G.R. No. L-11827 July 31, 1961 Dante, and Fernando Ty as sureties (Exhibit "A-1").
Dante, and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified, however, that when this bond
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
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.
Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De Leon and Natividad,
JJ., concur.
[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[1] to annul the Decision2[2] dated 26 June 1996 of the
Court of Appeals in CA-G.R. CV No. 41996. The Court of Appeals affirmed the Decision3[3]
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[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[5] Instead of filing an Answer with their co-defendants, Gavino
Joaquin and Lea Asis filed a Motion to Dismiss.6[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[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[8]
The Ruling of the Court of Appeals
The Court of Appeals affirmed the decision of the trial court. 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[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[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[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[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[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[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[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[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[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[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[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[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.
Davide, Jr., C.J., (Chairman), Panganiban, Ynares-Santiago, and Azcuna, JJ., concur.
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.
Paras, C. J., Padilla, Montemayor, Bautista Angelo, Concepcion, Reyes, J. B. L., and Felix, JJ.,
concur.
G.R. No. L-27044 June 30, 1975
THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND THE COURT OF TAX
APPEALS, respondents.
G.R. No. L-27452 June 30, 1975
ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS,
respondent.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo liabilities from P916,362.65 to P740,587.86 (Exhs. "R" and "9" pp. 162-170, BIR rec.), based on
R. Rosete, Solicitor Lolita O. Gal-lang, and Special Attorney Gemaliel H. Montalino for findings after conferences had with Engineering's Accountant and Auditor.
Commissioner of Internal Revenue, etc.
On November 29, 1966, the Court of Tax Appeals rendered its decision, the dispositive portion
Melquides C. Gutierrez, Jose U. Ong, Juan G. Collas, Jr., Luis Ma. Guerrero and J.R. of which reads as follows:
Balonkita for Engineering and Supply Company.
For ALL THE FOREGOING CONSIDERATIONS, the decision of
respondent appealed from is hereby modified, and petitioner, as a
contractor, is declared exempt from the deficiency manufacturers sales tax
covering the period from June 1, 1948. to September 2, 1956. However,
ESGUERRA, J.:
petitioner is ordered to pay respondent, or his duly authorized collection
agent, the sum of P174,141.62 as compensating tax and 25% surcharge for
Petition for review on certiorari of the decision of the Court of Tax Appeals in CTA Case the period from 1953 to September 1956. With costs against petitioner.
No. 681, dated November 29, 1966, assessing a compensating tax of P174,441.62 on the
Engineering Equipment and Supply Company.
The Commissioner, not satisfied with the decision of the Court of Tax Appeals, appealed to this
Court on January 18, 1967, (G.R. No. L-27044). On the other hand, Engineering, on January 4,
As found by the Court of Tax Appeals, and as established by the evidence on record, the 1967, filed with the Court of Tax Appeals a motion for reconsideration of the decision
facts of this case are as follows: abovementioned. This was denied on April 6, 1967, prompting Engineering to file also with this
Court its appeal, docketed as G.R. No. L-27452.
Engineering Equipment and Supply Co. (Engineering for short), a domestic corporation,
is an engineering and machinery firm. As operator of an integrated engineering shop, it is Since the two cases, G.R. No. L-27044 and G.R. No. L-27452, involve the same parties and
engaged, among others, in the design and installation of central type air conditioning issues, We have decided to consolidate and jointly decide them.
system, pumping plants and steel fabrications. (Vol. I pp. 12-16 T.S.N. August 23, 1960)
Engineering in its Petition claims that the Court of Tax Appeals committed the following errors:
On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now Commissioner, of
Internal Revenue denouncing Engineering for tax evasion by misdeclaring its imported
1. That the Court of Tax Appeals erred in holding Engineering Equipment &
articles and failing to pay the correct percentage taxes due thereon in connivance with its
Supply Company liable to the 30% compensating tax on its importations of
foreign suppliers (Exh. "2" p. 1 BIR record Vol. I). Engineering was likewise denounced to
equipment and ordinary articles used in the central type air conditioning
the Central Bank (CB) for alleged fraud in obtaining its dollar allocations. Acting on these
systems it designed, fabricated, constructed and installed in the buildings
denunciations, a raid and search was conducted by a joint team of Central Bank, (CB),
and premises of its customers, rather than to the compensating tax of only
National Bureau of Investigation (NBI) and Bureau of Internal Revenue (BIR) agents on
7%;
September 27, 1956, on which occasion voluminous records of the firm were seized and
confiscated. (pp. 173-177 T.S.N.)
2. That the Court of Tax Appeals erred in holding Engineering Equipment &
Supply Company guilty of fraud in effecting the said importations on the
On September 30, 1957, revenue examiners Quesada and Catudan reported and
basis of incomplete quotations from the contents of alleged photostat copies
recommended to the then Collector, now Commissioner, of Internal Revenue (hereinafter
of documents seized illegally from Engineering Equipment and Supply
referred to as Commissioner) that Engineering be assessed for P480,912.01 as deficiency
Company which should not have been admitted in evidence;
advance sales tax on the theory that it misdeclared its importation of air conditioning
units and parts and accessories thereof which are subject to tax under Section 185(m)1 of
the Tax Code, instead of Section 186 of the same Code. (Exh. "3" pp. 59-63 BIR rec. Vol. I) This 3. That the Court of Tax Appeals erred in holding Engineering Equipment &
assessment was revised on January 23, 1959, in line with the observation of the Chief, BIR Law Supply Company liable to the 25% surcharge prescribed in Section 190 of
Division, and was raised to P916,362.56 representing deficiency advance sales tax and the Tax Code;
manufacturers sales tax, inclusive of the 25% and 50% surcharges. (pp. 72-80 BIR rec. Vol. I)
4. That the Court of Tax Appeals erred in holding the assessment as not
On March 3, 1959. the Commissioner assessed against, and demanded upon, Engineering having prescribed;
payment of the increased amount and suggested that P10,000 be paid as compromise in
extrajudicial settlement of Engineering's penal liability for violation of the Tax Code. The firm,
5. That the Court of Tax Appeals erred in holding Engineering Equipment &
however, contested the tax assessment and requested that it be furnished with the details and
Supply Company liable for the sum of P174,141.62 as 30% compensating
particulars of the Commissioner's assessment. (Exh. "B" and "15", pp. 86-88 BIR rec. Vol. I) The
tax and 25% surcharge instead of completely absolving it from the
Commissioner replied that the assessment was in accordance with law and the facts of the case.
deficiency assessment of the Commissioner.

On July 30, 1959, Engineering appealed the case to the Court of Tax Appeals and during the
The Commissioner on the other hand claims that the Court of Tax Appeals erred:
pendency of the case the investigating revenue examiners reduced Engineering's deficiency tax
 1. In holding that the respondent company is a contractor and not a
manufacturer.
2. In holding respondent company liable to the 3% contractor's tax imposed
by Section 191 of the Tax Code instead of the 30% sales tax prescribed in
Section 185(m) in relation to Section 194(x) both of the same Code;
3. In holding that the respondent company is subject only to the 30%
compensating tax under Section 190 of the Tax Code and not to the 30%
advance sales tax imposed by section 183 (b), in relation to section 185(m)
both of the same Code, on its importations of parts and accessories of air
conditioning units;
4. In not holding the company liable to the 50% fraud surcharge under
Section 183 of the Tax Code on its importations of parts and accessories of
air conditioning units, notwithstanding the finding of said court that the
respondent company fraudulently misdeclared the said importations;
5. In holding the respondent company liable for P174,141.62 as
compensating tax and 25% surcharge instead of P740,587.86 as deficiency
advance sales tax, deficiency manufacturers tax and 25% and 50%
surcharge for the period from June 1, 1948 to December 31, 1956.
The main issue revolves on the question of whether or not Engineering is a manufacturer of air
conditioning units under Section 185(m), supra, in relation to Sections 183(b) and 194 of the
Code, or a contractor under Section 191 of the same Code.
The Commissioner contends that Engineering is a manufacturer and seller of air conditioning
units and parts or accessories thereof and, therefore, it is subject to the 30% advance sales tax
prescribed by Section 185(m) of the Tax Code, in relation to Section 194 of the same, which
defines a manufacturer as follows:
Section 194. Words and Phrases Defined. In applying the provisions
of this Title, words and phrases shall be taken in the sense and extension
indicated below:
xxx xxx xxx
(x) "Manufacturer" includes every person who by physical or chemical
process alters the exterior texture or form or inner substance of any raw
material or manufactured or partially manufactured products in such manner
as to prepare it for a special use or uses to which it could not have been put
in its original condition, or who by any such process alters the quality of any
such material or manufactured or partially manufactured product so as to
reduce it to marketable shape, or prepare it for any of the uses of industry,
or who by any such process combines any such raw material or
manufactured or partially manufactured products with other materials or
products of the same or of different kinds and in such manner that the
finished product of such process of manufacture can be put to special use
or uses to which such raw material or manufactured or partially
manufactured products in their original condition could not have been put,
and who in addition alters such raw material or manufactured or partially
manufactured products, or combines the same to produce such finished
products for the purpose of their sale or distribution to others and not for his
own use or consumption.
In answer to the above contention, Engineering claims that it is not a manufacturer and setter of
air-conditioning units and spare parts or accessories thereof subject to tax under Section 185(m)
of the Tax Code, but a contractor engaged in the design, supply and installation of the central
type of air-conditioning system subject to the 3% tax imposed by Section 191 of the same Code,
which is essentially a tax on the sale of services or labor of a contractor rather than on the sale
of articles subject to the tax referred to in Sections 184, 185 and 186 of the Code.
The arguments of both the Engineering and the Commissioner call for a clarification of the term
contractor as well as the distinction between a contract of sale and contract for furnishing
services, labor and materials. The distinction between a contract of sale and one for work, labor
and materials is tested by the inquiry whether the thing transferred is one not in existence and
which never would have existed but for the order of the party desiring to acquire it, or a thing
which would have existed and has been the subject of sale to some other persons even if the
order had not been given.2 If the article ordered by the purchaser is exactly such as the plaintiff
makes and keeps on hand for sale to anyone, and no change or modification of it is made at
defendant's request, it is a contract of sale, even though it may be entirely made after, and in
consequence of, the defendants order for it.3
Our New Civil Code, likewise distinguishes a contract of sale from a contract for a piece of work
thus:
Art. 1467. A contract for the delivery at a certain price of an article which the
vendor in the ordinary course of his business manufactures or procures for
the general market, whether the same is on hand at the time or not, is a
contract of sale, but if the goods are to be manufactured specially for the
customer and upon his special order and not for the general market, it is a
contract for a piece of work.
The word "contractor" has come to be used with special reference to a person who, in the
pursuit of the independent business, undertakes to do a specific job or piece of work for other
persons, using his own means and methods without submitting himself to control as to the petty
details. (Araas, Annotations and Jurisprudence on the National Internal Revenue Code, p. 318,
par. 191 (2), 1970 Ed.) The true test of a contractor as was held in the cases of Luzon
Stevedoring Co., vs. Trinidad, 43, Phil. 803, 807-808, and La Carlota Sugar Central vs. Trinidad,
43, Phil. 816, 819, would seem to be that he renders service in the course of an independent
occupation, representing the will of his employer only as to the result of his work, and not as to
the means by which it is accomplished.
With the foregoing criteria as guideposts, We shall now examine whether Engineering really did
"manufacture" and sell, as alleged by the Commissioner to hold it liable to the advance sales tax
under Section 185(m), or it only had its services "contracted" for installation purposes to hold it
liable under section 198 of the Tax Code.
I
After going over the three volumes of stenographic notes and the voluminous record of the BIR
and the CTA as well as the exhibits submitted by both parties, We find that Engineering did not
manufacture air conditioning units for sale to the general public, but imported some items (as
refrigeration compressors in complete set, heat exchangers or coils, t.s.n. p. 39) which were
used in executing contracts entered into by it. Engineering, therefore, undertook negotiations
and execution of individual contracts for the design, supply and installation of air conditioning
units of the central type (t.s.n. pp. 20-36; Exhs. "F", "G", "H", "I", "J", "K", "L", and "M"), taking
into consideration in the process such factors as the area of the space to be air conditioned; the
number of persons occupying or would be occupying the premises; the purpose for which the
various air conditioning areas are to be used; and the sources of heat gain or cooling load on the
plant such as sun load, lighting, and other electrical appliances which are or may be in the plan.
(t.s.n. p. 34, Vol. I) Engineering also testified during the hearing in the Court of Tax Appeals that
relative to the installation of air conditioning system, Engineering designed and engineered
complete each particular plant and that no two plants were identical but each had to be
engineered separately.
As found by the lower court, which finding4 We adopt
Engineering, in a nutshell, fabricates, assembles, supplies and installs in the
buildings of its various customers the central type air conditioning system;
prepares the plans and specifications therefor which are distinct and
different from each other; the air conditioning units and spare parts or
accessories thereof used by petitioner are not the window type of air
conditioner which are manufactured, assembled and produced locally for
sale to the general market; and the imported air conditioning units and spare
parts or accessories thereof are supplied and installed by petitioner upon
previous orders of its customers conformably with their needs and
requirements.
The facts and circumstances aforequoted support the theory that Engineering is a contractor
rather than a manufacturer.
The Commissioner in his Brief argues that "it is more in accord with reason and sound business
management to say that anyone who desires to have air conditioning units installed in his
premises and who is in a position and willing to pay the price can order the same from the
company (Engineering) and, therefore, Engineering could have mass produced and stockpiled
air conditioning units for sale to the public or to any customer with enough money to buy the
same." This is untenable in the light of the fact that air conditioning units, packaged, or what we
know as self-contained air conditioning units, are distinct from the central system which
Engineering dealt in. To Our mind, the distinction as explained by Engineering, in its Brief,
quoting from books, is not an idle play of words as claimed by the Commissioner, but a
significant fact which We just cannot ignore. As quoted by Engineering Equipment & Supply Co.,
from an Engineering handbook by L.C. Morrow, and which We reproduce hereunder for easy
reference:
... there is a great variety of equipment in use to do this job (of air
conditioning). Some devices are designed to serve a specific type of space;
others to perform a specific function; and still others as components to be
assembled into a tailor-made system to fit a particular building. Generally,
however, they may be grouped into two classifications unitary and central
system.
The unitary equipment classification includes those designs such as room
air conditioner, where all of the functional components are included in one
or two packages, and installation involves only making service connection
such as electricity, water and drains. Central-station systems, often referred
to as applied or built-up systems, require the installation of components at
different points in a building and their interconnection.
The room air conditioner is a unitary equipment designed specifically for a
room or similar small space. It is unique among air conditioning equipment
in two respects: It is in the electrical appliance classification, and it is made
by a great number of manufacturers.
There is also the testimony of one Carlos Navarro, a licensed Mechanical and Electrical
Engineer, who was once the Chairman of the Board of Examiners for Mechanical Engineers and
who was allegedly responsible for the preparation of the refrigeration and air conditioning code
of the City of Manila, who said that "the central type air conditioning system is an engineering job
that requires planning and meticulous layout due to the fact that usually architects assign definite
space and usually the spaces they assign are very small and of various sizes. Continuing
further, he testified:
I don't think I have seen central type of air conditioning machinery room that
are exactly alike because all our buildings here are designed by architects
dissimilar to existing buildings, and usually they don't coordinate and get the
advice of air conditioning and refrigerating engineers so much so that when
we come to design, we have to make use of the available space that they
are assigning to us so that we have to design the different component parts
of the air conditioning system in such a way that will be accommodated in
the space assigned and afterwards the system may be considered as a
definite portion of the building. ...
Definitely there is quite a big difference in the operation because the window
type air conditioner is a sort of compromise. In fact it cannot control humidity
to the desired level; rather the manufacturers, by hit and miss, were able to
satisfy themselves that the desired comfort within a room could be made by
a definite setting of the machine as it comes from the factory; whereas the
central type system definitely requires an intelligent operator. (t.s.n. pp. 301-
305, Vol. II)
The point, therefore, is this Engineering definitely did not and was not engaged in the
manufacture of air conditioning units but had its services contracted for the installation of a
central system. The cases cited by the Commissioner (Advertising Associates, Inc. vs. Collector
of Customs, 97, Phil. 636; Celestino Co & Co. vs. Collector of Internal Revenue, 99 Phil. 841
and Manila Trading & Supply Co. vs. City of Manila, 56 O.G. 3629), are not in point. Neither are
they applicable because the facts in all the cases cited are entirely different. Take for instance
the case of Celestino Co where this Court held the taxpayer to be a manufacturer rather than a
contractor of sash, doors and windows manufactured in its factory. Indeed, from the very start,
Celestino Co intended itself to be a manufacturer of doors, windows, sashes etc. as it did
register a special trade name for its sash business and ordered company stationery carrying the
bold print "ORIENTAL SASH FACTORY (CELESTINO CO AND COMPANY, PROP.) 926 Raon
St., Quiapo, Manila, Tel. No. etc., Manufacturers of All Kinds of Doors, Windows ... ." Likewise,
Celestino Co never put up a contractor's bond as required by Article 1729 of the Civil Code.
Also, as a general rule, sash factories receive orders for doors and windows of special design
only in particular cases, but the bulk of their sales is derived from ready-made doors and
windows of standard sizes for the average home, which "sales" were reflected in their books of
accounts totalling P118,754.69 for the period from January, 1952 to September 30, 1952, or for
a period of only nine (9) months. This Court found said sum difficult to have been derived from
its few customers who placed special orders for these items. Applying the abovestated facts to
the case at bar, We found them to he inapposite. Engineering advertised itself as Engineering
Equipment and Supply Company, Machinery Mechanical Supplies, Engineers, Contractors, 174
Marques de Comillas, Manila (Exh. "B" and "15" BIR rec. p. 186), and not as manufacturers. It
likewise paid the contractors tax on all the contracts for the design and construction of central
system as testified to by Mr. Rey Parker, its President and General Manager. (t.s.n. p. 102, 103)
Similarly, Engineering did not have ready-made air conditioning units for sale but as per
testimony of Mr. Parker upon inquiry of Judge Luciano of the CTA
 Q Aside from the general components, which go into
air conditioning plant or system of the central type
which your company undertakes, and the procedure
followed by you in obtaining and executing contracts
which you have already testified to in previous hearing,
would you say that the covering contracts for these
different projects listed ... referred to in the list, Exh. "F"
are identical in every respect? I mean every plan or
system covered by these different contracts are
identical in standard in every respect, so that you can
reproduce them?
A No, sir. They are not all standard. On the contrary,
none of them are the same. Each one must be
designed and constructed to meet the particular
requirements, whether the application is to be operated.
(t.s.n. pp. 101-102)
What We consider as on all fours with the case at bar is the case of S.M. Lawrence Co. vs.
McFarland, Commissioner of Internal Revenue of the State of Tennessee and McCanless, 355
SW 2d, 100, 101, "where the cause presents the question of whether one engaged in the
business of contracting for the establishment of air conditioning system in buildings, which work
requires, in addition to the furnishing of a cooling unit, the connection of such unit with electrical
and plumbing facilities and the installation of ducts within and through walls, ceilings and floors
to convey cool air to various parts of the building, is liable for sale or use tax as a contractor
rather than a retailer of tangible personal property. Appellee took the Position that appellant was
not engaged in the business of selling air conditioning equipment as such but in the furnishing to
its customers of completed air conditioning systems pursuant to contract, was a contractor
engaged in the construction or improvement of real property, and as such was liable for sales or
use tax as the consumer of materials and equipment used in the consummation of contracts,
irrespective of the tax status of its contractors. To transmit the warm or cool air over the
buildings, the appellant installed system of ducts running from the basic units through walls,
ceilings and floors to registers. The contract called for completed air conditioning systems which
became permanent part of the buildings and improvements to the realty." The Court held the
appellant a contractor which used the materials and the equipment upon the value of which the
tax herein imposed was levied in the performance of its contracts with its customers, and that
the customers did not purchase the equipment and have the same installed.
Applying the facts of the aforementioned case to the present case, We see that the supply of air
conditioning units to Engineer's various customers, whether the said machineries were in hand
or not, was especially made for each customer and installed in his building upon his special
order. The air conditioning units installed in a central type of air conditioning system would not
have existed but for the order of the party desiring to acquire it and if it existed without the
special order of Engineering's customer, the said air conditioning units were not intended for
sale to the general public. Therefore, We have but to affirm the conclusion of the Court of Tax
Appeals that Engineering is a contractor rather than a manufacturer, subject to the contractors
tax prescribed by Section 191 of the Code and not to the advance sales tax imposed by Section
185(m) in relation to Section 194 of the same Code. Since it has been proved to Our satisfaction
that Engineering imported air conditioning units, parts or accessories thereof for use in its
construction business and these items were never sold, resold, bartered or exchanged,
Engineering should be held liable to pay taxes prescribed under Section 1905 of the Code. This
compensating tax is not a tax on the importation of goods but a tax on the use of imported goods
not subject to sales tax. Engineering, therefore, should be held liable to the payment of 30%
compensating tax in accordance with Section 190 of the Tax Code in relation to Section 185(m)
of the same, but without the 50% mark up provided in Section 183(b).
II
We take up next the issue of fraud. The Commissioner charged Engineering with misdeclaration
of the imported air conditioning units and parts or accessories thereof so as to make them
subject to a lower rate of percentage tax (7%) under Section 186 of the Tax Code, when they
are allegedly subject to a higher rate of tax (30%) under its Section 185(m). This charge of fraud
was denied by Engineering but the Court of Tax Appeals in its decision found adversely and
said"
... We are amply convinced from the evidence presented by respondent that
petitioner deliberately and purposely misdeclared its importations. This
evidence consists of letters written by petitioner to its foreign suppliers,
instructing them on how to invoice and describe the air conditioning units
ordered by petitioner. ... (p. 218 CTA rec.)
Despite the above findings, however, the Court of Tax Appeals absolved Engineering from
paying the 50% surcharge prescribe by Section 183(a) of the Tax Code by reasoning out as
follows:
The imposition of the 50% surcharge prescribed by Section 183(a) of the
Tax Code is based on willful neglect to file the monthly return within 20 days
after the end of each month or in case a false or fraudulent return is willfully
made, it can readily be seen, that petitioner cannot legally be held subject to
the 50% surcharge imposed by Section 183(a) of the Tax Code. Neither can
petitioner be held subject to the 50% surcharge under Section 190 of the
Tax Code dealing on compensating tax because the provisions thereof do
not include the 50% surcharge. Where a particular provision of the Tax
Code does not impose the 50% surcharge as fraud penalty we cannot
enforce a non-existing provision of law notwithstanding the assessment of
respondent to the contrary. Instances of the exclusion in the Tax Code of
the 50% surcharge are those dealing on tax on banks, taxes on receipts of
insurance companies, and franchise tax. However, if the Tax Code imposes
the 50% surcharge as fraud penalty, it expressly so provides as in the cases
of income tax, estate and inheritance taxes, gift taxes, mining tax,
amusement tax and the monthly percentage taxes. Accordingly, we hold
that petitioner is not subject to the 50% surcharge despite the existence of
fraud in the absence of legal basis to support the importation thereof. (p.
228 CTA rec.)
We have gone over the exhibits submitted by the Commissioner evidencing fraud committed by
Engineering and We reproduce some of them hereunder for clarity.
As early as March 18, 1953, Engineering in a letter of even date wrote to Trane Co. (Exh. "3-K"
pp. 152-155, BIR rec.) viz:
Your invoices should be made in the name of Madrigal & Co., Inc., Manila,
Philippines, c/o Engineering Equipment & Supply Co., Manila, Philippines
forwarding all correspondence and shipping papers concerning this order to
us only and not to the customer.
When invoicing, your invoices should be exactly as detailed in the
customer's Letter Order dated March 14th, 1953 attached. This is in
accordance with the Philippine import licenses granted to Madrigal & Co.,
Inc. and such details must only be shown on all papers and shipping
 documents for this shipment. No mention of words air conditioning
equipment should be made on any shipping documents as well as on the
cases. Please give this matter your careful attention, otherwise great
difficulties will be encountered with the Philippine Bureau of Customs when
clearing the shipment on its arrival in Manila. All invoices and cases should
be marked "THIS EQUIPMENT FOR RIZAL CEMENT CO."
The same instruction was made to Acme Industries, Inc., San Francisco, California in a letter
dated March 19, 1953 (Exh. "3-J-1" pp. 150-151, BIR rec.)
On April 6, 1953, Engineering wrote to Owens-Corning Fiberglass Corp., New York, U.S.A. (Exh.
"3-1" pp. 147-149, BIR rec.) also enjoining the latter from mentioning or referring to the term 'air
conditioning' and to describe the goods on order as Fiberglass pipe and pipe fitting insulation
instead. Likewise on April 30, 1953, Engineering threatened to discontinue the forwarding
service of Universal Transcontinental Corporation when it wrote Trane Co. (Exh. "3-H" p. 146,
BIR rec.):
It will be noted that the Universal Transcontinental Corporation is not
following through on the instructions which have been covered by the above
correspondence, and which indicates the necessity of discontinuing the use
of the term "Air conditioning Machinery or Air Coolers". Our instructions
concerning this general situation have been sent to you in ample time to
have avoided this error in terminology, and we will ask that on receipt of this
letter that you again write to Universal Transcontinental Corp. and inform
them that, if in the future, they are unable to cooperate with us on this
requirement, we will thereafter be unable to utilize their forwarding service.
Please inform them that we will not tolerate another failure to follow our
requirements.
And on July 17, 1953 (Exh- "3-g" p. 145, BIR rec.) Engineering wrote Trane Co. another letter,
viz:
In the past, we have always paid the air conditioning tax on climate
changers and that mark is recognized in the Philippines, as air conditioning
equipment. This matter of avoiding any tie-in on air conditioning is very
important to us, and we are asking that from hereon that whoever takes
care of the processing of our orders be carefully instructed so as to avoid
again using the term "Climate changers" or in any way referring to the
equipment as "air conditioning."
And in response to the aforequoted letter, Trane Co. wrote on July 30, 1953, suggesting a
solution, viz:
We feel that we can probably solve all the problems by following the
procedure outlined in your letter of March 25, 1953 wherein you stated that
in all future jobs you would enclose photostatic copies of your import license
so that we might make up two sets of invoices: one set describing
equipment ordered simply according to the way that they are listed on the
import license and another according to our ordinary regular methods of
order write-up. We would then include the set made up according to the
import license in the shipping boxes themselves and use those items as our
actual shipping documents and invoices, and we will send the other regular
invoice to you, by separate correspondence. (Exh- No. "3-F-1", p. 144 BIR
rec.)
Another interesting letter of Engineering is one dated August 27, 1955 (Exh. "3-C" p. 141 BIR
rec.)
In the process of clearing the shipment from the piers, one of the Customs
inspectors requested to see the packing list. Upon presenting the packing
list, it was discovered that the same was prepared on a copy of your
letterhead which indicated that the Trane Co. manufactured air conditioning,
heating and heat transfer equipment. Accordingly, the inspectors insisted
that this equipment was being imported for air conditioning purposes. To
date, we have not been able to clear the shipment and it is possible that we
will be required to pay heavy taxes on equipment.
The purpose of this letter is to request that in the future, no documents of
any kind should be sent with the order that indicate in any way that the
equipment could possibly be used for air conditioning.
It is realized that this a broad request and fairly difficult to accomplish and
administer, but we believe with proper caution it can be executed. Your
cooperation and close supervision concerning these matters will be
appreciated. (Emphasis supplied)
The aforequoted communications are strongly indicative of the fraudulent intent of Engineering
to misdeclare its importation of air conditioning units and spare parts or accessories thereof to
evade payment of the 30% tax. And since the commission of fraud is altogether too glaring, We
cannot agree with the Court of Tax Appeals in absolving Engineering from the 50% fraud
surcharge, otherwise We will be giving premium to a plainly intolerable act of tax evasion. As
aptly stated by then Solicitor General, now Justice, Antonio P. Barredo: 'this circumstance will
not free it from the 50% surcharge because in any case whether it is subject to advance sales
tax or compensating tax, it is required by law to truly declare its importation in the import entries
and internal revenue declarations before the importations maybe released from customs
custody. The said entries are the very documents where the nature, quantity and value of the
imported goods declared and where the customs duties, internal revenue taxes, and other fees
or charges incident to the importation are computed. These entries, therefore, serve the same
purpose as the returns required by Section 183(a) of the Code.'
Anent the 25% delinquency surcharge, We fully agree to the ruling made by the Court of Tax
Appeals and hold Engineering liable for the same. As held by the lower court:
At first blush it would seem that the contention of petitioner that it is not
subject to the delinquency, surcharge of 25% is sound, valid and tenable.
However, a serious study and critical analysis of the historical provisions of
Section 190 of the Tax Code dealing on compensating tax in relation to
Section 183(a) of the same Code, will show that the contention of petitioner
is without merit. The original text of Section 190 of Commonwealth Act 466,
otherwise known as the National Internal Revenue Code, as amended by
Commonwealth Act No. 503, effective on October 1, 1939, does not provide
for the filing of a compensation tax return and payment of the 25 %
surcharge for late payment thereof. Under the original text of Section 190 of
the Tax Code as amended by Commonwealth Act No. 503, the contention
of the petitioner that it is not subject to the 25% surcharge appears to be
legally tenable. However, Section 190 of the Tax Code was subsequently
amended by the Republic Acts Nos. 253, 361, 1511 and 1612 effective
October 1, 1946, July 1, 1948, June 9, 1949, June 16, 1956 and August 24,
1956 respectively, which invariably provides among others, the following:
 ... If any article withdrawn from the customhouse or the
post office without payment of the compensating tax is
subsequently used by the importer for other purposes,
corresponding entry should be made in the books of
accounts if any are kept or a written notice thereof sent
to the Collector of Internal Revenue and payment of the
corresponding compensating tax made within 30 days
from the date of such entry or notice and if tax is not
paid within such period the amount of the tax shall be
increased by 25% the increment to be a part of the tax.
Since the imported air conditioning units-and spare parts or accessories thereof are subject to
the compensating tax of 30% as the same were used in the construction business of
Engineering, it is incumbent upon the latter to comply with the aforequoted requirement of
Section 190 of the Code, by posting in its books of accounts or notifying the Collector of Internal
Revenue that the imported articles were used for other purposes within 30 days. ...
Consequently; as the 30% compensating tax was not paid by petitioner within the time
prescribed by Section 190 of the Tax Code as amended, it is therefore subject to the 25%
surcharge for delinquency in the payment of the said tax. (pp. 224-226 CTA rec.)
III
Lastly the question of prescription of the tax assessment has been put in issue. Engineering
contends that it was not guilty of tax fraud in effecting the importations and, therefore, Section
332(a) prescribing ten years is inapplicable, claiming that the pertinent prescriptive period is five
years from the date the questioned importations were made. A review of the record however
reveals that Engineering did file a tax return or declaration with the Bureau of Customs before it
paid the advance sales tax of 7%. And the declaration filed reveals that it did in fact misdeclare
its importations. Section 332 of the Tax Code which provides:
Section 332. Exceptions as to period of limitation of assessment and
collection of taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of a
failure to file a return, the tax may be assessed, or a proceeding in court for
the collection of such tax may be begun without assessment at any time
within ten years after the discovery of the falsity, fraud or omission.
is applicable, considering the preponderance of evidence of fraud with the intent to evade the
higher rate of percentage tax due from Engineering. The, tax assessment was made within the
period prescribed by law and prescription had not set in against the Government.
WHEREFORE, the decision appealed from is affirmed with the modification that Engineering is
hereby also made liable to pay the 50% fraud surcharge.
SO ORDERED.
Makalintal, C.J., Castro, Makasiar and Martin, JJ., concur.
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.
Arellano, C.J., Torres, Johnson, Street and Malcolm, JJ., concur.
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 to pay a 10 per cent commission to the petitioner provided it was given the benefit of the 25 per
states: 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
3. That on or about November 19, 1929, the herein plaintiff (respondent) and
exhorbitant additional price that the respondent sought to limit it to 10 per cent, and the
defendant (petitioner) entered into an agreement, under and by virtue of which the
respondent is estopped from questioning that additional price. If the respondent later on
herein defendant was to secure from the United States, and sell and deliver to the
discovers itself at the short end of a bad bargain, it alone must bear the blame, and it cannot
herein plaintiff, certain sound reproducing equipment and machinery, for which the
rescind the contract, much less compel a reimbursement of the excess price, on that ground
said defendant, under and by virtue of said agreement, was to receive the actual cost
alone. The respondent could not secure equipment and machinery manufactured by the Starr
price plus ten per cent (10%), and was also to be reimbursed for all out of pocket
Piano Company except from the petitioner alone; it willingly paid the price quoted; it received the
expenses in connection with the purchase and delivery of such equipment, such as
equipment and machinery as represented; and that was the end of the matter as far as the
costs of telegrams, freight, and similar expenses. (Emphasis ours.)
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
We agree with the trial judge that "whatever unforseen events might have taken place between the petitioner and the respondent. Not every concealment is fraud; and short of fraud, it
unfavorable to the defendant (petitioner), such as change in prices, mistake in their quotation, were better that, within certain limits, business acumen permit of the loosening of the sleeves
loss of the goods not covered by insurance or failure of the Starr Piano Company to properly fill and of the sharpening of the intellect of men and women in the business world.
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
The writ of certiorari should be, as it is hereby, granted. The decision of the appellate court is
relation of agency between the petitioner and the respondent, because in agency, the agent is
accordingly reversed and the petitioner is absolved from the respondent's complaint in G. R. No.
exempted from all liability in the discharge of his commission provided he acts in accordance
1023, entitled "Arco Amusement Company (formerly known as Teatro Arco), plaintiff-appellant,
with the instructions received from his principal (section 254, Code of Commerce), and the
vs. Gonzalo Puyat & Sons, Inc., defendants-appellee," without pronouncement regarding costs.
principal must indemnify the agent for all damages which the latter may incur in carrying out the
So ordered.
agency without fault or imprudence on his part (article 1729, Civil Code).

Avancea, C.J., Diaz, Moran and Horrilleno, JJ., concur.

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 [G.R. No. 149420. October 8, 2003]
stipulation is not incompatible with the contract of purchase and sale. (See Quiroga vs. Parsons
Hardware Co., 38 Phil., 501.)
SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent.

In the second place, to hold the petitioner an agent of the respondent in the purchase of
DECISION
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. YNARES-SANTIAGO, J.:
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. Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged in the sale of
steel scaffoldings, while petitioner Sonny L. Lo, doing business under the name and style Sans
Enterprises, is a building contractor. On February 22, 1990, petitioner ordered scaffolding
It follows that the petitioner as vendor is not bound to reimburse the respondent as vendee for equipments from respondent worth P540,425.80.21[1] He paid a downpayment in the amount of
any difference between the cost price and the sales price which represents the profit realized by P150,000.00. The balance was made payable in ten monthly installments.
the vendor out of the transaction. This is the very essence of commerce without which
merchants or middleman would not exist.
Respondent delivered the scaffoldings to petitioner.22[2] Petitioner was able to pay the first two
monthly installments. His business, however, encountered financial difficulties and he was
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
unable to settle his obligation to respondent despite oral and written demands made against
him.23[3]
On October 11, 1990, petitioner and respondent executed a Deed of Assignment,24[4] whereby
petitioner assigned to respondent his receivables in the amount of P335,462.14 from Jomero
Realty Corporation. Pertinent portions of the Deed provide:
WHEREAS, the ASSIGNOR is the contractor for the construction of a residential house located
at Greenmeadow Avenue, Quezon City owned by Jomero Realty Corporation;
However, when respondent tried to collect the said credit from Jomero Realty Corporation, the
latter refused to honor the Deed of Assignment because it claimed that petitioner was also
indebted to it.26[6] On November 26, 1990, respondent sent a letter27[7] to petitioner demanding
payment of his obligation, but petitioner refused to pay claiming that his obligation had been
extinguished when they executed the Deed of Assignment.
Consequently, on January 10, 1991, respondent filed an action for recovery of a sum of money
against the petitioner before the Regional Trial Court of Makati, Branch 147, which was docketed
as Civil Case No. 91-074.28[8]

During the trial, petitioner argued that his obligation was extinguished with the execution of the
WHEREAS, in the construction of the aforementioned residential house, the ASSIGNOR
Deed of Assignment of credit. Respondent, for its part, presented the testimony of its employee,
purchased on account scaffolding equipments from the ASSIGNEE payable to the latter;
Almeda Baaga, who testified that Jomero Realty refused to honor the assignment of credit
because it claimed that petitioner had an outstanding indebtedness to it.
WHEREAS, up to the present the ASSIGNOR has an obligation to the ASSIGNEE for the
purchase of the aforementioned scaffoldings now in the amount of Three Hundred Thirty Five
On August 25, 1994, the trial court rendered a decision29[9] dismissing the complaint on the
Thousand Four Hundred Sixty Two and 14/100 Pesos (P335,462.14);
ground that the assignment of credit extinguished the obligation. The decretal portion thereof
provides:
NOW, THEREFORE, for and in consideration of the sum of Three Hundred Thirty Five
Thousand Four Hundred Sixty Two and 14/100 Pesos (P335,462.14), Philippine Currency which
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the
represents part of the ASSIGNORs collectible from Jomero Realty Corp., said ASSIGNOR
defendant and against the plaintiff, dismissing the complaint and ordering the plaintiff to pay the
hereby assigns, transfers and sets over unto the ASSIGNEE all collectibles amounting to the
defendant attorneys fees in the amount of P25,000.00.
said amount of P335, 462.14;

Respondent appealed the decision to the Court of Appeals. On April 19, 2001, the appellate
And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and assigns, the full
court rendered a decision,30[10] the dispositive portion of which reads:
power and authority to demand, collect, receive, compound, compromise and give acquittance
for the same or any part thereof, and in the name and stead of the said ASSIGNOR;

And the ASSIGNOR does hereby agree and stipulate to and with said ASSIGNEE, its
successors and assigns that said debt is justly owing and due to the ASSIGNOR for Jomero
Realty Corporation and that said ASSIGNOR has not done and will not cause anything to be
done to diminish or discharge said debt, or delay or to prevent the ASSIGNEE, its successors or
assigns, from collecting the same;

And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his
heirs, executors, administrators, or assigns, shall and will at times hereafter, at the request of
said ASSIGNEE, its successors or assigns, at his cost and expense, execute and do all such
further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE
to recover whatever collectibles said ASSIGNOR has in accordance with the true intent and
meaning of these presents. xxx25[5] (Italics supplied)
WHEREFORE, finding merit in this appeal, the court REVERSES the appealed Decision and III
enters judgment ordering defendant-appellee Sonny Lo to pay the plaintiff-appellant KJS ECO-
FORMWORK SYSTEM PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four Hundred
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF
Sixty-Two and 14/100 (P335,462.14) with legal interest of 6% per annum from January 10, 1991
THE TRIAL COURT AND IN ORDERING PAYMENT OF INTERESTS AND ATTORNEYS
(filing of the Complaint) until fully paid and attorneys fees equivalent to 10% of the amount due
FEES.34[14]
and costs of the suit.

The petition is without merit.

SO ORDERED.31[11]

In finding that the Deed of Assignment did not extinguish the obligation of the petitioner to the
respondent, the Court of Appeals held that (1) petitioner failed to comply with his warranty under
the Deed; (2) the object of the Deed did not exist at the time of the transaction, rendering it void
pursuant to Article 1409 of the Civil Code; and (3) petitioner violated the terms of the Deed of
Assignment when he failed to execute and do all acts and deeds as shall be necessary to
effectually enable the respondent to recover the collectibles.32[12]
Petitioner filed a motion for reconsideration of the said decision, which was denied by the Court
of Appeals.33[13]
In this petition for review, petitioner assigns the following errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN
DECLARING THE DEED OF ASSIGNMENT (EXH. 4) AS NULL AND VOID FOR LACK OF
OBJECT ON THE BASIS OF A MERE HEARSAY CLAIM.
An assignment of credit is an agreement by virtue of which the owner of a credit, known as the
assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and without the
consent of the debtor, transfers his credit and accessory rights to another, known as the
assignee, who acquires the power to enforce it to the same extent as the assignor could enforce
it against the debtor.35[15]
Corollary thereto, in dacion en pago, as a special mode of payment, the debtor offers another
thing to the creditor who accepts it as equivalent of payment of an outstanding debt.36[16] In order
that there be a valid dation in payment, the following are the requisites: (1) There must be the
performance of the prestation in lieu of payment (animo solvendi) which may consist in the
delivery of a corporeal thing or a real right or a credit against the third person; (2) There must be
some difference between the prestation due and that which is given in substitution (aliud pro
alio); (3) There must be an agreement between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance of a prestation different from that
due.37[17] The undertaking really partakes in one sense of the nature of sale, that is, the creditor
is really buying the thing or property of the debtor, payment for which is to be charged against
the debtors debt. As such, the vendor in good faith shall be responsible, for the existence and
legality of the credit at the time of the sale but not for the solvency of the debtor, in specified
circumstances.38[18]

II

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF

ASSIGNMENT (EXH. 4) DID NOT EXTINGUISH PETITIONERS OBLIGATION ON THE
WRONG NOTION THAT PETITIONER FAILED TO COMPLY WITH HIS WARRANTY
THEREUNDER.
Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal
property,39[19] produced the effects of a dation in payment which may extinguish the
obligation.40[20] However, as in any other contract of sale, the vendor or assignor is bound by
certain warranties. More specifically, the first paragraph of Article 1628 of the Civil Code
provides:
Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay respondent the
sum of P335,462.14 with legal interest thereon. However, we find that the award by the Court of
Appeals of attorneys fees is without factual basis. No evidence or testimony was presented to
substantiate this claim. Attorneys fees, being in the nature of actual damages, must be duly
substantiated by competent proof.

The vendor in good faith shall be responsible for the existence and legality of the credit at the WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals dated April 19,
time of the sale, unless it should have been sold as doubtful; but not for the solvency of the 2001 in CA-G.R. CV No. 47713, ordering petitioner to pay respondent the sum of P335,462.14
debtor, unless it has been so expressly stipulated or unless the insolvency was prior to the sale with legal interest of 6% per annum from January 10, 1991 until fully paid is AFFIRMED with
and of common knowledge. MODIFICATION. Upon finality of this Decision, the rate of legal interest shall be 12% per annum,
inasmuch as the obligation shall thereafter become equivalent to a forbearance of credit.43[23]
The award of attorneys fees is DELETED for lack of evidentiary basis.
From the above provision, petitioner, as vendor or assignor, is bound to warrant the existence
and legality of the credit at the time of the sale or assignment. When Jomero claimed that it was
no longer indebted to petitioner since the latter also had an unpaid obligation to it, it essentially SO ORDERED.
meant that its obligation to petitioner has been extinguished by compensation. 41[21] In other
words, respondent alleged the non-existence of the credit and asserted its claim to petitioners
Davide, Jr., C.J., (Chairman), Vitug, Carpio and Azcuna, JJ., concur.
warranty under the assignment. Therefore, it behooved on petitioner to make good its warranty
and paid the obligation.

Furthermore, we find that petitioner breached his obligation under the Deed of Assignment, to
wit:

And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his
heirs, executors, administrators, or assigns, shall and will at times hereafter, at the request of
said ASSIGNEE, its successors or assigns, at his cost and expense, execute and do all such
further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE
to recover whatever collectibles said ASSIGNOR has in accordance with the true intent and
meaning of these presents.42[22] (underscoring ours)

Indeed, by warranting the existence of the credit, petitioner should be deemed to have ensured
the performance thereof in case the same is later found to be inexistent. He should be held liable
to pay to respondent the amount of his indebtedness.