFORE, the petition is DENIED and the impugned decision of the Court of
Appeals dated January 24, 1994 is AFFIRMED. No costs.

SO ORDERED.
G.R. No. 115349 April 18, 1997

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE
MANILA UNIVERSITY, respondents.

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 contractor's tax? This
question is answer 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 contractor's 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 contractor's 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 contractor's 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, respondent's

decision is SET ASIDE. The deficiency contractor's 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% CONTRACTOR'S 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 contractor's tax of three per centum of the gross receipts is
hereby imposed on the following:

xxx xxx xxx

(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:

xxx xxx xxx

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.

xxx xxx xxx

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% contractor's 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% contractor's 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 contractor's tax
levied by then Section 205 of the National Internal Revenue Code?

The Court's 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 contractor's tax of three per centum of the gross receipts
is hereby imposed on the following:

xxx xxx xxx

(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;

xxx xxx xxx

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 contractor's 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 . . . renders physical and mental service
for a fee, is now indubitably considered an independent contractor liable to 3%
contractor's 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 . . . (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 contractor's tax on Ateneo's 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 petitioner's 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 Service of its Institute of Philippine Culture

After reviewing the records of this case, we find no evidence that Ateneo's 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. .
. . [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 (Emphasis supplied.)

In theory, the Commissioner of Internal Revenue may be correct. However, the records
do not show that Ateneo's 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,
petitioner's 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 Commissioner's 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 Examiner's 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 respondent's
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 IPC's 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
respondent's terms and conditions, among which are, that the research
is confined to topics consistent with the private respondent's 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 IPC's 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 Ateneo's 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 IPC's 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 IPC's 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
contractor's tax.

It is also well to stress that the questioned transactions of Ateneo's Institute of

Philippine Culture cannot be deemed either as a contract of sale or a contract of 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. . . . 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, . . ." 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 Ateneo's 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:

xxx xxx xxx

(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. (emphasis supplied)

xxx xxx xxx

32. University status may be withdrawn, after due notice and hearing,
for failure to maintain satisfactorily the standards and requirements
therefor. 20

Petitioner's 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 form 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 contractor's tax "through the evidence
presented before it." Consequently, "as a matter of principle, this Court will not set
aside the conclusion reached by . . . 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 . . ." 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 Ateneo's Director for Accounting Services, Ms. Leonor
Wijangco, provides significant insight on the academic and nonprofit nature of the
institute's research activities done in furtherance of the university's 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 [IPC's] 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.

G.R. No. L-11491 August 23, 1918

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.

G.R. No. L-47538 June 20, 1941

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 was not even aware of such an arrangement. The respondent, therefore,
could not have offered to pay a 10 per cent commission to the petitioner provided it 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 (formerly known as
Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat & Sons, Inc., defendants-appellee,"
without pronouncement regarding costs. So ordered.

G.R. No. L-20871 April 30, 1971

KER & CO., LTD., petitioner,

vs.
JOSE B. LINGAD, as Acting Commissioner of Internal Revenue, respondent.

Ross, Selph and Carrascoso for petitioner.

Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and
Special Atty. Balbino Gatdula, Jr. for respondent.

FERNANDO, J.:

Petitioner Ker & Co., Ltd. would have us reverse a decision of the Court of Tax Appeals,
holding it liable as a commercial broker under Section 194 (t) of the National Internal
Revenue Code. Its plea, notwithstanding the vigorous effort of its counsel, is not
sufficiently persuasive. An obstacle, well-nigh insuperable stands in the way. The
decision under review conforms to and is in accordance with the controlling doctrine
announced in the recent case of Commissioner of Internal Revenue v. Constantino. 1 The
decisive test, as therein set forth, is the retention of the ownership of the goods
delivered to the possession of the dealer, like herein petitioner, for resale to customers,
the price and terms remaining subject to the control of the firm consigning such goods.
The facts, as found by respondent Court, to which we defer, unmistakably indicate that
such a situation does exist. The juridical consequences must inevitably follow. We affirm.

It was shown that petitioner was assessed by the then Commissioner of Internal
Revenue Melecio R. Domingo the sum of P20,272.33 as the commercial broker's
percentage tax, surcharge, and compromise penalty for the period from July 1, 1949 to
December 31, 1953. There was a request on the part of petitioner for the cancellation of
such assessment, which request was turned down. As a result, it filed a petition for
review with the Court of Tax Appeals. In its answer, the then Commissioner Domingo
maintained his stand that petitioner should be taxed in such amount as a commercial
broker. In the decision now under review, promulgated on October 19, 1962, the Court of
Tax Appeals held petitioner taxable except as to the compromise penalty of P500.00,
the amount due from it being fixed at P19,772.33.

Such liability arose from a contract of petitioner with the United States Rubber
International, the former being referred to as the Distributor and the latter
specifically designated as the Company. The contract was to apply to transactions
between the former and petitioner, as Distributor, from July 1, 1948 to continue in
force until terminated by either party giving to the other sixty days' notice. 2 The
shipments would cover products "for consumption in Cebu, Bohol, Leyte, Samar, Jolo,
Negros Oriental, and Mindanao except [the] province of Davao", petitioner, as
Distributor, being precluded from disposing such products elsewhere than in the above
places unless written consent would first be obtained from the Company. 3 Petitioner, as
Distributor, is required to exert every effort to have the shipment of the products in
the maximum quantity and to promote in every way the sale thereof. 4 The prices,
discounts, terms of payment, terms of delivery and other conditions of sale were subject
to change in the discretion of the Company. 5

Then came this crucial stipulation: "The Company shall from time to time consign to the
Distributor and the Distributor will receive, accept and/or hold upon consignment the
products specified under the terms of this agreement in such quantities as in the
judgment of the Company may be necessary for the successful solicitation and
maintenance of business in the territory, and the Distributor agrees that responsibility
for the final sole of all goods delivered shall rest with him. All goods on consignment
shall remain the property of the Company until sold by the Distributor to the purchaser
or purchasers, but all sales made by the Distributor shall be in his name, in which the
sale price of all goods sold less the discount given to the Distributor by the Company in
accordance with the provision of paragraph 13 of this agreement, whether or not such
sale price shall have been collected by the Distributor from the purchaser or
purchasers, shall immediately be paid and remitted by the Distributor to the Company.
It is further agreed that this agreement does not constitute Distributor the agent or
legal representative 4 of the Company for any purpose whatsoever. Distributor is not
granted any right or authority to assume or to create any obligation or responsibility,
express or implied, in behalf of or in the name of the Company, or to bind the Company in
any manner or thing whatsoever." 6

All specifications for the goods ordered were subject to acceptance by the Company
with petitioner, as Distributor, required to accept such goods shipped as well as to clear
the same through customs and to arrange for delivery in its warehouse in Cebu City.
Moreover, orders are to be filled in whole or in part from the stocks carried by the
Company's neighboring branches, subsidiaries or other sources of Company's
brands. 7 Shipments were to be invoiced at prices to be agreed upon, with the customs
duties being paid by petitioner, as Distributor, for account of the Company. 8 Moreover,
all resale prices, lists, discounts and general terms and conditions of local resale were to
be subject to the approval of the Company and to change from time to time in its
discretion. 9 The dealer, as Distributor, is allowed a discount of ten percent on the net
amount of sales of merchandise made under such agreement. 10 On a date to be
determined by the Company, the petitioner, as Distributor, was required to report to it
data showing in detail all sales during the month immediately preceding, specifying
therein the quantities, sizes and types together with such information as may be
required for accounting purposes, with the Company rendering an invoice on sales as
described to be dated as of the date of inventory and sales report. As Distributor,
petitioner had to make payment on such invoice or invoices on due date with the Company
being privileged at its option to terminate and cancel the agreement forthwith upon the
failure to comply with this obligation. 11 The Company, at its own expense, was to keep
the consigned stock fully insured against loss or damage by fire or as a result of fire,
the policy of such insurance to be payable to it in the event of loss. Petitioner, as
Distributor, assumed full responsibility with reference to the stock and its safety at all
times; and upon request of the Company at any time, it was to render inventory of the
existing stock which could be subject to change. 12 There was furthermore this equally
tell-tale covenant: "Upon the termination or any cancellation of this agreement all goods
held on consignment shall be held by the Distributor for the account of the Company,
without expense to the Company, until such time as provision can be made by the
Company for disposition." 13

The issue with the Court of Tax Appeals, as with us now, is whether the relationship thus
created is one of vendor and vendee or of broker and principal. Not that there would
have been the slightest doubt were it not for the categorical denial in the contract that
petitioner was not constituted as "the agent or legal representative of the Company for
any purpose whatsoever." It would be, however, to impart to such an express disclaimer a
meaning it should not possess to ignore what is manifestly the role assigned to petitioner
considering the instrument as a whole. That would be to lose sight altogether of what
has been agreed upon. The Court of Tax Appeals was not misled in the language of the
decision now on appeal: "That the petitioner Ker & Co., Ltd. is, by contractual stipulation,
an agent of U.S. Rubber International is borne out by the facts that petitioner can
dispose of the products of the Company only to certain persons or entities and within
stipulated limits, unless excepted by the contract or by the Rubber Company (Par. 2);
that it merely receives, accepts and/or holds upon consignment the products, which
remain properties of the latter company (Par. 8); that every effort shall be made by
petitioner to promote in every way the sale of the products (Par. 3); that sales made by
petitioner are subject to approval by the company (Par. 12); that on dates determined by
the rubber company, petitioner shall render a detailed report showing sales during the
month (Par. 14); that the rubber company shall invoice the sales as of the dates of
inventory and sales report (Par. 14); that the rubber company agrees to keep the
consigned goods fully insured under insurance policies payable to it in case of loss (Par.
15); that upon request of the rubber company at any time, petitioner shall render an
inventory of the existing stock which may be checked by an authorized representative of
the former (Par. 15); and that upon termination or cancellation of the Agreement, all
goods held on consignment shall be held by petitioner for the account of the rubber
company until their disposition is provided for by the latter (Par. 19). All these
circumstances are irreconcilably antagonistic to the idea of an independent
merchant." 14 Hence its conclusion: "However, upon analysis of the contract, as a whole,
together with the actual conduct of the parties in respect thereto, we have arrived at
the conclusion that the relationship between them is one of brokerage or agency." 15 We
find ourselves in agreement, notwithstanding the able brief filed on behalf of petitioner
by its counsel. As noted at the outset, we cannot heed petitioner's plea for reversal.

1. According to the National Internal Revenue Code, a commercial broker "includes all
persons, other than importers, manufacturers, producers, or bona fide employees, who,
for compensation or profit, sell or bring about sales or purchases of merchandise for
other persons or bring proposed buyers and sellers together, or negotiate freights or
other business for owners of vessels or other means of transportation, or for the
shippers, or consignors or consignees of freight carried by vessels or other means of
transportation. The term includes commission merchants." 16 The controlling decision as
to the test to be followed as to who falls within the above definition of a commercial
broker is that of Commissioner of Internal Revenue v. Constantino. 17 In the language of
Justice J. B. L. Reyes, who penned the opinion: "Since the company retained ownership of
the goods, even as it delivered possession unto the dealer for resale to customers, the
price and terms of which were subject to the company's control, the relationship
between the company and the dealer is one of agency, ... ." 18 An excerpt from Salisbury
v. Brooks 19 cited in support of such a view follows: " 'The difficulty in distinguishing
between contracts of sale and the creation of an agency to sell has led to the
establishment of rules by the application of which this difficulty may be solved. The
decisions say the transfer of title or agreement to transfer it for a price paid or
promised is the essence of sale. If such transfer puts the transferee in the attitude or
position of an owner and makes him liable to the transferor as a debtor for the agreed
price, and not merely as an agent who must account for the proceeds of a resale, the
transaction is a sale; while the essence of an agency to sell is the delivery to an agent,
not as his property, but as the property of the principal, who remains the owner and has
the right to control sales, fix the price, and terms, demand and receive the proceeds
less the agent's commission upon sales made.' " 20 The opinion relied on the work of
Mechem on Sales as well as Mechem on Agency. Williston and Tiedman both of whom
wrote treatises on Sales, were likewise referred to.

Equally relevant is this portion of the Salisbury opinion: "It is difficult to understand or
appreciate the necessity or presence of these mutual requirements and obligations on
any theory other than that of a contract of agency. Salisbury was to furnish the mill and
put the timber owned by him into a marketable condition in the form of lumber; Brooks
was to furnish the funds necessary for that purpose, sell the manufactured product, and
account therefor to Salisbury upon the specific terms of the agreement, less the
compensation fixed by the parties in lieu of interest on the money advanced and for
services as agent. These requirements and stipulations are in tent with any other
conception of the contract. If it constitutes an agreement to sell, they are meaningless.
But they cannot be ignored. They were placed there for some purpose, doubtless as the
result of definite antecedent negotiations therefore, consummated by the final written
expression of the agreement." 21 Hence the Constantino opinion could categorically
affirm that the mere disclaimer in a contract that an entity like petitioner is not "the
agent or legal representative for any purpose whatsoever" does not suffice to yield the
conclusion that it is an independent merchant if the control over the goods for resale of
the goods consigned is pervasive in character. The Court of Tax Appeals decision now
under review pays fealty to such an applicable doctrine.

2. No merit therefore attaches to the first error imputed by petitioner to the Court of
Tax Appeals. Neither did such Court fail to appreciate in its true significance the act
and conduct pursued in the implementation of the contract by both the United States
Rubber International and petitioner, as was contended in the second assignment of
error. Petitioner ought to have been aware that there was no need for such an inquiry.
The terms of the contract, as noted, speak quite clearly. There is lacking that degree of
ambiguity sufficient to give rise to serious doubt as to what was contemplated by the
parties. A reading thereof discloses that the relationship arising therefrom was not one
of seller and purchaser. If it were thus intended, then it would not have included
covenants which in their totality would negate the concept of a firm acquiring as vendee
goods from another. Instead, the stipulations were so worded as to lead to no other
conclusion than that the control by the United States Rubber International over the
goods in question is, in the language of the Constantino opinion, "pervasive". The
insistence on a relationship opposed to that apparent from the language employed might
even yield the impression that such a mode of construction was resorted to in order that
the applicability of a taxing statute might be rendered nugatory. Certainly, such a result
is to be avoided.

Nor is it to be lost sight of that on a matter left to the discretion of the Court of Tax
Appeals which has developed an expertise in view of its function being limited solely to
the interpretation of revenue laws, this Court is not prepared to substitute its own
judgment unless a grave abuse of discretion is manifest. It would be to frustrate the
objective for which administrative tribunals are created if the judiciary, absent such a
showing, is to ignore their appraisal on a matter that forms the staple of their
specialized competence. While it is to be admitted that counsel for petitioner did
scrutinize with care the decision under review with a view to exposing what was
considered its flaws, it cannot be said that there was such a failure to apply what the
law commands as to call for its reversal. Instead, what cannot be denied is that the
Court of Tax Appeals reached a result to which the Court in the recent Constantino
decision gave the imprimatur of its approval.

WHEREFORE, the Court of Tax Appeals decision of October 19, 1962 is affirmed. With
costs against petitioner

G.R. No. 75198 October 18, 1988

SCHMID & OBERLY, INC., petitioner,

vs.
RJL MARTINEZ FISHING CORPORATION, respondent.

Sycip Salazar Hernandez & Gatmaitan Law Office for petitioner.

Siguion Reyna, Montecillo & Ongsiako Law Office for respondent.

CORTES, J.:

Petitioner seeks reversal of the decision and the resolution of the Court of Appeals,
ordering Schmid & Oberly Inc. (hereafter to be referred to simply as "SCHMID") to
refund the purchase price paid by RJL Martinez Fishing Corporation (hereafter to be
referred to simply as "RJL MARTINEZ") to D. Nagata Co., Ltd. of Japan (hereafter to
be referred to simply as NAGATA CO.") for twelve (12) defective "Nagata"-brand
generators, plus consequential damages, and attorneys fees.

The facts as found by the Court of Appeals, are as follows:

The findings of facts by the trial court (Decision, pp. 21-28, Record on
Appeal) shows: that the plaintiff RJL Martinez Fishing Corporation is
engaged in deep-sea fishing, and in the course of its business, needed
electrical generators for the operation of its business; that the
defendant sells electrical generators with the brand of "Nagata", a
Japanese product; that the supplier is the manufacturer, the D. Nagata
Co. Ltd., of Japan, that the defendant Schmid & Oberly Inc. advertised
the 12 Nagata generators for sale; that the plaintiff purchased 12 brand
new Nagata generators, as advertised by herein defendant; that through
an irrevocable line of credit, the D. Nagata Co., Ltd., shipped to the
plaintiff 12 electric generators, and the latter paid the amount of the
purchase price; that the 12 generators were found to be factory
defective; that the plaintiff informed the defendant herein that it shall
return the 12 generators as in fact three of the 12 were actually
returned to the defendant; that the plaintiff sued the defendant on the
warranty; asking for rescission of the contract; that the defendant be
ordered to accept the generators and be ordered to pay back the
purchase money; and that the plaintiff asked for damages. (Record on
Appeal, pp. 27-28) [CA Decision, pp. 34; Rollo, pp. 47-48.]

On the basis thereof, the Court of Appeals affirmed the decision of the trial court
ordering petitioner to refund to private respondent the purchase price for the twelve
(12) generators and to accept delivery of the same and to pay s and attorney's fees, with
a slight modification as to the amount to be refunded. In its resolution of the motion for
reconsideration, the Court of Appeals further modified the trial courts decision as to
the award of consequential damages.

Ordinarily, the Court will not disturb the findings of fact of the Court of Appeals in
petitions to review the latter's decisions under Rule 45 of the Revised Rules of Court,
the scope of the Court's inquiry being limited to a review of the imputed errors of law
[Chan v. Court of Appeals, G.R. No. L-27488, June 30, 1970, 33 SCRA 77; Tiongco v. De
la Merced, G.R. No. L-24426, July 25, 1974, 58 SCRA 89; Corona v. Court of Appeals,
G.R. No. 62482, April 28, 1983, 121 SCRA 865; Baniqued v. Court of Appeals, G.R. No.
L-47531, January 30, 1984, 127 SCRA 596.] However, when, as in this case, it is the
petitioner's position that the appealed judgment is premised on a misapprehension of
facts, * the Court is compelled to review the Court of Appeal's factual findings [De la
Cruz v. Sosing, 94 Phil. 26 (1953); Castillo v. Court of Appeals, G.R. No. I,48290,
September 29, 1983, 124 SCRA 808.]

Considering the sketchiness of the respondent court's narration of facts, whether or

not the Court of Appeals indeed misapprehended the facts could not be determined
without a thorough review of the records.

Thus, after a careful scrutiny of the records, the Court has found the appellate court's
narration of facts incomplete. It failed to include certain material facts.

The facts are actually as follows:

RJL MARTINEZ is engaged in the business of deep-sea fishing. As RJL MARTINEZ

needed electric generators for some of its boats and SCHMIID sold electric generators
of different brands, negotiations between them for the acquisition thereof took place.
The parties had two separate transactions over "Nagata"-brand generators.

The first transaction was the sale of three (3) generators. In this transaction, it is not
disputed that SCHMID was the vendor of the generators. The company supplied the
generators from its stockroom; it was also SCHMID which invoiced the sale.

The second transaction, which gave rise to the present controversy, involves twelve (12)
"Nagata"-brand generators. 'These are the facts surrounding this particular transaction:

As RJL MARTINEZ was canvassing for generators, SC gave RJL MARTINEZ its
Quotation dated August 19, 1975 [Exhibit 'A"] for twelve (12) "Nagata'-brand
generators with the following specifications:

"NAGATA" Single phase AC Alternators, 110/220 V, 60 cycles, 1800

rpm, unity power factor, rectifier type and radio suppressor,, 5KVA
(5KW) $546.75 @

It was stipulated that payment would be made by confirming an irrevocable letter of

credit in favor of NAGATA CO. Furthermore, among the General Conditions of Sale
appearing on the dorsal side of the Quotation is the following:

Buyer will, upon request, promptly open irrevocable Letter of Credit in

favor of seller, in the amount stated on the face of this memorandum,
specifying shipment from any Foreign port to Manila or any safe
 Philippine port, permitting partial shipments and providing that in the
event the shippers are unable to ship within the specified period due to
strikes, lack of shipping space or other circumstances beyond their
reasonable control, Buyer agrees to extend the said Letter of Credit for
later shipment. The Letter of Credit shall otherwise be subject to the
conditions stated in this memorandum of contract. [Emphasis supplied.]

Agreeing with the terms of the Quotation, RJL MARTINEZ opened a letter of credit in
favor of NAGATA CO. Accordingly, on November 20,1975, SCHMID transmitted to
NAGATA CO. an order [Exhibit "4"] for the twelve (12) generators to be shipped
directly to RJL MARTINEZ. NAGATA CO. thereafter sent RJL MARTINEZ the bill of
lading and its own invoice (Exhibit "B") and, in accordance with the order, shipped the
generators directly to RJL MARTINEZ. The invoice states that "one (1) case of
'NAGATA' AC Generators" consisting of twelve sets wasbought by order and for
account risk of Messrs. RJL Martinez Fishing Corporation.

For its efforts, SCHMID received from NAGATA CO. a commission of $1,752.00 for the
sale of the twelve generators to RJL MARTINEZ. [Exhibits "9", "9-A", "9-B" and "9-C".]

All fifteen (15) generators subject of the two transactions burned out after continuous
use. RJL MARTINEZ informed SCHMID about this development. In turn, SCHMID
brought the matter to the attention of NAGATA CO. In July 1976, NAGATA CO. sent
two technical representatives who made an ocular inspection and conducted tests on
some of the burned out generators, which by then had been delivered to the premises of
SCHMID.

The tests revealed that the generators were overrated. As indicated both in the
quotation and in the invoice, the capacity of a generator was supposed to be 5 KVA
(kilovolt amperes). However, it turned out that the actual capacity was only 4 KVA.

SCHMID replaced the three (3) generators subject of the first sale with generators of
a different brand.

As for the twelve (12) generators subject of the second transaction, the Japanese
technicians advised RJL MARTINEZ to ship three (3) generators to Japan, which the
company did. These three (3) generators were repaired by NAGATA CO. itself and
thereafter returned to RJL MARTINEZ; the remaining nine (9) were neither repaired
nor replaced. NAGATA CO., however, wrote SCHMID suggesting that the latter check
the generators, request for spare parts for replacement free of charge, and send to
NAGATA CO. SCHMID's warranty claim including the labor cost for repairs [Exhibit
"I".] In its reply letter, SCHMID indicated that it was not agreeable to these terms
[Exhibit "10".]

As not all of the generators were replaced or repaired, RJL MARTINEZ formally
demanded that it be refunded the cost of the generators and paid damages. SCHMID in
its reply maintained that it was not the seller of the twelve (12) generators and thus
refused to refund the purchase price therefor. Hence, on February 14, 1977, RJL
MARTINEZ brought suit against SCHMID on the theory that the latter was the vendor
of the twelve (12) generators and, as such vendor, was liable under its warranty against
hidden defects.

Both the trial court and the Court of Appeals upheld the contention of RJL MARTINEZ
that SCHMID was the vendor in the second transaction and was liable under its
warranty. Accordingly, the courts a quo rendered judgment in favor of RJL MARTINEZ.
Hence, the instant recourse to this Court.

In this petition for review, SCHMID seeks reversal on the following grounds:

(i) Schmid was merely the indentor in the sale [of the twelve (12)
generators] between Nagata Co., the exporter and RJL Martinez, the
importer;

(ii) as mere indentor, Schmid is not liable for the seller's implied
warranty against hidden defects, Schmid not having personally assumed
any such warranty.

(iii) in any event, conformably with Article 1563 of the Civil Code, there
was no implied warranty against hidden defects in the sale of these
twelve (12) generators because these were sold under their trade name
"Nagata"; and

(iv) Schmid, accordingly, is not liable for the reimbursement claimed by

RJL Martinez nor for the latter's unsubstantiated claim of PI 10.33
operational losses a day nor for exemplary damages, attorney's fees and
costs. [Petition, p. 6.]

1. As may be expected, the basic issue confronting this Court is whether the second
transaction between the parties was a sale or an indent transaction. SCHMID maintains
that it was the latter; RJL MARTINEZ claims that it was a sale.
At the outset, it must be understood that a contract is what the law defines it to be,
considering its essential elements, and not what it is caged by the contracting parties
[Quiroga v. Parsons Hardware Co., 38 Phil. 501 (1918).]

The Civil Code defines a contract of sale, thus:

ART. 458. 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.

It has been said that the essence of the contract of sale is transfer of title or
agreement to transfer it for a price paid or promised [Commissioner of Internal Revenue
v. Constantino, G.R. No. L-25926, February 27, 1970, 31 SCRA 779, 785, citing Salisbury
v. Brooks, 94 SE 117,118-19.] "If such transfer puts the transferee in the attitude or
position of an owner and makes him liable to the transferor as a debtor for the agreed
price, and not merely as an agent who must account for the proceeds of a resale, the
transaction is, a sale." [Ibid.]

On the other hand, there is no statutory definition of "indent" in this jurisdiction.

However, the Rules and Regulations to Implement Presidential Decree No. 1789 (the
Omnibus Investments Code) lumps "indentors" together with "commercial brokers" and
"commission merchants" in this manner:

... A foreign firm which does business through the middlemen acting in
their own names, such as indentors, commercial brokers or commission
merchants, shall not be deemed doing business in the Philippines. But
such indentors, commercial brokers or commission merchants shall be
the ones deemed to be doing business in the Philippines [Part I, Rule I,
Section 1, par. g (1).]

Therefore, an indentor is a middlemen in the same class as commercial brokers and

commission merchants. To get an Idea of what an indentor is, a look at the definition of
those in his class may prove helpful.

A broker is generally defined as one who is engaged, for others, on a

commission, negotiating contracts relative to property with the custody
of which he has no concern; the negotiator between other parties, never
acting in his own name but in the name of those who employed him; he is
strictly a middleman and for some purpose the agent of both parties. (1
9 Cyc 186; Henderson vs. The State, 50 Ind., 234; Black's Law
 Dictionary.) A broker is one whose occupation it is to bring parties
together to bargain, or to bargain for them, in matters of trade,
commerce or navigation. Mechem on Agency, sec. 13; Wharton on Agency,
sec. 695.) Judge Storey, in his work on Agency, defines a broker as an
agent employed to make bargains and contracts between other persons,
in matters of trade, commerce or navigation, for compensation commonly
called brokerage. (Storey on Agency, sec. 28.) [Behn Meyer and Co., Ltd.
v. Nolting and Garcia, 35 Phil. 274, 279-80 (1916).]

A commission merchant is one engaged in the purchase or sale for

another of personal property which, for this purpose, is placed in his
possession and at his disposal. He maintains a relation not only with his
principal and the purchasers or vendors, but also with the property
which is subject matter of the transaction. [Pacific Commercial Co. v.
Yatco, 68 Phil. 398, 401 (1939).]

Thus, the chief feature of a commercial broker and a commercial merchant is that in
effecting a sale, they are merely intermediaries or middle-men, and act in a certain
sense as the agent of both parties to the transaction.

Webster defines an indent as "a purchase order for goods especially when sent from a
foreign country." [Webster's Ninth New Collegiate Dictionary 612 (1986).] It would
appear that there are three parties to an indent transaction, namely, the buyer, the
indentor, and the supplier who is usually a non-resident manufacturer residing in the
country where the goods are to be bought [Commissioner of Internal Revenue v.
Cadwallader Pacific Company, G.R. No. L-20343, September 29, 1976, 73 SCRA 59.] An
indentor may therefore be best described as one who, for compensation, acts as a
middleman in bringing about a purchase and sale of goods between a foreign supplier and
a local purchaser.

Coming now to the case at bar, the admissions of the parties and the facts appearing on
record more than suffice to warrant the conclusion that SCHMID was not a vendor, but
was merely an indentor, in the second transaction.

In its complaint, RJL MARTINEZ admitted that the generators were purchased
"through indent order" [Record on Appeal, p. 6.] In the same vein, it admitted in its
demand letter previously sent to SCHMID that twelve (12) of en (15) Nagata-brand
generators "were purchased through your company (SCHMID), by indent order and three
(3) by direct purchase." [Exhibit "D".] The evidence also show that RJL MARTINEZ paid
directly NAGATA CO, for the generators, and that the latter company itself invoiced
the sale [Exhibit "B"], and shipped the generators directly to the former. The only
participation of SCHMID was to act as an intermediary or middleman between NAGATA
CO. and RJL MARTINEZ, by procuring an order from RJL MARTINEZ and forwarding
the same to NAGATA CO. for which the company received a commission from NAGATA
CO. [Exhibits "9", "9-A", "9-B" and "9-C".]

The above transaction is significantly different from the first transaction wherein
SCHMID delivered the goods from its own stock (which it had itself imported from
NAGATA CO.), issued its own invoice, and collected payment directly from the
purchaser.

These facts notwithstanding, RJL MARTINEZ insists that SCHMID was the vendor of
the twelve generators on the following grounds:

First, it is contended that the Quotation and the General Conditions of Sale on the
dorsal side thereof do not necessarily lead to the conclusion that NAGATA CO., and not
SCHMID, was the real seller in the case of the twelve (12) generators in that:

(i) the signing of the quotation, which was under SCHMID's letter-head,
perfected the contract of sale (impliedly, as between the signatories
theretoi.e., RJL MARTINEZ and SCHMID);

(ii) the qualification that the letter of credit shall be in favor of

NAGATA CO. constituted simply the manner of payment requested by
SCHMID (implying that SCHMID, as seller, merely chose to waive direct
payment, stipulating delivery of payment instead to NAGATA CO. as
supplier);

Second, it is asserted that the acts of SCHMID after it was informed of the defect in
the generators were indicative of its awareness that it was the vendor and
acknowledgment of its liability as such vendor. Attention is called to these facts: When
RJL MARTINEZ complained to SCHMID that the generators were defective, SCHMID
immediately asked RJL MARTINEZ to send the defective generators to its shop to
determine what was wrong. SCHMID likewise informed NAGATA CO. about the
complaint of RJL MARTINEZ. When the Japanese technicians arrived, SCHMID made
available its technicians, its shop and its testing equipment. After the generators were
found to have factory defects, SCHMID facilitated the shipment of three (3)
generators to Japan and, after their repair, back to the Philippines [Memorandum for
the Respondent, p. 8.]
Third, it is argued that the contents of the letter from NAGATA CO. to SCHMID
regarding the repair of the generators indicated that the latter was "within the purview
of a seller." [Ibid.]

Fourth, it is argued that if SCHMID is considered as a mere agent of NAGATA CO., a

foreign corporation not licensed to do business in the Philippines, then the officers and
employees of the former may be penalized for violation of the old Corporation Law which
provided:

Sec. 69 ... Any officer or agent of the corporation or any person

transacting business for any foreign corporation not having the license
prescribed shall be punished by imprisonment for not less than six
months nor more than two years or by a fine 'of not less than two
hundred pesos nor more than one thousand pesos or both such
imprisonment and fine, in the discretion of the Court.

The facts do not bear out these contentions.

The first contention disregards the circumstances surrounding the second transaction as
distinguished from those surrounding the first transaction, as noted above.

Neither does the solicitous manner by which SCHMID responded to RJL MARTINEZ's
complaint prove that the former was the seller of the generators. As aptly stated by
counsel, no indentor will just fold its hands when a client complains about the goods it
has bought upon the indentor's mediation. In its desire to promote the product of the
seller and to retain the goodwill of the buyer, a prudent indentor desirous of maintaining
his business would have to act considerably. towards his clients.

Note that in contrast to its act of replacing the three (3) generators subject of the
first transaction, SCHMID did not replace any of the twelve (12) generators, but merely
rendered assistance to both RJL TINES and NAGATA CO. so that the latter could
repair the defective generators.

The proposal of NAGATA CO. rejected by SCHMID that the latter undertake the repair
of the nine (9) other defective generators, with the former supplying the replacement
parts free of charge and subsequently reimbursing the latter for labor costs [Exhibit
"I"], cannot support the conclusion that SCHMID is vendor of the generators of the
second transaction or was acting "within the purview of a seller."

Finally, the afore-quoted penal provision in the Corporation Law finds no application to
SCHMID and its officers and employees relative to the transactions in the instant case.
What the law seeks to prevent, through said provision, is the circumvention by foreign
corporations of licensing requirements through the device of employing local
representatives. An indentor, acting in his own name, is not, however, covered by the
above-quoted provision. In fact, the provision of the Rules and Regulations implementing
the Omnibus Investments Code quoted above, which was copied from the Rules
implementing Republic Act No. 5455, recognizes the distinct role of an indentor, such
that when a foreign corporation does business through such indentor, the foreign
corporation is not deemed doing business in the Philippines.

In view of the above considerations, this Court rules that SCHMID was merely acting as
an indentor in the purchase and sale of the twelve (12) generators subject of the second
transaction. Not being the vendor, SCHMID cannot be held liable for the implied
warranty for hidden defects under the Civil Code [Art. 1561, et seq.]

2. However, even as SCHMID was merely an indentor, there was nothing to prevent it
from voluntarily warranting that twelve (12) generators subject of the second
transaction are free from any hidden defects. In other words, SCHMID may be held
answerable for some other contractual obligation, if indeed it had so bound itself. As
stated above, an indentor is to some extent an agent of both the vendor and the vendee.
As such agent, therefore, he may expressly obligate himself to undertake the obligations
of his principal (See Art. 1897, Civil Code.)

The Court's inquiry, therefore, shifts to a determination of whether or not SCHMID

expressly bound itself to warrant that the twelve (12) generators are free of any hidden
defects.

Again, we consider the facts.

The Quotation (Exhibit A is in writing. It is the repository of the contract between RJL
MARTINEZ and SCHMID. Notably, nowhere is it stated therein that SCHMID did bind
itself to answer for the defects of the things sold. There being no allegation nor any
proof that the Quotation does not express the true intent and agreement of the
contracting parties, extrinsic parol evidence of warranty will be to no avail [See Rule
123, Sec. 22.]

The trial court, however, relied on the testimony of Patrocinio Balagtas, the head of the
Electrical Department of RJL MARTINEZ, to support the finding that SCHMID did
warrant the twelve (12) generators against defects.

Upon careful examination of Balagtas' testimony, what is at once apparent is that

Balagtas failed to disclose the nature or terms and conditions of the warranty allegedly
given by SC Was it a warranty that the generators would be fit for the fishing business
of the buyer? Was it a warranty that the generators to be delivered would meet the
specifications indicated in the Quotation? Considering the different kinds of warranties
that may be contracted, unless the nature or terms and conditions of the warranty are
known, it would not be possible to determine whether there has been a breach thereof.

Moreover, a closer examination of the statements allegedly made by the representative

of SCHMID reveals that they merely constituted an expression of opinion which cannot
by any means be construed as a warranty [See Art. 1546, Civil Code.]

We quote from Balagtas' testimony:

Atty. CATRAL:

Q Did you not say at the start of your cross

examination, Mr. Balagtas, that the only participation
you had in the acquisition of those twelve (12) units [of]
generators was your having issued a purchase order to
your own company for the purchase of the units?

ATTY. AQUINO:

Misleading, your Honor.

Atty. CATRAL:

I am asking the witness.

COURT:

He has the right to ask that question because he is on

cross. Moreover, if I remember, he mentioned
something like that. Witness may answer.

A Yes, sir. Before I submitted that, we negotiated with

Schmid and Oberly the beat generators they can
recommend because we are looking for generators. The
representative of Schmid and Oberly said that Nagata
is very good. That is why I recommended that to the
management. [t.s.n., October 14, 1977, pp. 23-25.]
At any rate, when asked where SCHMID's warranty was contained, Balagtas testified
initially that it was in the receipts covering the sale. (At this point, it may be stated that
the invoice [Exhibit "B-l"] was issued by NAGATA CO. and nowhere is it stated therein
that SCHMID warranted the generators against defects.) When confronted with a copy
of the invoice issued by NAGATA CO., he changed his assertion and claimed that what he
meant was that the date of the commencement of the period of SCHMID's warranty
would be based on the date of the invoice. On further examination, he again changed his
mind and asserted that the warranty was given verbally [TSN, October 14, 1977, pp. 19-
22.] But then again, as stated earlier, the witness failed to disclose the nature or terms
and conditions of the warranty allegedly given by SCHMID.

On the other hand, Hernan Adad SCHMID's General Manager, was categorical that the
company does not warrant goods bought on indent and that the company warrants only
the goods bought directly from it, like the three generators earlier bought by RJL
MARTINEZ itself [TSN, December 19, 1977, pp. 63-64.] It must be recalled that
SCHMID readily replaced the three generators from its own stock. In the face of these
conflicting testimonies, this Court is of the view that RJL has failed to prove that
SCHMID had given a warranty on the twelve (12) generators subject of the second
transaction. Even assuming that a warranty was given, there is no way to determine
whether there has been a breach thereof, considering that its nature or terms and
conditions have not been shown.

3. In view of the foregoing, it becomes unnecessary to pass upon the other issues.

WHEREFORE, finding the Court of Appeals to have committed a reversible error, the
petition is GRANTED and the appealed Decision and Resolution of the Court of Appeals
are REVERSED. The complaint of RJL Martinez Fishing Corporation is hereby
DISMISSED. No costs.

SO ORDERED.

G.R. No. 117356 June 19, 2000

VICTORIAS MILLING CO., INC., petitioner,

vs.
COURT OF APPEALS and CONSOLIDATED SUGAR CORPORATION, respondents.

DECISION

QUISUMBING, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court
assailing the decision of the Court of Appeals dated February 24, 1994, in CA-G.R. CV
No. 31717, as well as the respondent court's resolution of September 30, 1994 modifying
said decision. Both decision and resolution amended the judgment dated February 13,
1991, of the Regional Trial Court of Makati City, Branch 147, in Civil Case No. 90-118.

The facts of this case as found by both the trial and appellate courts are as follows:

St. Therese Merchandising (hereafter STM) regularly bought sugar from petitioner
Victorias Milling Co., Inc., (VMC). In the course of their dealings, petitioner issued
several Shipping List/Delivery Receipts (SLDRs) to STM as proof of purchases. Among
these was SLDR No. 1214M, which gave rise to the instant case. Dated October 16, 1989,
SLDR No. 1214M covers 25,000 bags of sugar. Each bag contained 50 kilograms and
priced at P638.00 per bag as "per sales order VMC Marketing No. 042 dated October 16,
1989."1 The transaction it covered was a "direct sale."2 The SLDR also contains an
additional note which reads: "subject for (sic) availability of a (sic) stock at NAWACO
(warehouse)."3

On October 25, 1989, STM sold to private respondent Consolidated Sugar Corporation
(CSC) its rights in SLDR No. 1214M for P 14,750,000.00. CSC issued one check dated
October 25, 1989 and three checks postdated November 13, 1989 in payment. That same
day, CSC wrote petitioner that it had been authorized by STM to withdraw the sugar
covered by SLDR No. 1214M. Enclosed in the letter were a copy of SLDR No. 1214M and
a letter of authority from STM authorizing CSC "to withdraw for and in our behalf the
refined sugar covered by Shipping List/Delivery Receipt-Refined Sugar (SDR) No. 1214
dated October 16, 1989 in the total quantity of 25,000 bags." 4

On October 27, 1989, STM issued 16 checks in the total amount of P31,900,000.00 with
petitioner as payee. The latter, in turn, issued Official Receipt No. 33743 dated
October 27, 1989 acknowledging receipt of the said checks in payment of 50,000 bags.
Aside from SLDR No. 1214M, said checks also covered SLDR No. 1213.

Private respondent CSC surrendered SLDR No. 1214M to the petitioner's NAWACO
warehouse and was allowed to withdraw sugar. However, after 2,000 bags had been
released, petitioner refused to allow further withdrawals of sugar against SLDR No.
1214M. CSC then sent petitioner a letter dated January 23, 1990 informing it that SLDR
No. 1214M had been "sold and endorsed" to it but that it had been refused further
withdrawals of sugar from petitioner's warehouse despite the fact that only 2,000 bags
had been withdrawn.5 CSC thus inquired when it would be allowed to withdraw the
remaining 23,000 bags.
On January 31, 1990, petitioner replied that it could not allow any further withdrawals
of sugar against SLDR No. 1214M because STM had already dwithdrawn all the sugar
covered by the cleared checks. 6

On March 2, 1990, CSC sent petitioner a letter demanding the release of the balance of
23,000 bags.

Seven days later, petitioner reiterated that all the sugar corresponding to the amount of
STM's cleared checks had been fully withdrawn and hence, there would be no more
deliveries of the commodity to STM's account. Petitioner also noted that CSC had
represented itself to be STM's agent as it had withdrawn the 2,000 bags against SLDR
No. 1214M "for and in behalf" of STM.

On April 27, 1990, CSC filed a complaint for specific performance, docketed as Civil Case
No. 90-1118. Defendants were Teresita Ng Sy (doing business under the name of St.
Therese Merchandising) and herein petitioner. Since the former could not be served
with summons, the case proceeded only against the latter. During the trial, it was
discovered that Teresita Ng Go who testified for CSC was the same Teresita Ng Sy who
could not be reached through summons. 7 CSC, however, did not bother to pursue its case
against her, but instead used her as its witness.

CSC's complaint alleged that STM had fully paid petitioner for the sugar covered by
SLDR No. 1214M. Therefore, the latter had no justification for refusing delivery of the
sugar. CSC prayed that petitioner be ordered to deliver the 23,000 bags covered by
SLDR No. 1214M and sought the award of P1,104,000.00 in unrealized profits,
P3,000,000.00 as exemplary damages, P2,200,000.00 as attorney's fees and litigation
expenses.

Petitioner's primary defense a quo was that it was an unpaid seller for the 23,000
bags.8 Since STM had already drawn in full all the sugar corresponding to the amount of
its cleared checks, it could no longer authorize further delivery of sugar to CSC.
Petitioner also contended that it had no privity of contract with CSC.

Petitioner explained that the SLDRs, which it had issued, were not documents of title,
but mere delivery receipts issued pursuant to a series of transactions entered into
between it and STM. The SLDRs prescribed delivery of the sugar to the party specified
therein and did not authorize the transfer of said party's rights and interests.

Petitioner also alleged that CSC did not pay for the SLDR and was actually STM's co-
conspirator to defraud it through a misrepresentation that CSC was an innocent
purchaser for value and in good faith. Petitioner then prayed that CSC be ordered to pay
it the following sums: P10,000,000.00 as moral damages; P10,000,000.00 as exemplary
damages; and P1,500,000.00 as attorney's fees. Petitioner also prayed that cross-
defendant STM be ordered to pay it P10,000,000.00 in exemplary damages, and
P1,500,000.00 as attorney's fees.

Since no settlement was reached at pre-trial, the trial court heard the case on the
merits.

As earlier stated, the trial court rendered its judgment favoring private respondent
CSC, as follows:

"WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of
the plaintiff and against defendant Victorias Milling Company:

"1) Ordering defendant Victorias Milling Company to deliver to the plaintiff

23,000 bags of refined sugar due under SLDR No. 1214;

"2) Ordering defendant Victorias Milling Company to pay the amount of

P920,000.00 as unrealized profits, the amount of P800,000.00 as exemplary
damages and the amount of P1,357,000.00, which is 10% of the acquisition value
of the undelivered bags of refined sugar in the amount of P13,570,000.00, as
attorney's fees, plus the costs.

"SO ORDERED."9

It made the following observations:

"[T]he testimony of plaintiff's witness Teresita Ng Go, that she had fully paid the
purchase price of P15,950,000.00 of the 25,000 bags of sugar bought by her covered by
SLDR No. 1214 as well as the purchase price of P15,950,000.00 for the 25,000 bags of
sugar bought by her covered by SLDR No. 1213 on the same date, October 16, 1989
(date of the two SLDRs) is duly supported by Exhibits C to C-15 inclusive which are post-
dated checks dated October 27, 1989 issued by St. Therese Merchandising in favor of
Victorias Milling Company at the time it purchased the 50,000 bags of sugar covered by
SLDR No. 1213 and 1214. Said checks appear to have been honored and duly credited to
the account of Victorias Milling Company because on October 27, 1989 Victorias Milling
Company issued official receipt no. 34734 in favor of St. Therese Merchandising for the
amount of P31,900,000.00 (Exhibits B and B-1). The testimony of Teresita Ng Go is
further supported by Exhibit F, which is a computer printout of defendant Victorias
Milling Company showing the quantity and value of the purchases made by St. Therese
Merchandising, the SLDR no. issued to cover the purchase, the official reciept no. and
the status of payment. It is clear in Exhibit 'F' that with respect to the sugar covered
by SLDR No. 1214 the same has been fully paid as indicated by the word 'cleared'
appearing under the column of 'status of payment.'

"On the other hand, the claim of defendant Victorias Milling Company that the purchase
price of the 25,000 bags of sugar purchased by St. Therese Merchandising covered by
SLDR No. 1214 has not been fully paid is supported only by the testimony of Arnulfo
Caintic, witness for defendant Victorias Milling Company. The Court notes that the
testimony of Arnulfo Caintic is merely a sweeping barren assertion that the purchase
price has not been fully paid and is not corroborated by any positive evidence. There is
an insinuation by Arnulfo Caintic in his testimony that the postdated checks issued by
the buyer in payment of the purchased price were dishonored. However, said witness
failed to present in Court any dishonored check or any replacement check. Said witness
likewise failed to present any bank record showing that the checks issued by the buyer,
Teresita Ng Go, in payment of the purchase price of the sugar covered by SLDR No.
1214 were dishonored."10

Petitioner appealed the trial courts decision to the Court of Appeals.

On appeal, petitioner averred that the dealings between it and STM were part of a
series of transactions involving only one account or one general contract of sale. Pursuant
to this contract, STM or any of its authorized agents could withdraw bags of sugar only
against cleared checks of STM. SLDR No. 21214M was only one of 22 SLDRs issued to
STM and since the latter had already withdrawn its full quota of sugar under the said
SLDR, CSC was already precluded from seeking delivery of the 23,000 bags of sugar.

Private respondent CSC countered that the sugar purchases involving SLDR No. 1214M
were separate and independent transactions and that the details of the series of
purchases were contained in a single statement with a consolidated summary of cleared
check payments and sugar stock withdrawals because this a more convenient system than
issuing separate statements for each purchase.

The appellate court considered the following issues: (a) Whether or not the transaction
between petitioner and STM involving SLDR No. 1214M was a separate, independent, and
single transaction; (b) Whether or not CSC had the capacity to sue on its own on SLDR
No. 1214M; and (c) Whether or not CSC as buyer from STM of the rights to 25,000 bags
of sugar covered by SLDR No. 1214M could compel petitioner to deliver 23,000
bagsallegedly unwithdrawn.

On February 24, 1994, the Court of Appeals rendered its decision modifying the trial
court's judgment, to wit:
"WHEREFORE, the Court hereby MODIFIES the assailed judgment and orders
defendant-appellant to:

"1) Deliver to plaintiff-appellee 12,586 bags of sugar covered by SLDR No.

1214M;

"2) Pay to plaintiff-appellee P792,918.00 which is 10% of the value of the

undelivered bags of refined sugar, as attorneys fees;

"3) Pay the costs of suit.

"SO ORDERED."11

Both parties then seasonably filed separate motions for reconsideration.

In its resolution dated September 30, 1994, the appellate court modified its decision to
read:

"WHEREFORE, the Court hereby modifies the assailed judgment and orders defendant-
appellant to:

"(1) Deliver to plaintiff-appellee 23,000 bags of refined sugar under SLDR No.
1214M;

"(2) Pay costs of suit.

"SO ORDERED."12

The appellate court explained the rationale for the modification as follows:

"There is merit in plaintiff-appellee's position.

"Exhibit F' We relied upon in fixing the number of bags of sugar which remained
undelivered as 12,586 cannot be made the basis for such a finding. The rule is explicit
that courts should consider the evidence only for the purpose for which it was
offered. (People v. Abalos, et al, 1 CA Rep 783). The rationale for this is to afford the
party against whom the evidence is presented to object thereto if he deems it
necessary. Plaintiff-appellee is, therefore, correct in its argument that Exhibit F' which
was offered to prove that checks in the total amount of P15,950,000.00 had been
cleared. (Formal Offer of Evidence for Plaintiff, Records p. 58) cannot be used to prove
the proposition that 12,586 bags of sugar remained undelivered.
"Testimonial evidence (Testimonies of Teresita Ng [TSN, 10 October 1990, p. 33] and
Marianito L. Santos [TSN, 17 October 1990, pp. 16, 18, and 36]) presented by plaintiff-
appellee was to the effect that it had withdrawn only 2,000 bags of sugar from SLDR
after which it was not allowed to withdraw anymore. Documentary evidence (Exhibit I,
Id., p. 78, Exhibit K, Id., p. 80) show that plaintiff-appellee had sent demand letters to
defendant-appellant asking the latter to allow it to withdraw the remaining 23,000 bags
of sugar from SLDR 1214M. Defendant-appellant, on the other hand, alleged that sugar
delivery to the STM corresponded only to the value of cleared checks; and that all sugar
corresponded to cleared checks had been withdrawn. Defendant-appellant did not rebut
plaintiff-appellee's assertions. It did not present evidence to show how many bags of
sugar had been withdrawn against SLDR No. 1214M, precisely because of its theory that
all sales in question were a series of one single transaction and withdrawal of sugar
depended on the clearing of checks paid therefor.

"After a second look at the evidence, We see no reason to overturn the findings of the
trial court on this point."13

Hence, the instant petition, positing the following errors as grounds for review:

"1. The Court of Appeals erred in not holding that STM's and private
respondent's specially informing petitioner that respondent was authorized by
buyer STM to withdraw sugar against SLDR No. 1214M "for and in our (STM)
behalf," (emphasis in the original) private respondent's withdrawing 2,000 bags
of sugar for STM, and STM's empowering other persons as its agents to
withdraw sugar against the same SLDR No. 1214M, rendered respondent like the
other persons, an agent of STM as held in Rallos v. Felix Go Chan & Realty
Corp., 81 SCRA 252, and precluded it from subsequently claiming and proving
being an assignee of SLDR No. 1214M and from suing by itself for its
enforcement because it was conclusively presumed to be an agent (Sec. 2, Rule
131, Rules of Court) and estopped from doing so. (Art. 1431, Civil Code).

"2. The Court of Appeals erred in manifestly and arbitrarily ignoring and
disregarding certain relevant and undisputed facts which, had they been
considered, would have shown that petitioner was not liable, except for 69 bags
of sugar, and which would justify review of its conclusion of facts by this
Honorable Court.

"3. The Court of Appeals misapplied the law on compensation under Arts. 1279,
1285 and 1626 of the Civil Code when it ruled that compensation applied only to
credits from one SLDR or contract and not to those from two or more distinct
contracts between the same parties; and erred in denying petitioner's right to
 setoff all its credits arising prior to notice of assignment from other sales or
SLDRs against private respondent's claim as assignee under SLDR No. 1214M, so
as to extinguish or reduce its liability to 69 bags, because the law on
compensation applies precisely to two or more distinct contracts between the
same parties (emphasis in the original).

"4. The Court of Appeals erred in concluding that the settlement or liquidation
of accounts in Exh. F between petitioner and STM, respondent's admission of
its balance, and STM's acquiescence thereto by silence for almost one year did
not render Exh. `F' an account stated and its balance binding.

"5. The Court of Appeals erred in not holding that the conditions of the assigned
SLDR No. 1214, namely, (a) its subject matter being generic, and (b) the sale of
sugar being subject to its availability at the Nawaco warehouse, made the sale
conditional and prevented STM or private respondent from acquiring title to the
sugar; and the non-availability of sugar freed petitioner from further obligation.

"6. The Court of Appeals erred in not holding that the "clean hands" doctrine
precluded respondent from seeking judicial reliefs (sic) from petitioner, its only
remedy being against its assignor."14

Simply stated, the issues now to be resolved are:

(1)....Whether or not the Court of Appeals erred in not ruling that CSC was an
agent of STM and hence, estopped to sue upon SLDR No. 1214M as an assignee.

(2)....Whether or not the Court of Appeals erred in applying the law on

compensation to the transaction under SLDR No. 1214M so as to preclude
petitioner from offsetting its credits on the other SLDRs.

(3)....Whether or not the Court of Appeals erred in not ruling that the sale of
sugar under SLDR No. 1214M was a conditional sale or a contract to sell and
hence freed petitioner from further obligations.

(4)....Whether or not the Court of Appeals committed an error of law in not

applying the "clean hands doctrine" to preclude CSC from seeking judicial relief.

The issues will be discussed in seriatim.

Anent the first issue, we find from the records that petitioner raised this issue for the
first time on appeal.1avvphi1 It is settled that an issue which was not raised during the
trial in the court below could not be raised for the first time on appeal as to do so would
be offensive to the basic rules of fair play, justice, and due process. 15 Nonetheless, the
Court of Appeals opted to address this issue, hence, now a matter for our consideration.

Petitioner heavily relies upon STM's letter of authority allowing CSC to withdraw sugar
against SLDR No. 1214M to show that the latter was STM's agent. The pertinent portion
of said letter reads:

"This is to authorize Consolidated Sugar Corporation or its representative to

withdraw for and in our behalf (stress supplied) the refined sugar covered by Shipping
List/Delivery Receipt = Refined Sugar (SDR) No. 1214 dated October 16, 1989 in the
total quantity of 25, 000 bags."16

The Civil Code defines a contract of agency as follows:

"Art. 1868. By the contract of agency a person binds himself to render some service or
to do something in representation or on behalf of another, with the consent or authority
of the latter."

It is clear from Article 1868 that the basis of agency is representation. 17 On the part of
the principal, there must be an actual intention to appoint18 or an intention naturally
inferable from his words or actions;19 and on the part of the agent, there must be an
intention to accept the appointment and act on it,20 and in the absence of such intent,
there is generally no agency.21 One factor which most clearly distinguishes agency from
other legal concepts is control; one person - the agent - agrees to act under the control
or direction of another - the principal. Indeed, the very word "agency" has come to
connote control by the principal. 22 The control factor, more than any other, has caused
the courts to put contracts between principal and agent in a separate category. 23 The
Court of Appeals, in finding that CSC, was not an agent of STM, opined:

"This Court has ruled that where the relation of agency is dependent upon the acts of
the parties, the law makes no presumption of agency, and it is always a fact to be proved,
with the burden of proof resting upon the persons alleging the agency, to show not only
the fact of its existence, but also its nature and extent (Antonio vs. Enriquez [CA], 51
O.G. 3536]. Here, defendant-appellant failed to sufficiently establish the existence of
an agency relation between plaintiff-appellee and STM. The fact alone that it (STM) had
authorized withdrawal of sugar by plaintiff-appellee "for and in our (STM's) behalf"
should not be eyed as pointing to the existence of an agency relation ...It should be
viewed in the context of all the circumstances obtaining. Although it would seem STM
represented plaintiff-appellee as being its agent by the use of the phrase "for and in our
(STM's) behalf" the matter was cleared when on 23 January 1990, plaintiff-appellee
informed defendant-appellant that SLDFR No. 1214M had been "sold and endorsed" to it
by STM (Exhibit I, Records, p. 78). Further, plaintiff-appellee has shown that the 25,
000 bags of sugar covered by the SLDR No. 1214M were sold and transferred by STM to
it ...A conclusion that there was a valid sale and transfer to plaintiff-appellee may,
therefore, be made thus capacitating plaintiff-appellee to sue in its own name, without
need of joining its imputed principal STM as co-plaintiff."24

In the instant case, it appears plain to us that private respondent CSC was a buyer of
the SLDFR form, and not an agent of STM. Private respondent CSC was not subject to
STM's control. The question of whether a contract is one of sale or agency depends on
the intention of the parties as gathered from the whole scope and effect of the
language employed.25 That the authorization given to CSC contained the phrase "for and
in our (STM's) behalf" did not establish an agency. Ultimately, what is decisive is the
intention of the parties.26 That no agency was meant to be established by the CSC and
STM is clearly shown by CSC's communication to petitioner that SLDR No. 1214M had
been "sold and endorsed" to it.27 The use of the words "sold and endorsed" means that
STM and CSC intended a contract of sale, and not an agency. Hence, on this score, no
error was committed by the respondent appellate court when it held that CSC was not
STM's agent and could independently sue petitioner.

On the second issue, proceeding from the theory that the transactions entered into
between petitioner and STM are but serial parts of one account, petitioner insists that
its debt has been offset by its claim for STM's unpaid purchases, pursuant to Article
1279 of the Civil Code.28 However, the trial court found, and the Court of Appeals
concurred, that the purchase of sugar covered by SLDR No. 1214M was a separate and
independent transaction; it was not a serial part of a single transaction or of one account
contrary to petitioner's insistence. Evidence on record shows, without being rebutted,
that petitioner had been paid for the sugar purchased under SLDR No. 1214M. Petitioner
clearly had the obligation to deliver said commodity to STM or its assignee. Since said
sugar had been fully paid for, petitioner and CSC, as assignee of STM, were not mutually
creditors and debtors of each other. No reversible error could thereby be imputed to
respondent appellate court when, it refused to apply Article 1279 of the Civil Code to
the present case.

Regarding the third issue, petitioner contends that the sale of sugar under SLDR No.
1214M is a conditional sale or a contract to sell, with title to the sugar still remaining
with the vendor. Noteworthy, SLDR No. 1214M contains the following terms and
conditions:

"It is understood and agreed that by payment by buyer/trader of refined sugar and/or
receipt of this document by the buyer/trader personally or through a
representative, title to refined sugar is transferred to buyer/trader and delivery to
him/it is deemed effected and completed (stress supplied) and buyer/trader assumes
full responsibility therefore"29

The aforequoted terms and conditions clearly show that petitioner transferred title to
the sugar to the buyer or his assignee upon payment of the purchase price. Said terms
clearly establish a contract of sale, not a contract to sell. Petitioner is now estopped
from alleging the contrary. The contract is the law between the contracting
parties.30 And where the terms and conditions so stipulated are not contrary to law,
morals, good customs, public policy or public order, the contract is valid and must be
upheld.31 Having transferred title to the sugar in question, petitioner is now obliged to
deliver it to the purchaser or its assignee.

As to the fourth issue, petitioner submits that STM and private respondent CSC have
entered into a conspiracy to defraud it of its sugar. This conspiracy is allegedly
evidenced by: (a) the fact that STM's selling price to CSC was below its purchasing
price; (b) CSC's refusal to pursue its case against Teresita Ng Go; and (c) the authority
given by the latter to other persons to withdraw sugar against SLDR No. 1214M after
she had sold her rights under said SLDR to CSC. Petitioner prays that the doctrine of
"clean hands" should be applied to preclude CSC from seeking judicial relief. However,
despite careful scrutiny, we find here the records bare of convincing evidence
whatsoever to support the petitioner's allegations of fraud. We are now constrained to
deem this matter purely speculative, bereft of concrete proof.

WHEREFORE, the instant petition is DENIED for lack of merit. Costs against petitioner.

SO ORDERED.