The Nature of Sale CASES

G.R. No.
L-11827 July 31, 1961
FERNANDO A. GAITE, plaintiff-appellee, vs. SABELO FONACIER, GEORGE KRAKOWER,

LARAP MINES & SMELTING CO., INC., SEGUNDINA VIVAS, FRNACISCO DANTE,
PACIFICO ESCANDOR and FERNANDO TY, defendants-appellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the Court of First Instance because the claims involved
aggregate more than P200,000.00.
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in a
representative capacity, of 11 iron lode mineral claims, known as the Dawahan Group, situated
in the municipality of Jose Panganiban, province of Camarines Norte.
By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier constituted and
appointed plaintiff-appellee Fernando A. Gaite as his true and lawful attorney-in-fact to enter into
a contract with any individual or juridical person for the exploration and development of the
mining claims aforementioned on a royalty basis of not less than P0.50 per ton of ore that might
be extracted therefrom. On March 19, 1954, Gaite in turn executed a general assignment
(Record on Appeal, pp. 17-19) conveying the development and exploitation of said mining claims
into the Larap Iron Mines, a single proprietorship owned solely by and belonging to him, on the
same royalty basis provided for in Exhibit "3". Thereafter, Gaite embarked upon the development
and exploitation of the mining claims in question, opening and paving roads within and outside
their boundaries, making other improvements and installing facilities therein for use in the
development of the mines, and in time extracted therefrom what he claim and estimated to be
approximately 24,000 metric tons of iron ore.
For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to
Gaite to exploit and develop the mining claims in question, and Gaite assented thereto subject to
certain conditions. As a result, a document entitled "Revocation of Power of Attorney and
Contract" was executed on December 8, 1954 (Exhibit "A"),wherein Gaite transferred to
Fonacier, for the consideration of P20,000.00, plus 10% of the royalties that Fonacier would
receive from the mining claims, all his rights and interests on all the roads, improvements, and
facilities in or outside said claims, the right to use the business name "Larap Iron Mines" and its
goodwill, and all the records and documents relative to the mines. In the same document, Gaite
transferred to Fonacier all his rights and interests over the "24,000 tons of iron ore, more or less"
that the former had already extracted from the mineral claims, in consideration of the sum of
P75,000.00, P10,000.00 of which was paid upon the signing of the agreement, and
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid from and out of the
first letter of credit covering the first shipment of iron ores and of the first amount derived from
the local sale of iron ore made by the Larap Mines & Smelting Co. Inc., its assigns,
administrators, or successors in interests.
To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor
of Gaite a surety bond, and pursuant to the promise, Fonacier delivered to Gaite a surety bond
dated December 8, 1954 with himself (Fonacier) as principal and the Larap Mines and Smelting
Co. and its stockholders George Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante,
and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified, however, that when this bond was
presented to him by Fonacier together with the "Revocation of Power of Attorney and Contract",
Exhibit "A", on December 8, 1954, he refused to sign said Exhibit "A" unless another bond under
written by a bonding company was put up by defendants to secure the payment of the
P65,000.00 balance of their price of the iron ore in the stockpiles in the mining claims. Hence, a
second bond, also dated December 8, 1954 (Exhibit "B"),was executed by the same parties to the
first bond Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as additional surety, but
it provided that the liability of the surety company would attach only when there had been an
actual sale of iron ore by the Larap Mines & Smelting Co. for an amount of not less then
P65,000.00, and that, furthermore, the liability of said surety company would automatically
expire on December 8, 1955. Both bonds were attached to the "Revocation of Power of Attorney
and Contract", Exhibit "A", and made integral parts thereof.
MALIPO L Juris Doctor UBLC Sales 1

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 certiorari[1] to annul the Decision[2] dated 26 June 1996 of the Court
of Appeals in CA-G.R. CV No. 41996. The Court of Appeals affirmed the Decision[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 litisxxx are NULL AND VOID AB INITIO.
Defendants, on the other hand aver (1) that plaintiffs do not have a cause of action against them as well
as the requisite standing and interest to assail their titles over the properties in litis; (2) that the sales
were with sufficient considerations and made by defendants parents voluntarily, in good faith, and with
full knowledge of the consequences of their deeds of sale; and (3) that the certificates of title were issued
with sufficient factual and legal basis.[4] (Emphasis in the original)
The Ruling of the Trial Court
Before the trial, the trial court ordered the dismissal of the case against defendant spouses Gavino
Joaquin and Lea Asis.[5] Instead of filing an Answer with their co-defendants, Gavino Joaquin and Lea
Asis filed a Motion to Dismiss.[6] In granting the dismissal to Gavino Joaquin and Lea Asis, the trial court
noted that compulsory heirs have the right to a legitime but such right is contingent since said right
commences only from the moment of death of the decedent pursuant to Article 777 of the Civil Code of
the Philippines.[7]
After trial, the trial court ruled in favor of the defendants and dismissed the complaint. The trial court
stated:
In the first place, the testimony of the defendants, particularly that of the xxx father will show that the
Deeds of Sale were all executed for valuable consideration. This assertion must prevail over the negative
allegation of plaintiffs.
And then there is the argument that plaintiffs do not have a valid cause of action against defendants
since there can be no legitime to speak of prior to the death of their parents. The court finds this
contention tenable. In determining the legitime, the value of the property left at the death of the testator
shall be considered (Art. 908 of the New Civil Code). Hence, the legitime of a compulsory heir is
computed as of the time of the death of the decedent. Plaintiffs therefore cannot claim an impairment of
their legitime while their parents live.
All the foregoing considered, this case is DISMISSED.
In order to preserve whatever is left of the ties that should bind families together, the counterclaim is
likewise DISMISSED.
No costs.
SO ORDERED.[8]
The Ruling of the Court of Appeals
The Court of Appeals affirmed the decision of the trial court. The appellate court ruled:
To the mind of the Court, appellants are skirting the real and decisive issue in this case, which is, whether
xxx they have a cause of action against appellees.
Upon this point, there is no question that plaintiffs-appellants, like their defendant brothers and sisters,
are compulsory heirs of defendant spouses, Leonardo Joaquin and Feliciana Landrito, who are their
parents. However, their right to the properties of their defendant parents, as compulsory heirs, is merely
inchoate and vests only upon the latters death. While still alive, defendant parents are free to dispose of
their properties, provided that such dispositions are not made in fraud of creditors.
Plaintiffs-appellants are definitely not parties to the deeds of sale in question. Neither do they claim to be
creditors of their defendant parents. Consequently, they cannot be considered as real parties in interest
to assail the validity of said deeds either for gross inadequacy or lack of consideration or for failure to
express the true intent of the parties. In point is the ruling of the Supreme Court in Velarde, et al. vs.
Paez, et al., 101 SCRA 376, thus:
The plaintiffs are not parties to the alleged deed of sale and are not principally or subsidiarily bound
thereby; hence, they have no legal capacity to challenge their validity.
Plaintiffs-appellants anchor their action on the supposed impairment of their legitime by the dispositions
made by their defendant parents in favor of their defendant brothers and sisters. But, as correctly held
by the court a quo, the legitime of a compulsory heir is computed as of the time of the death of the
decedent. Plaintiffs therefore cannot claim an impairment of their legitime while their parents live.
With this posture taken by the Court, consideration of the errors assigned by plaintiffs-appellants is
inconsequential.
WHEREFORE, the decision appealed from is hereby AFFIRMED, with costs against plaintiffs-appellants.
SO ORDERED.[9]
Hence, the instant petition.
Issues
Petitioners assign the following as errors of the Court of Appeals:

1. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CONVEYANCE IN QUESTION
HAD NO VALID CONSIDERATION.
2. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT EVEN ASSUMING THAT THERE WAS
A CONSIDERATION, THE SAME IS GROSSLY INADEQUATE.
3. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE DEEDS OF SALE DO NOT
EXPRESS THE TRUE INTENT OF THE PARTIES.
4. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CONVEYANCE WAS PART AND
PARCEL OF A CONSPIRACY AIMED AT UNJUSTLY DEPRIVING THE REST OF THE CHILDREN OF
THE SPOUSES LEONARDO JOAQUIN AND FELICIANA LANDRITO OF THEIR INTEREST OVER
THE SUBJECT PROPERTIES.
5. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONERS HAVE A GOOD,
SUFFICIENT AND VALID CAUSE OF ACTION AGAINST THE PRIVATE RESPONDENTS.[10]

The Ruling of the Court
We find the petition without merit.

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

over the properties subject of the Deeds of Sale
Petitioners Complaint betrays their motive for filing this case. In their Complaint, petitioners
asserted that the purported sale of the properties in litis was the result of a deliberate conspiracy
designed to unjustly deprive the rest of the compulsory heirs (plaintiffs herein) of their legitime.
Petitioners strategy was to have the Deeds of Sale declared void so that ownership of the lots would
eventually revert to their respondent parents. If their parents die still owning the lots, petitioners and
their respondent siblings will then co-own their parents estate by hereditary succession.[11]
It is evident from the records that petitioners are interested in the properties subject of the Deeds of
Sale, but they have failed to show any legal right to the properties. The trial and appellate courts should
have dismissed the action for this reason alone. An action must be prosecuted in the name of the real
party-in-interest.[12]
[T]he question as to real party-in-interest is whether he is the party who would be benefitted or injured
by the judgment, or the party entitled to the avails of the suit.
xxx
In actions for the annulment of contracts, such as this action, the real parties are those who are parties
to the agreement or are bound either principally or subsidiarily or are prejudiced in their rights with
respect to one of the contracting parties and can show the detriment which would positively result to
them from the contract even though they did not intervene in it (Ibaez v. Hongkong & Shanghai Bank,
22 Phil. 572 [1912]) xxx.
These are parties with a present substantial interest, as distinguished from a mere expectancy or future,
contingent, subordinate, or consequential interest. The phrase present substantial interest more
concretely is meant such interest of a party in the subject matter of the action as will entitle him, under
the substantive law, to recover if the evidence is sufficient, or that he has the legal title to demand and
the defendant will be protected in a payment to or recovery by him.[13]
Petitioners do not have any legal interest over the properties subject of the Deeds of Sale. As the
appellate court stated, petitioners right to their parents properties is merely inchoate and vests only
upon their parents death. While still living, the parents of petitioners are free to dispose of their
properties. In their overzealousness to safeguard their future legitime, petitioners forget that
theoretically, the sale of the lots to their siblings does not affect the value of their parents estate. While
the sale of the lots reduced the estate, cash of equivalent value replaced the lots taken from the estate.
Whether the Deeds of Sale are void

for lack of consideration
Petitioners assert that their respondent siblings did not actually pay the prices stated in the Deeds of
Sale to their respondent father. Thus, petitioners ask the court to declare the Deeds of Sale void.
A contract of sale is not a real contract, but a consensual contract. As a consensual contract, a
contract of sale becomes a binding and valid contract upon the meeting of the minds as to price. If there
is a meeting of the minds of the parties as to the price, the contract of sale is valid, despite the manner
of payment, or even the breach of that manner of payment. If the real price is not stated in the contract,
then the contract of sale is valid but subject to reformation. If there is no meeting of the minds of the
parties as to the price, because the price stipulated in the contract is simulated, then the contract is

void.[14] Article 1471 of the Civil Code states that if the price in a contract of sale is simulated, the sale
is void.
It is not the act of payment of price that determines the validity of a contract of sale. Payment of the
price has nothing to do with the perfection of the contract. Payment of the price goes into the
performance of the contract. Failure to pay the consideration is different from lack of consideration. The
former results in a right to demand the fulfillment or cancellation of the obligation under an existing valid
contract while the latter prevents the existence of a valid contract.[15]
Petitioners failed to show that the prices in the Deeds of Sale were absolutely simulated. To prove
simulation, petitioners presented Emma Joaquin Valdozs testimony stating that their father, respondent
Leonardo Joaquin, told her that he would transfer a lot to her through a deed of sale without need for her
payment of the purchase price.[16] The trial court did not find the allegation of absolute simulation of
price credible. Petitioners failure to prove absolute simulation of price is magnified by their lack of
knowledge of their respondent siblings financial capacity to buy the questioned lots.[17] On the other
hand, the Deeds of Sale which petitioners presented as evidence plainly showed the cost of each lot
sold. Not only did respondents minds meet as to the purchase price, but the real price was also stated in
the Deeds of Sale. As of the filing of the complaint, respondent siblings have also fully paid the price to
their respondent father.[18]
Whether the Deeds of Sale are void

for gross inadequacy of price
Petitioners ask that assuming that there is consideration, the same is grossly inadequate as to
invalidate the Deeds of Sale.
Articles 1355 of the Civil Code states:
Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a
contract, unless there has been fraud, mistake or undue influence. (Emphasis supplied)
Article 1470 of the Civil Code further provides:
Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as may indicate a
defect in the consent, or that the parties really intended a donation or some other act or
contract. (Emphasis supplied)
Petitioners failed to prove any of the instances mentioned in Articles 1355 and 1470 of the Civil Code
which would invalidate, or even affect, the Deeds of Sale. Indeed, there is no requirement that the price
be equal to the exact value of the subject matter of sale. All the respondents believed that they received
the commutative value of what they gave. As we stated inVales v. Villa:[19]
Courts cannot follow one every step of his life and extricate him from bad bargains, protect him from
unwise investments, relieve him from one-sided contracts, or annul the effects of foolish acts. Courts
cannot constitute themselves guardians of persons who are not legally incompetent. Courts operate not
because one person has been defeated or overcome by another, but because he has been defeated or
overcome illegally. Men may do foolish things, make ridiculous contracts, use miserable judgment, and
lose money by them indeed, all they have in the world; but not for that alone can the law intervene and
restore. There must be, in addition, a violation of the law, the commission of what the law knows as
an actionable wrong, before the courts are authorized to lay hold of the situation and remedy it.
(Emphasis in the original)
Moreover, the factual findings of the appellate court are conclusive on the parties and carry greater
weight when they coincide with the factual findings of the trial court. This Court will not weigh the
evidence all over again unless there has been a showing that the findings of the lower court are totally
devoid of support or are clearly erroneous so as to constitute serious abuse of discretion.[20] In the
instant case, the trial court found that the lots were sold for a valid consideration, and that the defendant
children actually paid the purchase price stipulated in their respective Deeds of Sale. Actual payment of
the purchase price by the buyer to the seller is a factual finding that is now conclusive upon us.
WHEREFORE, we AFFIRM the decision of the Court of Appeals in toto.
SO ORDERED.
Buenaventura v. CA 416 SCRA 263
Facts: The private respondent sold its property to their le iti!ate children herein the co"respondent.
Thus this petition #here the petitioner contends that the contract o$ sale #as void%Because there
inade&uate consideration and the contract #as a conspiracy desi ned to deprivethe rest o$ the
co!pulsory heirs o$ their le iti!e.
'ssue: (hether or not inade&uate consideration renders a contract o$ sale void.)
Held: no% The court held that the inade&uate consideration +ears no !erit to the validity o$ acontract
o$ sale.At the present case the petitioner has no le al +asis +ecause le iti!e o$ a co!pulsory heir
isco!puted at the ti!e o$ death o$ the decedent.,etitioner there$ore cannot clai! an i!pair!ent

G.R. No. L-8506 August 31, 1956
CELESTINO CO & COMPANY, petitioner, vs. COLLECTOR OF INTERNAL

REVENUE, 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 stockdoors
of the kind sold to Teodoro, it could stock and/or probably had in stock the sash, mouldings and
panels it used therefor (some of them at least).
In our opinion when this Factory accepts a job that requires the use of extraordinary or additional
equipment, or involves services not generally performed by it-it thereby contracts for a piece of
work filing special orders within the meaning of Article 1467. The orders herein exhibited were
not shown to be special. They were merely orders for work nothing is shown to call them
special requiring extraordinary service of the factory.
The thought occurs to us that if, as alleged-all the work of appellant is only to fill orders
previously made, such orders should not be called special work, but regular work. Would a
factory do business performing only special, extraordinary or peculiar merchandise?
Anyway, supposing for the moment that the transactions were not sales, they were neither lease
of services nor contract jobs by a contractor. But as the doors and windows had been admittedly
"manufactured" by the Oriental Sash Factory, such transactions could be, and should be taxed as
"transfers" thereof under section 186 of the National Revenue Code.
The appealed decision is consequently affirmed. So ordered.

G.R. No. 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.
ESGUERRA, J.:
Petition for review on certiorari of the decision of the Court of Tax Appeals in CTA Case No. 681, dated
November 29, 1966, assessing a compensating tax of P174,441.62 on the Engineering Equipment and
Supply Company.
As found by the Court of Tax Appeals, and as established by the evidence on record, the facts of this case
are as follows:
Engineering Equipment and Supply Co. (Engineering for short), a domestic corporation, is an
engineering and machinery firm. As operator of an integrated engineering shop, it is engaged, among
others, in the design and installation of central type air conditioning system, pumping plants and steel
fabrications. (Vol. I pp. 12-16 T.S.N. August 23, 1960)
On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now Commissioner, of Internal Revenue
denouncing Engineering for tax evasion by misdeclaring its imported articles and failing to pay the
correct percentage taxes due thereon in connivance with its foreign suppliers (Exh. "2" p. 1 BIR record
Vol. I). Engineering was likewise denounced to the Central Bank (CB) for alleged fraud in obtaining its
dollar allocations. Acting on these denunciations, a raid and search was conducted by a joint team of
Central Bank, (CB), National Bureau of Investigation (NBI) and Bureau of Internal Revenue (BIR) agents
on September 27, 1956, on which occasion voluminous records of the firm were seized and confiscated.
(pp. 173-177 T.S.N.)
On September 30, 1957, revenue examiners Quesada and Catudan reported and recommended to the
then Collector, now Commissioner, of Internal Revenue (hereinafter referred to as Commissioner) that
Engineering be assessed for P480,912.01 as deficiency advance sales tax on the theory that it
misdeclared its importation of air conditioning units and parts and accessories thereof which are subject
to tax under Section 185(m) 1 of the Tax Code, instead of Section 186 of the same Code. (Exh. "3" pp.
59-63 BIR rec. Vol. I) This assessment was revised on January 23, 1959, in line with the observation of
the Chief, BIR Law Division, and was raised to P916,362.56 representing deficiency advance sales tax
and manufacturers sales tax, inclusive of the 25% and 50% surcharges. (pp. 72-80 BIR rec. Vol. I)
On March 3, 1959. the Commissioner assessed against, and demanded upon, Engineering payment of
the increased amount and suggested that P10,000 be paid as compromise in extrajudicial settlement of
Engineering's penal liability for violation of the Tax Code. The firm, however, contested the tax
assessment and requested that it be furnished with the details and particulars of the Commissioner's
assessment. (Exh. "B" and "15", pp. 86-88 BIR rec. Vol. I) The Commissioner replied that the
assessment was in accordance with law and the facts of the case.
On July 30, 1959, Engineering appealed the case to the Court of Tax Appeals and during the pendency
of the case the investigating revenue examiners reduced Engineering's deficiency tax liabilities from
P916,362.65 to P740,587.86 (Exhs. "R" and "9" pp. 162-170, BIR rec.), based on findings after
conferences had with Engineering's Accountant and Auditor.
On November 29, 1966, the Court of Tax Appeals rendered its decision, the dispositive portion of which
reads as follows:
For ALL THE FOREGOING CONSIDERATIONS, the decision of respondent appealed from is hereby
modified, and petitioner, as a contractor, is declared exempt from the deficiency manufacturers sales tax
covering the period from June 1, 1948. to September 2, 1956. However, petitioner is ordered to pay

respondent, or his duly authorized collection agent, the sum of P174,141.62 as compensating tax and
25% surcharge for the period from 1953 to September 1956. With costs against petitioner.
The Commissioner, not satisfied with the decision of the Court of Tax Appeals, appealed to this Court on
January 18, 1967, (G.R. No. L-27044). On the other hand, Engineering, on January 4, 1967, filed with
the Court of Tax Appeals a motion for reconsideration of the decision abovementioned. This was denied
on April 6, 1967, prompting Engineering to file also with this Court its appeal, docketed as G.R. No.
L-27452.
Since the two cases, G.R. No. L-27044 and G.R. No. L-27452, involve the same parties and issues, We
have decided to consolidate and jointly decide them.
Engineering in its Petition claims that the Court of Tax Appeals committed the following errors:
1. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company liable to the
30% compensating tax on its importations of equipment and ordinary articles used in the central type air
conditioning systems it designed, fabricated, constructed and installed in the buildings and premises of
its customers, rather than to the compensating tax of only 7%;
2. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company guilty of
fraud in effecting the said importations on the basis of incomplete quotations from the contents of
alleged photostat copies of documents seized illegally from Engineering Equipment and Supply Company
which should not have been admitted in evidence;
3. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company liable to the
25% surcharge prescribed in Section 190 of the Tax Code;
4. That the Court of Tax Appeals erred in holding the assessment as not having prescribed;
5. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company liable for the
sum of P174,141.62 as 30% compensating tax and 25% surcharge instead of completely absolving it
from the deficiency assessment of the Commissioner.
The Commissioner on the other hand claims that the Court of Tax Appeals erred:
1. In holding that the respondent company is a contractor and not a manufacturer.
2. In holding respondent company liable to the 3% contractor's tax imposed by Section 191 of the Tax
Code instead of the 30% sales tax prescribed in Section 185(m) in relation to Section 194(x) both of the
same Code;
3. In holding that the respondent company is subject only to the 30% compensating tax under Section
190 of the Tax Code and not to the 30% advance sales tax imposed by section 183 (b), in relation to
section 185(m) both of the same Code, on its importations of parts and accessories of air conditioning
units;
4. In not holding the company liable to the 50% fraud surcharge under Section 183 of the Tax Code on
its importations of parts and accessories of air conditioning units, notwithstanding the finding of said
court that the respondent company fraudulently misdeclared the said importations;
5. In holding the respondent company liable for P174,141.62 as compensating tax and 25% surcharge
instead of P740,587.86 as deficiency advance sales tax, deficiency manufacturers tax and 25% and 50%
surcharge for the period from June 1, 1948 to December 31, 1956.
The main issue revolves on the question of whether or not Engineering is a manufacturer of air
conditioning units under Section 185(m), supra, in relation to Sections 183(b) and 194 of the Code, or
a contractor under Section 191 of the same Code.
The Commissioner contends that Engineering is a manufacturer and seller of air conditioning units and
parts or accessories thereof and, therefore, it is subject to the 30% advance sales tax prescribed by
Section 185(m) of the Tax Code, in relation to Section 194 of the same, which defines a manufacturer as
follows:
Section 194. Words and Phrases Defined. In applying the provisions of this Title, words and phrases
shall be taken in the sense and extension indicated below:
xxx xxx xxx
(x) "Manufacturer" includes every person who by physical or chemical process alters the exterior texture
or form or inner substance of any raw material or manufactured or partially manufactured products in
such manner as to prepare it for a special use or uses to which it could not have been put in its original
condition, or who by any such process alters the quality of any such material or manufactured or partially
manufactured product so as to reduce it to marketable shape, or prepare it for any of the uses of industry,
or who by any such process combines any such raw material or manufactured or partially manufactured
products with other materials or products of the same or of different kinds and in such manner that the
finished product of such process of manufacture can be put to special use or uses to which such raw
material or manufactured or partially manufactured products in their original condition could not have
been put, and who in addition alters such raw material or manufactured or partially manufactured
products, or combines the same to produce such finished products for the purpose of their sale or
distribution to others and not for his own use or consumption.
In answer to the above contention, Engineering claims that it is not a manufacturer and setter of
air-conditioning units and spare parts or accessories thereof subject to tax under Section 185(m) of the
Tax Code, but a contractor engaged in the design, supply and installation of the central type of
air-conditioning system subject to the 3% tax imposed by Section 191 of the same Code, which is
essentially a tax on the sale of services or labor of a contractor rather than on the sale of articles subject
to the tax referred to in Sections 184, 185 and 186 of the Code.
The arguments of both the Engineering and the Commissioner call for a clarification of the term
contractor as well as the distinction between a contract of sale and contract for furnishing services, labor
and materials. The distinction between a contract of sale and one for work, labor and materials is tested
by the inquiry whether the thing transferred is one not in existence and which never would have existed
but for the order of the party desiring to acquire it, or a thing which would have existed and has been the
subject of sale to some other persons even if the order had not been given. 2 If the article ordered by the
purchaser is exactly such as the plaintiff makes and keeps on hand for sale to anyone, and no change or
modification of it is made at defendant's request, it is a contract of sale, even though it may be entirely
made after, and in consequence of, the defendants order for it. 3
Our New Civil Code, likewise distinguishes a contract of sale from a contract for a piece of work thus:
Art. 1467. A contract for the delivery at a certain price of an article which the vendor in the ordinary
course of his business manufactures or procures for the general market, whether the same is on hand at
the time or not, is a contract of sale, but if the goods are to be manufactured specially for the customer
and upon his special order and not for the general market, it is a contract for a piece of work.
The word "contractor" has come to be used with special reference to a person who, in the pursuit of the
independent business, undertakes to do a specific job or piece of work for other persons, using his own
means and methods without submitting himself to control as to the petty details. (Araas, Annotations
and Jurisprudence on the National Internal Revenue Code, p. 318, par. 191 (2), 1970 Ed.) The true test
of a contractor as was held in the cases of Luzon Stevedoring Co., vs. Trinidad, 43, Phil. 803, 807-808,
andLa 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.
After going over the three volumes of stenographic notes and the voluminous record of the BIR and the
CTA as well as the exhibits submitted by both parties, We find that Engineering did not manufacture air
conditioning units for sale to the general public, but imported some items (as refrigeration compressors
in complete set, heat exchangers or coils, t.s.n. p. 39) which were used in executing contracts entered
into by it. Engineering, therefore, undertook negotiations and execution of individual contracts for the
design, supply and installation of air conditioning units of the central type (t.s.n. pp. 20-36; Exhs. "F",
"G", "H", "I", "J", "K", "L", and "M"), taking into consideration in the process such factors as the area of
the space to be air conditioned; the number of persons occupying or would be occupying the premises;
the purpose for which the various air conditioning areas are to be used; and the sources of heat gain or
cooling load on the plant such as sun load, lighting, and other electrical appliances which are or may be
in the plan. (t.s.n. p. 34, Vol. I) Engineering also testified during the hearing in the Court of Tax Appeals
that relative to the installation of air conditioning system, Engineering designed and engineered
complete each particular plant and that no two plants were identical but each had to be engineered
separately.
As found by the lower court, which finding 4 We adopt
Engineering, in a nutshell, fabricates, assembles, supplies and installs in the buildings of its various
customers the central type air conditioning system; prepares the plans and specifications therefor which
are distinct and different from each other; the air conditioning units and spare parts or accessories
thereof used by petitioner are not the window type of air conditioner which are manufactured, assembled
and produced locally for sale to the general market; and the imported air conditioning units and spare
parts or accessories thereof are supplied and installed by petitioner upon previous orders of its
customers conformably with their needs and requirements.
The facts and circumstances aforequoted support the theory that Engineering is a contractor rather than
a manufacturer.
The Commissioner in his Brief argues that "it is more in accord with reason and sound business
management to say that anyone who desires to have air conditioning units installed in his premises and
who is in a position and willing to pay the price can order the same from the company (Engineering) and,
therefore, Engineering could have mass produced and stockpiled air conditioning units for sale to the
public or to any customer with enough money to buy the same." This is untenable in the light of the fact
that air conditioning units, packaged, or what we know as self-contained air conditioning units, are
distinct from the central system which Engineering dealt in. To Our mind, the distinction as explained by
Engineering, in its Brief, quoting from books, is not an idle play of words as claimed by the Commissioner,
but a significant fact which We just cannot ignore. As quoted by Engineering Equipment & Supply Co.,
from an Engineering handbook by L.C. Morrow, and which We reproduce hereunder for easy reference:
... there is a great variety of equipment in use to do this job (of air conditioning). Some devices are
designed to serve a specific type of space; others to perform a specific function; and still others as
components to be assembled into a tailor-made system to fit a particular building. Generally, however,
they may be grouped into two classifications unitary and central system.
The unitary equipment classification includes those designs such as room air conditioner, where all of the
functional components are included in one or two packages, and installation involves only making
service connection such as electricity, water and drains. Central-station systems, often referred to as
applied or built-up systems, require the installation of components at different points in a building and
their interconnection.
The room air conditioner is a unitary equipment designed specifically for a room or similar small space.
It is unique among air conditioning equipment in two respects: It is in the electrical appliance
classification, and it is made by a great number of manufacturers.
There is also the testimony of one Carlos Navarro, a licensed Mechanical and Electrical Engineer, who
was once the Chairman of the Board of Examiners for Mechanical Engineers and who was allegedly
responsible for the preparation of the refrigeration and air conditioning code of the City of Manila, who
said that "the central type air conditioning system is an engineering job that requires planning and
meticulous layout due to the fact that usually architects assign definite space and usually the spaces they
assign are very small and of various sizes. Continuing further, he testified:
I don't think I have seen central type of air conditioning machinery room that are exactly alike because
all our buildings here are designed by architects dissimilar to existing buildings, and usually they don't
coordinate and get the advice of air conditioning and refrigerating engineers so much so that when we
come to design, we have to make use of the available space that they are assigning to us so that we have
to design the different component parts of the air conditioning system in such a way that will be
accommodated in the space assigned and afterwards the system may be considered as a definite portion
of the building. ...
Definitely there is quite a big difference in the operation because the window type air conditioner is a sort
of compromise. In fact it cannot control humidity to the desired level; rather the manufacturers, by hit
and miss, were able to satisfy themselves that the desired comfort within a room could be made by a
definite setting of the machine as it comes from the factory; whereas the central type system definitely
requires an intelligent operator. (t.s.n. pp. 301-305, Vol. II)
The point, therefore, is this Engineering definitely did not and was not engaged in the manufacture of
air conditioning units but had its services contracted for the installation of a central system. The cases
cited by the Commissioner (Advertising Associates, Inc. vs. Collector of Customs, 97, Phil. 636;
Celestino Co & Co. vs. Collector of Internal Revenue, 99 Phil. 841 and Manila Trading & Supply Co. vs.
City of Manila, 56 O.G. 3629), are not in point. Neither are they applicable because the facts in all the
cases cited are entirely different. Take for instance the case of Celestino Co where this Court held the
taxpayer to be a manufacturer rather than a contractor of sash, doors and windows manufactured in its
factory. Indeed, from the very start, Celestino Co intended itself to be a manufacturer of doors, windows,
sashes etc. as it did register a special trade name for its sash business and ordered company stationery
carrying the bold print "ORIENTAL SASH FACTORY (CELESTINO CO AND COMPANY, PROP.) 926 Raon St.,
Quiapo, Manila, Tel. No. etc., Manufacturers of All Kinds of Doors, Windows ... ." Likewise, Celestino Co
never put up a contractor's bond as required by Article 1729 of the Civil Code. Also, as a general rule,
sash factories receive orders for doors and windows of special design only in particular cases, but the
bulk of their sales is derived from ready-made doors and windows of standard sizes for the average
home, which "sales" were reflected in their books of accounts totalling P118,754.69 for the period from
January, 1952 to September 30, 1952, or for a period of only nine (9) months. This Court found said sum
difficult to have been derived from its few customers who placed special orders for these items. Applying
the abovestated facts to the case at bar, We found them to he inapposite. Engineering advertised itself
as Engineering Equipment and Supply Company, Machinery Mechanical Supplies, Engineers, Contractors,
174 Marques de Comillas, Manila (Exh. "B" and "15" BIR rec. p. 186), and not as manufacturers. It
likewise paid the contractors tax on all the contracts for the design and construction of central system as
testified to by Mr. Rey Parker, its President and General Manager. (t.s.n. p. 102, 103) Similarly,
Engineering did not have ready-made air conditioning units for sale but as per testimony of Mr. Parker
upon inquiry of Judge Luciano of the CTA
Q Aside from the general components, which go into air conditioning plant or system of the central
type which your company undertakes, and the procedure followed by you in obtaining and executing
contracts which you have already testified to in previous hearing, would you say that the covering
contracts for these different projects listed ... referred to in the list, Exh. "F" are identical in every respect?
I mean every plan or system covered by these different contracts are identical in standard in every
respect, so that you can reproduce them?
A No, sir. They are not all standard. On the contrary, none of them are the same. Each one must be
designed and constructed to meet the particular requirements, whether the application is to be operated.
(t.s.n. pp. 101-102)
What We consider as on all fours with the case at bar is the case of S.M. Lawrence Co. vs.
McFarland,Commissioner of Internal Revenue of the State of Tennessee and McCanless, 355 SW 2d, 100,
101, "where the cause presents the question of whether one engaged in the business of contracting for
the establishment of air conditioning system in buildings, which work requires, in addition to the
furnishing of a cooling unit, the connection of such unit with electrical and plumbing facilities and the
installation of ducts within and through walls, ceilings and floors to convey cool air to various parts of the
building, is liable for sale or use tax as a contractor rather than a retailer of tangible personal property.
Appellee took the Position that appellant was not engaged in the business of selling air conditioning
equipment as such but in the furnishing to its customers of completed air conditioning systems pursuant
to contract, was a contractor engaged in the construction or improvement of real property, and as such
was liable for sales or use tax as the consumer of materials and equipment used in the consummation of
contracts, irrespective of the tax status of its contractors. To transmit the warm or cool air over the
buildings, the appellant installed system of ducts running from the basic units through walls, ceilings and
floors to registers. The contract called for completed air conditioning systems which became permanent
part of the buildings and improvements to the realty." The Court held the appellant a contractor which
used the materials and the equipment upon the value of which the tax herein imposed was levied in the

performance of its contracts with its customers, and that the customers did not purchase the equipment
and have the same installed.
Applying the facts of the aforementioned case to the present case, We see that the supply of air
conditioning units to Engineer's various customers, whether the said machineries were in hand or not,
was especially made for each customer and installed in his building upon his special order. The air
conditioning units installed in a central type of air conditioning system would not have existed but for the
order of the party desiring to acquire it and if it existed without the special order of Engineering's
customer, the said air conditioning units were not intended for sale to the general public. Therefore, We
have but to affirm the conclusion of the Court of Tax Appeals that Engineering is a contractor rather than
a manufacturer, subject to the contractors tax prescribed by Section 191 of the Code and not to the
advance sales tax imposed by Section 185(m) in relation to Section 194 of the same Code. Since it has
been proved to Our satisfaction that Engineering imported air conditioning units, parts or accessories
thereof for use in its construction business and these items were never sold, resold, bartered or
exchanged, Engineering should be held liable to pay taxes prescribed under Section 190 5 of the Code.
This compensating tax is not a tax on the importation of goods but a tax on the use of imported goods
not subject to sales tax. Engineering, therefore, should be held liable to the payment of 30%
compensating tax in accordance with Section 190 of the Tax Code in relation to Section 185(m) of the
same, but without the 50% mark up provided in Section 183(b).
II
We take up next the issue of fraud. The Commissioner charged Engineering with misdeclaration of the
imported air conditioning units and parts or accessories thereof so as to make them subject to a lower
rate of percentage tax (7%) under Section 186 of the Tax Code, when they are allegedly subject to a
higher rate of tax (30%) under its Section 185(m). This charge of fraud was denied by Engineering but
the Court of Tax Appeals in its decision found adversely and said"
... We are amply convinced from the evidence presented by respondent that petitioner deliberately and
purposely misdeclared its importations. This evidence consists of letters written by petitioner to its
foreign suppliers, instructing them on how to invoice and describe the air conditioning units ordered by
petitioner. ... (p. 218 CTA rec.)
Despite the above findings, however, the Court of Tax Appeals absolved Engineering from paying the
50% surcharge prescribe by Section 183(a) of the Tax Code by reasoning out as follows:
The imposition of the 50% surcharge prescribed by Section 183(a) of the Tax Code is based on willful
neglect to file the monthly return within 20 days after the end of each month or in case a false or
fraudulent return is willfully made, it can readily be seen, that petitioner cannot legally be held subject
to the 50% surcharge imposed by Section 183(a) of the Tax Code. Neither can petitioner be held subject
to the 50% surcharge under Section 190 of the Tax Code dealing on compensating tax because the
provisions thereof do not include the 50% surcharge. Where a particular provision of the Tax Code does
not impose the 50% surcharge as fraud penalty we cannot enforce a non-existing provision of law
notwithstanding the assessment of respondent to the contrary. Instances of the exclusion in the Tax
Code of the 50% surcharge are those dealing on tax on banks, taxes on receipts of insurance companies,
and franchise tax. However, if the Tax Code imposes the 50% surcharge as fraud penalty, it expressly so
provides as in the cases of income tax, estate and inheritance taxes, gift taxes, mining tax, amusement
tax and the monthly percentage taxes. Accordingly, we hold that petitioner is not subject to the 50%
surcharge despite the existence of fraud in the absence of legal basis to support the importation thereof.
(p. 228 CTA rec.)
We have gone over the exhibits submitted by the Commissioner evidencing fraud committed by
Engineering and We reproduce some of them hereunder for clarity.
As early as March 18, 1953, Engineering in a letter of even date wrote to Trane Co. (Exh. "3-K" pp.
152-155, BIR rec.) viz:
Your invoices should be made in the name of Madrigal & Co., Inc., Manila, Philippines, c/o Engineering
Equipment & Supply Co., Manila, Philippines forwarding all correspondence and shipping papers
concerning this order to us only and not to the customer.

When invoicing, your invoices should be exactly as detailed in the customer's Letter Order dated March
14th, 1953 attached. This is in accordance with the Philippine import licenses granted to Madrigal & Co.,
Inc. and such details must only be shown on all papers and shipping documents for this shipment. No
mention of words air conditioning equipment should be made on any shipping documents as well as on
the cases. Please give this matter your careful attention, otherwise great difficulties will be encountered
with the Philippine Bureau of Customs when clearing the shipment on its arrival in Manila. All invoices
and cases should be marked "THIS EQUIPMENT FOR RIZAL CEMENT CO."
The same instruction was made to Acme Industries, Inc., San Francisco, California in a letter dated
March 19, 1953 (Exh. "3-J-1" pp. 150-151, BIR rec.)
On April 6, 1953, Engineering wrote to Owens-Corning Fiberglass Corp., New York, U.S.A. (Exh. "3-1" pp.
147-149, BIR rec.) also enjoining the latter from mentioning or referring to the term 'air conditioning'
and to describe the goods on order as Fiberglass pipe and pipe fitting insulation instead. Likewise on April
30, 1953, Engineering threatened to discontinue the forwarding service of Universal Transcontinental
Corporation when it wrote Trane Co. (Exh. "3-H" p. 146, BIR rec.):
It will be noted that the Universal Transcontinental Corporation is not following through on the
instructions which have been covered by the above correspondence, and which indicates the necessity of
discontinuing the use of the term "Air conditioning Machinery or Air Coolers". Our instructions concerning
this general situation have been sent to you in ample time to have avoided this error in terminology, and
we will ask that on receipt of this letter that you again write to Universal Transcontinental Corp. and
inform them that, if in the future, they are unable to cooperate with us on this requirement, we will
thereafter be unable to utilize their forwarding service. Please inform them that we will not tolerate
another failure to follow our requirements.
And on July 17, 1953 (Exh- "3-g" p. 145, BIR rec.) Engineering wrote Trane Co. another letter, viz:
In the past, we have always paid the air conditioning tax on climate changers and that mark is
recognized in the Philippines, as air conditioning equipment. This matter of avoiding any tie-in on air
conditioning is very important to us, and we are asking that from hereon that whoever takes care of the
processing of our orders be carefully instructed so as to avoid again using the term "Climate changers"
or in any way referring to the equipment as "air conditioning."
And in response to the aforequoted letter, Trane Co. wrote on July 30, 1953, suggesting a solution, viz:
We feel that we can probably solve all the problems by following the procedure outlined in your letter of
March 25, 1953 wherein you stated that in all future jobs you would enclose photostatic copies of your
import license so that we might make up two sets of invoices: one set describing equipment ordered
simply according to the way that they are listed on the import license and another according to our
ordinary regular methods of order write-up. We would then include the set made up according to the
import license in the shipping boxes themselves and use those items as our actual shipping documents
and invoices, and we will send the other regular invoice to you, by separate correspondence. (Exh- No.
"3-F-1", p. 144 BIR rec.)
Another interesting letter of Engineering is one dated August 27, 1955 (Exh. "3-C" p. 141 BIR rec.)
In the process of clearing the shipment from the piers, one of the Customs inspectors requested to see
the packing list. Upon presenting the packing list, it was discovered that the same was prepared on a
copy of your letterhead which indicated that the Trane Co. manufactured air conditioning, heating and
heat transfer equipment. Accordingly, the inspectors insisted that this equipment was being imported for
air conditioning purposes. To date, we have not been able to clear the shipment and it is possible that we
will be required to pay heavy taxes on equipment.
The purpose of this letter is to request that in the future, no documents of any kind should be sent with
the order that indicate in any way that the equipment could possibly be used for air conditioning.
It is realized that this a broad request and fairly difficult to accomplish and administer, but we believe
with proper caution it can be executed. Your cooperation and close supervision concerning these matters
will be appreciated. (Emphasis supplied)

The aforequoted communications are strongly indicative of the fraudulent intent of Engineering to
misdeclare its importation of air conditioning units and spare parts or accessories thereof to evade
payment of the 30% tax. And since the commission of fraud is altogether too glaring, We cannot agree
with the Court of Tax Appeals in absolving Engineering from the 50% fraud surcharge, otherwise We will
be giving premium to a plainly intolerable act of tax evasion. As aptly stated by then Solicitor General,
now Justice, Antonio P. Barredo: 'this circumstance will not free it from the 50% surcharge because in
any case whether it is subject to advance sales tax or compensating tax, it is required by law to truly
declare its importation in the import entries and internal revenue declarations before the importations
maybe released from customs custody. The said entries are the very documents where the nature,
quantity and value of the imported goods declared and where the customs duties, internal revenue taxes,
and other fees or charges incident to the importation are computed. These entries, therefore, serve the
same purpose as the returns required by Section 183(a) of the Code.'
Anent the 25% delinquency surcharge, We fully agree to the ruling made by the Court of Tax Appeals
and hold Engineering liable for the same. As held by the lower court:
At first blush it would seem that the contention of petitioner that it is not subject to the delinquency,
surcharge of 25% is sound, valid and tenable. However, a serious study and critical analysis of the
historical provisions of Section 190 of the Tax Code dealing on compensating tax in relation to Section
183(a) of the same Code, will show that the contention of petitioner is without merit. The original text of
Section 190 of Commonwealth Act 466, otherwise known as the National Internal Revenue Code, as
amended by Commonwealth Act No. 503, effective on October 1, 1939, does not provide for the filing of
a compensation tax return and payment of the 25 % surcharge for late payment thereof. Under the
original text of Section 190 of the Tax Code as amended by Commonwealth Act No. 503, the contention
of the petitioner that it is not subject to the 25% surcharge appears to be legally tenable. However,
Section 190 of the Tax Code was subsequently amended by the Republic Acts Nos. 253, 361, 1511 and
1612 effective October 1, 1946, July 1, 1948, June 9, 1949, June 16, 1956 and August 24, 1956
respectively, which invariably provides among others, the following:
... If any article withdrawn from the customhouse or the post office without payment of the
compensating tax is subsequently used by the importer for other purposes, corresponding entry should
be made in the books of accounts if any are kept or a written notice thereof sent to the Collector of
Internal Revenue and payment of the corresponding compensating tax made within 30 days from the
date of such entry or notice and if tax is not paid within such period the amount of the tax shall be
increased by 25% the increment to be a part of the tax.
Since the imported air conditioning units-and spare parts or accessories thereof are subject to the
compensating tax of 30% as the same were used in the construction business of Engineering, it is
incumbent upon the latter to comply with the aforequoted requirement of Section 190 of the Code, by
posting in its books of accounts or notifying the Collector of Internal Revenue that the imported articles
were used for other purposes within 30 days. ... Consequently; as the 30% compensating tax was not
paid by petitioner within the time prescribed by Section 190 of the Tax Code as amended, it is therefore
subject to the 25% surcharge for delinquency in the payment of the said tax. (pp. 224-226 CTA rec.)
III
Lastly the question of prescription of the tax assessment has been put in issue. Engineering contends
that it was not guilty of tax fraud in effecting the importations and, therefore, Section 332(a) prescribing
ten years is inapplicable, claiming that the pertinent prescriptive period is five years from the date the
questioned importations were made. A review of the record however reveals that Engineering did file a
tax return or declaration with the Bureau of Customs before it paid the advance sales tax of 7%. And the
declaration filed reveals that it did in fact misdeclare its importations. Section 332 of the Tax Code which
provides:
Section 332. Exceptions as to period of limitation of assessment and collection of taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return, the
tax may be assessed, or a proceeding in court for the collection of such tax may be begun without
assessment at any time within ten years after the discovery of the falsity, fraud or omission.

is applicable, considering the preponderance of evidence of fraud with the intent to evade the higher rate
of percentage tax due from Engineering. The, tax assessment was made within the period prescribed by
law and prescription had not set in against the Government.
WHEREFORE, the decision appealed from is affirmed with the modification that Engineering is hereby
also made liable to pay the 50% fraud surcharge.
SO ORDERED.

G.R. No. L-11491 August 23, 1918
ANDRES QUIROGA, plaintiff-appellant, vs. PARSONS HARDWARE CO., defendant-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.

Quiroga vs. Parsons Hardware
38 Phil 501
August 1918
FACTS:
On January 24, 1911, plaintiff Andres Quiroga and J. Parsons (to whose rights and obligations the
present defendant Parsons Hardware Co. later subrogated itself) entered into a contract, where it was
stated among others that Quiroga grants in favor of Parsons the exclusive rights to sell his beds in the
Visayan Islands under some conditions. One of the said conditions provided that 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 while another one passed on to Parsons the obligation to order by the dozen and in no other
manner the beds from Quiroga.
Alleging that the Parsons was his agent for the sale of his beds in Iloilo, Quiroga filed a complaint against
the former for violating the following obligations implied in what he contended to be a contract of
commercial agency: 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.
ISSUE:
Is the defendant, by reason of the contract, a purchaser or an agent of the plaintiff for the sale of the
latters beds in Iloilo?
COURT RULING:
The Supreme Court declared 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.
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. 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.

G.R. No. L-47538 June 20, 1941
GONZALO PUYAT & SONS, INC., petitioner, vs. ARCO AMUSEMENT COMPANY (formerly known
as Teatro Arco), respondent.
LAUREL, J.:
This is a petition for the issuance of a writ of certiorari to the Court of Appeals for the purpose of
reviewing its Amusement Company (formerly known as Teatro Arco), plaintiff-appellant, vs. Gonzalo
Puyat and Sons. Inc., defendant-appellee."
It appears that the respondent herein brought an action against the herein petitioner in the Court of First
Instance of Manila to secure a reimbursement of certain amounts allegedly overpaid by it on account of
the purchase price of sound reproducing equipment and machinery ordered by the petitioner from the
Starr Piano Company of Richmond, Indiana, U.S.A. The facts of the case as found by the trial court and
confirmed by the appellate court, which are admitted by the respondent, are as follows:
In the year 1929, the "Teatro Arco", a corporation duly organized under the laws of the Philippine Islands,
with its office in Manila, was engaged in the business of operating cinematographs. In 1930, its name
was changed to Arco Amusement Company. C. S. Salmon was the president, while A. B. Coulette was the
business manager. About the same time, Gonzalo Puyat & Sons, Inc., another corporation doing
business in the Philippine Islands, with office in Manila, in addition to its other business, was acting as
exclusive agents in the Philippines for the Starr Piano Company of Richmond, Indiana, U.S. A. It would
seem that this last company dealt in cinematographer equipment and machinery, and the Arco
Amusement Company desiring to equipt its cinematograph with sound reproducing devices, approached
Gonzalo Puyat & Sons, Inc., thru its then president and acting manager, Gil Puyat, and an employee
named Santos. After some negotiations, it was agreed between the parties, that is to say, Salmon and
Coulette on one side, representing the plaintiff, and Gil Puyat on the other, representing the defendant,
that the latter would, on behalf of the plaintiff, order sound reproducing equipment from the Starr Piano
Company and that the plaintiff would pay the defendant, in addition to the price of the equipment, a 10
per cent commission, plus all expenses, such as, freight, insurance, banking charges, cables, etc. At the
expense of the plaintiff, the defendant sent a cable, Exhibit "3", to the Starr Piano Company, inquiring
about the equipment desired and making the said company to quote its price without discount. A reply
was received by Gonzalo Puyat & Sons, Inc., with the price, evidently the list price of $1,700 f.o.b.
factory Richmond, Indiana. The defendant did not show the plaintiff the cable of inquiry nor the reply but
merely informed the plaintiff of the price of $1,700. Being agreeable to this price, the plaintiff, by means
of Exhibit "1", which is a letter signed by C. S. Salmon dated November 19, 1929, formally authorized the
order. The equipment arrived about the end of the year 1929, and upon delivery of the same to the
plaintiff and the presentation of necessary papers, the price of $1.700, plus the 10 per cent commission
agreed upon and plus all the expenses and charges, was duly paid by the plaintiff to the defendant.
Sometime the following year, and after some negotiations between the same parties, plaintiff and
defendants, another order for sound reproducing equipment was placed by the plaintiff with the
defendant, on the same terms as the first order. This agreement or order was confirmed by the plaintiff
by its letter Exhibit "2", without date, that is to say, that the plaintiff would pay for the equipment the
amount of $1,600, which was supposed to be the price quoted by the Starr Piano Company, plus 10 per
cent commission, plus all expenses incurred. The equipment under the second order arrived in due time,
and the defendant was duly paid the price of $1,600 with its 10 per cent commission, and $160, for all
expenses and charges. This amount of $160 does not represent actual out-of-pocket expenses paid by
the defendant, but a mere flat charge and rough estimate made by the defendant equivalent to 10 per
cent of the price of $1,600 of the equipment.
About three years later, in connection with a civil case in Vigan, filed by one Fidel Reyes against the
defendant herein Gonzalo Puyat & Sons, Inc., the officials of the Arco Amusement Company discovered
that the price quoted to them by the defendant with regard to their two orders mentioned was not the net
price but rather the list price, and that the defendants had obtained a discount from the Starr Piano
Company. Moreover, by reading reviews and literature on prices of machinery and cinematograph
equipment, said officials of the plaintiff were convinced that the prices charged them by the defendant
were much too high including the charges for out-of-pocket expense. For these reasons, they sought to
obtain a reduction from the defendant or rather a reimbursement, and failing in this they brought the
present action.

The trial court held that the contract between the petitioner and the respondent was one of outright
purchase and sale, and absolved that petitioner from the complaint. The appellate court, however, by
a division of four, with one justice dissenting held that the relation between petitioner and respondent
was that of agent and principal, the petitioner acting as agent of the respondent in the purchase of the
equipment in question, and sentenced the petitioner to pay the respondent alleged overpayments in the
total sum of $1,335.52 or P2,671.04, together with legal interest thereon from the date of the filing of
the complaint until said amount is fully paid, as well as to pay the costs of the suit in both instances. The
appellate court further argued that even if the contract between the petitioner and the respondent was
one of purchase and sale, the petitioner was guilty of fraud in concealing the true price and hence would
still be liable to reimburse the respondent for the overpayments made by the latter.
The petitioner now claims that the following errors have been incurred by the appellate court:
I. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, segun hechos, entre la
recurrente y la recurrida existia una relacion implicita de mandataria a mandante en la transaccion de
que se trata, en vez de la de vendedora a compradora como ha declarado el Juzgado de Primera Instncia
de Manila, presidido entonces por el hoy Magistrado Honorable Marcelino Montemayor.
II. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, suponiendo que dicha relacion
fuerra de vendedora a compradora, la recurrente obtuvo, mediante dolo, el consentimiento de la
recurrida en cuanto al precio de $1,700 y $1,600 de las maquinarias y equipos en cuestion, y condenar
a la recurrente ha obtenido de la Starr Piano Company of Richmond, Indiana.
We sustain the theory of the trial court that the contract between the petitioner and the respondent was
one of purchase and sale, and not one of agency, for the reasons now to be stated.
In the first place, the contract is the law between the parties and should include all the things they are
supposed to have been agreed upon. What does not appear on the face of the contract should be
regarded merely as "dealer's" or "trader's talk", which can not bind either party. (Nolbrook v. Conner, 56
So., 576, 11 Am. Rep., 212; Bank v. Brosscell, 120 III., 161; Bank v. Palmer, 47 III., 92; Hosser v.
Copper, 8 Allen, 334; Doles v. Merrill, 173 Mass., 411.) The letters, Exhibits 1 and 2, by which the
respondent accepted the prices of $1,700 and $1,600, respectively, for the sound reproducing
equipment subject of its contract with the petitioner, are clear in their terms and admit no other
interpretation that the respondent in question at the prices indicated which are fixed and determinate.
The respondent admitted in its complaint filed with the Court of First Instance of Manila that the
petitioner agreed to sell to it the first sound reproducing equipment and machinery. The third paragraph
of the respondent's cause of action states:
3. That on or about November 19, 1929, the herein plaintiff (respondent) and defendant (petitioner)
entered into an agreement, under and by virtue of which the herein defendant was to secure from the
United States, and sell and deliver to the herein plaintiff, certain sound reproducing equipment and
machinery, for which the said defendant, under and by virtue of said agreement, was to receive the
actual cost price plus ten per cent (10%), and was also to be reimbursed for all out of pocket expenses
in connection with the purchase and delivery of such equipment, such as costs of telegrams, freight, and
similar expenses. (Emphasis ours.)
We agree with the trial judge that "whatever unforseen events might have taken place unfavorable to
the defendant (petitioner), such as change in prices, mistake in their quotation, loss of the goods not
covered by insurance or failure of the Starr Piano Company to properly fill the orders as per specifications,
the plaintiff (respondent) might still legally hold the defendant (petitioner) to the prices fixed of $1,700
and $1,600." This is incompatible with the pretended relation of agency between the petitioner and the
respondent, because in agency, the agent is exempted from all liability in the discharge of his
commission provided he acts in accordance with the instructions received from his principal (section 254,
Code of Commerce), and the principal must indemnify the agent for all damages which the latter may
incur in carrying out the agency without fault or imprudence on his part (article 1729, Civil Code).
While the latters, Exhibits 1 and 2, state that the petitioner was to receive ten per cent (10%)
commission, this does not necessarily make the petitioner an agent of the respondent, as this provision
is only an additional price which the respondent bound itself to pay, and which stipulation is not
incompatible with the contract of purchase and sale. (See Quiroga vs. Parsons Hardware Co., 38 Phil.,
501.)

In the second place, to hold the petitioner an agent of the respondent in the purchase of equipment and
machinery from the Starr Piano Company of Richmond, Indiana, is incompatible with the admitted fact
that the petitioner is the exclusive agent of the same company in the Philippines. It is out of the ordinary
for one to be the agent of both the vendor and the purchaser. The facts and circumstances indicated do
not point to anything but plain ordinary transaction where the respondent enters into a contract of
purchase and sale with the petitioner, the latter as exclusive agent of the Starr Piano Company in the
United States.
It follows that the petitioner as vendor is not bound to reimburse the respondent as vendee for any
difference between the cost price and the sales price which represents the profit realized by the vendor
out of the transaction. This is the very essence of commerce without which merchants or middleman
would not exist.
The respondents contends that it merely agreed to pay the cost price as distinguished from the list price,
plus ten per cent (10%) commission and all out-of-pocket expenses incurred by the petitioner. The
distinction which the respondents seeks to draw between the cost price and the list price we consider to
be spacious. It is to be observed that the twenty-five per cent (25%) discount granted by the Starr piano
Company to the petitioner is available only to the latter as the former's exclusive agent in the Philippines.
The respondent could not have secured this discount from the Starr Piano Company and neither was the
petitioner willing to waive that discount in favor of the respondent. As a matter of fact, no reason is
advanced by the respondent why the petitioner should waive the 25 per cent discount granted it by the
Starr Piano Company in exchange for the 10 percent commission offered by the respondent. Moreover,
the petitioner was not duty bound to reveal the private arrangement it had with the Starr Piano Company
relative to such discount to its prospective customers, and the respondent was not even aware of such
an arrangement. The respondent, therefore, could not have offered to pay a 10 per cent commission to
the petitioner provided it was given the benefit of the 25 per cent discount enjoyed by the petitioner. It
is well known that local dealers acting as agents of foreign manufacturers, aside from obtaining a
discount from the home office, sometimes add to the list price when they resell to local purchasers. It
was apparently to guard against an exhorbitant additional price that the respondent sought to limit it to
10 per cent, and the respondent is estopped from questioning that additional price. If the respondent
later on discovers itself at the short end of a bad bargain, it alone must bear the blame, and it cannot
rescind the contract, much less compel a reimbursement of the excess price, on that ground alone. The
respondent could not secure equipment and machinery manufactured by the Starr Piano Company
except from the petitioner alone; it willingly paid the price quoted; it received the equipment and
machinery as represented; and that was the end of the matter as far as the respondent was concerned.
The fact that the petitioner obtained more or less profit than the respondent calculated before entering
into the contract or reducing the price agreed upon between the petitioner and the respondent. Not
every concealment is fraud; and short of fraud, it were better that, within certain limits, business
acumen permit of the loosening of the sleeves and of the sharpening of the intellect of men and women
in the business world.
The writ of certiorari should be, as it is hereby, granted. The decision of the appellate court is accordingly
reversed and the petitioner is absolved from the respondent's complaint in G. R. No. 1023, entitled "Arco
Amusement Company (formerly known as Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat & Sons,
Inc., defendants-appellee," without pronouncement regarding costs. So ordered.
Avancea, C.J., Diaz, Moran and Horrilleno, JJ., concur.

Lo vs. KJS Eco-Formwork System Phil., Inc (2003)

Dacion en pago
case
Lo is building contractor doing business under the name Sans Enterprises. On February 1990, Lo
ordered P540,425.80 worth of scaffolding equipments from KJS. Lo paid P150,000 as downpayment
andthe balance was made payable in 10 monthly installments. KJS delivered the scaffoldings to theLo,
but Lo was only able to pay the first 2 monthly installments as his business encounteredfinancial
difficulties and he was unable to settle his obligation to respondent despite oral andwritten demands
made against him. On, October 1990 petitioner and respondent executed aDeed of Assignment where Lo
assigned to KJS his receivables in the amount of P335,462.14from Jomero Realty Corporation. However,
when KJS tried to collect the credit from JomeroRealty, the latter refused to honor the DOA because it
claimed that petitioner was also indebtedto it. When KJS demanded from Lo the payment of his
obligation, Lo refused to pay claiming thathis obligation have been extinguished when they executed the
DOA.
Was the obligation to pay extinguished by the DOA?
NO. The assignment of credit, which is in the nature of a sale of personal property, produced theeffects
of a dation in payment which may extinguish the obligation. However, as in any contract of sale, the
vendor or assignor is bound by certain warranties. The petitioner, as vendor/assignor, isbound 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 Lo because of debt compensation, Lohave breached his
obligation under the DOA in warranting the existence of the credit.
NOTES
An assignment by virtue of which the owner of a credit, known as the assignor, by 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 thepower to enforce it to the same as the assignor could enforce it against the debtor.
\
acion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts
it as equivalent payment of an outstanding debt. The undertaking really partakesin one sense the nature
of sale, that is, the creditor is really buying the thing or property of thedebtor as payment for which to
be charged against the debtors debt.
Requisites of a valid
d a t i o n
in payment there must be:
1. performance of the prestation in lieu of payment (animo solvendi)
which may consist inthe delivery of a corporeal thing or a real right or a credit against the third
person2. some difference between the prestation due and that which is given in substitution (aliud pro
alio)
3. An agreement between the creditor that the obligation is immediately extinguished byreason of a
prestation different from that due.

LO V. KJS ECO-FRAMEWORK SYSTEM PHIL INC G.R. NO 149420 (2003)
FACTS: Respondent KJS Eco-Framework System is a corporation engaged in the sale of steel scaffoldings,
while petitioner Sonny Lo, doing business under the name of Sans Enterprises, is a building contractor.
1. In February 1990, petitioner ordered scaffolding equipments from the respondent amounting to
P540, 425.80. He paid a down payment of P150,000 and the balance was to be paid in 10 monthly
installments
2. However, Lo was only able to pay the first 2 monthly installments due to financial difficulties despite
demands from the respondent
3. In October 1990, petitioner and respondent executed a deed of assignment whereby petitioner
assigned to respondent his receivables of P335,462.14 from Jomero Realty Corp
4. But when respondent tried to collect the said credit from Jomero Realty Corp, the latter refused to
honor the deed of assignment because it claimed that the petitioner was also indebted to it. As such, KJS
sent Lo a demand letter but the latter refused to pay, claiming that his obligation had been extinguished
when they executed the deed of assignment
5. Subsequently, respondent filed an action for recovery of sum of money against petitioner.
6. Petitioner argued that his obligation was extinguished with the execution of the deed of assignment
of credit. Respondent alleged that Jomero Realty Corp refused to honor the deed of assignment because
it claimed that the petitioner had outstanding indebtedness to it
7. The trial court dismissed the complaint on the ground that the assignment of credit extinguished the
bligation
8. Upon appeal, CA reversed the trial court decision and held in favor of KJS. CA held that
a. Petitioner failed to comply with his warranty under the deed
b. The object of the deed did not exist at the time of the transaction, rendering it void under Art 1409
NCC
c. Petitioner violated the terms of the deed of assignment when he failed to execute and do all acts
necessary to effectually enable the respondent to recover the collectibles
ISSUE: WON the deed of assignment extinguished the petitioners obligation
HELD: No, the petitioners obligation was not extinguished with the execution of the deed of assignment.
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.
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. 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. 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.
Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal property,
produced the effects of a dation in payment which may extinguish the obligation. 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:
The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the
sale, unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has
been so expressly stipulated or unless the insolvency was prior to the sale and of common knowledge.
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 meant that its
obligation to petitioner has been extinguished by compensation. In other words, respondent alleged the
non-existence of the credit and asserted its claim to petitioners warranty under the
assignment. Therefore, it necessary for the petitioner to make good its warranty and pay the obligation.
Furthermore, the petitioner breached his obligation under the Deed of Assignment, to 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.
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
ture of Salerespondent the amount of his indebtedness

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G.R. No.

L-11827 July 31, 1961

FERNANDO A. GAITE, plaintiff-appellee, vs. SABELO FONACIER, GEORGE KRAKOWER,

REYES, J.B.L., J.:

MALIPO L Juris Doctor UBLC Sales 1

The main issues presented by appellants in this appeal are:

MALIPO L Juris Doctor UBLC Sales 6

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

MALIPO L Juris Doctor UBLC Sales 7

Necessarily, and as an inevitable consequence, Transfer Certificates of Title Nos. 36113/T-172,

The Ruling of the Trial Court

All the foregoing considered, this case is DISMISSED.

The Ruling of the Court of Appeals

Hence, the instant petition.

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

MALIPO L Juris Doctor UBLC Sales 9

We find the petition without merit.

Whether Petitioners have a legal interest

Whether the Deeds of Sale are void

MALIPO L Juris Doctor UBLC Sales 10

Whether the Deeds of Sale are void

Article 1470 of the Civil Code further provides:

'ssue: (hether or not inade&uate consideration renders a contract o$ sale void.)

MALIPO L Juris Doctor UBLC Sales 12

CELESTINO CO & COMPANY, petitioner, vs. COLLECTOR OF INTERNAL

Appeal from a decision of the Court of Tax Appeals.

Said article reads as follows:

The appealed decision is consequently affirmed. So ordered.

MALIPO L Juris Doctor UBLC Sales 15

THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ENGINEERING EQUIPMENT AND

G.R. No. L-27452 June 30, 1975

ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner, vs. THE COMMISSIONER OF

MALIPO L Juris Doctor UBLC Sales 16

1. In holding that the respondent company is a contractor and not a manufacturer.

xxx xxx xxx

As found by the lower court, which finding 4 We adopt

MALIPO L Juris Doctor UBLC Sales 20

MALIPO L Juris Doctor UBLC Sales 21

MALIPO L Juris Doctor UBLC Sales 22

Section 332. Exceptions as to period of limitation of assessment and collection of taxes.

MALIPO L Juris Doctor UBLC Sales 23

MALIPO L Juris Doctor UBLC Sales 24

ANDRES QUIROGA, plaintiff-appellant, vs. PARSONS HARDWARE CO., defendant-appellee.

MALIPO L Juris Doctor UBLC Sales 26

Arellano, C.J., Torres, Johnson, Street and Malcolm, JJ., concur.

MALIPO L Juris Doctor UBLC Sales 27

MALIPO L Juris Doctor UBLC Sales 28

MALIPO L Juris Doctor UBLC Sales 29

MALIPO L Juris Doctor UBLC Sales 30

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

MALIPO L Juris Doctor UBLC Sales 31

MALIPO L Juris Doctor UBLC Sales 32

ISSUE: WON the deed of assignment extinguished the petitioners obligation

MALIPO L Juris Doctor UBLC Sales 34

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