3.
Subsequently, a “Confirmatory Extrajudicial Partition Agreement” was
[1] Adelfa Properties, Inc. v. Court of Appeals
G.R. No. 111238 | January 25, 1995 | Option contract v. CTS | Kathleen
Petitioner: ADELFA PROPERTIES, INC.
Respondents: COURT OF APPEALS, ROSARIO JIMENEZ-CASTAÑEDA and SALUD
JIMENEZ
Recit-Ready:
Petitioner bought ½ of a portion of co-owned land from Jimenez brothers. The other
½ was allocated to the respondents (Jimenez sisters) after partition. Petitioner
thereafter entered into an Exclusive Option to Purchase the remaining ½ from the
respondents. P50K “option money” was given to be credited as partial payment and
balance to be paid at a later date. Before they could pay, an annulment case was
filed by the nephews and nieces of the respondents claiming ownership over the
whole portion of the land. This case was subsequently dismissed by the RTC. But
during the pendency of the case, petitioner suspended the payment of the price.
Private respondents, in turn, cancelled the transaction and sold the same portion of
land to another person. Petitioner insists on the transaction and refused to return
the owner’s duplicate copy of the TCT that it holds. The issues raised are whether
or not the contract was a mere option contract and whether there was valid
suspension of payment. The Court ruled that there was a perfected contract to sell
which can be inferred from the acts and intention of the parties. Court further held
that there was a valid suspension of payment but concluded that private
respondents could no longer be compelled to execute the transaction for it validly
rescinded the contract to sell.
Doctrine: A perusal of the contract in this case, as well as the oral and documentary
evidence presented by the parties, readily shows that there is indeed a concurrence
of petitioner’s offer to buy and private respondents’ acceptance thereof. Acceptance
may be shown by the acts, conduct, or words of a party recognizing the existence of
the contract of sale.
The test in determining whether a contract is a “contract of sale or purchase” or a
mere “option” is whether or not the agreement could be specifically enforced.
Check comparative tables in Ratio.
FACTS:
1. Private respondents (Rosario and Salud) and their brothers (Jose and
Dominador) were the registered co-owners of a parcel of land.
2. Jose and Dominador sold their share consisting of 1/2 of said parcel of
land, specifically the eastern portion, to petitioner.
executed by the Jimenezes, wherein the eastern portion of the subject lot,
was adjudicated to Jose and Dominador, while the western portion was
allocated to Rosario and Salud.
4. An “Exclusive Option to Purchase” was executed between petitioner and
private respondents. The terms are:
a. Selling price is P2.86M
b. The sum of P50,000.00 which we received from ADELFA
PROPERTIES, INC. as an option money shall be credited as partial
payment upon the consummation of the sale. Balance on Nov30
c. In case of default by petitioner to pay balance, this option shall
be cancelled and 50% of the option money to be forfeited in our
favor and the remaining 50% will be refunded upon the sale of
said property to a third party
d. All expenses including taxes are for the account of the VENDORS,
and expenses for the registration of the deed of sale in the
Registry of Deeds are for the account of petitioner
5. The owner's copy of the certificate of title issued to Salud had been lost,
a petition for the re-issuance of a new owner's copy of said certificate of
title was filed in court. Eventually, a new owner's copy was issued but it
remained in the possession of Atty. Bernardo (petitioner’s counsel who
acted counsel of Salud for this) until he turned it over to petitioner.
6. Before petitioner could make payment, it received summons regarding a
complaint filed by the nephews and nieces of private respondents against
the latter, Jose and Dominador, and herein petitioner for annulment of the
deed of sale and recovery of ownership.
7. Petitioner informed private respondents that it would hold payment of the
full purchase price and caused to be annotated on the title of the lot its
option contract with private respondents, and its contract of sale with
Jose and Dominador.
8. Private respondents sent Francisca to inform petitioner that they were
cancelling the transaction. Petitioner offered to pay the purchase price
but this was rejected by the respondents.
9. RTC dismissed the annulment case on February 23, 1990. In view of this,
Petitioner caused to be annotated anew on the TCT the exclusive option
to purchase on February 28.
10. But on the same date, private respondents executed a Deed of Conditional
Sale with Emylene Chua over the same parcel of land.
11. On April 16, 1990, Atty. Bernardo wrote private respondents informing the
latter that in view of the dismissal of the case against them, petitioner was
 willing to pay the purchase price, and he requested that the corresponding
deed of absolute sale be executed. This was ignored.
12. On July 27, 1990, private respondents’ counsel sent a letter to petitioner
enclosing therein a check for P25,000.00 representing the refund of 50%
of the option money paid under the exclusive option to purchase. They
also requested petitioner to return the owner’s duplicate copy of the TCT
of respondent Salud but petitioner failed to surrender.
13. Hence the filing of the case for annulment of contract with damages
RTC held that the agreement entered into by the parties was merely an option
contract, and declaring that the suspension of payment by herein petitioner
constituted a counteroffer which, therefore, was tantamount to a rejection of the
option.
CA affirmed in toto and held that the failure of petitioner to pay the purchase price
within the period agreed upon was tantamount to an election by petitioner not to
buy the property.
ISSUES:
(1) Whether or not the “Exclusive Option to Purchase” executed between petitioner
and private respondents is an option contract – NO; Contract to Sell
(2) Whether or not there was a valid suspension of payment of the purchase price
by said petitioner – YES
RATIO:
On the nature of the agreement
An analysis of the facts irresistibly leads to the conclusion that the agreement
between the parties is a contract to sell, and not an option contract or a contract
of sale.
Contract of sale Contract to sell
the title passes to the vendee upon the by agreement the ownership is
delivery of the thing sold reserved in the vendor and is not to
pass until the full payment of the price
the vendor has lost and cannot title is retained by the vendor until the
recover ownership until and unless the full payment of the price, such
contract is resolved or rescinded payment being a positive suspensive
condition and failure of which is not a
breach but an event that prevents the
obligation of the vendor to convey title
from becoming effective
There are two features which convince us that the parties never intended to
transfer ownership to petitioner except upon full payment of the purchase price.
First. The exclusive option to purchase, although it provided for automatic
rescission of the contract and partial forfeiture of the amount already paid in case
of default, does not mention that petitioner is obliged to return possession or
ownership of the property as a consequence of nonpayment. It may legally be
inferred that the parties never intended to transfer ownership to the petitioner prior
to completion of payment of the purchase price.
The deed of absolute sale would have been issued only upon the payment of the
balance of the purchase price, as may be gleaned from the letter dated April 16
where it informed private respondents that it “is now ready and willing to pay you
simultaneously with the execution of the corresponding deed of absolute sale.
Second. It has not been shown that there was delivery of the property, actual or
constructive, made to herein petitioner. The exclusive option to purchase is not
contained in a public instrument the execution of which would have been
considered equivalent to delivery. Neither did petitioner take actual, physical
possession of the property at any given time
Judging from the subsequent acts of the parties, it is undeniable that the intention
of the parties was to enter into a contract to sell. The title of a contract does not
necessarily determine its true nature. The fact that the document is entitled
“Exclusive Option to Purchase” is not controlling where the text thereof shows that
it is a contract to sell.
Option contract Contract of sale
a continuing offer or contract by which fixes definitely the relative rights and
the owner stipulates with another that obligations of both parties at the time
the latter shall have the right to buy the of its execution. The offer and the
property at a fixed price within a acceptance are concurrent, since the
certain time, or under, or in minds of the contracting parties meet
compliance with, certain terms and in the terms of the agreement.
conditions, or which gives to the
owner of the property the right to sell
or demand a sale
It is not a sale of property but a sale of
the right to purchase.
A perusal of the contract in this case, as well as the oral and documentary evidence
presented by the parties, readily shows that there is indeed a concurrence of
petitioner’s offer to buy and private respondents’ acceptance thereof. Acceptance
may be shown by the acts, conduct, or words of a party recognizing the existence
of the contract of sale.
• At the time petitioner made its offer, private respondents suggested that
their TCT be first reconstituted, to which petitioner agreed.
 • After the title was reconstituted, the parties renegotiated the terms of
payment. Private respondents agreed to the counter-offer made by
petitioner.
• As a result, the exclusive option to purchase was prepared by petitioner
and was subsequently signed by private respondents, thereby creating a
perfected contract to sell between them. The agreement as to the object,
the price of the property, and the terms of payment was clear and well-
defined.
• The parties even went beyond the basic requirements of the law by
stipulating regarding the payment of expenses and taxes.
The obligation of petitioner consisted of an obligation to pay the purchase price.
The contract did not simply give petitioner the discretion to pay for the property. It
will be noted that there is nothing in the said contract to show that petitioner was
merely given a certain period within which to exercise its privilege to buy.
The test in determining whether a contract is a “contract of sale or purchase” or a
mere “option” is whether or not the agreement could be specifically enforced.
There is no doubt that the obligation of petitioner to pay the purchase price is
specific, definite and certain, and consequently binding and enforceable.
While there is jurisprudence to the effect that a contract which still provides that
the initial payment shall be totally forfeited in case of default in payment is to be
considered as an option contract, we are not inclined to conform with the findings
that the contract executed between the parties is an option contract, for the reason
that the parties were already contemplating the payment of the balance of the
purchase price, and were not merely quoting an agreed value for the property. The
alleged option money of P50K was actually earnest money which was intended to
form part of the purchase price.
Option Money Earnest Money
the money given as a distinct part of the purchase price
consideration for an option contract
applies to a sale not yet perfected given only where there is already a
sale
When given, buyer is not required to When given, the buyer is bound to pay
buy the balance
1 ART. 1590. Should the vendee be disturbed in the possession or ownership of the thing
acquired, or should he have reasonable grounds to fear such disturbance, by a vindicatory action
or a foreclosure of mortgage, he may suspend the payment of the price until the vendor has
caused the disturbance or danger to cease, unless the latter gives security for the return of the
The aforequoted characteristics of earnest money are apparent in the contract
under review, even though it was called “option money” by the parties.
On the validity of the suspension of payment
Art. 1590 of the Civil Code applies to the case at bar.1
Although the complaint in the first annulment case prayed for the annulment only
of the contract of sale executed between petitioner and the Jimenez brothers, the
same likewise prayed for the recovery of therein plaintiffs’ share in that parcel of
land. In other words, the plaintiffs therein were claiming to be co-owners of the
entire parcel of land which includes the land that was the subject of the Exclusive
Option to Purchase. Petitioner was justified in suspending payment of the balance
of the purchase price by reason of the aforesaid vindicatory action filed against it.
The assurance made by private respondents that petitioner did not have to worry
about the case because it was pure and simple harassment is not the kind of
guaranty contemplated under the exceptive clause in Article 1590 wherein the
vendor is bound to make payment even with the existence of a vindicatory action
if the vendee should give a security for the return of the price.
Notwithstanding the validity of the suspension of payment, private respondents
may no longer be compelled to sell and deliver the subject property to petitioner
for two reasons:
1. Petitioner’s failure to duly effect the consignation of the purchase price
after the disturbance had ceased;
• February 28 when petitioner caused its exclusive option to be
annotated on TCT, it already knew of the dismissal of the case.
However, it was only on April 16 that petitioner wrote private
respondents expressing its willingness to pay the balance of the
purchase price upon the execution of the corresponding deed of
absolute sale – Mere notice to pay; no proper tender of payment
nor consignation
2. The fact that the contract to sell had been validly rescinded by private
respondents.
• Written notice of rescission is deemed sufficient under the
circumstances AND petitioner failed to protest it.
• Article 1592 of the Civil Code “which requires rescission either by
judicial action or notarial act is not applicable to a contract to sell
price in a proper case, or it has been stipulated that, notwithstanding any such contingency, the
vendee shall be bound to make the payment. A mere act of trespass shall not authorize the
suspension of the payment of the price

[03] Puyat v. Arco Amusement
G.R. No. 47538. | June 20, 1941 | 1466;1868 | Sha
Petitioner: GONZALO PUYAT & SONS, INC.
Respondents: ARCO AMUSEMENT COMPANY (formerly known as Teatro Arco)
Recit-Ready: Arco Amusement Company entered into an agreement with Gonzalo
Puyat & Sons, Inc, an exclusive agent of Star Piano Company based in the USA. On 2
occasions, Puyat, on behalf of Arco, ordered sound reproducing aquipment from Star
Piano. It was agreed that Arco is to pay the price of the equipment ($1,600; $1,700), 10%
commission, plus all other expenses. The equipment was delivered and Arco duly paid
Puyat. 3 years later, a case was filed against Puyat (some other party filed the case) and
the officials of Arco discovered that the price quoted to them by the defendant with regard
to their two orders was not the net price but rather the list price, and that Puyat had
obtained a discount from the Starr Piano Company. Moreover, said officials were
convinced that the prices charged Puyat were much too high. They ordered Puyat to
reimburse them which Puyat failed to do. Hence, they filed a case against Puyat. The CA
held that the relation between the two was that of agent and principal, the petitioner acting
as agent of the respondent in the purchase of the equipment thus ordering Puyat to pay
the alleged overpayments in the total sum.
The issue is WON the contract was an outright purchase and sale or agency. (purchase
and sale)
Doctrine: The contract is the law between the parties and should include all the things
they are supposed to have been agreed upon. The letters, which the respondent
accepted the prices of $1,700 and $1,600, are clear in their terms and admit of no other
interpretation than that the respondent agreed to purchase from the petitioner the
equipment in question at the prices indicated which are fixed and determinate.
SC agrees with the trial judge that "whatever unforeseen events might have taken
place unfavorable to the Arco 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, Puyat might still legally hold Arco to the
prices 􏰁fixed of $1,700 and $1,600." This is incompatible with the pretended relation of
agency 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 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.
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.
Applicable Laws
Art. 1466. In construing a contract containing provisions characteristic of both the
contract of sale and of the contract of agency to sell, the essential clauses of the
whole instrument shall be considered.
Art. 1868. By the contract of agency a person binds himself to render some service or
to do something in representation or on behalf of another, with the consent or
authority of the latter.
FACTS:
1. 'Teatro Arco', a corporation, was engaged in the business of operating
cinematographs.
a. its name was changed to Arco Amusement Company (Arco)
b. C. S. Salmon was the president; A. B. Coulette was the business
manager.
2. About the same time, Gonzalo Puyat & Sons, Inc. (Puyat), was acting as
exclusive agents in the Philippines for the Starr Piano Company of
Richmond, Indiana, USA.
a. The company dealt in cinematograph equipment and machinery
3. Arco Amusement desiring to equip its cinematograph with sound
reproducing devices, approached Gonzalo Puyat & Sons, Inc.
4. After some negotiations, it was agreed between the parties that Gil Puyat
would, on behalf of Arco Amusement, order sound reproducing equipment
from the Star Piano Company.
a. Arco would pay Gonzalo Puyat, in addition to the price of the
equipment, a 10% commission, plus all expenses (freight,
insurance, banking charges, cables, etc.)
5. At the expense of Arco, the Gonzalo Puyat sent a cable, to the Starr Piano
Company, inquiring about the equipment desired and making the said
company to quote its price of $1,700 FOB factory Richmond, Indiana.
6. Puyat did not show Arco the cable of inquiry nor the reply but merely
informed the plaintiff of the price of $1,700.
7. Agreeing, Arco formally authorized the order.
8. The equipment arrived about the end of the year 1929, and upon delivery of
the same, the price of $1,700, plus the 10% commission plus all the
expenses and charges, was duly paid.
9. The following year, another order for sound reproducing equipment was
placed by Arco (same terms as the 􏰁first order).
a. The equipment arrived in due time, and Arco paid the price of
$1,600 with its 10% commission, and $160, for all expenses and
charges.
 10. About 3 years later, in connection with a civil case in Vigan, against Gonzalo
Puyat & Sons, Inc., the officials of the Arco Amusement discovered that the
price quoted to them by the defendant with regard to their two orders was
not the net price but rather the list price, and that Puyat had obtained a
discount from the Starr Piano Company.
a. Moreover, by reading reviews and literature on prices of machinery
and cinematograph equipment, said officials were convinced that
the prices charged Puyat were much too high
11. Arco sought to obtain a reimbursement from the Puyat
a. Puyat didn’t comply
12. Hence, Arco brought the present action
13. Trial court:
a. the contract was one of the outright purchase and sale
b. absolved Puyat
14. Appellate court 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.
a. ordered Puyat to pay the alleged overpayments in the total sum of
$1,335.52 or P2,671.04, together with legal interest
b. further argued that even if the contract between the petitioner and
the respondent was one of the 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.
ISSUES:
1. WON the contract was an outright purchase and sale or agency.
(purchase and sale)
RATIO:
We sustain the theory of the trial court that the contract was one of purchase and
sale, and not one of agency.
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 cannot bind either party.
The letters, which the respondent accepted the prices of $1,700 and $1,600, are clear
in their terms and admit of no other interpretation than that the respondent agreed to
purchase from the petitioner the equipment in question at the prices indicated which
are fixed and determinate.
We agree with the trial judge that "whatever unforeseen events might have taken
place unfavorable to the Arco 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, Puyat might still legally hold Arco to the
prices 􏰁fixed of $1,700 and $1,600."
This is incompatible with the pretended relation of agency 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
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.
While the Puyat was to receive 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.
In the second place, to hold the petitioner an agent of the respondent in the purchase
of equipment and machinery from the Starr Piano 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.
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.
The distinction which the respondent seeks to draw between the cost price and the
list price we consider to be specious. The 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.
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. 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 fact that the petitioner obtained more or less profit than the respondent calculated
before entering into the contract of purchase and sale, is no ground for rescinding the
contract of purchase and sale, or reducing the price agreed upon between the
petitioner and the respondent.
The writ of certiorari should be, as it is hereby, granted. The decision of the appellate
court is accordingly reversed.

[04] CELESTINO CO & CO. v. COLLECTOR OF INTERNAL REVENUE
GR No. L-8506 | August 31, 1956 | Art. 1467: Sale v. Piece of Work | Mart
Petitioner: CELESTINO CO & COMPANY
Respondents: COLLECTOR OF INTERNAL REVENUE
Recit-Ready: Celestino Co is a partnership doing business under the name “Oriental
Sash Factory”. For 5 years it paid 7% taxes on its gross receipts under Section 186
of the Tax Code. The next year, it claims only 3% tax liability under Section 191 of
the Tax Code, alleging that it is a contractor or service provider since it
manufactures products to the specifications of its purchasers. The BIR and the CA
were unimpressed. The CA held that it does not fall within any of the listed
occupations under Section 191. IS THE COMPANY ENGAGED IN SALES OF
PRODUCTS OR SALES OF SERVICES? The Court held that they are engaged in selling
manufactured doors and windows. Although the doors and windows are assembled
according to the specifications of the purchasers, it does not take the transaction
ISSUES: WHETHER OR NOT THE CA WAS CORRECT IN HOLDING THAT THE
out the contracts of sale under Article 1467 as compared to sales of services. For
COMPANY IS NOT ENGAGED IN THE SALE OF SERVICES - YES
the company to be engaged in the sales of services, it should accept a job that
requires the use of extraordinary or additional equipment, or involves services not
RATIO:
generally performed it. However the orders shown in the case were not special.
1.
Doctrine: For the company to be engaged in the sales of services (aka contracts
for pieces of work), it should accept a job that requires the use of extraordinary or
additional equipment, or involves services not generally performed it.
FACTS:
1. Celestino Co & Company is a duly registered general partnership doing
business under the name “Oriental Sash Factory”. From 1946 to 1951, it
paid percentage taxes of 7% on its gross receipts of its sash, door, and
window factory, in accordance with section 186 of the Tax Code.
2. In 1952, it began to claim lability only to the contractor’s 3% tax under
section 191 of the same code. The BIR, and subsequently the CA, were
not convinced. The CA held that the company has chosen for its
tradename and has offered itself to the public as a “Factory”, which means
it means to do business on a large scale. As a general rule, such 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. The CA added that out
of the more than 50 occupations listed under Section 191 of the tax code,
the business of the company cannot fit in any one of those mentioned,
especially under the category of “road, building, navigation, artesian well,
water works and other construction work contractors.” Construction work
contractors are those who alter or repair buildings, structures, streets,
highways, sewers, street railways, railroads, logging roads, electric,
steam, or water plants, telegraph and telephone plants and lines, 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. It concluded that the percentage tax in Section 191 is a tax on the
sale of services, in contradiction to Section 186 which is a tax on the
original sales of articles by the manufacturer, producer, or importer. The
fact that the articles sold are manufactured by the seller does not
exchange the contract from the purview of section 186 as a sale of
articles.
THEIR PRODUCTS ARE MANUFACTURED FROM READY-MADE PARTS.
THE FACT THAT THE CUSTOMERS GIVE SPECIFICATIONS AS TO THEIR
DESIRED PRODUCTS DOES NOT TAKE THE TRANSACTION OUT OF A
CONTRACT OF SALE AND INTO A CONTRACT FOR A PIECE OF WORK.
The fact that windows and doors made by it only when the customers
place their orders, does not alter then nature of the establishment. It only
accepted such orders as called for the employment of such materials-
moulding, frames, panels as it ordinarily manufactured or was in a
position habitually to manufacture.
The Company alleges that it manufactures sash, doors, and windows 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 market. It adds that its contractual relation with their customers is
that of a contract for a piece of work, thus it should be taxed under Section
191 and not under Section 186.
However, any builder or homeowner, with enough money, may order
windows or doors of the kind manufactured by the Company. Therefore it
does not serve special customers ONLY.

If the specifications do not happen to be the kind habitually manufactured

by the company, it would not accept the order, and no sale is made. If they
do, the transaction is similar to a purchase of manufactured goods held
for sale. They are bought because they meet the specifications desired by
the purchaser. Oriental Sash only sells the goods it mass-produces; sash,
panels, frames, etc., only cutting them to size and assembling them to
their customers’ specifications.

Further, the company invokes Article 1467 of the Civil Code, to claim that
its business is contracting for particular pieces of work or “merely sold its
services.” Article 1467 provides:

Article 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. (n)

However, the Company did not sell its services to its customers. It only
sold materials ordinarily manufactured by it, although in such form as
suited the fancy of the purchaser. Such new form does not divest Oriental
Sash Factory of its character as manufacturer. Neither does it take the
transaction out of the category of sales under Article 1467. When the
Factory accepts a job that requires the use of extraordinary or additional
equipment, or involves services not generally performed it, it contracts for
a piece of work. The orders shown here were not shown to be special.

Suppose the transactions were not sales, they were neither lease of
services nor contract jobs by a contractor. But as the doors and windows
are admittedly “manufactured” by the Oriental Sash Factory, such
transactions should be taxed as transfers under Section 186 of the Tax
Code.
 is  engaged  in  the  design  and  installation  of  central type air conditioning 
[05] CIR v. ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND CTA  system, pumping plants and steel fabrications. 
2. July  27,  1956:  One  Juan  de  la  Cruz,  wrote  to  the  Commissioner  of 
GR No. L-27044 and L-27452 | June 30, 1975 | Art. 1467 | Alex  Internal  Revenue  (CIR)  denouncing  Engineering  for  tax  evasion  by 
Petitioner: THE COMMISSIONER OF INTERNAL REVENUE  misdeclaring  its  imported  articles  and  failing  to  pay  the  correct 
Respondents:  ENGINEERING  EQUIPMENT  AND  SUPPLY  COMPANY  ​and  ​THE  percentage  taxes  due  thereon  in  connivance  with  its  foreign  suppliers. 
COURT OF TAX APPEALS  Engineering was likewise denounced to the Central Bank (CB) for alleged 
  fraud  in  obtaining  its dollar allocations. Acting on these denunciations, a 
Recit-Ready:  ​Respondent  Engineering  is engaged in the design and installation of  raid  and  search  was  conducted  by  a  joint  team  of  Central  Bank,  (CB), 
central  type  air  conditioning  system,  pumping  plants and steel fabrications. It was  National  Bureau  of  Investigation  (NBI)  and  Bureau  of  Internal  Revenue 
reported  to  the  CIR  that  Engineering  is  guilty  for  tax  evasion  by  misdeclaring  its  (BIR)  agents  on  September  27,  1956,  on  which  occasion  voluminous 
imported  articles  and  failing to pay the correct taxes with its foreign suppliers. The  records of the firm were seized and confiscated. 
parties  argue  on  the  basis of the tax liability of Engineering with respect to the Tax  3. September  30,  1957: Revenue examiners reported and recommended to 
Code.  CIR  contends  that  Engineering  is  a  manufacturer,  subject  to  pay  the  CIR  that  Engineering  be  assessed  for  P480,912.01  as  deficiency 
compensating  tax  on  its importations and additional fraud surcharge. On the other  advance  sales  tax  on  the  theory that it misdeclared its importation of air 
hand,  Engineering  contends  that it is a contractor and must only pay the tax on the  conditioning  units  and  parts  and  accessories  thereof  which  are  subject 
sale  of  services  or  labor  of  a  contractor.  The  main  issue  is  whether  or  not  to tax under Section 185(m)​ ​ of the Tax Code. 
Engineering  is  a manufacturer or contractor. Such issue is pertinent in determining  4. March  3,  1959:  The  CIR  assessed  against,  and  demanded  upon, 
Engineering’s  tax  liability.  The  SC  held  that  Engineering  is  a  CONTRACTOR  and  Engineering  payment  of  the  increased  amount  and  suggested  that 
should  be  held  liable  to  pay  30%  compensating tax under Section 190 of the Code  P10,000  be  paid  as  compromise  in  extrajudicial  settlement  of 
plus 50% fraud surcharge for failing to truly declare its importations.  Engineering's  penal  liability  for  violation  of  the  Tax  Code.  The  firm, 
  however,  contested  the  tax  assessment  and  requested  that  it  be 
Doctrine:  ​Art.  1467.  A contract for the delivery at a certain price of an article which  furnished  with  the  details  and  particulars  of  the  Commissioner's 
the  vendor  in the ordinary course of his business manufactures or procures for the  assessment 
general  market,  whether  the  same  is  on  hand  at  the  time  or  not,  is  a  contract  of  5. Engineering  appealed  the  case  to  the  Court  of Tax Appeals (CTA) which 
sale​,  but  if  the  goods  are  to  be manufactured specially for the customer and upon  held  that  Engineering  as  a  contractor  is  exempted  from  the  deficiency 
his  special  order  and  not  for  the  general  market,  it  is  a  ​contract  for  a  piece  of  manufacturers  sales tax but ordered it to pay compensating tax and 25% 
work.  surcharge. 
  6. Both petitioner and respondent appealed the decision of the CTA. 
The  SC  held  that  Engineering  is  a  contractor  and  NOT  a  manufacturer.  It  did  not  7. CIR’s contentions:  
manufacture  air  conditioning  units  for  sale  to  the  general  public,  but  imported  - Respondent is a manufacturer and NOT a contractor 
some  items  which  were used in executing contracts entered into by it. We see that  - Should  be  liable  to  the  30%  sales  tax in Section 185(m) and Section 194 
the  supply  of  air  conditioning  units  to  Engineer's  various  customers,  whether  the  of Tax Code, on its importations of parts and accessories of aircon units 
said  machineries  were  in  hand  or not, was especially made for each customer and  - Should be liable for 50% fraud surcharge 
installed in his building upon his special order.   - Should be liable for deficiency advance sales tax and other surcharges 
 
Engineering’s contentions: 
FACTS:  - Not liable to the 30% compensating tax on its importations of equipment 
- Not  guilty  of  fraud  in  effecting  the  said  importations  on  the  basis  of 
1. Respondent  Engineering  Equipment  and  Supply  Company (Engineering),  incomplete quotations 
as  a  domestic  corporation,  is  an  engineering  and  machinery  firm  which  - Not liable to the 25% surcharge prescribed in Tax Code 
 - Claims  that  it  is  a  contractor  engaged  in  the  design,  supply  and  would  be  occupying  the  premises;  the  purpose  for  which  the  various  air 
installation  of  the  central  type  air-conditioning  system subject to the tax  conditioning  areas  are  to  be  used;  and  the  sources  of  heat  gain  or  cooling  load 
imposed  by  Section  191  of  Tax  Code,  which  is  essentially  a  ​tax  on  the  on  the  plant  such  as  sun  load,  lighting,  and  other electrical appliances which are 
sale  of  services  or  labor  of  a  contractor  rather  than  on  the  sale  of  or may be in the plan. 
articles   
Applying  the  facts  of  the  aforementioned  case  to  the  present  case,  We  see  that 
ISSUES:  Whether  or  not  Engineering  is a manufacturer of air conditioning units  the  supply  of  air  conditioning  units  to  Engineer's various customers, whether the 
or a contractor (Engineering is a CONTRACTOR)  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 
RATIO:  ​The  arguments  of  both  the  Engineering  and  the  Commissioner  call  for a  installed  in  a  central  type  of  air  conditioning  system  would  not  have  existed  but 
clarification  of  the  term  contractor  as  well  as  the  distinction between a ​contract  for  the  order  of the party desiring to acquire it and if it existed without the special 
of  sale  and  ​contract  for  furnishing services, labor and materials​. The distinction  order  of Engineering's customer, the said air conditioning units were not intended 
between  a  contract  of  sale  and  one for work, labor and materials is tested by the  for sale to the general public. 
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  We  have  but  to  affirm  the  conclusion  of  the  Court  of  Tax  Appeals  that 
which  would  have  existed  and  has  been  the  subject  of  sale  to  some  other  Engineering is a contractor rather than a manufacturer, subject to the ​contractors 
persons even if the order had not been given.  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 
If  the  article  ordered  by  the  purchaser  is  exactly  such  as  the plaintiff makes and  has  been  proved  to  Our  satisfaction  that  Engineering  imported  air  conditioning 
keeps  on  hand  for  sale  to  anyone, and no change or modification of it is made at  units,  parts  or  accessories  thereof  for  use in its construction business and these 
defendant's  request,  it  is  a  ​contract  of  sale​,  even though it may be entirely made  items  were  never  sold, resold, bartered or exchanged, Engineering should be held 
after, and in consequence of, the defendants order for it.  liable to pay taxes prescribed under Section 190 of the Code.  
   
Art. 1467 of the Civil Code​ distinguishes a contract of sale from a contract for a  This  compensating  tax  is  not  a  tax  on  the  importation  of  goods  but a ​tax on the 
piece of work:  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 
Art.  1467.  A  contract  for  the  delivery  at  a  certain  price  of  an  article  which  the  190  of  the  Tax  Code  in  relation  to  Section  185(m)  of  the  same,  ​but  without  the 
vendor  in  the  ordinary  course  of  his  business  manufactures  or  procures  for  the  50% mark up provided in Section 183(b). 
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 facts and circumstances support the theory that Engineering is a contractor 
rather than a manufacturer. 
 
We find that Engineering did not manufacture air conditioning units for sale to the 
general  public,  but  imported  some  items 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,  taking  into consideration in the process such factors as 
the  area  of  the  space  to  be  air  conditioned;  the  number of persons occupying or 

[6] Roberts v Papio
G.R. No. 166714 | February 9, 2007 | Comparison (pacto and E. Mortgage |
Wayne Novera
Petitioner: AMELIA ROBERTS
Respondents: PAPIO SPOUSES
Recit-Ready: Spouses Papio obtained a loan from Amparo Investment
Corporation. They executed a REM over their property in Makati. Spouses
defaulted but in order to redeem their lot, they executed a Deed of
Absolute Sale over the in favor of Martin Papio's cousin, Amelia Roberts.
Spouses stayed as lessee. However, after some time, they failed to pay
rent to Roberts. So, Roberts filed an unlawful detainer to the trial court and
ordered them to vacate the property and pay their rent arrears. Papio
contended that entered into a contract of sale with pacto de retro with
Roberts (through her agent, Ventura), and prayed that the latter be ordered
to execute a Deed of Sale over the property. Roberts contended that the
sale is void for she did not authorize Ventura to sell the land but merely to
collect rent arrears from spouses Papio. MTC and RTC ruled in favor of
Roberts, but CA REVERSED it saying what was entered into was an
equitable mortgage.
ISSUE W/N it was pacto de recto sale or an equitable mortgage? –
PACTO DE RECTO SALE – but it was not valid since the owner did
not consent.
HELD: (medj mahaba kasi cinompare when it is EM or Pacto)
An equitable mortgage is one that, although lacking in some formality, form
or words, or other requisites demanded by a statute, nevertheless reveals
the intention of the parties to change a real property as security for a debt
and contain nothing impossible or contrary to law.
A contract between the parties is an equitable mortgage if the following
requisites are present:
(a) the parties entered into a contract denominated as a contract of sale;
and (b) the intention was to secure an existing debt by way of mortgage.
The decisive factor is the intention of the parties.
In an equitable mortgage, the mortgagor retains ownership over the
property but subject to foreclosure and sale at public auction upon failure
of the mortgagor to pay his obligation.
In contrast, in a pacto de retro sale, ownership of the property sold is
immediately transferred to the vendee a retro subject only to the right
of the vendor a retro to repurchase the property upon compliance with legal
requirements for the repurchase. The failure of the vendor a retro to
exercise the right to repurchase within the agreed time vests upon
the vendee a retro, by operation of law, absolute title over the
property.
In this case, by insisting that he had repurchased the property,
respondent thereby admitted that the deed of absolute sale executed
by him and petitioner was, in fact and in law, a deed of absolute sale and
not an equitable mortgage; Respondent is, thus, estopped from
asserting that the contract under the deed of absolute sale is an
equitable mortgage
HOWEVER, SC explained that a pacto de retro sale, to be valid:
The right of repurchase is not a right granted the vendor by the
vendee in a subsequent instrument, but is a right reserved by the
vendor in the same instrument of sale as one of the stipulations of
the contract.
Once the instrument of absolute sale is executed, the vendor can no
longer reserve the right to repurchase, and any right thereafter
granted the vendor by the vendee in a separate instrument cannot be
a right of repurchase but some other right like the option to buy in
the instant case.
(In my own words: In short, you need to state in the SAME instrument
(i.e.,DoA) that you are giving the right to repurchase to the vendor.
Otherwise, it’s just an option to buy/promise to sell)
FACTS:
• The spouses Martin and Lucina Papio were the owners of a 274-
square-meter residential lot located in Makati.
o In order to secure a P59,000.00 loan from the Amparo
Investments Corporation, they executed a real estate
mortgage on the property.
 o Upon Papio's failure to pay the loan, the corporation filed a
petition for the extrajudicial foreclosure of the mortgage.
• The couple needed money to redeem the property and to prevent the
foreclosure of the real estate mortgage, they executed a Deed of
Absolute Sale over the in favor of Martin Papio's cousin, Amelia
Roberts.
• Of the P85,000.00 purchase price, P59,000.00 was paid to the
Amparo Investments Corporation, while the P26,000.00 difference
was retained by the spouses.
o As soon as the spouses had settled their obligation, the
corporation returned the owner's duplicate of TCT No. S-
44980, which was then delivered to Amelia Roberts.
• Thereafter, the parties (Amelia Roberts as lessor and Martin Papio as
lessee) executed a two-year contract of lease.
• Martin Papio paid the rentals from May 1, 1982 to May 1, 1984, and
thereafter, for another year.
o He then failed to pay rentals, but he and his family
nevertheless remained in possession of the property for a
period of almost thirteen (13) years.
o His total liability was PHP 410,000
• Roberts demanded that Papio vacate the property within 15 days from
receipt of the letter in case he failed to settle the amount.
o Papio spouses refused to vacate and did not heed the
demand to pay rent (not sale)
• She then filed a Complaint for unlawful detainer and damages
against Martin Papio
PAPIO:
• They paid the PHP 250,000 through Robert’s authorized
representative, Ventura
• Claimed that he entered into a contract of sale with pacto de retro with
Roberts (through her agent), and prayed that the latter be ordered to
execute a Deed of Sale over the property in his favor and transfer the
title over the property to and in his name
ROBERTS
• Roberts insisted that Papio's claim of the right to repurchase the
property, as well as his claim of payment therefor, is belied by his own
letter in which he offered to settle plaintiff's claim for back rentals.
• Even assuming that the purchase price of the property had been paid
through Ventura, Papio did not adduce any proof to show that
Ventura had been authorized to sell the property or to accept any
payment thereon
• Any payment to Ventura could have no binding effect on her since she
was not privy to the transaction; if at all, such agreement would be
binding only on Papio and Ventura.
• MTC and RTC: ruled in favor of ROBERTS
• CA REVERSED:
o They erred in ignoring Papio's defense of equitable mortgage,
and in not finding that the transaction covered by the deed of
absolute sale by and between the parties was one of
equitable mortgage under Article 1602 of the New Civil
Code. The appellate court ruled that Papio retained the
ownership of the property and its peaceful possession;
ISSUE: W/N it was pacto de recto sale or an equitable mortgage? – PACTO
DE RECTO SALE
HELD:
An equitable mortgage is one that, although lacking in some formality, form or
words, or other requisites demanded by a statute, nevertheless reveals the
intention of the parties to change a real property as security for a debt and
contain nothing impossible or contrary to law.
A contract between the parties is an equitable mortgage if the following
requisites are present:
(a) the parties entered into a contract denominated as a contract of sale; and
(b) the intention was to secure an existing debt by way of mortgage. The
decisive factor is the intention of the parties.
In an equitable mortgage, the mortgagor retains ownership over the property
but subject to foreclosure and sale at public auction upon failure of the
mortgagor to pay his obligation.
In contrast, in a pacto de retro sale, ownership of the property sold is
immediately transferred to the vendee a retro subject only to the right of the
vendor a retro to repurchase the property upon compliance with legal
requirements for the repurchase. The failure of the vendor a retro to
exercise the right to repurchase within the agreed time vests upon the
vendee a retro, by operation of law, absolute title over the property.
The right to repurchase presupposes a valid contract of sale between the repurchase but some other right like the option to buy in the instant case.
same parties.
• By insisting that he had repurchased the property, respondent The SC added that the Deed of Absolute Sale was also not valid being that
thereby admitted that the deed of absolute sale executed by him Roberts is not privy to the sale (only her agent and spouses Papio) and it was
and petitioner was, in fact and in law, a deed of absolute sale and done without her consent.
not an equitable mortgage;
• Hence, he had acquired ownership over the property based on said
deed.
• Respondent is, thus, estopped from asserting that the contract
under the deed of absolute sale is an equitable mortgage unless
there is allegation and evidence of palpable mistake on the part of
respondent; or a fraud on the part of petitioner.
• He maintained that petitioner had sold the property to him
acknowledged receipt of the purchase price thereof except the
amount of P39,000.00 retained by Perlita Ventura. Respondent is
thus bound by his admission of petitioner's ownership of the property
and is barred from claiming otherwise.

RE Contract of Sale (IMPT ALSO)

Respondent's admission that petitioner acquired ownership over the

property under the April 13, 1982 deed of absolute sale is buttressed by
his admission in the Contract of Lease that petitioner was the owner of
the property, and that he had paid the rentals for the duration of the contract
of lease and even until 1985 upon its extension.

Respondent was obliged to prove his defense that petitioner had given him
the right to repurchase, and that petitioner obliged herself to resell the
property for P250,000.00 when they executed the April 13, 1982 deed of
absolute sale.

SC said 􏰂that respondent failed to adduce competent and credible evidence

to prove his claim.

The contract is one of absolute sale and not one with right to
repurchase.

The right of repurchase is not a right granted the vendor by the vendee
in a subsequent instrument, but is a right reserved by the vendor in the
same instrument of sale as one of the stipulations of the contract.

Once the instrument of absolute sale is executed, the vendor can no

longer reserve the right to repurchase, and any right thereafter granted
the vendor by the vendee in a separate instrument cannot be a right of
 2. On  December  18,  1995,  Chua  borrowed  from  ​Spouses  Martires  the 
07 MARTIRES v CHUA  amount  of  P150,000.  The  loan  was  ​secured  by  a  ​real  estate  mortgage 
over  the  property.  Chua  committed  to  pay  a  monthy  interest  of  8%  and 
G.R. No. 174240 | March 20, 2013 | Arts. 1602 and 2088 | Binky  an additional 10% monthly interest in case of default. 
Petitioner: SPOUSES LEHNER and LUDY MARTIRES  3. PROBLEM​:​ Chua failed to fully settle her obligation. 
Respondents: MENELIA CHUA  4. Subsequently,  without  foreclosure  of  the  mortgage,  ownership  of  the 
  subject  lots  were  ​transferred  in  the  name  of  ​Spouses  Martires  via  a 
Recit-Ready:  ​Chua borrowed from Spouses Martires the amount of P150,000. The  Deed of Transfer. 
loan  was  secured  by  a  real  estate mortgage over the property. Chua committed to  5. RTC  QC:  Chua  filed  a  complaint  against  Spouses  Martires  for  the 
pay  a  monthy  interest  of  8%  and  an  additional  10%  monthly  interest  in  case  of  annulment  of  the  contract  of  mortgage  between  her  and  Sps.  Martires 
default.  Chua  failed  to  fully  settle her obligation.Subsequently, without foreclosure  on the ground that the interest rates imposed are unjust and exorbitant. 
of  the  mortgage,  ownership  of  the  subject  lots  were  transferred  in  the  name  of  6. RTC  QC  RULING:  Ruled  in  favor  of  Spouses  Martires  and dismissed the 
Spouses Martires via a Deed of Transfer.  complaint. 
7. CA:​ ​Affirmed the judgment of the RTC. 
W/N  the  Deed  of  Transfer  executed  between  Chua  and  Spouses  Martires  8. MR filed by Chua. 
constitute an equitable mortgage?​ YES  9. CA:​ Reversed itself and declared Deed of Transfer void ab initio. 

  ISSUES:  W/N  the  Deed  of  Transfer  executed  between  Chua  and  Spouses 
Doctrine:  ​In  the  instant  case,  it  has  been  established  that  the  intent  of  both  Martires constitute an equitable mortgage?​ YES 
petitioners  and  respondent  is  that  the  subject  property  shall  serve  as  security  for 
the  latter's  obligation  to  the  former.  As  correctly  pointed  out  by  the  CA,  the  RATIO: 
circumstances  surrounding  the  execution  of  the  disputed  Deed  of  Transfer would  DEFINITION OF EQUITABLE MORTGAGE​: An equitable mortgage has been 
show  that  the said document was executed to circumvent the terms of the original  defined as one which, although lacking in some formality, or form or words, or 
agreement  and  deprive  respondent  of  her  mortgaged  property  without  the  other requisites demanded by a statute, nevertheless reveals the intention of the 
requisite foreclosure.  parties to charge real property as security for a debt, there being no impossibility 
  nor anything contrary to law in this intent. 
In  addition,  evidence  points  to  the  fact  that  the  sale  of  the  subject  property,  as   
proven  by  the  disputed  Deed of Transfer, was simulated to cover up the automatic  CIRCUMSTANCE OF EM APPLIED IN THIS CASE:​ "where it may be fairly inferred 
transfer  of  ownership  in  petitioners'  favor.  While  there  was  no  stipulation  in  the  that the real intention of the parties is that the transaction shall secure the 
mortgage  contract  which  provides  for  petitioners'  automatic  appropriation  of  the  payment of a debt or the performance of any other obligation." 
subject mortgaged property in the event that respondent fails to pay her obligation,   
the  subsequent  acts  of  the  parties  and  the  circumstances  surrounding  such  acts  IN THE CASE AT BAR:​ In the instant case, it has been established that the intent 
point  to  no  other  conclusion  than  that  petitioners  were  empowered  to  acquire  of both petitioners and respondent is that the subject property shall serve as 
ownership of the disputed property without need of any foreclosure.  security for the latter's obligation to the former. As correctly pointed out by the 
CA, the circumstances surrounding the execution of the disputed Deed of 
Transfer would show that the said document was executed to circumvent the 
FACTS:  terms of the original agreement and deprive respondent of her mortgaged 
property without the requisite foreclosure 
1. SUBJECT  OF  CONTROVERSY:  24  memorial  lots  located  at  the  Holy   
Cross  Memorial  Park  in  Novaliches.  It is owned by ​Menelia Chua (Chua)  DEFINITION OF PACTUM COMMISSORIUM:​ a stipulation empowering the 
and her mother, ​Florencia Calagos (Calagos).  creditor to appropriate the thing given as guaranty for the fulfillment of the 
obligation in the event the obligor fails to live up to his undertakings, without 
further formality, such as foreclosure proceedings, and a public sale 
 
APPLICATION OF PACTUM IN THIS CASE:​ In the instant case, evidence points to 
the fact that the sale of the subject property, as proven by the disputed Deed of 
Transfer, was simulated to cover up the automatic transfer of ownership in 
petitioners' favor. While there was no stipulation in the mortgage contract which 
provides for petitioners' automatic appropriation of the subject mortgaged 
property in the event that respondent fails to pay her obligation, the subsequent 
acts of the parties and the circumstances surrounding such acts point to no 
other conclusion than that petitioners were empowered to acquire ownership of 
the disputed property without need of any foreclosure. 
 became the responsibility of the petitioner to make good its warranty and paid the
[08] Lo v. KJS Eco-Formwork System Phil., Inc.
obligation.
GR No. 149420 | Oct. 8, 2003 | Art. 1628 | Ally
Doctrine:
Petitioner: SONNY LO An assignment of credit is an agreement by virtue of which the owner of a credit,
Respondents: KJS ECO-FORMWORK SYSTEM PHIL., INC. 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
Recit-Ready: rights to another, known as the assignee, who acquires the power to enforce it to
PetitionerSonny Lo is a building contractor. Respondent KJS ECO-Formwork sold the same extent as the assignor could enforce it against the debtor.
scaffolding. Lo ordered scaffolding equipment worth P540k from KJS. They paid a
downpayment of P150k and the balance was payable in 10 months installment. Lo
FACTS:
paid the first 2 months but defaulted due to financial difficulties. Lo and KJS executed
a Deed of Assignment whereby the P335k balance would be paid from his
1. Petitioner Sonny Lo was a building contractor who was doing business
receivables from Jomero Realty Corp. It included the clause: “execute and do all
under the name San’s Enterprises. Respondent KJS Eco-Formwork
such further acts and deeds as shall be reasonably necessary to effectually enable
System Phil, Inc. is a corporation engaged in the sale of steel scaffoldings.
said assignee to recover whatever collectibles said assignor has in accordance with
2. Petitioner ordered scaffolding equipment from respondent worth
the true intent and meaning of these presents”. When KJS tried to collect, Jomero
P540,425.80. He paid a downpayment of P150,000. The balance was
refused to honor it, claiming that Lo was indebted to them. When KJS requested the
payable in 10 months installment.
payment from Sonny Lo, the petitioenr claims that the assignment of credit already
3. Respondent delivered the scaffoldings to petitioner.
extinguished the obligation.
4. Petitioner was able to pay the first two monthly installments but due to
financial difficulties, he was unable to settle his obligation despite
ISSUE: W/N the assignment of credit extinguished the obligation. (NO)
demand.
No because Lo failed to comply with his warranty under the Deed. The object of the
5. Petitioner and respondent executed a Deed of Assignment, where
deed did not exist at the time of the transaction, rendering such void. Lo violated the
petitioner assigned to respondent his receivables of P335,462.14 from
terms of the Deed of Assignment upon his failure to execute and do all acts and
Jomero Realty Corp.
deeds necessary to enable respondent to recover the collectibles.
a. Lo was a contractor for construction of a residential house
b. Clause:
The assignment of credit, which is in the nature of a sale of personal property,
i. “execute and do all such further acts and deeds as shall
produced the effects of a dation in payment which may extinguish the obligation.
be reasonably necessary to effectually enable said
However, as in any other contract of sale, the vendor or assignor is bound by certain
assignee to recover whatever collectubles said assignor
warranties. Art. 1628 of the CC provides:
has in accordance with the true intent and meaning of
The vendor in good faith shall be responsible for the existence: and legality of the
these presents”
credit at the time of the sale, unless it should have been sold as doubtful; but not for
6. When respondent tried to collect the credit from Jomero Realty Corp, the
the solvency of the debtor, unless it has been so expressly stipulated or unless the
latter refused to honor the Deed of Assignment because it claimed that
insolvency was prior to the sale and of common knowledge.
the petitioner was still indebted to it.
7. Respondent, through a letter, demanded payment of his obligation but
Applying Art. 1628, petitioner, as vendor or assignor, is bound to warrant the
petitioner still refused to pay claiming that his obligation had been
existence and legality of the credit at the time of sale or assignment. When Jomero
extinguished upon the execution of the Deed of Assignment.
claimed that it was no longer indebted to petitioner since the latter also had an
8. Respondent filed an action for recovery of a sum of money against
unpaid obligation to it, it meant that its obligation to petitioner has been extinguished
petitioner.
by compensation. In other words, respondent alleged the non-existence of the credit
9. RTC: Dismissed the complaint.
and asserted its claim to petitioner’s warranty under the assignment. Thus, it
10. CA: Reversed RTC.
 a. Lo must pay KJS P335,462.14 with legal interest.
b. Deed of Assignment did not extinguish the obligation of the
petitioner to respondent.
i. Petitioner failed to comply w his warranty under the deed
ii. Object of the deed did not exist at the time of the
transaction, rendering it void pursuant to Art. 1409 of CC
iii. Petitioner violated the terms of Deed of Assignment
when he failed to execute and do acts necessary to
enable respondent to recover the collectibles.
ISSUES: W/N the Deed of Assignment extinguished the petitioner’s
obligation. (NO)
RATIO:
No, it did not extinguish the obligation because he failed to comply with the
warranty.
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.
vendor or assignor is bound by certain warranties. Art. 1628 of the CC
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.
Applying Art. 1628, petitioner, as vendor or assignor, is bound to warrant
the existence and legality of the credit at the time of 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 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 petitioner’s warranty under the
assignment. Thus, it became the responsibility of the petitioner to make good its
warranty and paid the obligation.
Further, petitioner breached his obligation under the Deed of Assignment. By
warranting the existence of the credit, petitioner should be deemed to have
ensured the performance thereof in case the same is later found to be inexistent.
He should be held liable to pay to respondent the amount of the indebtedness.

In a dacion en pago, the debtor offers another thing to the creditor who accepts it
as equivalent of payment of an outstanding debt. The ff are reqs of dacion en pago:
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.

A dacion en pago really partkaes in one sense of the nature of sale that is the
creditor is really buying the property of the debtor, pyment of which is to b e
charged from the debtor’s debt.

Hence, it may well be that the assignment of credit, which is in the nature 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
 5. DBP: denied liability to Yu on the ground that there being no proof that the
09 DBP v. RTC MANILA unpaid merchandise purchased by Pioneer Glass were among those
transferred to it.
86 OG No. 6, 1137 | June 26, 1987 | Bulk Sales Law | Nicole 6. Union Glass: denied liability to Yu on the that there was no privity of contract
between them, or assuming applicability of the Bulk Sales Law, no liability
Petitioner: DEVELOPMENT BANK OF THE PHILIPPINES
attached to Union Glass.
Respondents: HONORABLE JUDGE OF THE REGIONAL TRIAL COURT OF MANILA
7. MTC denied the motions to dismiss filed by Union Glass and DBP and ruled in
favor of Yu.
Recit-Ready: Pioneer Glass Manufacturing Corp purchased from Antonio Yu equipment
8. RTC affirmed MTC's decision.
parts worth P7k. Upon demand, Pioneer failed to pay. Without informing Yu, Pioneer
transferred all its assets to DBP through a “Deed of Cession of Property” or simply dacion
ISSUE: w/n the Bulk Sales Law covers the conveyance in question (if applicable, its
en pago. In turn, DBP sold these assets to Union Glass. This prompted Yu to filed an
violation would make DBP, Union Glass, and Pioneer Glass liable to Yu) NO
action against Pioneer, DBP, and Union Glass claiming that the transfer of assets to DBP
was fraudulent; thus, void.
RATIO:
▪ Under the Bulk Sales Law, the terms "goods" and "merchandise," having
w/n the Bulk Sales Law covers the conveyance in question (if applicable, its violation
acquired a fixed meaning, refer to things and articles, which are kept for sale
would make DBP, Union Glass, and Pioneer Glass liable to Yu) NO
by a merchant. Likewise, the term "fixtures" has been interpreted to mean the
chattels, which the merchants usually possess and annex to the premises
The Court ruled that under the Bulk Sales Law, the terms "goods" and "merchandise,"
occupied by them in order to store, handle and display their goods and wares.
refer to things and articles, which are kept for sale by a merchant. Likewise, the term
The technicality of these terms conveys the intention of the law to apply it to
"fixtures" has been interpreted to mean the chattels, which the merchants usually
merchants who are in the business of selling goods and wares and similar
possess and annex to the premises occupied by them in order to store, handle and
merchandise.
display their goods and wares. The technicality of these terms conveys the intention of
▪ In this case, Pioneer Glass manufactured glass only on specific orders and it
the law to apply it to merchants who are in the business of selling goods and wares and
did not sell directly to consumers but manufactured its products only for
similar merchandise.
particular clients. Thus, Pioneer Glass was not a merchandiser.
In this case, Pioneer manufactured glass only on specific orders and it did not sell
▪ Moreover, the dacion en pago between Pioneer and DBP transferred and
directly to consumers but manufactured its products only for particular clients. Thus,
conveyed the bulk of its corporate assets to extinguish its outstanding debts
Pioneer Glass was not a merchandiser. Moreover, the dacion en pago transferred the
to DBP. Thus, the subject matter of the deed of cession was the assets, not
bulk of Pioneer’s corporate assets to extinguish its debts to DBP. The subject matter was
stock-in-trade. Such conveyance was clearly outside the ambit of the Bulk
the assets, not the stock-in-trade; thus, clearly outside the ambit of the law.
Sales Law.
▪ Pioneer is a mortgagor-debtor of the transferee, DBP, indebted to the latter for
FACTS: various loans which was secured by a mortgage on the corporate assets and
1. In 1978, Pioneer Glass Manufacturing Corp. purchased from Yu (under Ancar certain real properties. Thus, DBP is a secured creditor and there is nothing
Equipment Parts and Tonicar) equipment parts worth P7,000. fraudulent nor irregular in the transferring of its assets.
2. However, Pioneer failed or refused to pay upon demand. Without informing ▪ SC ordered Pioneer Glass, not DBP and Union Glass, to pay Yu the price of the
Yu, Pioneer Glass transferred all its assets to DBP in a "deed of cession of equipment purchased plus interest.
property in payment of obligation" or dacion en pago. In turn, DBP sold these
assets to Union Glass that same year.
3. In 1983, Yu instituted an action against Pioneer Glass, DBP, and Union Glass,
asserting that the transfer of the assets to DBP was void by reason of fraud.
4. Pioneer Glass: denied liability to Yu on the ground that by virtue of the dacion
en pago in favor of DBP, the bank assumed liability to its creditors including
Yu under a payment scheme, which is under pending implementation.