THIRD DIVISION

[G.R. No. 103577. October 7, 1996]

ROMULO A. CORONEL, ALARICO A. CORONEL, ANNETTE A.
CORONEL, ANNABELLE C. GONZALES (for herself and on behalf
of Floraida C. Tupper, as attorney-in-fact), CIELITO A. CORONEL,
FLORAIDA
A.
ALMONTE,
and
CATALINA
BALAIS
MABANAG, petitioners, vs.
THE
COURT
OF
APPEALS,
CONCEPCION D. ALCARAZ and RAMONA PATRICIA ALCARAZ,
assisted by GLORIA F. NOEL as attorney-in-fact,respondents.

house and lot, covered by TCT No. 119627 of the Registry of Deeds of
Quezon City, in the total amount of P1,240,000.00.
We bind ourselves to effect the transfer in our names from our
deceased father, Constancio P. Coronel, the transfer certificate of title
immediately upon receipt of the down payment above-stated.
On our presentation of the TCT already in or name, We will
immediately execute the deed of absolute sale of said property and
Miss Ramona Patricia Alcaraz shall immediately pay the balance of
the P1,190,000.00.

DECISION

Clearly, the conditions appurtenant to the sale are the following:

MELO, J.:

1.
Ramona will make a down payment of Fifty Thousand
(P50,000.00) pesos upon execution of the document aforestated;

The petition before us has its roots in a complaint for specific

performance to compel herein petitioners (except the last named,
Catalina Balais Mabanag) to consummate the sale of a parcel of land
with its improvements located along Roosevelt Avenue in Quezon
City entered into by the parties sometime in January 1985 for the price
of P1,240,000.00.
The undisputed facts of the case were summarized by respondent
court in this wise:
On January 19, 1985, defendants-appellants Romulo Coronel, et. al.
(hereinafter referred to as Coronels) executed a document entitled
Receipt of Down Payment (Exh. A) in favor of plaintiff Ramona
Patricia Alcaraz (hereinafter referred to as Ramona) which is
reproduced hereunder:
RECEIPT OF DOWN PAYMENT
P1,240,000.00 - Total amount
50,000.00 - Down payment
-----------------------------------------P1,190,000.00 - Balance
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon
City, the sum of Fifty Thousand Pesos purchase price of our inherited

2.
The Coronels will cause the transfer in their names of the title of
the property registered in the name of their deceased father upon
receipt of the Fifty Thousand (P50,000.00) Pesos down payment;
3.
Upon the transfer in their names of the subject property, the
Coronels will execute the deed of absolute sale in favor of Ramona
and the latter will pay the former the whole balance of One Million
One Hundred Ninety Thousand (P1,190,000.00) Pesos.
On the same date (January 15, 1985), plaintiff-appellee Concepcion D.
Alcaraz (hereinafter referred to as Concepcion), mother of Ramona,
paid the down payment of Fifty Thousand (P50,000.00) Pesos (Exh.
B, Exh. 2).
On February 6, 1985, the property originally registered in the name of
the Coronels father was transferred in their names under TCT No.
327043 (Exh. D; Exh 4)
On February 18, 1985, the Coronels sold the property covered by TCT
No. 327043 to intervenor-appellant Catalina B. Mabanag (hereinafter
referred to as Catalina) for One Million Five Hundred Eighty
Thousand (P1,580,000.00) Pesos after the latter has paid Three
Hundred Thousand (P300,000.00) Pesos (Exhs. F-3; Exh. 6-C)

`Page 1 of 113

For this reason, Coronels canceled and rescinded the contract (Exh.
A) with Ramona by depositing the down payment paid
by Concepcion in the bankin trust for Ramona Patricia Alcaraz.
On February 22, 1985, Concepcion, et. al., filed a complaint for a
specific performance against the Coronels and caused the annotation
of a notice of lis pendens at the back of TCT No. 327403 (Exh. E;
Exh. 5).
On April 2, 1985, Catalina caused the annotation of a notice of adverse
claim covering the same property with the Registry of Deeds of
Quezon City (Exh. F; Exh. 6).
On April 25, 1985, the Coronels executed a Deed of Absolute Sale over
the subject property in favor of Catalina (Exh. G; Exh. 7).
On June 5, 1985, a new title over the subject property was issued in
the name of Catalina under TCT No. 351582 (Exh. H; Exh. 8).
(Rollo, pp. 134-136)
In the course of the proceedings before the trial court (Branch 83,
RTC, Quezon City) the parties agreed to submit the case for decision
solely on the basis of documentary exhibits. Thus, plaintiffs therein
(now private respondents) proffered their documentary evidence
accordingly marked as Exhibits A through J, inclusive of their
corresponding submarkings. Adopting these same exhibits as their
own, then defendants (now petitioners) accordingly offered and
marked them as Exhibits 1 through 10, likewise inclusive of their
corresponding submarkings. Upon motion of the parties, the trial
court gave them thirty (30) days within which to simultaneously
submit their respective memoranda, and an additional 15 days within
which to submit their corresponding comment or reply thereto, after
which, the case would be deemed submitted for resolution.
On April 14, 1988, the case was submitted for resolution before Judge
Reynaldo Roura, who was then temporarily detailed to preside over
Branch 82 of the RTC of Quezon City. On March 1, 1989, judgment
was handed down by Judge Roura from his regular bench at
Macabebe, Pampanga for the Quezon City branch, disposing as
follows:

WHEREFORE, judgment for specific performance is hereby rendered

ordering defendant to execute in favor of plaintiffs a deed of absolute
sale covering that parcel of land embraced in and covered by Transfer
Certificate of Title No. 327403 (now TCT No. 331582) of the Registry
of Deeds for Quezon City, together with all the improvements
existing thereon free from all liens and encumbrances, and once
accomplished, to immediately deliver the said document of sale to
plaintiffs and upon receipt thereof, the plaintiffs are ordered to pay
defendants the whole balance of the purchase price amounting
toP1,190,000.00 in cash. Transfer Certificate of Title No. 331582 of the
Registry of Deeds for Quezon City in the name of intervenor is hereby
canceled and declared to be without force and effect. Defendants and
intervenor and all other persons claiming under them are hereby
ordered to vacate the subject property and deliver possession thereof
to plaintiffs. Plaintiffs claim for damages and attorneys fees, as well
as the counterclaims of defendants and intervenors are hereby
dismissed.
No pronouncement as to costs.
So Ordered.
Macabebe, Pampanga for Quezon City, March 1, 1989.
(Rollo, p. 106)
A motion for reconsideration was filed by petitioners before the new
presiding judge of the Quezon City RTC but the same was denied by
Judge Estrella T. Estrada, thusly:
The prayer contained in the instant motion, i.e., to annul the decision
and to render anew decision by the undersigned Presiding Judge
should be denied for the following reasons: (1) The instant case
became submitted for decision as of April 14, 1988 when the parties
terminated the presentation of their respective documentary evidence
and when the Presiding Judge at that time was Judge Reynaldo
Roura. The fact that they were allowed to file memoranda at some
future date did not change the fact that the hearing of the case was
terminated before Judge Roura and therefore the same should be
submitted to him for decision; (2) When the defendants and
`Page 2 of 113

intervenor did not object to the authority of Judge Reynaldo Roura to

decide the case prior to the rendition of the decision, when they met
for the first time before the undersigned Presiding Judge at the
hearing of a pending incident in Civil Case No. Q-46145 on November
11, 1988, they were deemed to have acquiesced thereto and they are
now estopped from questioning said authority of Judge Roura after
they received the decision in question which happens to be adverse to
them; (3) While it is true that Judge Reynaldo Roura was merely a
Judge-on-detail at this Branch of the Court, he was in all respects the
Presiding Judge with full authority to act on any pending incident
submitted before this Court during his incumbency. When he
returned to his Official Station at Macabebe, Pampanga, he did not
lose his authority to decide or resolve cases submitted to him for
decision or resolution because he continued as Judge of the Regional
Trial Court and is of co-equal rank with the undersigned Presiding
Judge. The standing rule and supported by jurisprudence is that a
Judge to whom a case is submitted for decision has the authority to
decide the case notwithstanding his transfer to another branch or
region of the same court (Sec. 9, Rule 135, Rule of Court).

Hence, the instant petition which was filed on March 5, 1992. The last
pleading, private respondents Reply Memorandum, was filed
onSeptember 15, 1993. The case was, however, re-raffled to
undersigned ponente only on August 28, 1996, due to the voluntary
inhibition of the Justice to whom the case was last assigned.

Coming now to the twin prayer for reconsideration of the Decision

dated March 1, 1989 rendered in the instant case, resolution of which
now pertains to the undersigned Presiding Judge, after a meticulous
examination of the documentary evidence presented by the parties,
she is convinced that the Decision of March 1, 1989 is supported by
evidence and, therefore, should not be disturbed.

Art. 1305. A contract is a meeting of minds between two persons

whereby one binds himself, with respect to the other, to give
something or to render some service.

IN VIEW OF THE FOREGOING, the Motion for Reconsideration

and/or to Annul Decision and Render Anew Decision by the
Incumbent Presiding Judge dated March 20, 1989 is hereby DENIED.
SO ORDERED.
Quezon City, Philippines, July 12, 1989.
(Rollo, pp. 108-109)
Petitioners thereupon interposed an appeal, but on December 16,
1991, the Court of Appeals (Buena, Gonzaga-Reyes, Abad-Santos (P),
JJ.) rendered its decision fully agreeing with the trial court.

While we deem it necessary to introduce certain refinements in the

disquisition of respondent court in the affirmance of the trial courts
decision, we definitely find the instant petition bereft of merit.
The heart of the controversy which is the ultimate key in the
resolution of the other issues in the case at bar is the precise
determination of the legal significance of the document entitled
Receipt of Down Payment which was offered in evidence by both
parties. There is no dispute as to the fact that the said document
embodied the binding contract between Ramona Patricia Alcaraz on
the one hand, and the heirs of Constancio P. Coronel on the other,
pertaining to a particular house and lot covered by TCT No. 119627,
as defined in Article 1305 of the Civil Code of the Philippines which
reads as follows:

While, it is the position of private respondents that the Receipt of

Down Payment embodied a perfected contract of sale, which
perforce, they seek to enforce by means of an action for specific
performance, petitioners on their part insist that what the document
signified was a mere executory contract to sell, subject to certain
suspensive conditions, and because of the absence of Ramona P.
Alcaraz, who left for the United States of America, said contract could
not possibly ripen into a contract of absolute sale.
Plainly, such variance in the contending parties contention is brought
about by the way each interprets the terms and/or conditions set
forth in said private instrument. Withal, based on whatever relevant
and admissible evidence may be available on record, this Court, as
were the courts below, is now called upon to adjudge what the real
intent of the parties was at the time the said document was executed.
`Page 3 of 113

The Civil Code defines a contract of sale, thus:

Art. 1458. By the contract of sale one of the contracting parties
obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain in
money or its equivalent.
Sale, by its very nature, is a consensual contract because it is perfected
by mere consent. The essential elements of a contract of sale are the
following:
a)
Consent or meeting of the minds, that is, consent to transfer
ownership in exchange for the price;
b)

Determinate subject matter; and

c)

Price certain in money or its equivalent.

Under this definition, a Contract to Sell may not be considered as a

Contract of Sale because the first essential element is lacking. In a
contract to sell, the prospective seller explicitly reserves the transfer of
title to the prospective buyer, meaning, the prospective seller does not
as yet agree or consent to transfer ownership of the property subject
of the contract to sell until the happening of an event, which for
present purposes we shall take as the full payment of the purchase
price. What the seller agrees or obliges himself to do is to fulfill his
promise to sell the subject property when the entire amount of the
purchase price is delivered to him. In other words the full payment of
the purchase price partakes of a suspensive condition, the nonfulfillment of which prevents the obligation to sell from arising and
thus, ownership is retained by the prospective seller without further
remedies by the prospective buyer. In Roque vs. Lapuz (96 SCRA 741
[1980]), this Court had occasion to rule:
Hence, We hold that the contract between the petitioner and the
respondent was a contract to sell where the ownership or title is
retained by the seller and is not to pass until the full payment of the
price, such payment being a positive suspensive condition and failure
of which is not a breach, casual or serious, but simply an event that
prevented the obligation of the vendor to convey title from acquiring
binding force.

Stated positively, upon the fulfillment of the suspensive condition

which is the full payment of the purchase price, the prospective
sellers obligation to sell the subject property by entering into a
contract of sale with the prospective buyer becomes demandable as
provided in Article 1479 of the Civil Code which states:
Art. 1479. A promise to buy and sell a determinate thing for a price
certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing
for a price certain is binding upon the promissor of the promise is
supported by a consideration distinct from the price.
A contract to sell may thus be defined as a bilateral contract whereby
the prospective seller, while expressly reserving the ownership of the
subject property despite delivery thereof to the prospective buyer,
binds himself to sell the said property exclusively to the prospective
buyer upon fulfillment of the condition agreed upon, that is, full
payment of the purchase price.
A contract to sell as defined hereinabove, may not even be considered
as a conditional contract of sale where the seller may likewise reserve
title to the property subject of the sale until the fulfillment of a
suspensive condition, because in a conditional contract of sale, the
first element of consent is present, although it is conditioned upon the
happening of a contingent event which may or may not occur. If the
suspensive condition is not fulfilled, the perfection of the contract of
sale is completely abated (cf. Homesite and Housing Corp. vs. Court
of Appeals, 133 SCRA 777 [1984]). However, if the suspensive
condition is fulfilled, the contract of sale is thereby perfected, such
that if there had already been previous delivery of the property
subject of the sale to the buyer, ownership thereto automatically
transfers to the buyer by operation of law without any further act
having to be performed by the seller.
In a contract to sell, upon the fulfillment of the suspensive condition
which is the full payment of the purchase price, ownership will not
automatically transfer to the buyer although the property may have
been previously delivered to him. The prospective seller still has to
`Page 4 of 113

convey title to the prospective buyer by entering into a contract of

absolute sale.

586 [1992]). Thus, when petitioners declared in the said Receipt of

Down Payment that they --

It is essential to distinguish between a contract to sell and a

conditional contract of sale specially in cases where the subject
property is sold by the owner not to the party the seller contracted
with, but to a third person, as in the case at bench. In a contract to
sell, there being no previous sale of the property, a third person
buying such property despite the fulfillment of the suspensive
condition such as the full payment of the purchase price, for instance,
cannot be deemed a buyer in bad faith and the prospective buyer
cannot seek the relief of reconveyance of the property. There is no
double sale in such case. Title to the property will transfer to the
buyer after registration because there is no defect in the owner-sellers
title per se, but the latter, of course, may be sued for damages by the
intending buyer.

Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon

City, the sum of Fifty Thousand Pesos purchase price of our inherited
house and lot, covered by TCT No. 1199627 of the Registry of Deeds
of Quezon City, in the total amount of P1,240,000.00.

In a conditional contract of sale, however, upon the fulfillment of the

suspensive condition, the sale becomes absolute and this will
definitely affect the sellers title thereto. In fact, if there had been
previous delivery of the subject property, the sellers ownership or
title to the property is automatically transferred to the buyer such
that, the seller will no longer have any title to transfer to any third
person. Applying Article 1544 of the Civil Code, such second buyer of
the property who may have had actual or constructive knowledge of
such defect in the sellers title, or at least was charged with the
obligation to discover such defect, cannot be a registrant in good
faith. Such second buyer cannot defeat the first buyers title. In case a
title is issued to the second buyer, the first buyer may seek
reconveyance of the property subject of the sale.
With the above postulates as guidelines, we now proceed to the task
of deciphering the real nature of the contract entered into by
petitioners and private respondents.
It is a canon in the interpretation of contracts that the words used
therein should be given their natural and ordinary meaning unless a
technical meaning was intended (Tan vs. Court of Appeals, 212 SCRA

without any reservation of title until full payment of the entire

purchase price, the natural and ordinary idea conveyed is that they
sold their property.
When the Receipt of Down payment is considered in its entirety, it
becomes more manifest that there was a clear intent on the part of
petitioners to transfer title to the buyer, but since the transfer
certificate of title was still in the name of petitioners father, they
could not fully effect such transfer although the buyer was then
willing and able to immediately pay the purchase price. Therefore,
petitioners-sellers undertook upon receipt of the down payment from
private respondent Ramona P. Alcaraz, to cause the issuance of a new
certificate of title in their names from that of their father, after which,
they promised to present said title, now in their names, to the latter
and to execute the deed of absolute sale whereupon, the latter shall, in
turn, pay the entire balance of the purchase price.
The agreement could not have been a contract to sell because the
sellers herein made no express reservation of ownership or title to the
subject parcel of land. Furthermore, the circumstance which
prevented the parties from entering into an absolute contract of sale
pertained to the sellers themselves (the certificate of title was not in
their names) and not the full payment of the purchase price. Under
the established facts and circumstances of the case, the Court may
safely presume that, had the certificate of title been in the names of
petitioners-sellers at that time, there would have been no reason why
an absolute contract of sale could not have been executed and
consummated right there and then.
Moreover, unlike in a contract to sell, petitioners in the case at bar did
not merely promise to sell the property to private respondent upon
the fulfillment of the suspensive condition. On the contrary, having
`Page 5 of 113

already agreed to sell the subject property, they undertook to have the
certificate of title change to their names and immediately thereafter, to
execute the written deed of absolute sale.
Thus, the parties did not merely enter into a contract to sell where the
sellers, after compliance by the buyer with certain terms and
conditions, promised to sell the property to the latter. What may be
perceived from the respective undertakings of the parties to the
contract is that petitioners had already agreed to sell the house and lot
they inherited from their father, completely willing to transfer
ownership of the subject house and lot to the buyer if the documents
were then in order. It just so happened, however, that the transfer
certificate of title was then still in the name of their father. It was
more expedient to first effect the change in the certificate of title so as
to bear their names. That is why they undertook to cause the issuance
of a new transfer of the certificate of title in their names upon receipt
of the down payment in the amount of P50,000.00. As soon as the
new certificate of title is issued in their names, petitioners were
committed to immediately execute the deed of absolute sale. Only
then will the obligation of the buyer to pay the remainder of the
purchase price arise.
There is no doubt that unlike in a contract to sell which is most
commonly entered into so as to protect the seller against a buyer who
intends to buy the property in installment by withholding ownership
over the property until the buyer effects full payment therefor, in the
contract entered into in the case at bar, the sellers were the ones who
were unable to enter into a contract of absolute sale by reason of the
fact that the certificate of title to the property was still in the name of
their father. It was the sellers in this case who, as it were, had the
impediment which prevented, so to speak, the execution of an
contract of absolute sale.
What is clearly established by the plain language of the subject
document is that when the said Receipt of Down Payment was
prepared and signed by petitioners Romulo A. Coronel, et. al., the
parties had agreed to a conditional contract of sale, consummation of
which is subject only to the successful transfer of the certificate of title

from the name of petitioners father, Constancio P. Coronel, to their

names.
The Court significantly notes that this suspensive condition was, in
fact, fulfilled on February 6, 1985 (Exh. D; Exh. 4). Thus, on said
date, the conditional contract of sale between petitioners and private
respondent Ramona P. Alcaraz became obligatory, the only act
required for the consummation thereof being the delivery of the
property by means of the execution of the deed of absolute sale in a
public instrument, which petitioners unequivocally committed
themselves to do as evidenced by the Receipt of Down Payment.
Article 1475, in correlation with Article 1181, both of the Civil Code,
plainly applies to the case at bench. Thus,
Art. 1475. The contract of sale is perfected at the moment there is a
meeting of minds upon the thing which is the object of the contract
and upon the price.
From that moment, the parties may reciprocally demand
performance, subject to the provisions of the law governing the form
of contracts.
Art. 1181. In conditional obligations, the acquisition of rights, as well
as the extinguishment or loss of those already acquired, shall depend
upon the happening of the event which constitutes the condition.
Since the condition contemplated by the parties which is the issuance
of a certificate of title in petitioners names was fulfilled on February
6, 1985, the respective obligations of the parties under the contract of
sale became mutually demandable, that is, petitioners, as sellers, were
obliged to present the transfer certificate of title already in their
names to private respondent Ramona P. Alcaraz, the buyer, and to
immediately execute the deed of absolute sale, while the buyer on her
part, was obliged to forthwith pay the balance of the purchase price
amounting to P1,190,000.00.
It is also significant to note that in the first paragraph in page 9 of
their petition, petitioners conclusively admitted that:
3. The petitioners-sellers Coronel bound themselves to effect the
transfer in our names from our deceased father Constancio P.
`Page 6 of 113

Coronel, the transfer certificate of title immediately upon receipt of

the downpayment above-stated". The sale was still subject to this
suspensive condition. (Emphasis supplied.)

In obligations to do or not to do, the courts shall determine, in each

case, the retroactive effect of the condition that has been complied
with.

(Rollo, p. 16)

the rights and obligations of the parties with respect to the perfected
contract of sale became mutually due and demandable as of the time
of fulfillment or occurrence of the suspensive condition on February
6, 1985. As of that point in time, reciprocal obligations of both seller
and buyer arose.

Petitioners themselves recognized that they entered into a contract of

sale subject to a suspensive condition. Only, they contend, continuing
in the same paragraph, that:
. . . Had petitioners-sellers not complied with this condition of first
transferring the title to the property under their names, there could be
no perfected contract of sale. (Emphasis supplied.)
(Ibid.)
not aware that they have set their own trap for themselves, for Article
1186 of the Civil Code expressly provides that:
Art. 1186. The condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment.
Besides, it should be stressed and emphasized that what is more
controlling than these mere hypothetical arguments is the fact that
thecondition herein referred to was actually and indisputably fulfilled
on February 6, 1985, when a new title was issued in the names of
petitioners as evidenced by TCT No. 327403 (Exh. D; Exh. 4).
The inevitable conclusion is that on January 19, 1985, as evidenced by
the document denominated as Receipt of Down Payment (Exh. A;
Exh. 1), the parties entered into a contract of sale subject to the
suspensive condition that the sellers shall effect the issuance of new
certificate title from that of their fathers name to their names and
that, on February 6, 1985, this condition was fulfilled (Exh. D; Exh.
4).
We, therefore, hold that, in accordance with Article 1187 which
pertinently provides Art. 1187. The effects of conditional obligation to give, once the
condition has been fulfilled, shall retroact to the day of the
constitution of the obligation . . .

Petitioners also argue there could been no perfected contract on

January 19, 1985 because they were then not yet the absolute owners
of the inherited property.
We cannot sustain this argument.
Article 774 of the Civil Code defines Succession as a mode of
transferring ownership as follows:
Art. 774. Succession is a mode of acquisition by virtue of which the
property, rights and obligations to the extent and value of the
inheritance of a person are transmitted through his death to another
or others by his will or by operation of law.
Petitioners-sellers in the case at bar being the sons and daughters of
the decedent Constancio P. Coronel are compulsory heirs who were
called to succession by operation of law. Thus, at the point their
father drew his last breath, petitioners stepped into his shoes insofar
as the subject property is concerned, such that any rights or
obligations pertaining thereto became binding and enforceable upon
them. It is expressly provided that rights to the succession are
transmitted from the moment of death of the decedent (Article 777,
Civil Code; Cuison vs. Villanueva, 90 Phil. 850 [1952]).
Be it also noted that petitioners claim that succession may not be
declared unless the creditors have been paid is rendered moot by the
fact that they were able to effect the transfer of the title to the property
from the decedents name to their names on February 6, 1985.
Aside from this, petitioners are precluded from raising their supposed
lack of capacity to enter into an agreement at that time and they
cannot be allowed to now take a posture contrary to that which they
`Page 7 of 113

took when they entered into the agreement with private respondent
Ramona P. Alcaraz. The Civil Code expressly states that:
Art. 1431. Through estoppel an admission or representation is
rendered conclusive upon the person making it, and cannot be denied
or disproved as against the person relying thereon.
Having represented themselves as the true owners of the subject
property at the time of sale, petitioners cannot claim now that they
were not yet the absolute owners thereof at that time.
Petitioners also contend that although there was in fact a perfected
contract of sale between them and Ramona P. Alcaraz, the latter
breach her reciprocal obligation when she rendered impossible the
consummation thereof by going to the United States of America,
without leaving her address, telephone number, and Special Power of
Attorney (Paragraphs 14 and 15, Answer with Compulsory
Counterclaim to the Amended Complaint, p. 2; Rollo, p. 43), for
which reason, so petitioners conclude, they were correct in
unilaterally rescinding the contract of sale.
We do not agree with petitioners that there was a valid rescission of
the contract of sale in the instant case. We note that these supposed
grounds for petitioners rescission, are mere allegations found only in
their responsive pleadings, which by express provision of the rules,
are deemed controverted even if no reply is filed by the plaintiffs (Sec.
11, Rule 6, Revised Rules of Court). The records are absolutely bereft
of any supporting evidence to substantiate petitioners
allegations. We have stressed time and again that allegations must be
proven by sufficient evidence (Ng Cho Cio vs. Ng Diong, 110 Phil. 882
[1961]; Recaro vs. Embisan, 2 SCRA 598 [1961]). Mere allegation is not
an evidence (Lagasca vs. De Vera, 79 Phil. 376 [1947]).
Even assuming arguendo that Ramona P. Alcaraz was in the United
States of America on February 6, 1985, we cannot justify petitionerssellers act of unilaterally and extrajudicially rescinding the contract of
sale, there being no express stipulation authorizing the sellers to
extrajudicially rescind the contract of sale. (cf. Dignos vs. CA, 158
SCRA 375 [1988]; Taguba vs. Vda. De Leon, 132 SCRA 722 [1984])

Moreover, petitioners are estopped from raising the alleged absence

of Ramona P. Alcaraz because although the evidence on record shows
that the sale was in the name of Ramona P. Alcaraz as the buyer, the
sellers had been dealing with Concepcion D. Alcaraz, Ramonas
mother, who had acted for and in behalf of her daughter, if not also in
her own behalf. Indeed, the down payment was made by Concepcion
D. Alcaraz with her own personal Check (Exh. B; Exh. 2) for and
in behalf of Ramona P. Alcaraz. There is no evidence showing that
petitioners ever questioned Concepcions authority to represent
Ramona P. Alcaraz when they accepted her personal check. Neither
did they raise any objection as regards payment being effected by a
third person. Accordingly, as far as petitioners are concerned, the
physical absence of Ramona P. Alcaraz is not a ground to rescind the
contract of sale.
Corollarily, Ramona P. Alcaraz cannot even be deemed to be in
default, insofar as her obligation to pay the full purchase price is
concerned. Petitioners who are precluded from setting up the defense
of the physical absence of Ramona P. Alcaraz as above-explained
offered no proof whatsoever to show that they actually presented the
new transfer certificate of title in their names and signified their
willingness and readiness to execute the deed of absolute sale in
accordance with their agreement. Ramonas corresponding obligation
to pay the balance of the purchase price in the amount
of P1,190,000.00 (as buyer) never became due and demandable and,
therefore, she cannot be deemed to have been in default.
Article 1169 of the Civil Code defines when a party in a contract
involving reciprocal obligations may be considered in default, to wit:
Art. 1169. Those obliged to deliver or to do something, incur in delay
from the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation.
xxx
In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. From the moment one of the parties
fulfill his obligation, delay by the other begins. (Emphasis supplied.)
`Page 8 of 113

There is thus neither factual nor legal basis to rescind the contract of
sale between petitioners and respondents.
With the foregoing conclusions, the sale to the other petitioner,
Catalina B. Mabanag, gave rise to a case of double sale where Article
1544 of the Civil Code will apply, to wit:
Art. 1544. If the same thing should have been sold to different
vendees, the ownership shall be transferred to the person who may
have first taken possession thereof in good faith, if it should be
movable property.
Should it be immovable property, the ownership shall belong to the
person acquiring it who in good faith first recorded it in the Registry
of Property.
Should there be no inscription, the ownership shall pertain to the
person who in good faith was first in the possession; and, in the
absence thereof to the person who presents the oldest title, provided
there is good faith.
The record of the case shows that the Deed of Absolute Sale dated
April 25, 1985 as proof of the second contract of sale was registered
with the Registry of Deeds of Quezon City giving rise to the issuance
of a new certificate of title in the name of Catalina B. Mabanag on June
5, 1985. Thus, the second paragraph of Article 1544 shall apply.
The above-cited provision on double sale presumes title or ownership
to pass to the buyer, the exceptions being: (a) when the second buyer,
in good faith, registers the sale ahead of the first buyer, and (b) should
there be no inscription by either of the two buyers, when the second
buyer, in good faith, acquires possession of the property ahead of the
first buyer. Unless, the second buyer satisfies these requirements, title
or ownership will not transfer to him to the prejudice of the first
buyer.
In his commentaries on the Civil Code, an accepted authority on the
subject, now a distinguished member of the Court, Justice Jose C.
Vitug, explains:
The governing principle is prius tempore, potior jure (first in time,
stronger in right). Knowledge by the first buyer of the second sale

cannot defeat the first buyers rights except when the second buyer
first registers in good faith the second sale (Olivares vs. Gonzales, 159
SCRA 33). Conversely, knowledge gained by the second buyer of the
first sale defeats his rights even if he is first to register, since
knowledge taints his registration with bad faith (see also Astorga vs.
Court of Appeals, G.R. No. 58530, 26 December 1984). In Cruz vs.
Cabana (G.R. No. 56232, 22 June 1984, 129 SCRA 656), it was held that
it is essential, to merit the protection of Art. 1544, second paragraph,
that the second realty buyer must act in good faith in registering his
deed of sale (citing Carbonell vs. Court of Appeals, 69 SCRA 99,
Crisostomo vs. CA, G.R. No. 95843, 02 September 1992).
(J. Vitug, Compendium of Civil Law and Jurisprudence, 1993 Edition,
p. 604).
Petitioners point out that the notice of lis pendens in the case at bar
was annotated on the title of the subject property only on February 22,
1985, whereas, the second sale between petitioners Coronels and
petitioner Mabanag was supposedly perfected prior thereto or on
February 18, 1985. The idea conveyed is that at the time petitioner
Mabanag, the second buyer, bought the property under a clean title,
she was unaware of any adverse claim or previous sale, for which
reason she is a buyer in good faith.
We are not persuaded by such argument.
In a case of double sale, what finds relevance and materiality is not
whether or not the second buyer in good faith but whether or not said
second buyer registers such second sale in good faith, that is, without
knowledge of any defect in the title of the property sold.
As clearly borne out by the evidence in this case, petitioner Mabanag
could not have in good faith, registered the sale entered into on
February 18, 1985 because as early as February 22, 1985, a notice of lis
pendens had been annotated on the transfer certificate of title in the
names of petitioners, whereas petitioner Mabanag registered the said
sale sometime in April, 1985. At the time of registration, therefore,
petitioner Mabanag knew that the same property had already been
previously sold to private respondents, or, at least, she was charged
with knowledge that a previous buyer is claiming title to the same
`Page 9 of 113

property. Petitioner Mabanag cannot close her eyes to the defect in

petitioners title to the property at the time of the registration of the
property.
This Court had occasions to rule that:
If a vendee in a double sale registers the sale after he has acquired
knowledge that there was a previous sale of the same property to a
third party or that another person claims said property in a previous
sale, the registration will constitute a registration in bad faith and will
not confer upon him any right. (Salvoro vs. Tanega, 87 SCRA 349
[1978]; citing Palarca vs. Director of Land, 43 Phil. 146; Cagaoan vs.
Cagaoan, 43 Phil. 554; Fernandez vs. Mercader, 43 Phil. 581.)
Thus, the sale of the subject parcel of land between petitioners and
Ramona P. Alcaraz, perfected on February 6, 1985, prior to that
between petitioners and Catalina B. Mabanag on February 18, 1985,
was correctly upheld by both the courts below.
Although there may be ample indications that there was in fact an
agency between Ramona as principal and Concepcion, her mother, as
agent insofar as the subject contract of sale is concerned, the issue of
whether or not Concepcion was also acting in her own behalf as a cobuyer is not squarely raised in the instant petition, nor in such
assumption disputed between mother and daughter. Thus, We will
not touch this issue and no longer disturb the lower courts ruling on
this point.
WHEREFORE, premises considered, the instant petition is hereby
DISMISSED and the appealed judgment AFFIRMED.
SO ORDERED.
Narvasa, C.J. (Chairman), Davide, Jr., and Francisco, JJ., concur.
Panganiban, J., no part.

`Page 10 of 113

SECOND DIVISION
[G.R. No. 120747. September 21, 2000]
VICENTE GOMEZ, as successor-in-interest of awardee LUISA
GOMEZ, petitioner, vs. COURT OF APPEALS, City of MANILA
acting thru the City Tenants Security Committee now the Urban
Settlement Office, Register of Deeds of Manila, respondents.
DECISION
BUENA, J.:
Sought to be reversed in this petition for review on certiorari under
Rule 45 of the Rules of Court is the decision[1] of the Court of Appeals
in C.A. G.R. Sp. No. 32101 promulgated on 22 February 1995 which
annulled and set aside the decision of the Regional Trial Court of
Manila, Branch 12 in Civil Case No. 51930.
Impugned similarly is the resolution[2] of the Court of Appeals dated
29 June 1995 denying petitioners motion for reconsideration.
From the records, we find the following antecedents:
Pursuant to the Land for the Landless Program of the City of Manila
and in accordance with City Ordinance No. 6880, the Office of City
Mayor issued Resolution No. 16-A,[3] Series of 1978, dated 17 May
1978, which effectively set guidelines and criteria for the award of city
home lots to qualified and deserving applicants. Attached to said
resolution and made as integral part thereof was a Contract to Sell[4]
that further laid down terms and conditions which the lot awardee
must comply with.
On 30 June 1978, the City of Manila, through the City Tenants
Security Committee (CTSC) presently known as the Urban Settlement
Office (URBAN), passed Resolution 17-78[5] which in effect awarded
to 46 applicants, 37 homelots in the former Ampil-Gorospe estate
located in Tondo, Manila. Luisa Gomez, predecessor-in-interest of
herein petitioner Vicente Gomez, was awarded Lot 4, Block 1, subject
to the provisions of Resolution No. 3-78 of the CTSC and building,
subdivision and zoning rules and regulations.

Consequently, a certificate of award[6]dated 02 July 1978 was granted

by the CTSC in favor of Luisa Gomez, who paid the purchase price of
the lot in the amount of P3,556.00 on installment basis,[7] said
payments being duly covered by official receipts.
In 1979, Luisa Gomez traveled to the Unites States of America but
returned to the Philippines in the same year.
On 18 January 1980, Luisa Gomez finally paid in full the P 3,556.00
purchase price of the lot. Despite the full payment, Luisa still paid in
installment an amount of P8,244.00, in excess of the purchase price,
which the City of Manila, through the CTSC, accepted. Additionally,
the lot was declared for taxation purposes and the corresponding real
estate taxes thereon paid from 1980-1988. In 1982, Luisa, together with
her spouse Daniel, left again for the United States of America where
she died[8] on 09 January 1983. She is survived by her husband and
four children, namely, Ramona G. Takorda, Edgardo Gomez, Erlinda
G. Pena, and Rebecca G. Dizon.[9]
Subsequently, in a memorandum dated 07 February 1984, the Urban
Settlements Officer and Member-Executive Secretary of the CTSC
directed the Western Police District, City Hall Detachment, to conduct
an investigation regarding reported violations of the terms and
conditions of the award committed by the lot awardees.
Thus, on 23 November 1984, a team headed by Pfc. Reynaldo
Cristobal of the Western Police District, proceeded to the former
Ampil-Gorospe estate where the subject lots are located, and
conducted an investigation of alleged violations thereat.
On 19 December 1984, team leader Pfc. Reynaldo Cristobal rendered
an investigation report[10] addressed to the City Mayor of Manila, as
Chairman of the CTSC, stating, among others, the following findings:
X X X After the said operation, it was found out that of all the lot
awardees in the said estate, the following were confirmed to have
violated the terms and conditions of their respective awards as
indicated opposite their names, to wit:
X X X 2. Name of awardee : Daniel Gomez
`Page 11 of 113

Address : No. 2557-C Juan Luna St. Tondo, Manila

Violation: The place was found actually occupied by Mrs. Erlinda
Perez and her family together with Mr. Mignony Lorghas and family,
who are paying monthly rentals of P 210.00 each to Vicente Gomez,
brother of awardee. Daniel Gomez is now presently residing in the
United States of America and only returns for vacation once in a
while as a Balikbayan X X X.
Thus, on 01 July 1986, the CTSC, headed by then City Mayor
Gemiliano Lopez, Jr. as Chairman, issued Resolution No. 015-86,[11]
adopting the findings of the investigation report submitted by Pfc.
Cristobal, and ordering the cancellation of the lot awards of Daniel
Gomez and other awardees who were found to have committed
violations, and further declaring the forfeiture of payments made by
said awardees as reasonable compensation for the use of the
homelots.
In a letter[12] dated 04 August 1986, herein petitioner Vicente Gomez,
acting as attorney-in-fact[13] of his brother Daniel Gomez (spouse of
Luisa Gomez) asked for reconsideration of the CTSC resolution
revoking the award of the lot.
On 28 June 1988, Daniel Gomez, spouse of awardee Luisa Gomez,
died in the United States of America. Eventually, on 01 February 1989,
the surviving children of the deceased spouses, who were American
citizens and residents of the United States of America, executed an
affidavit of adjudication with deed of donation[14] disposing
gratuitously Lot No. 1, Block 4, in favor of their uncle Vicente Gomez.
On 20 February 1989, petitioner Vicente Gomez filed a
memorandum[15] before the CTSC praying that Resolution 15-86 be
set aside and that the award of the lot be restored to Luisa Gomez, or
her heirs or successor-in-interest , preferably Vicente Gomez.
Thereafter, two supplemental memoranda, dated 26 July 1989[16] and
10 January 1990,[17] were submitted by petitioner before the CTSC
reiterating the prayer in the initial memorandum.

On 05 February 1990, herein petitioner filed before the Regional Trial

Court (RTC) of Manila, Branch 12, a petition for certiorari, prohibition
and mandamus docketed as Civil Case No. 90-51930, entitled
Vicente Gomez, as successor-in-interest of Awardee, Luisa Gomez,
petitioner, versus City Tenants Security Committee (now Urban
Settlement Office) and Register of Deeds of Manila, respondents.
In an order[18] dated 24 April 1990, the lower court directed the
petitioner to amend its petition so as to implead the proper
government agency.
Hence, petitioner filed an amended petition[19] impleading the City
of Manila as respondent, to which the latter submitted an answer.[20]
Accordingly, after the presentation of evidence, the lower court
promulgated its decision[21] dated 20 January 1993, the decretal
portion of which reads:
Wherefore, the petition is hereby granted :
1. Ordering the City of Manila through its agency the City Tenants
Security Committee (now Urban Settlement Office) to set aside the
order of cancellation of the award for Lot No. 4, Block 1 (formerly of
the Ampil-Gorospe estate) in favor of Luisa Gomez, her heirs and
successor-in-interest, the herein petitioner;
2. Prohibiting the City of Manila through its agency including the
Register of Deeds of Manila from awarding the same lot and issuing
the corresponding certificate of title therefor to any other person;
3. Ordering the City of Manila through its agency the City Tenants
Security Committee (now Urban Settlement Office) to execute a Deed
of Absolute Sale over the aforementioned lot in favor of the petitioner
as successor-in-interest of the awardee and further ordering them to
stop and/or refrain from disturbing the peaceful physical possession
thereof of (sic) the petitioner; and
4. Ordering the City of Manila through its agency the City Tenants
Security Committee (now Urban Settlement Office) to refund to the
petitioner his overpayments amounting to P8,244.00 and to pay the
costs of suit.
`Page 12 of 113

On appeal, the Court of Appeals reversed the lower courts decision

prompting petitioner to file a motion for reconsideration which the
appellate court denied via its assailed resolution dated 29 June 1995.
Hence, the instant appeal where the core of controversy revolves
around the propriety of CTSCs act of canceling the lot award,
through Resolution No. 015-86, and further declaring the forfeiture of
amounts paid by the awardee, as reasonable compensation for the use
of the home lot.
The petition is unmeritorious.
A thorough scrutiny of the records and an even more exhaustive
perusal of the evidence, both documentary and testimonial, would
lead to the inevitable conclusion that the fact of cancellation of the
award covering Lot 4, Block 1, by the City of Manila, acting through
the CTSC, was properly exercised within the bounds of law and
contractual stipulation between the parties.
Viewed broadly, petitioner anchors his case on the premise, albeit
erroneous, that upon full payment of the purchase price of the lot in
January 1980, Luisa Gomez, actual awardee, already acquired a
vested right over the real property subject of the present controversy.
Thus, according to petitioner, upon the death of Luisa Gomez on 09
January 1983, the alleged vested right was transmitted by operation of
law to her lawful heirs, pursuant to Article 777 of the Civil Code.
Additionally, petitioner submits that by virtue of the affidavit of
adjudication with Deed of Donation executed on 01 February 1989 in
his favor by the surviving children of Luisa, he, in effect, became the
successor-in-interest of Luisa and thus entitled to whatever rights
enjoyed by the latter over the property.
In the light of existing law and jurisprudence and based on the
evidence adduced, this Court finds difficulty giving credence and
weight to petitioners submissions. We therefore rule that the
cancellation of the award of Lot 4, Block 1, through the expediency of
Resolution No. 015-86, was proper.

Primarily, it must be stressed that the contract entered into between

the City of Manila and awardee Luisa Gomez was not one of sale but
a contract to sell, which, under both statutory and case law, has its
own attributes, peculiarities and effects.
Speaking through Mr. Justice Florenz Regalado, this Court in Adelfa
Properties, Inc. vs. Court of Appeals,[22] mapped out the bold
distinctions between these species of contracts, to wit:
In a contract of sale, the title passes to the vendee upon the delivery
of the thing sold; whereas in a contract to sell, by agreement, the
ownership is reserved in the vendor and is not to pass until the full
payment of the price. In a contract of sale, the vendor has lost and
cannot recover ownership until and unless the contract is resolved or
rescinded; whereas in a contract to sell, title is retained by the vendor
until the full payment of the purchase price, such payment being a
positive suspensive condition and failure of which is not a breach but
an event that prevents the obligation of the vendor to convey title
from being effective. Thus, a deed of sale is considered absolute in
nature where there is neither a stipulation in the deed that title to the
property sold is reserved in the seller until the full payment of the
price, nor one giving the vendor the right to unilaterally resolve the
contract the moment the buyer fails to pay within a fixed period.
To our mind, however, this pronouncement should not curtail the
right of the parties in a contract to sell to provide additional
stipulations, nor bar them from imposing conditions relative to the
transfer of ownership.
To be sure, a contract of sale may either be absolute or conditional.
One form of conditional sales is what is now popularly termed as a
Contract to Sell, where ownership or title is retained until the
fulfillment of a positive suspensive condition normally the payment
of the purchase price in the manner agreed upon.[23] (Emphasis ours)
From the above disquisition in Galang and applying Article 1306 of
the Civil Code, the contracting parties are accorded the liberality and
freedom to establish such stipulations, clauses, terms and conditions
as they may deem convenient, provided the same are not contrary to
law, morals, good custom, public order or public policy. In the law on
`Page 13 of 113

contracts, such fundamental principle is known as the autonomy of

contracts.
Under the present circumstances, we see no hindrance that prohibits
the parties from stipulating other lawful conditions, aside from full
payment of the purchase price, which they pledge to bind themselves
and upon which transfer of ownership depends.
In the instant case, we uphold the Contract to Sell, duly annexed and
attached to Resolution 16-A, which explicitly provides for additional
terms and conditions upon which the lot awardees are bound.
Although unsigned, the Contract to Sell, in addition to the provisions
of Resolution 16-A, constitutes the law between the contracting
parties. After all, under the law there exists a binding contract
between the parties whose minds have met on a certain matter
notwithstanding that they did not affix their signatures to its written
form.[24]
For a contract, like a contract to sell, involves a meeting of minds
between two persons whereby one binds himself, with respect to the
other, to give something or to render some service. Contracts, in
general, are perfected by mere consent, which is manifested by the
meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the contract. The offer must be certain and the
acceptance absolute.[25]
As to the matter of acceptance, the same may be evidenced by some
acts, or conduct, communicated to the offeror, either in a formal or an
informal manner, that clearly manifest the intention or determination
to accept the offer to buy or sell.[26]
In the case at bar, acceptance on the part of the vendee was
manifested through a plethora of acts, such as payment of the
purchase price, declaration of the property for taxation purposes, and
payment of real estate taxes thereon, and similar acts showing
vendee's assent to the contract.
Verily, Resolution 16-A and the Contract to Sell which was annexed,
attached and made to form part of said resolution, clearly laid down
the terms and conditions which the awardee-vendee must comply

with. Accordingly, as an awardee, Luisa Gomez, her heirs and

successors-in-interest alike, are duty-bound to perform the correlative
obligations embodied in Resolution 16-A and the Contract to Sell.
Resolution 16-A, Series of 1978, explicitly provides that aside from the
requirement of Filipino citizenship and legal age, the basic criteria for
award of the lot pursuant to the Land for the Landless Program of the
City of Manila shall be the following:
a) Occupancy - The applicant must be the legal and actual or
physical occupant of the lot in question at the time of its acquisition
by the City. He must be the owner of the house and lot, must be using
the same for his residential purposes, and must have had a lesseelessor relationship with the previous owner of the land or landed
estate of which the subject lot is a part.
b) Non-ownership of land - The applicant and/or his spouse, if he is
married, must not be an owner of any parcel of land in Manila,
Metropolitan Manila or elsewhere in the Philippines. Neither must he
and/or his spouse be a prospective owner or a buyer on installment
basis of any lot other than that which he is occupying and for which
he is applying for award from the City.
c) Capacity to pay- The applicant must have such financial means
and/or support as will enable him to make regular payments of
amortizations or installments for the lot if the same is awarded to
him.
Of equal importance are the essential terms and conditions embraced
in the Contract to Sell, which awardee Luisa Gomez, her heirs and
successors-in-interest, violated, to wit:
X X X Par.(3). The vendee shall occupy and use the lot exclusively for
his/her residential purpose . X X X
X X X Par. (5). The vendee hereby warrants and declares under oath
that he/she is a bonafide and actual occupant and tenant of the lot; X
X X and that he/she fully understands that any false statement or
misrepresentation hereof (sic) shall be sufficient cause for the
`Page 14 of 113

automatic cancellation of his/her rights under this agreement as well

as ground for criminal prosecution.

award, as evidenced by the investigation report submitted by Pfc.

Cristobal, dated 19 December 1984.

Par. (6). Until complete payment of the purchase price and

compliance with all the vendees obligations herein, title to the lot
remains in the name of the owner. During the effectivity of this
agreement, however, the owner may transfer its title or assign its
rights and interest under this agreement to any person, corporation,
bank or financial institution.

Results of the investigation conducted on 23 November 1984, reveal

that the lot was actually occupied and leased by a certain Erlinda
Perez and Mignony Lorghas, together with their respective families,
who were paying rentals to petitioner Vicente Gomez for the lease of
the subject premises.

Title shall pass to the vendee upon execution of a final deed of sale in
his/her favor. X X X
Par. (8). In order not to defeat the purpose of this social land reform
program of the City of Manila, and to prevent real estate speculations
within twenty years from complete payment of the purchase price
and execution of the final deed of sale, the lot and residential house or
improvement thereon shall not be sold, transferred, mortgaged,
leased or otherwise alienated or encumbered without the written
consent of the City Mayor.
Par. (9). During the effectivity of this agreement, the residential
house or improvement thereon shall not be leased, sold, transferred or
otherwise alienated by the vendee without the written consent of the
owner. X X X
Par. (14). In the event that the vendee dies before full payment of the
purchase price of the lot, his/her surviving spouse, children heirs
and/or successors-in-interest shall succeed in all his/her rights and
interest, as well as assume all/his/her obligations under this
agreement.
Par. (15). This agreement shall be binding upon the heirs, executors
and administrators of the vendee. (emphasis ours)
Petitioner urges that awardee Luisa Gomez did not commit any
violation of the lot award. On the contrary, the records would
indubitably show that Luisa Gomez, including her heirs and
successors-in-interest, have performed acts that constitute gross, if not
brazen, violation of the aforementioned terms and conditions of the

Moreover, in a conference held on 13 January 1989 at the Office of the

Acting Urban Settlement Officer, Lorghas admitted that she has been
leasing the property and paying rent to petitioner Vicente Gomez,
thus:[27]
Atty. Bernardo: Mrs. Lorghas, how long have you been renting the
property?
Mrs. Lorghas: I was living there since 1960 until today. I was renting a
small room downfloor (sic). When the family of Mr. Gomez died,
kami na ang tumira sa itaas until now.
Atty. Bernardo : Magkano ang upa mo?
Mrs. Lorghas: P300 a month.
Atty. Bernardo: Kanino?
Mrs. Lorghas: Kay Vicente Gomez.
Atty. Bernardo: Meron bang resibo?
Mrs. Lorghas: Wala po.
Atty. Bernardo: Noong 1973, kayo na rin ang nakatira sa lugar ni
Gomez.
Mrs. Lorghas: Opo.
Certainly, said acts constitute a brazen transgression of Resolution 16A and clear contravention of the Contract to Sell, specifically par. (3),
(8) and (9) thereof.

`Page 15 of 113

The contract provides in no uncertain terms, that the abovementioned

terms and conditions shall bind the heirs, executors and
administrators of the vendee. The contract further states that breach
thereof would result to the automatic cancellation of the vendees
rights thereunder.
Thus, par.(10) (b) (a) of the Contract to Sell, which reads:
X X X any violation of the terms and conditions of this agreement
shall automatically cause the cancellation of the vendees rights under
this agreement without necessity of prior notice or judicial declaration
X X X.
Such kind of stipulation was upheld by this Court in the Adelfa case
where we categorically declared that Article 1592 of the Civil Code,
which requires rescission either by judicial action, or notarial act, does
not apply to a contract to sell.[28]
Moreover, judicial action for rescission of a contract is not necessary
where the contract provides for automatic rescission in case of
breach,[29] as in the contract involved in the present controversy.
Likewise, this Court sustains the forfeiture of the payments made by
awardee as reasonable compensation for the use of the lot. At this
juncture, par. (1) of the Contract to Sell furnishes support to this
conclusion:
X X X In case of the cancellation of the vendees rights under this
agreement as hereinafter stipulated, all payments made by him/her
shall be forfeited and considered as rentals for the use of the lot X X
X.
Further, Article 1486 of the Civil Code provides that a stipulation that
the installments or rents paid shall not be returned to the vendee or
lessee shall be valid insofar as the same may not be unconscionable
under the circumstances.[30]
Applying the foregoing, we are of the considered view that the
payment of the purchase price of P3,556.00, constitutes fair and
reasonable rental for the period in which said property was under the
control of awardee Luisa Gomez, her heirs and successors-in-interest.
Undeniably, the awardee together with her heirs and successors-in-

interest, have gained benefits, financial or otherwise, for a period of

eight years - from the time of actual award of the lot to the time of
cancellation thereof (1978-1986).
Nonetheless, we ought to stress that in the present case, forfeiture of
the installments paid as rentals, only applies to the purchase price of
P3,556.00 and not to the overpayment of the amount of P8,244.00.
Under these circumstances, the vendor should refund the amount of
P8,244.00 representing the overpayment made, plus interest, to be
computed in accordance with the rule of thumb enunciated in the
landmark case of Eastern Shipping Lines, Inc. vs. Court of
Appeals[31] and reiterated in the case of Philippine National Bank vs.
Court of Appeals.[32]
For us to uphold the forfeiture of the amount representing the
overpayment would be to revolt against the dictates of justice and
fairness. A contrary ruling would unjustly enrich the vendor to the
prejudice of the vendee.
In the same vein, the provisions of Article 777 of the Civil Code
notwithstanding, we hold that the surviving children of awardee
Luisa Gomez are not qualified transferees of Lot 4, Block 1 for failure
to conform with the prerequisites set by Resolution 16-A, to wit,
Filipino citizenship and actual occupancy, which in the present case,
are basic criteria for the award of the lot, pursuant to the Land for
the Landless Program of the City of Manila.
The records reveal that the children of Luisa Gomez are American
citizens and permanent residents of the United States of America.
Notably, Resolution 16-A specifically enumerates Filipino citizenship
and actual occupancy of the lot for residential purposes, as
qualifications for entitlement to the lot award. For this court to
consider said surviving children as qualified awardee-transferees
would render illusory the purposes for which Resolution 16-A and
the Land for the Landless Program of the City of Manila were
adopted.
Even assuming arguendo that the surviving children of Luisa Gomez
are entitled to the lot by virtue of Article 777 of the Civil Code, said
`Page 16 of 113

heirs nevertheless abandoned their right when they violated the terms
and conditions of the award by donating the subject property to
petitioner Vicente Gomez.
As paragraph (15) of the agreement provides that the heirs of the
vendee shall be bound thereby, it is then incumbent upon said heirs to
render strict compliance with the provisions thereof.
In particular, paragraph (8) of the Contract proscribes the sale,
transfer, mortgage, lease, alienation or encumbrance of the lot,
residential house, or improvement thereon, without the written
consent of the City Mayor, within a period of twenty (20) years from
complete payment of the purchase price and execution of the final
deed of sale. The execution of the Deed of Donation by the surviving
children of Luisa Gomez on February 1, 1989, in favor of Vicente
Gomez, was clearly within the prohibited period of 20 years from the
full payment of the purchase price on January 18, 1980.
Without doubt, the prohibition applies to them.
Furthermore, the subject lot and residential house were occupied by,
and leased to, third persons, in crystalline and evident derogation of
the terms of the award.
WHEREFORE, premises considered, the instant petition is
DISMISSED for lack of merit, and the assailed decision of the Court of
Appeals with respect to the cancellation of the award of Lot 4, Block 1,
is AFFIRMED SUBJECT TO MODIFICATION as to the forfeiture of
amounts paid by the vendee.
As modified, the City of Manila, is hereby ordered to refund with
dispatch the amount of P8,244.00 representing the overpayment made
by petitioner plus interest.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing, and De Leon, Jr., JJ.,
concur.

`Page 17 of 113

G.R. No. 107207

November 23, 1995

VIRGILIO R. ROMERO, petitioner, vs.

HON. COURT OF APPEALS and ENRIQUETA CHUA VDA. DE
ONGSIONG, respondents.
VITUG, J.:
The parties pose this question: May the vendor demand the rescission
of a contract for the sale of a parcel of land for a cause traceable to his
own failure to have the squatters on the subject property evicted
within the contractually-stipulated period?
Petitioner Virgilio R. Romero, a civil engineer, was engaged in the
business of production, manufacture and exportation of perlite filter
aids, permalite insulation and processed perlite ore. In 1988,
petitioner and his foreign partners decided to put up a central
warehouse in Metro Manila on a land area of approximately 2,000
square meters. The project was made known to several freelance real
estate brokers.
A day or so after the announcement, Alfonso Flores and his wife,
accompanied by a broker, offered a parcel of land measuring 1,952
square meters. Located in Barangay San Dionisio, Paraaque, Metro
Manila, the lot was covered by TCT No. 361402 in the name of private
respondent Enriqueta Chua vda. de Ongsiong. Petitioner visited the
property and, except for the presence of squatters in the area, he
found the place suitable for a central warehouse.
Later, the Flores spouses called on petitioner with a proposal that
should he advance the amount of P50,000.00 which could be used in
taking up an ejectment case against the squatters, private respondent
would agree to sell the property for only P800.00 per square meter.
Petitioner expressed his concurrence. On 09 June 1988, a contract,
denominated "Deed of Conditional Sale," was executed between
petitioner and private respondent. The simply-drawn contract read:
DEED OF CONDITIONAL SALE
KNOW ALL MEN BY THESE PRESENTS:

This Contract, made and executed in the Municipality of Makati,

Philippines this 9th day of June, 1988 by and between:
ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow,
Filipino and residing at 105 Simoun St., Quezon City, Metro Manila,
hereinafter referred to as the VENDOR;
-andVIRGILIO R. ROMERO, married to Severina L. Lat, of Legal age,
Filipino, and residing at 110 San Miguel St., Plainview Subd.,
Mandaluyong Metro Manila, hereinafter referred to as the VENDEE:
W I T N E S S E T H : That
WHEREAS, the VENDOR is the owner of One (1) parcel of land with
a total area of ONE THOUSAND NINE HUNDRED FIFTY TWO
(1,952) SQUARE METERS, more or less, located in Barrio San
Dionisio, Municipality of Paraaque, Province of Rizal, covered by
TCT No. 361402 issued by the Registry of Deeds of Pasig and more
particularly described as follows:
xxx

xxx

xxx

WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land
and the VENDOR has accepted the offer, subject to the terms and
conditions hereinafter stipulated:
NOW, THEREFORE, for and in consideration of the sum of ONE
MILLION FIVE HUNDRED SIXTY ONE THOUSAND SIX
HUNDRED PESOS (P1,561,600.00) ONLY, Philippine Currency,
payable by VENDEE to in to (sic) manner set forth, the VENDOR
agrees to sell to the VENDEE, their heirs, successors, administrators,
executors, assign, all her rights, titles and interest in and to the
property mentioned in the FIRST WHEREAS CLAUSE, subject to the
following terms and conditions:
1.
That the sum of FIFTY THOUSAND PESOS (P50,000.00)
ONLY Philippine Currency, is to be paid upon signing and execution
of this instrument.
2.
The balance of the purchase price in the amount of ONE
MILLION FIVE HUNDRED ELEVEN THOUSAND SIX HUNDRED
`Page 18 of 113

PESOS (P1,511,600.00) ONLY shall be paid 45 days after the removal

of all squatters from the above described property.
3.
Upon full payment of the overall purchase price as aforesaid,
VENDOR without necessity of demand shall immediately sign,
execute, acknowledged (sic) and deliver the corresponding deed of
absolute sale in favor of the VENDEE free from all liens and
encumbrances and all Real Estate taxes are all paid and updated.
It is hereby agreed, covenanted and stipulated by and between the
parties hereto that if after 60 days from the date of the signing of this
contract the VENDOR shall not be able to remove the squatters from
the property being purchased, the downpayment made by the buyer
shall be returned/reimbursed by the VENDOR to the VENDEE.
That in the event that the VENDEE shall not be able to pay the
VENDOR the balance of the purchase price of ONE MILLION FIVE
HUNDRED ELEVEN THOUSAND SIX HUNDRED PESOS
(P1,511,600.00) ONLY after 45 days from written notification to the
VENDEE of the removal of the squatters from the property being
purchased, the FIFTY THOUSAND PESOS (P50,000.00) previously
paid as downpayment shall be forfeited in favor of the VENDOR.
Expenses for the registration such as registration fees, documentary
stamp, transfer fee, assurances and such other fees and expenses as
may be necessary to transfer the title to the name of the VENDEE
shall be for the account of the VENDEE while capital gains tax shall
be paid by the VENDOR.
IN WITNESS WHEREOF, the parties hereunto signed those (sic)
presents in the City of Makati MM, Philippines on this 9th day of
June, 1988.
(Sgd.) (Sgd.)
VIRGILIO R. ROMERO
ONGSIONG
Vendee

ENRIQUETA

Vendor

SIGNED IN THE PRESENCE OF:

CHUA

VDA.

DE

(Sgd.) (Sgd.)
Rowena C. Ongsiong Jack M. Cruz 1
Alfonso Flores, in behalf of private respondent, forthwith received
and acknowledged a check for P50,000.00 2 from petitioner. 3
Pursuant to the agreement, private respondent filed a complaint for
ejectment (Civil Case No. 7579) against Melchor Musa and 29 other
squatter families with the Metropolitan Trial Court of Paraaque. A
few months later, or on 21 February 1989, judgment was rendered
ordering the defendants to vacate the premises. The decision was
handed down beyond the 60-day period (expiring 09 August 1988)
stipulated in the contract. The writ of execution of the judgment was
issued, still later, on 30 March 1989.
In a letter, dated 07 April 1989, private respondent sought to return
the P50,000.00 she received from petitioner since, she said, she could
not "get rid of the squatters" on the lot. Atty. Sergio A.F. Apostol,
counsel for petitioner, in his reply of 17 April 1989, refused the tender
and stated:.
Our client believes that with the exercise of reasonable diligence
considering the favorable decision rendered by the Court and the writ
of execution issued pursuant thereto, it is now possible to eject the
squatters from the premises of the subject property, for which reason,
he proposes that he shall take it upon himself to eject the squatters,
provided, that expenses which shall be incurred by reason thereof
shall be chargeable to the purchase price of the land. 4
Meanwhile, the Presidential Commission for the Urban Poor
("PCUD"), through its Regional Director for Luzon, Farley O. Viloria,
asked the Metropolitan Trial Court of Paraaque for a grace period of
45 days from 21 April 1989 within which to relocate and transfer the
squatter families. Acting favorably on the request, the court
suspended the enforcement of the writ of execution accordingly.
On 08 June 1989, Atty. Apostol reminded private respondent on the
expiry of the 45-day grace period and his client's willingness to
`Page 19 of 113

"underwrite the expenses for the execution of the judgment and

ejectment of the occupants." 5
In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for
private respondent, advised Atty. Apostol that the Deed of
Conditional Sale had been rendered null and void by virtue of his
client's failure to evict the squatters from the premises within the
agreed 60-day period. He added that private respondent had "decided
to retain the property." 6
On 23 June 1989, Atty. Apostol wrote back to explain:
The contract of sale between the parties was perfected from the very
moment that there was a meeting of the minds of the parties upon the
subject lot and the price in the amount of P1,561,600.00. Moreover, the
contract had already been partially fulfilled and executed upon
receipt of the downpayment of your client. Ms. Ongsiong is
precluded from rejecting its binding effects relying upon her inability
to eject the squatters from the premises of subject property during the
agreed period. Suffice it to state that, the provision of the Deed of
Conditional Sale do not grant her the option or prerogative to rescind
the contract and to retain the property should she fail to comply with
the obligation she has assumed under the contract. In fact, a perusal
of the terms and conditions of the contract clearly shows that the right
to rescind the contract and to demand the return/reimbursement of
the downpayment is granted to our client for his protection.
Instead, however, of availing himself of the power to rescind the
contract and demand the return, reimbursement of the
downpayment, our client had opted to take it upon himself to eject
the squatters from the premises. Precisely, we refer you to our letters
addressed to your client dated April 17, 1989 and June 8, 1989.
Moreover, it is basic under the law on contracts that the power to
rescind is given to the injured party. Undoubtedly, under the
circumstances, our client is the injured party.
Furthermore, your client has not complied with her obligation under
their contract in good faith. It is undeniable that Ms. Ongsiong
deliberately refused to exert efforts to eject the squatters from the

premises of the subject property and her decision to retain the

property was brought about by the sudden increase in the value of
realties in the surrounding areas.
Please consider this letter as a tender of payment to your client and a
demand to execute the absolute Deed of Sale. 7
A few days later (or on 27 June 1989), private respondent, prompted
by petitioner's continued refusal to accept the return of the P50,000.00
advance payment, filed with the Regional Trial Court of Makati,
Branch 133, Civil Case No. 89-4394 for rescission of the deed of
"conditional" sale, plus damages, and for the consignation of
P50,000.00 cash.
Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued
an alias writ of execution in Civil Case No. 7579 on motion of private
respondent but the squatters apparently still stayed on.
Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial
Court of Makati 8 rendered decision holding that private respondent
had no right to rescind the contract since it was she who "violated her
obligation to eject the squatters from the subject property" and that
petitioner, being the injured party, was the party who could, under
Article 1191 of the Civil Code, rescind the agreement. The court ruled
that the provisions in the contract relating to (a) the
return/reimbursement of the P50,000.00 if the vendor were to fail in
her obligation to free the property from squatters within the
stipulated period or (b), upon the other hand, the sum's forfeiture by
the vendor if the vendee were to fail in paying the agreed purchase
price, amounted to "penalty clauses". The court added:
This Court is not convinced of the ground relied upon by the plaintiff
in seeking the rescission, namely: (1) he (sic) is afraid of the squatters;
and (2) she has spent so much to eject them from the premises (p. 6,
tsn, ses. Jan. 3, 1990). Militating against her profession of good faith is
plaintiffs conduct which is not in accord with the rules of fair play
and justice. Notably, she caused the issuance of an alias writ of
execution on August 25, 1989 (Exh. 6) in the ejectment suit which was
almost two months after she filed the complaint before this Court on
June 27, 1989. If she were really afraid of the squatters, then she
`Page 20 of 113

should not have pursued the issuance of an alias writ of execution.

Besides, she did not even report to the police the alleged phone
threats from the squatters. To the mind of the Court, the so-called
squatter factor is simply factuitous (sic). 9
The lower court, accordingly, dismissed the complaint and ordered,
instead, private respondent to eject or cause the ejectment of the
squatters from the property and to execute the absolute deed of
conveyance upon payment of the full purchase price by petitioner.
Private respondent appealed to the Court of Appeals. On 29 May
1992, the appellate court rendered its decision. 10 It opined that the
contract entered into by the parties was subject to a resolutory
condition, i.e., the ejectment of the squatters from the land, the nonoccurrence of which resulted in the failure of the object of the
contract; that private respondent substantially complied with her
obligation to evict the squatters; that it was petitioner who was not
ready to pay the purchase price and fulfill his part of the contract, and
that the provision requiring a mandatory return/reimbursement of
the P50,000.00 in case private respondent would fail to eject the
squatters within the 60-day period was not a penal clause. Thus, it
concluded.
WHEREFORE, the decision appealed from is REVERSED and SET
ASIDE, and a new one entered declaring the contract of conditional
sale dated June 9, 1988 cancelled and ordering the defendant-appellee
to accept the return of the downpayment in the amount of P50,000.00
which was deposited in the court below. No pronouncement as to
costs. 11
Failing to obtain a reconsideration, petitioner filed this petition for
review on certiorari raising issues that, in fine, center on the nature of
the contract adverted to and the P50,000.00 remittance made by
petitioner.
A perfected contract of sale may either be absolute or conditional 12
depending on whether the agreement is devoid of, or subject to, any
condition imposed on the passing of title of the thing to be conveyed
or on the obligation of a party thereto. When ownership is retained
until the fulfillment of a positive condition the breach of the condition

will simply prevent the duty to convey title from acquiring an

obligatory force. If the condition is imposed on an obligation of a
party which is not complied with, the other party may either refuse to
proceed or waive said condition (Art. 1545, Civil Code). Where, of
course, the condition is imposed upon the perfection of the contract
itself, the failure of such condition would prevent the juridical
relation itself from coming into existence. 13
In determining the real character of the contract, the title given to it by
the parties is not as much significant as its substance. For example, a
deed of sale, although denominated as a deed of conditional sale, may
be treated as absolute in nature, if title to the property sold is not
reserved in the vendor or if the vendor is not granted the right to
unilaterally rescind the contract predicated on the fulfillment or nonfulfillment, as the case may be, of the prescribed condition. 14
The term "condition" in the context of a perfected contract of sale
pertains, in reality, to the compliance by one party of an undertaking
the fulfillment of which would beckon, in turn, the demandability of
the reciprocal prestation of the other party. The reciprocal obligations
referred to would normally be, in the case of vendee, the payment of
the agreed purchase price and, in the case of the vendor, the
fulfillment of certain express warranties (which, in the case at bench is
the timely eviction of the squatters on the property).
It would be futile to challenge the agreement here in question as not
being a duly perfected contract. A sale is at once perfected when a
person (the seller) obligates himself, for a price certain, to deliver and
to transfer ownership of a specified thing or right to another (the
buyer) over which the latter agrees. 15
The object of the sale, in the case before us, was specifically identified
to be a 1,952-square meter lot in San Dionisio, Paraaque, Rizal,
covered by Transfer Certificate of Title No. 361402 of the Registry of
Deeds for Pasig and therein technically described. The purchase price
was fixed at P1,561,600.00, of which P50,000.00 was to be paid upon
the execution of the document of sale and the balance of P1,511,600.00
payable "45 days after the removal of all squatters from the above
described property."
`Page 21 of 113

From the moment the contract is perfected, the parties are bound not
only to the fulfillment of what has been expressly stipulated but also
to all the consequences which, according to their nature, may be in
keeping with good faith, usage and law. Under the agreement, private
respondent is obligated to evict the squatters on the property. The
ejectment of the squatters is a condition the operative act of which sets
into motion the period of compliance by petitioner of his own
obligation, i.e., to pay the balance of the purchase price. Private
respondent's failure "to remove the squatters from the property"
within the stipulated period gives petitioner the right to either refuse
to proceed with the agreement or waive that condition in consonance
with Article 1545 of the Civil Code. 16 This option clearly belongs to
petitioner and not to private respondent.
We share the opinion of the appellate court that the undertaking
required of private respondent does not constitute a "potestative
condition dependent solely on his will" that might, otherwise, be void
in accordance with Article 1182 of the Civil Code 17 but a "mixed"
condition "dependent not on the will of the vendor alone but also of
third persons like the squatters and government agencies and
personnel concerned." 18 We must hasten to add, however, that
where the so-called "potestative condition" is imposed not on the birth
of the obligation but on its fulfillment, only the obligation is avoided,
leaving unaffected the obligation itself. 19
In contracts of sale particularly, Article 1545 of the Civil Code,
aforementioned, allows the obligee to choose between proceeding
with the agreement or waiving the performance of the condition. It is
this provision which is the pertinent rule in the case at bench. Here,
evidently, petitioner has waived the performance of the condition
imposed on private respondent to free the property from squatters. 20

execution of the judgment in the ejectment case and to make

arrangements with the sheriff to effect such execution. In his letter of
23 June 1989, counsel for petitioner has tendered payment and
demanded forthwith the execution of the deed of absolute sale.
Parenthetically, this offer to pay, having been made prior to the
demand for rescission, assuming for the sake of argument that such a
demand is proper under Article 1592 23 of the Civil Code, would
likewise suffice to defeat private respondent's prerogative to rescind
thereunder.
There is no need to still belabor the question of whether the
P50,000.00 advance payment is reimbursable to petitioner or
forfeitable by private respondent, since, on the basis of our foregoing
conclusions, the matter has ceased to be an issue. Suffice it to say that
petitioner having opted to proceed with the sale, neither may
petitioner demand its reimbursement from private respondent nor
may private respondent subject it to forfeiture.
WHEREFORE, the questioned decision of the Court of Appeals is
hereby REVERSED AND SET ASIDE, and another is entered ordering
petitioner to pay private respondent the balance of the purchase price
and the latter to execute the deed of absolute sale in favor of
petitioner. No costs.
SO ORDERED.
Feliciano, Romero, Melo and Panganiban, JJ., concur.

In any case, private respondent's action for rescission is not

warranted. She is not the injured party. 21 The right of resolution of a
party to an obligation under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party that violates the
reciprocity between them. 22 It is private respondent who has failed
in her obligation under the contract. Petitioner did not breach the
agreement. He has agreed, in fact, to shoulder the expenses of the
`Page 22 of 113

THIRD DIVISION
[G.R. No. 108346. July 11, 2001]
Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE,
petitioners, vs. COURT OF APPEALS, DAVID A. RAYMUNDO and
GEORGE RAYMUNDO, respondents.

other improvements thereon, located at 1918 Kamias St., Dasmarias

Village, Makati and covered by TCT No. 142177. Defendant George
Raymundo [herein private respondent] is Davids father who
negotiated with plaintiffs Avelina and Mariano Velarde [herein
petitioners] for the sale of said property, which was, however, under
lease (Exh. 6, p. 232, Record of Civil Case No. 15952).

DECISION
PANGANIBAN, J.:
A substantial breach of a reciprocal obligation, like failure to pay the
price in the manner prescribed by the contract, entitles the injured
party to rescind the obligation. Rescission abrogates the contract from
its inception and requires a mutual restitution of benefits received.
The Case
Before us is a Petition for Review on Certiorari[1] questioning the
Decision[2] of the Court of Appeals (CA) in CA-GR CV No. 32991
dated October 9, 1992, as well as its Resolution[3] dated December 29,
1992 denying petitioners motion for reconsideration.[4]
The dispositive portion of the assailed Decision reads:
WHEREFORE, the Order dated May 15, 1991 is hereby ANNULLED
and SET ASIDE and the Decision dated November 14, 1990
dismissing the [C]omplaint is REINSTATED. The bonds posted by
plaintiffs-appellees
and
defendants-appellants
are
hereby
RELEASED.[5]
The Facts
The factual antecedents of the case, as found by the CA, are as
follows:
x x x. David Raymundo [herein private respondent] is the absolute
and registered owner of a parcel of land, together with the house and

On August 8, 1986, a Deed of Sale with Assumption of Mortgage

(Exh. A; Exh. 1, pp. 11-12, Record) was executed by defendant
David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as
vendee, with the following terms and conditions:
x x x

xxx

xxx

That for and in consideration of the amount of EIGHT HUNDRED

THOUSAND PESOS (P800,000.00), Philippine currency, receipt of
which in full is hereby acknowledged by the VENDOR from the
VENDEE, to his entire and complete satisfaction, by these presents
the VENDOR hereby SELLS, CEDES, TRANSFERS, CONVEYS AND
DELIVERS, freely and voluntarily, with full warranty of a legal and
valid title as provided by law, unto the VENDEE, her heirs, successors
and assigns, the parcel of land mentioned and described above,
together with the house and other improvements thereon.
That the aforesaid parcel of land, together with the house and other
improvements thereon, were mortgaged by the VENDOR to the
BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila, to
secure the payment of a loan of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, as
evidenced by a Real Estate Mortgage signed and executed by the
VENDOR in favor of the said Bank of the Philippine Islands,
on______ and which Real Estate Mortgage was ratified before Notary
Public for Makati, _______, as Doc. No. ____, Page No. ___, Book No.
___, Series of 1986 of his Notarial Register.
`Page 23 of 113

That as part of the consideration of this sale, the VENDEE hereby

assumes to pay the mortgage obligations on the property herein sold
in the amount of ONE MILLION EIGHT HUNDRED THOUSAND
PESOS (P1,800,000.00), Philippine currency, in favor of Bank of the
Philippine Islands, in the name of the VENDOR, and further agrees to
strictly and faithfully comply with all the terms and conditions
appearing in the Real Estate Mortgage signed and executed by the
VENDOR in favor of BPI, including interests and other charges for
late payment levied by the Bank, as if the same were originally signed
and executed by the VENDEE.
It is further agreed and understood by the parties herein that the
capital gains tax and documentary stamps on the sale shall be for the
account of the VENDOR; whereas, the registration fees and transfer
tax thereon shall be for the account of the VENDEE. (Exh. A, pp. 1112, Record).
On the same date, and as part of the above-document, plaintiff
Avelina Velarde, with the consent of her husband, Mariano, executed
an Undertaking (Exh. C, pp. 13-14, Record), the pertinent portions of
which read, as follows:
x x x

xxx

xxx

Whereas, as per Deed of Sale with Assumption of Mortgage, I paid

Mr. David A. Raymundo the sum of EIGHT HUNDRED THOUSAND
PESOS (P800,000.00), Philippine currency, and assume the mortgage
obligations on the property with the Bank of the Philippine Islands in
the amount of ONE MILLION EIGHT HUNDRED THOUSAND
PESOS (P1,800,000.00), Philippine currency, in accordance with the
terms and conditions of the Deed of Real Estate Mortgage dated
_________, signed and executed by Mr. David A. Raymundo with the

said Bank, acknowledged before Notary Public for Makati, _____, as

Doc. No. ___, Page No. ___, Book No. __, Series of 1986 of his Notarial
Register.
WHEREAS, while my application for the assumption of the mortgage
obligations on the property is not yet approved by the mortgagee
Bank, I have agreed to pay the mortgage obligations on the property
with the Bank in the name of Mr. David A. Raymundo, in accordance
with the terms and conditions of the said Deed of Real Estate
Mortgage, including all interests and other charges for late payment.
WHEREAS, this undertaking is being executed in favor of Mr. David
A. Raymundo, for purposes of attesting and confirming our private
understanding concerning the said mortgage obligations to be
assumed.
NOW, THEREFORE, for and in consideration of the foregoing
premises, and the assumption of the mortgage obligations of ONE
MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),
Philippine currency, with the Bank of the Philippine islands, I, Mrs.
Avelina D. Velarde, with the consent of my husband, Mariano Z.
Velarde, do hereby bind and obligate myself, my heirs, successors and
assigns, to strictly and faithfully comply with the following terms and
conditions:
1. That until such time as my assumption of the mortgage
obligations on the property purchased is approved by the mortgagee
bank, the Bank of the Philippine Islands, I shall continue to pay the
said loan in accordance with the terms and conditions of the Deed of
Real Estate Mortgage in the name of Mr. David A. Raymundo, the
original Mortgagor.

`Page 24 of 113

2. That, in the event I violate any of the terms and conditions of the
said Deed of Real Estate Mortgage, I hereby agree that my
downpayment of P800,000.00, plus all payments made with the Bank
of the Philippine Islands on the mortgage loan, shall be forfeited in
favor of Mr. David A. Raymundo, as and by way of liquidated
damages, without necessity of notice or any judicial declaration to
that effect, and Mr. David A Raymundo shall resume total and
complete ownership and possession of the property sold by way of
Deed of Sale with Assumption of Mortgage, and the same shall be
deemed automatically cancelled and be of no further force or effect, in
the same manner as if (the) same had never been executed or entered
into.
3. That I am executing this Undertaking for purposes of binding
myself, my heirs, successors and assigns, to strictly and faithfully
comply with the terms and conditions of the mortgage obligations
with the Bank of the Philippine Islands, and the covenants,
stipulations and provisions of this Undertaking.
That, David A. Raymundo, the vendor of the property mentioned
and identified above, [does] hereby confirm and agree to the
undertakings of the Vendee pertinent to the assumption of the
mortgage obligations by the Vendee with the Bank of the Philippine
Islands. (Exh. C, pp. 13-14, Record).
This undertaking was signed by Avelina and Mariano Velarde and
David Raymundo.
It appears that the negotiated terms for the payment of the balance of
P1.8 million was from the proceeds of a loan that plaintiffs were to
secure from a bank with defendants help. Defendants had a standing
approved credit line with the Bank of the Philippine Islands (BPI).
The parties agreed to avail of this, subject to BPIs approval of an
application for assumption of mortgage by plaintiffs. Pending BPIs

approval o[f] the application, plaintiffs were to continue paying the

monthly interests of the loan secured by a real estate mortgage.
Pursuant to said agreements, plaintiffs paid BPI the monthly interest
on the loan secured by the aforementioned mortgage for three (3)
months as follows: September 19, 1986 at P27,225.00; October 20, 1986
at P23,000.00; and November 19, 1986 at P23,925.00 (Exh. E, H & J,
pp. 15, 17 and 18, Record).
On December 15, 1986, plaintiffs were advised that the Application
for Assumption of Mortgage with BPI was not approved (Exh. J, p.
133, Record). This prompted plaintiffs not to make any further
payment.
On January 5, 1987, defendants, thru counsel, wrote plaintiffs
informing the latter that their non-payment to the mortgage bank
constitute[d] non-performance of their obligation (Exh. 3, p. 220,
Record).
In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded,
as follows:
This is to advise you, therefore, that our client is willing to pay the
balance in cash not later than January 21, 1987 provided: (a) you
deliver actual possession of the property to her not later than January
15, 1987 for her immediate occupancy; (b) you cause the release of
title and mortgage from the Bank of P.I. and make the title available
and free from any liens and encumbrances; and (c) you execute an
absolute deed of sale in her favor free from any liens or encumbrances
not later than January 21, 1987. (Exhs. K, 4, p. 223, Record).

`Page 25 of 113

On January 8, 1987, defendants sent plaintiffs a notarial notice of

cancellation/rescission of the intended sale of the subject property
allegedly due to the latters failure to comply with the terms and
conditions of the Deed of Sale with Assumption of Mortgage and the
Undertaking (Exh. 5, pp. 225-226, Record).[6]
Consequently, petitioners filed on February 9, 1987 a Complaint
against private respondents for specific performance, nullity of
cancellation, writ of possession and damages. This was docketed as
Civil Case No. 15952 at the Regional Trial Court of Makati, Branch
149. The case was tried and heard by then Judge Consuelo YnaresSantiago (now an associate justice of this Court), who dismissed the
Complaint in a Decision dated November 14, 1990.[7] Thereafter,
petitioners filed a Motion for Reconsideration.[8]
Meanwhile, then Judge Ynares-Santiago was promoted to the Court
of Appeals and Judge Salvador S. A. Abad Santos was assigned to the
sala she vacated. In an Order dated May 15, 1991,[9] Judge Abad
Santos granted petitioners Motion for Reconsideration and directed
the parties to proceed with the sale. He instructed petitioners to pay
the balance of P1.8 million to private respondents who, in turn, were
ordered to execute a deed of absolute sale and to surrender
possession of the disputed property to petitioners.

In the Deed of Sale with Assumption of Mortgage, it was stipulated

that as part of the consideration of this sale, the VENDEE (Velarde)
would assume to pay the mortgage obligation on the subject property
in the amount of P1.8 million in favor of BPI in the name of the
Vendor (Raymundo). Since the price to be paid by the Vendee
Velarde includes the downpayment of P800,000.00 and the balance of
P1.8 million, and the balance of P1.8 million cannot be paid in cash,
Vendee Velarde, as part of the consideration of the sale, had to
assume the mortgage obligation on the subject property. In other
words, the assumption of the mortgage obligation is part of the
obligation of Velarde, as vendee, under the contract. Velarde further
agreed to strictly and faithfully comply with all the terms and
conditions appearing in the Real Estate Mortgage signed and
executed by the VENDOR in favor of BPI x x x as if the same were
originally signed and executed by the Vendee. (p.2, thereof, p.12,
Record). This was reiterated by Velarde in the document entitled
Undertaking wherein the latter agreed to continue paying said loan
in accordance with the terms and conditions of the Deed of Real
Estate Mortgage in the name of Raymundo. Moreover, it was
stipulated that in the event of violation by Velarde of any terms and
conditions of said deed of real estate mortgage, the downpayment of
P800,000.00 plus all payments made with BPI or the mortgage loan
would be forfeited and the [D]eed of [S]ale with [A]ssumption of
[M]ortgage would thereby be cancelled automatically and of no force
and effect (pars. 2 & 3, thereof, pp. 13-14, Record).

Private respondents appealed to the CA.

Ruling of the Court of Appeals
The CA set aside the Order of Judge Abad Santos and reinstated then
Judge Ynares-Santiagos earlier Decision dismissing petitioners
Complaint. Upholding the validity of the rescission made by private
respondents, the CA explained its ruling in this wise:

From these 2 documents, it is therefore clear that part of the

consideration of the sale was the assumption by Velarde of the
mortgage obligation of Raymundo in the amount of P1.8 million. This
would mean that Velarde had to make payments to BPI under the
[D]eed of [R]eal [E]state [M]ortgage in the name of Raymundo. The
application with BPI for the approval of the assumption of mortgage
would mean that, in case of approval, payment of the mortgage
obligation will now be in the name of Velarde. And in the event said
application is disapproved, Velarde had to pay in full. This is alleged
`Page 26 of 113

and admitted in Paragraph 5 of the Complaint. Mariano Velarde

likewise admitted this fact during the hearing on September 15, 1997
(p. 47, t.s.n., September 15, 1987; see also pp. 16-26, t.s.n., October 8,
1989). This being the case, the non-payment of the mortgage
obligation would result in a violation of the contract. And, upon
Velardes failure to pay the agreed price, the[n] Raymundo may
choose either of two (2) actions - (1) demand fulfillment of the
contract, or (2) demand its rescission (Article 1191, Civil Code).
The disapproval by BPI of the application for assumption of
mortgage cannot be used as an excuse for Velardes non-payment of
the balance of the purchase price. As borne out by the evidence,
Velarde had to pay in full in case of BPIs disapproval of the
application for assumption of mortgage. What Velarde should have
done was to pay the balance of P1.8 million. Instead, Velarde sent
Raymundo a letter dated January 7, 1987 (Exh. K, 4) which was
strongly given weight by the lower court in reversing the decision
rendered by then Judge Ynares-Santiago. In said letter, Velarde
registered their willingness to pay the balance in cash but enumerated
3 new conditions which, to the mind of this Court, would constitute a
new undertaking or new agreement which is subject to the consent or
approval of Raymundo. These 3 conditions were not among those
previously agreed upon by Velarde and Raymundo. These are mere
offers or, at most, an attempt to novate. But then again, there can be
no novation because there was no agreement of all the parties to the
new contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).
It was likewise agreed that in case of violation of the mortgage
obligation, the Deed of Sale with Assumption of Mortgage would be
deemed automatically cancelled and of no further force and effect, as
if the same had never been executed or entered into. While it is true
that even if the contract expressly provided for automatic rescission
upon failure to pay the price, the vendee may still pay, he may do so
only for as long as no demand for rescission of the contract has been
made upon him either judicially or by a notarial act (Article 1592,

Civil Code). In the case at bar, Raymundo sent Velarde a notarial

notice dated January 8, 1987 of cancellation/rescission of the contract
due to the latters failure to comply with their obligation. The
rescission was justified in view of Velardes failure to pay the price
(balance) which is substantial and fundamental as to defeat the object
of the parties in making the agreement. As adverted to above, the
agreement of the parties involved a reciprocal obligation wherein the
obligation of one is a resolutory condition of the obligation of the
other, the non-fulfillment of which entitles the other party to rescind
the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the nonpayment of the mortgage obligation by appellees Velarde would
create a right to demand payment or to rescind the contract, or to
criminal prosecution (Edca Publishing & Distribution Corporation vs.
Santos, 184 SCRA 614). Upon appellees failure, therefore, to pay the
balance, the contract was properly rescinded (Ruiz vs. IAC, 184 SCRA
720). Consequently, appellees Velarde having violated the contract,
they have lost their right to its enforcement and hence, cannot avail of
the action for specific performance (Voysaw vs. Interphil Promotions,
Inc., 148 SCRA 635).[10]
Hence, this appeal.[11]
The Issues
Petitioners, in their Memorandum,[12] interpose the following
assignment of errors:
I.
The Court of Appeals erred in holding that the non-payment of the
mortgage obligation resulted in a breach of the contract.
II.
The Court of Appeals erred in holding that the rescission (resolution)
of the contract by private respondents was justified.
III.
The Court of Appeals erred in holding that petitioners January 7,
1987 letter gave three new conditions constituting mere offers or an
`Page 27 of 113

attempt to novate necessitating a new agreement between the

parties.
The Courts Ruling
The Petition is partially meritorious.

In a contract of sale, the seller obligates itself to transfer the ownership

of and deliver a determinate thing, and the buyer to pay therefor a
price certain in money or its equivalent.[13] Private respondents had
already performed their obligation through the execution of the Deed
of Sale, which effectively transferred ownership of the property to
petitioner through constructive delivery. Prior physical delivery or
possession is not legally required, and the execution of the Deed of
Sale is deemed equivalent to delivery.[14]

First Issue:
Breach of Contract
Petitioners aver that their nonpayment of private respondents
mortgage obligation did not constitute a breach of contract,
considering that their request to assume the obligation had been
disapproved by the mortgagee bank. Accordingly, payment of the
monthly amortizations ceased to be their obligation and, instead, it
devolved upon private respondents again.
However, petitioners did not merely stop paying the mortgage
obligations; they also failed to pay the balance of the purchase price.
As admitted by both parties, their agreement mandated that
petitioners should pay the purchase price balance of P1.8 million to
private respondents in case the request to assume the mortgage
would be disapproved.
Thus, on December 15, 1986, when
petitioners received notice of the banks disapproval of their
application to assume respondents mortgage, they should have paid
the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents
offering to make such payment only upon the fulfillment of certain
conditions not originally agreed upon in the contract of sale. Such
conditional offer to pay cannot take the place of actual payment as
would discharge the obligation of a buyer under a contract of sale.

Petitioners, on the other hand, did not perform their correlative

obligation of paying the contract price in the manner agreed upon.
Worse, they wanted private respondents to perform obligations
beyond those stipulated in the contract before fulfilling their own
obligation to pay the full purchase price.
Second Issue
Validity of the Rescission
Petitioners likewise claim that the rescission of the contract by private
respondents was not justified, inasmuch as the former had signified
their willingness to pay the balance of the purchase price only a little
over a month from the time they were notified of the disapproval of
their application for assumption of mortgage. Petitioners also aver
that the breach of the contract was not substantial as would warrant a
rescission. They cite several cases[15] in which this Court declared
that rescission of a contract would not be permitted for a slight or
casual breach. Finally, they argue that they have substantially
performed their obligation in good faith, considering that they have
already made the initial payment of P800,000 and three (3) monthly
mortgage payments.
As pointed out earlier, the breach committed by petitioners was not
so much their nonpayment of the mortgage obligations, as their
`Page 28 of 113

nonperformance of their reciprocal obligation to pay the purchase

price under the contract of sale. Private respondents right to rescind
the contract finds basis in Article 1191 of the Civil Code, which
explicitly provides as follows:
Art. 1191. -- The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is
incumbent upon him.
The injured party may choose between fulfillment and the rescission
of the obligation, with the payment of damages in either case. He
may also seek rescission even after he has chosen fulfillment, if the
latter should become impossible.
The right of rescission of a party to an obligation under Article 1191 of
the Civil Code is predicated on a breach of faith by the other party
who violates the reciprocity between them.[16] The breach
contemplated in the said provision is the obligors failure to comply
with an existing obligation.[17] When the obligor cannot comply with
what is incumbent upon it, the obligee may seek rescission and, in the
absence of any just cause for the court to determine the period of
compliance, the court shall decree the rescission.[18]
In the present case, private respondents validly exercised their right
to rescind the contract, because of the failure of petitioners to comply
with their obligation to pay the balance of the purchase price.
Indubitably, the latter violated the very essence of reciprocity in the
contract of sale, a violation that consequently gave rise to private
respondents right to rescind the same in accordance with law.

compliance of their reciprocal obligation. Moreover, the offer to pay

was conditioned on the performance by private respondents of
additional burdens that had not been agreed upon in the original
contract. Thus, it cannot be said that the breach committed by
petitioners was merely slight or casual as would preclude the exercise
of the right to rescind.
Misplaced is petitioners reliance on the cases[19] they cited because
the factual circumstances in those cases are not analogous to those in
the present one. In Song Fo there was, on the part of the buyer, only a
delay of twenty (20) days to pay for the goods delivered. Moreover,
the buyers offer to pay was unconditional and was accepted by the
seller. In Zepeda, the breach involved a mere one-week delay in
paying the balance of P1,000, which was actually paid. In Tan, the
alleged breach was private respondents delay of only a few days,
which was for the purpose of clearing the title to the property; there
was no reference whatsoever to the nonpayment of the contract price.
In the instant case, the breach committed did not merely consist of a
slight delay in payment or an irregularity; such breach would not
normally defeat the intention of the parties to the contract. Here,
petitioners not only failed to pay the P1.8 million balance, but they
also imposed upon private respondents new obligations as
preconditions to the performance of their own obligation. In effect,
the qualified offer to pay was a repudiation of an existing obligation,
which was legally due and demandable under the contract of sale.
Hence, private respondents were left with the legal option of seeking
rescission to protect their own interest.
Mutual Restitution
Required in Rescission

True, petitioners expressed their willingness to pay the balance of the

purchase price one month after it became due; however, this was not
equivalent to actual payment as would constitute a faithful
`Page 29 of 113

As discussed earlier, the breach committed by petitioners was the

nonperformance of a reciprocal obligation, not a violation of the terms
and conditions of the mortgage contract. Therefore, the automatic
rescission and forfeiture of payment clauses stipulated in the contract
does not apply. Instead, Civil Code provisions shall govern and
regulate the resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191
of the Civil Code, mutual restitution is required to bring back the
parties to their original situation prior to the inception of the contract.
Accordingly, the initial payment of P800,000 and the corresponding
mortgage payments in the amounts of P27,225, P23,000 and P23,925
(totaling P874,150.00) advanced by petitioners should be returned by
private respondents, lest the latter unjustly enrich themselves at the
expense of the former.
Rescission creates the obligation to return the object of the contract. It
can be carried out only when the one who demands rescission can
return whatever he may be obliged to restore.[20] To rescind is to
declare a contract void at its inception and to put an end to it as
though it never was. It is not merely to terminate it and release the
parties from further obligations to each other, but to abrogate it from
the beginning and restore the parties to their relative positions as if no
contract has been made.[21]

pay the balance of the sale price. They had no right to demand
preconditions to the fulfillment of their obligation, which had become
due.
WHEREFORE, the assailed Decision is hereby AFFIRMED with the
MODIFICATION that private respondents are ordered to return to
petitioners the amount of P874,150, which the latter paid as a
consequence of the rescinded contract, with legal interest thereon
from January 8, 1987, the date of rescission. No pronouncement as to
costs.
SO ORDERED.
Melo, (Chairman), Vitug, and Sandoval-Gutierrez, JJ., concur.
Gonzaga-Reyes, J., on leave.

Third Issue
Attempt to Novate
In view of the foregoing discussion, the Court finds it no longer
necessary to discuss the third issue raised by petitioners. Suffice it to
say that the three conditions appearing on the January 7, 1987 letter of
petitioners to private respondents were not part of the original
contract. By that time, it was already incumbent upon the former to
`Page 30 of 113

G.R. No. 118114

December 7, 1995

TEODORO ACAP, petitioner,

vs.
COURT OF APPEALS and EDY DE LOS REYES, respondents.

PADILLA, J.:
This is a petition for review on certiorari of the decision 1 of the Court
of Appeals, 2nd Division, in CA-G.R. No. 36177, which affirmed the
decision 2 of the Regional Trial Court of Himamaylan, Negros
Occidental holding that private respondent Edy de los Reyes had
acquired ownership of Lot No. 1130 of the Cadastral Survey of
Hinigaran, Negros Occidental based on a document entitled
"Declaration of Heirship and Waiver of Rights", and ordering the
dispossession of petitioner as leasehold tenant of the land for failure
to pay rentals.
The facts of the case are as follows:
The title to Lot No. 1130 of the Cadastral Survey of Hinigaran, Negros
Occidental was evidenced by OCT No. R-12179. The lot has an area of
13,720 sq. meters. The title was issued and is registered in the name of
spouses Santiago Vasquez and Lorenza Oruma. After both spouses
died, their only son Felixberto inherited the lot. In 1975, Felixberto
executed a duly notarized document entitled "Declaration of Heirship
and Deed of Absolute Sale" in favor of Cosme Pido.

The evidence before the court a quo established that since 1960,
petitioner Teodoro Acap had been the tenant of a portion of the said
land, covering an area of nine thousand five hundred (9,500) meters.
When ownership was transferred in 1975 by Felixberto to Cosme
Pido, Acap continued to be the registered tenant thereof and
religiously paid his leasehold rentals to Pido and thereafter, upon
Pido's death, to his widow Laurenciana.
The controversy began when Pido died intestate and on 27 November
1981, his surviving heirs executed a notarized document denominated
as "Declaration of Heirship and Waiver of Rights of Lot No. 1130
Hinigaran Cadastre," wherein they declared; to quote its pertinent
portions, that:
. . . Cosme Pido died in the Municipality of Hinigaran, Negros
Occidental, he died intestate and without any known debts and
obligations which the said parcel of land is (sic) held liable.
That Cosme Pido was survived by his/her legitimate heirs, namely:
LAURENCIANA PIDO, wife, ELY, ERVIN, ELMER, and ELECHOR
all surnamed PIDO; children;
That invoking the provision of Section 1, Rule 74 of the Rules of
Court, the above-mentioned heirs do hereby declare unto [sic]
ourselves the only heirs of the late Cosme Pido and that we hereby
adjudicate unto ourselves the above-mentioned parcel of land in
equal shares.
Now, therefore, We LAURENCIANA 3, ELY, ELMER, ERVIN and
ELECHOR all surnamed PIDO, do hereby waive, quitclaim all our
rights, interests and participation over the said parcel of land in favor
of EDY DE LOS REYES, of legal age, (f)ilipino, married to VIRGINIA
`Page 31 of 113

DE LOS REYES, and resident of Hinigaran, Negros Occidental,

Philippines. . . . 4 (Emphasis supplied)

refused and failed to pay the agreed annual rental of ten (10) cavans
of palay despite repeated demands.

The document was signed by all of Pido's heirs. Private respondent

Edy de los Reyes did not sign said document.

During the trial before the court a quo, petitioner reiterated his refusal
to recognize private respondent's ownership over the subject land. He
averred that he continues to recognize Cosme Pido as the owner of
the said land, and having been a registered tenant therein since 1960,
he never reneged on his rental obligations. When Pido died, he
continued to pay rentals to Pido's widow. When the latter left for
abroad, she instructed him to stay in the landholding and to pay the
accumulated rentals upon her demand or return from abroad.

It will be noted that at the time of Cosme Pido's death, title to the
property continued to be registered in the name of the Vasquez
spouses. Upon obtaining the Declaration of Heirship with Waiver of
Rights in his favor, private respondent Edy de los Reyes filed the
same with the Registry of Deeds as part of a notice of an adverse
claim against the original certificate of title.
Thereafter, private respondent sought for petitioner (Acap) to
personally inform him that he (Edy) had become the new owner of
the land and that the lease rentals thereon should be paid to him.
Private respondent further alleged that he and petitioner entered into
an oral lease agreement wherein petitioner agreed to pay ten (10)
cavans of palay per annum as lease rental. In 1982, petitioner
allegedly complied with said obligation. In 1983, however, petitioner
refused to pay any further lease rentals on the land, prompting
private respondent to seek the assistance of the then Ministry of
Agrarian Reform (MAR) in Hinigaran, Negros Occidental. The MAR
invited petitioner to a conference scheduled on 13 October 1983.
Petitioner did not attend the conference but sent his wife instead to
the conference. During the meeting, an officer of the Ministry
informed Acap's wife about private respondent's ownership of the
said land but she stated that she and her husband (Teodoro) did not
recognize private respondent's claim of ownership over the land.
On 28 April 1988, after the lapse of four (4) years, private respondent
filed a complaint for recovery of possession and damages against
petitioner, alleging in the main that as his leasehold tenant, petitioner

Petitioner further claimed before the trial court that he had no

knowledge about any transfer or sale of the lot to private respondent
in 1981 and even the following year after Laurenciana's departure for
abroad. He denied having entered into a verbal lease tenancy contract
with private respondent and that assuming that the said lot was
indeed sold to private respondent without his knowledge, R.A. 3844,
as amended, grants him the right to redeem the same at a reasonable
price. Petitioner also bewailed private respondent's ejectment action
as a violation of his right to security of tenure under P.D. 27.
On 20 August 1991, the lower court rendered a decision in favor of
private respondent, the dispositive part of which reads:
WHEREFORE, premises considered, the Court renders judgment in
favor of the plaintiff, Edy de los Reyes, and against the defendant,
Teodoro Acap, ordering the following, to wit:
1.
Declaring forfeiture of defendant's preferred right to issuance
of a Certificate of Land Transfer under Presidential Decree No. 27 and
his farmholdings;
`Page 32 of 113

2.
Ordering the defendant Teodoro Acap to deliver possession of
said farm to plaintiff, and;
3.
Ordering the defendant to pay P5,000.00 as attorney's fees, the
sum of P1,000.00 as expenses of litigation and the amount of
P10,000.00 as actual damages. 5
In arriving at the above-mentioned judgment, the trial court stated
that the evidence had established that the subject land was "sold" by
the heirs of Cosme Pido to private respondent. This is clear from the
following disquisitions contained in the trial court's six (6) page
decision:
There is no doubt that defendant is a registered tenant of Cosme Pido.
However, when the latter died their tenancy relations changed since
ownership of said land was passed on to his heirs who, by executing a
Deed of Sale, which defendant admitted in his affidavit, likewise
passed on their ownership of Lot 1130 to herein plaintiff (private
respondent). As owner hereof, plaintiff has the right to demand
payment of rental and the tenant is obligated to pay rentals due from
the time demand is made. . . . 6
xxx

xxx

xxx

Certainly, the sale of the Pido family of Lot 1130 to herein plaintiff
does not of itself extinguish the relationship. There was only a change
of the personality of the lessor in the person of herein plaintiff Edy de
los Reyes who being the purchaser or transferee, assumes the rights
and obligations of the former landowner to the tenant Teodoro Acap,
herein defendant. 7

Aggrieved, petitioner appealed to the Court of Appeals, imputing

error to the lower court when it ruled that private respondent
acquired ownership of Lot No. 1130 and that he, as tenant, should pay
rentals to private respondent and that failing to pay the same from
1983 to 1987, his right to a certificate of land transfer under P.D. 27
was deemed forfeited.
The Court of Appeals brushed aside petitioner's argument that the
Declaration of Heirship and Waiver of Rights (Exhibit "D"), the
document relied upon by private respondent to prove his ownership
to the lot, was excluded by the lower court in its order dated 27
August 1990. The order indeed noted that the document was not
identified by Cosme Pido's heirs and was not registered with the
Registry of Deeds of Negros Occidental. According to respondent
court, however, since the Declaration of Heirship and Waiver of
Rights appears to have been duly notarized, no further proof of its
due execution was necessary. Like the trial court, respondent court
was also convinced that the said document stands as prima facie
proof of appellee's (private respondent's) ownership of the land in
dispute.
With respect to its non-registration, respondent court noted that
petitioner had actual knowledge of the subject sale of the land in
dispute to private respondent because as early as 1983, he (petitioner)
already knew of private respondent's claim over the said land but
which he thereafter denied, and that in 1982, he (petitioner) actually
paid rent to private respondent. Otherwise stated, respondent court
considered this fact of rental payment in 1982 as estoppel on
petitioner's part to thereafter refute private respondent's claim of
ownership over the said land. Under these circumstances, respondent
court ruled that indeed there was deliberate refusal by petitioner to
pay rent for a continued period of five years that merited forfeiture of
his otherwise preferred right to the issuance of a certificate of land
transfer.
`Page 33 of 113

In the present petition, petitioner impugns the decision of the Court of

Appeals as not in accord with the law and evidence when it rules that
private respondent acquired ownership of Lot No. 1130 through the
aforementioned Declaration of Heirship and Waiver of Rights.
Hence, the issues to be resolved presently are the following:
1.
WHETHER OR NOT THE SUBJECT DECLARATION OF
HEIRSHIP AND WAIVER OF RIGHTS IS A RECOGNIZED MODE
OF ACQUIRING OWNERSHIP BY PRIVATE RESPONDENT OVER
THE LOT IN QUESTION.
2.
WHETHER OR NOT THE SAID DOCUMENT CAN BE
CONSIDERED A DEED OF SALE IN FAVOR OF PRIVATE
RESPONDENT OF THE LOT IN QUESTION.
Petitioner argues that the Regional Trial Court, in its order dated 7
August 1990, explicitly excluded the document marked as Exhibit "D"
(Declaration of Heirship, etc.) as private respondent's evidence
because it was not registered with the Registry of Deeds and was not
identified by anyone of the heirs of Cosme Pido. The Court of
Appeals, however, held the same to be admissible, it being a
notarized document, hence, a prima facie proof of private
respondents' ownership of the lot to which it refers.
Petitioner points out that the Declaration of Heirship and Waiver of
Rights is not one of the recognized modes of acquiring ownership
under Article 712 of the Civil Code. Neither can the same be
considered a deed of sale so as to transfer ownership of the land to
private respondent because no consideration is stated in the contract
(assuming it is a contract or deed of sale).

Private respondent defends the decision of respondent Court of

Appeals as in accord with the evidence and the law. He posits that
while it may indeed be true that the trial court excluded his Exhibit
"D" which is the Declaration of Heirship and Waiver of Rights as part
of his evidence, the trial court declared him nonetheless owner of the
subject lot based on other evidence adduced during the trial, namely,
the notice of adverse claim (Exhibit "E") duly registered by him with
the Registry of Deeds, which contains the questioned Declaration of
Heirship and Waiver of Rights as an integral part thereof.
We find the petition impressed with merit.
In the first place, an asserted right or claim to ownership or a real
right over a thing arising from a juridical act, however justified, is not
per se sufficient to give rise to ownership over the res. That right or
title must be completed by fulfilling certain conditions imposed by
law. Hence, ownership and real rights are acquired only pursuant to a
legal mode or process. While title is the juridical justification, mode is
the actual process of acquisition or transfer of ownership over a thing
in question. 8
Under Article 712 of the Civil Code, the modes of acquiring
ownership are generally classified into two (2) classes, namely, the
original mode (i.e., through occupation, acquisitive prescription, law
or intellectual creation) and the derivative mode (i.e., through
succession mortis causa or tradition as a result of certain contracts,
such as sale, barter, donation, assignment or mutuum).
In the case at bench, the trial court was obviously confused as to the
nature and effect of the Declaration of Heirship and Waiver of Rights,
equating the same with a contract (deed) of sale. They are not the
same.

`Page 34 of 113

In a Contract of Sale, one of the contracting parties obligates himself

to transfer the ownership of and to deliver a determinate thing, and
the other party to pay a price certain in money or its equivalent. 9
Upon the other hand, a declaration of heirship and waiver of rights
operates as a public instrument when filed with the Registry of Deeds
whereby the intestate heirs adjudicate and divide the estate left by the
decedent among themselves as they see fit. It is in effect an
extrajudicial settlement between the heirs under Rule 74 of the Rules
of Court. 10
Hence, there is a marked difference between a sale of hereditary
rights and a waiver of hereditary rights. The first presumes the
existence of a contract or deed of sale between the parties. 11 The
second is, technically speaking, a mode of extinction of ownership
where there is an abdication or intentional relinquishment of a known
right with knowledge of its existence and intention to relinquish it, in
favor of other persons who are co-heirs in the succession. 12 Private
respondent, being then a stranger to the succession of Cosme Pido,
cannot conclusively claim ownership over the subject lot on the sole
basis of the waiver document which neither recites the elements of
either a sale, 13 or a donation, 14 or any other derivative mode of
acquiring ownership.
Quite surprisingly, both the trial court and public respondent Court
of Appeals concluded that a "sale" transpired between Cosme Pido's
heirs and private respondent and that petitioner acquired actual
knowledge of said sale when he was summoned by the Ministry of
Agrarian Reform to discuss private respondent's claim over the lot in
question. This conclusion has no basis both in fact and in law.
On record, Exhibit "D", which is the "Declaration of Heirship and
Waiver of Rights" was excluded by the trial court in its order dated 27
August 1990 because the document was neither registered with the

Registry of Deeds nor identified by the heirs of Cosme Pido. There is

no showing that private respondent had the same document attached
to or made part of the record. What the trial court admitted was
Annex "E", a notice of adverse claim filed with the Registry of Deeds
which contained the Declaration of Heirship with Waiver of rights
and was annotated at the back of the Original Certificate of Title to the
land in question.
A notice of adverse claim, by its nature, does not however prove
private respondent's ownership over the tenanted lot. "A notice of
adverse claim is nothing but a notice of a claim adverse to the
registered owner, the validity of which is yet to be established in court
at some future date, and is no better than a notice of lis pendens
which is a notice of a case already pending in court." 15
It is to be noted that while the existence of said adverse claim was
duly proven, there is no evidence whatsoever that a deed of sale was
executed between Cosme Pido's heirs and private respondent
transferring the rights of Pido's heirs to the land in favor of private
respondent. Private respondent's right or interest therefore in the
tenanted lot remains an adverse claim which cannot by itself be
sufficient to cancel the OCT to the land and title the same in private
respondent's name.
Consequently, while the transaction between Pido's heirs and private
respondent may be binding on both parties, the right of petitioner as a
registered tenant to the land cannot be perfunctorily forfeited on a
mere allegation of private respondent's ownership without the
corresponding proof thereof.
Petitioner had been a registered tenant in the subject land since 1960
and religiously paid lease rentals thereon. In his mind, he continued
to be the registered tenant of Cosme Pido and his family (after Pido's
`Page 35 of 113

death), even if in 1982, private respondent allegedly informed

petitioner that he had become the new owner of the land.
Under the circumstances, petitioner may have, in good faith, assumed
such statement of private respondent to be true and may have in fact
delivered 10 cavans of palay as annual rental for 1982 to private
respondent. But in 1983, it is clear that petitioner had misgivings over
private respondent's claim of ownership over the said land because in
the October 1983 MAR conference, his wife Laurenciana categorically
denied all of private respondent's allegations. In fact, petitioner even
secured a certificate from the MAR dated 9 May 1988 to the effect that
he continued to be the registered tenant of Cosme Pido and not of
private respondent. The reason is that private respondent never
registered the Declaration of Heirship with Waiver of Rights with the
Registry of Deeds or with the MAR. Instead, he (private respondent)
sought to do indirectly what could not be done directly, i.e., file a
notice of adverse claim on the said lot to establish ownership
thereover.

Occidental dated 20 August 1991 is hereby SET ASIDE. The private

respondent's complaint for recovery of possession and damages
against petitioner Acap is hereby DISMISSED for failure to properly
state a cause of action, without prejudice to private respondent taking
the proper legal steps to establish the legal mode by which he claims
to have acquired ownership of the land in question.
SO ORDERED.
Davide, Jr., Bellosillo, Kapunan and Hermosisima, Jr., JJ., concur.

It stands to reason, therefore, to hold that there was no unjustified or

deliberate refusal by petitioner to pay the lease rentals or
amortizations to the landowner/agricultural lessor which, in this
case, private respondent failed to establish in his favor by clear and
convincing evidence. 16
Consequently, the sanction of forfeiture of his preferred right to be
issued a Certificate of Land Transfer under P.D. 27 and to the
possession of his farmholdings should not be applied against
petitioners, since private respondent has not established a cause of
action for recovery of possession against petitioner.
WHEREFORE, premises considered, the Court hereby GRANTS the
petition and the decision of the Court of Appeals dated 1 May 1994
which affirmed the decision of the RTC of Himamaylan, Negros
`Page 36 of 113

SECOND DIVISION
[G.R. No. 126444. December 4, 1998]
ALFONSO QUIJADA, CRESENTE QUIJADA, REYNELDA
QUIJADA, DEMETRIO QUIJADA, ELIUTERIA QUIJADA, EULALIO
QUIJADA, and WARLITO QUIJADA, petitioners, vs. COURT OF
APPEALS, REGALADO MONDEJAR, RODULFO GOLORAN,
ALBERTO ASIS, SEGUNDINO RAS, ERNESTO GOLORAN, CELSO
ABISO, FERNANDO BAUTISTA, ANTONIO MACASERO, and
NESTOR MAGUINSAY, respondents.
DECISION
MARTINEZ, J.:
Petitioners, as heirs of the late Trinidad Quijada, filed a complaint
against private respondents for quieting of title, recovery of
possession and ownership of parcels of land with claim for attorney's
fees and damages. The suit was premised on the following facts
found by the Court of Appeals, which is materially the same as that
found by the trial court:
"Plaintiffs-appellees (petitioners) are the children of the late Trinidad
Corvera Vda. de Quijada. Trinidad was one of the heirs of the late
Pedro Corvera and inherited from the latter the two-hectare parcel of
land subject of the case, situated in the barrio of San Agustin,
Talacogon, Agusan del Sur. On April 5, 1956, Trinidad Quijada
together with her sisters Leonila Corvera Vda. de Sequea and Paz
Corvera Cabiltes and brother Epapiadito Corvera executed a
conditional deed of donation (Exh. C) of the two-hectare parcel of
land subject of the case in favor of the Municipality of Talacogon, the
condition being that the parcel of land shall be used solely and
exclusively as part of the campus of the proposed provincial high
school in Talacogon. Apparently, Trinidad remained in possession of
the parcel of land despite the donation. On July 29, 1962, Trinidad

sold one (1) hectare of the subject parcel of land to defendantappellant Regalado Mondejar (Exh. 1). Subsequently, Trinidad
verbally sold the remaining one (1) hectare to defendant-appellant
(respondent) Regalado Mondejar without the benefit of a written
deed of sale and evidenced solely by receipts of payment. In 1980, the
heirs of Trinidad, who at that time was already dead, filed a
complaint for forcible entry (Exh. E) against defendant-appellant
(respondent) Regalado Mondejar, which complaint was, however,
dismissed for failure to prosecute (Exh. F). In 1987, the proposed
provincial high school having failed to materialize, the Sangguniang
Bayan of the municipality of Talacogon enacted a resolution reverting
the two (2) hectares of land donated back to the donors (Exh. D). In
the meantime, defendant-appellant (respondent) Regalado Mondejar
sold portions of the land to defendants-appellants (respondents)
Fernando Bautista (Exh. 5), Rodolfo Goloran (Exh. 6), Efren Guden
(Exh. 7) and Ernesto Goloran (Exh. 8).
"On July 5, 1988, plaintiffs-appellees (petitioners) filed this action
against defendants-appellants (respondents).
In the complaint,
plaintiffs-appellees (petitioners) alleged that their deceased mother
never sold, conveyed, transferred or disposed of the property in
question to any person or entity much less to Regalado Mondejar save
the donation made to the Municipality of Talacogon in 1956; that at
the time of the alleged sale to Regalado Mondejar by Trinidad
Quijada, the land still belongs to the Municipality of Talacogon,
hence, the supposed sale is null and void.
"Defendants-appellants (respondents), on the other hand, in their
answer claimed that the land in dispute was sold to Regalado
Mondejar, the one (1) hectare on July 29, 1962, and the remaining one
(1) hectare on installment basis until fully paid. As affirmative
and/or special defense, defendants-appellants (respondents) alleged
that plaintiffs' action is barred by laches or has prescribed.

`Page 37 of 113

"The court a quo rendered judgment in favor of plaintiffs-appellees

(petitioners): firstly because 'Trinidad Quijada had no legal title or
right to sell the land to defendant Mondejar in 1962, 1966, 1967 and
1968, the same not being hers to dispose of because ownership
belongs to the Municipality of Talacogon' (Decision, p. 4; Rollo, p. 39)
and, secondly, that the deed of sale executed by Trinidad Quijada in
favor of Mondejar did not carry with it the conformity and
acquiescence of her children, more so that she was already 63 years
old at the time, and a widow (Decision, p. 6; Rollo, p. 41)."[1]
The dispositive portion of the trial court's decision reads:
"WHEREFORE, viewed from the above perceptions, the scale of
justice having tilted in favor of the plaintiffs, judgment is, as it is
hereby rendered:
1) ordering the Defendants to return and vacate the two (2) hectares
of land to Plaintiffs as described in Tax Declaration No. 1209 in the
name of Trinidad Quijada;
2) ordering any person acting in Defendants' behalf to vacate and
restore the peaceful possession of the land in question to Plaintiffs;
3) ordering the cancellation of the Deed of Sale executed by the late
Trinidad Quijada in favor of Defendant Regalado Mondejar as well as
the Deeds of Sale/Relinquishments executed by Mondejar in favor of
the other Defendants;
4) ordering Defendants to remove their improvements constructed on
the questioned lot;

5) ordering the Defendants to pay Plaintiffs, jointly and severally, the

amount of P10,000.00 representing attorney's fees;
6) ordering Defendants to pays the amount of P8,000.00 as expenses
of litigation; and
7) ordering Defendants to pay the sum of P30,000.00 representing
moral damages.
SO ORDERED."[2]
On appeal, the Court of Appeals reversed and set aside the judgment
a quo[3] ruling that the sale made by Trinidad Quijada to respondent
Mondejar was valid as the4 former retained an inchoate interest on
the lots by virtue of the automatic reversion clause in the deed of
donation.[4] Thereafter, petitioners filed a motion for reconsideration.
When the CA denied their motion,[5] petitioners instituted a petition
for review to this Court arguing principally that the sale of the subject
property made by Trinidad Quijada to respondent Mondejar is void,
considering that at that time, ownership was already transferred to
the Municipality of Talacogon. On the contrary, private respondents
contend that the sale was valid, that they are buyers in good faith, and
that petitioners' case is barred by laches.[6]
We affirm the decision of the respondent court.
The donation made on April 5, 1956 by Trinidad Quijada and her
brother and sisters[7] was subject to the condition that the donated
property shall be "used solely and exclusively as a part of the campus
of the proposed Provincial High School in Talacogon."[8] The
donation further provides that should "the proposed Provincial High
School be discontinued or if the same shall be opened but for some
`Page 38 of 113

reason or another, the same may in the future be closed" the donated
property shall automatically revert to the donor.[9] Such condition,
not being contrary to law, morals, good customs, public order or
public policy was validly imposed in the donation.[10]
When the Municipality's acceptance of the donation was made known
to the donor, the former became the new owner of the donated
property -- donation being a mode of acquiring and transmitting
ownership[11] - notwithstanding the condition imposed by the donee.
The donation is perfected once the acceptance by the donee is made
known to the donor.[12] Accordingly, ownership is immediately
transferred to the latter and that ownership will only revert to the
donor if the resolutory condition is not fulfilled.
In this case, that resolutory condition is the construction of the school.
It has been ruled that when a person donates land to another on the
condition that the latter would build upon the land a school, the
condition imposed is not a condition precedent or a suspensive
condition but a resolutory one.[13] Thus, at the time of the sales made
in 1962 towards 1968, the alleged seller (Trinidad) could not have sold
the lots since she had earlier transferred ownership thereof by virtue
of the deed of donation. So long as the resolutory condition subsists
and is capable of fulfillment, the donation remains effective and the
donee continues to be the owner subject only to the rights of the
donor or his successors-in-interest under the deed of donation. Since
no period was imposed by the donor on when must the donee comply
with the condition, the latter remains the owner so long as he has
tried to comply with the condition within a reasonable period. Such
period, however, became irrelevant herein when the doneeMunicipality manifested through a resolution that it cannot comply
with the condition of building a school and the same was made
known to the donor. Only then - when the non-fulfillment of the
resolutory condition was brought to the donor's knowledge - that
ownership of the donated property reverted to the donor as provided
in the automatic reversion clause of the deed of donation.

The donor may have an inchoate interest in the donated property

during the time that ownership of the land has not reverted to her.
Such inchoate interest may be the subject of contracts including a
contract of sale. In this case, however, what the donor sold was the
land itself which she no longer owns. It would have been different if
the donor-seller sold her interests over the property under the deed of
donation which is subject to the possibility of reversion of ownership
arising from the non-fulfillment of the resolutory condition.
As to laches, petitioners' action is not yet barred thereby. Laches
presupposes failure or neglect for an unreasonable and unexplained
length of time, to do that which, by exercising due diligence, could or
should have been done earlier;[14] "it is negligence or omission to
assert a right within a reasonable time, thus, giving rise to a
presumption that the party entitled to assert it either has abandoned
or declined to assert it."[15] Its essential elements of:
a) Conduct on the part of the defendant, or of one under whom he
claims, giving rise to the situation complained of;
b) Delay in asserting complainant's right after he had knowledge of
the defendant's conduct and after he has an opportunity to sue;
c) Lack of knowledge or notice on the part of the defendant that the
complainant would assert the right on which he bases his suit; and,
d) Injury or prejudice to the defendant in the event relief is accorded
to the complainant."[16]
are absent in this case. Petitioners' cause of action to quiet title
commenced only when the property reverted to the donor and/or his
successors-in-interest in 1987. Certainly, when the suit was initiated
the following year, it cannot be said that petitioners had slept on their
rights for a long time. The 1960's sales made by Trinidad Quijada
cannot be the reckoning point as to when petitioners' cause of action
arose. They had no interest over the property at that time except
under the deed of donation to which private respondents were not
privy. Moreover, petitioners had previously filed an ejectment suit
`Page 39 of 113

against private respondents only that it did not prosper on a

technicality.
Be that at it may, there is one thing which militates against the claim
of petitioners. Sale, being a consensual contract, is perfected by mere
consent, which is manifested the moment there is a meeting of the
minds[17] as to the offer and acceptance thereof on three (3) elements:
subject matter, price and terms of payment of the price.[18] ownership
by the seller on the thing sold at the time of the perfection of the
contract of sale is not an element for its perfection. What the law
requires is that the seller has the right to transfer ownership at the
time the thing sold is delivered.[19] Perfection per se does not
transfer ownership which occurs upon the actual or constructive
delivery of the thing sold.[20] A perfected contract of sale cannot be
challenged on the ground of non-ownership on the part of the seller at
the time of its perfection; hence, the sale is still valid.
The consummation, however, of the perfected contract is another
matter. It occurs upon the constructive or actual delivery of the
subject matter to the buyer when the seller or her successors-ininterest subsequently acquires ownership thereof. Such circumstance
happened in this case when petitioners -- who are Trinidad Quijada's
heirs and successors-in-interest -- became the owners of the subject
property upon the reversion of the ownership of the land to them.
Consequently, ownership is transferred to respondent Mondejar ands
those who claim their right from him. Article 1434 of the New Civil
Code supports the ruling that the seller's "title passes by operation of
law to the buyer."[21] This rule applies not only when the subject
matter of the contract of sale is goods,[22] but also to other kinds of
property, including real property.[23]

thus, the contract involving the same is inexistent and void from the
beginning. However, nowhere in Article 1409 (4) is it provided that
the properties of a municipality, whether it be those for public use or
its patrimonial property[25] are outside the commerce of men.
Besides, the lots in this case were conditionally owned by the
municipality. To rule that the donated properties are outside the
commerce of men would render nugatory the unchallenged
reasonableness and justness of the condition which the donor has the
right to impose as owner thereof. Moreover, the objects referred to as
outsides the commerce of man are those which cannot be
appropriated, such as the open seas and the heavenly bodies.
With respect to the trial courts award of attorneys fees, litigation
expenses and moral damages, there is neither factual nor legal basis
thereof. Attorneys fees and expenses of litigation cannot, following
the general rule in Article 2208 of the New Civil Code, be recovered in
this case, there being no stipulation to that effect and the case does not
fall under any of the exceptions.[26] It cannot be said that private
respondents had compelled petitioners to litigate with third persons.
Neither can it be ruled that the former acted in gross and evident
bad faith in refusing to satisfy the latters claims considering that
private respondents were under an honest belief that they have a legal
right over the property by virtue of the deed of sale. Moral damages
cannot likewise be justified as none of the circumstances enumerated
under Articles 2219[27] and 2220[28] of the New Civil Code concur in
this case.
WHEREFORE, by virtue of the foregoing, the assailed decision of the
Court of Appeals is AFFIRMED.
SO ORDERED.

There is also no merit in petitioners' contention that since the lots

were owned by the municipality at the time of the sale, they were
outside the commerce of men under Article 1409 (4) of the NCC;[24]

Melo (Acting Chairman), Puno, and Mendoza, JJ., concur.

`Page 40 of 113

`Page 41 of 113

THIRD DIVISION

4.

The costs of suit.

[G.R. No. 112212. March 2, 1998]

SO ORDERED.

GREGORIO FULE, petitioner, vs. COURT OF APPEALS,

NINEVETCH CRUZ and JUAN BELARMINO, respondents.

As found by the Court of Appeals and the lower court, the antecedent
facts of this case are as follows:

DECISION
ROMERO, J.:
This petition for review on certiorari questions the affirmance by the
Court of Appeals of the decision[1] of the Regional Trial Court of San
Pablo City, Branch 30, dismissing the complaint that prayed for the
nullification of a contract of sale of a 10-hectare property in Tanay,
Rizal in consideration of the amount of P40,000.00 and a 2.5 carat
emerald-cut diamond (Civil Case No. SP-2455). The lower courts
decision disposed of the case as follows:
WHEREFORE, premises considered, the Court hereby renders
judgment dismissing the complaint for lack of merit and ordering
plaintiff to pay:
1.
Defendant Dra. Ninevetch M. Cruz the sum of P300,000.00 as
and for moral damages and the sum of P100,000.00 as and for
exemplary damages;
2.
Defendant Atty. Juan Belarmino the sum of P250,000.00 as and
for moral damages and the sum of P150,000.00 as and for exemplary
damages;

Petitioner Gregorio Fule, a banker by profession and a jeweler at the

same time, acquired a 10-hectare property in Tanay, Rizal (hereinafter
Tanay property), covered by Transfer Certificate of Title No. 320725
which used to be under the name of Fr. Antonio Jacobe. The latter
had mortgaged it earlier to the Rural Bank of Alaminos (the Bank),
Laguna, Inc. to secure a loan in the amount of P10,000.00, but the
mortgage was later foreclosed and the property offered for public
auction upon his default.
In July 1984, petitioner, as corporate secretary of the bank, asked
Remelia Dichoso and Oliva Mendoza to look for a buyer who might
be interested in the Tanay property. The two found one in the person
of herein private respondent Dr. Ninevetch Cruz. It so happened that
at the time, petitioner had shown interest in buying a pair of emeraldcut diamond earrings owned by Dr. Cruz which he had seen in
January of the same year when his mother examined and appraised
them as genuine. Dr. Cruz, however, declined petitioners offer to
buy the jewelry for P100,000.00. Petitioner then made another bid to
buy them for US$6,000.00 at the exchange rate of $1.00 to P25.00. At
this point, petitioner inspected said jewelry at the lobby of the
Prudential Bank branch in San Pablo City and then made a sketch
thereof. Having sketched the jewelry for twenty to thirty minutes,
petitioner gave them back to Dr. Cruz who again refused to sell them
since the exchange rate of the peso at the time appreciated to P19.00 to
a dollar.

3.
Defendant Dra. Cruz and Atty. Belarmino the sum of P25,000.00
each as and for attorneys fees and litigation expenses; and
`Page 42 of 113

Subsequently, however, negotiations for the barter of the jewelry and

the Tanay property ensued. Dr. Cruz requested herein private
respondent Atty. Juan Belarmino to check the property who, in turn,
found out that no sale or barter was feasible because the one-year
period for redemption of the said property had not yet expired at the
time.
In an effort to cut through any legal impediment, petitioner executed
on October 19, 1984, a deed of redemption on behalf of Fr. Jacobe
purportedly in the amount of P15,987.78, and on even date, Fr. Jacobe
sold the property to petitioner for P75,000.00. The haste with which
the two deeds were executed is shown by the fact that the deed of sale
was notarized ahead of the deed of redemption. As Dr. Cruz had
already agreed to the proposed barter, petitioner went to Prudential
Bank once again to take a look at the jewelry.
In the afternoon of October 23, 1984, petitioner met Atty. Belarmino at
the latters residence to prepare the documents of sale.[2] Dr. Cruz
herself was not around but Atty. Belarmino was aware that she and
petitioner had previously agreed to exchange a pair of emerald-cut
diamond earrings for the Tanay property.
Atty. Belarmino
accordingly caused the preparation of a deed of absolute sale while
petitioner and Dr. Cruz attended to the safekeeping of the jewelry.
The following day, petitioner, together with Dichoso and Mendoza,
arrived at the residence of Atty. Belarmino to finally execute a deed of
absolute sale. Petitioner signed the deed and gave Atty. Belarmino the
amount of P13,700.00 for necessary expenses in the transfer of title
over the Tanay property. Petitioner also issued a certification to the
effect that the actual consideration of the sale was P200,000.00 and not
P80,000.00 as indicated in the deed of absolute sale. The disparity
between the actual contract price and the one indicated on the deed of
absolute sale was purportedly aimed at minimizing the amount of the
capital gains tax that petitioner would have to shoulder. Since the

jewelry was appraised only at P160,000.00, the parties agreed that the
balance of P40,000.00 would just be paid later in cash.
As pre-arranged, petitioner left Atty. Belarminos residence with
Dichoso and Mendoza and headed for the bank, arriving there at past
5:00 p.m. Dr. Cruz also arrived shortly thereafter, but the cashier
who kept the other key to the deposit box had already left the bank.
Dr. Cruz and Dichoso, therefore, looked for said cashier and found
him having a haircut. As soon as his haircut was finished, the cashier
returned to the bank and arrived there at 5:48 p.m., ahead of Dr. Cruz
and Dichoso who arrived at 5:55 p.m. Dr. Cruz and the cashier then
opened the safety deposit box, the former retrieving a transparent
plastic or cellophane bag with the jewelry inside and handing over
the same to petitioner. The latter took the jewelry from the bag, went
near the electric light at the banks lobby, held the jewelry against the
light and examined it for ten to fifteen minutes. After a while, Dr.
Cruz asked, Okay na ba iyan? Petitioner expressed his satisfaction
by nodding his head.
For services rendered, petitioner paid the agents, Dichoso and
Mendoza, the amount of US$300.00 and some pieces of jewelry. He
did not, however, give them half of the pair of earrings in question
which he had earlier promised.
Later, at about 8:00 oclock in the evening of the same day, petitioner
arrived at the residence of Atty. Belarmino complaining that the
jewelry given to him was fake. He then used a tester to prove the
alleged fakery. Meanwhile, at 8:30 p.m., Dichoso and Mendoza went
to the residence of Dr. Cruz to borrow her car so that, with Atty.
Belarmino, they could register the Tanay property. After Dr. Cruz
had agreed to lend her car, Dichoso called up Atty. Belarmino. The
latter, however, instructed Dichoso to proceed immediately to his
residence because petitioner was there. Believing that petitioner had
finally agreed to give them half of the pair of earrings, Dichoso went
`Page 43 of 113

posthaste to the residence of Atty. Belarmino only to find petitioner

already demonstrating with a tester that the earrings were fake.
Petitioner then accused Dichoso and Mendoza of deceiving him
which they, however, denied. They countered that petitioner could
not have been fooled because he had vast experience regarding
jewelry. Petitioner nonetheless took back the US$300.00 and jewelry
he had given them.
Thereafter, the group decided to go to the house of a certain Macario
Dimayuga, a jeweler, to have the earrings tested. Dimayuga, after
taking one look at the earrings, immediately declared them
counterfeit. At around 9:30 p.m., petitioner went to one Atty.
Reynaldo Alcantara residing at Lakeside Subdivision in San Pablo
City, complaining about the fake jewelry. Upon being advised by the
latter, petitioner reported the matter to the police station where
Dichoso and Mendoza likewise executed sworn statements.
On October 26, 1984, petitioner filed a complaint before the Regional
Trial Court of San Pablo City against private respondents praying,
among other things, that the contract of sale over the Tanay property
be declared null and void on the ground of fraud and deceit.
On October 30, 1984, the lower court issued a temporary restraining
order directing the Register of Deeds of Rizal to refrain from acting on
the pertinent documents involved in the transaction. On November
20, 1984, however, the same court lifted its previous order and denied
the prayer for a writ of preliminary injunction.
After trial, the lower court rendered its decision on March 7, 1989.
Confronting the issue of whether or not the genuine pair of earrings
used as consideration for the sale was delivered by Dr. Cruz to
petitioner, the lower court said:

The Court finds that the answer is definitely in the affirmative.

Indeed, Dra. Cruz delivered (the) subject jewelries (sic) into the hands
of plaintiff who even raised the same nearer to the lights of the lobby
of the bank near the door. When asked by Dra. Cruz if everything
was in order, plaintiff even nodded his satisfaction (Hearing of Feb.
24, 1988). At that instance, plaintiff did not protest, complain or beg
for additional time to examine further the jewelries (sic). Being a
professional banker and engaged in the jewelry business plaintiff is
conversant and competent to detect a fake diamond from the real
thing. Plaintiff was accorded the reasonable time and opportunity to
ascertain and inspect the jewelries (sic) in accordance with Article
1584 of the Civil Code. Plaintiff took delivery of the subject jewelries
(sic) before 6:00 p.m. of October 24, 1984. When he went at 8:00 p.m.
that same day to the residence of Atty. Belarmino already with a
tester complaining about some fake jewelries (sic), there was already
undue delay because of the lapse of a considerable length of time
since he got hold of subject jewelries (sic). The lapse of two (2) hours
more or less before plaintiff complained is considered by the Court as
unreasonable delay.[3]
The lower court further ruled that all the elements of a valid contract
under Article 1458 of the Civil Code were present, namely: (a) consent
or meeting of the minds; (b) determinate subject matter, and (c) price
certain in money or its equivalent. The same elements, according to
the lower court, were present despite the fact that the agreement
between petitioner and Dr. Cruz was principally a barter contract.
The lower court explained thus:
x x x. Plaintiffs ownership over the Tanay property passed unto
Dra. Cruz upon the constructive delivery thereof by virtue of the
Deed of Absolute Sale (Exh. D). On the other hand, the ownership of
Dra. Cruz over the subject jewelries (sic) transferred to the plaintiff
upon her actual personal delivery to him at the lobby of the
Prudential Bank. It is expressly provided by law that the thing sold
shall be understood as delivered, when it is placed in the control and
`Page 44 of 113

possession of the vendee (Art. 1497, Civil Code; Kuenzle & Straff vs.
Watson & Co. 13 Phil. 26). The ownership and/or title over the
jewelries (sic) was transmitted immediately before 6:00 p.m. of
October 24, 1984. Plaintiff signified his approval by nodding his head.
Delivery or tradition, is one of the modes of acquiring ownership (Art.
712, Civil Code).
Similarly, when Exhibit D was executed, it was equivalent to the
delivery of the Tanay property in favor of Dra. Cruz. The execution
of the public instrument (Exh. D) operates as a formal or symbolic
delivery of the Tanay property and authorizes the buyer, Dra. Cruz to
use the document as proof of ownership (Florendo v. Foz, 20 Phil.
399). More so, since Exhibit D does not contain any proviso or
stipulation to the effect that title to the property is reserved with the
vendor until full payment of the purchase price, nor is there a
stipulation giving the vendor the right to unilaterally rescind the
contract the moment the vendee fails to pay within a fixed period
(Taguba v. Vda. De Leon, 132 SCRA 722; Luzon Brokerage Co. Inc. vs.
Maritime Building Co. Inc. 86 SCRA 305; Froilan v. Pan Oriental
Shipping Co. et al. 12 SCRA 276).[4]
Aside from concluding that the contract of barter or sale had in fact
been consummated when petitioner and Dr. Cruz parted ways at the
bank, the trial court likewise dwelt on the unexplained delay with
which petitioner complained about the alleged fakery. Thus:
x x x. Verily, plaintiff is already estopped to come back after the
lapse of considerable length of time to claim that what he got was
fake. He is a Business Management graduate of La Salle University,
Class 1978-79, a professional banker as well as a jeweler in his own
right. Two hours is more than enough time to make a switch of a
Russian diamond with the real diamond. It must be remembered that
in July 1984 plaintiff made a sketch of the subject jewelries (sic) at the
Prudential Bank. Plaintiff had a tester at 8:00 p.m. at the residence of
Atty. Belarmino. Why then did he not bring it out when he was
examining the subject jewelries (sic) at about 6:00 p.m. in the banks

lobby? Obviously, he had no need for it after being satisfied of the

genuineness of the subject jewelries (sic). When Dra. Cruz and
plaintiff left the bank both of them had fully performed their
respective prestations. Once a contract is shown to have been
consummated or fully performed by the parties thereto, its existence
and binding effect can no longer be disputed. It is irrelevant and
immaterial to dispute the due execution of a contract if both of them
have in fact performed their obligations thereunder and their
respective signatures and those of their witnesses appear upon the
face of the document (Weldon Construction v. CA G.R. No. L-35721,
Oct. 12, 1987).[5]
Finally, in awarding damages to the defendants, the lower court
remarked:
The Court finds that plaintiff acted in wanton bad faith. Exhibit 2Belarmino purports to show that the Tanay property is worth
P25,000.00. However, also on that same day it was executed, the
propertys worth was magnified at P75,000.00 (Exh. 3-Belarmino).
How could in less than a day (Oct. 19, 1984) the value would (sic)
triple under normal circumstances? Plaintiff, with the assistance of his
agents, was able to exchange the Tanay property which his bank
valued only at P25,000.00 in exchange for a genuine pair of emerald
cut diamond worth P200,000.00 belonging to Dra. Cruz. He also
retrieved the US$300.00 and jewelries (sic) from his agents. But he was
not satisfied in being able to get subject jewelries for a song. He had
to file a malicious and unfounded case against Dra. Cruz and Atty.
Belarmino who are well known, respected and held in high esteem in
San Pablo City where everybody practically knows everybody.
Plaintiff came to Court with unclean hands dragging the defendants
and soiling their clean and good name in the process. Both of them
are near the twilight of their lives after maintaining and nurturing
their good reputation in the community only to be stunned with a
court case. Since the filing of this case on October 26, 1984 up to the
present they were living under a pall of doubt. Surely, this affected
not only their earning capacity in their practice of their respective
professions, but also they suffered besmirched reputations. Dra. Cruz
`Page 45 of 113

runs her own hospital and defendant Belarmino is a well respected

legal practitioner.
The length of time this case dragged on during which period their
reputation were (sic) tarnished and their names maligned by the
pendency of the case, the Court is of the belief that some of the
damages they prayed for in their answers to the complaint are
reasonably proportionate to the sufferings they underwent (Art. 2219,
New Civil Code). Moreover, because of the falsity, malice and
baseless nature of the complaint defendants were compelled to
litigate. Hence, the award of attorneys fees is warranted under the
circumstances (Art. 2208, New Civil Code).[6]
From the trial courts adverse decision, petitioner elevated the matter
to the Court of Appeals. On October 20, 1992, the Court of Appeals,
however, rendered a decision[7]affirming in toto the lower courts
decision. His motion for reconsideration having been denied on
October 19, 1993, petitioner now files the instant petition alleging that:
I. THE TRIAL COURT ERRED IN DISMISSING PLAINTIFFS
COMPLAINT AND IN HOLDING THAT THE PLAINTIFF
ACTUALLY RECEIVED A GENUINE PAIR OF EMERALD CUT
DIAMOND EARRING(S) FROM DEFENDANT CRUZ x x x;
II. THE TRIAL COURT ERRED IN AWARDING MORAL AND
EXEMPLARY DAMAGES AND ATTORNEYS FEES IN FAVOR OF
DEFENDANTS AND AGAINST THE PLAINTIFF IN THIS CASE;
and
III.THE TRIAL COURT ERRED IN NOT DECLARING THE DEED
OF SALE OF THE TANAY PROPERTY (EXH. `D) AS NULL AND
VOID OR IN NOT ANNULLING THE SAME, AND IN FAILING TO

GRANT REASONABLE
PLAINTIFF.[8]

DAMAGES

IN

FAVOR

OF

THE

As to the first allegation, the Court observes that petitioner is

essentially raising a factual issue as it invites us to examine and weigh
anew the facts regarding the genuineness of the earrings bartered in
exchange for the Tanay property. This, of course, we cannot do
without unduly transcending the limits of our review power in
petitions of this nature which are confined merely to pure questions
of law. We accord, as a general rule, conclusiveness to a lower courts
findings of fact unless it is shown, inter alia, that: (1) the conclusion
is a finding grounded on speculations, surmises or conjectures; (2)
the inference is manifestly mistaken, absurd and impossible; (3)
when there is a grave abuse of discretion; (4) when the judgment is
based on a misapprehension of facts; (5) when the findings of fact are
conflicting; and (6) when the Court of Appeals, in making its findings,
went beyond the issues of the case and the same is contrary to the
admission of both parties.[9] We find nothing, however, that warrants
the application of any of these exceptions.
Consequently, this Court upholds the appellate courts findings of
fact especially because these concur with those of the trial court
which, upon a thorough scrutiny of the records, are firmly grounded
on evidence presented at the trial.[10] To reiterate, this Courts
jurisdiction is only limited to reviewing errors of law in the absence of
any showing that the findings complained of are totally devoid of
support in the record or that they are glaringly erroneous as to
constitute serious abuse of discretion.[11]
Nonetheless, this Court has to closely delve into petitioners
allegation that the lower courts decision of March 7, 1989 is a readymade one because it was handed down a day after the last date of
the trial of the case.[12] Petitioner, in this regard, finds it incredible
that Judge J. Ausberto Jaramillo was able to write a 12-page singlespaced decision, type it and release it on March 7, 1989, less than a
day after the last hearing on March 6, 1989. He stressed that Judge
Jaramillo replaced Judge Salvador de Guzman and heard only his
rebuttal testimony.
`Page 46 of 113

This allegation is obviously no more than a desperate effort on the

part of petitioner to disparage the lower courts findings of fact in
order to convince this Court to review the same. It is noteworthy that
Atty. Belarmino clarified that Judge Jaramillo had issued the first
order in the case as early as March 9, 1987 or two years before the
rendition of the decision. In fact, Atty. Belarmino terminated
presentation of evidence on October 13, 1987, while Dr. Cruz finished
hers on February 4, 1989, or more than a month prior to the rendition
of the judgment. The March 6, 1989 hearing was conducted solely for
the presentation of petitioner's rebuttal testimony.[13] In other words,
Judge Jaramillo had ample time to study the case and write the
decision because the rebuttal evidence would only serve to confirm or
verify the facts already presented by the parties.
The Court finds nothing anomalous in the said situation. No proof
has been adduced that Judge Jaramillo was motivated by a malicious
or sinister intent in disposing of the case with dispatch. Neither is
there proof that someone else wrote the decision for him. The
immediate rendition of the decision was no more than Judge
Jaramillos compliance with his duty as a judge to dispose of the
courts business promptly and decide cases within the required
periods.[14] The two-year period within which Judge Jaramillo
handled the case provided him with all the time to study it and even
write down its facts as soon as these were presented to court. In fact,
this Court does not see anything wrong in the practice of writing a
decision days before the scheduled promulgation of judgment and
leaving the dispositive portion for typing at a time close to the date of
promulgation, provided that no malice or any wrongful conduct
attends its adoption.[15] The practice serves the dual purposes of
safeguarding the confidentiality of draft decisions and rendering
decisions with promptness. Neither can Judge Jaramillo be made
administratively answerable for the immediate rendition of the
decision. The acts of a judge which pertain to his judicial functions
are not subject to disciplinary power unless they are committed with
fraud, dishonesty, corruption or bad faith.[16] Hence, in the absence
of sufficient proof to the contrary, Judge Jaramillo is presumed to

have performed his job in accordance with law and should instead be
commended for his close attention to duty.
Having disposed of petitioners first contention, we now come to the
core issue of this petition which is whether the Court of Appeals erred
in upholding the validity of the contract of barter or sale under the
circumstances of this case.
The Civil Code provides that contracts are perfected by mere consent.
From this moment, the parties are bound not only to the fulfillment of
what has been expressly stipulated but also to all the consequences
which, according to their nature, may be in keeping with good faith,
usage and law.[17] A contract of sale is perfected at the moment there
is a meeting of the minds upon the thing which is the object of the
contract and upon the price.[18] Being consensual, a contract of sale
has the force of law between the contracting parties and they are
expected to abide in good faith by their respective contractual
commitments. Article 1358 of the Civil Code which requires the
embodiment of certain contracts in a public instrument, is only for
convenience,[19] and registration of the instrument only adversely
affects third parties.[20] Formal requirements are, therefore, for the
benefit of third parties. Non-compliance therewith does not adversely
affect the validity of the contract nor the contractual rights and
obligations of the parties thereunder.
It is evident from the facts of the case that there was a meeting of the
minds between petitioner and Dr. Cruz. As such, they are bound by
the contract unless there are reasons or circumstances that warrant its
nullification. Hence, the problem that should be addressed in this
case is whether or not under the facts duly established herein, the
contract can be voided in accordance with law so as to compel the
parties to restore to each other the things that have been the subject of
the contract with their fruits, and the price with interest.[21]
Contracts that are voidable or annullable, even though there may
have been no damage to the contracting parties are: (1) those where
`Page 47 of 113

one of the parties is incapable of giving consent to a contract; and (2)

those where the consent is vitiated by mistake, violence, intimidation,
undue influence or fraud.[22] Accordingly, petitioner now stresses
before this Court that he entered into the contract in the belief that the
pair of emerald-cut diamond earrings was genuine. On the pretext
that those pieces of jewelry turned out to be counterfeit, however,
petitioner subsequently sought the nullification of said contract on the
ground that it was, in fact, tainted with fraud[23] such that his
consent was vitiated.

moved one or both parties to enter into the contract.[25] An example

of mistake as to the object of the contract is the substitution of a
specific thing contemplated by the parties with another.[26] In his
allegations in the complaint, petitioner insinuated that an inferior one
or one that had only Russian diamonds was substituted for the
jewelry he wanted to exchange with his 10-hectare land. He,
however, failed to prove the fact that prior to the delivery of the
jewelry to him, private respondents endeavored to make such
substitution.

There is fraud when, through the insidious words or machinations of

one of the contracting parties, the other is induced to enter into a
contract which, without them, he would not have agreed to.[24] The
records, however, are bare of any evidence manifesting that private
respondents employed such insidious words or machinations to
entice petitioner into entering the contract of barter. Neither is there
any evidence showing that Dr. Cruz induced petitioner to sell his
Tanay property or that she cajoled him to take the earrings in
exchange for said property. On the contrary, Dr. Cruz did not
initially accede to petitioners proposal to buy the said jewelry.
Rather, it appears that it was petitioner, through his agents, who led
Dr. Cruz to believe that the Tanay property was worth exchanging for
her jewelry as he represented that its value was P400,000.00 or more
than double that of the jewelry which was valued only at P160,000.00.
If indeed petitioners property was truly worth that much, it was
certainly contrary to the nature of a businessman-banker like him to
have parted with his real estate for half its price. In short, it was in
fact petitioner who resorted to machinations to convince Dr. Cruz to
exchange her jewelry for the Tanay property.

Likewise, the facts as proven do not support the allegation that

petitioner himself could be excused for the mistake. On account of
his work as a banker-jeweler, it can be rightfully assumed that he was
an expert on matters regarding gems. He had the intellectual capacity
and the business acumen as a banker to take precautionary measures
to avert such a mistake, considering the value of both the jewelry and
his land. The fact that he had seen the jewelry before October 24, 1984
should not have precluded him from having its genuineness tested in
the presence of Dr. Cruz. Had he done so, he could have avoided the
present situation that he himself brought about. Indeed, the finger of
suspicion of switching the genuine jewelry for a fake inevitably points
to him. Such a mistake caused by manifest negligence cannot
invalidate a juridical act.[27] As the Civil Code provides, (t)here is no
mistake if the party alleging it knew the doubt, contingency or risk
affecting the object of the contract.[28]

Moreover, petitioner did not clearly allege mistake as a ground for

nullification of the contract of sale. Even assuming that he did,
petitioner cannot successfully invoke the same. To invalidate a
contract, mistake must refer to the substance of the thing that is the
object of the contract, or to those conditions which have principally

Furthermore, petitioner was afforded the reasonable opportunity

required in Article 1584 of the Civil Code within which to examine the
jewelry as he in fact accepted them when asked by Dr. Cruz if he was
satisfied with the same.[29] By taking the jewelry outside the bank,
petitioner executed an act which was more consistent with his
exercise of ownership over it. This gains credence when it is borne in
mind that he himself had earlier delivered the Tanay property to Dr.
Cruz by affixing his signature to the contract of sale. That after two
hours he later claimed that the jewelry was not the one he intended in
`Page 48 of 113

exchange for his Tanay property, could not sever the juridical tie that
now bound him and Dr. Cruz. The nature and value of the thing he
had taken preclude its return after that supervening period within
which anything could have happened, not excluding the alteration of
the jewelry or its being switched with an inferior kind.

(2)

Both the trial and appellate courts, therefore, correctly ruled that there
were no legal bases for the nullification of the contract of sale.
Ownership over the parcel of land and the pair of emerald-cut
diamond earrings had been transferred to Dr. Cruz and petitioner,
respectively, upon the actual and constructive delivery thereof.[30]
Said contract of sale being absolute in nature, title passed to the
vendee upon delivery of the thing sold since there was no stipulation
in the contract that title to the property sold has been reserved in the
seller until full payment of the price or that the vendor has the right to
unilaterally resolve the contract the moment the buyer fails to pay
within a fixed period.[31] Such stipulations are not manifest in the
contract of sale.

Not one of these cases obtains here. This case should, of course, be
distinguished from De la Cruz v. Legaspi,[33] where the court held
that failure to pay the consideration after the notarization of the
contract as previously promised resulted in the vendees liability for
payment of interest. In the case at bar, there is no stipulation for the
payment of interest in the contract of sale nor proof that the Tanay
property produced fruits or income. Neither did petitioner demand
payment of the price as in fact he filed an action to nullify the contract
of sale.

While it is true that the amount of P40,000.00 forming part of the

consideration was still payable to petitioner, its nonpayment by Dr.
Cruz is not a sufficient cause to invalidate the contract or bar the
transfer of ownership and possession of the things exchanged
considering the fact that their contract is silent as to when it becomes
due and demandable.[32]
Neither may such failure to pay the balance of the purchase price
result in the payment of interest thereon. Article 1589 of the Civil
Code prescribes the payment of interest by the vendee for the period
between the delivery of the thing and the payment of the price in the
following cases:

Should the thing sold and delivered produce fruits or income;

(3) Should he be in default, from the time of judicial or extrajudicial

demand for the payment of the price.

All told, petitioner appears to have elevated this case to this Court for
the principal reason of mitigating the amount of damages awarded to
both private respondents which petitioner considers as exorbitant.
He contends that private respondents do not deserve at all the award
of damages. In fact, he pleads for the total deletion of the award as
regards private respondent Belarmino whom he considers a mere
nominal party because no specific claim for damages against him
was alleged in the complaint. When he filed the case, all that
petitioner wanted was that Atty. Belarmino should return to him the
owners duplicate copy of TCT No. 320725, the deed of sale executed
by Fr. Antonio Jacobe, the deed of redemption and the check alloted
for expenses. Petitioner alleges further that Atty. Belarmino should
not have delivered all those documents to Dr. Cruz because as the
lawyer for both the seller and the buyer in the sale contract, he
should have protected the rights of both parties. Moreover,
petitioner asserts that there was no firm basis for damages except for
Atty. Belarminos uncorroborated testimony.[34]

(1) Should it have been so stipulated;

`Page 49 of 113

Moral and exemplary damages may be awarded without proof of

pecuniary loss. In awarding such damages, the court shall take into
account the circumstances obtaining in the case and assess damages
according to its discretion.[35] To warrant the award of damages, it
must be shown that the person to whom these are awarded has
sustained injury. He must likewise establish sufficient data upon
which the court can properly base its estimate of the amount of
damages.[36] Statements of facts should establish such data rather
than mere conclusions or opinions of witnesses.[37] Thus:
x x x. For moral damages to be awarded, it is essential that the
claimant must have satisfactorily proved during the trial the existence
of the factual basis of the damages and its causal connection with the
adverse partys acts. If the court has no proof or evidence upon which
the claim for moral damages could be based, such indemnity could
not be outrightly awarded. The same holds true with respect to the
award of exemplary damages where it must be shown that the party
acted in a wanton, oppressive or malevolent manner.[38]
In this regard, the lower court appeared to have awarded damages on
a ground analogous to malicious prosecution under Article 2219(8) of
the Civil Code[39] as shown by (1) petitioners wanton bad faith in
bloating the value of the Tanay property which he exchanged for a
genuine pair of emerald-cut diamond worth P200,000.00; and (2) his
filing of a malicious and unfounded case against private
respondents who were well known, respected and held in high
esteem in San Pablo City where everybody practically knows
everybody and whose good names in the twilight of their lives
were soiled by petitioners coming to court with unclean hands,
thereby affecting their earning capacity in the exercise of their
respective professions and besmirching their reputation.
For its part, the Court of Appeals affirmed the award of damages to
private respondents for these reasons:

The malice with which Fule filed this case is apparent. Having taken
possession of the genuine jewelry of Dra. Cruz, Fule now wishes to
return a fake jewelry to Dra. Cruz and, more than that, get back the
real property, which his bank owns. Fule has obtained a genuine
jewelry which he could sell anytime, anywhere and to anybody,
without the same being traced to the original owner for practically
nothing. This is plain and simple, unjust enrichment.[40]
While, as a rule, moral damages cannot be recovered from a person
who has filed a complaint against another in good faith because it is
not sound policy to place a penalty on the right to litigate,[41] the
same, however, cannot apply in the case at bar. The factual findings
of the courts a quo to the effect that petitioner filed this case because
he was the victim of fraud; that he could not have been such a victim
because he should have examined the jewelry in question before
accepting delivery thereof, considering his exposure to the banking
and jewelry businesses; and that he filed the action for the
nullification of the contract of sale with unclean hands, all deserve full
faith and credit to support the conclusion that petitioner was
motivated more by ill will than a sincere attempt to protect his rights
in commencing suit against respondents.
As pointed out earlier, a closer scrutiny of the chain of events
immediately prior to and on October 24, 1984 itself would amply
demonstrate that petitioner was not simply negligent in failing to
exercise due diligence to assure himself that what he was taking in
exchange for his property were genuine diamonds. He had rather
placed himself in a situation from which it preponderantly appears
that his seeming ignorance was actually just a ruse. Indeed, he had
unnecessarily dragged respondents to face the travails of litigation in
speculating at the possible favorable outcome of his complaint when
he should have realized that his supposed predicament was his own
making. We, therefore, see here no semblance of an honest and
sincere belief on his part that he was swindled by respondents which
would entitle him to redress in court. It must be noted that before
`Page 50 of 113

petitioner was able to convince Dr. Cruz to exchange her jewelry for
the Tanay property, petitioner took pains to thoroughly examine said
jewelry, even going to the extent of sketching their appearance. Why
at the precise moment when he was about to take physical possession
thereof he failed to exert extra efforts to check their genuineness
despite the large consideration involved has never been explained at
all by petitioner. His acts thus failed to accord with what an ordinary
prudent man would have done in the same situation. Being an
experienced banker and a businessman himself who deliberately
skirted a legal impediment in the sale of the Tanay property and to
minimize the capital gains tax for its exchange, it was actually gross
recklessness for him to have merely conducted a cursory examination
of the jewelry when every opportunity for doing so was not denied
him. Apparently, he carried on his person a tester which he later used
to prove the alleged fakery but which he did not use at the time when
it was most needed. Furthermore, it took him two more hours of
unexplained delay before he complained that the jewelry he received
were counterfeit. Hence, we stated earlier that anything could have
happened during all the time that petitioner was in complete
possession and control of the jewelry, including the possibility of
substituting them with fake ones, against which respondents would
have a great deal of difficulty defending themselves. The truth is that
petitioner even failed to successfully prove during trial that the
jewelry he received from Dr. Cruz were not genuine. Add to that the
fact that he had been shrewd enough to bloat the Tanay propertys
price only a few days after he purchased it at a much lower value.
Thus, it is our considered view that if this slew of circumstances were
connected, like pieces of fabric sewn into a quilt, they would
sufficiently demonstrate that his acts were not merely negligent but
rather studied and deliberate.

petitioner himself. In other words, he was placed in a situation where

he could not honestly evaluate whether his cause of action has a
semblance of merit, such that it would require the expertise of the
courts to put it to a test. His insistent pursuit of such case then
coupled with circumstances showing that he himself was guilty in
bringing about the supposed wrongdoing on which he anchored his
cause of action would render him answerable for all damages the
defendant may suffer because of it. This is precisely what took place
in the petition at bar and we find no cogent reason to disturb the
findings of the courts below that respondents in this case suffered
considerable damages due to petitioners unwarranted action.
WHEREFORE, the decision of the Court of Appeals dated October 20,
1992 is hereby AFFIRMED in toto. Dr. Cruz, however, is ordered to
pay petitioner the balance of the purchase price of P40,000.00 within
ten (10) days from the finality of this decision. Costs against
petitioner.
SO ORDERED.
Narvasa, CJ. (Chairman), Kapunan and Purisima, JJ., concur.

We do not have here, therefore, a situation where petitioners

complaint was simply found later to be based on an erroneous
ground which, under settled jurisprudence, would not have been a
reason for awarding moral and exemplary damages.[42] Instead, the
cause of action of the instant case appears to have been contrived by
`Page 51 of 113

SECOND DIVISION
[G.R. No. 143513. November 14, 2001]
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES, petitioner, vs.
COURT OF APPEALS and FIRESTONE CERAMICS, INC.,
respondents.
[G.R. No. 143590. November 14, 2001]
NATIONAL DEVELOPMENT CORPORATION,
FIRESTONE CERAMICS, INC., respondents.

petitioner,

Sometime in May 1965 private respondent Firestone Ceramics Inc.

(FIRESTONE) manifested its desire to lease a portion of the property
for its ceramic manufacturing business. On 24 August 1965 NDC and
FIRESTONE entered into a contract of lease denominated as Contract
No. C-30-65 covering a portion of the property measured at 2.90118
hectares for use as a manufacturing plant for a term of ten (10) years,
renewable for another ten (10) years under the same terms and
conditions.[1] In consequence of the agreement, FIRESTONE
constructed on the leased premises several warehouses and other
improvements needed for the fabrication of ceramic products.

vs.

DECISION
BELLOSILLO, J.:
A litigation is not simply a contest of litigants before the bar of public
opinion; more than that, it is a pursuit of justice through legal and
equitable means. To prevent the search for justice from evolving into
a competition for public approval, society invests the judiciary with
complete independence thereby insulating it from demands
expressed through any medium, the press not excluded. Thus, if the
court would merely reflect, and worse, succumb to the great
pressures of the day, the end result, it is feared, would be a travesty of
justice.
In the early sixties, petitioner National Development Corporation
(NDC), a government owned and controlled corporation created
under CA 182 as amended by CA 311 and PD No. 668, had in its
disposal a ten (10)-hectare property located along Pureza St., Sta.
Mesa, Manila. The estate was popularly known as the NDC
compound and covered by Transfer Certificates of Title Nos. 92885,
110301 and 145470.

Three and a half (3-1/2) years later, or on 8 January 1969, FIRESTONE

entered into a second contract of lease with NDC over the latter's four
(4)-unit pre-fabricated reparation steel warehouse stored in Daliao,
Davao. FIRESTONE agreed to ship the warehouse to Manila for
eventual assembly within the NDC compound. The second contract,
denominated as Contract No. C-26-68, was for similar use as a
ceramic manufacturing plant and was agreed expressly to be "coextensive with the lease of LESSEE with LESSOR on the 2.60 hectarelot."[2]
On 31 July 1974 the parties signed a similar contract concerning a six
(6)-unit pre-fabricated steel warehouse which, as agreed upon by the
parties, would expire on 2 December 1978.[3] Prior to the expiration of
the aforementioned contract, FIRESTONE wrote NDC requesting for
an extension of their lease agreement. Consequently on 29 November
1978 the Board of Directors of NDC adopted Resolution No. 11-78-117
extending the term of the lease, subject to several conditions among
which was that in the event NDC "with the approval of higher
authorities, decide to dispose and sell these properties including the
lot, priority should be given to the LESSEE"[4] (underscoring
supplied). On 22 December 1978, in pursuance of the resolution, the
parties entered into a new agreement for a ten-year lease of the
property, renewable for another ten (10) years, expressly granting
FIRESTONE the first option to purchase the leased premises in the
`Page 52 of 113

event that it decided "to dispose and sell these properties including
the lot . . . . "[5]
The contracts of lease conspicuously contain an identically worded
provision requiring FIRESTONE to construct buildings and other
improvements within the leased premises worth several hundred
thousands of pesos.[6]
The parties' lessor-lessee relationship went smoothly until early 1988
when FIRESTONE, cognizant of the impending expiration of their
lease agreement with NDC, informed the latter through several letters
and telephone calls that it was renewing its lease over the property.
While its letter of 17 March 1988 was answered by Antonio A.
Henson, General Manager of NDC, who promised immediate action
on the matter, the rest of its communications remained
unacknowledged.[7] FIRESTONE's predicament worsened when
rumors of NDC's supposed plans to dispose of the subject property in
favor of petitioner Polytechnic University of the Philippines (PUP)
came to its knowledge. Forthwith, FIRESTONE served notice on
NDC conveying its desire to purchase the property in the exercise of
its contractual right of first refusal.
Apprehensive that its interest in the property would be disregarded,
FIRESTONE instituted an action for specific performance to compel
NDC to sell the leased property in its favor. FIRESTONE averred that
it was pre-empting the impending sale of the NDC compound to
petitioner PUP in violation of its leasehold rights over the 2.60hectare[8] property and the warehouses thereon which would expire
in 1999. FIRESTONE likewise prayed for the issuance of a writ of
preliminary injunction to enjoin NDC from disposing of the property
pending the settlement of the controversy.[9]
In support of its complaint, FIRESTONE adduced in evidence a letter
of Antonio A. Henson dated 15 July 1988 addressed to Mr. Jake C.

Lagonera, Director and Special Assistant to Executive Secretary

Catalino Macaraeg, reviewing a proposed memorandum order
submitted to then President Corazon C. Aquino transferring the
whole NDC compound, including the leased property, in favor of
petitioner PUP. Attached to the letter was a draft of the proposed
memorandum order as well as a summary of existing leases on the
subject property. The survey listed FIRESTONE as lessee of a portion
of the property, placed at 29,000[10] square meters, whose contract
with NDC was set to expire on 31 December 1989[11] renewable for
another ten (10) years at the option of the lessee. The report expressly
recognized FIRESTONE's right of first refusal to purchase the leased
property "should the lessor decide to sell the same."[12]
Meanwhile, on 21 February 1989 PUP moved to intervene and
asserted its interest in the subject property, arguing that a "purchaser
pendente lite of property which is subject of a litigation is entitled to
intervene in the proceedings."[13] PUP referred to Memorandum
Order No. 214 issued by then President Aquino ordering the transfer
of the whole NDC compound to the National Government, which in
turn would convey the aforementioned property in favor of PUP at
acquisition cost. The issuance was supposedly made in recognition of
PUP's status as the "Poor Man's University" as well as its serious need
to extend its campus in order to accommodate the growing student
population. The order of conveyance of the 10.31-hectare property
would automatically result in the cancellation of NDC's total
obligation in favor of the National Government in the amount of
P57,193,201.64.
Convinced that PUP was a necessary party to the controversy that
ought to be joined as party defendant in order to avoid multiplicity of
suits, the trial court granted PUP's motion to intervene. FIRESTONE
moved for reconsideration but was denied. On certiorari, the Court of
Appeals affirmed the order of the trial court. FIRESTONE came to us
on review but in a Resolution dated 11 July 1990 we upheld PUP's
inclusion as party-defendant in the present controversy.
`Page 53 of 113

Following the denial of its petition, FIRESTONE amended its

complaint to include PUP and Executive Secretary Catalino Macaraeg,
Jr., as party-defendants, and sought the annulment of Memorandum
Order No. 214. FIRESTONE alleged that although Memorandum
Order No. 214 was issued "subject to such liens/leases existing [on the
subject property]," PUP disregarded and violated its existing lease by
increasing the rental rate at P200,000.00 a month while demanding
that it vacated the premises immediately.[14] FIRESTONE prayed that
in the event Memorandum Order No. 214 was not declared
unconstitutional, the property should be sold in its favor at the price
for which it was sold to PUP - P554.74 per square meter or for a total
purchase price of P14,423,240.00.[15]
Petitioner PUP, in its answer to the amended complaint, argued in
essence that the lease contract covering the property had expired long
before the institution of the complaint, and that further, the right of
first refusal invoked by FIRESTONE applied solely to the six-unit prefabricated warehouse and not the lot upon which it stood.
After trial on the merits, judgment was rendered declaring the
contracts of lease executed between FIRESTONE and NDC covering
the 2.60-hectare property and the warehouses constructed thereon
valid and existing until 2 June 1999. PUP was ordered and directed to
sell to FIRESTONE the "2.6 hectare leased premises or as may be
determined by actual verification and survey of the actual size of the
leased properties where plaintiff's fire brick factory is located" at
P1,500.00 per square meter considering that, as admitted by
FIRESTONE, such was the prevailing market price thereof.
The trial court ruled that the contracts of lease executed between
FIRESTONE and NDC were interrelated and inseparable because
"each of them forms part of the integral system of plaintiff's brick
manufacturing plant x x x if one of the leased premises will be taken

apart or otherwise detached from the two others, the purpose of the
lease as well as plaintiff's business operations would be rendered
useless and inoperative."[16] It thus decreed that FIRESTONE could
exercise its option to purchase the property until 2 June 1999
inasmuch as the 22 December 1978 contract embodied a covenant to
renew the lease for another ten (10) years at the option of the lessee as
well as an agreement giving the lessee the right of first refusal.
The trial court also sustained the constitutionality of Memorandum
Order No. 214 which was not per se hostile to FIRESTONE's property
rights, but deplored as prejudicial thereto the "very manner with
which defendants NDC and PUP interpreted and applied the same,
ignoring in the process that plaintiff has existing contracts of lease
protectable by express provisions in the Memorandum No. 214
itself."[17] It further explained that the questioned memorandum was
issued "subject to such liens/leases existing thereon"[18] and
petitioner PUP was under express instructions "to enter, occupy and
take possession of the transferred property subject to such leases or
liens and encumbrances that may be existing thereon"[19]
(underscoring supplied).
Petitioners PUP, NDC and the Executive Secretary separately filed
their Notice of Appeal, but a few days thereafter, or on 3 September
1996, perhaps realizing the groundlessness and the futility of it all, the
Executive Secretary withdrew his appeal.[20]
Subsequently, the Court of Appeals affirmed the decision of the trial
court ordering the sale of the property in favor of FIRESTONE but
deleted the award of attorney's fees in the amount of Three Hundred
Thousand Pesos (P300,000.00). Accordingly, FIRESTONE was given a
grace period of six (6) months from finality of the court's judgment
within which to purchase the property in questioned in the exercise of
its right of first refusal. The Court of Appeals observed that as there
was a sale of the subject property, NDC could not excuse itself from
`Page 54 of 113

its obligation TO OFFER THE PROPERTY FOR SALE FIRST TO

FIRESTONE BEFORE IT COULD TO OTHER PARTIES. The Court of
Appeals held: "NDC cannot look to Memorandum Order No. 214 to
excuse or shield it from its contractual obligations to FIRESTONE.
There is nothing therein that allows NDC to disavow or repudiate the
solemn engagement that it freely and voluntarily undertook, or
agreed to undertake."[21]
PUP moved for reconsideration asserting that in ordering the sale of
the property in favor of FIRESTONE the courts a quo unfairly created
a contract to sell between the parties. It argued that the "court cannot
substitute or decree its mind or consent for that of the parties in
determining whether or not a contract (has been) perfected between
PUP and NDC."[22] PUP further contended that since "a real property
located in Sta. Mesa can readily command a sum of P10,000.00 per
square (meter)," the lower court gravely erred in ordering the sale of
the property at only P1,500.00 per square meter. PUP also advanced
the theory that the enactment of Memorandum Order No. 214
amounted to a withdrawal of the option to purchase the property
granted to FIRESTONE. NDC, for its part, vigorously contended that
the contracts of lease executed between the parties had expired
without being renewed by FIRESTONE; consequently, FIRESTONE
was no longer entitled to any preferential right in the sale or
disposition of the leased property.
We do not see it the way PUP and NDC did. It is elementary that a
party to a contract cannot unilaterally withdraw a right of first refusal
that stands upon valuable consideration. That principle was clearly
upheld by the Court of Appeals when it denied on 6 June 2000 the
twin motions for reconsideration filed by PUP and NDC on the
ground that the appellants failed to advance new arguments
substantial enough to warrant a reversal of the Decision sought to be
reconsidered.[23] On 28 June 2000 PUP filed an urgent motion for an
additional period of fifteen (15) days from 29 June 2000 or until 14

July 2000 within which to file a Petition for Review on Certiorari of

the Decision of the Court of Appeals.
On the last day of the extended period PUP filed its Petition for
Review on Certiorari assailing the Decision of the Court of Appeals of
6 December 1999 as well as the Resolution of 6 June 2000 denying
reconsideration thereof. PUP raised two issues: (a) whether the
courts a quo erred when they "conjectured" that the transfer of the
leased property from NDC to PUP amounted to a sale; and, (b)
whether FIRESTONE can rightfully invoke its right of first refusal.
Petitioner posited that if we were to place our imprimatur on the
decisions of the courts a quo, "public welfare or specifically the
constitutional priority accorded to education" would greatly be
prejudiced.[24]
Paradoxically, our paramount interest in education does not license
us, or any party for that matter, to destroy the sanctity of binding
obligations. Education may be prioritized for legislative or budgetary
purposes, but we doubt if such importance can be used to confiscate
private property such as FIRESTONE's right of first refusal.
On 17 July 2000 we denied PUP's motion for extension of fifteen (15)
days within which to appeal inasmuch as the aforesaid pleading
lacked an affidavit of service of copies thereof on the Court of
Appeals and the adverse party, as well as written explanation for not
filing and serving the pleading personally.[25]
Accordingly, on 26 July 2000 we issued a Resolution dismissing PUP's
Petition for Review for having been filed out of time. PUP moved for
reconsideration imploring a resolution or decision on the merits of its
petition. Strangely, about the same time, several articles came out in
the newspapers assailing the denial of the petition. The daily papers
reported that we unreasonably dismissed PUP's petition on technical
grounds, affirming in the process the decision of the trial court to sell
`Page 55 of 113

the disputed property to the prejudice of the government in the

amount of P1,000,000,000.00.[26] Counsel for petitioner PUP, alleged
that the trial court and the Court of Appeals "have decided a question
of substance in a way definitely not in accord with law or
jurisprudence."[27]

that if the parties involved are both government entities the

transaction cannot be legally called a sale.

At the outset, let it be noted that the amount of P1,000,000,000.00 as

reported in the papers was way too exaggerated, if not fantastic. We
stress that NDC itself sold the whole 10.31-hectare property to PUP at
only P57,193,201.64 which represents NDC's obligation to the national
government that was, in exchange, written off. The price offered per
square meter of the property was pegged at P554.74. FIRESTONE's
leased premises would therefore be worth only P14,423,240.00. From
any angle, this amount is certainly far below the ballyhooed price of
P1,000,000,000.00.

We believe that the courts a quo did not hypothesize, much less
conjure, the sale of the disputed property by NDC in favor of
petitioner PUP. Aside from the fact that the intention of NDC and
PUP to enter into a contract of sale was clearly expressed in the
Memorandum Order No. 214,[31] a close perusal of the circumstances
of this case strengthens the theory that the conveyance of the property
from NDC to PUP was one of absolute sale, for a valuable
consideration, and not a mere paper transfer as argued by petitioners.

On 4 October 2000 we granted PUP's Motion for Reconsideration to

give it a chance to ventilate its right, if any it still had in the leased
premises, thereby paving the way for a reinstatement of its Petition
for Review.[28] In its appeal, PUP took to task the courts a quo for
supposedly "substituting or decreeing its mind or consent for that of
the parties (referring to NDC and PUP) in determining whether or not
a contract of sale was perfected." PUP also argued that inasmuch as "it
is the parties alone whose minds must meet in reference to the subject
matter and cause," it concluded that it was error for the lower courts
to have decreed the existence of a sale of the NDC compound thus
allowing FIRESTONE to exercise its right of first refusal.
On the other hand, NDC separately filed its own Petition for Review
and advanced arguments which, in fine, centered on whether or not
the transaction between petitioners NDC and PUP amounted to a sale
considering that ownership of the property remained with the
government.[29] Petitioner NDC introduced the novel proposition

In due course both petitions were consolidated.[30]

A contract of sale, as defined in the Civil Code, is a contract where

one of the parties obligates himself to transfer the ownership of and to
deliver a determinate thing to the other or others who shall pay
therefore a sum certain in money or its equivalent.[32] It is therefore a
general requisite for the existence of a valid and enforceable contract
of sale that it be mutually obligatory, i.e., there should be a
concurrence of the promise of the vendor to sell a determinate thing
and the promise of the vendee to receive and pay for the property so
delivered and transferred. The Civil Code provision is, in effect, a
"catch-all" provision which effectively brings within its grasp a whole
gamut of transfers whereby ownership of a thing is ceded for a
consideration.
Contrary to what petitioners PUP and NDC propose, there is not just
one party involved in the questioned transaction. Petitioners NDC
and PUP have their respective charters and therefore each possesses a
separate and distinct individual personality.[33] The inherent
weakness of NDCs proposition that there was no sale as it was only
the government which was involved in the transaction thus reveals
itself. Tersely put, it is not necessary to write an extended dissertation
`Page 56 of 113

on government owned and controlled corporations and their legal

personalities. Beyond cavil, a government owned and controlled
corporation has a personality of its own, distinct and separate from
that of the government.[34] The intervention in the transaction of the
Office of the President through the Executive Secretary did not
change the independent existence of these entities. The involvement
of the Office of the President was limited to brokering the consequent
relationship between NDC and PUP. But the withdrawal of the
appeal by the Executive Secretary is considered significant as he
knew, after a review of the records, that the transaction was subject to
existing liens and encumbrances, particularly the priority to purchase
the leased premises in favor of FIRESTONE.
True that there may be instances when a particular deed does not
disclose the real intentions of the parties, but their action may
nevertheless indicate that a binding obligation has been undertaken.
Since the conduct of the parties to a contract may be sufficient to
establish the existence of an agreement and the terms thereof, it
becomes necessary for the courts to examine the contemporaneous
behavior of the parties in establishing the existence of their contract.
The preponderance of evidence shows that NDC sold to PUP the
whole NDC compound, including the leased premises, without the
knowledge much less consent of private respondent FIRESTONE
which had a valid and existing right of first refusal.
All three (3) essential elements of a valid sale, without which there
can be no sale, were attendant in the "disposition" and "transfer" of
the property from NDC to PUP - consent of the parties, determinate
subject matter, and consideration therefor.
Consent to the sale is obvious from the prefatory clauses of
Memorandum Order No. 214 which explicitly states the acquiescence
of the parties to the sale of the property -

WHEREAS, PUP has expressed its willingness to acquire said NDC

properties and NDC has expressed its willingness to sell the
properties to PUP (underscoring supplied).[35]
Furthermore, the cancellation of NDC's liabilities in favor of the
National Government in the amount of P57,193,201.64 constituted the
"consideration" for the sale. As correctly observed by the Court of
AppealsThe defendants-appellants' interpretation that there was a mere
transfer, and not a sale, apart from being specious sophistry and a
mere play of words, is too strained and hairsplitting. For it is
axiomatic that every sale imposes upon the vendor the obligation to
transfer ownership as an essential element of the contract. Transfer of
title or an agreement to transfer title for a price paid, or promised to
be paid, is the very essence of sale (Kerr & Co. v. Lingad, 38 SCRA
524; Schmid & Oberly, Inc., v. RJL Martinez Fishing Corp., 166 SCRA
493). At whatever legal angle we view it, therefore, the inescapable
fact remains that all the requisites of a valid sale were attendant in the
transaction between co-defendants-appellants NDC and PUP
concerning the realities subject of the present suit.[36]
What is more, the conduct of petitioner PUP immediately after the
transaction is in itself an admission that there was a sale of the NDC
compound in its favor. Thus, after the issuance of Memorandum
Order No. 214 petitioner PUP asserted its ownership over the
property by posting notices within the compound advising residents
and occupants to vacate the premises.[37] In its Motion for
Intervention petitioner PUP also admitted that its interest as a
"purchaser pendente lite" would be better protected if it was joined as
party-defendant in the controversy thereby confessing that it indeed
purchased the property.
`Page 57 of 113

In light of the foregoing disquisition, we now proceed to determine

whether FIRESTONE should be allowed to exercise its right of first
refusal over the property. Such right was expressly stated by NDC
and FIRESTONE in par. XV of their third contract denominated as A10-78 executed on 22 December 1978 which, as found by the courts a
quo, was interrelated to and inseparable from their first contract
denominated as C-30-65 executed on 24 August 1965 and their second
contract denominated as C-26-68 executed on 8 January 1969. Thus Should the LESSOR desire to sell the leased premises during the term
of this Agreement, or any extension thereof, the LESSOR shall first
give to the LESSEE, which shall have the right of first option to
purchase the leased premises subject to mutual agreement of both
parties.[38]
In the instant case, the right of first refusal is an integral and
indivisible part of the contract of lease and is inseparable from the
whole contract. The consideration for the right is built into the
reciprocal obligations of the parties. Thus, it is not correct for
petitioners to insist that there was no consideration paid by
FIRESTONE to entitle it to the exercise of the right, inasmuch as the
stipulation is part and parcel of the contract of lease making the
consideration for the lease the same as that for the option.
It is a settled principle in civil law that when a lease contract contains
a right of first refusal, the lessor is under a legal duty to the lessee not
to sell to anybody at any price until after he has made an offer to sell
to the latter at a certain price and the lessee has failed to accept it.[39]
The lessee has a right that the lessor's first offer shall be in his favor.
The option in this case was incorporated in the contracts of lease by
NDC for the benefit of FIRESTONE which, in view of the total
amount of its investments in the property, wanted to be assured that
it would be given the first opportunity to buy the property at a price

for which it would be offered. Consistent with their agreement, it was

then implicit for NDC to have first offered the leased premises of 2.60
hectares to FIRESTONE prior to the sale in favor of PUP. Only if
FIRESTONE failed to exercise its right of first priority could NDC
lawfully sell the property to petitioner PUP.
It now becomes apropos to ask whether the courts a quo were correct
in fixing the proper consideration of the sale at P1,500.00 per square
meter. In contracts of sale, the basis of the right of first refusal must
be the current offer of the seller to sell or the offer to purchase of the
prospective buyer. Only after the lessee-grantee fails to exercise its
right under the same terms and within the period contemplated can
the owner validly offer to sell the property to a third person, again,
under the same terms as offered to the grantee.[40] It appearing that
the whole NDC compound was sold to PUP for P554.74 per square
meter, it would have been more proper for the courts below to have
ordered the sale of the property also at the same price. However,
since FIRESTONE never raised this as an issue, while on the other
hand it admitted that the value of the property stood at P1,500.00 per
square meter, then we see no compelling reason to modify the
holdings of the courts a quo that the leased premises be sold at that
price.
Our attention is invited by petitioners to Ang Yu Asuncion v. CA[41]
in concluding that if our holding in Ang Yu would be applied to the
facts of this case then FIRESTONE's "option, if still subsisting, is not
enforceable," the option being merely a preparatory contract which
cannot be enforced.
The contention has no merit. At the heels of Ang Yu came Equatorial
Realty Development, Inc., v. Mayfair Theater, Inc.,[42] where after
much deliberation we declared, and so we hold, that a right of first
refusal is neither "amorphous nor merely preparatory" and can be
enforced and executed according to its terms. Thus, in Equatorial we
`Page 58 of 113

ordered the rescission of the sale which was made in violation of the
lessee's right of first refusal and further ordered the sale of the leased
property in favor of Mayfair Theater, as grantee of the right.
Emphatically, we held that "(a right of first priority) should be
enforced according to the law on contracts instead of the panoramic
and indefinite rule on human relations." We then concluded that the
execution of the right of first refusal consists in directing the grantor
to comply with his obligation according to the terms at which he
should have offered the property in favor of the grantee and at that
price when the offer should have been made.

SO ORDERED.
Mendoza, Buena, and De Leon, Jr., JJ., concur.
Quisumbing, J., no part due to prior close relations.

One final word. Petitioner PUP should be cautioned against bidding

for public sympathy by bewailing the dismissal of its petition before
the press. Such advocacy is not likely to elicit the compassion of this
Court or of any court for that matter. An entreaty for a favorable
disposition of a case not made directly through pleadings and oral
arguments before the courts do not persuade us, for as judges, we are
ruled only by our forsworn duty to give justice where justice is due.
WHEREFORE, the petitions in G.R. No. 143513 and G.R. No. 143590
are DENIED. Inasmuch as the first contract of lease fixed the area of
the leased premises at 2.90118 hectares while the second contract
placed it at 2.60 hectares, let a ground survey of the leased premises
be immediately conducted by a duly licensed, registered surveyor at
the expense of private respondent FIRESTONE CERAMICS, INC.,
within two (2) months from finality of the judgment in this case.
Thereafter, private respondent FIRESTONE CERAMICS, INC., shall
have six (6) months from receipt of the approved survey within which
to exercise its right to purchase the leased property at P1,500.00 per
square meter, and petitioner Polytechnic University of the Philippines
is ordered to reconvey the property to FIRESTONE CERAMICS, INC.,
in the exercise of its right of first refusal upon payment of the
purchase price thereof.

`Page 59 of 113

G.R. No. L-11827

July 31, 1961

FERNANDO A. GAITE, plaintiff-appellee,

vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES &
SMELTING CO., INC., SEGUNDINA VIVAS, FRNACISCO DANTE,
PACIFICO ESCANDOR and FERNANDO TY, defendants-appellants.
Alejo Mabanag for plaintiff-appellee.
Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for
defendants-appellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the Court of First Instance
because the claims involved aggregate more than P200,000.00.
Defendant-appellant Isabelo Fonacier was the owner and/or holder,
either by himself or in a representative capacity, of 11 iron lode
mineral claims, known as the Dawahan Group, situated in the
municipality of Jose Panganiban, province of Camarines Norte.
By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"),
Fonacier constituted and appointed plaintiff-appellee Fernando A.
Gaite as his true and lawful attorney-in-fact to enter into a contract
with any individual or juridical person for the exploration and
development of the mining claims aforementioned on a royalty basis
of not less than P0.50 per ton of ore that might be extracted therefrom.
On March 19, 1954, Gaite in turn executed a general assignment
(Record on Appeal, pp. 17-19) conveying the development and

exploitation of said mining claims into the Larap Iron Mines, a single
proprietorship owned solely by and belonging to him, on the same
royalty basis provided for in Exhibit "3". Thereafter, Gaite embarked
upon the development and exploitation of the mining claims in
question, opening and paving roads within and outside their
boundaries, making other improvements and installing facilities
therein for use in the development of the mines, and in time extracted
therefrom what he claim and estimated to be approximately 24,000
metric tons of iron ore.
For some reason or another, Isabelo Fonacier decided to revoke the
authority granted by him to Gaite to exploit and develop the mining
claims in question, and Gaite assented thereto subject to certain
conditions. As a result, a document entitled "Revocation of Power of
Attorney and Contract" was executed on December 8, 1954 (Exhibit
"A"),wherein Gaite transferred to Fonacier, for the consideration of
P20,000.00, plus 10% of the royalties that Fonacier would receive from
the mining claims, all his rights and interests on all the roads,
improvements, and facilities in or outside said claims, the right to use
the business name "Larap Iron Mines" and its goodwill, and all the
records and documents relative to the mines. In the same document,
Gaite transferred to Fonacier all his rights and interests over the
"24,000 tons of iron ore, more or less" that the former had already
extracted from the mineral claims, in consideration of the sum of
P75,000.00, P10,000.00 of which was paid upon the signing of the
agreement, and
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will
be paid from and out of the first letter of credit covering the first
shipment of iron ores and of the first amount derived from the local
sale of iron ore made by the Larap Mines & Smelting Co. Inc., its
assigns, administrators, or successors in interests.

`Page 60 of 113

To secure the payment of the said balance of P65,000.00, Fonacier

promised to execute in favor of Gaite a surety bond, and pursuant to
the promise, Fonacier delivered to Gaite a surety bond dated
December 8, 1954 with himself (Fonacier) as principal and the Larap
Mines and Smelting Co. and its stockholders George Krakower,
Segundina Vivas, Pacifico Escandor, Francisco Dante, and Fernando
Ty as sureties (Exhibit "A-1"). Gaite testified, however, that when this
bond was presented to him by Fonacier together with the "Revocation
of Power of Attorney and Contract", Exhibit "A", on December 8, 1954,
he refused to sign said Exhibit "A" unless another bond under written
by a bonding company was put up by defendants to secure the
payment of the P65,000.00 balance of their price of the iron ore in the
stockpiles in the mining claims. Hence, a second bond, also dated
December 8, 1954 (Exhibit "B"),was executed by the same parties to
the first bond Exhibit "A-1", with the Far Eastern Surety and Insurance
Co. as additional surety, but it provided that the liability of the surety
company would attach only when there had been an actual sale of
iron ore by the Larap Mines & Smelting Co. for an amount of not less
then P65,000.00, and that, furthermore, the liability of said surety
company would automatically expire on December 8, 1955. Both
bonds were attached to the "Revocation of Power of Attorney and
Contract", Exhibit "A", and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he gave
to Gaite and the two executed and signed the "Revocation of Power of
Attorney and Contract", Exhibit "A", Fonacier entered into a "Contract
of Mining Operation", ceding, transferring, and conveying unto the
Larap Mines and Smelting Co., Inc. the right to develop, exploit, and
explore the mining claims in question, together with the
improvements therein and the use of the name "Larap Iron Mines"
and its good will, in consideration of certain royalties. Fonacier
likewise transferred, in the same document, the complete title to the
approximately 24,000 tons of iron ore which he acquired from Gaite,
to the Larap & Smelting Co., in consideration for the signing by the
company and its stockholders of the surety bonds delivered by
Fonacier to Gaite (Record on Appeal, pp. 82-94).

Up to December 8, 1955, when the bond Exhibit "B" expired with

respect to the Far Eastern Surety and Insurance Company, no sale of
the approximately 24,000 tons of iron ore had been made by the Larap
Mines & Smelting Co., Inc., nor had the P65,000.00 balance of the price
of said ore been paid to Gaite by Fonacier and his sureties payment of
said amount, on the theory that they had lost right to make use of the
period given them when their bond, Exhibit "B" automatically expired
(Exhibits "C" to "C-24"). And when Fonacier and his sureties failed to
pay as demanded by Gaite, the latter filed the present complaint
against them in the Court of First Instance of Manila (Civil Case No.
29310) for the payment of the P65,000.00 balance of the price of the
ore, consequential damages, and attorney's fees.
All the defendants except Francisco Dante set up the uniform defense
that the obligation sued upon by Gaite was subject to a condition that
the amount of P65,000.00 would be payable out of the first letter of
credit covering the first shipment of iron ore and/or the first amount
derived from the local sale of the iron ore by the Larap Mines &
Smelting Co., Inc.; that up to the time of the filing of the complaint, no
sale of the iron ore had been made, hence the condition had not yet
been fulfilled; and that consequently, the obligation was not yet due
and demandable. Defendant Fonacier also contended that only 7,573
tons of the estimated 24,000 tons of iron ore sold to him by Gaite was
actually delivered, and counterclaimed for more than P200,000.00
damages.
At the trial of the case, the parties agreed to limit the presentation of
evidence to two issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay
Gaite P65,000.00 become due and demandable when the defendants
failed to renew the surety bond underwritten by the Far Eastern
`Page 61 of 113

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."

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.

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.

The first issue involves an interpretation of the following provision in

the contract Exhibit "A":

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

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:
`Page 62 of 113

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.
`Page 63 of 113

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
`Page 64 of 113

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
`Page 65 of 113

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.

`Page 66 of 113

THIRD DIVISION
[G.R. No. 115349. April 18, 1997]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE
COURT OF APPEALS, THE COURT OF TAX APPEALS and
ATENEO DE MANILA UNIVERSITY, respondents.
DECISION
PANGANIBAN, J.:
In conducting researches and studies of social organizations and
cultural values thru its Institute of Philippine Culture, is the Ateneo
de Manila University performing the work of an independent
contractor and thus taxable within the purview of then Section 205 of
the National Internal Revenue Code levying a three percent
contractors tax? This question is answered by the Court in the
negative as it resolves this petition assailing the Decision[1] of the
Respondent Court of Appeals[2] in CA-G.R. SP No. 31790
promulgated on April 27, 1994 affirming that of the Court of Tax
Appeals.[3]

sponsorships for its research activities from international

organizations, private foundations and government agencies.
On July 8, 1983, private respondent received from petitioner
Commissioner of Internal Revenue a demand letter dated June 3,
1983, assessing private respondent the sum of P174,043.97 for alleged
deficiency contractors tax, and an assessment dated June 27, 1983 in
the sum of P1,141,837 for alleged deficiency income tax, both for the
fiscal year ended March 31, 1978. Denying said tax liabilities, private
respondent sent petitioner a letter-protest and subsequently filed with
the latter a memorandum contesting the validity of the assessments.
On March 17, 1988, petitioner rendered a letter-decision canceling the
assessment for deficiency income tax but modifying the assessment
for deficiency contractors tax by increasing the amount due to
P193,475.55.
Unsatisfied, private respondent requested for a
reconsideration or reinvestigation of the modified assessment. At the
same time, it filed in the respondent court a petition for review of the
said letter-decision of the petitioner. While the petition was pending
before the respondent court, petitioner issued a final decision dated
August 3, 1988 reducing the assessment for deficiency contractors tax
from P193,475.55 to P46,516.41, exclusive of surcharge and interest.

The Antecedent Facts

The antecedents as found by the Court of Appeals are reproduced
hereinbelow, the same being largely undisputed by the parties.
Private respondent is a non-stock, non-profit educational institution
with auxiliary units and branches all over the Philippines. One such
auxiliary unit is the Institute of Philippine Culture (IPC), which has
no legal personality separate and distinct from that of private
respondent. The IPC is a Philippine unit engaged in social science
studies of Philippine society and culture. Occasionally, it accepts

On July 12, 1993, the respondent court rendered the questioned

decision which dispositively reads:
WHEREFORE, in view of the foregoing, respondents decision is SET
ASIDE. The deficiency contractors tax assessment in the amount of
P46,516.41 exclusive of surcharge and interest for the fiscal year ended
March 31, 1978 is hereby CANCELED. No pronouncement as to cost.
SO ORDERED.
`Page 67 of 113

Not in accord with said decision, petitioner has come to this Court via
the present petition for review raising the following issues:
1)WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER
THE PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT
TO SECTION 205 OF THE TAX CODE; and
2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3%
CONTRACTORS TAX UNDER SECTION 205 OF THE TAX CODE.
The pertinent portions of Section 205 of the National Internal Revenue
Code, as amended, provide:
Sec. 205. Contractor, proprietors or operators of dockyards, and
others. - A contractors tax of three per centum of the gross receipts is
hereby imposed on the following:
xxx

xxx

xxx

(16)
Business agents and other independent contractors except
persons, associations and corporations under contract for embroidery
and apparel for export, as well as their agents and contractors and
except gross receipts of or from a pioneer industry registered with the
Board of Investments under Republic Act No. 5186:
xxx

xxx

xxx

The term independent contractors include persons (juridical or

natural) not enumerated above (but not including individuals subject

to the occupation tax under Section 12 of the Local Tax Code) whose
activity consists essentially of the sale of all kinds of services for a fee
regardless of whether or not the performance of the service calls for
the exercise or use of the physical or mental faculties of such
contractors or their employees.
xxx

xxx

xxx

Petitioner contends that the respondent court erred in holding that

private respondent is not an independent contractor within the
purview of Section 205 of the Tax Code. To petitioner, the term
independent contractor, as defined by the Code, encompasses all
kinds of services rendered for a fee and that the only exceptions are
the following:
a.
Persons, association and corporations under contract for
embroidery and apparel for export and gross receipts of or from
pioneer industry registered with the Board of Investment under R.A.
No. 5186;
b.
Individuals occupation tax under Section 12 of the Local Tax
Code (under the old Section 182 [b] of the Tax Code); and
c.
Regional or area headquarters established in the Philippines
by multinational corporations, including their alien executives, and
which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communication and
coordinating centers for their affiliates, subsidiaries or branches in the
Asia Pacific Region (Section 205 of the Tax Code).
Petitioner thus submits that since private respondent falls under the
definition of an independent contractor and is not among the
`Page 68 of 113

aforementioned exceptions, private respondent is therefore subject to

the 3% contractors tax imposed under the same Code.[4]
The Court of Appeals disagreed with the Petitioner Commissioner of
Internal Revenue and affirmed the assailed decision of the Court of
Tax Appeals. Unfazed, petitioner now asks us to reverse the CA
through this petition for review.
The Issues
Petitioner submits before us the following issues:
1)
Whether or not private respondent falls under the purview of
independent contractor pursuant to Section 205 of the Tax Code
2)
Whether or not private respondent is subject to 3% contractors
tax under Section 205 of the Tax Code.[5]
In fine, these may be reduced to a single issue: Is Ateneo de Manila
University, through its auxiliary unit or branch -- the Institute of
Philippine Culture -- performing the work of an independent
contractor and, thus, subject to the three percent contractors tax
levied by then Section 205 of the National Internal Revenue Code?

The parts of then Section 205 of the National Internal Revenue Code
germane to the case before us read:
SEC. 205. Contractors, proprietors or operators of dockyards, and
others. -- A contractors tax of three per centum of the gross receipts
is hereby imposed on the following:
xxx

xxx

xxx

(16)
Business agents and other independent contractors, except
persons, associations and corporations under contract for embroidery
and apparel for export, as well as their agents and contractors, and
except gross receipts of or from a pioneer industry registered with the
Board of Investments under the provisions of Republic Act No. 5186;
xxx

xxx

xxx

The term independent contractors include persons (juridical or

natural) not enumerated above (but not including individuals subject
to the occupation tax under Section 12 of the Local Tax Code) whose
activity consists essentially of the sale of all kinds of services for a fee
regardless of whether or not the performance of the service calls for
the exercise or use of the physical or mental faculties of such
contractors or their employees.

The Courts Ruling

The petition is unmeritorious.

The term independent contractor shall not include regional or area

headquarters established in the Philippines by multinational
corporations, including their alien executives, and which
headquarters do not earn or derive income from the Philippines and

Interpretation of Tax Laws

`Page 69 of 113

which act as supervisory, communications and coordinating centers

for their affiliates, subsidiaries or branches in the Asia-Pacific Region.
The term gross receipts means all amounts received by the prime or
principal contractor as the total contract price, undiminished by
amount paid to the subcontractor, shall be excluded from the taxable
gross receipts of the subcontractor.
Petitioner Commissioner of Internal Revenue contends that Private
Respondent Ateneo de Manila University falls within the definition
of an independent contractor and is not one of those mentioned as
excepted; hence, it is properly a subject of the three percent
contractors tax levied by the foregoing provision of law.[6] Petitioner
states that the term independent contractor is not specifically
defined so as to delimit the scope thereof, so much so that any person
who x x x renders physical and mental service for a fee, is now
indubitably considered an independent contractor liable to 3%
contractors tax.[7] according to petitioner, Ateneo has the burden of
proof to show its exemption from the coverage of the law.
We disagree. Petitioner Commissioner of Internal Revenue erred in
applying the principles of tax exemption without first applying the
well-settled doctrine of strict interpretation in the imposition of taxes.
It is obviously both illogical and impractical to determine who are
exempted without first determining who are covered by the aforesaid
provision. The Commissioner should have determined first if private
respondent was covered by Section 205, applying the rule of strict
interpretation of laws imposing taxes and other burdens on the
populace, before asking Ateneo to prove its exemption therefrom.
The Court takes this occasion to reiterate the hornbook doctrine in the
interpretation of tax laws that (a) statute will not be construed as
imposing a tax unless it does so clearly, expressly, and
unambiguously. x x x (A) tax cannot be imposed without clear and
express words for that purpose. Accordingly, the general rule of

requiring adherence to the letter in construing statutes applies with

peculiar strictness to tax laws and the provisions of a taxing act are
not to be extended by implication.[8] Parenthetically, in answering
the question of who is subject to tax statutes, it is basic that in case of
doubt, such statutes are to be construed most strongly against the
government and in favor of the subjects or citizens because burdens
are not to be imposed nor presumed to be imposed beyond what
statutes expressly and clearly import.[9]
To fall under its coverage, Section 205 of the National Internal
Revenue Code requires that the independent contractor be engaged in
the business of selling its services. Hence, to impose the three percent
contractors tax on Ateneos Institute of Philippine Culture, it should
be sufficiently proven that the private respondent is indeed selling its
services for a fee in pursuit of an independent business. And it is only
after private respondent has been found clearly to be subject to the
provisions of Sec. 205 that the question of exemption therefrom would
arise. Only after such coverage is shown does the rule of construction
-- that tax exemptions are to be strictly construed against the taxpayer
-- come into play, contrary to petitioners position. This is the main
line of reasoning of the Court of Tax Appeals in its decision,[10]
which was affirmed by the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Services of its Institute of Philippine Culture
After reviewing the records of this case, we find no evidence that
Ateneos Institute of Philippine Culture ever sold its services for a fee
to anyone or was ever engaged in a business apart from and
independently of the academic purposes of the university.
Stressing that it is not the Ateneo de Manila University per se which
is being taxed, Petitioner Commissioner of Internal Revenue
`Page 70 of 113

contends that the tax is due on its activity of conducting researches

for a fee. The tax is due on the gross receipts made in favor of IPC
pursuant to the contracts the latter entered to conduct researches for
the benefit primarily of its clients. The tax is imposed on the exercise
of a taxable activity. x x x [T]he sale of services of private respondent
is made under a contract and the various contracts entered into
between private respondent and its clients are almost of the same
terms, showing, among others, the compensation and terms of
payment.[11] (Underscoring supplied.)
In theory, the Commissioner of Internal Revenue may be correct.
However, the records do not show that Ateneos IPC in fact
contracted to sell its research services for a fee. Clearly then, as found
by the Court of Appeals and the Court of Tax Appeals, petitioners
theory is inapplicable to the established factual milieu obtaining in
the instant case.
In the first place, the petitioner has presented no evidence to prove its
bare contention that, indeed, contracts for sale of services were ever
entered into by the private respondent. As appropriately pointed out
by the latter:
An examination of the Commissioners Written Formal Offer of
Evidence in the Court of Tax Appeals shows that only the following
documentary evidence was presented:
Exhibit 1

BIR letter of authority no. 331844

2 Examiners Field Audit Report

3 Adjustments to Sales/Receipts
4 Letter-decision of BIR Commissioner
Bienvenido A. Tan Jr.

None of the foregoing evidence even comes close to purport to be

contracts between private respondent and third parties.[12]
Moreover, the Court of Tax Appeals accurately and correctly declared
that the funds received by the Ateneo de Manila University are
technically not a fee. They may however fall as gifts or donations
which are tax-exempt as shown by private respondents compliance
with the requirement of Section 123 of the National Internal Revenue
Code providing for the exemption of such gifts to an educational
institution.[13]
Respondent Court of Appeals elucidated on the ruling of the Court of
Tax Appeals:
To our mind, private respondent hardly fits into the definition of an
independent contractor.
For one, the established facts show that IPC, as a unit of the private
respondent, is not engaged in business. Undisputedly, private
respondent is mandated by law to undertake research activities to
maintain its university status. In fact, the research activities being
carried out by the IPC is focused not on business or profit but on
social sciences studies of Philippine society and culture. Since it can
only finance a limited number of IPCs research projects, private
respondent occasionally accepts sponsorship for unfunded IPC
research projects from international organizations, private
foundations and governmental agencies.
However, such
sponsorships are subject to private respondents terms and
conditions, among which are, that the research is confined to topics
consistent with the private respondents academic agenda; that no
proprietary or commercial purpose research is done; and that private
respondent retains not only the absolute right to publish but also the
`Page 71 of 113

ownership of the results of the research conducted by the IPC. Quite

clearly, the aforementioned terms and conditions belie the allegation
that private respondent is a contractor or is engaged in business.
For another, it bears stressing that private respondent is a non-stock,
non-profit educational corporation.
The fact that it accepted
sponsorship for IPCs unfunded projects is merely incidental. For, the
main function of the IPC is to undertake research projects under the
academic agenda of the private respondent. Moreover, the records do
not show that in accepting sponsorship of research work, IPC realized
profits from such work. On the contrary, the evidence shows that for
about 30 years, IPC had continuously operated at a loss, which means
that sponsored funds are less than actual expenses for its research
projects. That IPC has been operating at a loss loudly bespeaks of the
fact that education and not profit is the motive for undertaking the
research projects.
Then, too, granting arguendo that IPC made profits from the
sponsored research projects, the fact still remains that there is no
proof that part of such earnings or profits was ever distributed as
dividends to any stockholder, as in fact none was so distributed
because they accrued to the benefit of the private respondent which is
a non-profit educational institution.[14]
Therefore, it is clear that the funds received by Ateneos Institute of
Philippine Culture are not given in the concept of a fee or price in
exchange for the performance of a service or delivery of an object.
Rather, the amounts are in the nature of an endowment or donation
given by IPCs benefactors solely for the purpose of sponsoring or
funding the research with no strings attached. As found by the two
courts below, such sponsorships are subject to IPCs terms and
conditions. No proprietary or commercial research is done, and IPC
retains the ownership of the results of the research, including the
absolute right to publish the same. The copyrights over the results of

the research are owned by Ateneo and, consequently, no portion

thereof may be reproduced without its permission.[15] The amounts
given to IPC, therefore, may not be deemed, it bears stressing, as fees
or gross receipts that can be subjected to the three percent contractors
tax.
It is also well to stress that the questioned transactions of Ateneos
Institute of Philippine Culture cannot be deemed either as a contract
of sale or a contract for a piece of work. By the contract of sale, one
of the contracting parties obligates himself to transfer the ownership
of and to deliver a determinate thing, and the other to pay therefor a
price certain in money or its equivalent.[16] By its very nature, a
contract of sale requires a transfer of ownership. Thus, Article 1458 of
the Civil Code expressly makes the obligation to transfer ownership
as an essential element of the contract of sale, following modern
codes, such as the German and the Swiss. Even in the absence of this
express requirement, however, most writers, including Sanchez
Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have
considered such transfer of ownership as the primary purpose of sale.
Perez and Alguer follow the same view, stating that the delivery of
the thing does not mean a mere physical transfer, but is a means of
transmitting ownership. Transfer of title or an agreement to transfer
it for a price paid or promised to be paid is the essence of sale.[17] In
the case of a contract for a piece of work, the contractor binds himself
to execute a piece of work for the employer, in consideration of a
certain price or compensation. x x x If the contractor agrees to
produce the work from materials furnished by him, he shall deliver
the thing produced to the employer and transfer dominion over the
thing. x x x.[18] Ineludably, whether the contract be one of sale or
one for a piece of work, a transfer of ownership is involved and a
party necessarily walks away with an object.[19] In the case at bench,
it is clear from the evidence on record that there was no sale either of
objects or services because, as adverted to earlier, there was no
transfer of ownership over the research data obtained or the results of
research projects undertaken by the Institute of Philippine Culture.
`Page 72 of 113

Furthermore, it is clear that the research activity of the Institute of

Philippine Culture is done in pursuance of maintaining Ateneos
university status and not in the course of an independent business of
selling such research with profit in mind. This is clear from a reading
of the regulations governing universities:

Petitioners contention that it is the Institute of Philippine Culture that

is being taxed and not the Ateneo is patently erroneous because the
former is not an independent juridical entity that is separate and
distinct from the latter.
Factual Findings and Conclusions of the Court of Tax Appeals

31.In addition to the legal requisites an institution must meet, among

others, the following requirements before an application for
university status shall be considered:
xxx

xxx

xxx

(e)
The institution must undertake research and operate with a
competent qualified staff at least three graduate departments in
accordance with the rules and standards for graduate education. One
of the departments shall be science and technology. The competence
of the staff shall be judged by their effective teaching, scholarly
publications and research activities published in its school journal as
well as their leadership activities in the profession.
(f)
The institution must show evidence of adequate and stable
financial resources and support, a reasonable portion of which should
be devoted to institutional development and research. (underscoring
supplied)

Affirmed by the Court of Appeals Generally Conclusive

In addition, we reiterate that the Court of Tax Appeals is a highly
specialized body specifically created for the purpose of reviewing tax
cases. Through its expertise, it is undeniably competent to determine
the issue of whether[21] Ateneo de Manila University may be
deemed a subject of the three percent contractors tax through the
evidence presented before it. Consequently, as a matter of
principle, this Court will not set aside the conclusion reached by x x x
the Court of Tax Appeals which is, by the very nature of its function,
dedicated exclusively to the study and consideration of tax problems
and has necessarily developed an expertise on the subject unless there
has been an abuse or improvident exercise of authority x x x.[22]
This point becomes more evident in the case before us where the
findings and conclusions of both the Court of Tax Appeals and the
Court of Appeals appear untainted by any abuse of authority, much
less grave abuse of discretion. Thus, we find the decision of the latter
affirming that of the former free from any palpable error.
Public Service, Not Profit, is the Motive

xxx

xxx

x x x

32.
University status may be withdrawn, after due notice and
hearing, for failure to maintain satisfactorily the standards and
requirements therefor.[20]

The records show that the Institute of Philippine Culture conducted

its research activities at a huge deficit of P1,624,014.00 as shown in its
statements of fund and disbursements for the period 1972 to 1985.[23]
In fact, it was Ateneo de Manila University itself that had funded the
research projects of the institute, and it was only when Ateneo could
no longer produce the needed funds that the institute sought funding
`Page 73 of 113

from outside. The testimony of Ateneos Director for Accounting

Services, Ms. Leonor Wijangco, provides significant insight on the
academic and nonprofit nature of the institutes research activities
done in furtherance of the universitys purposes, as follows:

WHEREFORE, premises considered, the petition is DENIED and the

assailed Decision of the Court of Appeals is hereby AFFIRMED in
full.
SO ORDERED.

Q Now it was testified to earlier by Miss Thelma Padero (Office

Manager of the Institute of Philippine Culture) that as far as grants
from sponsored research it is possible that the grant sometimes is less
than the actual cost. Will you please tell us in this case when the
actual cost is a lot less than the grant who shoulders the additional
cost?
A

The University.

Now, why is this done by the University?

Narvasa, C.J., (Chairman) , Davide, Jr., Melo, and Francisco, JJ.,

concur.

A
Because of our faculty development program as a university,
because a university has to have its own research institute.[24]
So, why is it that Ateneo continues to operate and conduct researches
through its Institute of Philippine Culture when it undisputedly loses
not an insignificant amount in the process? The plain and simple
answer is that private respondent is not a contractor selling its
services for a fee but an academic institution conducting these
researches pursuant to its commitments to education and, ultimately,
to public service. For the institute to have tenaciously continued
operating for so long despite its accumulation of significant losses,
we can only agree with both the Court of Tax Appeals and the Court
of Appeals that education and not profit is [IPCs] motive for
undertaking the research projects.[25]

`Page 74 of 113

G.R. No. 115902 September 27, 1995

FILINVEST CREDIT CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and SPOUSES EDILBERTO and
MARCIANA TADIAMAN, respondents.

DAVIDE, JR., J.:

This petition for review on certiorari seeks to set aside the decision of
the Court of Appeals in CA-G.R. CV No. 30231 1affirming in toto the
decision of the Regional Trial Court (RTC) of San Fernando
(Pampanga), Branch 46, in Civil Case No. 6599. 2
The antecedent facts are summarized by the Court of Appeals as
follows:
Defendants-appellees, spouses Edilberto and Marciana Tadiaman,
residents of Cabanatuan City, purchased a 10-wheeler Izusu cargo
truck from Jordan Enterprises, Inc., in Quezon City, in installments.
Said spouses executed a promissory note for P196,680.00 payable in 24
monthly installments in favor of Jordan Enterprises, Inc., and a
Chattel Mortgage over the motor vehicle purchased to secure the
payment of the promissory note. Jordan Enterprises, Inc. assigned its
rights and interests over the said instruments to Filinvest Finance and
Leasing Corporation, which in turn assigned them to plaintiffappellant Filinvest Credit Corporation.
Subsequently, the spouses Tadiaman defaulted in the payment of the
installments due on the promissory note, and plaintiff-appellant filed
an action for replevin and damages against them with the court
below. Upon motion of the plaintiff-appellant, a writ of replevin was

issued, and the truck was seized in the province of Isabela, by persons
who represented themselves to be special sheriffs of the court, but
who turned out to be employees of the plaintiff-appellant. The truck
was brought by such persons all the way back to Metro Manila.
Thereafter, defendant spouses filed a counterbond, and the lower
court ordered the return of the truck. This was not immediately
implemented because the defendant spouses were met with delaying
tactics of the plaintiff-appellant, and when they finally recovered the
truck, they found the same to be "cannibalized". This was graphically
recounted in the report (Exhibit "3") of Deputy Sheriff Anastacio
Dizon, who assisted the spouses in recovering the vehicle, excerpts of
which are as follows:
On February 14, 1983, the undersigned contacted Mr. Villanueva,
Branch Manager of the FILINVEST at Bo. Dolores, San Fernando,
Pampanga and he gave the information that the said Isuzu Cargo
Truck, subject of the aforesaid Court Order, was already delivered to
their main garage at Bo. Talon, Las Pias; Metro Manila. Mr.
Villanueva further told the undersigned that in order to effectively
enforce the aforementioned Court Order, the undersigned should
discuss the matter with Mr. Telesforo (Jun) Isidro, Collection incharge, and Mr. Gaspar Antonio delos Santos, Vice President for
Branch Administration of the FILINVEST main office at Makati,
Metro Manila.
On February 18, 1983, defendant Marciana Tadiaman, Atty. Benites
and the undersigned contacted Messrs. Gaspar Antonio delos Santos
and Telesforo (Jun) Isidro at the main office, FILINVEST at Paseo de
Roxas, Makati, Metro Manila and we discussed the smooth retaking
of possession by the defendants of the 10-wheeler Isuzu Cargo Truck
with motor No. E 120-22041, Serial No. SPM 710164864. Messrs. Delos
Santos and Isidro alternatively argued that the Traveler's Insurance
`Page 75 of 113

Company is one of the black listed Insurance firm, so much so, it is

only the company's lawyer who can direct the delivery of the abovecited Cargo Truck to us. They told us to wait for the arrival of their
Lawyer at 5:40 p.m., and we agreed that in the meantime that their
lawyer is not around, the said vehicle would not be transferred to any
other place.
Came 5:30 P.M., but the company's lawyer never arrived and we were
told to go back on February 21, 1983. Mr. delos Santos finally told us
that the company will not deliver to us the said Cargo Truck until and
after their company lawyer would say so.
On February 19, 1983, Mr. Felicisimo Hogaldo, Atty. Benites,
defendant Marciana Tadiaman, three policemen of Las Pinas, Metro
Manila, and the undersigned went directly to the FILINVEST garage
at Bo. Talon, Las Pinas, Metro Manila and there contracted Mr. Ismael
Pascual, Custodian of all repossessed vehicles of the said company,
and Mr. Pedro Gervacio, Security Guard of the company assigned by
the Allied Investigation Bureau at 6th Floor, Ramon Santos Bldg. They
told us that the 10-wheeler Cargo Truck subject of the above-cited
court order is not one of the vehicles listed in their in-coming and outgoing ledger books and they told us to examine their books.
Defendant Marciana Tadiaman told Messrs. Pedro Gervacio and
Ismael Pascual that she saw the above-mentioned Cargo-Truck last
February 14, 1983 at the end corner of the garage. And for that
purpose she requested us, including Mr. Pascual and the Security
Guard, to inspect the site where the said truck was supposed to have
been placed when she for the first time saw it on February 14, 1983.
Unexpectedly, she saw and pointed to us on the site oil leaks on the
ground which she believed came from the vehicle we were looking
for. We also saw skid marks of tires of a truck starting from the site
where the cargo truck was previously placed as pointed to by

defendant Marciana Tadiaman up to around 20 meters before

reaching the gate of the compound. The other skid larks of tires of a
truck was also seen on a portion of a road leading to a compound
owned by other person.
Mr. Gervacio and Pascual strongly insisted that they do not know the
whereabouts of the said Cargo Truck. The undersigned requested the
Policemen of Las Pinas, Metro Manila, Atty. Benites and defendant
Marciana Tadiaman to see for ourselves the road leading to a
compound owned by another firm, about 1/3 of the Length of which
road is completely blocked by a big and tall building. It was at this
portion where the subject Cargo Truck was placed.
Mr. Ismael Pascual called their main office, FILINVEST, by telephone
about the discovery of the whereabouts of said cargo truck by the
undersigned.
Defendant
Marciana
Tadiaman
to
Mr. Pascual that there were missing parts and that other parts of the
truck were completely changed with worn-out spare parts.
Mr. Pascual told the undersigned that he will only affix his signature
on the acknowledgment receipt, below the line "GIVEN BY", if the
missing parts and replaced parts were not mentioned in said receipt.
It was because of the said actuations of the plaintiff-appellant that the
defendants-appellee [sic] filed a counterclaim for damages. . . . 3
After trial, the trial court rendered a decision the dispositive portion
of which reads as follows:
WHEREFORE, judgment is hereby rendered on the main action, in
favor of plaintiff and against defendants, ordering the latter, jointly
and severally, to pay the plaintiff the following sums:

`Page 76 of 113

(a) The sum of P88,333.32 which is the balance of the promissory note
as of September 26, 1982, with interest thereon at 14% per
annum from said date.

(4) P20,000.00 as attorney's fee; and

(b) The sum equivalent to 25% of the amount sued upon, as and for
attorney's fees, that is P88,333.32 plus the stipulated interest; and

SO ORDERED. 4

(c) The costs of suit.

On the Counterclaim:
Plaintiff not having successfully rebutted the defendants' evidence
respecting damages caused to them by virtue of the illegal seizure of
the property, and hiding the truck in some other place not their
garage, feigning knowledge that the same had been recorded in their
incoming ledger books, the "cannibalizing" done while the truck was
in the custody of plaintiff's garage, the frustrations which the
defendants had to undergo for two weeks before the truck was finally
placed in the hands of Sheriff Dizon, all point to the liability of
plaintiff for its failure intentionally or otherwise "to observe certain
norms that spring from the fountain of good conscience and guide
human conduct to the end that law may approach its supreme ideal,
which is the sway and dominance of justice.

(5) Proportionate part of the costs adjudged against plaintiff.

Petitioner Filinvest Credit Corporation (hereinafter Filinvest)

appealed that portion of the judgment on the counterclaim to the
Court of Appeals (CA-G.R. CV No. 30231) and assigned the following
errors of the lower court:
I
THE TRIAL COURT ERRED IN AWARDING DAMAGES; ACTUAL,
MORAL, EXEMPLARY AND ATTORNEY'S FEES AND
PROPORTIONATE PART OF THE COSTS IN FAVOR OF THE
DEFENDANTS IN THEIR COUNTER-CLAIMS IN THE ABSENCE
OF ANY ACTIONABLE LOSS SUSTAINED BY THEM FOR IT WAS
THE DEFENDANTS WHO VIOLATED THEIR PROMISSORY NOTE
AND CHATTEL MORTGAGE WITH THE PLAINTIFF.
II

WHEREFORE, judgment is rendered in favor of counter-claimants

defendants and against plaintiff, ordering the latter to pay to the
defendants the following sums:

THE TRIAL COURT ERRED IN HOLDING THAT THE PLAINTIFF

OR ANY OF ITS REPRESENTATIVES HAD NO RIGHT TO TAKE
THE MORTGAGED PROPERTY AFTER THE BREACH OF THE
CONDITIONS IN THE PROMISSORY NOTE AND CHATTEL
MORTGAGE BY THE DEFENDANTS. 5

(1) Actual damages representing lost spare parts while in the custody
of plaintiff in its garage being hidden from defendants, in the sum of
P50,000.00;

In its decision of 26 May 1994, the Court of Appeals affirmed in

toto the decision of the trial court. It found no merit in the appeal.
Thus:

(2) P50,000.00 as moral damages;

The plaintiff-appellant argues that it had the right to seize the truck
from the moment that the defendants-appellees defaulted in the
payment of the monthly installments, and to institute an action for
`Page 77 of 113

(3) P20,000.00 as exemplary damages;

replevin preliminary to effecting a foreclosure of the property

mortgaged extrajudicially. The plaintiff-appellant misses the point
entirely. In the first place, it has not been held liable for filing an
action for replevin in order to recover possession of the truck prior to
its foreclosure, but for the manner in which it carried out the seizure
of the vehicle. It is ironic that, in spite of plaintiff-appellant's apparent
recognition of the necessity of legal means for the recovery of the
truck, in the end, it utilized illegal means in the actual seizure of the
vehicle by having its employees pose as special agents of the court in
effecting the same. Plaintiff-appellant even went to the extent of
asking the appointment of a special sheriff to enforce the order of
seizure, but still had the truck seized by its own people instead. It is as
if the plaintiff-appellant utilized the court only to clothe its employees
with apparent authority to seize the vehicle concerned.
In the second place, plaintiff-appellant was held liable for hiding the
truck and making it difficult for the defendants-appellees to recover
the same. Defendants-appell[ees] were able to have the writ of seizure
quashed on the basis of a counterbond. Plaintiff-appellant should
have been the first to obey the order for the return of the seized truck,
considering its avowed adherence to law and order. And yet, it made
it difficult for the defendants-appellees to actually recover the vehicle,
as reported by the deputy sheriff above.
In the third place, there is unrebutted evidence that the truck was
"cannibalized" while in the custody of the plaintiff-appellant. The
latter argues that such evidence is not credible, because, if the truck
was stripped of vital parts, it could not have been driven by the
defendants-appellees all the way back to Cabanatuan City. Plaintiffappellant conveniently overlooks the testimony of defendant-appellee
Mrs. Tadiaman that they had to buy the missing parts in order to
make the truck run (t.s.n., p. 40, October 2, 1986, Exhibits "'9", "10" and
"11"). 6

Filinvest now comes to us alleging that the Court of Appeals:

(a) . . . DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN
ACCORD WITH LAW AND THE APPLICABLE DECISIONS OF
THIS HONORABLE COURT WHEN IT REVERSED THE DECISION
OF THE REGIONAL TRIAL COURT OF MANILA, BRANCH 9;
(b) . . . ACTED WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OF JURISDICTION WHEN IT SUSTAINED
THE ERRONEOUS DECISION OF THE HONORABLE REGIONAL
TRIAL COURT BRANCH 46 OF SAN FERNANDO, PAMPANGA;
(c) . . . ACTED WITH GRAVE ABUSE OF DISCRETION AND
CONTRARY TO EXISTING LAW AND JURISPRUDENCE WHEN
[IT] SUSTAINED THE SPECULATIVE FINDING OF THE RTC THAT
THE PETITIONER "CANNIBALIZED" THE MORTGAGED
VEHICLE;
(d) . . . ERRED GRIEVOUSLY WHEN IT EXONERATED PRIVATE
RESPONDENTS FROM PAYING THE PETITIONER ON THE
LATTER'S LEGITIMATE CLAIMS UNDER THE COMPLAINT
PARTICULARLY ON THE UNPAID PROMISSORY NOTE MADE BY
THE PRIVATE RESPONDENTS;
(e) . . . ACTED CONTRARY TO LAW WHEN IT IGNORED THE
PLAIN ADMISSIONS IN THE ANSWER (AT PARAGRAPH 2, & 3,
PAGE 1) OF THE DEFENDANTS (PRIVATE RESPONDENTS) THAT
THEY HAVE DULY EXECUTED A PROMISSORY NOTE SECURED
BY A DEED OF CHATTEL MORTGAGE AND THAT THE PRIVATE
RESPONDENTS VIOLATED THE TERMS OF THE PROMISSORY
NOTE IN FAILING TO PAY THE INSTALLMENTS DUE THEREON
FOR NOV. 15, 1981 AND THE SUBSEQUENT 9 INSTALLMENTS OR
UP TO AUGUST 15, 1982;
`Page 78 of 113

(f) . . . ERRED IN REFUSING TO APPLY THE TERMS AND

CONDITIONS OF THE PROMISSORY NOTE AND THE DEED OF
CHATTEL MORTGAGE SIGNED BY THE PONCES "AS THE LAW
BETWEEN THE PARTIES" TO THE CONTRACT SUBJECT OF THE
SUIT IN THE RTC. 7
Additionally, Filinvest maintains that:
(g) THERE IS NO PROOF TO SUSTAIN THE AWARD OF MORAL
DAMAGES FOR P50,000.00 ACCORDINGLY THERE IS NO BASIS
FOR THE AWARD OF EXEMPLARY DAMAGES. 8
We gave due course to the petition and required the parties to submit
their respective memoranda after the filing of the comment to the
petition by the private respondents and of the reply thereto by
Filinvest. The parties subsequently filed their memoranda which
merely reiterated the arguments in their respective initiatory
pleadings.
The only relevant issue in this petition is whether or not the Court of
Appeals committed reversible error in dismissing Filinvest's appeal
from the decision of the trial court on the private respondents'
counterclaim and in affirming in toto the said decision. The first
ground raised herein by Filinvest is baseless since the discussions or
arguments in Filinvest's petition and memorandum fail to disclose
what the decision of Branch 9 of the RTC of Manila is all about. So is
the fourth ground, for, the unappealed portion of the trial court's
decision did in fact order the private respondents to pay Filinvest the
unpaid balance of the promissory note, with interest and attorney's
fees. All the other grounds are deemed waived for not having been
raised in the appeal to the Court of Appeals. In any event, Filinvest's
disquisitions on such irrelevant issues are confounded.

As to the sole issue defined above, the Court of Appeals correctly

ruled that Filinvest is liable for damages not because it commenced an
action for replevin to recover possession of the truck prior to its
foreclosure, but because of the manner it carried out the seizure of the
vehicle. Sections 3 and 4, Rule 60 of the Rules of Court are very clear
and direct as to the procedure for the seizure of property under a writ
of replevin, thus:
Sec. 3. Order. Upon the filing of such affidavit and bond with the
clerk or judge of the court in which the action is pending, the judge of
such court shall issue an order describing the personal property
alleged to be wrongfully detained, and requiring the sheriff or other
proper officer of the court forthwith to take such property into his
custody.
Sec. 4. Duty of the officer. Upon receiving such order the officer
must serve a copy thereof on the defendant together with a copy of
the application, affidavit and bond, and must forthwith take the
property, if it be in the possession of the defendant or his agent, and
retain it in his custody. . . . (emphasis supplied)
In the instant case, it was not the sheriff or any other proper officer of
the trial court who implemented the writ of replevin. Because it was
aware that no other person can implement the writ, Filinvest asked
the trial court to appoint a special sheriff. Yet, it used its own
employees who misrepresented themselves as deputy sheriffs to seize
the truck without having been authorized by the court to do so.
Filinvest justified its seizure by citing a statement in Bachrach Motor
Co. vs.Summers, 9 to wit, "the only restriction on the mode by which
the mortgagee shall secure possession of the mortgaged property after
breach of condition is that he must act in an orderly manner and
without creating a breach of the peace, subjecting himself to an action
for trespass."
`Page 79 of 113

This justification is misplace and misleading for Bachrach itself had

ruled that if a mortgagee cannot obtain possession of a mortgaged
property for its sale on foreclosure, it must bring a civil action either
to recover such possession as a preliminary step to the sale or to
obtain judicial foreclosure. Pertinent portions of Bachrach read as
follows:
Where, however, debtor refuses to yield up the property, the creditor
must institute an action, either to effect a judicial foreclosure directly,
to secure possession as a preliminary to the sale contemplated in the
provision above quoted. He cannot lawfully take the property by
force against the will of the debtor. Upon this point the American
authorities are even more harmonious that they are upon the point
that the creditor is entitled to possession. As was said may years ago
by the writer of this opinion in a monographic article contributed to
an encyclopedic legal treatise, "if possession cannot be peaceably
obtained the mortgagee must bring an action." (Trust Deeds and
Power of Sale Mortgages, 28 Am. & Eng. Encyc. of Law, 2d ed., 783.)
In the Article of Chattel Mortgages, in Corpus Juris, we find the
following statement of the law on the same point: "The only
restriction on the mode by which the mortgagee shall secure
possession of the mortgaged property after breach of condition is that
he must act in an orderly manner and without creating a breach of the
peace, subjecting himself to an action to trespass. (11 C.J., 560; see
also 5 R.C.L., 462.)
The reason why the law does not allow the creditor to possess himself
of the mortgaged property with violence and against the will of the
debtor is to be found in the fact that the creditor's right of possession
is conditioned upon the fact of default, and the existence of this fact
may naturally be the subject of controversy. The debtor, for instance,
may claim in good faith, and rightly or wrongly, that the debt is paid,
or that for some other reason the alleged default is nonexistent. His

possession in this situation is as fully entitled to protection as that of

any other person, and in the language of article 446 of the Civil Code
he must be respected therein. To allow the creditor to seize the
property against the will of the debtor would make the former to a
certain extent both judge and executioner in his own cause a thing
which is inadmissible in the absence of unequivocal agreement in the
contract itself or express provision to that effect in the statute.
It will be observed that the law places the responsibility of conducting
the sale upon "a public officer;" and it might be supposed that an
officer, such as the sheriff, can seize the property where the creditor
could not. This suggestion is, we think, without force, as it is manifest
that the sheriff or other officer proceeding under the authority of the
language already quoted from section 14 of the Chattel Mortgage
Law, becomes pro hac vice the mere agent of the creditor. There is
nothing in this provision which creates a specific duty on the part of
the officer to seize the mortgaged property; and no intention on the
part of the law-making body to impose such a duty can be implied.
The conclusion is clear that for the recovery of possession, where the
right is disputed, the creditor must proceed along the usual channels
by action in court. Whether the sheriff, upon being indemnified by the
creditor, could safely proceed to take the property from the debtor, is
a point upon which we express no opinion. . . .
But whatever conclusion may be drawn in the premises with respect
to the true nature of a chattel mortgage, the result must in this case be
the same; for whether the mortgagee becomes the real owner of the
mortgaged property as some suppose or acquires only certain
rights therein, it is none the less clear that he has after default the
right of possession; though it cannot be admitted that he may take the
law into his own hands and wrest the property violently from the
possession of the mortgagor. Neither can he do through the medium
of a public officer that which he cannot directly do himself. The
`Page 80 of 113

consequence is that in such case the creditor must either resort to a

civil action to recover possession as a preliminary to a sale, or
preferably he may bring an action to obtain a judicial foreclosure in
conformity, so far as with the provisions of the Chattel to Mortgage
Law. 10
Replevin is, of course, the appropriate action to recover possession
preliminary to the extrajudicial foreclosure of a chattel mortgage.
Filinvest did in fact institute such an action and obtained a writ of
replevin. And, by filing it, Filinvest admitted that it cannot acquire
possession of the mortgaged vehicle in an orderly or peaceful manner.
Accordingly, it should have left the enforcement of the writ in
accordance with Rule 60 of the Rules of Court which it had
voluntarily invoked.
Parenthetically, it must be observed that the trial court erred in
holding that the action for replevin was "not in order as [Filinvest] is
not the owner of the property (Sec, 2 par. (a) Rule 60)." 11 It is not only
the owner who can institute a replevin suit. A person "entitled to the
possession" of the property also can, as provided in the same
paragraph cited by the trial court, which reads:
Sec. 2. Affidavit and bond. Upon applying for such order the
plaintiff must show . . .
(a) That the plaintiff is the owner of the property claimed, particularly
describing it, or is entitled to the possession thereof; . . . (emphasis
supplied)
Upon the default by the mortgagor in his obligations, Filinvest, as a
mortgagee, had the right to the possession of the property mortgaged
preparatory to its sale in a public auction. 12 However, for employing
subterfuge in seizing the truck by misrepresenting its employees as
deputy sheriffs and then hiding and cannibalizing it, Filinvest

committed bad faith in violation of Article 19 of the Civil Code which

provides:
Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.
In common usage, good faith is ordinarily used to describe that state
of mind denoting honesty of purpose, freedom from intention to
defraud, and, generally speaking, means being faithful to one's duty
or obligation. 13 It consists of the honest intention to abstain from
taking an unconscionable and unscrupulous advantage of another. 14
This leaves us to the issue of damages and attorney's fees.
In their answer with counterclaim, the private respondents asked for
(a) actual damages of P50,000.00 for the spare parts found missing
after their recovery of the truck and another P50,000.00 for unearned
profits due to the failure to use the truck in their ricemill business; (b)
moral damages of P50,000.00 for "the mental anguish, serious anxiety,
physical suffering, wounded feelings, social humiliation, moral shock,
sleepless nights and other similar injury" which they suffered as a
"proximate result of the [petitioner's illegal, wrongful and unlawful
acts"; (c) nominal damages of P30,000.00; (d) exemplary damages of
P20,000.00; and (e) attorney's fees of P20,000.00 which they incurred
"as a direct result of [petitioner's] illegal and unwarranted actuations
and in connection with the defense of this action." 15
As to actual damages, the petitioner admits that per Exhibits "1," "9,"
and "10" of the private respondents, only the sum of P33,222.00 and
not P50,000.00 was "supposedly spent for the alleged lost spare
parts." 16 The petitioner may thus be held liable only for such amount
for actual or compensatory damages.
`Page 81 of 113

Anent the moral damages, the trial court ruled that the acts of the
petitioner were in total disregard of Articles 19, 20, and 21 of the Civil
Code. 17 It added that the petitioner had not only caused actual
damages in lost earnings, but had also caused the private respondents
to suffer indignities at the hands of the petitioner's personnel in
hiding the truck in question, misleading them, and making them
work for the release of the truck for about two weeks, thereby
justifying the award of moral damages along with the exemplary and
other damages in favor of the private respondents. 18
We agree with this finding of the trial court. The petitioner's acts
clearly fall within the contemplation of Articles 19 and 21 of the Civil
Code. 19 The acts of fraudulently taking the truck, hiding it from the
private respondents, and removing its spare parts show nothing but a
willful intention to cause loss to the private respondents that is
punctuated with bad faith and is obviously contrary to good customs.
Thus, the private respondents are entitled to the moral damages they
prayed for, for under Article 2219 of the Civil Code, moral damages
may be recovered in cases involving acts referred to in Article 21 of
the same Code.
The private respondents prayed for nominal damages of P30,000.00
which the trial court did not award them. Having failed to appeal this
omission by the trial court, we cannot make anymore such award at
this point.
The award of exemplary damages is in order in view of the wanton,
fraudulent, and oppressive manner by which the petitioner sought to
enforce its right to the possession of the mortgaged vehicle. Article
2232 of the Civil Code provides:
In contracts and quasi-contracts, the court may award exemplary
damages if the defendant acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner.

Of course, a plaintiff need not prove the actual extent of exemplary

damages, for its determination is addressed to the sound discretion of
the court upon proof of the plaintiff's entitlement to moral, temperate,
or actual or compensatory damages. Article 2234 of the Civil Code
thus provides in part as follows:
While the amount of the exemplary damages need not be proved, the
plaintiff must show that he is entitled to moral, temperate or
compensatory damages before the court may consider the question of
whether or not exemplary damages should be awarded. . . .
The award for attorney's fees must, however, be set aside. There is no
question that the petitioner filed in good faith its complaint for
replevin and damages to protect its rights under the promissory note
and the chattel mortgage. That the private respondents had defaulted
in its obligation under the promissory note thereby authorizing the
petitioner to seek enforcement of its claim thereunder and proceed
against the mortgage of the vehicle was duly recognized by the trial
court by its judgment against the private respondents incorporated in
the first part of the dispositive portion. The private respondents did
not appeal therefrom. There would then be no basis for awarding
attorney's fees in favor of the private respondents for whatever
physical suffering, mental anguish, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, or any
other similar injury they had suffered, even if proven, were only such
as are usually caused to parties haled into court as a defendant and
which are not compensable, for the law could not have meant to
impose a penalty on the right to litigate. 20
WHEREFORE, the assailed judgment of the Court of Appeals in CAG.R. CV No. 30231 as well as that of the Regional Trial Court of San
Fernando, Pampanga, Branch 46 in Civil Case No. 6599 on the
counterclaim is AFFIRMED, subject to the modifications abovestated.
`Page 82 of 113

As so modified, the petitioner is hereby ordered to pay the private

respondents only the following:
(a) actual damages in the reduced amount of P33,222.00;
(b) moral damages in the amount of P50,000.00; and
(c) exemplary damages in the amount of P20,000.00.
No pronouncement as to costs.

`Page 83 of 113

G.R. No. L-47538

June 20, 1941

GONZALO
PUYAT
&
SONS,
INC., petitioner,
vs.
ARCO AMUSEMENT COMPANY (formerly known as Teatro
Arco), respondent.
Feria
&
Lao
for
J. W. Ferrier and Daniel Me. Gomez for respondent.

petitioner.

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
`Page 84 of 113

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-ofpocket 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
`Page 85 of 113

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.
(SeeQuiroga 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
`Page 86 of 113

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., defendantsappellee," without pronouncement regarding costs. So ordered.
Avancea, C.J., Diaz, Moran and Horrilleno, JJ., concur.

`Page 87 of 113

G.R. No. L-11491

August 23, 1918

ANDRES
QUIROGA, plaintiff-appellant,
vs.
PARSONS HARDWARE CO., defendant-appellee.
Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant.
Crossfield & O'Brien for appellee.
AVANCEA, J.:
On January 24, 1911, in this city of manila, a contract in the following
tenor was entered into by and between the plaintiff, as party of the
first part, and J. Parsons (to whose rights and obligations the present
defendant later subrogated itself), as party of the second part:
CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA
AND J. PARSONS, BOTH MERCHANTS ESTABLISHED IN
MANILA, FOR THE EXCLUSIVE SALE OF "QUIROGA" BEDS IN
THE VISAYAN ISLANDS.
ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his
beds in the Visayan Islands to J. Parsons under the following
conditions:
(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons
for the latter's establishment in Iloilo, and shall invoice them at the
same price he has fixed for sales, in Manila, and, in the invoices, shall
make and allowance of a discount of 25 per cent of the invoiced
prices, as commission on the sale; and Mr. Parsons shall order the
beds by the dozen, whether of the same or of different styles.
(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds
received, within a period of sixty days from the date of their
shipment.

(C) The expenses for transportation and shipment shall be borne by

M. Quiroga, and the freight, insurance, and cost of unloading from
the vessel at the point where the beds are received, shall be paid by
Mr. Parsons.
(D) If, before an invoice falls due, Mr. Quiroga should request its
payment, said payment when made shall be considered as a prompt
payment, and as such a deduction of 2 per cent shall be made from
the amount of the invoice.
The same discount shall be made on the amount of any invoice which
Mr. Parsons may deem convenient to pay in cash.
(E) Mr. Quiroga binds himself to give notice at least fifteen days
before hand of any alteration in price which he may plan to make in
respect to his beds, and agrees that if on the date when such alteration
takes effect he should have any order pending to be served to Mr.
Parsons, such order shall enjoy the advantage of the alteration if the
price thereby be lowered, but shall not be affected by said alteration if
the price thereby be increased, for, in this latter case, Mr. Quiroga
assumed the obligation to invoice the beds at the price at which the
order was given.
(F) Mr. Parsons binds himself not to sell any other kind except the
"Quiroga" beds.
ART. 2. In compensation for the expenses of advertisement which, for
the benefit of both contracting parties, Mr. Parsons may find himself
obliged to make, Mr. Quiroga assumes the obligation to offer and give
the preference to Mr. Parsons in case anyone should apply for the
exclusive agency for any island not comprised with the Visayan
group.

`Page 88 of 113

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.
`Page 89 of 113

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.
`Page 90 of 113

G.R. No. L-27044 June 30, 1975

THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND THE
COURT OF TAX APPEALS, respondents.
G.R. No. L-27452 June 30, 1975
ENGINEERING
EQUIPMENT
AND
SUPPLY
COMPANY, petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE AND THE
COURT OF TAX APPEALS, respondent.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor
General Felicisimo R. Rosete, Solicitor Lolita O. Gal-lang, and Special
Attorney Gemaliel H. Montalino for Commissioner of Internal
Revenue, etc.
Melquides C. Gutierrez, Jose U. Ong, Juan G. Collas, Jr., Luis Ma.
Guerrero and J.R. Balonkita for Engineering and Supply Company.

ESGUERRA, J.:
Petition for review on certiorari of the decision of the Court of Tax
Appeals in CTA Case No. 681, dated November 29, 1966, assessing a
compensating tax of P174,441.62 on the Engineering Equipment and
Supply Company.
As found by the Court of Tax Appeals, and as established by the
evidence on record, the facts of this case are as follows:

Engineering Equipment and Supply Co. (Engineering for short), a

domestic corporation, is an engineering and machinery firm. As
operator of an integrated engineering shop, it is engaged, among
others, in the design and installation of central type air conditioning
system, pumping plants and steel fabrications. (Vol. I pp. 12-16 T.S.N.
August 23, 1960)
On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now
Commissioner, of Internal Revenue denouncing Engineering for tax
evasion by misdeclaring its imported articles and failing to pay the
correct percentage taxes due thereon in connivance with its foreign
suppliers (Exh. "2" p. 1 BIR record Vol. I). Engineering was likewise
denounced to the Central Bank (CB) for alleged fraud in obtaining its
dollar allocations. Acting on these denunciations, a raid and search
was conducted by a joint team of Central Bank, (CB), National Bureau
of Investigation (NBI) and Bureau of Internal Revenue (BIR) agents on
September 27, 1956, on which occasion voluminous records of the
firm were seized and confiscated. (pp. 173-177 T.S.N.)
On September 30, 1957, revenue examiners Quesada and Catudan
reported and recommended to the then Collector, now Commissioner,
of Internal Revenue (hereinafter referred to as Commissioner) that
Engineering be assessed for P480,912.01 as deficiency advance sales
tax on the theory that it misdeclared its importation of air
conditioning units and parts and accessories thereof which are subject
to tax under Section 185(m) 1 of the Tax Code, instead of Section 186
of the same Code. (Exh. "3" pp. 59-63 BIR rec. Vol. I) This assessment
was revised on January 23, 1959, in line with the observation of the
Chief, BIR Law Division, and was raised to P916,362.56 representing
deficiency advance sales tax and manufacturers sales tax, inclusive of
the 25% and 50% surcharges. (pp. 72-80 BIR rec. Vol. I)

`Page 91 of 113

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. L27044). 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.
`Page 92 of 113

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
compensating tax
deficiency advance
and 50% surcharge
1956.

respondent company liable for P174,141.62 as

and 25% surcharge instead of P740,587.86 as
sales tax, deficiency manufacturers tax and 25%
for the period from June 1, 1948 to December 31,

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
`Page 93 of 113

accessories thereof subject to tax under Section 185(m) of the Tax

Code, but a contractor engaged in the design, supply and installation
of the central type of air-conditioning system subject to the 3% tax
imposed by Section 191 of the same Code, which is essentially a tax
on the sale of services or labor of a contractor rather than on the sale
of articles subject to the tax referred to in Sections 184, 185 and 186 of
the Code.
The arguments of both the Engineering and the Commissioner call for
a clarification of the term contractor as well as the distinction between
a contract of sale and contract for furnishing services, labor and
materials. The distinction between a contract of sale and one for work,
labor and materials is tested by the inquiry whether the thing
transferred is one not in existence and which never would have
existed but for the order of the party desiring to acquire it, or a thing
which would have existed and has been the subject of sale to some
other persons even if the order had not been given. 2 If the article
ordered by the purchaser is exactly such as the plaintiff makes and
keeps on hand for sale to anyone, and no change or modification of it
is made at defendant's request, it is a contract of sale, even though it
may be entirely made after, and in consequence of, the defendants
order for it. 3
Our New Civil Code, likewise distinguishes a contract of sale from a
contract for a piece of work thus:
Art. 1467. A contract for the delivery at a certain price of an article
which the vendor in the ordinary course of his business manufactures
or procures for the general market, whether the same is on hand at
the time or not, is a contract of sale, but if the goods are to be
manufactured specially for the customer and upon his special order
and not for the general market, it is a contract for a piece of work.

The word "contractor" has come to be used with special reference to a

person who, in the pursuit of the independent business, undertakes to
do a specific job or piece of work for other persons, using his own
means and methods without submitting himself to control as to the
petty details. (Araas, Annotations and Jurisprudence on the National
Internal Revenue Code, p. 318, par. 191 (2), 1970 Ed.) The true test of a
contractor as was held in the cases of Luzon Stevedoring Co., vs.
Trinidad, 43, Phil. 803, 807-808, and La Carlota Sugar Central vs.
Trinidad, 43, Phil. 816, 819, would seem to be that he renders service
in the course of an independent occupation, representing the will of
his employer only as to the result of his work, and not as to the means
by which it is accomplished.
With the foregoing criteria as guideposts, We shall now examine
whether Engineering really did "manufacture" and sell, as alleged by
the Commissioner to hold it liable to the advance sales tax under
Section 185(m), or it only had its services "contracted" for installation
purposes to hold it liable under section 198 of the Tax Code.
I
After going over the three volumes of stenographic notes and the
voluminous record of the BIR and the CTA as well as the exhibits
submitted by both parties, We find that Engineering did not
manufacture air conditioning units for sale to the general public, but
imported some items (as refrigeration compressors in complete set,
heat exchangers or coils, t.s.n. p. 39) which were used in executing
contracts entered into by it. Engineering, therefore, undertook
negotiations and execution of individual contracts for the design,
supply and installation of air conditioning units of the central type
(t.s.n. pp. 20-36; Exhs. "F", "G", "H", "I", "J", "K", "L", and "M"), taking
into consideration in the process such factors as the area of the space
to be air conditioned; the number of persons occupying or would be
`Page 94 of 113

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
`Page 95 of 113

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
`Page 96 of 113

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?

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.

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)

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).

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

II
We take up next the issue of fraud. The Commissioner charged
Engineering with misdeclaration of the imported air conditioning
`Page 97 of 113

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.)

`Page 98 of 113

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.

`Page 99 of 113

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
`Page 100 of 113

as amended, it is therefore subject to the 25% surcharge for

delinquency in the payment of the said tax. (pp. 224-226 CTA rec.)

SO ORDERED.
Makalintal, C.J., Castro, Makasiar and Martin, JJ., concur.

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.
`Page 101 of 113

G.R. No. L-8506

August 31, 1956

CELESTINO
CO
&
COMPANY, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
Office of the Solicitor General Ambrosio Padilla, Fisrt Assistant
Solicitor General Guillermo E. Torres and Solicitor Federico V. Sian
for respondent.
BENGZON, J.:
Appeal from a decision of the Court of Tax Appeals.
Celestino Co & Company is a duly registered general copartnership
doing business under the trade name of "Oriental Sash Factory". From
1946 to 1951 it paid percentage taxes of 7 per cent on the gross receipts
of its sash, door and window factory, in accordance with section one
hundred eighty-six of the National Revenue Code imposing taxes on
sale of manufactured articles. However in 1952 it began to claim
liability only to the contractor's 3 per cent tax (instead of 7 per cent)
under section 191 of the same Code; and having failed to convince the
Bureau of Internal Revenue, it brought the matter to the Court of Tax
Appeals, where it also failed. Said the Court:
To support his contention that his client is an ordinary contractor . . .
counsel presented . . . duplicate copies of letters, sketches of doors and
windows and price quotations supposedly sent by the manager of the
Oriental Sash Factory to four customers who allegedly made special
orders to doors and window from the said factory. The conclusion
that counsel would like us to deduce from these few exhibits is that
the Oriental Sash Factory does not manufacture ready-made doors,
sash and windows for the public but only upon special order of its
select customers. . . . I cannot believe that petitioner company would

take, as in fact it has taken, all the trouble and expense of registering a
special trade name for its sash business and then orders company
stationery carrying the bold print "Oriental Sash Factory (Celestino Co
& Company, Prop.) 926 Raon St. Quiapo, Manila, Tel. No.
33076,Manufacturers of all kinds of doors, windows, sashes, furniture,
etc. used season-dried and kiln-dried lumber, of the best quality
workmanships" solely for the purpose of supplying the needs for
doors, windows and sash of its special and limited customers. One ill
note that petitioner has chosen for its tradename and has offered itself
to the public as a "Factory", which means it is out to do business, in its
chosen lines on a big scale. As a general rule, sash factories receive
orders for doors and windows of special design only in particular
cases but the bulk of their sales is derived from a ready-made doors
and windows of standard sizes for the average home. Moreover, as
shown from the investigation of petitioner's book of accounts, during
the period from January 1, 1952 to September 30, 1952, it sold sash,
doors and windows worth P188,754.69. I find it difficult to believe
that this amount which runs to six figures was derived by petitioner
entirely from its few customers who made special orders for these
items.
Even if we were to believe petitioner's claim that it does not
manufacture ready-made sash, doors and windows for the public and
that it makes these articles only special order of its customers, that
does not make it a contractor within the purview of section 191 of the
national Internal Revenue Code. there are no less than fifty
occupations enumerated in the aforesaid section of the national
Internal Revenue Code subject to percentage tax and after reading
carefully each and every one of them, we cannot find under which the
business of manufacturing sash, doors and windows upon special
order of customers fall under the category of "road, building,
navigation, artesian well, water workers and other construction work
contractors" are those who alter or repair buildings, structures, streets,
`Page 102 of 113

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
`Page 103 of 113

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.

because it also sold the materials. The truth of the matter is that it sold
materials ordinarily manufactured by it sash, panels, mouldings
to Teodoro & Co., although in such form or combination as suited the
fancy of the purchaser. Such new form does not divest the Oriental
Sash Factory of its character as manufacturer. Neither does it take the
transaction out of the category of sales under Article 1467 above
quoted, because although the Factory does not, in the ordinary course
of its business, manufacture and keep on stock doors of the kind sold
to Teodoro, it could stock and/or probably had in stock the sash,
mouldings and panels it used therefor (some of them at least).
In our opinion when this Factory accepts a job that requires the use of
extraordinary or additional equipment, or involves services not
generally performed by it-it thereby contracts for a piece of work
filing special orders within the meaning of Article 1467. The orders
herein exhibited were not shown to be special. They were merely
orders for work nothing is shown to call them special requiring
extraordinary service of the factory.
The thought occurs to us that if, as alleged-all the work of appellant is
only to fill orders previously made, such orders should not be
called special work, but regular work. Would a factory do business
performing only special, extraordinary or peculiar merchandise?
Anyway, supposing for the moment that the transactions were not
sales, they were neither lease of services nor contract jobs by a
contractor. But as the doors and windows had been admittedly
"manufactured" by the Oriental Sash Factory, such transactions could
be, and should be taxed as "transfers" thereof under section 186 of the
National Revenue Code.
The appealed decision is consequently affirmed. So ordered.

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)
`Page 104 of 113

G.R. No. L-6584

October 16, 1911

INCHAUSTI
AND
CO., plaintiff-appellant,
vs.
ELLIS CROMWELL, Collector of Internal Revenue, defendantappellee.
Haussermann,
Cohn
&
Fisher,
Acting Attorney-General Harvey, for appellee.

for

appellant.

MORELAND, J.:
This is an appeal by the plaintiff from a judgment of the Court of First
Instance of the city of Manila, the Hon. Simplicio del Rosario
presiding, dismissing the complaint upon the merits after trial,
without costs.
The facts presented to this court are agreed upon by both parties,
consisting, in so far as they are material to a decision of the case, in
the following:
III. That the plaintiff firm for many years past has been and now is
engaged in the business of buying and selling at wholesale hemp,
both for its own account and on commission.
IV. That it is customary to sell hemp in bales which are made by
compressing the loose fiber by means of presses, covering two sides
of the bale with matting, and fastening it by means of strips of rattan;
that the operation of bailing hemp is designated among merchants by
the word "prensaje."
V. That in all sales of hemp by the plaintiff firm, whether for its own
account or on commission for others, the price is quoted to the buyer
at so much per picul, no mention being made of bailing; but with the

tacit understanding, unless otherwise expressly agreed, that the hemp

will be delivered in bales and that, according to the custom prevailing
among hemp merchants and dealers in the Philippine Islands, a
charge, the amount of which depends upon the then prevailing rate, is
to be made against the buyer under the denomination of "prensaje."
That this charge is made in the same manner in all cases, even when
the operation of bailing was performed by the plaintiff or by its
principal long before the contract of sale was made. Two specimens of
the ordinary form of account used in these operations are hereunto
appended, marked Exhibits A and B, respectively, and made a part
hereof.
VI. That the amount of the charge made against hemp buyers by the
plaintiff firm and other sellers of hemp under the denomination of
"prensaje" during the period involved in this litigation was P1.75 per
bale; that the average cost of the rattan and matting used on each bale
of hemp is fifteen (15) centavos and that the average total cost of
bailing hemp is one (1) peso per bale.
VII. That insurance companies in the Philippine Islands, in estimating
the insurable value of hemp always add to the quoted price of same
the charge made by the seller under the denomination of "prensaje."
VII. That the average weight of a bale of hemp is two (2) piculs (126.5
kilograms).
IX. That between the first day of January, 1905, and the 31st day of
March, 1910, the plaintiff firm, in accordance with the custom
mentioned in paragraph V hereof, collected and received, under the
denomination of "prensaje," from purchasers of hemp sold by the said
firm for its own account, in addition to the price expressly agreed
upon for the said hemp, sums aggregating P380,124.35; and between
the 1st day of October, 1908, and the 1st day of March, 1910, collected
for the account of the owners of hemp sold by the plaintiff firm in
`Page 105 of 113

Manila on commission, and under the said denomination of

"prensaje," in addition to the price expressly agreed upon the said
hemp, sums aggregating P31,080.
X. That the plaintiff firm in estimating the amount due it as
commissions on sales of hemp made by it for its principals has always
based the said amount on the total sum collected from the purchasers
of the hemp, including the charge made in each case under the
denomination of "prensaje."
XI. That the plaintiff has always paid to the defendant or to his
predecessor in the office of the Collector of Internal Revenue the tax
collectible under the provisions of section 139 of Act No. 1189 upon
the selling price expressly agreed upon for all hemp sold by the
plaintiff firm both for its own account and on commission, but has
not, until compelled to do so as hereinafter stated, paid the said tax
upon sums received from the purchaser of such hemp under the
denomination of "prensaje."
XII. That of the 29th day of April, 1910, the defendant, acting in his
official capacity as Collector of Internal Revenue of the Philippine
Islands, made demand in writing upon the plaintiff firm for the
payment within the period of five (5) days of the sum of P1,370.68 as a
tax of one third of one per cent on the sums of money mentioned in
Paragraph IX hereof, and which the said defendant claimed to be
entitled to receive, under the provisions of the said section 139 of Act
No. 1189, upon the said sums of money so collected from purchasers
of hemp under the denomination of "prensaje."
XIII. That on the 4th day of May, 1910, the plaintiff firm paid to the
defendant under protest the said sum of P1,370.69, and on the same
date appealed to the defendant as Collector of Internal Revenue,
against the ruling by which the plaintiff firm was required to make
said payment, but defendant overruled said protest and adversely

decided said appeal, and refused and still refuses to return to plaintiff
the said sum of P1,370.68 or any part thereof.1awphil.net
XIV. Upon the facts above set forth t is contended by the plaintiff that
the tax of P1,370.68 assessed by the defendant upon the aggregate
sum of said charges made against said purchasers of hemp by the
plaintiff during the period in question, under the denomination of
"prensaje" as aforesaid, namely, P411,204.35, is illegal upon the
ground that the said charge does not constitute a part of the selling
price of the hemp, but is a charge made for the service of baling the
hemp, and that the plaintiff firm is therefore entitled to recover of the
defendant the said sum of P1,370.68 paid to him under protest,
together with all interest thereon at the legal rate since payment, and
the costs of this action.
Upon the facts above stated it is the contention of the defendant that
the said charge made under the denomination of "prensaje" is in truth
and in fact a part of the gross value of the hemp sold and of its actual
selling price, and that therefore the tax imposed by section 139 of Act
No. 1189 lawfully accrued on said sums, that the collection thereof
was lawfully and properly made and that therefore the plaintiff is not
entitled to recover back said sum or any part thereof; and that the
defendant should have judgment against plaintiff for his costs.
Under these facts we are of the opinion that the judgment of the court
below was right. It is one of the stipulations in the statement of facts
that it is customary to sell hemp in bales, and that the price quoted in
the market for hemp per picul is the price for the hemp baled. The fact
is that among large dealers like the plaintiff in this case it is practically
impossible to handle hemp without its being baled, and it is admitted
by the statement of facts, as well as demonstrated by the documentary
proof introduced in the case, that if the plaintiff sold a quality of
hemp it would be the under standing, without words, that such hemp
`Page 106 of 113

would be delivered in bales, and that the purchase price would

include the cost and expense of baling. In other words, it is the fact as
stipulated, as well as it would be the fact of necessity, that in all
dealings in hemp in the general market the selling price consists of the
value of the hemp loose plus the cost and expense of putting it into
marketable form. In the sales made by the plaintiff, which are the
basis of the controversy here, there were n services performed by him
for his vendee. There was agreement that services should be
performed. Indeed, at the time of such sales it was not known by the
vendee whether the hemp was then actually baled or not. All that he
knew and all that concerned him was that the hemp should be
delivered to him baled. He did not ask the plaintiff to perform
services for him, nor did the plaintiff agree to do so. The contract was
single and consisted solely in the sale and purchase of hemp. The
purchaser contracted for nothing else and the vendor agreed to
deliver nothing else.
The word "price" signifies the sum stipulated as the equivalent of the
thing sold and also every incident taken into consideration for the
fixing of the price, put to the debit of the vendee and agreed to by
him. It is quite possible that the plaintiff, in this case in connection
with the hemp which he sold, had himself already paid the additional
expense of baling as a part of the purchase price which he paid and
that he himself had received the hemp baled from his vendor. It is
quite possible also that such vendor of the plaintiff may have received
the same hemp from his vendor in baled form, that he paid the
additions cost of baling as a part of the purchase price which he paid.
In such case the plaintiff performed no service whatever for his
vendee, nor did the plaintiff's vendor perform any service for him.
The distinction between a contract of sale and one for work, labor,
and materials is tested by the inquiry whether the thing transferred is
one no in existence and which never would have existed but for the

order of the party desiring to acquire it, or a thing which would have
existed and been the subject of sale to some other person, even if the
order had not been given. (Groves vs. Buck, 3 Maule & S., 178;
Towers vs. Osborne, 1 Strange, 506; Benjamin on Sales, 90.) It is clear
that in the case at bar the hemp was in existence in baled form before
the agreements of sale were made, or, at least, would have been in
existence even if none of the individual sales here in question had
been consummated. It would have been baled, nevertheless, for sale
to someone else, since, according to the agreed statement of facts, it is
customary to sell hemp in bales. When a person stipulates for the
future sale of articles which he is habitually making, and which at the
time are not made or finished, it is essentially a contract of sale and
not a contract for labor. It is otherwise when the article is made
pursuant to agreement. (Lamb vs. Crafts, 12 Met., 353;
Smith vs. N.Y.C. Ry. Co., 4 Keyes, 180; Benjamin on Sales, 98.) Where
labor is employed on the materials of the seller he can not maintain an
action for work and labor. (Atkinson vs. Bell, 8 Barn. & C., 277;
Lee vs. Griffin, 30 L.J.N. S.Q.B., 252; Prescott vs. Locke, 51 N.H., 94.) If
the article ordered by the purchaser is exactly such as the plaintiff
makes and keeps on hand for sale to anyone, and no change or
modification of it is made at the defendant's request, it is a contract of
sale, even though it may be entirely made after, and in consequence
of, the defendant's order for it. (Garbutt s. Watson, 5 Barn. & Ald.,
613; Gardner vs. Joy, 9 Met., 177; Lamb vs. Crafts, 12 Met., 353;
Waterman vs. Meigs, 4 Cush., 497., Clark vs. Nichols, 107 Mass., 547;
May vs. Ward, 134 Mass., 127; Abbottvs. Gilchrist, 38 Me., 260;
Crocket vs. Scribner, 64 Me., 105; Pitkin vs. Noyes, 48 N. H., 294;
Prescott vs. Locke, 51 N. H., 94; Ellison vs. Brigham, 38 Vt., 64.) It has
been held in Massachusetts that a contract to make is a contract of sale
if the article ordered is already substantially in existence at the time of
the order and merely requires some alteration, modification, or
adoption to the buyer's wishes or purposes. (Mixer vs. Howarth, 21
`Page 107 of 113

Pick., 205.) It is also held in that state that a contract for the sale of an
article which the vendor in the ordinary course of his business
manufactures or procures for the general market, whether the same is
on hand at the time or not, is a contract for the sale of goods to which
the statute of frauds applies. But if the goods are to be manufactured
especially for the purchaser and upon his special order, and not for
the general market, the case is not within the statute.
(Goddard vs. Binney, 115 Mass., 450.)
It is clear to our minds that in the case at bar the baling was
performed for the general market and was not something done by
plaintiff which was a result of any peculiar wording of the particular
contract between him and his vendee. It is undoubted that the
plaintiff prepared his hemp for the general market. This would be
necessary. One whose exposes goods for sale in the market must have
them in marketable form. The hemp in question would not have been
in that condition if it had not been baled. the baling, therefore, was
nothing peculiar to the contract between the plaintiff and his vendee.
It was precisely the same contract that was made by every other seller
of hemp, engaged as was the plaintiff, and resulted simply in the
transfer of title to goods already prepared for the general market. The
method of bookkeeping and form of the account rendered is not
controlling as to the nature of the contract made. It is conceded in the
case tat a separate entry and charge would have been made for the
baling even if the plaintiff had not been the one who baled the hemp
but, instead, had received it already baled from his vendor. This
indicates of necessity tat the mere fact of entering a separate item for
the baling of the hemp is formal rather than essential and in no sense
indicates in this case the real transaction between the parties. It is
undisputable that, if the plaintiff had brought the hemp in question
already baled, and that was the hemp the sale which formed the
subject of this controversy, then the plaintiff would have performed
no service for his vendee and could not, therefore, lawfully charge for

the rendition of such service. It is, nevertheless, admitted that in spite

of that fact he would still have made the double entry in his invoice of
sale to such vendee. This demonstrates the nature of the transaction
and discloses, as we have already said, that the entry of a separate
charge for baling does not accurately describe the transaction between
the parties.
Section 139 [Act No. 1189] of the Internal Revenue Law provides that:
There shall be paid by each merchant and manufacturer a tax at the
rate of one-third of one per centum on the gross value in money of all
goods, wares and merchandise sold, bartered or exchanged in the
Philippine Islands, and that this tax shall be assessed on the actual
selling price at which every such merchant or manufacturer disposes
of his commodities.
The operation of baling undoubtedly augments the value of the
goods. We agree that there can be no question that, if the value of the
hemp were not augmented to the amount of P1.75 per bale by said
operation, the purchaser would not pay that sum. If one buys a bale of
hemp at a stipulated price of P20, well knowing that there is an
agreement on his part, express or implied, to pay an additional
amount of P1.75 for that bale, he considers the bale of hemp worth
P21. 75. It is agreed, as we have before stated, that hemp is sold in
bales. Therefore, baling is performed before the sale. The purchaser of
hemp owes to the seller nothing whatever by reason of their contract
except the value of the hemp delivered. That value, that sum which
the purchaser pays to the vendee, is the true selling price of the hemp,
and every item which enters into such price is a part of such selling
price. By force of the custom prevailing among hemp dealers in the
Philippine Islands, a purchaser of hemp in the market, unless he
expressly stipulates that it shall be delivered to him in loose form,
obligates himself to purchase and pay for baled hemp. Wheher or not
`Page 108 of 113

such agreement is express or implied, whether it is actual or tacit, it

has the same force. After such an agreement has once been made by
the purchaser, he has no right to insists thereafter that the seller shall
furnish him with unbaled hemp. It is undoubted that the vendees, in
the sales referred to in the case at bar, would have no right, after
having made their contracts, to insists on the delivery of loose hemp
with the purpose in view themselves to perform the baling and thus
save 75 centavos per bale. It is unquestioned that the seller, the
plaintiff, would have stood upon his original contract of sale, that is,
the obligation to deliver baled hemp, and would have forced his
vendees to accept baled hemp, he himself retaining among his own
profits those which accrued from the proceed of baling.
We are of the opinion that the judgment appealed from must be
affirmed, without special finding as to costs, and it is so ordered.

`Page 109 of 113

FIRST DIVISION
[G. R. No. 130972. January 23, 2002]

The Facts
The facts, as found by the Court of Appeals, are as follows:

PHILIPPINE LAWIN BUS, CO., MASTER TOURS & TRAVEL CORP.,

MARCIANO TAN, ISIDRO TAN, ESTEBAN TAN and HENRY TAN,
petitioners, vs. COURT OF APPEALS and ADVANCE CAPITAL
CORPORATION, respondents.
DECISION
PARDO, J.:
The Case
The case is a petition for review via certiorari of the decision of the
Court of Appeals,[1] reversing that of the trial court[2] and sentencing
petitioners as follows:
WHEREFORE, the appealed decision should be, as it is hereby
REVERSED and SET ASIDE. In lieu thereof, a new one is hereby
rendered ordering the defendants-appellees to pay, jointly and
solidarily, in favor of plaintiff-appellant Advance Capital
Corporation, the following amounts:
1. P16,484,994.42, the principal obligation under the two promissory
note Nos. 003 and 00037 plus interest and penalties;
2. P100,000.00 for loss of goodwill and good reputation;
3. An amount equivalent to 10% of the collectible amount, plus
P50,000, as acceptance fee and P500 per appearance, as and for
attorneys fees: and

On 7 August 1990 plaintiff Advance Capital Corporation, a licensed

lending investor, extended a loan to defendant Philippine Lawin Bus
Company (hereafter referred to as LAWIN), in the amount of
P8,000,000.00 payable within a period of one (1) year, as evidenced by
a Credit Agreement (Exhibits B to B-4-B). The defendant, through
Marciano Tan, its Executive Vice President, executed Promissory Note
No. 003, for the amount of P8,000,000.00 (Exhs. C to C-1).
To guarantee payment of the loan, defendant Lawin executed in
favor of plaintiff the following documents: (1) A Deed of Chattel
Mortgage wherein 9 units of buses were constituted as collaterals
(Exhibits F to F-7): (2) A joint and several UNDERTAKING of
defendant Master Tours and Travel Corporation dated 07 August
1990, signed by Isidro Tan and Marciano Tan (Exhs. H to H-1): and
(3) A joint and several UNDERTAKING dated 21 August 1990,
executed and signed by Esteban, Isidro, Marciano and Henry, all
surnamed Tan (Exhs. I to I-6).
Out of the P8,000,000.00 loan, P1,800,000.00 was paid. Thus, on 02
November 1990, defendant Bus Company was able to avail an
additional loan of P2,000,000.00 for one (1) month under Promissory
Note 00028 (Exhs. J-J-1).
Defendant LAWIN failed to pay the aforementioned promissory
note and the same was renewed on 03 December 1990 to become due
on or before 01 February 1991, under Promissory Note 00037 (Exh.
K).

4. P100,000 as litigation expenses.

Costs shall be taxed against defendant-appellees.

On 15 May 1991 for failure to pay the two promissory notes,

defendant LAWIN was granted a loan re-structuring for two (2)
months to mature on 31 July 1991.

SO ORDERED.[3]
`Page 110 of 113

Despite the restructuring, defendant LAWIN failed to pay. Thus,

plaintiff foreclosed the mortgaged buses and as the sole bidder
thereof, the amount of P2,000,000.00 was accepted by the deputy
sheriff conducting the sale and credited to the account of defendant
LAWIN.
Thereafter, on 27 May 1992, identical demand letters were sent to the
defendants to pay their obligation (Exhs. X to CC). Despite
repeated demands, the defendants failed to pay their indebtedness
which totaled of P16,484,992.42 as of 31 July 1992 (Exhs. DD-DD1).

be applied to the loan obligation of defendant Lawin. (p. 4 Answer;

p. 166, rec.)
Defendants further assert that the foreclosure sale was in violation of
the aforequoted arrangement and prayed for the nullification of the
same and the dismissal of the complaint.[4]
On 28 June 1995, the trial court rendered a decision dismissing the
complaint, as follows:
WHEREFORE, judgment is rendered as follows:

Thus, the suit for sum of money, wherein the plaintiff prays that
defendants solidarily pay plaintiff as of July 31, 1992 the sum of (a)
P16,484,994.12 as principal obligation under the two promissory notes
Nos. 003 and 00037, plus interests and penalties: (b) P300,000.00 for
loss of good will and good business reputation: (c) attorneys fees
amounting to P100,000.00 as acceptance fee and a sum equivalent to
10% of the collectible amount, and P500.00 as appearance fee; (d)
P200,000.00 as litigation expenses; (e) exemplary damages in an
amount to be awarded at the courts discretion; and (f) the costs.

1. Dismissing the complaint for lack of merit;

On 04 September 1993, a writ of preliminary injunction was issued

with respect to movable and immovable properties of the defendants.

5. Ordering the Sheriff of this Branch or whoever is in possession, to

return all the personal properties attached in this case to the owner/s
thereof within one (1) week from the finality of this decision;

In answer to the complaint, defendants-appellees assert by way of

special and affirmative defense, that there was already an
arrangement as to the full settlement of the loan obligation by way of:

2. Declaring the foreclosure and auction sale null and void;

3. Declaring the
EXTINGUISHED;

obligation

or indebtedness

of

defendants

4. Declaring the writ of attachment issued in this case null and void
and, therefore, is hereby declared dissolved; and

6. Dismissing defendants counterclaim for lack of sufficient merit.

No pronouncement as to costs.

17.A. Sale of the nine (9) units passenger buses the proceeds of which
will be credited against the loan amount as full payment thereof; or in
the alternative.
17.B. Plaintiff will shoulder and bear the cost of rehabilitating the
buses, with the amount thereof to be included in the total obligation
of defendant Lawin and the bus operated, with the earnings thereof to

SO ORDERED.[5]
In time, respondent Advance Capital Corporation appealed from the
decision to the Court of Appeals.[6]

`Page 111 of 113

On 30 September 1997, the Court of Appeals promulgated a decision

reversing that of the trial court, the dispositive portion of which is set
out in the opening paragraph of this decision.

as agreed upon by the parties or as may be proved, unless the parties

by agreement, express or implied, or by their silence, consider the
thing as equivalent to the obligation, in which case the obligation is
totally extinguished."[18]

Hence, this appeal.[7]

The Issue
The issue raised is whether there was dacion en pago between the
parties upon the surrender or transfer of the mortgaged buses to the
respondent.[8]
The Courts Ruling
We deny the petition, with modification.
The issue raised is factual. In an appeal via certiorari, we may not
review the factual findings of the Court of Appeals.[9] When
supported by substantial evidence, the findings of fact of the Court of
Appeals are conclusive and binding on the parties and are not
reviewable by this Court,[10] unless the case falls under any of the
recognized exceptions to the rule.[11]
Petitioner failed to prove that the case falls within the exceptions.[12]
The Supreme Court is not a trier of facts.[13] It is not our function to
review, examine and evaluate or weigh the probative value of the
evidence presented.[14] A question of fact would arise in such
event.[15]
Nonetheless, we agree with the Court of Appeals that there was no
dacion en pago that took place between the parties.
In dacion en pago, property is alienated to the creditor in satisfaction
of a debt in money.[16] It is the delivery and transmission of
ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation.[17] It extinguishes
the obligation to the extent of the value of the thing delivered, either

Article 1245 of the Civil Code provides that the law on sales shall
govern an agreement of dacion en pago. A contract of sale is
perfected at the moment there is a meeting of the minds of the parties
thereto upon the thing which is the object of the contract and upon
the price.[19] In Filinvest Credit Corporation v. Philippine Acetylene
Co., Inc., we said:
x x x. In dacion en pago, as a special mode of payment, the debtor
offers another thing to the creditor who accepts it as equivalent of
payment of an outstanding obligation. The undertaking really
partakes in one sense of the nature of sale, that is, the creditor is really
buying the thing or property of the debtor, payment for which is to be
charged against the debtors debt. As such, the essential elements of a
contract of sale, namely, consent, object certain, and cause or
consideration must be present. In its modern concept, what actually
takes place in dacion en pago is an objective novation of the
obligation where the thing offered as an accepted equivalent of the
performance of an obligation is considered as the object of the
contract of sale, while the debt is considered as the purchase price. In
any case, common consent is an essential prerequisite, be it sale or
novation, to have the effect of totally extinguishing the debt or
obligation.[20]
In this case, there was no meeting of the minds between the parties on
whether the loan of the petitioners would be extinguished by dacion
en pago. The petitioners anchor their claim solely on the testimony of
Marciano Tan that he proposed to extinguish petitioners obligation
by the surrender of the nine buses to the respondent acceded to as
shown by receipts its representative made.[21] However, the receipts
executed by respondents representative as proof of an agreement of
the parties that delivery of the buses to private respondent would
result in extinguishing petitioners obligation do not in any way
`Page 112 of 113

reflect the intention of the parties that ownership thereof by

respondent would be complete and absolute. The receipts show that
the two buses were delivered to respondent in order that it would
take custody for the purpose of selling the same. The receipts
themselves in fact show that petitioners deemed respondent as their
agent in the sale of the two vehicles whereby the proceeds thereof
would be applied in payment of petitioners indebtedness to
respondent.
Such an agreement negates transfer of absolute
ownership over the property to respondent, as in a sale. Thus, in
Philippine National Bank v. Pineda[22] we held that where machinery
and equipment were repossessed to secure the payment of a loan
obligation and not for the purpose of transferring ownership thereof
to the creditor in satisfaction of said loan, no dacion en pago was ever
accomplished.

Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Ynares-Santiago,

JJ., concur.

The Fallo
IN VIEW WHEREOF, the Court DENIES the petition and AFFIRMS
the decision of the Court of Appeals[23] with MODIFICATION as
follows:
WHEREFORE, the appealed decision is hereby REVERSED and SET
ASIDE. In lieu thereof, judgment is hereby rendered ordering
defendants-appellees to pay, jointly and severally, plaintiff-appellant
Advance Capital Corp. the following amounts:
(1) P16,484,994.42, the principal obligation under the two promissory
notes plus 12% per annum from the finality of this decision until fully
paid;
(2) P50,000.00 as attorneys fees;
(3) Costs of suit.
All other monetary awards are deleted.
SO ORDERED.
`Page 113 of 113