G.R. No.
L-6584 October 16, 1911
INCHAUSTI AND CO., plaintiff-appellant, vs.ELLIS CROMWELL, Collector of Internal Revenue, defendant-
appellee MORELAND, J.:
This is an appeal by the plaintiff from a judgment of the Court of First Instance of the city of Manila, the Hon.
Simplicio del Rosario presiding, dismissing the complaint upon the merits after trial, without costs.
The facts presented to this court are agreed upon by both parties, consisting, in so far as they are material to a
decision of the case, in the following:
III. That the plaintiff firm for many years past has been and now is engaged in the business of buying and
selling at wholesale hemp, both for its own account and on commission.
IV. That it is customary to sell hemp in bales which are made by compressing the loose fiber by means of
presses, covering two sides of the bale with matting, and fastening it by means of strips of rattan; that the
operation of bailing hemp is designated among merchants by the word "prensaje."
V. That in all sales of hemp by the plaintiff firm, whether for its own account or on commission for others,
the price is quoted to the buyer at so much per picul, no mention being made of bailing; but with the tacit
understanding, unless otherwise expressly agreed, that the hemp will be delivered in bales and that,
according to the custom prevailing among hemp merchants and dealers in the Philippine Islands, a charge,
the amount of which depends upon the then prevailing rate, is to be made against the buyer under the
denomination of "prensaje." That this charge is made in the same manner in all cases, even when the
operation of bailing was performed by the plaintiff or by its principal long before the contract of sale was
made. Two specimens of the ordinary form of account used in these operations are hereunto appended,
marked Exhibits A and B, respectively, and made a part hereof.
VI. That the amount of the charge made against hemp buyers by the plaintiff firm and other sellers of hemp
under the denomination of "prensaje" during the period involved in this litigation was P1.75 per bale; that
the average cost of the rattan and matting used on each bale of hemp is fifteen (15) centavos and that the
average total cost of bailing hemp is one (1) peso per bale.
VII. That insurance companies in the Philippine Islands, in estimating the insurable value of hemp always
add to the quoted price of same the charge made by the seller under the denomination of "prensaje."
VII. That the average weight of a bale of hemp is two (2) piculs (126.5 kilograms).
IX. That between the first day of January, 1905, and the 31st day of March, 1910, the plaintiff firm, in
accordance with the custom mentioned in paragraph V hereof, collected and received, under the
denomination of "prensaje," from purchasers of hemp sold by the said firm for its own account, in addition
to the price expressly agreed upon for the said hemp, sums aggregating P380,124.35; and between the
1st day of October, 1908, and the 1st day of March, 1910, collected for the account of the owners of hemp
sold by the plaintiff firm in Manila on commission, and under the said denomination of "prensaje," in
addition to the price expressly agreed upon the said hemp, sums aggregating P31,080.
X. That the plaintiff firm in estimating the amount due it as commissions on sales of hemp made by it for its
principals has always based the said amount on the total sum collected from the purchasers of the hemp,
including the charge made in each case under the denomination of "prensaje."
XI. That the plaintiff has always paid to the defendant or to his predecessor in the office of the Collector of
Internal Revenue the tax collectible under the provisions of section 139 of Act No. 1189 upon the selling
price expressly agreed upon for all hemp sold by the plaintiff firm both for its own account and on
1
commission, but has not, until compelled to do so as hereinafter stated, paid the said tax upon sums
received from the purchaser of such hemp under the denomination of "prensaje."
XII. That of the 29th day of April, 1910, the defendant, acting in his official capacity as Collector of Internal
Revenue of the Philippine Islands, made demand in writing upon the plaintiff firm for the payment within
the period of five (5) days of the sum of P1,370.68 as a tax of one third of one per cent on the sums of
money mentioned in Paragraph IX hereof, and which the said defendant claimed to be entitled to receive,
under the provisions of the said section 139 of Act No. 1189, upon the said sums of money so collected
from purchasers of hemp under the denomination of "prensaje."
XIII. That on the 4th day of May, 1910, the plaintiff firm paid to the defendant under protest the said sum of
P1,370.69, and on the same date appealed to the defendant as Collector of Internal Revenue, against the
ruling by which the plaintiff firm was required to make said payment, but defendant overruled said protest
and adversely decided said appeal, and refused and still refuses to return to plaintiff the said sum of
P1,370.68 or any part thereof.1awphil.net
XIV. Upon the facts above set forth t is contended by the plaintiff that the tax of P1,370.68 assessed by the
defendant upon the aggregate sum of said charges made against said purchasers of hemp by the plaintiff
during the period in question, under the denomination of "prensaje" as aforesaid, namely, P411,204.35, is
illegal upon the ground that the said charge does not constitute a part of the selling price of the hemp, but
is a charge made for the service of baling the hemp, and that the plaintiff firm is therefore entitled to
recover of the defendant the said sum of P1,370.68 paid to him under protest, together with all interest
thereon at the legal rate since payment, and the costs of this action.
Upon the facts above stated it is the contention of the defendant that the said charge made under the
denomination of "prensaje" is in truth and in fact a part of the gross value of the hemp sold and of its actual
selling price, and that therefore the tax imposed by section 139 of Act No. 1189 lawfully accrued on said
sums, that the collection thereof was lawfully and properly made and that therefore the plaintiff is not
entitled to recover back said sum or any part thereof; and that the defendant should have judgment against
plaintiff for his costs.
Under these facts we are of the opinion that the judgment of the court below was right. It is one of the stipulations in
the statement of facts that it is customary to sell hemp in bales, and that the price quoted in the market for hemp per
picul is the price for the hemp baled. The fact is that among large dealers like the plaintiff in this case it is practically
impossible to handle hemp without its being baled, and it is admitted by the statement of facts, as well as
demonstrated by the documentary proof introduced in the case, that if the plaintiff sold a quality of hemp it would be
the under standing, without words, that such hemp would be delivered in bales, and that the purchase price would
include the cost and expense of baling. In other words, it is the fact as stipulated, as well as it would be the fact of
necessity, that in all dealings in hemp in the general market the selling price consists of the value of the hemp loose
plus the cost and expense of putting it into marketable form. In the sales made by the plaintiff, which are the basis of
the controversy here, there were n services performed by him for his vendee. There was agreement that services
should be performed. Indeed, at the time of such sales it was not known by the vendee whether the hemp was then
actually baled or not. All that he knew and all that concerned him was that the hemp should be delivered to him
baled. He did not ask the plaintiff to perform services for him, nor did the plaintiff agree to do so. The contract was
single and consisted solely in the sale and purchase of hemp. The purchaser contracted for nothing else and the
vendor agreed to deliver nothing else.
The word "price" signifies the sum stipulated as the equivalent of the thing sold and also every incident taken into
consideration for the fixing of the price, put to the debit of the vendee and agreed to by him. It is quite possible that
the plaintiff, in this case in connection with the hemp which he sold, had himself already paid the additional expense
of baling as a part of the purchase price which he paid and that he himself had received the hemp baled from his
vendor. It is quite possible also that such vendor of the plaintiff may have received the same hemp from his vendor in
baled form, that he paid the additions cost of baling as a part of the purchase price which he paid. In such case the
plaintiff performed no service whatever for his vendee, nor did the plaintiff's vendor perform any service for him.
The distinction between a contract of sale and one for work, labor, and materials is tested by the inquiry whether the
thing transferred is one no in existence and which never would have existed but for the order of the party desiring to
acquire it, or a thing which would have existed and been the subject of sale to some other person, even if the order and every item which enters into such price is a part of such selling price. By force of the custom prevailing among
had not been given. (Groves vs. Buck, 3 Maule & S., 178; Towers vs. Osborne, 1 Strange, 506; Benjamin on Sales, hemp dealers in the Philippine Islands, a purchaser of hemp in the market, unless he expressly stipulates that it shall
90.) It is clear that in the case at bar the hemp was in existence in baled form before the agreements of sale were be delivered to him in loose form, obligates himself to purchase and pay for baled hemp. Wheher or not such
made, or, at least, would have been in existence even if none of the individual sales here in question had been agreement is express or implied, whether it is actual or tacit, it has the same force. After such an agreement has
consummated. It would have been baled, nevertheless, for sale to someone else, since, according to the agreed once been made by the purchaser, he has no right to insists thereafter that the seller shall furnish him with unbaled
statement of facts, it is customary to sell hemp in bales. When a person stipulates for the future sale of articles which hemp. It is undoubted that the vendees, in the sales referred to in the case at bar, would have no right, after having
he is habitually making, and which at the time are not made or finished, it is essentially a contract of sale and not a made their contracts, to insists on the delivery of loose hemp with the purpose in view themselves to perform the
contract for labor. It is otherwise when the article is made pursuant to agreement. (Lamb vs. Crafts, 12 Met., 353; baling and thus save 75 centavos per bale. It is unquestioned that the seller, the plaintiff, would have stood upon his
Smith vs. N.Y.C. Ry. Co., 4 Keyes, 180; Benjamin on Sales, 98.) Where labor is employed on the materials of the original contract of sale, that is, the obligation to deliver baled hemp, and would have forced his vendees to accept
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. baled hemp, he himself retaining among his own profits those which accrued from the proceed of baling.
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,
We are of the opinion that the judgment appealed from must be affirmed, without special finding as to costs, and it is
it is a contract of sale, even though it may be entirely made after, and in consequence of, the defendant's order for it.
so ordered.
(Garbutt s. Watson, 5 Barn. & Ald., 613; Gardner vs. Joy, 9 Met., 177; Lamb vs. Crafts, 12 Met., 353;
Waterman vs. Meigs, 4 Cush., 497., Clark vs. Nichols, 107 Mass., 547; May vs. Ward, 134 Mass., 127;
Abbott vs. Gilchrist, 38 Me., 260; Crocket vs. Scribner, 64 Me., 105; Pitkin vs. Noyes, 48 N. H., 294;
Prescott vs.Locke, 51 N. H., 94; Ellison vs. Brigham, 38 Vt., 64.) It has been held in Massachusetts that a contract to
make is a contract of sale if the article ordered is already substantially in existence at the time of the order and
merely requires some alteration, modification, or adoption to the buyer's wishes or purposes. (Mixer vs. Howarth, 21
Pick., 205.) It is also held in that state that a contract for the sale of an article which the vendor in the ordinary course
of his business manufactures or procures for the general market, whether the same is on hand at the time or not, is a
contract for the sale of goods to which the statute of frauds applies. But if the goods are to be manufactured
especially for the purchaser and upon his special order, and not for the general market, the case is not within the
statute. (Goddardvs. 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,

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G.R. No. L-8506 August 31, 1956
CELESTINO CO & COMPANY, petitioner, vs.COLLECTOR OF INTERNAL REVENUE, respondent.
BENGZON, J.:
Appeal from a decision of the Court of Tax Appeals.
Celestino Co & Company is a duly registered general copartnership doing business under the trade name of
"Oriental Sash Factory". From 1946 to 1951 it paid percentage taxes of 7 per cent on the gross receipts of its sash,
door and window factory, in accordance with section one hundred eighty-six of the National Revenue Code imposing
taxes on sale of manufactured articles. However in 1952 it began to claim liability only to the contractor's 3 per cent
tax (instead of 7 per cent) under section 191 of the same Code; and having failed to convince the Bureau of Internal
Revenue, it brought the matter to the Court of Tax Appeals, where it also failed. Said the Court:
To support his contention that his client is an ordinary contractor . . . counsel presented . . . duplicate
copies of letters, sketches of doors and windows and price quotations supposedly sent by the manager of
the Oriental Sash Factory to four customers who allegedly made special orders to doors and window from
the said factory. The conclusion that counsel would like us to deduce from these few exhibits is that the
Oriental Sash Factory does not manufacture ready-made doors, sash and windows for the public but only
upon special order of its select customers. . . . I cannot believe that petitioner company would take, as in
fact it has taken, all the trouble and expense of registering a special trade name for its sash business and
then orders company stationery carrying the bold print "Oriental Sash Factory (Celestino Co & Company,
Prop.) 926 Raon St. Quiapo, Manila, Tel. No. 33076, Manufacturers of all kinds of doors, windows, sashes,
furniture, etc. used season-dried and kiln-dried lumber, of the best quality workmanships" solely for the
purpose of supplying the needs for doors, windows and sash of its special and limited customers. One ill
note that petitioner has chosen for its tradename and has offered itself to the public as a "Factory", which
means it is out to do business, in its chosen lines on a big scale. As a general rule, sash factories receive
orders for doors and windows of special design only in particular cases but the bulk of their sales is derived
from a ready-made doors and windows of standard sizes for the average home. Moreover, as shown from
the investigation of petitioner's book of accounts, during the period from January 1, 1952 to September 30,
1952, it sold sash, doors and windows worth P188,754.69. I find it difficult to believe that this amount which
runs to six figures was derived by petitioner entirely from its few customers who made special orders for
these items.
Even if we were to believe petitioner's claim that it does not manufacture ready-made sash, doors and
windows for the public and that it makes these articles only special order of its customers, that does not
make it a contractor within the purview of section 191 of the national Internal Revenue Code. there are no
less than fifty occupations enumerated in the aforesaid section of the national Internal Revenue Code
subject to percentage tax and after reading carefully each and every one of them, we cannot find under
which the business of manufacturing sash, doors and windows upon special order of customers fall under
the category of "road, building, navigation, artesian well, water workers and other construction work
contractors" are those who alter or repair buildings, structures, streets, highways, sewers, street railways
railroads logging roads, electric lines or power lines, and includes any other work for the construction,
altering or repairing for which machinery driven by mechanical power is used. (Payton vs. City of Anadardo
64 P. 2d 878, 880, 179 Okl. 68).
Having thus eliminated the feasibility off taxing petitioner as a contractor under 191 of the national Internal
Revenue Code, this leaves us to decide the remaining issue whether or not petitioner could be taxed with
lesser strain and more accuracy as seller of its manufactured articles under section 186 of the same code,
as the respondent Collector of Internal Revenue has in fact been doing the Oriental Sash Factory was
established in 1946.
The percentage tax imposed in section 191 of our Tax Code is generally a tax on the sales of services, in
contradiction with the tax imposed in section 186 of the same Code which is a tax on the original sales of
articles by the manufacturer, producer or importer. (Formilleza's Commentaries and Jurisprudence on the
3
National Internal Revenue Code, Vol. II, p. 744). The fact that the articles sold are manufactured by the
seller does not exchange the contract from the purview of section 186 of the National Internal Revenue
Code as a sale of articles.
There was a strong dissent; but upon careful consideration of the whole matter are inclines to accept the above
statement of the facts and the law. The important thing to remember is that Celestino Co & Company habitually
makes sash, windows and doors, as it has represented in its stationery and advertisements to the public. That it
"manufactures" the same is practically admitted by appellant itself. The fact that windows and doors are made by it
only when customers place their orders, does not alter the nature of the establishment, for it is obvious that it only
accepted such orders as called for the employment of such material-moulding, frames, panels-as it ordinarily
manufactured or was in a position habitually to manufacture.
Perhaps the following paragraph represents in brief the appellant's position in this Court:
Since the petitioner, by clear proof of facts not disputed by the respondent, manufacturers sash, windows
and doors only for special customers and upon their special orders and in accordance with the desired
specifications of the persons ordering the same and not for the general market: since the doors ordered by
Don Toribio Teodoro & Sons, Inc., for instance, are not in existence and which never would have existed
but for the order of the party desiring it; and since petitioner's contractual relation with his customers is that
of a contract for a piece of work or since petitioner is engaged in the sale of services, it follows that the
petitioner should be taxed under section 191 of the Tax Code and NOT under section 185 of the same
Code." (Appellant's brief, p. 11-12).
But the argument rests on a false foundation. Any builder or homeowner, with sufficient money, may order windows
or doors of the kind manufactured by this appellant. Therefore it is not true that it serves special customers only or
confines its services to them alone. And anyone who sees, and likes, the doors ordered by Don Toribio Teodoro &
Sons Inc. may purchase from appellant doors of the same kind, provided he pays the price. Surely, the appellant will
not refuse, for it can easily duplicate or even mass-produce the same doors-it is mechanically equipped to do so.
That the doors and windows must meet desired specifications is neither here nor there. If these specifications do not
happen to be of the kind habitually manufactured by appellant special forms for sash, mouldings of panels it
would not accept the order and no sale is made. If they do, the transaction would be no different from a
purchasers of manufactured goods held is stock for sale; they are bought because they meet the specifications
desired by the purchaser.
Nobody will say that when a sawmill cuts lumber in accordance with the peculiar specifications of a customer-sizes
not previously held in stock for sale to the public-it thereby becomes an employee or servant of the customer,1 not
the seller of lumber. The same consideration applies to this sash manufacturer.
The Oriental Sash Factory does nothing more than sell the goods that it mass-produces or habitually makes; sash,
panels, mouldings, frames, cutting them to such sizes and combining them in such forms as its customers may
desire.
On the other hand, petitioner's idea of being a contractor doing construction jobs is untenable. Nobody would regard
the doing of two window panels a construction work in common parlance. 2
Appellant invokes Article 1467 of the New Civil Code to bolster its contention that in filing orders for windows and
doors according to specifications, it did not sell, but merely contracted for particular pieces of work or "merely sold its
services".
Said article reads as follows:
A contract for the delivery at a certain price of an article which the vendor in the ordinary course of his
business manufactures or procures for the general market, whether the same is on hand at the time or not,
 is a contract of sale, but if the goods are to be manufactured specially for the customer and upon his
special order, and not for the general market, it is contract for a piece of work.

It is at once apparent that the Oriental Sash Factory did not merely sell its services to Don Toribio Teodoro & Co. (To
take one instance) because it also sold the materials. The truth of the matter is that it sold materials ordinarily
manufactured by it sash, panels, mouldings to Teodoro & Co., although in such form or combination as suited
the fancy of the purchaser. Such new form does not divest the Oriental Sash Factory of its character as
manufacturer. Neither does it take the transaction out of the category of sales under Article 1467 above quoted,
because although the Factory does not, in the ordinary course of its business, manufacture and keep on stockdoors
of the kind sold to Teodoro, it could stock and/or probably had in stock the sash, mouldings and panels it used
therefor (some of them at least).

In our opinion when this Factory accepts a job that requires the use of extraordinary or additional equipment, or
involves services not generally performed by it-it thereby contracts for a piece of work filing special orders within
the meaning of Article 1467. The orders herein exhibited were not shown to be special. They were merely orders for
work nothing is shown to call them special requiring extraordinary service of the factory.

The thought occurs to us that if, as alleged-all the work of appellant is only to fill orders previously made, such orders
should not be called special work, but regular work. Would a factory do business performing only special,
extraordinary or peculiar merchandise?

Anyway, supposing for the moment that the transactions were not sales, they were neither lease of services nor
contract jobs by a contractor. But as the doors and windows had been admittedly "manufactured" by the Oriental
Sash Factory, such transactions could be, and should be taxed as "transfers" thereof under section 186 of the
National Revenue Code.

The appealed decision is consequently affirmed. So ordered.

4
G.R. No. 71122 March 25, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.ARNOLDUS CARPENTRY SHOP, INC. and COURT
OF TAX APPEALS, respondents. CORTES, J.:
Assailed in this petition is the decision of the Court of Tax Appeals in CTA case No. 3357 entitled "ARNOLDUS
CARPENTRY SHOP, INC. v. COMMISSIONER OF INTERNAL REVENUE."
The facts are simple.
Arnoldus Carpentry Shop, Inc. (private respondent herein) is a domestic corporation which has been in existence
since 1960. It has for its secondary purpose the "preparing, processing, buying, selling, exporting, importing,
manufacturing, trading and dealing in cabinet shop products, wood and metal home and office furniture, cabinets,
doors, windows, etc., including their component parts and materials, of any and all nature and description" (Rollo, pp.
160-161). These furniture, cabinets and other woodwork were sold locally and exported abroad.
For this business venture, private respondent kept samples or models of its woodwork on display from where its
customers may refer to when placing their orders.
Sometime in March 1979, the examiners of the petitioner Commissioner of Internal Revenue conducted an
investigation of the business tax liabilities of private respondent pursuant to Letter of Authority No. 08307 NA dated
November 23, 1978. As per the examination, the total gross sales of private respondent for the year 1977 from both
its local and foreign dealings amounted to P5,162,787.59 (Rollo. p. 60). From this amount, private respondent
reported in its quarterly percentage tax returns P2,471,981.62 for its gross local sales. The balance of
P2,690,805.97, which is 52% of the total gross sales, was considered as its gross export sales (CTA Decision, p.
12).
Based on such an examination, BIR examiners Honesto A. Vergel de Dios and Voltaire Trinidad made a report to the
Commissioner classifying private respondent as an "other independent contractor" under Sec. 205 (16) [now Sec.
169 (q)] of the Tax Code. The relevant portion of the report reads:
Examination of the records show that per purchase orders, which are hereby attached, of the
taxpayer's customers during the period under review, subject corporation should be considered
a contractor and not a manufacturer. The corporation renders service in the course of an
independent occupation representing the will of his employer only as to the result of his work,
and not as to the means by which it is accomplished, (Luzon Stevedoring Co. v. Trinidad, 43
Phil. 803). Hence, in the computation of the percentage tax, the 3% contractor's tax should be
imposed instead of the 7% manufacturer's tax. [Rollo, p. 591 (Emphasis supplied.)
xxx xxx xxx
As a result thereof, the examiners assessed private respondent for deficiency tax in the amount of EIGHTY EIGHT
THOUSAND NINE HUNDRED SEVENTY TWO PESOS AND TWENTY THREE CENTAVOS ( P88,972.23 ). Later,
on January 31, 1981, private respondent received a letter/notice of tax deficiency assessment inclusive of charges
and interest for the year 1977 in the amount of ONE HUNDRED EIGHT THOUSAND SEVEN HUNDRED TWENTY
PESOS AND NINETY TWO CENTAVOS ( P 108,720.92 ). This tax deficiency was a consequence of the 3% tax
imposed on private respondent's gross export sales which, in turn, resulted from the examiners' finding that
categorized private respondent as a contractor (CTA decision, p.2).
Against this assessment, private respondent filed on February 19, 1981 a protest with the petitioner Commissioner of
Internal Revenue. In the protest letter, private respondent's manager maintained that the carpentry shop is a
manufacturer and therefor entitled to tax exemption on its gross export sales under Section 202 (e) of the National
Internal Revenue Code. He explained that it was the 7% tax exemption on export sales which prompted private
respondent to exploit the foreign market which resulted in the increase of its foreign sales to at least 52% of its total
gross sales in 1977 (CTA decision, pp. 1213).
5
On June 23, 1981, private respondent received the final decision of the petitioner stating:
It is the stand of this Office that you are considered a contractor an not a manufacturer. Records
show that you manufacture woodworks only upon previous order from supposed manufacturers
and only in accordance with the latter's own design, model number, color, etc. [Rollo p. 64]
(Emphasis supplied.)
On July 22, 1981, private respondent appealed to the Court of Tax Appeals alleging that the decision of the
Commissioner was contrary to law and the facts of the case.
On April 22, 1985, respondent Court of Tax Appeals rendered the questioned decision holding that private
respondent was a manufacturer thereby reversing the decision of the petitioner.
Hence, this petition for review wherein petitioner raises the sole issue of. Whether or not the Court of Tax Appeals
erred in holding that private respondent is a manufacturer and not a contractor and therefore not liable for the
amount of P108,720.92, as deficiency contractor's tax, inclusive of surcharge and interest, for the year 1977.
The petition is without merit.
1. Private respondent is a "manufacturer" as defined in the Tax Code and not a "contractor" under Section 205(e) of
the Tax Code as petitioner would have this Court decide.
(a) Section 205 (16) [now Sec. 170 (q)] of the Tax Code defines "independent contractors" as:
... persons (juridical and natural) not enumerated above (but not including individuals subject to
the occupation tax under Section 12 of the Local Tax Code) whose activity consists essentially
of the sale of all kinds of services for a fee regardless of whether or not the performance of the
service calls for the exercise or use of the physical or mental faculties of such contractors or
their employees. (Emphasis supplied.)
Private respondent's business does not fall under this definition.
Petitioner contends that the fact that private respondent "designs and makes samples or models that are 'displayed'
or presented or 'submitted' to prospective buyers who 'might choose' therefrom" signifies that what private
respondent is selling is a kind of service its shop is capable of rendering in terms of woodwork skills and
craftsmanship (Brief for Petitioner, p. 6). He further stresses the point that if there are no orders placed for goods as
represented by the sample or model, the shop does not produce anything; on the other hand, if there are orders
placed, the shop goes into fall production to fill up the quantity ordered (Petitioner's Brief, p. 7).
The facts of the case do not support petitioner's claim. Petitioner is ignoring the fact that private respondent sells
goods which it keeps in stock and not services. As the respondent Tax Court had found:
xxx xxx xxx
Petitioner [private respondent herein] claims, and the records bear petitioner out, that it had a
ready stock of its shop products for sale to its foreign and local buyers. As a matter of fact, the
purchase orders from its foreign buyers showed that they ordered by referring to the models
designated by petitioner. Even purchases by local buyers for television cabinets (Exhs. '2 to13',
pp. 1-13, BIR records) were by orders for existing models except only for some adjustments in
sizes and accessories utilized.
With regard to the television cabinets, petitioner presented three witnesses its bookkeeper,
production manager and manager who testified that samples of television cabinets were
 designed and made by petitioner, from which models the television companies such as Hitachi
National and others might choose, then specified whatever innovations they desired. If found to
be saleable, some television cabinets were manufactured for display and sold to the general
public. These cabinets were not exported but only sold locally. (t.s.n., pp. 2235, February
18,1982; t.s.n., pp. 7-10, March 25, 1982; t.s.n., pp. 3-6, August 10, 1983.)
xxx xxx xxx
In the case of petitioner's other woodwork products such as barometer cases, knife racks,
church furniture, school furniture, knock down chairs, etc., petitioner's above-mentioned
witnesses testified that these were manufactured without previous orders. Samples were
displayed, and if in stock, were available for immediate sale to local and foreign customers. Such
testimony was not contradicted by respondent (petitioner herein). And in all the purchase orders
presented as exhibits, whether from foreign or local buyers, reference was made to the model
number of the product being ordered or to the sample submitted by petitioner.
Respondent's examiners, in their memorandum to the Commissioner of Internal Revenue, stated
that petitioner manufactured only upon previous orders from customers and "only in accordance
with the latter's own design, model number, color, etc." (Exh. '1', p. 27, BIR records.) Their bare
statement that the model numbers and designs were the customers' own, unaccompanied by
adequate evidence, is difficult to believe. It ignores commonly accepted and recognized
business practices that it is not the customer but the manufacturer who furnishes the samples or
models from which the customers select when placing their orders, The evidence adduced by
petitioner to prove that the model numbers and designs were its own is more convincing [CTA
decision, pp. 6-8.] (Emphasis supplied)
xxx xxx xxx
This Court finds no reason to disagree with the Tax Court's finding of fact. It has been consistently held that while the
decisions of the Court of Tax Appeals are appealable to the Supreme Court, the former's finding of fact are entitled to
the highest respect. The factual findings can only be disturbed on the part of the tax court [Collector of Intern. al
Revenue v. Henderson, L-12954, February 28, 1961, 1 SCRA 649; Aznar v. Court of Tax Appeals, L-20569, Aug. 23,
1974, 58 SCRA 519; Raymundo v. de Joya, L-27733, Dec. 3, 1980, 101 SCRA 495; Industrial Textiles Manufacturing
Co. of the Phils. , Inc. v. Commissioner of Internal Revenue, L-27718 and L-27768, May 27,1985,136 SCRA 549.]
(b) Neither can Article 1467 of the New Civil Code help petitioner's cause. Article 1467 states:
A contract for the delivery at a certain price of an article Which the vendor in the ordinary course of his business
manufactures or procures for the - general market, whether the same is on hand at the time or not, is a contract of
sale, but if the goods are to be manufactured specially for the customer and upon his special order, and not for the
general market, it is a contract for a piece of work.
Petitioner alleged that what exists prior to any order is but the sample model only, nothing more, nothing less and the
ordered quantity would never have come into existence but for the particular order as represented by the sample or
model [Brief for Petitioner, pp. 9-101.]
Petitioner wants to impress upon this Court that under Article 1467, the true test of whether or not the contract is a
piece of work (and thus classifying private respondent as a contractor) or a contract of sale (which would classify
private respondent as a manufacturer) is the mere existence of the product at the time of the perfection of the
contract such that if the thing already exists, the contract is of sale, if not, it is work.
This is not the test followed in this jurisdiction. As can be clearly seen from the wordings of Art. 1467, what
determines whether the contract is one of work or of sale is whether the thing has been manufactured specially for
the customer and upon his special order." Thus, if the thing is specially done at the order of another, this is a contract
6
for a piece of work. If, on the other hand, the thing is manufactured or procured for the general market in the ordinary
course of one's business, it is a b contract of sale.
Jurisprudence has followed this criterion. As held in Commissioner of Internal Revenue v. Engineering Equipment
and Supply Co. (L-27044 and L-27452, June 30, 1975, 64 SCRA 590, 597), "the distinction between a contract of
sale and one for work, labor and materials is tested by the inquiry whether the thing transferred is one not in
existence and which never would have existed but for the order of the party desiring to acquire it, or a thing which
would have existed and has been the subject of sale to some other persons even if the order had not been given."
(Emphasis supplied.) And in a BIR ruling, which as per Sec. 326 (now Sec. 277) of the Tax Court the Commissioner
has the power to make and which, as per settled jurisprudence is entitled to the greatest weight as an administrative
view [National Federation of Sugar Workers (NFSW) v. Ovejera, G.R. No. 59743, May 31, 1982, 114 SCRA 354,
391; Sierra Madre Trust v. Hon. Sec. of Agriculture and Natural Resources, Nos. 32370 and 32767, April 20,
1983,121 SCRA 384; Espanol v. Chairman and Members of the Board of Administrators, Phil. Veterans
Administration, L-44616, June 29, 1985, 137 SCRA 3141, "one who has ready for the sale to the general public
finished furniture is a manufacturer, and the mere fact that he did not have on hand a particular piece or pieces of
furniture ordered does not make him a contractor only" (BIR Ruling No. 33-1, series of 1960). Likewise,
xxx xxx xxx
When the vendor enters into a contract for the delivery of an article which in the ordinary course
of his business he manufactures or procures for the general market at a price certain (Art. 1458)
such contract is one of sale even if at the time of contracting he may not have such article on
hand. Such articles fall within the meaning of "future goods" mentioned in Art. 1462, par. 1. [5
Padilla, Civil Law: Civil Code Annotated 139 (1974)
xxx xxx xxx
These considerations were what precisely moved the respondent Court of Tax Appeals to rule that 'the fact that
[private respondent] kept models of its products... indicate that these products were for sale to the general public and
not for special orders,' citing Celestino Co and Co. v. Collector of Internal Revenue [99 Phil, 841 (1956)]. (CTA
Decision, pp. 8-9.)
Petitioner alleges that the error of the respondent Tax Court was due to the 'heavy albeit misplaced and
indiscriminate reliance on the case of Celestino Co and Co. v. Collector of Internal Revenue [99 Phil. 841, 842
(1956)] which is not a case in point' 1 Brief for Petitioner, pp. 14-15). The Commissioner of Internal Revenue made
capital of the difference between the kinds of business establishments involved a FACTORY in the Celestino Co
case and a CARPENTRY SHOP in this case (Brief for Petitioner, pp. 14-18). Petitioner seems to have missed the
whole point in the former case.
True, the former case did mention the fact of the business concern being a FACTORY, Thus:
xxx xxx xxx
... I cannot believe that petitioner company would take, as in fact it has taken, all the trouble and
expense of registering a special trade name for its sash business and then orders company
stationery carrying the bold print "Oriental Sash Factory (Celestino Co and Company, Prop.) 926
Raon St., Quiapo, Manila, Tel. No. 33076, Manufacturers of all kinds of doors, windows, sashes
furniture, etc. used season dried and kiln-dried lumber, of the best quality workmanship" solely
for the purpose of supplying the need for doors, windows and sash of its special and limited
customers. One will note that petitioner has chosen for its trade name and has offered itself to
the public as a FACTORY, which means it is out to do business in its chosen lines on a big
scale. As a general rule, sash factories receive orders for doors and windows of special design
only in particular cases but the bulk of their sales is derived from ready-made doors and
windows of standard sizes for the average home. [Emphasis supplied.]
 xxx xxx xxx Collector of Internal Revenue, 100 Phil. 60 (1956)1; the processing of unhusked kapok into clean kapok fiber
[Oriental Kapok Industries v. Commissioner of Internal Revenue, L-17837, Jan. 31, 1963, 7 SCRA 132]; or making
charcoal out of firewood Bermejo v. Collector of Internal Revenue, 87 Phil. 96 (1950)].
However, these findings were merely attendant facts to show what the Court was really driving at the habitualityof
the production of the goods involved for the general public.
2. As the Court of Tax Appeals did not err in holding that private respondent is a "manufacturer," then private
respondent is entitled to the tax exemption under See. 202 (d) and (e) mow Sec. 167 (d) and (e)] of the Tax Code
In the instant case, it may be that what is involved is a CARPENTRY SHOP. But, in the same vein, there are also
which states:
attendant facts herein to show habituality of the production for the general public.

Sec. 202. Articles not subject to percentage tax on sales. The following shall be exempt from the
In this wise, it is noteworthy to again cite the findings of fact of the respondent Tax Court:
percentage taxes imposed in Sections 194, 195, 196, 197, 198, 199, and 201:

xxx xxx xxx

xxx xxx xxx

Petitioner [private respondent herein] claims, and the records bear petitioner out, that it had a
ready stock of its shop products for sale to its foreign and local buyers. As a matter of fact, the
purchase orders from its foreign buyers showed that they ordered by referring to the models
designed by petitioner. Even purchases by local buyers for television cabinets... were by orders
for existing models. ...
With regard to the television cabinets, petitioner presented three witnesses... who testified that
samples of television cabinets were designed and made by petitioner, from which models the
television companies ... might choose, then specified whatever innovations they desired. If found
to be saleable, some television cabinets were manufactured for display and sold to the general
public.
xxx xxx xxx
In the case of petitioner's other woodwork products... these were manufactured without previous
orders. Samples were displayed, and if in stock, were available for immediate sale to local and
foreign customers. (CTA decision, pp. 6-8.1 [Emphasis supplied.]
(d) Articles shipped or exported by the manufacturer or producer, irrespective of any shipping
arrangement that may be agreed upon which may influence or determine the transfer of
ownership of the articles so exported.
(e) Articles sold by "registered export producers" to (1) other" registered export producers" (2)
"registered export traders' or (3) foreign tourists or travelers, which are considered as "export
sales."
The law is clear on this point. It is conceded that as a rule, as argued by petitioner, any claim for tax exemption from
tax statutes is strictly construed against the taxpayer and it is contingent upon private respondent as taxpayer to
establish a clear right to tax exemption [Brief for Petitioners, p. 181. Tax exemptions are strictly construed against the
grantee and generally in favor of the taxing authority [City of Baguio v. Busuego, L-29772, Sept. 18, 1980, 100 SCRA
1161; they are looked upon with disfavor [Western Minolco Corp. v. Commissioner Internal Revenue, G.R. No.
61632, Aug. 16,1983,124 1211. They are held strictly against the taxpayer and if expressly mentioned in the law,
must at least be within its purview by clear legislative intent [Commissioner of Customs v. Phil., Acetylene Co., L-
22443, May 29, 1971, 39 SCRA 70, Light and Power Co. v. Commissioner of Customs, G.R. L-28739 and L-28902,
March 29, 1972, 44 SCRA 122].

(c) The private respondent not being a "contractor" as defined by the Tax Code or of the New Civil Code, is it a
'manufacturer' as countered by the carpentry shop?
Sec. 187 (x) [now Sec. 157 (x)] of the Tax Code defines a manufacturer' as follows:
"Manufacturer" includes every person who by physical or chemical process alters the exterior
texture or form or inner substance of any raw material or manufactured or partially manufactured
product in such manner as to prepare it for a special use or uses to which it could not have been
in its original condition, or who by any such process alters the quality or any such raw material or
manufactured or partially manufactured product so as to reduce it to marketable shape or
prepare it for any of the uses of industry, or who by any such process combines any such raw
material or manufactured or partially manufactured products with other materials or products of
the same or different kinds and in such manner that the finished product of such process or
manufacture can be put to a special use or uses to which such raw material or manufactured or
partially manufactured products in their original condition would not have been put, and who in
addition alters such raw material or manufactured or partially manufactured products, or
combines the same to produce such finished products for the purpose of their sale or distribution
to others and not for his own use or consumption.
Conversely therefore, if there is an express mention or if the taxpayer falls within the purview of the exemption by
clear legislative intent, then the rule on strict construction will not apply. In the present case the respondent Tax
Court did not err in classifying private respondent as a "manufacturer". Clearly, the 'latter falls with the term
'manufacturer' mentioned in Art. 202 (d) and (e) of the Tax Code. As the only question raised by petitioner in relation
to this tax exemption claim by private respondent is the classification of the latter as a manufacturer, this Court
affirms the holding of respondent Tax Court that private respondent is entitled to the percentage tax exemption on its
export sales.
There is nothing illegal in taking advantage of tax exemptions. When the private respondent was still exporting less
and producing locally more, the petitioner did not question its classification as a manufacturer. But when in 1977 the
private respondent produced locally less and exported more, petitioner did a turnabout and imposed the contractor's
tax. By classifying the private respondent as a contractor, petitioner would likewise take away the tax exemptions
granted under Sec. 202 for manufacturers. Petitioner's action finds no support in the applicable law.
WHEREFORE, the Court hereby DENIES the Petition for lack of merit and AFFIRMS the Court of Tax Appeals
decision in CTA Case No. 3357.
SO ORDERED.

It is a basic rule in statutory construction that when the language of the law is clear and unequivocal, the law must be
taken to mean exactly what it says [Banawa et al. v. Mirano et al., L-24750, May 16, 1980, 97 SCRA 517, 533].

The term "manufacturer" had been considered in its ordinary and general usage. The term has been construed
broadly to include such processes as buying and converting duck eggs to salted eggs ('balut") [Ngo Shiek v.
7
G.R. No. 52267 January 24, 1996
ENGINEERING & MACHINERY CORPORATION, petitioner, vs.COURT OF APPEALS and PONCIANO L.
ALMEDA, respondent.
DECISION PANGANIBAN, J.:
Is a contract for the fabrication and installation of a central air-conditioning system in a building, one of "sale" or "for a
piece of work"? What is the prescriptive period for filing actions for breach of the terms of such contract?
These are the legal questions brought before this Court in this Petition for review on certiorari under Rule 45 of the
Rules of Court, to set aside the Decision1 of the Court of Appeals2 in CA-G.R. No. 58276-R promulgated on
November 28, 1978 (affirming in toto the decision3 dated April 15, 1974 of the then Court of First Instance of Rizal,
Branch II4 , in Civil Case No. 14712, which ordered petitioner to pay private respondent the amount needed to rectify
the faults and deficiencies of the air-conditioning system installed by petitioner in private respondent's building, plus
damages, attorney's fees and costs).
By a resolution of the First Division of this Court dated November 13, 1995, this case was transferred to the Third.
After deliberating on the various submissions of the parties, including the petition, record on appeal, private
respondent's comment and briefs for the petitioner and the private respondent, the Court assigned the writing of this
Decision to the undersigned, who took his oath as a member of the Court on October 10, 1995.
The Facts
Pursuant to the contract dated September 10, 1962 between petitioner and private respondent, the former undertook
to fabricate, furnish and install the air-conditioning system in the latter's building along Buendia Avenue, Makati in
consideration of P210,000.00. Petitioner was to furnish the materials, labor, tools and all services required in order to
so fabricate and install said system. The system was completed in 1963 and accepted by private respondent, who
paid in full the contract price.
On September 2, 1965, private respondent sold the building to the National Investment and Development
Corporation (NIDC). The latter took possession of the building but on account of NIDC's noncompliance with the
terms and conditions of the deed of sale, private respondent was able to secure judicial rescission thereof. The
ownership of the building having been decreed back to private respondent, he re-acquired possession sometime in
1971. It was then that he learned from some NIDC, employees of the defects of the air-conditioning system of the
building.
Acting on this information, private respondent commissioned Engineer David R. Sapico to render a technical
evaluation of the system in relation to the contract with petitioner. In his report, Sapico enumerated the defects of the
system and concluded that it was "not capable of maintaining the desired room temperature of 76F - 2F (Exhibit
C)"5 .
On the basis of this report, private respondent filed on May 8, 1971 an action for damages against petitioner with the
then Court of First Instance of Rizal (Civil Case No. 14712). The complaint alleged that the air-conditioning system
installed by petitioner did not comply with the agreed plans and specifications. Hence, private respondent prayed for
the amount of P210,000.00 representing the rectification cost, P100,000.00 as damages and P15,000.00 as
attorney's fees.
Petitioner moved to dismiss the complaint, alleging that the prescriptive period of six months had set in pursuant to
Articles 1566 and 1567, in relation to Article 1571 of the Civil Code, regarding the responsibility of a vendor for any
hidden faults or defects in the thing sold.
8
Private respondent countered that the contract dated September 10, 1962 was not a contract for sale but a contract
for a piece of work under Article 1713 of the Civil Code. Thus, in accordance with Article 1144 (1) of the same Code,
the complaint was timely brought within the ten-year prescriptive period.
In its reply, petitioner argued that Article 1571 of the Civil Code providing for a six-month prescriptive period is
applicable to a contract for a piece of work by virtue of Article 1714, which provides that such a contract shall be
governed by the pertinent provisions on warranty of title and against hidden defects and the payment of price in a
contract of sale6 .
The trial court denied the motion to dismiss. In its answer to the complaint, petitioner reiterated its claim of
prescription as an affirmative defense. It alleged that whatever defects might have been discovered in the air-
conditioning system could have been caused by a variety of factors, including ordinary wear and tear and lack of
proper and regular maintenance. It pointed out that during the one-year period that private respondent withheld final
payment, the system was subjected to "very rigid inspection and testing and corrections or modifications effected" by
petitioner. It interposed a compulsory counterclaim suggesting that the complaint was filed "to offset the adverse
effects" of the judgment in Civil Case No. 71494, Court of First Instance of Manila, involving the same parties,
wherein private respondent was adjudged to pay petitioner the balance of the unpaid contract price for the air-
conditioning system installed in another building of private respondent, amounting to P138,482.25.
Thereafter, private respondent filed an ex-parte motion for preliminary attachment on the strength of petitioner's own
statement to the effect that it had sold its business and was no longer doing business in Manila. The trial court
granted the motion and, upon private respondent's posting of a bond of F'50,000.00, ordered the issuance of a writ of
attachment.
In due course, the trial court rendered a decision finding that petitioner failed to install certain parts and accessories
called for by the contract, and deviated from the plans of the system, thus reducing its operational effectiveness to
the extent that 35 window-type units had to be installed in the building to achieve a fairly desirable room temperature.
On the question of prescription, the trial court ruled that the complaint was filed within the ten-year court prescriptive
period although the contract was one for a piece of work, because it involved the "installation of an air-conditioning
system which the defendant itself manufactured, fabricated, designed and installed."
Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. Hence, it instituted the
instant petition.
The Submissions of the Parties
In the instant Petition, petitioner raised three issues. First, it contended that private respondent's acceptance of the
work and his payment of the contract price extinguished any liability with respect to the defects in the air-conditioning
system. Second, it claimed that the Court of Appeals erred when it held that the defects in the installation were not
apparent at the time of delivery and acceptance of the work considering that private respondent was not an expert
who could recognize such defects. Third, it insisted that, assuming arguendo that there were indeed hidden defects,
private respondent's complaint was barred by prescription under Article 1571 of the Civil Code, which provides for a
six-month prescriptive period.
Private respondent, on the other hand, averred that the issues raised by petitioner, like the question of whether there
was an acceptance of the work by the owner and whether the hidden defects in the installation could have been
discovered by simple inspection, involve questions of fact which have been passed upon by the appellate court.
The Court's Ruling
The Supreme Court reviews only errors of law in petitions for review on certiorari under Rule 45. It is not the function
of this Court to re-examine the findings of fact of the appellate court unless said findings are not supported by the
evidence on record or the judgment is based on a misapprehension of facts 7 of Appeals erred when it held that the
defects in the installation were not apparent at the time of delivery and acceptance of the work considering that
private respondent was not an expert who could recognize such defects. Third. it insisted that,
assuming arguendothat there were indeed hidden defects, private respondent's complaint was barred by prescription
under Article 1571 of the Civil Code, which provides for a six-month prescriptive period.
Private respondent, on the other hand, averred that the issues raised by petitioner, like the question of whether here
was an acceptance of the work by the owner and whether the hidden defects in the installation could have been
discovered by simple inspection, involve questions of fact which have been passed upon by the appellate court.
The Court has consistently held that the factual findings of the trial court, as well as the Court of Appeals,
are final and conclusive and may not be reviewed on appeal. Among the exceptional circumstances where
a reassessment of facts found by the lower courts is allowed are when the conclusion is a finding
grounded entirely on speculation, surmises or conjectures; when the inference made is manifestly absurd,
mistaken or impossible; when there is grave abuse of discretion in the appreciation of facts; when the
judgment is premised on a misapprehension of facts; when the findings went beyond the issues of the
case and the same are contrary to the admissions of both appellant and appellee. After a careful study of
the case at bench, we find none of the above grounds present to justify the re-evaluation of the findings of
fact made by the courts below.8
We see no valid reason to discard the factual conclusions of the appellate court. . . . (I)t is not the function
of this Court to assess and evaluate all over again the evidence, testimonial and documentary, adduced by
the parties, particularly where, such as here, the findings of both the trial court and the appellate court on
the matter coincide.9 (Emphasis supplied)
Hence, the first two issues will not be resolved as they raise questions of fact.
Thus, the only question left to be resolved is that of prescription. In their submissions, the parties argued lengthily on
the nature of the contract entered into by them, viz., whether it was one of sale or for a piece of work.
Article 1713 of the Civil Code defines a contract for a piece of work thus:
By the contract for a piece of work the contractor binds himself to execute a piece of work for the
employer, in consideration of a certain price or compensation. The contractor may either employ only his
labor or skill, or also furnish the material.
A contract for a piece of work, labor and materials may be distinguished from a contract of sale by the inquiry as to
whether the thing transferred is one not in existence and which would never have existed but for the order, of the
person desiring it10 . In such case, the contract is one for a piece of work, not a sale. On the other hand, if the thing
subject of the contract would have existed and been the subject of a sale to some other person even if the order had
not been given, then the contract is one of sale11 .
Thus, Mr. Justice Vitug12 explains that -
A contract for the delivery at a certain price of an article which the vendor in the ordinary course of his
business manufactures or procures for the general market, whether the same is on hand at the time or not
is a contract of sale, but if the goods are to be manufactured specially for the customer and upon his
special order, and not for the general market, it is a contract for a piece of work (Art. 1467, Civil Code). The
mere fact alone that certain articles are made upon previous orders of customers will not argue against the
imposition of the sales tax if such articles are ordinarily manufactured by the taxpayer for sale to the public
(Celestino Co. vs. Collector, 99 Phil. 841).
To Tolentino, the distinction between the two contracts depends on the intention of the parties. Thus, if the parties
intended that at some future date an object has to be delivered, without considering the work or labor of the party
bound to deliver, the contract is one of sale. But if one of the parties accepts the undertaking on the basis of some
plan, taking into account the work he will employ personally or through another, there is a contract for a piece of
work13 .
9
Clearly, the contract in question is one for a piece of work. It is not petitioner's line of business to manufacture air-
conditioning systems to be sold "off-the-shelf." Its business and particular field of expertise is the fabrication and
installation of such systems as ordered by customers and in accordance with the particular plans and specifications
provided by the customers. Naturally, the price or compensation for the system manufactured and installed will
depend greatly on the particular plans and specifications agreed upon with the customers.
The obligations of a contractor for a piece of work are set forth in Articles 1714 and 1715 of the Civil Code, which
provide:
Art. 1714. If the contractor agrees to produce the work from material furnished by him, he shall deliver the
thing produced to the employer and transfer dominion over the thing. This contract shall be governed by
the following articles as well as by the pertinent provisions on warranty of title and against hidden defects
and the payment of price in a contract of sale.
Art. 1715. The contractor shall execute the work in such a manner that it has the qualities agreed upon and
has no defects which destroy or lessen its value or fitness for its ordinary or stipulated use. Should the
work be not of such quality, the employer may require that the contractor remove the defect or execute
another work. If the contractor fails or refuses to comply with this obligation, the employer may have the
defect removed or another work executed, at the contractor's cost.
The provisions on warranty against hidden defects, referred to in Art. 1714 above-quoted, are found in Articles 1561
and 1566, which read as follows:
Art. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold
may have, should they render it unfit for the use for which it is intended, or should they diminish its fitness
for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or
would have given a lower price for it; but said vendor shall not be answerable for patent defects or those
which may be visible, or for those which are not visible if the vendee is an expert who, by reason of his
trade or profession, should have known them.
xxx xxx xxx
Art. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold, even
though he was not aware thereof.
This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the
hidden faults or defects in the thing sold.
The remedy against violations of the warranty against hidden defects is either to withdraw from the contract
(redhibitory action) or to demand a proportionate reduction of the price (accion quanti manoris), with damages in
either case14 .
In Villostas vs. Court of Appeals15 , we held that, "while it is true that Article 1571 of the Civil Code provides for a
prescriptive period of six months for a redhibitory action, a cursory reading of the ten preceding articles to which it
refers will reveal that said rule may be applied only in case of implied warranties"; and where there is an express
warranty in the contract, as in the case at bench, the prescriptive period is the one specified in the express warranty,
and in the absence of such period, "the general rule on rescission of contract, which is four years (Article 1389, Civil
Code) shall apply"16 .
Consistent with the above discussion, it would appear that this suit is barred by prescription because the complaint
was filed more than four years after the execution of the contract and the completion of the air-conditioning system.
However, a close scrutiny of the complaint filed in the trial court reveals that the original action is not really for
enforcement of the warranties against hidden defects, but one for breach of the contract itself. It alleged17 that the
petitioner, "in the installation of the air conditioning system did not comply with the specifications provided" in the Defects Noted:
written agreement between the parties, "and an evaluation of the air-conditioning system as installed by the
defendant showed the following defects and violations of the specifications of the agreement, to wit:
Same as right wing. except No. 4, All other defects on right wing are common to the left wing.

GROUND FLOOR:
SECOND FLOOR: (Common up to EIGHT FLOORS)

"A. RIGHT WING:

Compressors installed are MELCO with 7.5 Hp V-belt driven by 1800 RPM, -220 volts, 60 cycles, 3 phase,
Thrige electric motor with starters.
Equipped with Worthington Compressor, Model 2VC4 directly driven by an Hp Elin electric motor 1750
rmp, 3 phase, 60 cycles, 220 volts, complete with starter evaporative condenser, circulating water pump,
As stated in the specifications under, Section No. IV, the MELCO compressors do not satisfy the
air handling unit air ducts.
conditions stated therein due to the following:

Defects Noted:
1. MELCO Compressors are not provided with automatic capacity unloader.

1. Deteriorated evaporative condenser panels, coils are full of scales and heavy corrosion is very evident.
2. Not provided with oil pressure safety control.

2. Defective gauges of compressors;

3. Particular compressors do not have provision for renewal sleeves.

3. No belt guard on motor;

Out of the total 15 MELCO compressors installed to serve the 2nd floor up to 8th floors, only six (6) units
are in operation and the rest were already replaced. Of the remaining six (6) units, several of them have
4. Main switch has no cover; been replaced with bigger crankshafts.

5. Desired room temperature not attained; NINTH FLOOR:

Aside from the above defects, the following were noted not installed although provided in the Two (2) Worthington 2VC4 driven by 15 Hp, 3 phase, 220 volts, 60 cycles, 1750 rpm, Higgs motors with
specifications. starters.

1. Face by-pass damper of G.I. sheets No. 16. This damper regulates the flow of cooled air depending on
room condition.
2. No fresh air intake provision were provided which is very necessary for efficient comfort cooling..
3. No motor to regulate the face and by-pass damper.
Defects Noted are similar to ground floor.
GENERAL REMARKS:
Under Section III, Design conditions of specification for air conditioning work, and taking into account "A" &
"B" same, the present systems are not capable of maintaining the desired temperature of 76 = 2F (sic).

4. Liquid level indicator for refrigerant not provided. The present tenant have installed 35 window type air conditioning units distributed among the different
floor levels. Temperature measurements conducted on March 29. 1971, revealed that 78F room (sic) is
only maintained due to the additional window type units.
5. Suitable heat exchanger is not installed. This is an important component to increase refrigeration
efficiency.
The trial court, after evaluating the evidence presented, held that, indeed, petitioner failed to install items and parts
required in the contract and substituted some other items which were not in accordance with the specifications 18 ,
6. Modulating thermostat not provided.
thus:

7. Water treatment device for evaporative condenser was not provided.

From all of the foregoing, the Court is persuaded to believe the plaintiff that not only had the defendant
failed to install items and parts provided for in the specifications of the air-conditioning system be installed,
8. Liquid receiver not provided by sight glass. like face and by-pass dampers and modulating thermostat and many others, but also that there are items,
parts and accessories which were used and installed on the air-conditioning system which were not in full
accord with contract specifications. These omissions to install the equipments, parts and accessories
B. LEFT WING: called for in the specifications of the contract, as well as the deviations made in putting into the air-
conditioning system equipments, parts and accessories not in full accord with the contract specification
Worthington Compressor Model 2VC4 is installed complete with 15 Hp electric motor, 3 phase, 220 volts naturally resulted to adversely affect the operational effectiveness of the air-conditioning system which
60 cycles with starter. necessitated the installation of thirty-five window type of air-conditioning units distributed among the
different floor levels in order to be able to obtain a fairly desirable room temperature for the tenants and

10
 actual occupants of the building. The Court opines and so holds that the failure of the defendant to follow
the contract specifications and said omissions and deviations having resulted in the operational
ineffectiveness of the system installed makes the defendant liable to the plaintiff in the amount necessary
to rectify to put the air conditioning system in its proper operational condition to make it serve the purpose
for which the plaintiff entered into the contract with the defendant.

The respondent Court affirmed the trial court's decision thereby making the latter's findings also its own.

Having concluded that the original complaint is one for damages arising from breach of a written contract - and not a
suit to enforce warranties against hidden defects - we here - with declare that the governing law is Article 1715
(supra). However, inasmuch as this provision does not contain a specific prescriptive period, the general law on
prescription, which is Article 1144 of the Civil Code, will apply. Said provision states, inter alia, that actions "upon a
written contract" prescribe in ten (10) years. Since the governing contract was executed on September 10, 1962 and
the complaint was filed on May 8, 1971, it is clear that the action has not prescribed.

What about petitioner's contention that "acceptance of the work by the employer relieves the contractor of liability for
any defect in the work"? This was answered by respondent Court 19 as follows:

As the breach of contract which gave rise to the instant case consisted in appellant's omission to install the
equipments (sic), parts and accessories not in accordance with the plan and specifications provided for in
the contract and the deviations made in putting into the air conditioning system parts and accessories not
in accordance with the contract specifications, it is evident that the defect in the installation was not
apparent at the time of the delivery and acceptance of the work, considering further that plaintiff is not an
expert to recognize the same. From the very nature of things, it is impossible to determine by the simple
inspection of air conditioning system installed in an 8-floor building whether it has been furnished and
installed as per agreed specifications.

Verily, the mere fact that the private respondent accepted the work does not, ipso facto, relieve the petitioner from
liability for deviations from and violations of the written contract, as the law gives him ten (10) years within which to
file an action based on breach thereof.

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. No costs.

SO ORDERED.

11
G.R. No. 113564 June 20, 2001
INOCENCIA YU DINO and her HUSBAND doing business under the trade name "CANDY CLAIRE FASHION
GARMENTS", petitioners, vs.COURT OF APPEALS and ROMAN SIO, doing business under the name
"UNIVERSAL TOY MASTER MANUFACTURING", respondents.
PUNO, J.:
Though people say, "better late than never", the law frowns upon those who assert their rights past the eleventh
hour. For failing to timely institute their action, the petitioners are forever barred from claiming a sum of money from
the respondent.
This is a petition for review on certiorari to annul and set aside the amended decision of the respondent court dated
January 24, 1994 reversing its April 30, 1993 decision and dismissing the plaintiff-petitioners' Complaint on the
ground of prescription.The following undisputed facts gave rise to the case at bar:
Petitioners spouses Dino, doing business under the trade name "Candy Claire Fashion Garment" are engaged in the
business of manufacturing and selling shirts.1 Respondent Sio is part owner and general manager of a
manufacturing corporation doing business under the trade name "Universal Toy Master Manufacturing." 2
Petitioners and respondent Sio entered into a contract whereby the latter would manufacture for the petitioners
20,000 pieces of vinyl frogs and 20,000 pieces of vinyl mooseheads at P7.00 per piece in accordance with the
sample approved by the petitioners. These frogs and mooseheads were to be attached to the shirts petitioners would
manufacture and sell.3
Respondent Sio delivered in several installments the 40,000 pieces of frogs and mooseheads. The last delivery was
made on September 28, 1988. Petitioner fully paid the agreed price. 4 Subsequently, petitioners returned to
respondent 29,772 pieces of frogs and mooseheads for failing to comply with the approved sample.5 The return was
made on different dates: the initial one on December 12, 1988 consisting of 1,720 pieces, 6 the second on January
11, 1989,7 and the last on January 17, 1989.8
Petitioners then demanded from the respondent a refund of the purchase price of the returned goods in the amount
of P208,404.00. As respondent Sio refused to pay,9 petitioners filed on July 24, 1989 an action for collection of a sum
of money in the Regional Trial Court of Manila, Branch 38.
The trial court ruled in favor of the petitioners, viz:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs Vicente and Inocencia Dino and
against defendant Toy Master Manufacturing, Inc. ordering the latter to pay the former:
1. The amount of Two Hundred Eight Thousand Four Hundred Four (P208,404.00) Pesos with legal
interest thereon from July 5, 1989, until fully paid; and
2. The amount of Twenty Thousand (P20,000.00) Pesos as attorney's fees and the costs of this suit.
The counterclaim on the other hand is hereby dismissed for lack of merit."10
Respondent Sio sought recourse in the Court of Appeals. In its April 30, 1993 decision, the appellate court affirmed
the trial court decision. Respondent then filed a Motion for Reconsideration and a Supplemental Motion for
Reconsideration alleging therein that the petitioners' action for collection of sum of money based on a breach of
warranty had already prescribed. On January 24, 1994, the respondent court reversed its decision and dismissed
petitioners' Complaint for having been filed beyond the prescriptive period. The amended decision read in part, viz:
12
"Even if there is failure to raise the affirmative defense of prescription in a motion to dismiss or in an
appropriate pleading (answer, amended or supplemental answer) and an amendment would no longer be
feasible, still prescription, if apparent on the face of the complaint may be favorably considered (Spouses
Matias B. Aznar, III, et al. vs. Hon. Juanito A. Bernad, etc., supra, G.R. 81190, May 9, 1988). The rule in
Gicano vs. Gegato (supra) was reiterated in Severo v. Court of Appeals, (G.R. No. 84051, May 19, 1989).
WHEREFORE the Motion For Reconsideration is granted. The judgment of this Court is set aside and
judgment is hereby rendered REVERSING the judgment of the trial court and dismissing plaintiff's
complaint."11
Hence, this petition with the following assignment of errors:
I. The respondent Court of Appeals seriously erred in dismissing the complaint of the Petitioners on the
ground that the action had prescribed.
II. The respondent Court of Appeals seriously erred in holding that the defense of prescription would still
be considered despite the fact that it was not raised in the answer, if apparent on the face of the
complaint.
We first determine the nature of the action filed in the trial court to resolve the issue of prescription. Petitioners claim
that the Complaint they filed in the trial court on July 24, 1989 was one for the collection of a sum of money.
Respondent contends that it was an action for breach of warranty as the sum of money petitioners sought to collect
was actually a refund of the purchase price they paid for the alleged defective goods they bought from the
respondent.
We uphold the respondent's contention.
The following provisions of the New Civil Code are apropos:
"Art. 1467. A contract for the delivery at a certain price of an article which the vendor in the ordinary course
of his business manufactures or procures for the general market, whether the same is on hand at the time
or not, is a contract of sale, but if the goods are to be manufactured specially for the customer and upon
his special order, and not for the general market, it is a contract for a piece of work."
"Art. 1713. By the contract for a piece of work the contractor binds himself to execute a piece of work for
the employer, in consideration of a certain price or compensation. The contractor may either employ only
his labor or skill, or also furnish the material."
As this Court ruled in Engineering & Machinery Corporation v. Court of Appeals, et al.,12 "a contract for a piece of
work, labor and materials may be distinguished from a contract of sale by the inquiry as to whether the thing
transferred is one not in existence and which would never have existed but for the order of the person desiring it. In
such case, the contract is one for a piece of work, not a sale. On the other hand, if the thing subject of the contract
would have existed and been the subject of a sale to some other person even if the order had not been given then
the contract is one of sale."13 The contract between the petitioners and respondent stipulated that respondent would
manufacture upon order of the petitioners 20,000 pieces of vinyl frogs and 20,000 pieces of vinyl mooseheads
according to the samples specified and approved by the petitioners. Respondent Sio did not ordinarily manufacture
these products, but only upon order of the petitioners and at the price agreed upon. 14 Clearly, the contract executed
by and between the petitioners and the respondent was a contract for a piece of work. At any rate, whether the
agreement between the parties was one of a contract of sale or a piece of work, the provisions on warranty of title
against hidden defects in a contract of sale apply to the case at bar, viz:
"Art. 1714. If the contractor agrees to produce the work from material furnished by him, he shall deliver the
thing produced to the employer and transfer dominion over the thing. This contract shall be governed by
the following articles as well as by the pertinent provisions on warranty of title and against hidden defects
and the payment of price in a contract of sale."
 "Art. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold
may have, should they render it unfit for the use for which it is intended, or should they diminish its fitness
for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or
would have given a lower price for it; but said vendor shall not be answerable for patent defects or those
which may be visible, or for those which are not visible if the vendee is an expert who, by reason of his
trade or profession, should have known them."
Petitioners aver that they discovered the defects in respondent's products when customers in their (petitioners') shirt
business came back to them complaining that the frog and moosehead figures attached to the shirts they bought
were torn. Petitioners allege that they did not readily see these hidden defects upon their acceptance. A hidden
defect is one which is unknown or could not have been known to the vendee. 15 Petitioners then returned to the
respondent 29,772 defective pieces of vinyl products and demanded a refund of their purchase price in the amount
of P208,404.00. Having failed to collect this amount, they filed an action for collection of a sum of money.
Article 1567 provides for the remedies available to the vendee in case of hidden defects, viz:
"Art. 1567. In the cases of Articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between
withdrawing from the contract and demanding a proportionate reduction of the price, with damages in
either case."
By returning the 29,772 pieces of vinyl products to respondent and asking for a return of their purchase price,
petitioners were in effect "withdrawing from the contract" as provided in Art. 1567. The prescriptive period for this
kind of action is provided in Art. 1571 of the New Civil Code, viz:
"Art. 1571. Actions arising from the provisions of the preceding ten articles shall be barred after six
monthsfrom the delivery of the thing sold." (Emphasis supplied)
There is no dispute that respondent made the last delivery of the vinyl products to petitioners on September 28,
1988. It is also settled that the action to recover the purchase price of the goods petitioners returned to the
respondent was filed on July 24, 1989,16 more than nine months from the date of last delivery. Petitioners having filed
the action three months after the six-month period for filing actions for breach of warranty against hidden defects
stated in Art. 1571,17 the appellate court dismissed the action.
Petitioners fault the ruling on the ground that it was too late in the day for respondent to raise the defense of
prescription. The law then applicable to the case at bar, Rule 9, Sec. 2 of the Rules of Court, provides:
"Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived;
except the failure to state a cause of action . . . "
Thus, they claim that since the respondent failed to raise the defense of prescription in a motion to dismiss or in its
answer, it is deemed waived and cannot be raised for the first time on appeal in a motion for reconsideration of the
appellate court's decision.
As a rule, the defense of prescription cannot be raised for the first time on appeal. Thus, we held in Ramos v.
Osorio,18 viz:
"It is settled law in this jurisdiction that the defense of prescription is waivable, and that if it was not raised
as a defense in the trial court, it cannot be considered on appeal, the general rule being that the appellate
court is not authorized to consider and resolve any question not properly raised in the lower court (Subido
vs. Lacson, 55 O.G. 8281, 8285; Moran, Comments on the Rules of Court, Vol. I, p. 784, 1947 Edition)."
However, this is not a hard and fast rule. In Gicano v. Gegato,19 we held:
13
". . .(T)rial courts have authority and discretion to dimiss an action on the ground of prescription when the
parties' pleadings or other facts on record show it to be indeed time-barred; (Francisco v. Robles, Feb, 15,
1954; Sison v. McQuaid, 50 O.G. 97; Bambao v. Lednicky, Jan. 28, 1961; Cordova v. Cordova, Jan. 14,
1958; Convets, Inc. v. NDC, Feb. 28, 1958; 32 SCRA 529; Sinaon v. Sorongan, 136 SCRA 408); and it
may do so on the basis of a motion to dismiss (Sec. 1,f, Rule 16, Rules of Court), or an answer which sets
up such ground as an affirmative defense (Sec. 5, Rule 16), or even if the ground is alleged after judgment
on the merits, as in a motion for reconsideration (Ferrer v. Ericta, 84 SCRA 705); or even if the defense
has not been asserted at all, as where no statement thereof is found in the pleadings (Garcia v. Mathis,
100 SCRA 250; PNB v. Pacific Commission House, 27 SCRA 766; Chua Lamco v. Dioso, et al., 97 Phil.
821); or where a defendant has been declared in default (PNB v. Perez, 16 SCRA 270). What is essential
only, to repeat, is that the facts demonstrating the lapse of the prescriptive period be otherwise sufficiently
and satisfactorily apparent on the record; either in the averments of the plaintiff's complaint, or otherwise
established by the evidence." (emphasis supplied)
In Aldovino, et al. v. Alunan, et al.,20 the Court en banc reiterated the Garcia v. Mathis doctrine cited in the Gicano
case that when the plaintiff's own complaint shows clearly that the action has prescribed, the action may be
dismissed even if the defense of prescription was not invoked by the defendant.
It is apparent in the records that respondent made the last delivery of vinyl products to the petitioners on September
28, 1988. Petitioners admit this in their Memorandum submitted to the trial court and reiterate it in their Petition for
Review.21 It is also apparent in the Complaint that petitioners instituted their action on July 24, 1989. The issue for
resolution is whether or not the respondent Court of Appeals could dismiss the petitioners' action if the defense of
prescription was raised for the first time on appeal but is apparent in the records.
Following the Gicano doctrine that allows dismissal of an action on the ground of prescription even after judgment on
the merits, or even if the defense was not raised at all so long as the relevant dates are clear on the record, we rule
that the action filed by the petitioners has prescribed. The dates of delivery and institution of the action are
undisputed. There are no new issues of fact arising in connection with the question of prescription, thus carving out
the case at bar as an exception from the general rule that prescription if not impleaded in the answer is deemed
waived.22
Even if the defense of prescription was raised for the first time on appeal in respondent's Supplemental Motion for
Reconsideration of the appellate court's decision, this does not militate against the due process right of the
petitioners. On appeal, there was no new issue of fact that arose in connection with the question of prescription, thus
it cannot be said that petitioners were not given the opportunity to present evidence in the trial court to meet a factual
issue. Equally important, petitioners had the opportunity to oppose the defense of prescription in their Opposition to
the Supplemental Motion for Reconsideration filed in the appellate court and in their Petition for Review in this Court.
This Court's application of the Osorio and Gicano doctrines to the case at bar is confirmed and now enshrined in
Rule 9, Sec. 1 of the 1997 Rules of Civil Procedure, viz:
"Section 1. Defense and objections not pleaded. - Defenses and objections not pleaded whether in a
motion to dismiss or in the answer are deemed waived. However, when it appears from the pleadings that
the court has no jurisdiction over the subject matter, that there is another action pending between the
same parties for the same cause, or that the action is barred by a prior judgment or by statute of
limitations, the court shall dismiss the claim." (Emphasis supplied)
WHEREFORE, the petition is DENIED and the impugned decision of the Court of Appeals dated January 24, 1994 is
AFFIRMED. No costs.
SO ORDERED.
G.R. No. 115349 April 18, 1997 Not in accord with said decision, petitioner has come to this Court via the present petition for review raising
the following issues:
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA 1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE
UNIVERSITY,respondents. PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT TO SECTION
205 OF THE TAX CODE; and
PANGANIBAN, J.:
2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3%
CONTRACTOR'S TAX UNDER SECTION 205 OF THE TAX CODE.
In conducting researches and studies of social organizations and cultural values thru its Institute of Philippine
Culture, is the Ateneo de Manila University performing the work of an independent contractor and thus taxable within
the purview of then Section 205 of the National Internal Revenue Code levying a three percent contractor's tax? This The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide:
question is answer by the Court in the negative as it resolves this petition assailing the Decision 1 of the Respondent
Court of Appeals 2 in CA-G.R. SP No. 31790 promulgated on April 27, 1994 affirming that of the Court of Tax
Sec. 205. Contractor, proprietors or operators of dockyards, and others. A contractor's tax of
Appeals. 3
threeper centum of the gross receipts is hereby imposed on the following:

The Antecedent Facts

xxx xxx xxx

The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being largely undisputed
(16) Business agents and other independent contractors except persons,
by the parties.
associations and corporations under contract for embroidery and apparel for
export, as well as their agents and contractors and except gross receipts of
Private respondent is a non-stock, non-profit educational institution with auxiliary units and or from a pioneer industry registered with the Board of Investments under
branches all over the Philippines. One such auxiliary unit is the Institute of Philippine Culture Republic Act No. 5186:
(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.
xxx xxx xxx
Occasionally, it accepts sponsorships for its research activities from international organizations,
private foundations and government agencies.
The term "independent contractors" include persons (juridical or natural) not
enumerated above (but not including individuals subject to the occupation
On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue
tax under Section 12 of the Local Tax Code) whose activity consists
a demand letter dated June 3, 1983, assessing private respondent the sum of P174,043.97 for
essentially of the sale of all kinds of services for a fee regardless of whether
alleged deficiency contractor's tax, and an assessment dated June 27, 1983 in the sum of
or not the performance of the service calls for the exercise or use of the
P1,141,837 for alleged deficiency income tax, both for the fiscal year ended March 31, 1978.
physical or mental faculties of such contractors or their employees.
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.
xxx xxx xxx
On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for
deficiency income tax but modifying the assessment for deficiency contractor's tax by increasing Petitioner contends that the respondent court erred in holding that private respondent is not an
the amount due to P193,475.55. Unsatisfied, private respondent requested for a reconsideration "independent contractor" within the purview of Section 205 of the Tax Code. To petitioner, the
or reinvestigation of the modified assessment. At the same time, it filed in the respondent court a term "independent contractor", as defined by the Code, encompasses all kinds of services
petition for review of the said letter-decision of the petitioner. While the petition was pending rendered for a fee and that the only exceptions are the following:
before the respondent court, petitioner issued a final decision dated August 3, 1988 reducing the
assessment for deficiency contractor's tax from P193,475.55 to P46,516.41, exclusive of
surcharge and interest. 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;
On July 12, 1993, the respondent court rendered the questioned decision which dispositively
reads:
b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182
[b] of the Tax Code); and
WHEREFORE, in view of the foregoing, respondent's decision is SET
ASIDE. The deficiency contractor's tax assessment in the amount of
c. Regional or area headquarters established in the Philippines by multinational corporations,
P46,516.41 exclusive of surcharge and interest for the fiscal year ended
March 31, 1978 is hereby CANCELED. No pronouncement as to cost. 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).
SO ORDERED.

14
 Petitioner thus submits that since private respondent falls under the definition of an "independent
contractor" and is not among the aforementioned exceptions, private respondent is therefore
subject to the 3% contractor's tax imposed under the same Code. 4
The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed the assailed
decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA through this petition for
review.
The Issues
Petitioner submits before us the following issues:
1) Whether or not private respondent falls under the purview of independent contractor pursuant
to Section 205 of the Tax Code.
2) Whether or not private respondent is subject to 3% contractor's tax under Section 205 of the
Tax Code. 5
In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary unit or branch
the Institute of Philippine Culture performing the work of an independent contractor and, thus, subject to the three
percent contractor's tax levied by then Section 205 of the National Internal Revenue Code?
The Court's Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue Code germane to the case before us read:
Sec. 205. Contractors, proprietors or operators of dockyards, and others. A contractor's tax of
threeper centum of the gross receipts is hereby imposed on the following:
xxx xxx xxx
(16) Business agents and other independent contractors, except persons, associations and
corporations under contract for embroidery and apparel for export, as well as their agents and
contractors, and except gross receipts of or from a pioneer industry registered with the Board of
Investments under the provisions of Republic Act No. 5186;
xxx xxx xxx
The term "independent contractors" include persons (juridical or natural) not enumerated above
(but not including individuals subject to the occupation tax under Section 12 of the Local Tax
Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless
of whether or not the performance of the service calls for the exercise or use of the physical or
mental faculties of such contractors or their employees.
The term "independent contractor" shall not include regional or area headquarters established in
the Philippines by multinational corporations, including their alien executives, and which
headquarters do not earn or derive income from the Philippines and which act as supervisory,
15
communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-
Pacific Region.
The term "gross receipts" means all amounts received by the prime or principal contractor as the
total contract price, undiminished by amount paid to the subcontractor, shall be excluded from
the taxable gross receipts of the subcontractor.
Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila University "falls
within the definition" of an independent contractor and "is not one of those mentioned as excepted"; hence, it is
properly a subject of the three percent contractor's tax levied by the foregoing provision of law. 6 Petitioner states that
the "term 'independent contractor' is not specifically defined so as to delimit the scope thereof, so much so that any
person who . . . renders physical and mental service for a fee, is now indubitably considered an independent
contractor liable to 3% contractor's tax." 7 According to petitioner, Ateneo has the burden of proof to show its
exemption from the coverage of the law.
We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without
first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and
impractical to determine who are exempted without first determining who are covered by the aforesaid provision. The
Commissioner should have determined first if private respondent was covered by Section 205, applying the rule of
strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its
exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws
that "(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. .
. (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions
of a taxing act are not to be extended by implication." 8 Parenthetically, in answering the question of who is subject to
tax statutes, it is basic that "in case of doubt, such statutes are to be construed most strongly against the government
and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond
what statutes expressly and clearly import." 9
To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the independent
contractor be engaged in the business of selling its services. Hence, to impose the three percent contractor's tax on
Ateneo's Institute of Philippine Culture, it should be sufficiently proven that the private respondent is indeed selling its
services for a fee in pursuit of an independent business. And it is only after private respondent has been found
clearly to be subject to the provisions of Sec. 205 that the question of exemption therefrom would arise. Only after
such coverage is shown does the rule of construction that tax exemptions are to be strictly construed against the
taxpayer come into play, contrary to petitioner's position. This is the main line of reasoning of the Court of Tax
Appeals in its decision, 10 which was affirmed by the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Service of its Institute of Philippine Culture
After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture ever sold its
services for a fee to anyone or was ever engaged in a business apart from and independently of the academic
purposes of the university.
Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner Commissioner of
Internal Revenue contends that "the tax is due on its activity of conducting researches for a fee. The tax is due on
the gross receipts made in favor of IPC pursuant to the contracts the latter entered to conduct researches for the
benefit primarily of its clients. The tax is imposed on the exercise of a taxable activity. . . . [T]he sale of services of
private respondent is made under a contract and the various contracts entered into between private respondent and
its clients are almost of the same terms, showing, among others, the compensation and terms of
payment." 11(Emphasis supplied.)
In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show that Ateneo's
IPC in fact contracted to sell its research services for a fee. Clearly then, as found by the Court of Appeals and the
Court of Tax Appeals, petitioner's theory is inapplicable to the established factual milieu obtaining in the instant case.
In the first place, the petitioner has presented no evidence to prove its bare contention that, indeed, contracts for sale
of services were ever entered into by the private respondent. As appropriately pointed out by the latter:
An examination of the Commissioner's Written Formal Offer of Evidence in the Court of Tax
Appeals shows that only the following documentary evidence was presented:
Exhibit 1 BIR letter of authority no. 331844
2 Examiner's Field Audit Report
3 Adjustments to Sales/Receipts
4 Letter-decision of BIR Commissioner Bienvenido A.
Tan Jr.
None of the foregoing evidence even comes close to purport to be contracts between private
respondent and third parties. 12
Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received by the Ateneo de
Manila University are technically not a fee. They may however fall as gifts or donations which are tax-exempt" as
shown by private respondent's compliance with the requirement of Section 123 of the National Internal Revenue
Code providing for the exemption of such gifts to an educational institution. 13
Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:
To our mind, private respondent hardly fits into the definition of an "independent contractor".
For one, the established facts show that IPC, as a unit of the private respondent, is not engaged
in business. Undisputedly, private respondent is mandated by law to undertake research
activities to maintain its university status. In fact, the research activities being carried out by the
IPC is focused not on business or profit but on social sciences studies of Philippine society and
culture. Since it can only finance a limited number of IPC's research projects, private respondent
occasionally accepts sponsorship for unfunded IPC research projects from international
organizations, private foundations and governmental agencies. However, such sponsorships are
subject to private respondent's terms and conditions, among which are, that the research is
confined to topics consistent with the private respondent's academic agenda; that no proprietary
or commercial purpose research is done; and that private respondent retains not only the
absolute right to publish but also the ownership of the results of the research conducted by the
IPC. Quite clearly, the aforementioned terms and conditions belie the allegation that private
respondent is a contractor or is engaged in business.
For another, it bears stressing that private respondent is a non-stock, non-profit educational
corporation. The fact that it accepted sponsorship for IPC's unfunded projects is merely
incidental. For, the main function of the IPC is to undertake research projects under the
academic agenda of the private respondent. Moreover the records do not show that in accepting
sponsorship of research work, IPC realized profits from such work. On the contrary, the
evidence shows that for about 30 years, IPC had continuously operated at a loss, which means
that sponsored funds are less than actual expenses for its research projects. That IPC has been
operating at a loss loudly bespeaks of the fact that education and not profit is the motive for
undertaking the research projects.
Then, too, granting arguendo that IPC made profits from the sponsored research projects, the
fact still remains that there is no proof that part of such earnings or profits was ever distributed
16
as dividends to any stockholder, as in fact none was so distributed because they accrued to the
benefit of the private respondent which is a non-profit educational institution. 14
Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not given in the concept of
a fee or price in exchange for the performance of a service or delivery of an object. Rather, the amounts are in the
nature of an endowment or donation given by IPC's benefactors solely for the purpose of sponsoring or funding the
research with no strings attached. As found by the two courts below, such sponsorships are subject to IPC's terms
and conditions. No proprietary or commercial research is done, and IPC retains the ownership of the results of the
research, including the absolute right to publish the same. The copyrights over the results of the research are owned
by
Ateneo and, consequently, no portion thereof may be reproduced without its permission. 15 The amounts given to
IPC, therefore, may not be deemed, it bears stressing as fees or gross receipts that can be subjected to the three
percent contractor's tax.
It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot be deemed
either as a contract of sale or a contract of a piece of work. "By the contract of sale, one of the contracting parties
obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price
certain in money or its equivalent." 16 By its very nature, a contract of sale requires a transfer of ownership. Thus,
Article 1458 of the Civil Code "expressly makes the obligation to transfer ownership as an essential element of the
contract of sale, following modern codes, such as the German and the Swiss. Even in the absence of this express
requirement, however, most writers, including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant,
have considered such transfer of ownership as the primary purpose of sale. Perez and Alguer follow the same view,
stating that the delivery of the thing does not mean a mere physical transfer, but is a means of transmitting
ownership. Transfer of title or an agreement to transfer it for a price paid or promised to be paid is the essence of
sale." 17 In the case of a contract for a piece of work, "the contractor binds himself to execute a piece of work for the
employer, in consideration of a certain price or compensation. . . . If the contractor agrees to produce the work from
materials furnished by him, he shall deliver the thing produced to the employer and transfer dominion over the thing, .
. ." 18 Ineludably, whether the contract be one of sale or one for a piece of work, a transfer of ownership is involved
and a party necessarily walks away with an object. 19 In the case at bench, it is clear from the evidence on record
that there was no sale either of objects or services because, as adverted to earlier, there was no transfer of
ownership over the research data obtained or the results of research projects undertaken by the Institute of
Philippine Culture.
Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in pursuance of
maintaining Ateneo's university status and not in the course of an independent business of selling such research with
profit in mind. This is clear from a reading of the regulations governing universities:
31. In addition to the legal requisites an institution must meet, among others, the following
requirements before an application for university status shall be considered:
xxx xxx xxx
(e) The institution must undertake research and operate with a competent qualified staff at least
three graduate departments in accordance with the rules and standards for graduate education.
One of the departments shall be science and technology. The competence of the staff shall be
judged by their effective teaching, scholarly publications and research activities published in its
school journal as well as their leadership activities in the profession.
(f) The institution must show evidence of adequate and stable financial resources and support, a
reasonable portion of which should be devoted to institutional development and research.
(emphasis supplied)
xxx xxx xxx
32. University status may be withdrawn, after due notice and hearing, for failure to maintain
satisfactorily the standards and requirements therefor. 20
Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the Ateneo is patently
erroneous because the former is not an independent juridical entity that is separate and distinct form the latter.

Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals Generally
Conclusive

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

Public Service, Not Profit, is the Motive

The records show that the Institute of Philippine Culture conducted its research activities at a huge deficit of
P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972 to 1985. 23 In fact, it was
Ateneo de Manila University itself that had funded the research projects of the institute, and it was only when Ateneo
could no longer produce the needed funds that the institute sought funding from outside. The testimony of Ateneo's
Director for Accounting Services, Ms. Leonor Wijangco, provides significant insight on the academic and nonprofit
nature of the institute's research activities done in furtherance of the university's purposes, as follows:

Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of
Philippine Culture) that as far as grants from sponsored research it is possible that the grant
sometimes is less than the actual cost. Will you please tell us in this case when the actual cost is
a lot less than the grant who shoulders the additional cost?

A The University.

Q Now, why is this done by the University?

A Because of our faculty development program as a university, because a university has to have
its own research institute. 24

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

WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of Appeals is
hereby AFFIRMED in full.

SO ORDERED.

17
G.R. No. L-11491 August 23, 1918
ANDRES QUIROGA, plaintiff-appellant, vs.PARSONS HARDWARE CO., defendant-appellee.
AVANCEA, J.:
On January 24, 1911, in this city of manila, a contract in the following tenor was entered into by and between the
plaintiff, as party of the first part, and J. Parsons (to whose rights and obligations the present defendant later
subrogated itself), as party of the second part:
CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND J. PARSONS, BOTH
MERCHANTS ESTABLISHED IN MANILA, FOR THE EXCLUSIVE SALE OF "QUIROGA"
BEDS IN THE VISAYAN ISLANDS.
ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his beds in the Visayan Islands to J.
Parsons under the following conditions:
(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for the latter's establishment in Iloilo,
and shall invoice them at the same price he has fixed for sales, in Manila, and, in the invoices, shall make
and allowance of a discount of 25 per cent of the invoiced prices, as commission on the sale; and Mr.
Parsons shall order the beds by the dozen, whether of the same or of different styles.
(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds received, within a period of sixty days from
the date of their shipment.
(C) The expenses for transportation and shipment shall be borne by M. Quiroga, and the freight,
insurance, and cost of unloading from the vessel at the point where the beds are received, shall be paid by
Mr. Parsons.
(D) If, before an invoice falls due, Mr. Quiroga should request its payment, said payment when made shall
be considered as a prompt payment, and as such a deduction of 2 per cent shall be made from the amount
of the invoice.
The same discount shall be made on the amount of any invoice which Mr. Parsons may deem convenient
to pay in cash.
(E) Mr. Quiroga binds himself to give notice at least fifteen days before hand of any alteration in price
which he may plan to make in respect to his beds, and agrees that if on the date when such alteration
takes effect he should have any order pending to be served to Mr. Parsons, such order shall enjoy the
advantage of the alteration if the price thereby be lowered, but shall not be affected by said alteration if the
price thereby be increased, for, in this latter case, Mr. Quiroga assumed the obligation to invoice the beds
at the price at which the order was given.
(F) Mr. Parsons binds himself not to sell any other kind except the "Quiroga" beds.
ART. 2. In compensation for the expenses of advertisement which, for the benefit of both contracting
parties, Mr. Parsons may find himself obliged to make, Mr. Quiroga assumes the obligation to offer and
give the preference to Mr. Parsons in case anyone should apply for the exclusive agency for any island not
comprised with the Visayan group.
ART. 3. Mr. Parsons may sell, or establish branches of his agency for the sale of "Quiroga" beds in all the
towns of the Archipelago where there are no exclusive agents, and shall immediately report such action to
Mr. Quiroga for his approval.
18
ART. 4. This contract is made for an unlimited period, and may be terminated by either of the contracting
parties on a previous notice of ninety days to the other party.
Of the three causes of action alleged by the plaintiff in his complaint, only two of them constitute the subject matter of
this appeal and both substantially amount to the averment that the defendant violated the following obligations: not to
sell the beds at higher prices than those of the invoices; to have an open establishment in Iloilo; itself to conduct the
agency; to keep the beds on public exhibition, and to pay for the advertisement expenses for the same; and to order
the beds by the dozen and in no other manner. As may be seen, with the exception of the obligation on the part of
the defendant to order the beds by the dozen and in no other manner, none of the obligations imputed to the
defendant in the two causes of action are expressly set forth in the contract. But the plaintiff alleged that the
defendant was his agent for the sale of his beds in Iloilo, and that said obligations are implied in a contract of
commercial agency. The whole question, therefore, reduced itself to a determination as to whether the defendant, by
reason of the contract hereinbefore transcribed, was a purchaser or an agent of the plaintiff for the sale of his beds.
In order to classify a contract, due regard must be given to its essential clauses. In the contract in question, what was
essential, as constituting its cause and subject matter, is that the plaintiff was to furnish the defendant with the beds
which the latter might order, at the price stipulated, and that the defendant was to pay the price in the manner
stipulated. The price agreed upon was the one determined by the plaintiff for the sale of these beds in Manila, with a
discount of from 20 to 25 per cent, according to their class. Payment was to be made at the end of sixty days, or
before, at the plaintiff's request, or in cash, if the defendant so preferred, and in these last two cases an additional
discount was to be allowed for prompt payment. These are precisely the essential features of a contract of purchase
and sale. There was the obligation on the part of the plaintiff to supply the beds, and, on the part of the defendant, to
pay their price. These features exclude the legal conception of an agency or order to sell whereby the mandatory or
agent received the thing to sell it, and does not pay its price, but delivers to the principal the price he obtains from the
sale of the thing to a third person, and if he does not succeed in selling it, he returns it. By virtue of the contract
between the plaintiff and the defendant, the latter, on receiving the beds, was necessarily obliged to pay their price
within the term fixed, without any other consideration and regardless as to whether he had or had not sold the beds.
It would be enough to hold, as we do, that the contract by and between the defendant and the plaintiff is one of
purchase and sale, in order to show that it was not one made on the basis of a commission on sales, as the plaintiff
claims it was, for these contracts are incompatible with each other. But, besides, examining the clauses of this
contract, none of them is found that substantially supports the plaintiff's contention. Not a single one of these clauses
necessarily conveys the idea of an agency. The words commission on sales used in clause (A) of article 1 mean
nothing else, as stated in the contract itself, than a mere discount on the invoice price. The word agency, also used
in articles 2 and 3, only expresses that the defendant was the only one that could sell the plaintiff's beds in the
Visayan Islands. With regard to the remaining clauses, the least that can be said is that they are not incompatible
with the contract of purchase and sale.
The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-president of the defendant corporation and
who established and managed the latter's business in Iloilo. It appears that this witness, prior to the time of his
testimony, had serious trouble with the defendant, had maintained a civil suit against it, and had even accused one of
its partners, Guillermo Parsons, of falsification. He testified that it was he who drafted the contract Exhibit A, and,
when questioned as to what was his purpose in contracting with the plaintiff, replied that it was to be an agent for his
beds and to collect a commission on sales. However, according to the defendant's evidence, it was Mariano Lopez
Santos, a director of the corporation, who prepared Exhibit A. But, even supposing that Ernesto Vidal has stated the
truth, his statement as to what was his idea in contracting with the plaintiff is of no importance, inasmuch as the
agreements contained in Exhibit A which he claims to have drafted, constitute, as we have said, a contract of
purchase and sale, and not one of commercial agency. This only means that Ernesto Vidal was mistaken in his
classification of the contract. But it must be understood that a contract is what the law defines it to be, and not what it
is called by the contracting parties.
The plaintiff also endeavored to prove that the defendant had returned beds that it could not sell; that, without
previous notice, it forwarded to the defendant the beds that it wanted; and that the defendant received its
commission for the beds sold by the plaintiff directly to persons in Iloilo. But all this, at the most only shows that, on
the part of both of them, there was mutual tolerance in the performance of the contract in disregard of its terms; and
it gives no right to have the contract considered, not as the parties stipulated it, but as they performed it. Only the
acts of the contracting parties, subsequent to, and in connection with, the execution of the contract, must be
considered for the purpose of interpreting the contract, when such interpretation is necessary, but not when, as in the
instant case, its essential agreements are clearly set forth and plainly show that the contract belongs to a certain kind
and not to another. Furthermore, the return made was of certain brass beds, and was not effected in exchange for
the price paid for them, but was for other beds of another kind; and for the letter Exhibit L-1, requested the plaintiff's
prior consent with respect to said beds, which shows that it was not considered that the defendant had a right, by
virtue of the contract, to make this return. As regards the shipment of beds without previous notice, it is insinuated in
the record that these brass beds were precisely the ones so shipped, and that, for this very reason, the plaintiff
agreed to their return. And with respect to the so-called commissions, we have said that they merely constituted a
discount on the invoice price, and the reason for applying this benefit to the beds sold directly by the plaintiff to
persons in Iloilo was because, as the defendant obligated itself in the contract to incur the expenses of advertisement
of the plaintiff's beds, such sales were to be considered as a result of that advertisement.

In respect to the defendant's obligation to order by the dozen, the only one expressly imposed by the contract, the
effect of its breach would only entitle the plaintiff to disregard the orders which the defendant might place under other
conditions; but if the plaintiff consents to fill them, he waives his right and cannot complain for having acted thus at
his own free will.

For the foregoing reasons, we are of opinion that the contract by and between the plaintiff and the defendant was
one of purchase and sale, and that the obligations the breach of which is alleged as a cause of action are not
imposed upon the defendant, either by agreement or by law.

The judgment appealed from is affirmed, with costs against the appellant. So ordered.

19
G.R. No. L-47538 June 20, 1941
GONZALO PUYAT & SONS, INC., petitioner, vs.ARCO AMUSEMENT COMPANY (formerly known as Teatro
Arco), respondent. LAUREL, J.:
This is a petition for the issuance of a writ of certiorari to the Court of Appeals for the purpose of reviewing its
Amusement Company (formerly known as Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat and Sons. Inc.,
defendant-appellee."
It appears that the respondent herein brought an action against the herein petitioner in the Court of First Instance of
Manila to secure a reimbursement of certain amounts allegedly overpaid by it on account of the purchase price of
sound reproducing equipment and machinery ordered by the petitioner from the Starr Piano Company of Richmond,
Indiana, U.S.A. The facts of the case as found by the trial court and confirmed by the appellate court, which are
admitted by the respondent, are as follows:
In the year 1929, the "Teatro Arco", a corporation duly organized under the laws of the Philippine Islands,
with its office in Manila, was engaged in the business of operating cinematographs. In 1930, its name was
changed to Arco Amusement Company. C. S. Salmon was the president, while A. B. Coulette was the
business manager. About the same time, Gonzalo Puyat & Sons, Inc., another corporation doing business
in the Philippine Islands, with office in Manila, in addition to its other business, was acting as exclusive
agents in the Philippines for the Starr Piano Company of Richmond, Indiana, U.S. A. It would seem that
this last company dealt in cinematographer equipment and machinery, and the Arco Amusement Company
desiring to equipt its cinematograph with sound reproducing devices, approached Gonzalo Puyat & Sons,
Inc., thru its then president and acting manager, Gil Puyat, and an employee named Santos. After some
negotiations, it was agreed between the parties, that is to say, Salmon and Coulette on one side,
representing the plaintiff, and Gil Puyat on the other, representing the defendant, that the latter would, on
behalf of the plaintiff, order sound reproducing equipment from the Starr Piano Company and that the
plaintiff would pay the defendant, in addition to the price of the equipment, a 10 per cent commission, plus
all expenses, such as, freight, insurance, banking charges, cables, etc. At the expense of the plaintiff, the
defendant sent a cable, Exhibit "3", to the Starr Piano Company, inquiring about the equipment desired
and making the said company to quote its price without discount. A reply was received by Gonzalo Puyat &
Sons, Inc., with the price, evidently the list price of $1,700 f.o.b. factory Richmond, Indiana. The defendant
did not show the plaintiff the cable of inquiry nor the reply but merely informed the plaintiff of the price of
$1,700. Being agreeable to this price, the plaintiff, by means of Exhibit "1", which is a letter signed by C. S.
Salmon dated November 19, 1929, formally authorized the order. The equipment arrived about the end of
the year 1929, and upon delivery of the same to the plaintiff and the presentation of necessary papers, the
price of $1.700, plus the 10 per cent commission agreed upon and plus all the expenses and charges, was
duly paid by the plaintiff to the defendant.
Sometime the following year, and after some negotiations between the same parties, plaintiff and
defendants, another order for sound reproducing equipment was placed by the plaintiff with the defendant,
on the same terms as the first order. This agreement or order was confirmed by the plaintiff by its letter
Exhibit "2", without date, that is to say, that the plaintiff would pay for the equipment the amount of $1,600,
which was supposed to be the price quoted by the Starr Piano Company, plus 10 per cent commission,
plus all expenses incurred. The equipment under the second order arrived in due time, and the defendant
was duly paid the price of $1,600 with its 10 per cent commission, and $160, for all expenses and charges.
This amount of $160 does not represent actual out-of-pocket expenses paid by the defendant, but a mere
flat charge and rough estimate made by the defendant equivalent to 10 per cent of the price of $1,600 of
the equipment.
About three years later, in connection with a civil case in Vigan, filed by one Fidel Reyes against the
defendant herein Gonzalo Puyat & Sons, Inc., the officials of the Arco Amusement Company discovered
that the price quoted to them by the defendant with regard to their two orders mentioned was not the net
price but rather the list price, and that the defendants had obtained a discount from the Starr Piano
Company. Moreover, by reading reviews and literature on prices of machinery and cinematograph
equipment, said officials of the plaintiff were convinced that the prices charged them by the defendant were
20
much too high including the charges for out-of-pocket expense. For these reasons, they sought to obtain a
reduction from the defendant or rather a reimbursement, and failing in this they brought the present action.
The trial court held that the contract between the petitioner and the respondent was one of outright purchase and
sale, and absolved that petitioner from the complaint. The appellate court, however, by a division of four, with one
justice dissenting held that the relation between petitioner and respondent was that of agent and principal, the
petitioner acting as agent of the respondent in the purchase of the equipment in question, and sentenced the
petitioner to pay the respondent alleged overpayments in the total sum of $1,335.52 or P2,671.04, together with legal
interest thereon from the date of the filing of the complaint until said amount is fully paid, as well as to pay the costs
of the suit in both instances. The appellate court further argued that even if the contract between the petitioner and
the respondent was one of purchase and sale, the petitioner was guilty of fraud in concealing the true price and
hence would still be liable to reimburse the respondent for the overpayments made by the latter.
The petitioner now claims that the following errors have been incurred by the appellate court:
I. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, segun hechos, entre la
recurrente y la recurrida existia una relacion implicita de mandataria a mandante en la transaccion de que
se trata, en vez de la de vendedora a compradora como ha declarado el Juzgado de Primera Instncia de
Manila, presidido entonces por el hoy Magistrado Honorable Marcelino Montemayor.
II. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, suponiendo que dicha relacion
fuerra de vendedora a compradora, la recurrente obtuvo, mediante dolo, el consentimiento de la recurrida
en cuanto al precio de $1,700 y $1,600 de las maquinarias y equipos en cuestion, y condenar a la
recurrente ha obtenido de la Starr Piano Company of Richmond, Indiana.
We sustain the theory of the trial court that the contract between the petitioner and the respondent was one of
purchase and sale, and not one of agency, for the reasons now to be stated.
In the first place, the contract is the law between the parties and should include all the things they are supposed to
have been agreed upon. What does not appear on the face of the contract should be regarded merely as "dealer's"
or "trader's talk", which can not bind either party. (Nolbrook v. Conner, 56 So., 576, 11 Am. Rep., 212; Bank v.
Brosscell, 120 III., 161; Bank v. Palmer, 47 III., 92; Hosser v. Copper, 8 Allen, 334; Doles v. Merrill, 173 Mass., 411.)
The letters, Exhibits 1 and 2, by which the respondent accepted the prices of $1,700 and $1,600, respectively, for the
sound reproducing equipment subject of its contract with the petitioner, are clear in their terms and admit no other
interpretation that the respondent in question at the prices indicated which are fixed and determinate. The
respondent admitted in its complaint filed with the Court of First Instance of Manila that the petitioner agreed to sellto
it the first sound reproducing equipment and machinery. The third paragraph of the respondent's cause of action
states:
3. That on or about November 19, 1929, the herein plaintiff (respondent) and defendant (petitioner)
entered into an agreement, under and by virtue of which the herein defendant was to secure from the
United States, and sell and deliver to the herein plaintiff, certain sound reproducing equipment and
machinery, for which the said defendant, under and by virtue of said agreement, was to receive the actual
cost price plus ten per cent (10%), and was also to be reimbursed for all out of pocket expenses in
connection with the purchase and delivery of such equipment, such as costs of telegrams, freight, and
similar expenses. (Emphasis ours.)
We agree with the trial judge that "whatever unforseen events might have taken place unfavorable to the defendant
(petitioner), such as change in prices, mistake in their quotation, loss of the goods not covered by insurance or failure
of the Starr Piano Company to properly fill the orders as per specifications, the plaintiff (respondent) might still legally
hold the defendant (petitioner) to the prices fixed of $1,700 and $1,600." This is incompatible with the pretended
relation of agency between the petitioner and the respondent, because in agency, the agent is exempted from all
liability in the discharge of his commission provided he acts in accordance with the instructions received from his
principal (section 254, Code of Commerce), and the principal must indemnify the agent for all damages which the
latter may incur in carrying out the agency without fault or imprudence on his part (article 1729, Civil Code).
While the latters, Exhibits 1 and 2, state that the petitioner was to receive ten per cent (10%) commission, this does
not necessarily make the petitioner an agent of the respondent, as this provision is only an additional price which the
respondent bound itself to pay, and which stipulation is not incompatible with the contract of purchase and sale.
(See Quiroga vs. Parsons Hardware Co., 38 Phil., 501.)

In the second place, to hold the petitioner an agent of the respondent in the purchase of equipment and machinery
from the Starr Piano Company of Richmond, Indiana, is incompatible with the admitted fact that the petitioner is the
exclusive agent of the same company in the Philippines. It is out of the ordinary for one to be the agent of both the
vendor and the purchaser. The facts and circumstances indicated do not point to anything but plain ordinary
transaction where the respondent enters into a contract of purchase and sale with the petitioner, the latter as
exclusive agent of the Starr Piano Company in the United States.

It follows that the petitioner as vendor is not bound to reimburse the respondent as vendee for any difference
between the cost price and the sales price which represents the profit realized by the vendor out of the transaction.
This is the very essence of commerce without which merchants or middleman would not exist.

The respondents contends that it merely agreed to pay the cost price as distinguished from the list price, plus ten per
cent (10%) commission and all out-of-pocket expenses incurred by the petitioner. The distinction which the
respondents seeks to draw between the cost price and the list price we consider to be spacious. It is to be observed
that the twenty-five per cent (25%) discount granted by the Starr piano Company to the petitioner is available only to
the latter as the former's exclusive agent in the Philippines. The respondent could not have secured this discount
from the Starr Piano Company and neither was the petitioner willing to waive that discount in favor of the respondent.
As a matter of fact, no reason is advanced by the respondent why the petitioner should waive the 25 per cent
discount granted it by the Starr Piano Company in exchange for the 10 percent commission offered by the
respondent. Moreover, the petitioner was not duty bound to reveal the private arrangement it had with the Starr
Piano Company relative to such discount to its prospective customers, and the respondent was not even aware of
such an arrangement. The respondent, therefore, could not have offered to pay a 10 per cent commission to the
petitioner provided it was given the benefit of the 25 per cent discount enjoyed by the petitioner. It is well known that
local dealers acting as agents of foreign manufacturers, aside from obtaining a discount from the home office,
sometimes add to the list price when they resell to local purchasers. It was apparently to guard against an
exhorbitant additional price that the respondent sought to limit it to 10 per cent, and the respondent is estopped from
questioning that additional price. If the respondent later on discovers itself at the short end of a bad bargain, it alone
must bear the blame, and it cannot rescind the contract, much less compel a reimbursement of the excess price, on
that ground alone. The respondent could not secure equipment and machinery manufactured by the Starr Piano
Company except from the petitioner alone; it willingly paid the price quoted; it received the equipment and machinery
as represented; and that was the end of the matter as far as the respondent was concerned. The fact that the
petitioner obtained more or less profit than the respondent calculated before entering into the contract or reducing
the price agreed upon between the petitioner and the respondent. Not every concealment is fraud; and short of fraud,
it were better that, within certain limits, business acumen permit of the loosening of the sleeves and of the
sharpening of the intellect of men and women in the business world.

The writ of certiorari should be, as it is hereby, granted. The decision of the appellate court is accordingly reversed
and the petitioner is absolved from the respondent's complaint in G. R. No. 1023, entitled "Arco Amusement
Company (formerly known as Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat & Sons, Inc., defendants-appellee,"
without pronouncement regarding costs. So ordered.

21
G.R. No. L-20871 April 30, 1971
KER & CO., LTD., petitioner, vs.JOSE B. LINGAD, as Acting Commissioner of Internal Revenue, respondent.
FERNANDO, J.:
Petitioner Ker & Co., Ltd. would have us reverse a decision of the Court of Tax Appeals, holding it liable as a
commercial broker under Section 194 (t) of the National Internal Revenue Code. Its plea, notwithstanding the
vigorous effort of its counsel, is not sufficiently persuasive. An obstacle, well-nigh insuperable stands in the way. The
decision under review conforms to and is in accordance with the controlling doctrine announced in the recent case
of Commissioner of Internal Revenue v. Constantino. 1 The decisive test, as therein set forth, is the retention of the
ownership of the goods delivered to the possession of the dealer, like herein petitioner, for resale to customers, the
price and terms remaining subject to the control of the firm consigning such goods. The facts, as found by
respondent Court, to which we defer, unmistakably indicate that such a situation does exist. The juridical
consequences must inevitably follow. We affirm.
It was shown that petitioner was assessed by the then Commissioner of Internal Revenue Melecio R. Domingo the
sum of P20,272.33 as the commercial broker's percentage tax, surcharge, and compromise penalty for the period
from July 1, 1949 to December 31, 1953. There was a request on the part of petitioner for the cancellation of such
assessment, which request was turned down. As a result, it filed a petition for review with the Court of Tax Appeals.
In its answer, the then Commissioner Domingo maintained his stand that petitioner should be taxed in such amount
as a commercial broker. In the decision now under review, promulgated on October 19, 1962, the Court of Tax
Appeals held petitioner taxable except as to the compromise penalty of P500.00, the amount due from it being fixed
at P19,772.33.
Such liability arose from a contract of petitioner with the United States Rubber International, the former being referred
to as the Distributor and the latter specifically designated as the Company. The contract was to apply to transactions
between the former and petitioner, as Distributor, from July 1, 1948 to continue in force until terminated by either
party giving to the other sixty days' notice. 2 The shipments would cover products "for consumption in Cebu, Bohol,
Leyte, Samar, Jolo, Negros Oriental, and Mindanao except [the] province of Davao", petitioner, as Distributor, being
precluded from disposing such products elsewhere than in the above places unless written consent would first be
obtained from the Company. 3 Petitioner, as Distributor, is required to exert every effort to have the shipment of the
products in the maximum quantity and to promote in every way the sale thereof. 4 The prices, discounts, terms of
payment, terms of delivery and other conditions of sale were subject to change in the discretion of the Company. 5
Then came this crucial stipulation: "The Company shall from time to time consign to the Distributor and the
Distributor will receive, accept and/or hold upon consignment the products specified under the terms of this
agreement in such quantities as in the judgment of the Company may be necessary for the successful solicitation
and maintenance of business in the territory, and the Distributor agrees that responsibility for the final sole of all
goods delivered shall rest with him. All goods on consignment shall remain the property of the Company until sold by
the Distributor to the purchaser or purchasers, but all sales made by the Distributor shall be in his name, in which the
sale price of all goods sold less the discount given to the Distributor by the Company in accordance with the
provision of paragraph 13 of this agreement, whether or not such sale price shall have been collected by the
Distributor from the purchaser or purchasers, shall immediately be paid and remitted by the Distributor to the
Company. It is further agreed that this agreement does not constitute Distributor the agent or legal representative 4
of the Company for any purpose whatsoever. Distributor is not granted any right or authority to assume or to create
any obligation or responsibility, express or implied, in behalf of or in the name of the Company, or to bind the
Company in any manner or thing whatsoever." 6
All specifications for the goods ordered were subject to acceptance by the Company with petitioner, as Distributor,
required to accept such goods shipped as well as to clear the same through customs and to arrange for delivery in its
warehouse in Cebu City. Moreover, orders are to be filled in whole or in part from the stocks carried by the
Company's neighboring branches, subsidiaries or other sources of Company's brands. 7 Shipments were to be
invoiced at prices to be agreed upon, with the customs duties being paid by petitioner, as Distributor, for account of
the Company. 8 Moreover, all resale prices, lists, discounts and general terms and conditions of local resale were to
be subject to the approval of the Company and to change from time to time in its discretion. 9 The dealer, as
Distributor, is allowed a discount of ten percent on the net amount of sales of merchandise made under such
22
agreement. 10 On a date to be determined by the Company, the petitioner, as Distributor, was required to report to it
data showing in detail all sales during the month immediately preceding, specifying therein the quantities, sizes and
types together with such information as may be required for accounting purposes, with the Company rendering an
invoice on sales as described to be dated as of the date of inventory and sales report. As Distributor, petitioner had
to make payment on such invoice or invoices on due date with the Company being privileged at its option to
terminate and cancel the agreement forthwith upon the failure to comply with this obligation. 11 The Company, at its
own expense, was to keep the consigned stock fully insured against loss or damage by fire or as a result of fire, the
policy of such insurance to be payable to it in the event of loss. Petitioner, as Distributor, assumed full responsibility
with reference to the stock and its safety at all times; and upon request of the Company at any time, it was to render
inventory of the existing stock which could be subject to change. 12 There was furthermore this equally tell-tale
covenant: "Upon the termination or any cancellation of this agreement all goods held on consignment shall be held
by the Distributor for the account of the Company, without expense to the Company, until such time as provision can
be made by the Company for disposition." 13
The issue with the Court of Tax Appeals, as with us now, is whether the relationship thus created is one of vendor
and vendee or of broker and principal. Not that there would have been the slightest doubt were it not for the
categorical denial in the contract that petitioner was not constituted as "the agent or legal representative of the
Company for any purpose whatsoever." It would be, however, to impart to such an express disclaimer a meaning it
should not possess to ignore what is manifestly the role assigned to petitioner considering the instrument as a whole.
That would be to lose sight altogether of what has been agreed upon. The Court of Tax Appeals was not misled in
the language of the decision now on appeal: "That the petitioner Ker & Co., Ltd. is, by contractual stipulation, an
agent of U.S. Rubber International is borne out by the facts that petitioner can dispose of the products of the
Company only to certain persons or entities and within stipulated limits, unless excepted by the contract or by the
Rubber Company (Par. 2); that it merely receives, accepts and/or holds upon consignment the products, which
remain properties of the latter company (Par. 8); that every effort shall be made by petitioner to promote in every way
the sale of the products (Par. 3); that sales made by petitioner are subject to approval by the company (Par. 12); that
on dates determined by the rubber company, petitioner shall render a detailed report showing sales during the month
(Par. 14); that the rubber company shall invoice the sales as of the dates of inventory and sales report (Par. 14); that
the rubber company agrees to keep the consigned goods fully insured under insurance policies payable to it in case
of loss (Par. 15); that upon request of the rubber company at any time, petitioner shall render an inventory of the
existing stock which may be checked by an authorized representative of the former (Par. 15); and that upon
termination or cancellation of the Agreement, all goods held on consignment shall be held by petitioner for the
account of the rubber company until their disposition is provided for by the latter (Par. 19). All these circumstances
are irreconcilably antagonistic to the idea of an independent merchant." 14 Hence its conclusion: "However, upon
analysis of the contract, as a whole, together with the actual conduct of the parties in respect thereto, we have
arrived at the conclusion that the relationship between them is one of brokerage or agency." 15 We find ourselves in
agreement, notwithstanding the able brief filed on behalf of petitioner by its counsel. As noted at the outset, we
cannot heed petitioner's plea for reversal.
1. According to the National Internal Revenue Code, a commercial broker "includes all persons, other than importers,
manufacturers, producers, or bona fide employees, who, for compensation or profit, sell or bring about sales or
purchases of merchandise for other persons or bring proposed buyers and sellers together, or negotiate freights or
other business for owners of vessels or other means of transportation, or for the shippers, or consignors or
consignees of freight carried by vessels or other means of transportation. The term includes commission
merchants." 16 The controlling decision as to the test to be followed as to who falls within the above definition of a
commercial broker is that of Commissioner of Internal Revenue v. Constantino. 17 In the language of Justice J. B. L.
Reyes, who penned the opinion: "Since the company retained ownership of the goods, even as it delivered
possession unto the dealer for resale to customers, the price and terms of which were subject to the company's
control, the relationship between the company and the dealer is one of agency, ... ." 18 An excerpt from Salisbury v.
Brooks 19 cited in support of such a view follows: " 'The difficulty in distinguishing between contracts of sale and the
creation of an agency to sell has led to the establishment of rules by the application of which this difficulty may be
solved. The decisions say the transfer of title or agreement to transfer it for a price paid or promised is the essence of
sale. If such transfer puts the transferee in the attitude or position of an owner and makes him liable to the transferor
as a debtor for the agreed price, and not merely as an agent who must account for the proceeds of a resale, the
transaction is a sale; while the essence of an agency to sell is the delivery to an agent, not as his property, but as the
property of the principal, who remains the owner and has the right to control sales, fix the price, and terms, demand
and receive the proceeds less the agent's commission upon sales made.' " 20 The opinion relied on the work of
Mechem on Sales as well as Mechem on Agency. Williston and Tiedman both of whom wrote treatises on Sales,
were likewise referred to.
Equally relevant is this portion of the Salisbury opinion: "It is difficult to understand or appreciate the necessity or
presence of these mutual requirements and obligations on any theory other than that of a contract of agency.
Salisbury was to furnish the mill and put the timber owned by him into a marketable condition in the form of lumber;
Brooks was to furnish the funds necessary for that purpose, sell the manufactured product, and account therefor to
Salisbury upon the specific terms of the agreement, less the compensation fixed by the parties in lieu of interest on
the money advanced and for services as agent. These requirements and stipulations are in tent with any other
conception of the contract. If it constitutes an agreement to sell, they are meaningless. But they cannot be ignored.
They were placed there for some purpose, doubtless as the result of definite antecedent negotiations therefore,
consummated by the final written expression of the agreement." 21 Hence the Constantino opinion could categorically
affirm that the mere disclaimer in a contract that an entity like petitioner is not "the agent or legal representative for
any purpose whatsoever" does not suffice to yield the conclusion that it is an independent merchant if the control
over the goods for resale of the goods consigned is pervasive in character. The Court of Tax Appeals decision now
under review pays fealty to such an applicable doctrine.

2. No merit therefore attaches to the first error imputed by petitioner to the Court of Tax Appeals. Neither did such
Court fail to appreciate in its true significance the act and conduct pursued in the implementation of the contract by
both the United States Rubber International and petitioner, as was contended in the second assignment of error.
Petitioner ought to have been aware that there was no need for such an inquiry. The terms of the contract, as noted,
speak quite clearly. There is lacking that degree of ambiguity sufficient to give rise to serious doubt as to what was
contemplated by the parties. A reading thereof discloses that the relationship arising therefrom was not one of seller
and purchaser. If it were thus intended, then it would not have included covenants which in their totality would negate
the concept of a firm acquiring as vendee goods from another. Instead, the stipulations were so worded as to lead to
no other conclusion than that the control by the United States Rubber International over the goods in question is, in
the language of the Constantino opinion, "pervasive". The insistence on a relationship opposed to that apparent from
the language employed might even yield the impression that such a mode of construction was resorted to in order
that the applicability of a taxing statute might be rendered nugatory. Certainly, such a result is to be avoided.

Nor is it to be lost sight of that on a matter left to the discretion of the Court of Tax Appeals which has developed an
expertise in view of its function being limited solely to the interpretation of revenue laws, this Court is not prepared to
substitute its own judgment unless a grave abuse of discretion is manifest. It would be to frustrate the objective for
which administrative tribunals are created if the judiciary, absent such a showing, is to ignore their appraisal on a
matter that forms the staple of their specialized competence. While it is to be admitted that counsel for petitioner did
scrutinize with care the decision under review with a view to exposing what was considered its flaws, it cannot be
said that there was such a failure to apply what the law commands as to call for its reversal. Instead, what cannot be
denied is that the Court of Tax Appeals reached a result to which the Court in the recent Constantino decision gave
the imprimatur of its approval.

WHEREFORE, the Court of Tax Appeals decision of October 19, 1962 is affirmed. With costs against petitioner.

23
G.R. No. 75198 October 18, 1988 RJL MARTINEZ is engaged in the business of deep-sea fishing. As RJL MARTINEZ needed electric generators for
some of its boats and SCHMIID sold electric generators of different brands, negotiations between them for the
acquisition thereof took place. The parties had two separate transactions over "Nagata"-brand generators.
SCHMID & OBERLY, INC., petitioner, vs.RJL MARTINEZ FISHING CORPORATION, respondent.

The first transaction was the sale of three (3) generators. In this transaction, it is not disputed that SCHMID was the
CORTES, J.:
vendor of the generators. The company supplied the generators from its stockroom; it was also SCHMID which
invoiced the sale.
Petitioner seeks reversal of the decision and the resolution of the Court of Appeals, ordering Schmid & Oberly Inc.
(hereafter to be referred to simply as "SCHMID") to refund the purchase price paid by RJL Martinez Fishing
The second transaction, which gave rise to the present controversy, involves twelve (12) "Nagata"-brand generators.
Corporation (hereafter to be referred to simply as "RJL MARTINEZ") to D. Nagata Co., Ltd. of Japan (hereafter to be
'These are the facts surrounding this particular transaction:
referred to simply as NAGATA CO.") for twelve (12) defective "Nagata"-brand generators, plus consequential
damages, and attorneys fees.
As RJL MARTINEZ was canvassing for generators, SC gave RJL MARTINEZ its Quotation dated August 19, 1975
[Exhibit 'A"] for twelve (12) "Nagata'-brand generators with the following specifications:
The facts as found by the Court of Appeals, are as follows:

"NAGATA" Single phase AC Alternators, 110/220 V, 60 cycles, 1800 rpm, unity power factor,
The findings of facts by the trial court (Decision, pp. 21-28, Record on Appeal) shows: that the
rectifier type and radio suppressor,, 5KVA (5KW) $546.75 @
plaintiff RJL Martinez Fishing Corporation is engaged in deep-sea fishing, and in the course of
its business, needed electrical generators for the operation of its business; that the defendant
sells electrical generators with the brand of "Nagata", a Japanese product; that the supplier is It was stipulated that payment would be made by confirming an irrevocable letter of credit in favor of NAGATA CO.
the manufacturer, the D. Nagata Co. Ltd., of Japan, that the defendant Schmid & Oberly Inc. Furthermore, among the General Conditions of Sale appearing on the dorsal side of the Quotation is the following:
advertised the 12 Nagata generators for sale; that the plaintiff purchased 12 brand new Nagata
generators, as advertised by herein defendant; that through an irrevocable line of credit, the D.
Buyer will, upon request, promptly open irrevocable Letter of Credit in favor of seller, in the
Nagata Co., Ltd., shipped to the plaintiff 12 electric generators, and the latter paid the amount of
amount stated on the face of this memorandum, specifying shipment from any Foreign port to
the purchase price; that the 12 generators were found to be factory defective; that the plaintiff
Manila or any safe Philippine port, permitting partial shipments and providing that in the event
informed the defendant herein that it shall return the 12 generators as in fact three of the 12
the shippers are unable to ship within the specified period due to strikes, lack of shipping space
were actually returned to the defendant; that the plaintiff sued the defendant on the warranty;
or other circumstances beyond their reasonable control, Buyer agrees to extend the said Letter
asking for rescission of the contract; that the defendant be ordered to accept the generators and
of Credit for later shipment. The Letter of Credit shall otherwise be subject to the conditions
be ordered to pay back the purchase money; and that the plaintiff asked for damages. (Record
stated in this memorandum of contract. [Emphasis supplied.]
on Appeal, pp. 27-28) [CA Decision, pp. 34; Rollo, pp. 47-48.]

Agreeing with the terms of the Quotation, RJL MARTINEZ opened a letter of credit in favor of NAGATA CO.
On the basis thereof, the Court of Appeals affirmed the decision of the trial court ordering petitioner to refund to
Accordingly, on November 20,1975, SCHMID transmitted to NAGATA CO. an order [Exhibit "4"] for the twelve (12)
private respondent the purchase price for the twelve (12) generators and to accept delivery of the same and to pay s
generators to be shipped directly to RJL MARTINEZ. NAGATA CO. thereafter sent RJL MARTINEZ the bill of lading
and attorney's fees, with a slight modification as to the amount to be refunded. In its resolution of the motion for
and its own invoice (Exhibit "B") and, in accordance with the order, shipped the generators directly to RJL
reconsideration, the Court of Appeals further modified the trial courts decision as to the award of consequential
MARTINEZ. The invoice states that "one (1) case of 'NAGATA' AC Generators" consisting of twelve sets was
damages.
bought by order and for account risk of Messrs. RJL Martinez Fishing Corporation.

Ordinarily, the Court will not disturb the findings of fact of the Court of Appeals in petitions to review the latter's
decisions under Rule 45 of the Revised Rules of Court, the scope of the Court's inquiry being limited to a review of
the imputed errors of law [Chan v. Court of Appeals, G.R. No. L-27488, June 30, 1970, 33 SCRA 77; Tiongco v. De
la Merced, G.R. No. L-24426, July 25, 1974, 58 SCRA 89; Corona v. Court of Appeals, G.R. No. 62482, April 28,
1983, 121 SCRA 865; Baniqued v. Court of Appeals, G.R. No.
L-47531, January 30, 1984, 127 SCRA 596.] However, when, as in this case, it is the petitioner's position that the
appealed judgment is premised on a misapprehension of
facts, * the Court is compelled to review the Court of Appeal's factual findings [De la Cruz v. Sosing, 94 Phil. 26
(1953); Castillo v. Court of Appeals, G.R. No. I,48290, September 29, 1983, 124 SCRA 808.]
Considering the sketchiness of the respondent court's narration of facts, whether or not the Court of Appeals indeed
misapprehended the facts could not be determined without a thorough review of the records.
For its efforts, SCHMID received from NAGATA CO. a commission of $1,752.00 for the sale of the twelve generators
to RJL MARTINEZ. [Exhibits "9", "9-A", "9-B" and "9-C".]
All fifteen (15) generators subject of the two transactions burned out after continuous use. RJL MARTINEZ informed
SCHMID about this development. In turn, SCHMID brought the matter to the attention of NAGATA CO. In July 1976,
NAGATA CO. sent two technical representatives who made an ocular inspection and conducted tests on some of the
burned out generators, which by then had been delivered to the premises of SCHMID.
The tests revealed that the generators were overrated. As indicated both in the quotation and in the invoice, the
capacity of a generator was supposed to be 5 KVA (kilovolt amperes). However, it turned out that the actual capacity
was only 4 KVA.

Thus, after a careful scrutiny of the records, the Court has found the appellate court's narration of facts incomplete. It SCHMID replaced the three (3) generators subject of the first sale with generators of a different brand.
failed to include certain material facts.
As for the twelve (12) generators subject of the second transaction, the Japanese technicians advised RJL
The facts are actually as follows: MARTINEZ to ship three (3) generators to Japan, which the company did. These three (3) generators were repaired
by NAGATA CO. itself and thereafter returned to RJL MARTINEZ; the remaining nine (9) were neither repaired nor
replaced. NAGATA CO., however, wrote SCHMID suggesting that the latter check the generators, request for spare

24
parts for replacement free of charge, and send to NAGATA CO. SCHMID's warranty claim including the labor cost for
repairs [Exhibit "I".] In its reply letter, SCHMID indicated that it was not agreeable to these terms [Exhibit "10".]
As not all of the generators were replaced or repaired, RJL MARTINEZ formally demanded that it be refunded the
cost of the generators and paid damages. SCHMID in its reply maintained that it was not the seller of the twelve (12)
generators and thus refused to refund the purchase price therefor. Hence, on February 14, 1977, RJL MARTINEZ
brought suit against SCHMID on the theory that the latter was the vendor of the twelve (12) generators and, as such
vendor, was liable under its warranty against hidden defects.
Both the trial court and the Court of Appeals upheld the contention of RJL MARTINEZ that SCHMID was the vendor
in the second transaction and was liable under its warranty. Accordingly, the courts a quo rendered judgment in favor
of RJL MARTINEZ. Hence, the instant recourse to this Court.
In this petition for review, SCHMID seeks reversal on the following grounds:
(i) Schmid was merely the indentor in the sale [of the twelve (12) generators] between Nagata
Co., the exporter and RJL Martinez, the importer;
(ii) as mere indentor, Schmid is not liable for the seller's implied warranty against hidden defects,
Schmid not having personally assumed any such warranty.
(iii) in any event, conformably with Article 1563 of the Civil Code, there was no implied warranty
against hidden defects in the sale of these twelve (12) generators because these were sold
under their trade name "Nagata"; and
(iv) Schmid, accordingly, is not liable for the reimbursement claimed by RJL Martinez nor for the
latter's unsubstantiated claim of PI 10.33 operational losses a day nor for exemplary damages,
attorney's fees and costs. [Petition, p. 6.]
1. As may be expected, the basic issue confronting this Court is whether the second transaction between the parties
was a sale or an indent transaction. SCHMID maintains that it was the latter; RJL MARTINEZ claims that it was a
sale.
At the outset, it must be understood that a contract is what the law defines it to be, considering its essential
elements, and not what it is caged by the contracting parties [Quiroga v. Parsons Hardware Co., 38 Phil. 501 (1918).]
The Civil Code defines a contract of sale, thus:
ART. 458. By the contract of sale one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in
money or its equivalent.
It has been said that the essence of the contract of sale is transfer of title or agreement to transfer it for a price paid
or promised [Commissioner of Internal Revenue v. Constantino, G.R. No. L-25926, February 27, 1970, 31 SCRA
779, 785, citing Salisbury v. Brooks, 94 SE 117,118-19.] "If such transfer puts the transferee in the attitude or
position of an owner and makes him liable to the transferor as a debtor for the agreed price, and not merely as an
agent who must account for the proceeds of a resale, the transaction is, a sale." [Ibid.]
On the other hand, there is no statutory definition of "indent" in this jurisdiction. However, the Rules and Regulations
to Implement Presidential Decree No. 1789 (the Omnibus Investments Code) lumps "indentors" together with
"commercial brokers" and "commission merchants" in this manner:
25
... A foreign firm which does business through the middlemen acting in their own names, such
asindentors, commercial brokers or commission merchants, shall not be deemed doing business
in the Philippines. But such indentors, commercial brokers or commission merchants shall be the
ones deemed to be doing business in the Philippines [Part I, Rule I, Section 1, par. g (1).]
Therefore, an indentor is a middlemen in the same class as commercial brokers and commission merchants. To get
an Idea of what an indentor is, a look at the definition of those in his class may prove helpful.
A broker is generally defined as one who is engaged, for others, on a commission, negotiating
contracts relative to property with the custody of which he has no concern; the negotiator
between other parties, never acting in his own name but in the name of those who employed
him; he is strictly a middleman and for some purpose the agent of both parties. (1 9 Cyc 186;
Henderson vs. The State, 50 Ind., 234; Black's Law Dictionary.) A broker is one whose
occupation it is to bring parties together to bargain, or to bargain for them, in matters of trade,
commerce or navigation. Mechem on Agency, sec. 13; Wharton on Agency, sec. 695.) Judge
Storey, in his work on Agency, defines a broker as an agent employed to make bargains and
contracts between other persons, in matters of trade, commerce or navigation, for compensation
commonly called brokerage. (Storey on Agency, sec. 28.) [Behn Meyer and Co., Ltd. v. Nolting
and Garcia, 35 Phil. 274, 279-80 (1916).]
A commission merchant is one engaged in the purchase or sale for another of personal property
which, for this purpose, is placed in his possession and at his disposal. He maintains a relation
not only with his principal and the purchasers or vendors, but also with the property which is
subject matter of the transaction. [Pacific Commercial Co. v. Yatco, 68 Phil. 398, 401 (1939).]
Thus, the chief feature of a commercial broker and a commercial merchant is that in effecting a sale, they are merely
intermediaries or middle-men, and act in a certain sense as the agent of both parties to the transaction.
Webster defines an indent as "a purchase order for goods especially when sent from a foreign country." [Webster's
Ninth New Collegiate Dictionary 612 (1986).] It would appear that there are three parties to an indent transaction,
namely, the buyer, the indentor, and the supplier who is usually a non-resident manufacturer residing in the country
where the goods are to be bought [Commissioner of Internal Revenue v. Cadwallader Pacific Company, G.R. No. L-
20343, September 29, 1976, 73 SCRA 59.] An indentor may therefore be best described as one who, for
compensation, acts as a middleman in bringing about a purchase and sale of goods between a foreign supplier and
a local purchaser.
Coming now to the case at bar, the admissions of the parties and the facts appearing on record more than suffice to
warrant the conclusion that SCHMID was not a vendor, but was merely an indentor, in the second transaction.
In its complaint, RJL MARTINEZ admitted that the generators were purchased "through indent order" [Record on
Appeal, p. 6.] In the same vein, it admitted in its demand letter previously sent to SCHMID that twelve (12) of en (15)
Nagata-brand generators "were purchased through your company (SCHMID), by indent order and three (3) by direct
purchase." [Exhibit "D".] The evidence also show that RJL MARTINEZ paid directly NAGATA CO, for the generators,
and that the latter company itself invoiced the sale [Exhibit "B"], and shipped the generators directly to the former.
The only participation of SCHMID was to act as an intermediary or middleman between NAGATA CO. and RJL
MARTINEZ, by procuring an order from RJL MARTINEZ and forwarding the same to NAGATA CO. for which the
company received a commission from NAGATA CO. [Exhibits "9", "9-A", "9-B" and "9-C".]
The above transaction is significantly different from the first transaction wherein SCHMID delivered the goods from
its own stock (which it had itself imported from NAGATA CO.), issued its own invoice, and collected payment directly
from the purchaser.
These facts notwithstanding, RJL MARTINEZ insists that SCHMID was the vendor of the twelve generators on the
following grounds:
First, it is contended that the Quotation and the General Conditions of Sale on the dorsal side thereof do not Finally, the afore-quoted penal provision in the Corporation Law finds no application to SCHMID and its officers and
necessarily lead to the conclusion that NAGATA CO., and not SCHMID, was the real seller in the case of the twelve employees relative to the transactions in the instant case. What the law seeks to prevent, through said provision, is
(12) generators in that: the circumvention by foreign corporations of licensing requirements through the device of employing local
representatives. An indentor, acting in his own name, is not, however, covered by the above-quoted provision. In
fact, the provision of the Rules and Regulations implementing the Omnibus Investments Code quoted above, which
(i) the signing of the quotation, which was under SCHMID's letter-head, perfected the contract of
was copied from the Rules implementing Republic Act No. 5455, recognizes the distinct role of an indentor, such that
sale (impliedly, as between the signatories theretoi.e., RJL MARTINEZ and SCHMID);
when a foreign corporation does business through such indentor, the foreign corporation is not deemed doing
business in the Philippines.
(ii) the qualification that the letter of credit shall be in favor of NAGATA CO. constituted simply
the manner of payment requested by SCHMID (implying that SCHMID, as seller, merely chose
In view of the above considerations, this Court rules that SCHMID was merely acting as an indentor in the purchase
to waive direct payment, stipulating delivery of payment instead to NAGATA CO. as supplier);
and sale of the twelve (12) generators subject of the second transaction. Not being the vendor, SCHMID cannot be
held liable for the implied warranty for hidden defects under the Civil Code [Art. 1561, et seq.]
Second, it is asserted that the acts of SCHMID after it was informed of the defect in the generators were indicative of
its awareness that it was the vendor and acknowledgment of its liability as such vendor. Attention is called to these
2. However, even as SCHMID was merely an indentor, there was nothing to prevent it from voluntarily warranting
facts: When RJL MARTINEZ complained to SCHMID that the generators were defective, SCHMID immediately
that twelve (12) generators subject of the second transaction are free from any hidden defects. In other words,
asked RJL MARTINEZ to send the defective generators to its shop to determine what was wrong. SCHMID likewise
SCHMID may be held answerable for some other contractual obligation, if indeed it had so bound itself. As stated
informed NAGATA CO. about the complaint of RJL MARTINEZ. When the Japanese technicians arrived, SCHMID
above, an indentor is to some extent an agent of both the vendor and the vendee. As such agent, therefore, he may
made available its technicians, its shop and its testing equipment. After the generators were found to have factory
expressly obligate himself to undertake the obligations of his principal (See Art. 1897, Civil Code.)
defects, SCHMID facilitated the shipment of three (3) generators to Japan and, after their repair, back to the
Philippines [Memorandum for the Respondent, p. 8.]
The Court's inquiry, therefore, shifts to a determination of whether or not SCHMID expressly bound itself to warrant
that the twelve (12) generators are free of any hidden defects.
Third, it is argued that the contents of the letter from NAGATA CO. to SCHMID regarding the repair of the generators
indicated that the latter was "within the purview of a seller." [Ibid.]
Again, we consider the facts.
Fourth, it is argued that if SCHMID is considered as a mere agent of NAGATA CO., a foreign corporation not
licensed to do business in the Philippines, then the officers and employees of the former may be penalized for The Quotation (Exhibit A is in writing. It is the repository of the contract between RJL MARTINEZ and SCHMID.
violation of the old Corporation Law which provided: Notably, nowhere is it stated therein that SCHMID did bind itself to answer for the defects of the things sold. There
being no allegation nor any proof that the Quotation does not express the true intent and agreement of the
contracting parties, extrinsic parol evidence of warranty will be to no avail [See Rule 123, Sec. 22.]
Sec. 69 ... Any officer or agent of the corporation or any person transacting business for any
foreign corporation not having the license prescribed shall be punished by imprisonment for not
less than six months nor more than two years or by a fine 'of not less than two hundred pesos The trial court, however, relied on the testimony of Patrocinio Balagtas, the head of the Electrical Department of RJL
nor more than one thousand pesos or both such imprisonment and fine, in the discretion of the MARTINEZ, to support the finding that SCHMID did warrant the twelve (12) generators against defects.
Court.
Upon careful examination of Balagtas' testimony, what is at once apparent is that Balagtas failed to disclose the
The facts do not bear out these contentions. nature or terms and conditions of the warranty allegedly given by SC Was it a warranty that the generators would be
fit for the fishing business of the buyer? Was it a warranty that the generators to be delivered would meet the
specifications indicated in the Quotation? Considering the different kinds of warranties that may be contracted,
The first contention disregards the circumstances surrounding the second transaction as distinguished from those
unless the nature or terms and conditions of the warranty are known, it would not be possible to determine whether
surrounding the first transaction, as noted above.
there has been a breach thereof.

Neither does the solicitous manner by which SCHMID responded to RJL MARTINEZ's complaint prove that the
Moreover, a closer examination of the statements allegedly made by the representative of SCHMID reveals that they
former was the seller of the generators. As aptly stated by counsel, no indentor will just fold its hands when a client
merely constituted an expression of opinion which cannot by any means be construed as a warranty [See Art. 1546,
complains about the goods it has bought upon the indentor's mediation. In its desire to promote the product of the
Civil Code.]
seller and to retain the goodwill of the buyer, a prudent indentor desirous of maintaining his business would have to
act considerably. towards his clients.
We quote from Balagtas' testimony:
Note that in contrast to its act of replacing the three (3) generators subject of the first transaction, SCHMID did not
replace any of the twelve (12) generators, but merely rendered assistance to both RJL TINES and NAGATA CO. so Atty. CATRAL:
that the latter could repair the defective generators.
Q Did you not say at the start of your cross examination, Mr. Balagtas, that
The proposal of NAGATA CO. rejected by SCHMID that the latter undertake the repair of the nine (9) other defective the only participation you had in the acquisition of those twelve (12) units
generators, with the former supplying the replacement parts free of charge and subsequently reimbursing the latter [of] generators was your having issued a purchase order to your own
for labor costs [Exhibit "I"], cannot support the conclusion that SCHMID is vendor of the generators of the second company for the purchase of the units?
transaction or was acting "within the purview of a seller."
ATTY. AQUINO:

26
 Misleading, your Honor.

Atty. CATRAL:

I am asking the witness.

COURT:

He has the right to ask that question because he is on cross. Moreover, if I

remember, he mentioned something like that. Witness may answer.

A Yes, sir. Before I submitted that, we negotiated with Schmid and Oberly
the beat generators they can recommend because we are looking for
generators. The representative of Schmid and Oberly said that Nagata is
very good. That is why I recommended that to the management. [t.s.n.,
October 14, 1977, pp. 23-25.]

At any rate, when asked where SCHMID's warranty was contained, Balagtas testified initially that it was in the
receipts covering the sale. (At this point, it may be stated that the invoice [Exhibit "B-l"] was issued by NAGATA CO.
and nowhere is it stated therein that SCHMID warranted the generators against defects.) When confronted with a
copy of the invoice issued by NAGATA CO., he changed his assertion and claimed that what he meant was that the
date of the commencement of the period of SCHMID's warranty would be based on the date of the invoice. On
further examination, he again changed his mind and asserted that the warranty was given verbally [TSN, October 14,
1977, pp. 19-22.] But then again, as stated earlier, the witness failed to disclose the nature or terms and conditions of
the warranty allegedly given by SCHMID.

On the other hand, Hernan Adad SCHMID's General Manager, was categorical that the company does not warrant
goods bought on indent and that the company warrants only the goods bought directly from it, like the three
generators earlier bought by RJL MARTINEZ itself [TSN, December 19, 1977, pp. 63-64.] It must be recalled that
SCHMID readily replaced the three generators from its own stock. In the face of these conflicting testimonies, this
Court is of the view that RJL has failed to prove that SCHMID had given a warranty on the twelve (12) generators
subject of the second transaction. Even assuming that a warranty was given, there is no way to determine whether
there has been a breach thereof, considering that its nature or terms and conditions have not been shown.

3. In view of the foregoing, it becomes unnecessary to pass upon the other issues.

WHEREFORE, finding the Court of Appeals to have committed a reversible error, the petition is GRANTED and the
appealed Decision and Resolution of the Court of Appeals are REVERSED. The complaint of RJL Martinez Fishing
Corporation is hereby DISMISSED. No costs.

SO ORDERED.

27
G.R. No. 117356 June 19, 2000 discovered that Teresita Ng Go who testified for CSC was the same Teresita Ng Sy who could not be reached
through summons.7 CSC, however, did not bother to pursue its case against her, but instead used her as its witness.
VICTORIAS MILLING CO., INC., petitioner, vs.COURT OF APPEALS and CONSOLIDATED SUGAR
CORPORATION, respondents. CSC's complaint alleged that STM had fully paid petitioner for the sugar covered by SLDR No. 1214M. Therefore,
the latter had no justification for refusing delivery of the sugar. CSC prayed that petitioner be ordered to deliver the
23,000 bags covered by SLDR No. 1214M and sought the award of P1,104,000.00 in unrealized profits,
D E C I S I O N QUISUMBING, J.:
P3,000,000.00 as exemplary damages, P2,200,000.00 as attorney's fees and litigation expenses.

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the decision of the Court
Petitioner's primary defense a quo was that it was an unpaid seller for the 23,000 bags.8 Since STM had already
of Appeals dated February 24, 1994, in CA-G.R. CV No. 31717, as well as the respondent court's resolution of
drawn in full all the sugar corresponding to the amount of its cleared checks, it could no longer authorize further
September 30, 1994 modifying said decision. Both decision and resolution amended the judgment dated February
delivery of sugar to CSC. Petitioner also contended that it had no privity of contract with CSC.
13, 1991, of the Regional Trial Court of Makati City, Branch 147, in Civil Case No. 90-118.

Petitioner explained that the SLDRs, which it had issued, were not documents of title, but mere delivery receipts
The facts of this case as found by both the trial and appellate courts are as follows:
issued pursuant to a series of transactions entered into between it and STM. The SLDRs prescribed delivery of the
sugar to the party specified therein and did not authorize the transfer of said party's rights and interests.
St. Therese Merchandising (hereafter STM) regularly bought sugar from petitioner Victorias Milling Co., Inc., (VMC).
In the course of their dealings, petitioner issued several Shipping List/Delivery Receipts (SLDRs) to STM as proof of
Petitioner also alleged that CSC did not pay for the SLDR and was actually STM's co-conspirator to defraud it
purchases. Among these was SLDR No. 1214M, which gave rise to the instant case. Dated October 16, 1989, SLDR
through a misrepresentation that CSC was an innocent purchaser for value and in good faith. Petitioner then prayed
No. 1214M covers 25,000 bags of sugar. Each bag contained 50 kilograms and priced at P638.00 per bag as "per
that CSC be ordered to pay it the following sums: P10,000,000.00 as moral damages; P10,000,000.00 as exemplary
sales order VMC Marketing No. 042 dated October 16, 1989."1 The transaction it covered was a "direct sale."2 The
damages; and P1,500,000.00 as attorney's fees. Petitioner also prayed that cross-defendant STM be ordered to pay
SLDR also contains an additional note which reads: "subject for (sic) availability of a (sic) stock at NAWACO
it P10,000,000.00 in exemplary damages, and P1,500,000.00 as attorney's fees.
(warehouse)."3

Since no settlement was reached at pre-trial, the trial court heard the case on the merits.
On October 25, 1989, STM sold to private respondent Consolidated Sugar Corporation (CSC) its rights in SLDR No.
1214M for P 14,750,000.00. CSC issued one check dated October 25, 1989 and three checks postdated November
13, 1989 in payment. That same day, CSC wrote petitioner that it had been authorized by STM to withdraw the sugar As earlier stated, the trial court rendered its judgment favoring private respondent CSC, as follows:
covered by SLDR No. 1214M. Enclosed in the letter were a copy of SLDR No. 1214M and a letter of authority from
STM authorizing CSC "to withdraw for and in our behalf the refined sugar covered by Shipping List/Delivery Receipt-
"WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff and against
Refined Sugar (SDR) No. 1214 dated October 16, 1989 in the total quantity of 25,000 bags."4
defendant Victorias Milling Company:

On October 27, 1989, STM issued 16 checks in the total amount of P31,900,000.00 with petitioner as payee. The
"1) Ordering defendant Victorias Milling Company to deliver to the plaintiff 23,000 bags of refined sugar
latter, in turn, issued Official Receipt No. 33743 dated October 27, 1989 acknowledging receipt of the said checks in
due under SLDR No. 1214;
payment of 50,000 bags. Aside from SLDR No. 1214M, said checks also covered SLDR No. 1213.

"2) Ordering defendant Victorias Milling Company to pay the amount of P920,000.00 as unrealized profits,
Private respondent CSC surrendered SLDR No. 1214M to the petitioner's NAWACO warehouse and was allowed to
the amount of P800,000.00 as exemplary damages and the amount of P1,357,000.00, which is 10% of the
withdraw sugar. However, after 2,000 bags had been released, petitioner refused to allow further withdrawals of
acquisition value of the undelivered bags of refined sugar in the amount of P13,570,000.00, as attorney's
sugar against SLDR No. 1214M. CSC then sent petitioner a letter dated January 23, 1990 informing it that SLDR No.
fees, plus the costs.
1214M had been "sold and endorsed" to it but that it had been refused further withdrawals of sugar from petitioner's
warehouse despite the fact that only 2,000 bags had been withdrawn. 5 CSC thus inquired when it would be allowed
to withdraw the remaining 23,000 bags. "SO ORDERED."9

On January 31, 1990, petitioner replied that it could not allow any further withdrawals of sugar against SLDR No.
1214M because STM had already dwithdrawn all the sugar covered by the cleared checks. 6
On March 2, 1990, CSC sent petitioner a letter demanding the release of the balance of 23,000 bags.
Seven days later, petitioner reiterated that all the sugar corresponding to the amount of STM's cleared checks had
been fully withdrawn and hence, there would be no more deliveries of the commodity to STM's account. Petitioner
also noted that CSC had represented itself to be STM's agent as it had withdrawn the 2,000 bags against SLDR No.
1214M "for and in behalf" of STM.
On April 27, 1990, CSC filed a complaint for specific performance, docketed as Civil Case No. 90-1118. Defendants
were Teresita Ng Sy (doing business under the name of St. Therese Merchandising) and herein petitioner. Since the
former could not be served with summons, the case proceeded only against the latter. During the trial, it was
It made the following observations:
"[T]he testimony of plaintiff's witness Teresita Ng Go, that she had fully paid the purchase price of P15,950,000.00 of
the 25,000 bags of sugar bought by her covered by SLDR No. 1214 as well as the purchase price of P15,950,000.00
for the 25,000 bags of sugar bought by her covered by SLDR No. 1213 on the same date, October 16, 1989 (date of
the two SLDRs) is duly supported by Exhibits C to C-15 inclusive which are post-dated checks dated October 27,
1989 issued by St. Therese Merchandising in favor of Victorias Milling Company at the time it purchased the 50,000
bags of sugar covered by SLDR No. 1213 and 1214. Said checks appear to have been honored and duly credited to
the account of Victorias Milling Company because on October 27, 1989 Victorias Milling Company issued official
receipt no. 34734 in favor of St. Therese Merchandising for the amount of P31,900,000.00 (Exhibits B and B-1). The
testimony of Teresita Ng Go is further supported by Exhibit F, which is a computer printout of defendant Victorias
Milling Company showing the quantity and value of the purchases made by St. Therese Merchandising, the SLDR
no. issued to cover the purchase, the official reciept no. and the status of payment. It is clear in Exhibit 'F' that with
respect to the sugar covered by SLDR No. 1214 the same has been fully paid as indicated by the word 'cleared'
appearing under the column of 'status of payment.'

28
"On the other hand, the claim of defendant Victorias Milling Company that the purchase price of the 25,000 bags of
sugar purchased by St. Therese Merchandising covered by SLDR No. 1214 has not been fully paid is supported only
by the testimony of Arnulfo Caintic, witness for defendant Victorias Milling Company. The Court notes that the
testimony of Arnulfo Caintic is merely a sweeping barren assertion that the purchase price has not been fully paid
and is not corroborated by any positive evidence. There is an insinuation by Arnulfo Caintic in his testimony that the
postdated checks issued by the buyer in payment of the purchased price were dishonored. However, said witness
failed to present in Court any dishonored check or any replacement check. Said witness likewise failed to present
any bank record showing that the checks issued by the buyer, Teresita Ng Go, in payment of the purchase price of
the sugar covered by SLDR No. 1214 were dishonored."10
Petitioner appealed the trial courts decision to the Court of Appeals.
On appeal, petitioner averred that the dealings between it and STM were part of a series of transactions involving
only one account or one general contract of sale. Pursuant to this contract, STM or any of its authorized agents could
withdraw bags of sugar only against cleared checks of STM. SLDR No. 21214M was only one of 22 SLDRs issued to
STM and since the latter had already withdrawn its full quota of sugar under the said SLDR, CSC was already
precluded from seeking delivery of the 23,000 bags of sugar.
Private respondent CSC countered that the sugar purchases involving SLDR No. 1214M were separate and
independent transactions and that the details of the series of purchases were contained in a single statement with a
consolidated summary of cleared check payments and sugar stock withdrawals because this a more convenient
system than issuing separate statements for each purchase.
The appellate court considered the following issues: (a) Whether or not the transaction between petitioner and STM
involving SLDR No. 1214M was a separate, independent, and single transaction; (b) Whether or not CSC had the
capacity to sue on its own on SLDR No. 1214M; and (c) Whether or not CSC as buyer from STM of the rights to
25,000 bags of sugar covered by SLDR No. 1214M could compel petitioner to deliver 23,000 bags allegedly
unwithdrawn.
On February 24, 1994, the Court of Appeals rendered its decision modifying the trial court's judgment, to wit:
"WHEREFORE, the Court hereby MODIFIES the assailed judgment and orders defendant-appellant to:
"1) Deliver to plaintiff-appellee 12,586 bags of sugar covered by SLDR No. 1214M;
"2) Pay to plaintiff-appellee P792,918.00 which is 10% of the value of the undelivered bags of refined
sugar, as attorneys fees;
"3) Pay the costs of suit.
"SO ORDERED."11
Both parties then seasonably filed separate motions for reconsideration.
In its resolution dated September 30, 1994, the appellate court modified its decision to read:
"WHEREFORE, the Court hereby modifies the assailed judgment and orders defendant-appellant to:
"(1) Deliver to plaintiff-appellee 23,000 bags of refined sugar under SLDR No. 1214M;
"(2) Pay costs of suit.
29
"SO ORDERED."12
The appellate court explained the rationale for the modification as follows:
"There is merit in plaintiff-appellee's position.
"Exhibit F' We relied upon in fixing the number of bags of sugar which remained undelivered as 12,586 cannot be
made the basis for such a finding. The rule is explicit that courts should consider the evidence only for the purpose
for which it was offered. (People v. Abalos, et al, 1 CA Rep 783). The rationale for this is to afford the party against
whom the evidence is presented to object thereto if he deems it necessary. Plaintiff-appellee is, therefore, correct in
its argument that Exhibit F' which was offered to prove that checks in the total amount of P15,950,000.00 had been
cleared. (Formal Offer of Evidence for Plaintiff, Records p. 58) cannot be used to prove the proposition that 12,586
bags of sugar remained undelivered.
"Testimonial evidence (Testimonies of Teresita Ng [TSN, 10 October 1990, p. 33] and Marianito L. Santos [TSN, 17
October 1990, pp. 16, 18, and 36]) presented by plaintiff-appellee was to the effect that it had withdrawn only 2,000
bags of sugar from SLDR after which it was not allowed to withdraw anymore. Documentary evidence (Exhibit I, Id.,
p. 78, Exhibit K, Id., p. 80) show that plaintiff-appellee had sent demand letters to defendant-appellant asking the
latter to allow it to withdraw the remaining 23,000 bags of sugar from SLDR 1214M. Defendant-appellant, on the
other hand, alleged that sugar delivery to the STM corresponded only to the value of cleared checks; and that all
sugar corresponded to cleared checks had been withdrawn. Defendant-appellant did not rebut plaintiff-appellee's
assertions. It did not present evidence to show how many bags of sugar had been withdrawn against SLDR No.
1214M, precisely because of its theory that all sales in question were a series of one single transaction and
withdrawal of sugar depended on the clearing of checks paid therefor.
"After a second look at the evidence, We see no reason to overturn the findings of the trial court on this point." 13
Hence, the instant petition, positing the following errors as grounds for review:
"1. The Court of Appeals erred in not holding that STM's and private respondent's specially informing
petitioner that respondent was authorized by buyer STM to withdraw sugar against SLDR No. 1214M "for
and in our (STM) behalf," (emphasis in the original) private respondent's withdrawing 2,000 bags of sugar
for STM, and STM's empowering other persons as its agents to withdraw sugar against the same SLDR
No. 1214M, rendered respondent like the other persons, an agent of STM as held in Rallos v. Felix Go
Chan & Realty Corp., 81 SCRA 252, and precluded it from subsequently claiming and proving being an
assignee of SLDR No. 1214M and from suing by itself for its enforcement because it was conclusively
presumed to be an agent (Sec. 2, Rule 131, Rules of Court) and estopped from doing so. (Art. 1431, Civil
Code).
"2. The Court of Appeals erred in manifestly and arbitrarily ignoring and disregarding certain relevant and
undisputed facts which, had they been considered, would have shown that petitioner was not liable, except
for 69 bags of sugar, and which would justify review of its conclusion of facts by this Honorable Court.
"3. The Court of Appeals misapplied the law on compensation under Arts. 1279, 1285 and 1626 of the Civil
Code when it ruled that compensation applied only to credits from one SLDR or contract and not to those
from two or more distinct contracts between the same parties; and erred in denying petitioner's right to
setoff all its credits arising prior to notice of assignment from other sales or SLDRs against private
respondent's claim as assignee under SLDR No. 1214M, so as to extinguish or reduce its liability to 69
bags, because the law on compensation applies precisely to two or more distinct contracts between the
same parties (emphasis in the original).
"4. The Court of Appeals erred in concluding that the settlement or liquidation of accounts in Exh. F
between petitioner and STM, respondent's admission of its balance, and STM's acquiescence thereto by
silence for almost one year did not render Exh. `F' an account stated and its balance binding.
 "5. The Court of Appeals erred in not holding that the conditions of the assigned SLDR No. 1214, namely,
(a) its subject matter being generic, and (b) the sale of sugar being subject to its availability at the Nawaco
warehouse, made the sale conditional and prevented STM or private respondent from acquiring title to the
sugar; and the non-availability of sugar freed petitioner from further obligation.
"6. The Court of Appeals erred in not holding that the "clean hands" doctrine precluded respondent from
seeking judicial reliefs (sic) from petitioner, its only remedy being against its assignor."14
Simply stated, the issues now to be resolved are:
(1)....Whether or not the Court of Appeals erred in not ruling that CSC was an agent of STM and hence,
estopped to sue upon SLDR No. 1214M as an assignee.
(2)....Whether or not the Court of Appeals erred in applying the law on compensation to the transaction
under SLDR No. 1214M so as to preclude petitioner from offsetting its credits on the other SLDRs.
(3)....Whether or not the Court of Appeals erred in not ruling that the sale of sugar under SLDR No. 1214M
was a conditional sale or a contract to sell and hence freed petitioner from further obligations.
(4)....Whether or not the Court of Appeals committed an error of law in not applying the "clean hands
doctrine" to preclude CSC from seeking judicial relief.
The issues will be discussed in seriatim.
Anent the first issue, we find from the records that petitioner raised this issue for the first time on appeal.1avvphi1 It
is settled that an issue which was not raised during the trial in the court below could not be raised for the first time on
appeal as to do so would be offensive to the basic rules of fair play, justice, and due process.15 Nonetheless, the
Court of Appeals opted to address this issue, hence, now a matter for our consideration.
Petitioner heavily relies upon STM's letter of authority allowing CSC to withdraw sugar against SLDR No. 1214M to
show that the latter was STM's agent. The pertinent portion of said letter reads:
"This is to authorize Consolidated Sugar Corporation or its representative to withdraw for and in our behalf (stress
supplied) the refined sugar covered by Shipping List/Delivery Receipt = Refined Sugar (SDR) No. 1214 dated
October 16, 1989 in the total quantity of 25, 000 bags."16
The Civil Code defines a contract of agency as follows:
"Art. 1868. By the contract of agency a person binds himself to render some service or to do something in
representation or on behalf of another, with the consent or authority of the latter."
It is clear from Article 1868 that the basis of agency is representation. 17 On the part of the principal, there must be an
actual intention to appoint18 or an intention naturally inferable from his words or actions; 19 and on the part of the
agent, there must be an intention to accept the appointment and act on it, 20 and in the absence of such intent, there
is generally no agency.21 One factor which most clearly distinguishes agency from other legal concepts is control;
one person - the agent - agrees to act under the control or direction of another - the principal. Indeed, the very word
"agency" has come to connote control by the principal. 22 The control factor, more than any other, has caused the
courts to put contracts between principal and agent in a separate category. 23 The Court of Appeals, in finding that
CSC, was not an agent of STM, opined:
"This Court has ruled that where the relation of agency is dependent upon the acts of the parties, the law makes no
presumption of agency, and it is always a fact to be proved, with the burden of proof resting upon the persons
alleging the agency, to show not only the fact of its existence, but also its nature and extent (Antonio vs.
30
Enriquez[CA], 51 O.G. 3536]. Here, defendant-appellant failed to sufficiently establish the existence of an agency
relation between plaintiff-appellee and STM. The fact alone that it (STM) had authorized withdrawal of sugar by
plaintiff-appellee "for and in our (STM's) behalf" should not be eyed as pointing to the existence of an agency relation
...It should be viewed in the context of all the circumstances obtaining. Although it would seem STM represented
plaintiff-appellee as being its agent by the use of the phrase "for and in our (STM's) behalf" the matter was cleared
when on 23 January 1990, plaintiff-appellee informed defendant-appellant that SLDFR No. 1214M had been "sold
and endorsed" to it by STM (Exhibit I, Records, p. 78). Further, plaintiff-appellee has shown that the 25, 000 bags of
sugar covered by the SLDR No. 1214M were sold and transferred by STM to it ...A conclusion that there was a valid
sale and transfer to plaintiff-appellee may, therefore, be made thus capacitating plaintiff-appellee to sue in its own
name, without need of joining its imputed principal STM as co-plaintiff."24
In the instant case, it appears plain to us that private respondent CSC was a buyer of the SLDFR form, and not an
agent of STM. Private respondent CSC was not subject to STM's control. The question of whether a contract is one
of sale or agency depends on the intention of the parties as gathered from the whole scope and effect of the
language employed.25 That the authorization given to CSC contained the phrase "for and in our (STM's) behalf" did
not establish an agency. Ultimately, what is decisive is the intention of the parties. 26 That no agency was meant to be
established by the CSC and STM is clearly shown by CSC's communication to petitioner that SLDR No. 1214M had
been "sold and endorsed" to it.27 The use of the words "sold and endorsed" means that STM and CSC intended a
contract of sale, and not an agency. Hence, on this score, no error was committed by the respondent appellate court
when it held that CSC was not STM's agent and could independently sue petitioner.
On the second issue, proceeding from the theory that the transactions entered into between petitioner and STM are
but serial parts of one account, petitioner insists that its debt has been offset by its claim for STM's unpaid
purchases, pursuant to Article 1279 of the Civil Code.28 However, the trial court found, and the Court of Appeals
concurred, that the purchase of sugar covered by SLDR No. 1214M was a separate and independent transaction; it
was not a serial part of a single transaction or of one account contrary to petitioner's insistence. Evidence on record
shows, without being rebutted, that petitioner had been paid for the sugar purchased under SLDR No. 1214M.
Petitioner clearly had the obligation to deliver said commodity to STM or its assignee. Since said sugar had been
fully paid for, petitioner and CSC, as assignee of STM, were not mutually creditors and debtors of each other. No
reversible error could thereby be imputed to respondent appellate court when, it refused to apply Article 1279 of the
Civil Code to the present case.
Regarding the third issue, petitioner contends that the sale of sugar under SLDR No. 1214M is a conditional sale or a
contract to sell, with title to the sugar still remaining with the vendor. Noteworthy, SLDR No. 1214M contains the
following terms and conditions:
"It is understood and agreed that by payment by buyer/trader of refined sugar and/or receipt of this document by the
buyer/trader personally or through a representative, title to refined sugar is transferred to buyer/trader and delivery to
him/it is deemed effected and completed (stress supplied) and buyer/trader assumes full responsibility therefore"29
The aforequoted terms and conditions clearly show that petitioner transferred title to the sugar to the buyer or his
assignee upon payment of the purchase price. Said terms clearly establish a contract of sale, not a contract to sell.
Petitioner is now estopped from alleging the contrary. The contract is the law between the contracting parties. 30And
where the terms and conditions so stipulated are not contrary to law, morals, good customs, public policy or public
order, the contract is valid and must be upheld.31 Having transferred title to the sugar in question, petitioner is now
obliged to deliver it to the purchaser or its assignee.
As to the fourth issue, petitioner submits that STM and private respondent CSC have entered into a conspiracy to
defraud it of its sugar. This conspiracy is allegedly evidenced by: (a) the fact that STM's selling price to CSC was
below its purchasing price; (b) CSC's refusal to pursue its case against Teresita Ng Go; and (c) the authority given
by the latter to other persons to withdraw sugar against SLDR No. 1214M after she had sold her rights under said
SLDR to CSC. Petitioner prays that the doctrine of "clean hands" should be applied to preclude CSC from seeking
judicial relief. However, despite careful scrutiny, we find here the records bare of convincing evidence whatsoever to
support the petitioner's allegations of fraud. We are now constrained to deem this matter purely speculative, bereft of
concrete proof.
WHEREFORE, the instant petition is DENIED for lack of merit. Costs against petitioner. SO ORDERED.
G.R. No. L-46658 May 13, 1991
PHILIPPINE NATIONAL BANK, petitioner, vs.HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge
of the Court of First Instance of Rizal, Branch XXI and TAYABAS CEMENT COMPANY, INC., respondents.
FERNAN, C.J.:
In this petition for certiorari, petitioner Philippine National Bank (PNB) seeks to annul and set aside the orders dated
March 4, 1977 and May 31, 1977 rendered in Civil Case No. 24422 1 of the Court of First Instance of Rizal, Branch
XXI, respectively granting private respondent Tayabas Cement Company, Inc.'s application for a writ of preliminary
injunction to enjoin the foreclosure sale of certain properties in Quezon City and Negros Occidental and denying
petitioner's motion for reconsideration thereof.
charges and other expenses owed by said spouses as sureties of TCC. 7 Said petition was opposed by the spouses
Arroyo and the other bidder, Jose L. Araneta.
On September 12, 1975, Acting Clerk of Court and Ex-Officio Sheriff Diana L. Dungca issued a resolution finding that
the questions raised by the parties required the reception and evaluation of evidence, hence, proper for adjudication
by the courts of law. Since said questions were prejudicial to the holding of the foreclosure sale, she ruled that her
"Office, therefore, cannot properly proceed with the foreclosure sale unless and until there be a court ruling on the
aforementioned issues." 8
Thus, in May, 1976, PNB filed with the Court of First Instance of Quezon City, Branch V a petition
for mandamus 9against said Diana Dungca in her capacity as City Sheriff of Quezon City to compel her to proceed
with the foreclosure sale of the mortgaged properties covered by TCT No. 55323 in order to satisfy both the personal
obligation of the spouses Arroyo as well as their liabilities as sureties of TCC. 10

In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo Spouses), obtained a loan of P580,000.00
On September 6, 1976, the petition was granted and Dungca was directed to proceed with the foreclosure sale of the
from petitioner bank to purchase 60% of the subscribed capital stock, and thereby acquire the controlling interest of
mortgaged properties covered by TCT No. 55323 pursuant to Act No. 3135 and to issue the corresponding Sheriff's
private respondent Tayabas Cement Company, Inc. (TCC). 2 As security for said loan, the spouses Arroyo executed
Certificate of Sale. 11
a real estate mortgage over a parcel of land covered by Transfer Certificate of Title No. 55323 of the Register of
Deeds of Quezon City known as the La Vista property.
Before the decision could attain finality, TCC filed on September 14, 1976 before the Court of First Instance of Rizal,
Pasig, Branch XXI a complaint 12 against PNB, Dungca, and the Provincial Sheriff of Negros Occidental and Ex-
Thereafter, TCC filed with petitioner bank an application and agreement for the establishment of an eight (8) year
Officio Sheriff of Bacolod City seeking, inter alia, the issuance of a writ of preliminary injunction to restrain the
deferred letter of credit (L/C) for $7,000,000.00 in favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to cover the
foreclosure of the mortgages over the La Vista property and Hacienda Bacon as well as a declaration that its
importation of a cement plant machinery and equipment.
obligation with PNB had been fully paid by reason of the latter's repossession of the imported machinery and
equipment. 13
Upon approval of said application and opening of an L/C by PNB in favor of Toyo Menka Kaisha, Ltd. for the account
of TCC, the Arroyo spouses executed the following documents to secure this loan accommodation: Surety
On October 5, 1976, the CFI, thru respondent Judge Gregorio Pineda, issued a restraining order 14 and on March 4,
Agreement dated August 5, 1964 3 and Covenant dated August 6, 1964. 4
1977, granted a writ of preliminary injunction. 15 PNB's motion for reconsideration was denied, hence this petition.

The imported cement plant machinery and equipment arrived from Japan and were released to TCC under a trust
Petitioner PNB advances four grounds for the setting aside of the writ of preliminary injunction, namely: a) that it
receipt agreement. Subsequently, Toyo Menka Kaisha, Ltd. made the corresponding drawings against the L/C as
contravenes P.D. No. 385 which prohibits the issuance of a restraining order against a government financial
scheduled. TCC, however, failed to remit and/or pay the corresponding amount covered by the drawings. Thus, on
institution in any action taken by such institution in compliance with the mandatory foreclosure provided in Section 1
May 19, 1968, pursuant to the trust receipt agreement, PNB notified TCC of its intention to repossess, as it later did,
thereof; b) that the writ countermands a final decision of a co-equal and coordinate court; c) that the writ seeks to
the imported machinery and equipment for failure of TCC to settle its obligations under the L/C. 5
prohibit the performance of acts beyond the court's territorial jurisdiction; and, d) private respondent TCC has not
shown any clear legal right or necessity to the relief of preliminary injunction.
In the meantime, the personal accounts of the spouses Arroyo, which included another loan of P160,000.00 secured
by a real estate mortgage over parcels of agricultural land known as Hacienda Bacon located in Isabela, Negros
Private respondent TCC counters with the argument that P.D. No. 385 does not apply to the case at bar, firstly
Occidental, had likewise become due. The spouses Arroyo having failed to satisfy their obligations with PNB, the
because no foreclosure proceedings have been instituted against it by PNB and secondly, because its account under
latter decided to foreclose the real estate mortgages executed by the spouses Arroyo in its favor.
the L/C has been fully satisfied with the repossession of the imported machinery and equipment by PNB.

On July 18, 1975, PNB filed with the City Sheriff of Quezon City a petition for extra-judicial foreclosure under Act
The resolution of the instant controversy lies primarily on the question of whether or not TCC's liability has been
3138, as amended by Act 4118 and under Presidential Decree No. 385 of the real estate mortgage over the
extinguished by the repossession of PNB of the imported cement plant machinery and equipment.
properties known as the La Vista property covered by TCT No. 55323. 6 PNB likewise filed a similar petition with the
City Sheriff of Bacolod, Negros Occidental with respect to the mortgaged properties located at Isabela, Negros
Occidental and covered by OCT No. RT 1615. We rule for the petitioner PNB. It must be remembered that PNB took possession of the imported cement plant
machinery and equipment pursuant to the trust receipt agreement executed by and between PNB and TCC giving
the former the unqualified right to the possession and disposal of all property shipped under the Letter of Credit until
The foreclosure sale of the La Vista property was scheduled on August 11, 1975. At the auction sale, PNB was the
such time as all the liabilities and obligations under said letter had been discharged. 16 In the case of Vintola vs.
highest bidder with a bid price of P1,000,001.00. However, when said property was about to be awarded to PNB, the
Insular Bank of Asia and America 17 wherein the same argument was advanced by the Vintolas as entrustees of
representative of the mortgagor-spouses objected and demanded from the PNB the difference between the bid price
imported seashells under a trust receipt transaction, we said:
of P1,000,001.00 and the indebtedness of P499,060.25 of the Arroyo spouses on their personal account. It was the
contention of the spouses Arroyo's representative that the foreclosure proceedings referred only to the personal
account of the mortgagor spouses without reference to the account of TCC. Further, the VINTOLAS take the position that their obligation to IBAA has been extinguished inasmuch as,
through no fault of their own, they were unable to dispose of the seashells, and that they have relinquished
possession thereof to the IBAA, as owner of the goods, by depositing them with the Court.
To remedy the situation, PNB filed a supplemental petition on August 13, 1975 requesting the Sheriff's Office to
proceed with the sale of the subject real properties to satisfy not only the amount of P499,060.25 owed by the
spouses Arroyos on their personal account but also the amount of P35,019,901.49 exclusive of interest, commission The foregoing submission overlooks the nature and mercantile usage of the transaction involved. A letter
of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under
31
 that set-up, a bank extends a loan covered by the Letter of Credit, with the trust receipt as a security for institution concerned. 23 It is further provided therein that "no restraining order, temporary or permanent injunction
the loan. In other words, the transaction involves a loan feature represented by the letter of credit, and a shall be issued by the court against any government financial institution in any action taken by such institution in
security feature which is in the covering trust receipt. compliance with the mandatory foreclosure provided in Section 1 hereof, whether such restraining order, temporary
or permanent injunction is sought by the borrower(s) or any third party or parties . . ." 24
xxx xxx xxx
It is not disputed that the foreclosure proceedings instituted by PNB against the Arroyo spouses were in compliance
with the mandate of P.D. 385. This being the case, the respondent judge acted in excess of his jurisdiction in issuing
A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in
the injunction specifically proscribed under said decree.
the goods.1wphi1 It secures an indebtedness and there can be no such thing as security interest that
secures no obligation. As defined in our laws:
Another reason for striking down the writ of preliminary injunction complained of is that it interfered with the order of a
co-equal and coordinate court. Since Branch V of the CFI of Rizal had already acquired jurisdiction over the question
(h) "Security interest" means a property interest in goods, documents or instruments to secure
of foreclosure of mortgage over the La Vista property and rendered judgment in relation thereto, then it retained
performance of some obligations of the entrustee or of some third persons to the entruster and
jurisdiction to the exclusion of all other coordinate courts over its judgment, including all incidents relative to the
includes title, whether or not expressed to be absolute, whenever such title is in substance taken
control and conduct of its ministerial officers, namely the sheriff thereof. 25 The foreclosure sale having been ordered
or retained for security only.
by Branch V of the CFI of Rizal, TCC should not have filed injunction proceedings with Branch XXI of the same CFI,
but instead should have first sought relief by proper motion and application from the former court which had exclusive
xxx xxx xxx jurisdiction over the foreclosure proceeding. 26

Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It was This doctrine of non-interference is premised on the principle that a judgment of a court of competent jurisdiction may
merely the holder of a security title for the advances it had made to the VINTOLAS. The goods the not be opened, modified or vacated by any court of concurrent jurisdiction. 27
VINTOLAS had purchased through IBAA financing remain their own property and they hold it at their own
risk. The trust receipt arrangement did not convert the IBAA into an investor; the latter remained a lender
Furthermore, we find the issuance of the preliminary injunction directed against the Provincial Sheriff of Negros
and creditor.
Occidental and ex-officio Sheriff of Bacolod City a jurisdictional faux pas as the Courts of First Instance, now
Regional Trial Courts, can only enforce their writs of injunction within their respective designated territories. 28
xxx xxx xxx
WHEREFORE, the instant petition is hereby granted. The assailed orders are hereby set aside. Costs against private
Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that because respondent.
they have surrendered the goods to IBAA and subsequently deposited them in the custody of the court,
they are absolutely relieved of their obligation to pay their loan because of their inability to dispose of the
goods. The fact that they were unable to sell the seashells in question does not affect IBAA's right to
recover the advances it had made under the Letter of Credit.

PNB's possession of the subject machinery and equipment being precisely as a form of security for the advances
given to TCC under the Letter of Credit, said possession by itself cannot be considered payment of the loan secured
thereby. Payment would legally result only after PNB had foreclosed on said securities, sold the same and applied
the proceeds thereof to TCC's loan obligation. Mere possession does not amount to foreclosure for foreclosure
denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and
includes the sale itself. 18

Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is alienated
to the creditor in satisfaction of a debt in money and the same is governed by sales. 19 Dation in payment 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. 20 As aforesaid, the repossession of the machinery and equipment in question was
merely to secure the payment of TCC's loan obligation and not for the purpose of transferring ownership thereof to
PNB in satisfaction of said loan. Thus, no dacion en pago was ever accomplished.

Proceeding from this finding, PNB has the right to foreclose the mortgages executed by the spouses Arroyo as
sureties of TCC. A surety is considered in law as being the same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. 21 As sureties,
the Arroyo spouses are primarily liable as original promissors and are bound immediately to pay the creditor the
amount outstanding. 22

Under Presidential Decree No. 385 which took effect on January 31, 1974, government financial institutions like
herein petitioner PNB are required to foreclose on the collaterals and/or securities for any loan, credit or
accommodation whenever the arrearages on such account amount to at least twenty percent (20%) of the total
outstanding obligations, including interests and charges, as appearing in the books of account of the financial
32
G.R. No. 149420 October 8, 2003 Consequently, on January 10, 1991, respondent filed an action for recovery of a sum of money against the petitioner
before the Regional Trial Court of Makati, Branch 147, which was docketed as Civil Case No. 91-074.8
SONNY LO, petitioner, vs.KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent.
During the trial, petitioner argued that his obligation was extinguished with the execution of the Deed of Assignment
of credit. Respondent, for its part, presented the testimony of its employee, Almeda Baaga, who testified that
D E C I S I O N YNARES-SANTIAGO, J.:
Jomero Realty refused to honor the assignment of credit because it claimed that petitioner had an outstanding
indebtedness to it.
Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged in the sale of steel scaffoldings,
while petitioner Sonny L. Lo, doing business under the name and style Sans Enterprises, is a building contractor. On
On August 25, 1994, the trial court rendered a decision9 dismissing the complaint on the ground that the assignment
February 22, 1990, petitioner ordered scaffolding equipments from respondent worth P540,425.80.1 He paid a
of credit extinguished the obligation. The decretal portion thereof provides:
downpayment in the amount of P150,000.00. The balance was made payable in ten monthly installments.

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the defendant and against the
Respondent delivered the scaffoldings to petitioner.2 Petitioner was able to pay the first two monthly
plaintiff, dismissing the complaint and ordering the plaintiff to pay the defendant attorneys fees in the amount of
installments.1a\^/phi1.netHis business, however, encountered financial difficulties and he was unable to settle his
P25,000.00.1a\^/phi1.net
obligation to respondent despite oral and written demands made against him. 3

Respondent appealed the decision to the Court of Appeals. On April 19, 2001, the appellate court rendered a
On October 11, 1990, petitioner and respondent executed a Deed of Assignment,4 whereby petitioner assigned to
decision,10 the dispositive portion of which reads:
respondent his receivables in the amount of P335,462.14 from Jomero Realty Corporation. Pertinent portions of the
Deed provide:
WHEREFORE, finding merit in this appeal, the court REVERSES the appealed Decision and enters judgment
ordering defendant-appellee Sonny Lo to pay the plaintiff-appellant KJS ECO-FORMWORK SYSTEM PHILIPPINES,
WHEREAS, the ASSIGNOR is the contractor for the construction of a residential house located at Greenmeadow
INC. Three Hundred Thirty Five Thousand Four Hundred Sixty-Two and 14/100 (P335,462.14) with legal interest of
Avenue, Quezon City owned by Jomero Realty Corporation;
6% per annum from January 10, 1991 (filing of the Complaint) until fully paid and attorneys fees equivalent to 10% of
the amount due and costs of the suit.
WHEREAS, in the construction of the aforementioned residential house, the ASSIGNOR purchased on account
scaffolding equipments from the ASSIGNEE payable to the latter;
SO ORDERED.11

WHEREAS, up to the present the ASSIGNOR has an obligation to the ASSIGNEE for the purchase of the
In finding that the Deed of Assignment did not extinguish the obligation of the petitioner to the respondent, the Court
aforementioned scaffoldings now in the amount of Three Hundred Thirty Five Thousand Four Hundred Sixty Two and
of Appeals held that (1) petitioner failed to comply with his warranty under the Deed; (2) the object of the Deed did
14/100 Pesos (P335,462.14);
not exist at the time of the transaction, rendering it void pursuant to Article 1409 of the Civil Code; and (3) petitioner
violated the terms of the Deed of Assignment when he failed to execute and do all acts and deeds as shall be
NOW, THEREFORE, for and in consideration of the sum of Three Hundred Thirty Five Thousand Four Hundred Sixty necessary to effectually enable the respondent to recover the collectibles. 12
Two and 14/100 Pesos (P335,462.14), Philippine Currency which represents part of the ASSIGNORs collectible
from Jomero Realty Corp., said ASSIGNOR hereby assigns, transfers and sets over unto the ASSIGNEE all
Petitioner filed a motion for reconsideration of the said decision, which was denied by the Court of Appeals.13
collectibles amounting to the said amount of P335, 462.14;

In this petition for review, petitioner assigns the following errors:

And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and assigns, the full power and authority to
demand, collect, receive, compound, compromise and give acquittance for the same or any part thereof, and in the
name and stead of the said ASSIGNOR; I. THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN DECLARING THE
DEED OF ASSIGNMENT (EXH. "4") AS NULL AND VOID FOR LACK OF OBJECT ON THE BASIS
OF A MERE HEARSAY CLAIM.
And the ASSIGNOR does hereby agree and stipulate to and with said ASSIGNEE, its successors and assigns that
II. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF
said debt is justly owing and due to the ASSIGNOR for Jomero Realty Corporation and that said ASSIGNOR has not
ASSIGNMENT (EXH. "4") DID NOT EXTINGUISH PETITIONERS OBLIGATION ON THE WRONG
done and will not cause anything to be done to diminish or discharge said debt, or delay or to prevent the
NOTION THAT PETITIONER FAILED TO COMPLY WITH HIS WARRANTY THEREUNDER.
ASSIGNEE, its successors or assigns, from collecting the same;
III. THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE TRIAL
COURT AND IN ORDERING PAYMENT OF INTERESTS AND ATTORNEYS FEES.14
And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his heirs, executors,
administrators, or assigns, shall and will at times hereafter, at the request of said ASSIGNEE, its successors or
The petition is without merit.
assigns, at his cost and expense, execute and do all such further acts and deeds as shall be reasonably necessary
to effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR has in accordance with the
true intent and meaning of these presents. xxx5 (Italics supplied) An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal
cause, such as sale, dacion en pago, exchange or donation, and without the consent of the debtor, transfers his
credit and accessory rights to another, known as the assignee, who acquires the power to enforce it to the same
However, when respondent tried to collect the said credit from Jomero Realty Corporation, the latter refused to honor
extent as the assignor could enforce it against the debtor. 15
the Deed of Assignment because it claimed that petitioner was also indebted to it. 6 On November 26, 1990,
respondent sent a letter7 to petitioner demanding payment of his obligation, but petitioner refused to pay claiming
that his obligation had been extinguished when they executed the Deed of Assignment. Corollary thereto, in dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor
who accepts it as equivalent of payment of an outstanding debt.16 In order that there be a valid dation in payment,
33
the following are the requisites: (1) There must be the performance of the prestation in lieu of payment (animo
solvendi) which may consist in the delivery of a corporeal thing or a real right or a credit against the third person; (2)
There must be some difference between the prestation due and that which is given in substitution (aliud pro alio); (3)
There must be an agreement between the creditor and debtor that the obligation is immediately extinguished by
reason of the performance of a prestation different from that due. 17 The undertaking really partakes in one sense of
the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be
charged against the debtors debt. As such, the vendor in good faith shall be responsible, for the existence and
legality of the credit at the time of the sale but not for the solvency of the debtor, in specified circumstances. 18

Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal property, 19produced
the effects of a dation in payment which may extinguish the obligation.20 However, as in any other contract of sale,
the vendor or assignor is bound by certain warranties. More specifically, the first paragraph of Article 1628 of the Civil
Code provides:

The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale, unless
it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly stipulated
or unless the insolvency was prior to the sale and of common knowledge.

From the above provision, petitioner, as vendor or assignor, is bound to warrant the existence and legality of the
credit at the time of the sale or assignment. When Jomero claimed that it was no longer indebted to petitioner since
the latter also had an unpaid obligation to it, it essentially meant that its obligation to petitioner has been extinguished
by compensation.21 In other words, respondent alleged the non-existence of the credit and asserted its claim to
petitioners warranty under the assignment. Therefore, it behooved on petitioner to make good its warranty and paid
the obligation.

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

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

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

Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay respondent the sum of P335,462.14
with legal interest thereon. However, we find that the award by the Court of Appeals of attorneys fees is without
factual basis. No evidence or testimony was presented to substantiate this claim. Attorneys fees, being in the nature
of actual damages, must be duly substantiated by competent proof.

WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals dated April 19, 2001 in CA-G.R. CV No.
47713, ordering petitioner to pay respondent the sum of P335,462.14 with legal interest of 6% per annum from
January 10, 1991 until fully paid is AFFIRMED with MODIFICATION. Upon finality of this Decision, the rate of legal
interest shall be 12% per annum, inasmuch as the obligation shall thereafter become equivalent to a forbearance of
credit.23 The award of attorneys fees is DELETED for lack of evidentiary basis.

SO ORDERED.

34
G.R. No. 166704 December 20, 2006 Whether or not plaintiff is entitled to her claim of P773,000.00;

AGRIFINA AQUINTEY, petitioner, vs.SPOUSES FELICIDAD AND RICO TIBONG, respondents. Whether or not plaintiff is entitled to stipulated interests in the promissory notes; and

D E C I S I O N CALLEJO, SR., J.: Whether or not the parties are entitled to their claim for damages. 9

Before us is a petition for review under Rule 45 of the Revised Rules on Civil Procedure of the Decision1 of the Court The Case for Petitioner
of Appeals in CA-G.R. CV No. 78075, which affirmed with modification the Decision2 of the Regional Trial Court
(RTC), Branch 61, Baguio City, and the Resolution3 of the appellate court denying reconsideration thereof.
Agrifina and Felicidad were classmates at the University of Pangasinan. Felicidad's husband, Rico, also happened to
be a distant relative of Agrifina. Upon Felicidad's prodding, Agrifina agreed to lend money to Felicidad. According to
The Antecedents Felicidad, Agrifina would be earning interests higher than those given by the bank for her money. Felicidad told
Agrifina that since she (Felicidad) was engaged in the sale of dry goods at the GP Shopping Arcade, she would use
the money to buy bonnels and thread.10 Thus, Agrifina lent a total sum of P773,000.00 to Felicidad, and each loan
On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC of Baguio City, a complaint for sum of money and
transaction was covered by either a promissory note or an acknowledgment receipt. 11 Agrifina stated that she had
damages against the respondents, spouses Felicidad and Rico Tibong. Agrifina alleged that Felicidad had secured
lost the receipts signed by Felicidad for the following amounts: P100,000.00, P34,000.00 and P2,000.00.12 The
loans from her on several occasions, at monthly interest rates of 6% to 7%. Despite demands, the spouses Tibong
particulars of the transactions are as follows:
failed to pay their outstanding loan, amounting to P773,000.00 exclusive of interests. The complaint contained the
following prayer:
Amount Date Obtained Interest Per Due Date
WHEREFORE, premises considered, it is most respectfully prayed of this Honorable Court, after due Mo.
notice and hearing, to render judgment ordering defendants to pay plaintiff the following: P 100,000.00 May 11, 1989 6% August 11, 1989
4,000.00 June 8, 1989 - -
a). SEVEN HUNDRED SEVENTY-THREE THOUSAND PESOS (P773,000.00) representing the
50,000.00 June 13, 1989 6% On demand
principal obligation of the defendants with the stipulated interests of six (6%) percent per month
from May 11, 1999 to date and or those that are stipulated on the contracts as mentioned from 60,000.00 Aug. 16, 1989 7% January 1990
paragraph two (2) of the complaint. 205,000.00 Oct. 13, 1989 7% January 1990
128,000.00 Oct. 19, 1989 7% January 1990
b). FIFTEEN PERCENT (15%) of the total accumulated obligations as attorney's fees.
2,000.00 Nov. 12, 1989 6% April 28, 1990
10,000.00 June 13, 1990 - -
c). Actual expenses representing the filing fee and other charges and expenses to be incurred
during the prosecution of this case. 80,000.00 Jan. 4, 1990 - -
34,000.00 - 6% October 19, 1989
Further prays for such other relief and remedies just and equitable under the premises.4 100,000.00 July 14, 1989 5% October 198913

Agrifina appended a copy of the Counter-Affidavit executed by Felicidad in I.S. No. 93-334, as well as copies of the According to Agrifina, Felicidad was able to pay only her loans amounting to P122,600.00.14
promissory notes and acknowledgment receipts executed by Felicidad covering the loaned amounts. 5

In their Answer with Counterclaim,6 spouses Tibong admitted that they had secured loans from Agrifina. The
proceeds of the loan were then re-lent to other borrowers at higher interest rates. They, likewise, alleged that they
had executed deeds of assignment in favor of Agrifina, and that their debtors had executed promissory notes in
Agrifina's favor. According to the spouses Tibong, this resulted in a novation of the original obligation to Agrifina.
They insisted that by virtue of these documents, Agrifina became the new collector of their debtors; and the
obligation to pay the balance of their loans had been extinguished.
The spouses Tibong specifically denied the material averments in paragraphs 2 and 2.1 of the complaint. While they
did not state the total amount of their loans, they declared that they did not receive anything from Agrifina without any
written receipt.7 They prayed for that the complaint be dismissed.
In their Pre-Trial Brief, the spouses Tibong maintained that they have never obtained any loan from Agrifina without
the benefit of a written document.8
On August 17, 2000, the trial court issued a Pre-Trial Order where the following issues of the case were defined:
In July 1990, Felicidad gave to Agrifina City Trust Bank Check No. 126804 dated August 25, 1990 in the amount
ofP50,000.00 as partial payment.15 However, the check was dishonored for having been drawn against insufficient
funds.16 Agrifina then filed a criminal case against Felicidad in the Office of the City Prosecutor. An Information for
violation of Batas Pambansa Bilang 22 was filed against Felicidad, docketed as Criminal Case No. 11181-R. After
trial, the court ordered Felicidad to pay P50,000.00. Felicidad complied and paid the face value of the check.17
In the meantime, Agrifina learned that Felicidad had re-loaned the amounts to other borrowers.18 Agrifina sought the
assistance of Atty. Torres G. A-ayo who advised her to require Felicidad to execute deeds of assignment over
Felicidad's debtors. The lawyer also suggested that Felicidad's debtors execute promissory notes in Agrifina's favor,
to "turn over" their loans from Felicidad. This arrangement would facilitate collection of Felicidad's account. Agrifina
agreed to the proposal.19 Agrifina, Felicidad, and the latter's debtors had a conference20 where Atty. A-ayo explained
that Agrifina could apply her collections as payments of Felicidad's account. 21
From August 7, 1990 to October, 1990, Felicidad executed deeds of assignment of credits (obligations)22 duly
notarized by Atty. A-ayo, in which Felicidad transferred and assigned to Agrifina the total amount of P546,459.00 due
from her debtors.23 In the said deeds, Felicidad confirmed that her debtors were no longer indebted to her for their
respective loans. For her part, Agrifina conformed to the deeds of assignment relative to the loans of Virginia Morada
and Corazon Dalisay.24 She was furnished copies of the deeds as well as the promissory notes.25

35
The following debtors of Felicidad executed promissory notes where they obliged themselves to pay directly to 1. P472,000 as actual obligation with the stipulated interest of 6% per month from May 11, 1999 until the
Agrifina: said obligation is fully paid. However, the amount of P50,000 shall be deducted from the total accumulated
interest for the same was already paid by the defendant as admitted by the plaintiff in her complaint,
Debtors Account Date of Instrument Date Payable
Juliet & Tommy Tibong P50,000.00 August 7, 1990 November 4, 1990 and February 4, 2. P25,000 as attorney's fees,
1991
Corazon Dalisay 8,000.00 August 7, 1990 No date 3. [T]o pay the costs.
Rita Chomacog 4,480.00 August 8, 1990 September 23, 1990
Antoinette Manuel 12,000.00 October 19, 1990 March 30, 1991 SO ORDERED.46
Rosemarie Bandas 8,000.00 August 8, 1990 February 3, 1991
Fely Cirilo 63,600.00 September 13, 1990 No date The trial court ruled that Felicidad's obligation had not been novated by the deeds of assignment and the promissory
Virginia Morada 62,379.00 August 9, 1990 February 9, 1991 notes executed by Felicidad's borrowers. It explained that the documents did not contain any express agreement to
Carmelita Casuga 59,000.00 August 28, 1990 February 28, 1991 novate and extinguish Felicidad's obligation. It declared that the deeds and notes were separate contracts which
could stand alone from the original indebtedness of Felicidad. Considering, however, Agrifina's admission that she
Merlinda Gelacio 17,200.00 August 29, 1990 November 29, 199026 was able to collect from Felicidad's debtors the total amount of P301,000.00, this should be deducted from the
Total P284,659.00 latter's accountability.47 Hence, the balance, exclusive of interests, amounted to P472,000.00.

Agrifina narrated that Felicidad showed to her the way to the debtors' houses to enable her to collect from them. One
of the debtors, Helen Cabang, did not execute any promissory note but conformed to the Deed of Assignment of
Credit which Felicidad executed in favor of Agrifina.27 Eliza Abance conformed to the deed of assignment for and in
behalf of her sister, Fely Cirilo.28 Edna Papat-iw was not able to affix her signature on the deed of assignment nor
sign the promissory note because she was in Taipei, Taiwan.29
Following the execution of the deeds of assignment and promissory notes, Agrifina was able to collect the total
amount of P301,000.00 from Felicidad's debtors.30 In April 1990, she tried to collect the balance of Felicidad's
account, but the latter told her to wait until her debtors had money. 31 When Felicidad reneged on her promise,
Agrifina filed a complaint in the Office of the Barangay Captain for the collection of P773,000.00. However, no
settlement was arrived at.32
The Case for Respondents
On appeal, the CA affirmed with modification the decision of the RTC and stated that, based on the promissory notes
and acknowledgment receipts signed by Felicidad, the appellants secured loans from the appellee in the total
principal amount of only P637,000.00, not P773,000.00 as declared by the trial court. The CA found that, other than
Agrifina's bare testimony that she had lost the promissory notes and acknowledgment receipts, she failed to present
competent documentary evidence to substantiate her claim that Felicidad had, likewise, borrowed the amounts
of P100,000.00, P34,000.00, and P2,000.00. Of the P637,000.00 total account, P585,659.00 was covered by the
deeds of assignment and promissory notes; hence, the balance of Felicidad's account amounted to only P51,341.00.
The fallo of the decision reads:
WHEREFORE, in view of the foregoing, the decision dated January 20, 2003 of the RTC, Baguio City,
Branch 61 in Civil Case No. 4370-R is hereby MODIFIED. Defendants-appellants are hereby ordered to
pay the balance of the total indebtedness in the amount of P51,341.00 plus the stipulated interest of 6%
per month from May 11, 1999 until the finality of this decision.

Felicidad testified that she and her friend Agrifina had been engaged in the money-lending business.33 Agrifina would
lend her money with monthly interest,34 and she, in turn, would re-lend the money to borrowers at a higher interest
rate. Their business relationship turned sour when Agrifina started complaining that she (Felicidad) was actually
earning more than Agrifina.35 Before the respective maturity dates of her debtors' loans, Agrifina asked her to pay her
account since Agrifina needed money to buy a house and lot in Manila. However, she told Agrifina that she could not
pay yet, as her debtors' loan payments were not yet due.36 Agrifina then came to her store every afternoon to collect
from her, and persuaded her to go to Atty. Torres G. A-ayo for legal advice.37 The lawyer suggested that she indorse
the accounts of her debtors to Agrifina so that the latter would be the one to collect from her debtors and she would
no longer have any obligation to Agrifina.38 She then executed deeds of assignment in favor of Agrifina covering the
sums of money due from her debtors. She signed the deeds prepared by Atty. A-ayo in the presence of
Agrifina.39 Some of the debtors signed the promissory notes which were likewise prepared by the lawyer. Thereafter,
Agrifina personally collected from Felicidad's debtors.40 Felicidad further narrated that she received P250,000.00
from one of her debtors, Rey Rivera, and remitted the payment to Agrifina. 41
Agrifina testified, on rebuttal, that she did not enter into a re-lending business with Felicidad. When she asked
Felicidad to consolidate her loans in one document, the latter told her to seek the assistance of Atty. A-ayo.42 The
lawyer suggested that Felicidad assign her credits in order to help her collect her loans. 43 She agreed to the deeds of
assignment to help Felicidad collect from the debtors.44
On January 20, 2003, the trial court rendered its Decision45 in favor of Agrifina. The fallo of the decision reads:
WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendants ordering the latter
to pay the plaintiffs (sic) the following amounts:
SO ORDERED.48
The appellate court sustained the trial court's ruling that Felicidad's obligation to Agrifina had not been novated by
the deeds of assignment and promissory notes executed in the latter's favor. Although Agrifina was subrogated as a
new creditor in lieu of Felicidad, Felicidad's obligation to Agrifina under the loan transaction remained; there was no
intention on their part to novate the original obligation. Nonetheless, the appellate court held that the legal effects of
the deeds of assignment could not be totally disregarded. The assignments of credits were onerous, hence, had the
effect of payment, pro tanto, of the outstanding obligation. The fact that Agrifina never repudiated or rescinded such
assignments only shows that she had accepted and conformed to it. Consequently, she cannot collect both from
Felicidad and her individual debtors without running afoul to the principle of unjust enrichment. Agrifina's primary
recourse then is against Felicidad's individual debtors on the basis of the deeds of assignment and promissory notes.
The CA further declared that the deeds of assignment executed by Felicidad had the effect of payment of her
outstanding obligation to Agrifina in the amount of P585,659.00. It ruled that, since an assignment of credit is in the
nature of a sale, the assignors remained liable for the warranties as they are responsible for the existence and
legality of the credit at the time of the assignment.
Both parties moved to have the decision reconsidered,49 but the appellate court denied both motions on December
21, 2004.50
Agrifina, now petitioner, filed the instant petition, contending that

36
 1. The Honorable Court of Appeals erred in ruling that the deeds of assignment in favor of petitioner has
the effect of payment of the original obligation even as it ruled out that the original obligation and the
assigned credit are distinct and separate and can stand independently from each other;
2. The Honorable Court of Appeals erred in passing upon issues raised for the first time on appeal; and
3. The Honorable Court of Appeals erred in resolving fact not in issue.51
Petitioner avers that the appellate court erred in ruling that respondents' original obligation amounted to
onlyP637,000.00 (instead of P773,000.00) simply because she lost the promissory notes/receipts which evidenced
the loans executed by respondent Felicidad Tibong. She insists that the issue of whether Felicidad owed her less
thanP773,000.00 was not raised by respondents during pre-trial and in their appellate brief; the appellate court was
thus proscribed from taking cognizance of the issue.
Petitioner avers that respondents failed to deny, in their verified answer, that they had secured the P773,000.00 loan;
hence, respondents are deemed to have admitted the allegation in the complaint that the loans secured by
respondent from her amounted to P773,000.00. As gleaned from the trial court's pre-trial order, the main issue is
whether or not she should be made to pay this amount.
Petitioner further maintains that the CA erred in deducting the total amount of P585,659.00 covered by the deeds of
assignment executed by Felicidad and the promissory notes executed by the latter's debtors, and that the balance of
respondents' account was only P51,341.00. Moreover, the appellate court's ruling that there was no novation runs
counter to its holding that the primary recourse was against Felicidad's debtors. Petitioner avers that of the 11 deeds
of assignment and promissory notes, only two bore her signature.52 She insists that she is not bound by the deeds
which she did not sign. By assigning the obligation to pay petitioner their loan accounts, Felicidad's debtors merely
assumed the latter's obligation and became co-debtors to petitioner. Respondents were not released from their
obligation under their loan transactions, and she had the option to demand payment from them or their debtors.
Citing the ruling of this Court in Magdalena Estates, Inc. v. Rodriguez,53 petitioner insists that the first debtor is not
released from responsibility upon reaching an agreement with the creditor. The payment by a third person of the first
debtor's obligation does not constitute novation, and the creditor can still enforce the obligation against the original
debtor. Petitioner also cites the ruling of this Court in Guerrero v. Court of Appeals.54
In their Comment on the petition, respondents aver that by virtue of respondent Felicidad's execution of the deeds of
assignment, and the original debtors' execution of the promissory notes (along with their conformity to the deeds of
assignment with petitioner's consent), their loan accounts with petitioner amounting to P585,659.00 had been
effectively extinguished. Respondents point out that this is in accordance with Article 1291, paragraph 2, of the Civil
Code. Thus, the original debtors of respondents had been substituted as petitioner's new debtors.
Respondents counter that petitioner had been subrogated to their right to collect the loan accounts of their debtors.
In fact, petitioner, as the new creditor of respondents' former debtors had been able to collect the latter's loan
accounts which amounted to P301,000.00. The sums received by respondents' debtors were the same loans which
they obliged to pay to petitioner under the promissory notes executed in petitioner's favor.
Respondents aver that their obligation to petitioner cannot stand or exist separately from the original debtors'
obligation to petitioner as the new creditor. If allowed to collect from them as well as from their original debtors,
petitioner would be enriching herself at the expense of respondents. Thus, despite the fact that petitioner had
collected P172,600.00 from respondents and P301,000.00 from the original debtors, petitioner still sought to
collectP773,000.00 from them in the RTC. Under the deeds of assignment executed by Felicidad and the original
debtors' promissory notes, the original debtors' accounts were assigned to petitioner who would be the new creditor.
In fine, respondents are no longer liable to petitioner for the balance of their loan account inclusive of interests.
Respondents also insist that petitioner failed to prove that she (petitioner) was merely authorized to collect the
accounts of the original debtors so as to to facilitate the payment of respondents' loan obligation.
The Issues
37
The threshold issues are: (1) whether respondent Felicidad Tibong borrowed P773,000.00 from petitioner; and (2)
whether the obligation of respondents to pay the balance of their loans, including interest, was partially extinguished
by the execution of the deeds of assignment in favor of petitioner, relative to the loans of Edna Papat-iw, Helen
Cabang, Antoinette Manuel, and Fely Cirilo in the total amount of P371,000.00.
The Ruling of the Court
We have carefully reviewed the brief of respondents as appellants in the CA, and find that, indeed, they had raised
the issue of whether they received P773,000.00 by way of loans from petitioner. They averred that, as gleaned from
the documentary evidence of petitioner in the RTC, the total amount they borrowed was only P673,000.00. They
asserted that petitioner failed to adduce concrete evidence that they received P773,000.00 from her.55
We agree, however, with petitioner that the appellate court erred in reversing the finding of the RTC simply because
petitioner failed to present any document or receipt signed by Felicidad.
Section 10, Rule 8 of the Rules of Civil Procedure requires a defendant to "specify each material allegation of fact
the truth of which he does not admit and, whenever practicable, x x x set forth the substance of the matters upon
which he relies to support his denial.56
Section 11, Rule 8 of the same Rules provides that allegations of the complaint not specifically denied are deemed
admitted.57
The purpose of requiring the defendant to make a specific denial is to make him disclose the matters alleged in the
complaint which he succinctly intends to disprove at the trial, together with the matter which he relied upon to support
the denial. The parties are compelled to lay their cards on the table.58
A denial is not made specific simply because it is so qualified by the defendant. A general denial does not become
specific by the use of the word "specifically." When matters of whether the defendant alleges having no knowledge or
information sufficient to form a belief are plainly and necessarily within the defendant's knowledge, an alleged
"ignorance or lack of information" will not be considered as a specific denial. Section 11, Rule 8 of the Rules also
provides that material averments in the complaint other than those as to the amount of unliquidated damages shall
be deemed admitted when not specifically denied.59 Thus, the answer should be so definite and certain in its
allegations that the pleader's adversary should not be left in doubt as to what is admitted, what is denied, and what is
covered by denials of knowledge as sufficient to form a belief.60
In the present case, petitioner alleged the following in her complaint:
2. That defendants are indebted to the plaintiff in the principal amount of SEVEN HUNDRED SEVENTY-
THREE THOUSAND PESOS (P773,000.00) Philippine Currency with a stipulated interest which are
broken down as follows. The said principal amounts was admitted by the defendants in their counter-
affidavit submitted before the court. Such affidavit is hereby attached as Annex "A;"61
xxxx
H) The sum of THIRTY FOUR THOUSAND PESOS (P34,000.00) with interest at six (6%) per cent per
month and payable on October 19, 1989, however[,] the receipt for the meantime cannot be recovered as
it was misplaced by the plaintiff but the letter of defendant FELICIDAD TIBONG is hereby attached as
Annex "H" for the appreciation of the Honorable court;
I) The sum of ONE HUNDRED THOUSAND PESOS (P100,000.00) with interest at five (5%) percent per
month, obtained on July 14, 1989 and payable on October 14, 1989. Such receipt was lost but admitted by
the defendants in their counter-affidavit as attached [to] this complaint and marked as Annex "A"
mentioned in paragraph one (1); x x x62
In their Answer, respondents admitted that they had secured loans from petitioner. While the allegations in paragraph
2 of the complaint were specifically denied, respondents merely averred that petitioner and respondent Felicidad
entered into an agreement for the lending of money to interested borrowers at a higher interest rate. Respondents
failed to declare the exact amount of the loans they had secured from petitioner. They also failed to deny the
allegation in paragraph 2 of the complaint that respondent Felicidad signed and submitted a counter-affidavit in I.S.
No. 93-334 where she admitted having secured loans from petitioner in the amount of P773,000.00. Respondents,
likewise, failed to deny the allegation in paragraph 2(h) of the complaint that respondents had secured a P34,000.00
loan payable on October 19, 1989, evidenced by a receipt which petitioner had misplaced. Although respondents
specifically denied in paragraph 2.11 of their Answer the allegations in paragraph 2(I) of the complaint, they merely
alleged that "they have not received sums of money from the plaintiff without any receipt therefor."
Respondents, likewise, failed to specifically deny another allegation in the complaint that they had secured
aP100,000.00 loan from petitioner on July 14, 1989; that the loan was payable on October 14, 1989; and evidenced
by a receipt which petitioner claimed to have lost. Neither did respondents deny the allegation that respondents
admitted their loan of P100,000.00 in the counter-affidavit of respondent Felicidad, which was appended to the
complaint as Annex "A." In fine, respondents had admitted the existence of their P773,000.00 loan from petitioner.
We agree with the finding of the CA that petitioner had no right to collect from respondents the total amount
ofP301,000.00, which includes more than P178,980.00 which respondent Felicidad collected from Tibong, Dalisay,
Morada, Chomacog, Cabang, Casuga, Gelacio, and Manuel. Petitioner cannot again collect the same amount from
respondents; otherwise, she would be enriching herself at their expense. Neither can petitioner collect from
respondents more than P103,500.00 which she had already collected from Nimo, Cantas, Rivera, Donguis,
Fernandez and Ramirez.
There is no longer a need for the Court to still resolve the issue of whether respondents' obligation to pay the
balance of their loan account to petitioner was partially extinguished by the promissory notes executed by Juliet
Tibong, Corazon Dalisay, Rita Chomacog, Carmelita Casuga, Merlinda Gelacio and Antoinette Manuel because, as
admitted by petitioner, she was able to collect the amounts under the notes from said debtors and applied them to
respondents' accounts.
Under Article 1231(b) of the New Civil Code, novation is enumerated as one of the ways by which obligations are
extinguished. Obligations may be modified by changing their object or principal creditor or by substituting the person
of the debtor.63 The burden to prove the defense that an obligation has been extinguished by novation falls on the
debtor.64 The nature of novation was extensively explained in Iloilo Traders Finance, Inc. v. Heirs of Sps. Oscar
Soriano, Jr.,65 as follows:
Novation may either be extinctive or modificatory, much being dependent on the nature of the change and
the intention of the parties. Extinctive novation is never presumed; there must be an express intention to
novate; in cases where it is implied, the acts of the parties must clearly demonstrate their intent to dissolve
the old obligation as the moving consideration for the emergence of the new one. Implied novation
necessitates that the incompatibility between the old and new obligation be total on every point such that
the old obligation is completely superseded by the new one. The test of incompatibility is whether they can
stand together, each one having an independent existence; if they cannot and are irreconciliable, the
subsequent obligation would also extinguish the first.
An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and,
second, creating a new one in its stead. This kind of novation presupposes a confluence of four essential
requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3)
the extinguishment of the old obligation; and (4) the birth of a valid new obligation. Novation is merely
modificatory where the change brought about by any subsequent agreement is merely incidental to the
main obligation (e.g., a change in interest rates or an extension of time to pay); in this instance, the new
agreement will not have the effect of extinguishing the first but would merely supplement it or supplant
some but not all of its provisions.66 (Citations Omitted)
Novation which consists in substituting a new debtor (delegado) in the place of the original one (delegante) may be
made even without the knowledge or against the will of the latter but not without the consent of the creditor.
Substitution of the person of the debtor may be effected by delegacion, meaning, the debtor offers, and the creditor
38
(delegatario), accepts a third person who consents to the substitution and assumes the obligation. Thus, the consent
of those three persons is necessary.67 In this kind of novation, it is not enough to extend the juridical relation to a
third person; it is necessary that the old debtor be released from the obligation, and the third person or new debtor
take his place in the relation.68 Without such release, there is no novation; the third person who has assumed the
obligation of the debtor merely becomes a co-debtor or a surety. If there is no agreement as to solidarity, the first and
the new debtor are considered obligated jointly.69
In Di Franco v. Steinbaum,70 the appellate court ruled that as to the consideration necessary to support a contract of
novation, the rule is the same as in other contracts. The consideration need not be pecuniary or even beneficial to
the person promising. It is sufficient if it be a loss of an inconvenience, such as the relinquishment of a right or the
discharge of a debt, the postponement of a remedy, the discontinuance of a suit, or forbearance to sue.
In City National Bank of Huron, S.D. v. Fuller,71 the Circuit Court of Appeals ruled that the theory of novation is that
the new debtor contracts with the old debtor that he will pay the debt, and also to the same effect with the
creditor, while the latter agrees to accept the new debtor for the old. A novation is not made by showing that the
substituted debtor agreed to pay the debt; it must appear that he agreed with the creditor to do so. Moreover, the
agreement must be based on the consideration of the creditor's agreement to look to the new debtor instead
of the old. It is not essential that acceptance of the terms of the novation and release of the debtor be shown by
express agreement. Facts and circumstances surrounding the transaction and the subsequent conduct of the parties
may show acceptance as clearly as an express agreement, albeit implied. 72
We find in this case that the CA correctly found that respondents' obligation to pay the balance of their account with
petitioner was extinguished, pro tanto, by the deeds of assignment of credit executed by respondent Felicidad in
favor of petitioner.
An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal
cause, such as sale, dation in payment, exchange or donation, and without the consent of the debtor, transfers his
credit and accessory rights to another, known as the assignee, who acquires the power to enforce it to the same
extent as the assignor could enforce it against the debtor. 73 It may be in the form of sale, but at times it may
constitute a dation in payment, such as when a debtor, in order to obtain a release from his debt, assigns to his
creditor a credit he has against a third person.74
In Vda. de Jayme v. Court of Appeals,75 the Court held that dacion en pago 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. It is
a special mode of payment where the debtor offers another thing to the creditor who accepts it as equivalent of
payment of an outstanding debt. 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 debtor's
obligation. 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.76
The requisites for dacion en pago are: (1) there must be a performance of the prestation in lieu of payment (animo
solvendi) which may consist in the delivery of a corporeal thing or a real right or a credit against the third person; (2)
there must be some difference between the prestation due and that which is given in substitution (aliud pro alio); and
(3) there must be an agreement between the creditor and debtor that the obligation is immediately extinguished by
reason of the performance of a prestation different from that due. 77
All the requisites for a valid dation in payment are present in this case. As gleaned from the deeds, respondent
Felicidad assigned to petitioner her credits "to make good" the balance of her obligation. Felicidad testified that she
executed the deeds to enable her to make partial payments of her account, since she could not comply with
petitioner's frenetic demands to pay the account in cash. Petitioner and respondent Felicidad agreed to relieve the
latter of her obligation to pay the balance of her account, and for petitioner to collect the same from respondent's
debtors.
Admittedly, some of respondents' debtors, like Edna Papat-iw, were not able to affix their conformity to the deeds. In Although it has been said that an ambiguous or uncertain assignment should be construed most strictly against the
an assignment of credit, however, the consent of the debtor is not essential for its perfection; the knowledge thereof assignor, the general rule is that any ambiguity or uncertainty in the meaning of an assignment will be resolved
or lack of it affecting only the efficaciousness or inefficaciousness of any payment that might have been made. The against the party who prepared it; hence, if the assignment was prepared by the assignee, it will be construed most
assignment binds the debtor upon acquiring knowledge of the assignment but he is entitled, even then, to raise strictly against him or her.85 One who chooses the words by which a right is given ought to be held to the strict
against the assignee the same defenses he could set up against the assignor78 necessary in order that assignment interpretation of them, rather than the other who only accepts them. 86
may fully produce legal effects. Thus, the duty to pay does not depend on the consent of the debtor. The purpose of
the notice is only to inform that debtor from the date of the assignment. Payment should be made to the assignee
Considering all the foregoing, we find that respondents still have a balance on their account to petitioner in the
and not to the original creditor.
principal amount of P33,841.00, the difference between their loan of P773,000.00 less P585,659.00, the payment of
respondents' other debtors amounting to P103,500.00, and the P50,000.00 payment made by respondents.
The transfer of rights takes place upon perfection of the contract, and ownership of the right, including all
appurtenant accessory rights, is acquired by the assignee79 who steps into the shoes of the original creditor as
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The Decision and Resolution of the Court of Appeals
subrogee of the latter80 from that amount, the ownership of the right is acquired by the assignee. The law does not
are AFFIRMED with MODIFICATION in that the balance of the principal account of the respondents to the petitioner
require any formal notice to bind the debtor to the assignee, all that the law requires is knowledge of the assignment.
is P33,841.00. No costs.
Even if the debtor had not been notified, but came to know of the assignment by whatever means, the debtor is
bound by it. If the document of assignment is public, it is evidence even against a third person of the facts which
gave rise to its execution and of the date of the latter. The transfer of the credit must therefore be held valid and SO ORDERED.
effective from the moment it is made to appear in such instrument, and third persons must recognize it as such, in
view of the authenticity of the document, which precludes all suspicion of fraud with respect to the date of the transfer
or assignment of the credit.81

As gleaned from the deeds executed by respondent Felicidad relative to the accounts of her other debtors, petitioner
was authorized to collect the amounts of P6,000.00 from Cabang, and P63,600.00 from Cirilo. They obliged
themselves to pay petitioner. Respondent Felicidad, likewise, unequivocably declared that Cabang and Cirilo no
longer had any obligation to her.

Equally significant is the fact that, since 1990, when respondent Felicidad executed the deeds, petitioner no longer
attempted to collect from respondents the balance of their accounts. It was only in 1999, or after nine (9) years had
elapsed that petitioner attempted to collect from respondents. In the meantime, petitioner had collected from
respondents' debtors the amount of P301,000.00.

While it is true that respondent Felicidad likewise authorized petitioner in the deeds to collect the debtors' accounts,
and for the latter to pay the same directly, it cannot thereby be considered that respondent merely authorized
petitioner to collect the accounts of respondents' debtors and for her to apply her collections in partial payments of
their accounts. It bears stressing that petitioner, as assignee, acquired all the rights and remedies passed by
Felicidad, as assignee, at the time of the assignment.82 Such rights and remedies include the right to collect her
debtors' obligations to her.

Petitioner cannot find solace in the Court's ruling in Magdalena Estates. In that case, the Court ruled that the mere
fact that novation does not follow as a matter of course when the creditor receives a guaranty or accepts payments
from a third person who has agreed to assume the obligation when there is no agreement that the first debtor would
be released from responsibility. Thus, the creditor can still enforce the obligation against the original debtor.

In the present case, petitioner and respondent Felicidad agreed that the amounts due from respondents' debtors
were intended to "make good in part" the account of respondents. Case law is that, an assignment will, ordinarily, be
interpreted or construed in accordance with the rules of construction governing contracts generally, the primary
object being always to ascertain and carry out the intention of the parties. This intention is to be derived from a
consideration of the whole instrument, all parts of which should be given effect, and is to be sought in the words and
language employed.83

Indeed, the Court must not go beyond the rational scope of the words used in construing an assignment, words
should be construed according to their ordinary meaning, unless something in the assignment indicates that they are
being used in a special sense. So, if the words are free from ambiguity and expressed plainly the purpose of the
instrument, there is no occasion for interpretation; but where necessary, words must be interpreted in the light of the
particular subject matter.84 And surrounding circumstances may be considered in order to understand more perfectly
the intention of the parties. Thus, the object to be accomplished through the assignment, and the relations and
conduct of the parties may be considered in construing the document.

39
G.R. No. 175952 April 30, 2008
SOCIAL SECURITY SYSTEM, petitioner, vs.ATLANTIC GULF AND PACIFIC COMPANY OF MANILA, INC. and
SEMIRARA COAL CORPORATION, respondents.
D E C I S I O N TINGA, J.:
In this Petition for Review on Certiorari1 under Rule 45 of the 1997 Rules of Civil Procedure, petitioner Republic of
the Philippines represented by the Social Security System (SSS) assails the Decision2
dated 31 August 2006 of the Eleventh Division of the Court of Appeals and its Resolution3 dated 19 December 2006
denying petitioners Motion for Reconsideration.
Following are the antecedents culled from the decision of the Court of Appeals:
On 13 February 2004, Atlantic Gulf and Pacific Company of Manila, Inc. (AG & P) and Semirara Coal Corporation
(SEMIRARA) (collectively referred to as private respondents) filed a complaint for specific performance and damages
against SSS before the Regional Trial Court of Batangas City, Branch 3, docketed as Civil Case No. 7441. The
complaint alleged that:
xxx
3. Sometime in 2000, plaintiff informed the SSS in writing of its premiums and loan amortization
delinquencies covering the period from January 2000 to May 2000 amounting to P7.3 Million. AG&P
proposed to pay its said arrears by end of 2000, but requested for the condonation of all penalties;
4. In turn, the defendant suggested two (2) options to AG&P, either to pay by installment or through
"dacion en pago";
5. AG&P chose to settle its obligation with the SSS under the second option, that is through dacion en
pago of its 5,999 sq. m. property situated in Baguio City covered by TCT No. 3941 with an appraised value
of about P80.0 Million. SSS proposes to carve-out from the said property an area sufficient to cover
plaintiffs delinquencies. AG&P, however, is not amenable to subdivide its Baguio property;
6. AG&P then made another proposal to SSS. This time, offering as payment a portion of its 58,153 square
meter-lot, situated in F.S. Sebastian, Sto. Nio, San Pascual, Batangas. In addition, SSS informed AG&P
of its decision to include other companies within the umbrella of DMCI group with arrearages with the SSS.
In the process of elimination of the companies belonging to the DMCI group with possible outstanding
obligation with the SSS, it was only SEMIRARA which was left with outstanding delinquencies with the
SSS. Thus, SEMIRARAs inclusion in the proposed settlement through dacion en pago;
7. AG&P was, thereafter, directed by the defendant to submit certain documents, such as Transfer
Certificate of Title, Tax Declaration covering the subject lot, and the proposed subdivision plan, which
requirements AG&P immediately complied;
8. On April 4, 2001, SSS, in its Resolution No. 270, finally approved AG&Ps proposal to settle its and
SEMIRARAs delinquencies through dacion en pago, which as of March 31, 2001 amounted
to P29,261,902.45. Approval of AG&Ps proposal was communicated to it by Ms. Aurora E.L. Ortega, Vice-
President, NCR-Group of the SSS in a letter dated April 23, 2001. ;
9. As a result of the approval of the dacion en pago, posting of contributions and loan amortization to
individual member accounts, both for AG&P and SEMIRARA employees, was effected immediately
thereafter. Thus, the benefits of the member-employees of both companies were restored;
40
10. From the time of the approval of AG&Ps proposal up to the present, AG&P is (sic) religiously remitting
the premium contributions and loan amortization of its member-employees to the defendant;
11. To effect the property transfer, a Deed of Assignment has to be executed between the plaintiffs and the
defendant. Because of SSS failure to come up with the required Deed of Assignment to effect said
transfer, AG&P prepared the draft and submitted it to the Office of the Vice-President NCR thru SSS
Baclaran Branch in July 2001. Unfortunately, the defendant failed to take any action on said Deed of
Assignment causing AG&P to re-submit it to the same office of the Vice-President NCR in December
2001. From its original submission of the Deed of Assignment in July 2001 to its re-submission in
December 2001, and SSS returning of the revised draft in February 28, 2003 AG&P was consistent in its
regular follow ups with SSS as to the status of its submitted Deed of Assignment;
12. On February 28, 2003, or more than a year after the approval of AG&Ps proposal, defendant sent the
revised copy of the Deed of Assignment to AG&P. However, the amount of the plaintiffs obligation
appearing in the approved Deed of Assignment has ballooned fromP29,261,902.45
to P40,846,610.64 allegedly because of the additional interests and penalty charges assessed on
plaintiffs outstanding obligation from April 2001, the date of approval of the proposal, up to January 2003;
13. AG&P demanded for the waiver and deletion of the additional interests on the ground that delay in the
approval of the deed and the subsequent delay in conveyance of the property in defendants name was
solely attributable to the defendant; hence, to charge plaintiffs with additional interests and penalties
amounting to more than P10,000,000.00, would be unreasonable.;
14. AG&P and SEMIRARA maintain their willingness to settle their alleged obligation of P29,261,902.45 to
SSS. Defendant, however, refused to accept the payment through dacion en pago, unless plaintiffs also
pay the additional interests and penalties being charged;
xxx
Instead of filing an answer, SSS moved for the dismissal of the complaint for lack of jurisdiction and non-exhaustion
of administrative remedies. In an order dated 28 July 2004, the trial court granted SSSs motion and dismissed
private respondents complaint. The pertinent portions of the assailed order are as follows:
Clearly, the motion is triggered on the issue of the courts jurisdiction over the subject matter and the
nature of the instant complaint. The length and breadth of the complaint as perused, boils down to the
questions of premium and loan amortization delinquencies of the plaintiff, the option taken for the payment
of the same in favor of the defendant and the disagreement between the parties as to the amount of the
unpaid contributions and salary loan repayments. In other words, said questions are directly related to the
collection of contributions due the defendant. Republic Act No. 1161 as amended by R.A. No. 8282,
specifically provides that any dispute arising under the said Act shall be cognizable by the Commission
and any case filed with respect thereto shall be heard by the Commission. Hence, a procedural process
mandated by a special law.
Observingly, the running dispute between plaintiffs and defendant originated from the disagreement as to
the amount of unpaid contributions and the amount of the penalties imposed appurtenant thereto. The
alleged dacion en pago is crystal clear manifestation of offering a special form of payment which to the
mind of the court will produce effect only upon acceptance by the offeree and the observance and
compliance of the required formalities by the parties. No matter in what form it may be, still the court
believes that the subject matter is the payment of contributions and the corresponding penalties which are
within the ambit of Sec. 5 (a) of R.A. No. 1161, as amended by R.A. No. 8282.
WHEREFORE, the Court having no jurisdiction over the subject matter of the instant complaint, the motion
is granted and this case is hereby ordered DISMISSED.
SO ORDERED.4
Private respondents moved for the reconsideration of the order but the same was denied in an Order dated 15 Dacion en pago is the delivery and transmission of ownership of a thing by the debtor to the creditor as an
September 2004. accepted equivalent of the performance of the obligation. It is a special mode of payment where the debtor
offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. The
undertaking really partakes in one sense of the nature of sale, that is the creditor is really buying the thing
Consequently, private respondents filed an appeal before the Court of Appeals alleging that the trial court erred in its
or property of the debtor, payment for which is to be charged against the debtors debt. As such, the
pronouncement that it had no jurisdiction over the subject matter of the complaint and in granting the motion to
essential elements of a contract of sale, namely, consent, object certain, and cause or consideration must
dismiss.
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
The Court of Appeals reversed and set aside the trial courts challenged order, granted private respondents appeal considered as the object of the contract of sale, while the debt is considered as the purchase price. In any
and ordered the trial court to proceed with the civil case with dispatch. From the averments in their complaint, the case, common consent is an essential prerequisite, be it sale or novation, to have the effect of totally
appellate court observed that private respondents are seeking to implement the Deed of Assignment which they had extinguishing the debt or obligation.11
drafted and submitted to SSS sometime in July 2001, pursuant to SSSs letter addressed to AG& P dated 23 April
2001 approving AG&P and SEMIRARAS delinquencies through dacion en pago, which as of 31 March 2001,
The controversy, instead, lies in the non-implementation of the approved and agreed dacion en pago on the part of
amounted to P29,261,902.45. The appellate court thus held that the subject of the complaint is no longer the
the SSS. As such, respondents filed a suit to obtain its enforcement which is, doubtless, a suit for specific
payment of the premium and loan amortization delinquencies, as well as the penalties appurtenant thereto, but the
performance and one incapable of pecuniary estimation beyond the competence of the Commission. 12 Pertinently,
enforcement of the dacion en pago pursuant to SSS Resolution No. 270. The action then is one for specific
the Court ruled in Singson v. Isabela Sawmill,13 as follows:
performance which case law holds is an action incapable of pecuniary estimation falling under the jurisdiction of the
Regional Trial Court.5
In determining whether an action is one the subject matter of which is not capable of pecuniary estimation
this Court has adopted the criterion of first ascertaining the nature of the principal action or remedy sought.
SSS filed a motion for reconsideration of the appellate courts decision but the same was denied in a Resolution
If it is primarily for the recovery of a sum of money, the claim is considered capable of pecuniary
dated 19 December 2006.
estimation, and whether jurisdiction in the municipal courts or in the courts of first instance would depend
on the amount of the claim. However, where the basic issue is something other than the right to recover a
Now before the Court, SSS insists on the Social Security Commissions (the Commission) jurisdiction over the sum of money, where the money claim is purely incidental to, or a consequence of, the principal relief
complaint pursuant to Section 5 (a) of Republic Act (R.A.) No. 8282. SSS maintains the Commissions jurisdiction sought, this Court has considered such actions as cases where the subject of the litigation may not be
over all disputes arising from the provisions of R.A. No. 1161, amended by R.A. No. 8282 to the exclusion of trial estimated in terms of money, and are cognizable exclusively by courts of first instance (now Regional Trial
courts.6 Courts).14

The main issue in this case pertains to which body has jurisdiction to entertain a controversy arising from the non- In fine, the Court finds the decision of the Court of Appeals in accord with law and jurisprudence.
implementation of a dacion en pago agreed upon by the parties as a means of settlement of private respondents
liabilities.
WHEREFORE, the petition is DENIED. The Decision dated 31 August 2006 of the Court of Appeals Eleventh
Division in CA-G.R. CV No. 83775 AFFIRMED.
At the outset, it is well to restate the rule that what determines the nature of the action as well as the tribunal or body
which has jurisdiction over the case are the allegations in the complaint.7
Let the case be remanded to the trial court for further proceedings.

The pertinent provision of law detailing the jurisdiction of the Commission is Section 5(a) of R.A. No. 1161, as
SO ORDERED.
amended by R.A. No. 8282, otherwise known as the Social Security Act of 1997, to wit:

SEC. 5. Settlement of Disputes. (a) Any dispute arising under this Act with respect to coverage, benefits,
contributions and penalties thereon or any other matter related thereto, shall be cognizable by the
Commission, and any case filed with respect thereto shall be heard by the Commission, or any of its
members, or by hearing officers duly authorized by the Commission and decided within the mandatory
period of twenty (20) days after the submission of the evidence. The filing, determination and settlement of
disputes shall be governed by the rules and regulations promulgated by the Commission.

The law clearly vests upon the Commission jurisdiction over "disputes arising under this Act with respect to
coverage, benefits, contributions and penalties thereon or any matter related thereto..." Dispute is defined as "a
conflict or controversy."8

From the allegations of respondents complaint, it readily appears that there is no longer any dispute with respect to
respondents accountability to the SSS. Respondents had, in fact, admitted their delinquency and offered to settle
them by way of dacion en pago subsequently approved by the SSS in Resolution No. 270-s. 2001. SSS stated in
said resolution that "the dacion en pago proposal of AG&P Co. of Manila and Semirara Coals Corporation to pay
their liabilities in the total amount of P30,652,710.71 as of 31 March 2001 by offering their 5.8 ha. property located in
San Pascual, Batangas, be, as it is hereby, approved.."9 This statement unequivocally evinces its consent to
the dacion en pago. In Vda. de Jayme v. Court of Appeals,10 the Court ruled significantly as follows:

41
A.C. No. 6955 July 27, 2006
MAR YUSON, complainant, vs .ATTY. JEREMIAS R. VITAN, respondent.
D E C I S I O N PANGANIBAN, C.J.:
Once again this Court exhorts members of the bar to live up to the strictures of the Lawyers' Oath, the Code of
Professional Responsibility, and the Canons of Professional Ethics. Otherwise, they shall be sanctioned by this
Court.
The Case
Before us is a Letter-Complaint1 for the disbarment of Atty. Jeremias R. Vitan, filed by Mar Yuson with the
Commission on Bar Discipline (CBD) of the Integrated Bar of the Philippines (IBP). Respondent was accused of
taking advantage of complainant's generosity and credulity.
On August 5, 2004, IBP-CBD directed Atty. Vitan to submit his Answer within 15 days from receipt of the
Order;2otherwise, he would be considered in default and the case heard ex parte.
Because respondent failed to submit his Answer within the given period, the CBD considered his failure and non-
appearance as a waiver of his right to participate in the proceedings.3 Thus, the hearing scheduled for August 11,
2005, pushed through, with the original copies of the checks he had issued presented by complainant as evidence.
Afterwards, the CBD issued an Order submitting the case for Resolution. 4 On August 23, 2005, Commissioner
Milagros V. San Juan rendered her Report and Recommendation. 5
Respondent denied having received a copy of the Complaint against him and alleged that it was only on August 24,
2005, that he received the Order submitting the case for resolution. Thus, he filed an Urgent Motion to Revive/Re-
open and with Leave to Admit Attached Answer.6
In its Resolution No. XVII-2005-101 dated October 22, 2005, the IBP Board of Directors adopted and approved, with
modification, the investigating commissioner's Report and Recommendation. Upon respondent was imposed the
penalty of suspension from the practice of law for two years, after the board found that he had taken advantage of
complainant through deceit and dishonesty. The lawyer was further ordered to give back the money he had received
from complainant.
The Facts
Complainant Mar Yuson was a taxi driver with eight children. In October 2002, he received a sum of money by way
of inheritance. According to him, he and his wife intended to use the money to purchase a taxi, repair their
dilapidated house, and hold a debut party for their daughter.7
They were able to purchase a secondhand taxi, and Atty. Vitan helped him with all the legal matters concerning this
purchase. Regrettably, their other plans were put on hold, because the lawyer borrowed P100,000 from them in
December 2002. It was agreed that the loan would be repaid before the end of the following year,8 in time for the
debut on November 24, 2003.9
To guarantee payment, respondent executed in favor of complainant several postdated checks to cover the loaned
amount. Those checks, however, turned out to be worthless, because they had been drawn against the lawyer's
closed account in the Bank of Commerce in Escolta, Manila. The six dishonored checks were presented during the
hearing before the IBP commissioner.10
42
Complainant maintained that he had repeatedly tried to recover the debt, only to be turned away empty-handed each
time. He conceded, though, that respondent had given an undisclosed amount covered by the checks dated January
and February 2003.11 The amounts covered by the dishonored checks remained unpaid.
This development prompted complainant to seek the aid of the IBP National Committee on Legal Aid (NCLA) in
obtaining payment. On November 14, 2003, the IBP-NCLA, through Deputy Director Rosalie J. de la Cruz, sent him
a letter.12 It informed him of the impending administrative case and advised him to confer with complainant,
presumably to settle the matter. Upon receipt13 of the letter, he again gave assurances that he would pay the loan in
time for the debut.14
When the date passed without any payment, complainant demanded a collateral to secure the loan. Thus, in his
favor, Atty. Vitan executed a document denominated as a Deed of Absolute Sale, covering the latter's parcel of land
located in Sta. Maria, Bulacan. According to complainant, their intention was to transfer the title of the property to
him temporarily, so that he could either sell or mortgage15 it. It was further agreed that, if it was mortgaged,
respondent would redeem it as partial or full payment of the loan.16
Curiously, however, the parties executed a second Deed of Absolute Sale,17 this time in favor of Atty. Vitan, with
complainant as vendor. The purpose of this particular document was not explained by either party.
On April 12, 2004, complainant was able to mortgage18 the property for P30,000.19 Contrary to their earlier
agreement, respondent did not redeem it from the mortgagee and, instead, simply sent complainant a letter 20dated
July 7, 2004, promising to pay on or before July 12, 2004. As this promise was not fulfilled, the mortgagee demanded
payment from complainant and thereby allegedly exposed the latter to shame and ridicule.21
On July 19, 2004, IBP-NCLA sent another letter22 on behalf of complainant. Respondent was informed that an
administrative case would be filed against him, unless he settled his obligations by July 30, 2004, the date given by
complainant.
On August 30, 2004, the IBP-NCLA received the reply23 dated July 30, 2004, submitted by Atty. Vitan who explained
that he had already settled his obligation. He maintained that he had in fact executed, in complainant's favor, a Deed
of Absolute Sale over his 203-square-meter residential property in Sta. Maria, Bulacan. He clarified that "[their]
understanding was that [complainant] ha[d] the option to use, mortgage or sell [the property] and return to me the
excess of the proceeds after obtaining his money represented by my six (6) dishonored checks." 24Interestingly,
respondent attached the Deed of Absolute Sale in which he was the vendee and complainant the vendor.25 It
appears that this was the second Deed of Absolute Sale, also referred to in the Complaint. 26
Only after the IBP investigating commissioner had rendered her Report and Recommendation27 did Atty. Vitan
submit his Answer to the Letter-Complaint. He called the second document a "Counter Deed of Sale," executed as a
"sort of collateral/security for the account of [his] liaison officer [Evelyn Estur]." 28 He admitted having given several
postdated checks amounting to P100,000, supposedly to guarantee the indebtedness of Estur to complainant. Atty.
Vitan argued for the first time that it was she who had incurred the debts, and that he had acted only as a "character
reference and/or guarantor."29 He maintained that he had given in to the one-sided transactions, because he was
"completely spellbound by complainant's seeming sincerity and kindness." 30 To corroborate his statements, he
attached Estur's Affidavit.31
Report of the Investigating Commissioner
In her Report and Recommendation, Commissioner San Juan recommended that Atty. Vitan be suspended until his
restitution of the amount he had borrowed. She held that respondent, having taken advantage of complainant and
thus shown dishonesty and untrustworthiness, did not deserve to retain his membership in the bar.
On November 24, 2005, the Supreme Court received the IBP Resolution adopting, with modification, the Report and
Recommendation of the investigating commissioner.
The Court's Ruling
We agree with the findings of the IBP Board of Governors, but reduce the period of suspension to six months.
Respondent's Administrative Liability
Lawyers are instruments for the administration of justice. They are expected to maintain not only legal proficiency but
also a high standard of ethics, honesty, integrity and fair dealing. In this way, the people's faith and confidence in the
judicial system is ensured.32
In the present case, Atty. Vitan undoubtedly owed money to complainant. In a letter33 to IBP Deputy Director de la
Cruz, respondent admitted having incurred the P100,000 loan. It was only in his Answer34 that the lawyer suddenly
denied that he had personally incurred this obligation. This time, he pointed to his employee, Estur, as the true
debtor. We find his version of the facts implausible.
First, the story involving a certain Evelyn Estur was clearly a mere afterthought, conjured simply to escape his
liability. If it were true that it was she who owed the money, he should have mentioned this alleged fact in his letter to
the IBP NCLA deputy director. Instead, respondent was completely silent about Estur and merely asserted that he
had already settled his debt with complainant.
Second, the promise of Atty. Vitan to settle his obligations on particular dates is contained in two handwritten notes
signed by him and worded as follows:
"I undertake to settle the financial obligations of P100,000 plus before the end of the year."35
"Mar:
"We will settle on July 12, 2004, on or before said date."36
The wordings of these promissory notes disclose that he had a personal obligation to complainant, without any
mention of Estur at all. If it were true that Atty. Vitan had executed those notes for the account of his liaison officer,
he should have used words to that effect. As a lawyer, he was aware that the preparation of promissory notes was
not a "mere formality;" it had legal consequences. It is quite far-fetched for a lawyer to assume the role of guarantor,
without saying so in the notes.
A lawyer may be disciplined for evading the payment of a debt validly incurred. 37 In this case, the failure of Atty. Vitan
to pay his debt for over three years despite repeated demands puts in question his standing as a member of the bar.
Worse, he made several promises to pay his debt promptly, but reneged on all of them. He even started to hide from
complainant according to the latter .38
Failure to honor just debts, particularly from clients, constitutes dishonest conduct that does not speak well of a
member of the bar.39 It is vital that a lawyer's conduct be kept beyond reproach and above suspicion at all times.
Rule 1.01 of the Code of Professional Responsibility clearly provides that lawyers must not engage in unlawful,
immoral or deceitful conduct. They must comport themselves in a manner that will secure and preserve the respect
and confidence of the public for the legal profession.40
Atty. Vitan contends that his obligation was already extinguished, because he had allegedly sold his Bulacan
property to complainant.41 Basically, respondent is asserting that what had transpired was a dation in payment.
Governed by the law on sales, it is a transaction that takes place when a piece of property is alienated to the creditor
in satisfaction of a debt in money.42 It involves delivery and transmission of ownership of a thing -- by the debtor to
the creditor -- as an accepted equivalent of the performance of the obligation. 43
Going over the records of this case, we find the contention of Atty. Vitan undeserving of credence. The records
reveal that he did not really intend to sell and relinquish ownership over his property in Sta. Maria, Bulacan,
notwithstanding the execution of a Deed of Absolute Sale in favor of complainant. The second Deed of Absolute
43
Sale, which reconveyed the property to respondent, is proof that he had no such intention. This second Deed, which
he referred to as his "safety net,"44 betrays his intention to counteract the effects of the first one .
In a manner of speaking, Atty. Vitan was taking back with his right hand what he had given with his left. The second
Deed of Absolute Sale returned the parties right back where they started, as if there were no sale in favor of
complainant to begin with. In effect, on the basis of the second Deed of Sale, respondent took back and asserted his
ownership over the property despite having allegedly sold it. Thus, he fails to convince us that there was a bona fide
dation in payment or sale that took place between the parties; that is, that there was an extinguishment of obligation.
It appears that the true intention of the parties was to use the Bulacan property to facilitate payment. They only made
it appear that the title had been transferred to complainant to authorize him to sell or mortgage the property.45 Atty.
Vitan himself admitted in his letter dated July 30, 2004, that their intention was to convert the property into cash, so
that payment could be obtained by complainant and the excess returned to respondent. 46The records, however, do
not show that the proceeds derived were sufficient to discharge the obligation of the lawyer fully; thus, he is still liable
to the extent of the deficiency.
We hasten to add, however, that this administrative case is not the proper venue for us to determine the extent of the
remaining liability. This Court will not act as a collection agency from faltering debtors, when the amount of the
indebtedness is indefinite and disputed.47
Nevertheless, the records satisfactorily reveal the failure of respondent to live up to his duties as a lawyer in
consonance with the strictures of the Lawyer's Oath, the Code of Professional Responsibility, and the Canons of
Professional Ethics, thereby degrading not only his person but his profession as well. So far, we find that his lack of
sincerity in fulfilling his obligations is revealed by his acts of issuing promissory notes and reneging on them;
executing a simulated Deed of Absolute Sale; and breaking his promise to redeem the property from the mortgagee.
The repeated failure of Atty. Vitan to fulfill his promise puts in question his integrity and character. Indeed, not only
his integrity as an individual but, more important, his stature as a member of the bar is affected by his acts of
welching on his promises and misleading complainant. Canon 1 and Rule 1.01 of the Code of Professional
Responsibility explicitly state thus:
"CANON 1 A lawyer shall uphold the constitution, obey the laws of the land and promote respect for law
and legal processes.
"Rule 1.01 A lawyer shall not engage in unlawful, dishonest, immoral or deceitful conduct."
Any wrongdoing, whether professional or nonprofessional, indicating unfitness for the profession justifies disciplinary
action.48
There is yet another reason to find Atty. Vitan administratively liable. In his letter of July 30, 2004, was an admission
that the personal checks he issued in favor of complainant had all been dishonored. 49 Whether those checks were
issued for the account of respondent or of Estur is not important. The fact remains that the lawyer knowingly issued
worthless checks and thus revealed his disposition to defraud complainant.
The act of a lawyer in issuing a check without sufficient funds to cover them -- or, worse, drawn against a closed
account --constitutes such willful dishonesty and unethical conduct as to undermine the public confidence in the law
and in lawyers.50 The act also manifests a low regard for the Oath taken by the lawyer upon joining the profession,
whose image should be held in high esteem, not seriously and irreparably tarnished. 51
Moreover, the inimical effect of the issuance of worthless checks has been recognized by this Court in an earlier
case, from which we quote:
"[T]he effect [of issuance of worthless checks] transcends the private interests of the parties directly
involved in the transaction and touches the interests of the community at large. The mischief it creates is
 not only a wrong to the payee or holder, but also an injury to the public since the circulation of valueless
commercial papers can very well pollute the channels of trade and commerce, injure the banking system
and eventually hurt the welfare of society and the public interest." 52

We have also held that the deliberate failure to pay just debts and the issuance of worthless checks constitute gross
misconduct,53 for which a lawyer may be sanctioned with one year's suspension from the practice of law, 54 or a
suspension of six months upon partial payment of the obligation.55

In the instant case, complainant himself admits that respondent had already paid the amounts covered by the
January and February checks.56 Thus, there has been a partial payment that justifies a modification of IBP's
recommended penalty.

WHEREFORE, Atty. Jeremias R. Vitan is hereby found guilty of gross misconduct and SUSPENDED from the
practice of law for six (6) months, effective upon his receipt of this Decision, with the warning that a repetition of the
same or any other misconduct will be dealt with more severely.

Let a copy of this Decision be entered in respondent's record as a member of the Bar, and notice served on the
Integrated Bar of the Philippines and on the Office of the Court Administrator for circulation to all courts in the
country.

SO ORDERED.

44
G.R. No. 82508 September 29, 1989
FILINVEST CREDIT CORPORATION, petitioner, vs.THE COURT OF APPEALS, JOSE SY BANG and
ILUMINADA TAN SY BANG,*respondents.
SARMIENTO, J.:
This is a petition for review on certiorari of the decision, 1 dated March 17, 1988, of the Court of Appeals which
affirmed with modification the decision 2 of the Regional Trial Court of Quezon, Branch LIX, Lucena City. The
controversy stemmed from the following facts: The private respondents, the spouses Jose Sy Bang and Iluminada
Tan, were engaged in the sale of gravel produced from crushed rocks and used for construction purposes. In order
to increase their production, they engaged the services of Mr. Ruben Mercurio, the proprietor of Gemini Motor Sales
in Lucena City, to look for a rock crusher which they could buy. Mr. Mercurio referred the private respondents to the
Rizal Consolidated Corporation which then had for sale one such machinery described as:
ONE UNIT LIPPMAN PORTABLE CRUSHING PLANT (RECONDITIONED) [sic]
JAW CRUSHER-10xl6 DOUBLE ROLL CRUSHER 16x16
3 UNITS PRODUCT CONVEYOR
75 HP ELECTRIC MOTOR
8 PCS. BRAND NEW TIRES CHASSIS NO. 19696 GOOD RUNNING CONDITION 3
Oscar Sy Bang, a brother of private respondent Jose Sy Bang, went to inspect the machine at the Rizal
Consolidated's plant site. Apparently satisfied with the machine, the private respondents signified their intent to
purchase the same. They were however confronted with a problem-the rock crusher carried a cash price tag of P
550,000.00. Bent on acquiring the machinery, the private respondents applied for financial assistance from the
petitioner, Filinvest Credit Corporation. The petitioner agreed to extend to the private respondents financial aid on the
following conditions: that the machinery be purchased in the petitioner's name; that it be leased (with option to
purchase upon the termination of the lease period) to the private respondents; and that the private respondents
execute a real estate mortgage in favor of the petitioner as security for the amount advanced by the latter.
Accordingly, on May 18,1981, a contract of lease of machinery (with option to purchase) was entered into by the
parties whereby the private respondents agreed to lease from the petitioner the rock crusher for two years starting
from July 5, 1 981 payable as follows:
P10,000.00 - first 3 months
23,000.00 - next 6 months
24,800.00 - next 15 months
The contract likewise stipulated that at the end of the two-year period, the machine would be owned by the private
respondents. Thus, the private respondents issued in favor of the petitioner a check for P150,550.00, as initial rental
(or guaranty deposit), and twenty-four (24) postdated checks corresponding to the 24 monthly rentals. In addition, to
guarantee their compliance with the lease contract, the private respondents executed a real estate mortgage over
two parcels of land in favor of the petitioner. The rock crusher was delivered to the private respondents on June 9,
1981. Three months from the date of delivery, or on September 7, 1981, however, the private respondents, claiming
that they had only tested the machine that month, sent a letter-complaint to the petitioner, alleging that contrary to
the 20 to 40 tons per hour capacity of the machine as stated in the lease contract, the machine could only process 5
tons of rocks and stones per hour. They then demanded that the petitioner make good the stipulation in the lease
contract. They followed that up with similar written complaints to the petitioner, but the latter did not, however, act on
45
them. Subsequently, the private respondents stopped payment on the remaining checks they had issued to the
petitioner. 5
As a consequence of the non-payment by the private respondents of the rentals on the rock crusher as they fell due
despite the repeated written demands, the petitioner extrajudicially foreclosed the real estate mortgage. 6 On April
18, 1983, the private respondents received a Sheriff s Notice of Auction Sale informing them that their mortgaged
properties were going to be sold at a public auction on May 25, 1983 at 10:00 o'clock in the morning at the Office of
the Provincial Sheriff in Lucena City to satisfy their indebtedness to the petitioner. 7 To thwart the impending auction
of their properties, the private respondents filed before the Regional Trial Court of Quezon, on May 4, 1983, 8 a
complaint against the petitioner, for the rescission of the contract of lease, annullment of the real estate mortgage,
and for injunction and damages, with prayer for the issuance of a writ of preliminary injunction. 9 On May 23, 1983,
three days before the scheduled auction sale, the trial court issued a temporary restraining order commanding the
Provincial Sheriff of Quezon, and the petitioner, to refrain and desist from proceeding with the public auction. 10 Two
years later, on September 4, 1985, the trial court rendered a decision in favor of the private respondents, the
dispositive portion of which reads:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
1. making the injunction permanent;
2. rescinding the contract of lease of the machinery and equipment and ordering the plaintiffs to
return to the defendant corporation the machinery subject of the lease contract, and the
defendant corporation to return to plaintiffs the sum of P470,950.00 it received from the latter as
guaranty deposit and rentals with legal interest thereon until the amount is fully restituted;
3. annulling the real estate mortgage constituted over the properties of the plaintiffs covered by
Transfer Certificate of Title Nos. T32480 and T-5779 of the Registry of Deeds of Lucena City;
4. ordering the defendant corporation to pay plaintiffs P30,000.00 as attorney's fees and the
costs of the suit.
SO ORDERED. 11
Dissatisfied with the trial court's decision, the petitioner elevated the case to the respondent Court of Appeals.
On March 17, 1988, the appellate court, finding no error in the appealed judgment, affirmed the same in
toto. 12Hence, this petition.
Before us, the petitioner reasserts that the private respondents' cause of action is not against it (the petitioner), but
against either the Rizal Consolidated Corporation, the original owner-seller of the subject rock crusher, or Gemini
Motors Sales which served as a conduit facilitator of the purchase of the said machine. The petitioner argues that it is
a financing institution engaged in quasi-banking activities, primarily the lending of money to entrepreneurs such as
the private respondents and the general public, but certainly not the leasing or selling of heavy machineries like the
subject rock crusher. The petitioner denies being the seller of the rock crusher and only admits having financed its
acquisition by the private respondents. Further, the petitioner absolves itself of any liability arising out of the lease
contract it signed with the private respondents due to the waiver of warranty made by the latter. The petitioner
likewise maintains that the private respondents being presumed to be knowledgeable about machineries, should be
held responsible for the detection of defects in the machine they had acquired, and on account of that, they are
estopped from claiming any breach of warranty. Finally, the petitioner interposed the defense of prescription,
invoking Article 1571 of the Civil Code, which provides:
Art. 1571. Actions arising from the provisions of the preceding ten articles shall be barred after six months, from the
delivery of the thing sold.
We find the petitioner's first contention untenable. While it is accepted that the petitioner is a financing institution, it is
not, however, immune from any recourse by the private respondents. Notwithstanding the testimony of private
respondent Jose Sy Bang that he did not purchase the rock crusher from the petitioner, the fact that the rock crusher
was purchased from Rizal Consolidated Corporation in the name and with the funds of the petitioner proves beyond
doubt that the ownership thereof was effectively transferred to it. It is precisely this ownership which enabled the
petitioner to enter into the "Contract of Lease of Machinery and Equipment" with the private respondents.
Be that as it may, the real intention of the parties should prevail. The nomenclature of the agreement cannot change
its true essence, i.e., a sale on installments. It is basic that a contract is what the law defines it and the parties intend
it to be, not what it is called by the parties. 13 It is apparent here thatthe intent of the parties to the subject contract is
for the so-called rentals to be the installment payments. Upon the completion of the payments, then the rock crusher,
subject matter of the contract, would become the property of the private respondents. This form of agreement has
been criticized as a lease only in name. Thus in Vda. de Jose v. Barrueco 14 we stated:
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a bargain in that
form, for one reason or another, have frequently resorted to the device of making contracts in the form of leases
either with options to the buyer to purchase for a small consideration at the end of term, provided the so-called rent
has been duly paid, or with stipulations that if the rent throughout the term is paid, title shall thereupon vest in the
lessee. It is obvious that such transactions are leases only in name. The so-called rent must necessarily be regarded
as payment of the price in installments since the due payment of the agreed amount results, by the terms of bargain,
in the transfer of title to the lessee. 15
The importance of the criticism is heightened in the light of Article 1484 of the new Civil Code which provides for the
remedies of an unpaid seller of movables on installment basis.
Article 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage or the thing sold, if one has been constituted, should the
vendee's failure to pay cover two or more installments. In this case, he shall have no further
action against the purchaser to recover any unpaid balance of the price. Any agreement to the
contrary shall be void.
Under the aforequoted provision, the seller of movables in installments, in case the buyer fails to pay two or more
installments may elect to pursue either of the following remedies: (1) exact fulfillment by the purchaser of the
obligation; (2) cancel the sale; or (3) foreclose the mortgage on the purchased property if one was constituted
thereon. It is now settled that the said remedies are alternative and not cumulative and therefore, the exercise of one
bars the exercise of the others.
Indubitably, the device contract of lease with option to buy is at times resorted to as a means to circumvent Article
1484, particularly paragraph (3) thereof.Through the set-up, the vendor, by retaining ownership over the property in
the guise of being the lessor, retains, likewise, the right to repossess the same, without going through the process of
foreclosure, in the event the vendee-lessee defaults in the payment of the installments. There arises therefore no
need to constitute a chattel mortgage over the movable sold. More important, the vendor, after repossessing the
property and, in effect, canceling the contract of sale, gets to keep all the installments-cum-rentals already paid. It is
thus for these reasons that Article 1485 of the new Civil Code provides that:
Article 1485. The preceding article shall be applied to contracts purporting to be leases of
personal property with option to buy, when the lessor has deprived the lessee of possession or
enjoyment of the thing. (Emphasis ours.)
46
Unfortunately, even with the foregoing findings, we however fail to find any reason to hold the petitioner liable for the
rock crusher's failure to produce in accordance with its described capacity. According to the petitioner, it was the
private respondents who chose, inspected, and tested the subject machinery. It was only after they had inspected
and tested the machine, and found it to their satisfaction, that the private respondents sought financial aid from the
petitioner. These allegations of the petitioner had never been rebutted by the private respondents. In fact, they were
even admitted by the private respondents in the contract they signed. Thus:
LESSEE'S SELECTION, INSPECTION AND VERIFICATION.-The LESSEE hereby confirms and acknowledges that
he has independently inspected and verified the leased property and has selected and received the same from the
Dealer of his own choosing in good order and excellent running and operating condition and on the basis of such
verification, etc. the LESSEE has agreed to enter into this Contract." 16
Moreover, considering that between the parties, it is the private respondents, by reason of their business, who are
presumed to be more knowledgeable, if not experts, on the machinery subject of the contract, they should not
therefore be heard now to complain of any alleged deficiency of the said machinery. It is their failure or neglect to
exercise the caution and prudence of an expert, or, at least, of a prudent man, in the selection, testing, and
inspection of the rock crusher that gave rise to their difficulty and to this conflict. A well- established principle in law is
that between two parties, he, who by his negligence caused the loss, shall bear the same.
At any rate, even if the private respondents could not be adjudged as negligent, they still are precluded from imputing
any liability on the petitioner. One of the stipulations in the contract they entered into with the petitioner is an express
waiver of warranties in favor of the latter. By so signing the agreement, the private respondents absolved the
petitioner from any liability arising from any defect or deficiency of the machinery they bought. The stipulation on the
machine's production capacity being "typewritten" and that of the waiver being "printed" does not militate against the
latter's effectivity. As such, whether "a capacity of 20 to 40 tons per hour" is a condition or a description is of no
moment. What stands is that the private respondents had expressly exempted the petitioner from any warranty
whatsoever. Their Contract of Lease Of Machinery And Equipment states:
WARRANTY-LESSEE absolutely releases the lessor from any liability whatsoever as to any and all matters in
relation to warranty in accordance with the provisions hereinafter stipulated. 17
Taking into account that due to the nature of its business and its mode of providing financial assistance to clients, the
petitioner deals in goods over which it has no sufficient know-how or expertise, and the selection of a particular item
is left to the client concerned, the latter, therefore, shoulders the responsibility of protecting himself against product
defects. This is where the waiver of warranties is of paramount importance. Common sense dictates that a buyer
inspects a product before purchasing it (under the principle of caveat emptor or "buyer beware") and does not return
it for defects discovered later on, particularly if the return of the product is not covered by or stipulated in a contract or
warranty. In the case at bar, to declare the waiver as non-effective, as the lower courts did, would impair the
obligation of contracts. Certainly, the waiver in question could not be considered a mere surplusage in the contract
between the parties. Moreover, nowhere is it shown in the records of the case that the private respondent has
argued for its nullity or illegality. In any event, we find no ambiguity in the language of the waiver or the release of
warranty. There is therefore no room for any interpretation as to its effect or applicability vis-a- vis the deficient output
of the rock crusher. Suffice it to say that the private respondents have validly excused the petitioner from any
warranty on the rock crusher. Hence, they should bear the loss for any defect found therein.
WHEREFORE, the Petition is GRANTED; the Decision of the Court of Appeals dated March 17, 1988 is hereby
REVERSED AND SET ASIDE, and another one rendered DISMISSING the complaint. Costs against the private
respondents.
SO ORDERED.
G.R. No. 115966 March 20, 2003
JUANA ALMIRA, RENATO GARCIA, ROGELIO GARCIA, RODOLFO GARCIA, ROSITA GARCIA, RHODORA
GARCIA, ROSALINDA GARCIA, ROLANDO GARCIA and RAFAEL GARCIA Represented in this suit by
EDGARDO ALVAREZ, petitioners, vs.COURT OF APPEALS AND FEDERICO BRIONES, respondents.
AZCUNA, J.:
Before us is a petition for review on certiorari assailing the decision rendered by the Court of Appeals in C.A. G.R.
CV No. 409541 which reversed the decision of the Regional Trial Court, Branch 32, of San Pedro, Laguna that
rescinded the Kasunduan ng Pagbibilihan2 entered into between petitioners and private respondent over a portion of
a parcel of land situated in Sta. Rosa, Laguna.
The facts of the case are as follows:
Petitioners are the wife and the children of the late Julio Garcia who inherited from his mother, Maria Alibudbud, a
portion of a 90,655 square-meter property denominated as Lot 1642 of the Sta. Rosa Estate in Barangay Caingin,
Sta. Rosa, Laguna and covered by TCT No. RT-1076. Lot 1642 was co-owned and registered in the names of three
persons with the following shares: Vicente de Guzman (), Enrique Hemedes (1/4), and Francisco Alibudbud, the
father of Maria Alibudbud (). Although there was no separate title in the name of Julio Garcia, there were tax
declarations in his name to the extent of his grandfathers share covering an area of 21,460 square meters. On July
5, 1984, petitioners, as heirs of Julio Garcia, and respondent Federico Briones entered into a Kasunduan ng
Pagbibilihan (Kasunduan for brevity) over the 21,460 square-meter portion for the sum of P150,000.00. Respondent
paid P65,000.00 upon execution of the contract while the balance of P85,000.00 was made payable within six (6)
months from the date of the execution of the instrument. At the time of the execution of theKasunduan, petitioners
allegedly informed respondent that TCT No. RT-1076 was in the possession of their cousin, Conchalina Alibudbud
who having bought Vicente de Guzmans share, owned the bigger portion of Lot 1642. This notwithstanding,
respondent willingly entered into the Kasunduan provided that the full payment of the purchase price will be made
upon delivery to him of the title.3
The Kasunduan provides:
Na ang UNANG BAHAGI ay siyang magkakamayari (co-owners), bilang tagapagmana ng yumaong Julio
Garcia sa isang lagay na lupang taniman ng palay, matatagpuan sa nayon ng Caingin, Santa Rosa,
Laguna, may buong lawak na 21,460 metrong parisukat, humigit kumulang, na lalong makikilala sa mga
katangiang inilalahad sa pahayag ng Buwis Bilang 3472 na ganito ang natutunguhan: Mga kahanggan:
Hilaga-1641-Nazario Lauriles; Timog-Barique Hemedez; Silangan- Vicente de Guzman; at Kanluran-
Francisco Alibudbod; hinalagahan para sa pagbabayad ng buwis pampamahalaan ng P12,720.00; at
kasalukuyang may nabibinbing kahilingan sa hukuman upang magkaroon ng sariling titulo; nalilibot ng
batong mohon na nagsisilbing hanganan sa bawat sulok.
Na ang UNANG BAHAGI ay inialok sa IKALAWANG BAHAGI upang bilihin ang lupang nabanggit sa
kabuuang halagang ISANG DAAN AT LIMAMPUNG LIBONG (P150,000.00) PISO, Salaping Pilipino, at
ang IKALAWANG BAHAGI ay sumangayon na bilhin ang naulit na lupa batay sa sumusunod na mga
pasubali atKasunduan:
(1) Na pinatutunayan ng UNANG BAHAGI na tinanggap nila sa buong kasiyahan ng kalooban
buhat sa IKALAWANG BAHAGI ang halagang ANIMNAPU AT LIMANG LIBONG (P65,000.00)
PISO, salaping Pilipino, bilang paunang bayad, at ang nalalabing WALUMPU AT LIMANG
LIBONG (85,000.00) PISO, ay babayaran ng IKALAWANG BAHAGI sa UNANG BAHAGI sa
loob ng anim na buwan simula sa takda ng kasulatang ito, sa pasubali na ang kaukulang titulo
sa lupang nabanggit ay maipagkakaloob ng UNANG BAHAGI;
47
(2) Na ang UNANG BAHAGI ang siyang mananagot tungkol sa anumang kasulatang inihanda
ukol sa pagbibilihang ito, gayundin sa gastos sa notaryo publiko, capital gains tax at
pagpapatala ng kasulatan sa lalawigan ng Laguna;
(3) Na ang UNANG BAHAGI ay lalagda sa isang "Kasulatan ng Bilihang Tuluyan" matapos na
mabayarang lahat ng IKALAWANG BAHAGI ang kaukulang kabuuang halaga ng lupang
nabanggit.
Respondent took possession of the property subject of the Kasunduan and made various payments to petitioners
amounting to P58,500.00. However, upon failure of petitioners to deliver to him a separate title to the property in the
name of Julio Garcia, he refused to make further payments, prompting petitioners to file a civil action before the
Regional Trial Court of San Pedro, Laguna, Branch 32, on May 13, 1991 for (a) rescission of the Kasunduan; (b)
return by respondent to petitioners of the possession of the subject parcel of land; and (c) payment by respondent of
damages in favor of petitioners.
Petitioners alleged that respondent was bound to pay the balance of the purchase price within six (6) months from
the date of the execution of the Kasunduan and upon delivery to him of TCT No. RT-1076. Petitioners claimed that
they approached respondent several times to deliver TCT No. RT-1076 but respondent told them that he did not
have money to pay the balance of the purchase price.4 Respondent, on the other hand, filed a counterclaim for
damages and averred that he refused to make further payments because of petitioners failure to deliver to him a
separate title in the name of Julio Garcia.
On November 26, 1992, the trial court rendered a decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendant decreeing
the rescission of the "Kasunduan ng Pagbibilihan" dated July 5, 1984 and ordering the defendant to return
and restore possession of the property subject of the Kasunduan ng Pagbibilihan to the plaintiffs. For
paucity of evidence, no judgment can be rendered on the other reliefs prayed for in the complaint.
On the other hand, plaintiffs are hereby ordered to refund to the defendant the downpayment of
P65,000.00 and the partial payment of the balance totaling to P58,500.00 plus legal interest. Defendants
counterclaim is hereby dismissed for lack of merit. Costs against defendant.5
In its decision, the trial court noted that proceedings for the issuance of a separate title covering the property subject
of sale entail time and the parties could not have intended delivery by petitioners to respondent of a separate title in
the name of Julio Garcia as a condition for respondents payment of the full purchase price within six months from
the time of the execution of the Kasunduan. Said court observed that even if petitioners were obliged to deliver a
separate title in the name of Julio Garcia to respondent, the latter appeared to have insufficient funds to settle his
obligation as indicated by the fact that his payments amounting to P58,500.00 were made in "trickles," having been
given on thirty-nine occasions within a span of two years from the time of the execution of the Kasunduan. It
concluded that respondent refused to complete payment of the full purchase price not because of the failure of
petitioners to deliver a separate title in the name of Julio Garcia but because respondent simply did not have
sufficient funds at hand.
The Court of Appeals, however, noting that the Kasunduan made no reference to TCT No. RT-1076, reversed the
decision of the trial court, and dismissed the complaint. The appellate court opined that the parties intended to refer
to a separate title over the 21,460 square meter lot when the Kasunduan mentioned a "kaukulang titulo ng lupang
nabanggit" since it was the portion which was covered by a separate tax declaration in the name of Julio Garcia and
it was the portion that petitioners could sell. The appellate court noted that the actuations of the parties subsequent
to the execution of the Kasunduan confirmed respondents claim that a separate title to the property subject of
theKasunduan should be delivered to him. Nevertheless, respondents counterclaim for damages was dismissed on
the ground that the filing of the complaint for rescission was not attended by malice, there being an honest difference
of opinion between the parties as to the interpretation of the Kasunduan.
Feeling aggrieved by the aforesaid decision, petitioners filed before us the instant petition for certiorari, raising issues
which may essentially be summarized as follows: (1) whether payment of the balance of the purchase price is
conditioned upon delivery of a separate title in the name of Julio Garcia; (2) whether petitioners are entitled to Unawain po naman ninyo kami sa halagang kailangan naming para sa huling gumagawa ng Titulo ng lupa
rescind the Kasunduan for failure of respondent to complete payment of the purchase price; and (3) whether the para naman po maayos na ito.11
Court of Appeals should have dismissed respondents appeal for failure to comply with Circular 28-91.
Respondent signified his willingness to pay the balance of the purchase price but reminded petitioners of their
Petitioners contend that the Kasunduan never made a reference to a "title in the name of Julio Garcia" and that there obligation to deliver title to the property in the following reply:
was nothing in the actuations of the parties which would indicate that full payment of the purchase price is
conditioned upon the delivery to respondent of said title. Petitioners allege that respondent refused to give further
Hindi lingid sa inyong kaalaman na sa ilalim ng naubit na "Kasunduan ng Pagbibilihan" ay maliwanag ang
payments not because of their failure to deliver a separate title in the name of Julio Garcia but because he simply did
inyong tungkulin na ipagkaboob sa amin ang kaukulang titulo ng lupa sa boob ng anim (6) na buwan
not have sufficient funds to complete payment of the purchase price. Petitioners ask for rescission of
simula sa takda ng nasabing kasulatan at kami naman ay nahahandang magbayad ng lahat ng nalababing
theKasunduan pursuant to Article 1191 of the Civil Code on the ground that respondent failed to complete payment
kabayaran x x x at tuwing kayo ay kukuha ng pera ang lagi niyong idinadahilan ay ang diumano ay
of the purchase price. They further aver that the appellate court should have dismissed respondents appeal in the
paglalakad tungkol sa titulo. x x x12
first place for failure of respondent to comply with Circular No. 28-916 requiring parties to submit a certification of
non-forum shopping in petitions filed before the Supreme Court and the Court of Appeals. Petitioners lament that
although they raised the issue regarding respondents procedural lapse early on at the appellate court, the latter still Had the parties intended that petitioners deliver TCT No. RT-1076 instead of a separate title in the name of Julio
entertained respondents appeal. Garcia to respondent, then there would have been no need for petitioners to ask for partial sums on the ground that
this would be used to pay for the processing of the title to the property. Petitioners had only to present the existing
title, TCT No. RT-1076, to respondent and demand the balance of the purchase price. This, petitioners did not do.
As a rule, our jurisdiction in cases brought before us from the Court of Appeals under Rule 45 of the Rules of Court is
Instead, they were content to ask small sums from respondent on thirty-nine occasions for two years before filing an
limited to reviewing errors of law. Factual findings of the appellate court are generally binding on us.7 However, this
action in court for rescission of the Kasunduan another five years later. It is readily discernible from the tenor of
principle is subject to certain exceptions such as the situation in this case where the trial court and the appellate
various receipts13 issued by petitioners that the sums given by respondent on these thirty-nine occasions were made
court arrived at diverse factual findings.8
upon request of petitioners seeking respondents indulgence. A letter14 dated October 11, 1984 and addressed to
respondents father, Tata Omy, whom respondent authorized to give payments during the time he was working
The subject of conflicting interpretations between the parties pertains to the provision in the Kasunduan which states: abroad reads:

(1) Na pinatutunayan ng UNANG BAHAGI na tinanggap nila sa buong kasiyahan ng kalooban buhat sa Tata Omy,
IKALAWANG BAHAGI ang halagang ANIMNAPU AT LIMANG LIBO (P65,000.00) PISO, Salaping Pilipino,
bilang paunang bayad, at ang nalalabing WALUMPU AT LIMANG LIBONG (85,000.00) PISO ay
Ako si Rogelio A. Garcia ang sumulat nito at ang maydala ay si Rolando Garcia na kapatid kong bunso at
babayaran ng IKALAWANG BAHAGI sa UNANG BAHAGI sa loob ng anim na buwan simula sa takda ng
ito ay pinagawa ng aking ina si Juana Garcia. Ang dahilan ay mayroon silang nabiling t.v. 17 inches at
kasulatang ito, sa pasubali na ang kaukulang titulo ng lupang nabanggit ay maipagkakaloob ng UNANG
ngayon ay naririto sa amin. Kaya ako ay labis na nahihiya sa inyo ni Viring ngunit ano ang magagawa ko
BAHAGI sa IKALAWANG BAHAGI"
para diyan kaya kayo na ang bahalang magpasensiya sa amin. Ang kailangan nila ay halagang P800.00 at
para mabili nila ang T. V. + P200.00
Petitioners allege that the kaukulang titulo ng lupang nabanggit refers to TCT No. RT-1076 and not to a separate title
in the name of Julio Garcia. Petitioners stress the implausibility of delivering the separate title to respondent within
six (6) months from the time of the execution of the Kasunduan considering that issuance of the title required prior Ang gumagalang,
settlement of the estates of Francisco Alibudbud, Vicente de Guzman and Enrique Hemedes; partition of Lot 1642;
and segregation of the portion pertaining to the share acquired by Julio Garcia. Respondent, for his part, insists that (Sgd.) Rogelio Garcia
the kaukulang titulo ng lupang nabanggit refers to a separate title in the name of Julio Garcia. He argues that he only
acceded to the Kasunduan upon having been assured by petitioners that they would be able to deliver to him a
separate title in the name of Julio Garcia. Petitioners allegedly told respondent that there was a pending petition in Received: P1,000.00
the court of Bian for the issuance of a separate title to the subject property.9
By( Sgd). Rosita Garcia
It is basic in the interpretation and construction of contracts that the literal meaning of the stipulations shall control if
the terms of the contract are clear and leave no doubt on the intention of the contracting parties. However, if the
There is thus no basis to conclude that insufficiency of funds rather than failure of petitioners to deliver a separate
terms of the agreement are ambiguous, resort is made to contract interpretation which is the determination of the
title in the name of Julio Garcia prevented respondent from completing payment of the purchase price.
meaning attached to written or spoken words that make the contract.10 To ascertain the true intention of the parties,
their subsequent or contemporaneous actions must be principally considered.
That the parties agreed on delivery of a separate title in the name of Julio Garcia as a condition for respondents
payment of the balance of the purchase price is bolstered by the fact that there was already an approved subdivision
The tenor of the correspondence between petitioners and respondent shows that the parties intended that a
plan of the 21,460 square-meter lot years before petitioners filed an action in court for rescission. 15 The parties
separate title to the property in the name of Julio Garcia shall be delivered to respondent as a condition for the
evidently assumed petitioners would be able to deliver a separate title in the name of Julio Garcia to respondent
latters payment of the balance of the purchase price. Thus, petitioner Juana Almiras letter dated July 24, 1986 to
within six (6) months from the time of the execution of the Kasunduan since there was already a pending petition in
respondent reads:
court for the issuance of a separate title to 21,460 square-meter lot at that time. Unfortunately, the petitioners were
not able to secure a separate title in the name of Julio Garcia within the stipulated period.
Ang totoo po ngayon ay kailangan naming ang halagang LABING LIMANG LIBO (P15,000.00) PISO, yan
po ang dahilan kung bakit kami ay sumulat sa inyo, sapagkat sa mga unang naghawak at nag-ayos ng
Finally, we note that, as quoted earlier, the Kasunduan itself in its opening paragraph refers to the subject property
papeles ng lupang ito ay hindi nila naayos at hindi nila natapos, kaya po kami ay nakakita at malaki po ang
being sold as "buong lawak na 21,640 metrong parisukat, x x x at sa kasalukuyan may nabibinbing kahilingan sa
nagastos naming sa una na walang nangyari, kaya nga itong huli ay lalong lumaki
hukuman upang magkaroon ng sariling titulo; x x x." The next paragraph of the Kasunduan, therefore, which speaks

48
of "ang kaukulang titulo sa lupang nabanggit," clearly refers to the separate title being applied for, even without resort It follows that, not having established that they were ready, able and willing to comply with their obligation to deliver
to extraneous evidence. to respondent a separate title in the name of Julio Garcia, petitioners may not ask for rescission of the Kasunduannor
recover damages.
Petitioners, however, insist that it was respondents counsel who prepared the Kasunduan and any ambiguity therein
should be construed against respondent pursuant to Article 1377 of the Civil Code which states that the interpretation As regards the issue that the appellate court should have dismissed respondents appeal for failure of respondent to
of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. comply with Circular No. 28-91 requiring the submission of a certificate of non-forum shopping in petitions filed
before us and the Court of Appeals, suffice it to say that when technicality deserts its function of being an aid to
justice, the courts are justified in exempting from its operations a particular case. 21 Procedural rules are intended to
We find no reason to apply Article 1377 of the Civil Code in this case where the evident intention of the parties can
insure the orderly conduct of litigation, because of the higher objective they seek, which is to protect the parties
be readily discerned by their subsequent and contemporaneous acts. While it is true that the Kasunduan was
substantive rights.22
prepared by the counsel of respondent, there is no indication that respondent took unfair advantage of petitioners
when he had the terms of the Kasunduan drawn by his counsel. Petitioners freely assented to the Kasunduanwhich
is written entirely in a language spoken and understood by both parties. That petitioners were fully aware of the WHEREFORE, the petition is DENIED and the decision rendered by the Court of Appeals in CA G.R. No. 40954
terms of the Kasunduan is evidenced by their attempts to comply with their obligation by securing a subdivision plan entitled, "Juana Almira, et al., plaintiffs-appellees v. Federico Briones, defendant-appellant" is AFFIRMED. No costs.
and technical description16 of the property subject of sale.
SO ORDERED.
Having ruled that the kaukulang titulo ng lupang nabanggit refers to a separate title in the name of Julio Garcia, we
proceed to the issue as to whether petitioners may rescind the Kasunduan pursuant to Article 1191 of the Civil Code
for failure of respondent to give full payment of the balance of the purchase price.

The rights of the parties are governed by the terms and the nature of the contract they enter into. Hence, although
the nature of the Kasunduan was never placed in dispute by both parties, it is necessary to ascertain whether
theKasunduan is a contract to sell or a contract of sale before the issue as to whether petitioners may ask for
rescission of the contract may be resolved. In a contract to sell, ownership is, by agreement, reserved to the vendor
and is not to pass until full payment of the purchase price; whereas, in contract of sale, title to the property passes to
the vendee upon delivery of the thing sold.17 Non-payment by the vendee in a contract of sale entitles the vendor to
demand specific performance or rescission of the contract, with damages, under Article 1191 of the Civil Code.

Although both parties have consistently referred to the Kasunduan as a contract to sell, a careful reading of the
provisions of the Kasunduan reveals that it is a contract of sale. A deed of sale is absolute in nature in the absence
of any stipulation reserving title to the vendor until full payment of the purchase price. In such cases ownership of the
thing sold passes to the vendee upon actual or constructive delivery thereof. 18 There is nothing in
theKasunduan which expressly provides that petitioners retain title or ownership of the property, until full payment of
the purchase price. The absence of such stipulation in the Kasunduan coupled with the fact that respondent took
possession of the property upon the execution of the Kasunduan indicate that the parties have contemplated a
contract of absolute sale.

Stated otherwise, there was a perfected contract of sale. The parties agreed on the sale of a determinate object,i.e.,
21, 460 square meters of Lot 1642, covered by a tax declaration in the name of Julio Garcia, and the price certain
therefor, without any reservation of title on the part of petitioners. Ownership was effectively conveyed by petitioners
to respondent, who was given possession of the property. The delivery of a separate title in the name of Julio Garcia
was a condition imposed on respondents obligation to pay the balance of the purchase price. It was not a condition
imposed on the perfection of the contract of sale. In Laforteza v. Machuca,19 we stated that the fact that the
obligation to pay the balance of the purchase price was made subject to the condition that the seller first deliver the
reconstituted title of the property does not make the agreement a contract to sell for such condition is not inconsistent
with a contract of sale.

Addressing now the issue as to whether rescission of the Kasunduan by petitioners may prosper, we rule in the
negative. The power to rescind is only given to the injured party. The injured party is the party who has faithfully
fulfilled his obligation or is ready and willing to perform with his obligation. In the case at bar, petitioners were not
ready, willing and able to comply with their obligation to deliver a separate title in the name of Julio Garcia to
respondent. Therefore, they are not in a position to ask for rescission of the Kasunduan. Moreover, respondents
obligation to pay the balance of the purchase price was made subject to delivery by petitioners of a separate title in
the name of Julio Garcia within six (6) months from the time of the execution of the Kasunduan, a condition with
which petitioners failed to comply. Failure to comply with a condition imposed on the performance of an obligation
gives the other party the option either to refuse to proceed with the sale or to waive that condition under Article 1545
of the Civil Code.20 Hence, it is the respondent who has the option either to refuse to proceed with the sale or to
waive the performance of the condition imposed on his obligation to pay the balance of the purchase price.
49
G.R. No. 139173 February 28, 2007
SPOUSES ONNIE SERRANO AND AMPARO HERRERA, Petitioners vs.GODOFREDO CAGUIAT, Respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended,
assailing the Decision1 of the Court of Appeals dated January 29, 1999 and its Resolution dated July 14, 1999 in CA-
G.R. CV No. 48824.
Spouses Onnie and Amparo Herrera, petitioners, are the registered owners of a lot located in Las Pias, Metro
Manila covered by Transfer Certificate of Title No. T-9905.
Sometime in March 1990, Godofredo Caguiat, respondent, offered to buy the lot. Petitioners agreed to sell it
atP1,500.00 per square meter. Respondent then gave petitioners P100,000.00 as partial payment. In turn,
petitioners gave respondent the corresponding receipt stating that respondent promised to pay the balance of the
purchase price on or before March 23, 1990, thus:
Las Pias, Metro Manila
March 19, 1990
RECEIPT FOR PARTIAL PAYMENT OF LOT NO. 23 COVERED BY TCT NO. T-9905, LAS PIAS, METRO
MANILA
RECEIVED FROM MR. GODOFREDO CAGUIAT THE AMOUNT OF ONE HUNDRED THOUSAND PESOS
(P100,000.00) AS PARTIAL PAYMENT OF OUR LOT SITUATED IN LAS PIAS, M.M. COVERED BY TCT NO. T-
9905 AND WITH AN AREA OF 439 SQUARE METERS.
MR. CAGUIAT PROMISED TO PAY THE BALANCE OF THE PURCHASE PRICE ON OR BEFORE MARCH 23,
1990, AND THAT WE WILL EXECUTE AND SIGN THE FINAL DEED OF SALE ON THIS DATE.
SIGNED THIS 19th DAY OF MARCH, 1990 AT LAS PIAS, M.M.
(SGD) AMPARO HERRERA (SGD) ONNIE SERRANO"2
On March 28, 1990, respondent, through his counsel Atty. Ponciano Espiritu, wrote petitioners informing them of his
readiness to pay the balance of the contract price and requesting them to prepare the final deed of sale. 3
On April 4, 1990, petitioners, through Atty. Ruben V. Lopez, sent a letter4 to respondent stating that petitioner
Amparo Herrera is leaving for abroad on or before April 15, 1990 and that they are canceling the transaction.
Petitioners also informed respondent that he can recover the earnest money of P100,000.00 anytime.
Again, on April 6, 1990,5 petitioners wrote respondent stating that they delivered to his counsel Philippine National
Bank Managers Check No. 790537 dated April 6, 1990 in the amount of P100,000.00 payable to him.
In view of the cancellation of the contract by petitioners, respondent filed with the Regional Trial Court, Branch 63,
Makati City a complaint against them for specific performance and damages, docketed as Civil Case No. 90-1067.6
50
On June 27, 1994, after hearing, the trial court rendered its Decision7 finding there was a perfected contract of sale
between the parties and ordering petitioners to execute a final deed of sale in favor of respondent. The trial court
held:
xxx
In the evaluation of the evidence presented by the parties as to the issue as to who was ready to comply with his
obligation on the verbal agreement to sell on March 23, 1990, shows that plaintiffs position deserves more weight
and credibility. First, the P100,000.00 that plaintiff paid whether as downpayment or earnest money showed that
there was already a perfected contract. Art. 1482 of the Civil Code of the Philippines, reads as follows, to wit:
Art. 1482. Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as
proof of the perfection of the contract.
Second, plaintiff was the first to react to show his eagerness to push through with the sale by sending defendants the
letter dated March 25, 1990. (Exh. D) and reiterated the same intent to pursue the sale in a letter dated April 6,
1990. Third, plaintiff had the balance of the purchase price ready for payment (Exh. C). Defendants mere allegation
that it was plaintiff who did not appear on March 23, 1990 is unavailing. Defendants letters (Exhs. 2 and 5) appear
to be mere afterthought.
On appeal, the Court of Appeals, in its assailed Decision of January 29, 1999, affirmed the trial courts judgment.
Forthwith, petitioners filed their motion for reconsideration but it was denied by the appellate court in its
Resolution8dated July 14, 1999.
Hence, the present recourse.
The basic issue to be resolved is whether the document entitled "Receipt for Partial Payment" signed by both parties
earlier mentioned is a contract to sell or a contract of sale.
Petitioners contend that the Receipt is not a perfected contract of sale as provided for in Article 14589 in relation to
Article 147510 of the Civil Code. The delivery to them of P100,000.00 as down payment cannot be considered as
proof of the perfection of a contract of sale under Article 148211 of the same Code since there was no clear
agreement between the parties as to the amount of consideration.
Generally, the findings of fact of the lower courts are entitled to great weight and should not be disturbed except for
cogent reasons.14 Indeed, they should not be changed on appeal in the absence of a clear showing that the trial
court overlooked, disregarded, or misinterpreted some facts of weight and significance, which if considered
would have altered the result of the case.1awphi1.net12 In the present case, we find that both the trial court and
the Court of Appeals interpreted some significant facts resulting in an erroneous resolution of the issue involved.
In holding that there is a perfected contract of sale, both courts mainly relied on the earnest money given by
respondent to petitioners. They invoked Article 1482 of the Civil Code which provides that "Whenever earnest money
is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract."
We are not convinced.
In San Miguel Properties Philippines, Inc. v. Spouses Huang, 13 we held that the stages of a contract of sale are:
(1)negotiation, covering the period from the time the prospective contracting parties indicate interest in the contract to
the time the contract is perfected; (2) perfection, which takes place upon the concurrence of the essential elements
of the sale, which is the meeting of the minds of the parties as to the object of the contract and upon the price; and
(3) consummation, which begins when the parties perform their respective undertakings under the contract of sale,
culminating in the extinguishment thereof.
With the above postulates as guidelines, we now proceed to determine the real nature of the contract entered into by
the parties.
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.14 Thus, when petitioners declared in the said "Receipt for Partial
Payment" that they
It is true that Article 1482 of the Civil Code provides that "Whenever earnest money is given in a contract of sale, it
shall be considered as part of the price and proof of the perfection of the contract." However, this article speaks
ofearnest money given in a contract of sale. In this case, the earnest money was given in a contract to sell. The
earnest money forms part of the consideration only if the sale is consummated upon full payment of the purchase
price.21 Now, since the earnest money was given in a contract to sell, Article 1482, which speaks of a contract of
sale, does not apply.

As previously discussed, the suspensive condition (payment of the balance by respondent) did not take place.
RECEIVED FROM MR. GODOFREDO CAGUIAT THE AMOUNT OF ONE HUNDRED THOUSAND PESOS
Clearly, respondent cannot compel petitioners to transfer ownership of the property to him.
(P100,000.00) AS PARTIAL PAYMENT OF OUR LOT SITUATED IN LAS PIAS, M.M. COVERED BY TCT NO. T-
9905 AND WITH AN AREA OF 439 SQUARE METERS.
WHEREFORE, we GRANT the instant Petition for Review. The challenged Decision of the Court of Appeals
isREVERSED and respondents complaint is DISMISSED.
MR. CAGUIAT PROMISED TO PAY THE BALANCE OF THE PURCHASE PRICE ON OR BEFORE MARCH 23,
1990, AND THAT WE WILL EXECUTE AND SIGN THE FINAL DEED OF SALE ON THIS DATE.
SO ORDERED.
there can be no other interpretation than that they agreed to a conditional contract of sale, consummation of which is
subject only to the full payment of the purchase price.

A contract to sell is akin to a conditional sale where the efficacy or obligatory force of the vendor's obligation to
transfer title 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. The suspensive
condition is commonly full payment of the purchase price.15

The differences between a contract to sell and a contract of sale are well-settled in jurisprudence. As early as 1951,
in Sing Yee v. Santos,16 we held that:

x x x [a] distinction must be made between a contract of sale in which title passes to the buyer upon delivery of the
thing sold and a contract to sell x x x where by agreement the ownership is reserved in the seller and is not to pass
until the full payment, of the purchase price is made. In the first case, non-payment of the price is a negative
resolutory condition; in the second case, full payment is a positive suspensive condition. Being contraries, their effect
in law cannot be identical. In the first case, the vendor has lost and cannot recover the ownership of the land sold
until and unless the contract of sale is itself resolved and set aside. In the second case, however, the title remains in
the vendor if the vendee does not comply with the condition precedent of making payment at the time specified in the
contract.

In other words, in a contract to sell, ownership is retained by the seller and is not to pass to the buyer until full
payment of the price.17

In this case, the "Receipt for Partial Payment" shows that the true agreement between the parties is a contract to
sell.

First, ownership over the property was retained by petitioners and was not to pass to respondent until full
payment of the purchase price. Thus, petitioners need not push through with the sale should respondent
fail to remit the balance of the purchase price before the deadline on March 23, 1990. In effect, petitioners
have the right to rescind unilaterally the contract the moment respondent fails to pay within the fixed
period.18

Second, the agreement between the parties was not embodied in a deed of sale. The absence of a formal
deed of conveyance is a strong indication that the parties did not intend immediate transfer of ownership,
but only a transfer after full payment of the purchase price. 19

Third, petitioners retained possession of the certificate of title of the lot. This is an additional indication that
the agreement did not transfer to respondent, either by actual or constructive delivery, ownership of the
property.20

51
G.R. No. 161318 November 25, 2009 before Branch III of the Court of First Instance of Baguio and Benguet, should the VENDOR herein be defeated in
the said civil action to the end that he is divested of title over the area subject of this Instrument, then he hereby
warrants that he shall return any and all monies paid by the VENDEE herein whether paid to the PNB, La Trinidad,
JULIE NABUS,* MICHELLE NABUS* and BETTY TOLERO, Petitioners, vs.JOAQUIN PACSON and JULIA
Benguet Branch, or directly received by herein VENDOR, all such monies to be returned upon demand by the
PACSON, Respondents.
VENDEE;

D E C I S I O N PERALTA, J.:
THAT, [a] portion of the parcel of land subject of this instrument is presently in the possession of Mr. Marcos Tacloy,
and the VENDOR agrees to cooperate and assist in any manner possible in the ouster of said Mr. Marcos Tacloy
This is a petition for review on certiorari 1 of the Decision2 of the Court of Appeals in CA-G.R. CV No. 44941 dated from said possession and occupation to the end that the VENDEE herein shall make use of said portion as soon as
November 28, 2003. The Court of Appeals affirmed with modification the Decision of the Regional Trial Court of La is practicable;
Trinidad, Benguet, Branch 10, ordering petitioner Betty Tolero to execute a deed of absolute sale in favor of
respondents, spouses Joaquin and Julia Pacson, over the lots covered by Transfer Certificate of Title (TCT) Nos. T-
THAT, finally, the PARTIES hereby agree that this Instrument shall be binding upon their respective heirs,
18650 and T-18651 upon payment to her by respondents of the sum of P57,544.[8]4 representing the balance due
successors or assigns.5
for the full payment of the property subject of this case; and ordering petitioner Betty Tolero to surrender to
respondents her owners duplicate copy of TCT Nos. T-18650 and T-18651.
Pursuant to the Deed of Conditional Sale, respondents paid PNB the amount of P12,038.86 on February 22,
3 19776 and P20,744.30 on July 17, 19787 for the full payment of the loan.
The facts, as stated by the trial court, are as follows:

At the time of the transaction, Mr. Marcos Tacloy had a basket-making shop on the property, while the spouses
The spouses Bate and Julie Nabus were the owners of parcels of land with a total area of 1,665 square meters,
Delfin and Nelita Flores had a store. Tacloy and the Spouses Flores vacated the property after respondents paid
situated in Pico, La Trinidad, Benguet, duly registered in their names under TCT No. T-9697 of the Register of Deeds
them P4,000.00 each.
of the Province of Benguet. The property was mortgaged by the Spouses Nabus to the Philippine National Bank
(PNB), La Trinidad Branch, to secure a loan in the amount of P30,000.00.
Thereafter, respondents took possession of the subject property. They constructed an 80 by 32-feet building and a
steel-matting fence around the property to house their truck body-building shop which they called the "Emiliano
On February 19, 1977, the Spouses Nabus executed a Deed of Conditional Sale4 covering 1,000 square meters of
Trucking Body Builder and Auto Repair Shop."
the 1,665 square meters of land in favor of respondents Spouses Pacson for a consideration of P170,000.00, which
was duly notarized on February 21, 1977. The consideration was to be paid, thus:
On December 24, 1977, before the payment of the balance of the mortgage amount with PNB, Bate Nabus died. On
August 17, 1978, his surviving spouse, Julie Nabus, and their minor daughter, Michelle Nabus, executed a Deed of
THAT, the consideration of the amount of P170,000.00 will be paid by the VENDEE herein in my favor in the
Extra Judicial Settlement over the registered land covered by TCT No. 9697. On the basis of the said document, TCT
following manner:
No. T- 177188 was issued on February 17, 1984 in the names of Julie Nabus and Michelle Nabus.

a. That the sum of P13,000.00, more or less, on or before February 21, 1977 and which amount will be
Meanwhile, respondents continued paying their balance, not in installments of P2,000.00 as agreed upon, but in
paid directly to the PNB, La Trinidad Branch, and which will form part of the purchase price;
various, often small amounts ranging from as low as P10.009 to as high as P15,566.00,10 spanning a period of almost
seven years, from March 9, 197711 to January 17, 1984.12
b. That after paying the above amount to the PNB, La Trinidad, Benguet branch, a balance of
aboutP17,500.00 remains as my mortgage balance and this amount will be paid by the VENDEE herein at
There was a total of 364 receipts of payment,13 which receipts were mostly signed by Julie Nabus, who also signed
the rate of not less than P3,000.00 a month beginning March 1977, until the said mortgage balance is fully
as Julie Quan when she remarried. The others who signed were Bate Nabus; PNB, La Trinidad Branch; Maxima
liquidated, and that all payments made by the VENDEE to the PNB, La Trinidad, Benguet branch, shall
Nabus; Sylvia Reyes; Michelle Nabus and the second husband of Julie Nabus, Gereon Quan. Maxima Nabus is the
form part of the consideration of this sale;
mother of Bate Nabus, while Sylvia Reyes is a niece.

c. That, as soon as the mortgage obligation with the PNB as cited above is fully paid, then the VENDEE
The receipts showed that the total sum paid by respondents to the Spouses Nabus was P112,455.16,14 leaving a
herein hereby obligates himself, his heirs and assigns, to pay the amount of not less than P2,000.00 a
balance of P57,544.84. The sum of P30,000.00 which was the value of the pick-up truck allegedly sold and delivered
month in favor of the VENDOR, his heirs and assigns, until the full amount of P170,000.00 is fully
in 1978 to the Spouses Nabus, was not considered as payment because the registration papers remained in the
covered (including the payments cited in Pars. a and b above);
name of its owner, Dominga D. Pacson, who is the sister of Joaquin Pacson. The vehicle was also returned to
respondents.
THAT, as soon as the full consideration of this sale has been paid by the VENDEE, the corresponding transfer
documents shall be executed by the VENDOR to the VENDEE for the portion sold;
During the last week of January 1984, Julie Nabus, accompanied by her second husband, approached Joaquin
Pacson to ask for the full payment of the lot. Joaquin Pacson agreed to pay, but told her to return after four days as
THAT, the portion sold is as shown in the simple sketch hereto attached as Annex "A" and made part hereof; his daughter, Catalina Pacson, would have to go over the numerous receipts to determine the balance to be paid.
When Julie Nabus returned after four days, Joaquin sent her and his daughter, Catalina, to Atty. Elizabeth Rillera for
the execution of the deed of absolute sale. Since Julie was a widow with a minor daughter, Atty. Rillera required Julie
THAT, a segregation survey for the portion sold in favor of the VENDEE and the portion remaining in favor of the Nabus to return in four days with the necessary documents, such as the deed of extrajudicial settlement, the transfer
VENDOR shall be executed as soon as possible, all at the expense of the VENDEE herein;
certificate of title in the names of Julie Nabus and minor Michelle Nabus, and the guardianship papers of Michelle.
However, Julie Nabus did not return.
THAT, it is mutually understood that in as much as there is a claim by other persons of the entire property of which
the portion subject of this Instrument is only a part, and that this claim is now the subject of a civil case now pending

52
Getting suspicious, Catalina Pacson went to the Register of Deeds of the Province of Benguet and asked for a copy
of the title of the land. She found that it was still in the name of Julie and Michelle Nabus.
After a week, Catalina Pacson heard a rumor that the lot was already sold to petitioner Betty Tolero. Catalina Pacson
and Atty. Rillera went to the Register of Deeds of the Province of Benguet, and found that Julie Nabus and her minor
daughter, Michelle Nabus, represented by the formers mother as appointed guardian by a court order dated October
29, 1982, had executed a Deed of Absolute Sale in favor of Betty Tolero on March 5, 1984, covering the whole lot
comprising 1,665 square meters.15 The property was described in the deed of sale as comprising four lots: (1) Lot A-
2-A, with an area of 832 square meters; (2) Lot A-2-B, 168 square meters; (3) Lot A-2-C, 200 square meters; and (4)
Lot A-2-D, 465 square meters. Lots A-2-A and A-2-B, with a combined area of 1,000 square meters, correspond to
the lot previously sold to Joaquin and Julia Pacson in the Deed of Conditional Sale.
Catalina Pacson and Atty. Rillera also found that the Certificate of Title over the property in the name of Julie and
Michelle Nabus was cancelled on March 16, 1984, and four titles to the fours lots were issued in the name of Betty
Tolero, namely: TCT No. T-1865016 for Lot A-2-A; TCT No. 1865117 for Lot A-2-B; TCT No. T-1865218 for Lot A-2-C;
and T-1865319 for Lot A-2-D.
On March 22, 1984, the gate to the repair shop of the Pacsons was padlocked. A sign was displayed on the property
stating "No Trespassing."20
On March 26, 1984, Catalina Pacson filed an affidavit-complaint regarding the padlocking incident of their repair
shop with the police station at La Trinidad, Benguet.
On March 28, 2008, respondents Joaquin and Julia Pacson filed with the Regional Trial Court of La Trinidad,
Benguet (trial court) a Complaint21 for Annulment of Deeds, with damages and prayer for the issuance of a writ of
preliminary injunction.22 They sought the annulment of (1) the Extra-judicial Settlement of Estate, insofar as their right
to the 1,000-square-meter lot subject of the Deed of Conditional Sale23 was affected; (2) TCT No. T-17718 issued in
the names of Julie and Michelle Nabus; and (3) the Deed of Absolute Sale24 in favor of Betty Tolero and the transfer
certificates of title issued pursuant thereto. They also prayed for the award of actual, moral and exemplary damages,
as well as attorneys fees.
25
In their Answer, Julie and Michelle Nabus alleged that respondent Joaquin Pacson did not proceed with the
conditional sale of the subject property when he learned that there was a pending case over the whole property.
Joaquin proposed that he would rather lease the property with a monthly rental of P2,000.00 and apply the sum
ofP13,000.00 as rentals, since the amount was already paid to the bank and could no longer be withdrawn. Hence,
he did not affix his signature to the second page of a copy of the Deed of Conditional Sale. 26 Julie Nabus alleged that
in March 1994, due to her own economic needs and those of her minor daughter, she sold the property to Betty
Tolero, with authority from the court.
During the hearing on the merits, Julie Nabus testified that she sold the property to Betty Tolero because she was in
need of money. She stated that she was free to sell the property because the Deed of Conditional Sale executed in
favor of the Spouses Pacson was converted into a contract of lease. She claimed that at the time when the Deed of
Conditional Sale was being explained to them by the notary public, Joaquin Pacson allegedly did not like the portion
of the contract stating that there was a pending case in court involving the subject property. Consequently, Joaquin
Pacson did not continue to sign the document; hence, the second page of the document was unsigned.27Thereafter,
it was allegedly their understanding that the Pacsons would occupy the property as lessees and whatever amount
paid by them would be considered rentals.
Betty Tolero put up the defense that she was a purchaser in good faith and for value. She testified that it was Julie
Nabus who went to her house and offered to sell the property consisting of two lots with a combined area of 1,000
square meters. She consulted Atty. Aurelio de Peralta before she agreed to buy the property. She and Julie Nabus
brought to Atty. De Peralta the pertinent papers such as TCT No. T-17718 in the names of Julie and Michelle Nabus,
the guardianship papers of Michelle Nabus and the blueprint copy of the survey plan showing the two lots. After
examining the documents and finding that the title was clean, Atty. De Peralta gave her the go-signal to buy the
property.
Tolero testified that upon payment of the agreed price of P200,000.00, the Deed of Absolute Sale was executed and
registered, resulting in the cancellation of the title of Julie and Michelle Nabus and the issuance in her name of TCT
Nos. T-18650 and T-1865128 corresponding to the two lots. Thereafter, she asked her common-law husband, Ben
Ignacio, to padlock the gate to the property and hang the "No Trespassing" sign.
Tolero also testified that as the new owner, she was surprised and shocked to receive the Complaint filed by the
Spouses Pacson. She admitted that she knew very well the Spouses Pacson, because they used to buy vegetables
regularly from her. She had been residing along the highway at Kilometer 4, La Trinidad, Benguet since 1971. She
knew the land in question, because it was only 50 meters away across the highway. She also knew that the Spouses
Pacson had a shop on the property for the welding and body-building of vehicles. She was not aware of the Deed of
Conditional Sale executed in favor of the Pacsons, and she saw the document for the first time when Joaquin
Pacson showed it to her after she had already bought the property and the title had been transferred in her name. At
the time she was buying the property, Julie Nabus informed her that the Pacsons were merely renting the property.
She did not bother to verify if that was true, because the Pacsons were no longer in the property for two years before
she bought it.
In a Decision dated September 30, 1993, the trial court ruled in favor of respondents. The dispositive portion of the
Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs, ordering defendant Betty
Tolero to execute a deed of absolute sale in favor of the Spouses Joaquin and Julia Pacson over the lots covered by
Transfer Certificates of Title Nos. T-18650 and T-18651 upon payment to her by the plaintiffs of the sum
of P57,544.[8]4 representing the balance due for the full payment of the property subject of this case. In addition to
the execution of a deed of absolute sale, defendant Betty Tolero shall surrender to the plaintiffs her owners duplicate
copy of Transfer Certificates of Title Nos. T-18650 and T-18651.
Defendants Julie Nabus, Michelle Nabus, and Betty Tolero shall also pay the plaintiffs damages as
follows:P50,000.00 for moral damages; P20,000.00 for exemplary damages; and P10,000.00 for attorneys fees and
expenses for litigation.29
Two issues determined by the trial court were: (1) Was the Deed of Conditional Sale between the Spouses Pacson
and the Nabuses converted into a contract of lease? and (2) Was Betty Tolero a buyer in good faith?
The trial court held that the Deed of Conditional Sale was not converted into a contract of lease because the original
copy of the contract30 showed that all the pages were signed by all the parties to the contract. By the presumption of
regularity, all other carbon copies must have been duly signed. The failure of Joaquin Pacson to sign the second
page of one of the carbon copies of the contract was by sheer inadvertence. The omission was of no consequence
since the signatures of the parties in all the other copies of the contract were complete. Moreover, all the receipts of
payment expressly stated that they were made in payment of the lot. Not a single receipt showed payment for rental.
Further, the trial court held that Betty Tolero was not a purchaser in good faith as she had actual knowledge of the
Conditional Sale of the property to the Pacsons.
The trial court stated that the Deed of Conditional Sale contained reciprocal obligations between the parties, thus:
THAT, as soon as the full consideration of this sale has been paid by the VENDEE, the corresponding transfer
documents shall be executed by the VENDOR to the VENDEE for the portion sold;
xxxx
THAT, finally, the PARTIES hereby agree that this Instrument shall be binding upon their respective heirs,
successors or assigns.31

53
In other words, the trial court stated, when the vendees (the Spouses Pacson) were already ready to pay their
balance, it was the corresponding obligation of the vendors (Nabuses) to execute the transfer documents.
The trial court held that "[u]nder Article 1191 of the Civil Code, an injured party in a reciprocal obligation, such as the
Deed of Conditional Sale in the case at bar, may choose between the fulfillment [or] the rescission of the obligation,
with the payment of damages in either case." It stated that in filing the case, the Spouses Pacson opted for fulfillment
of the obligation, that is, the execution of the Deed of Absolute Sale in their favor upon payment of the purchase
price.
Respondents appealed the decision of the trial court to the Court of Appeals.
In the Decision dated November 28, 2003, the Court of Appeals affirmed the trial courts decision, but deleted the
award of attorneys fees. The dispositive portion of the Decision reads:
WHEREFORE, finding no reversible error in the September 30, 1993 Decision of the Regional Trial Court of La
Trinidad, Benguet, Branch 10, in Civil Case No. 84-CV-0079, the instant appeal is hereby DISMISSED for lack of
merit, and the assailed Decision is hereby AFFIRMED and UPHELD with the modification that the award of
attorneys fees is deleted.32
Petitioners filed this petition raising the following issues:
I. THE [COURT OF APPEALS] ERRED IN CONSIDERING THE CONTRACT ENTERED INTO
BETWEEN THE SPOUSES BATE NABUS AND JULIE NABUS AND SPOUSES JOAQUIN PACSON
AND JULIA PACSON TO BE A CONTRACT OF SALE.
II. THE COURT A QUO ERRED IN FINDING THAT THERE ARE ONLY TWO ISSUES IN THE CASE
ON APPEAL AND THEY ARE: WHETHER THE DEED OF CONDITIONAL SALE WAS
CONVERTED INTO A CONTRACT OF LEASE; AND THAT [WHETHER] PETITIONER BETTY
TOLERO WAS A BUYER IN GOOD FAITH.
III. THAT THE TRIAL COURT ERRED IN HOLDING THAT [RESPONDENTS] BALANCE TO THE
SPOUSES NABUS UNDER THE CONDITIONAL SALE IS ONLY P57,544.[8]4.
IV. THAT ASSUMING WITHOUT ADMITTING THAT PETITIONER BETTY TOLERO WAS AWARE OF
THE EXISTENCE OF THE DEED OF CONDITIONAL SALE, THE TRIAL COURT, AS WELL AS THE
[COURT OF APPEALS], ERRED IN ORDERING PETITIONER BETTY TOLERO TO EXECUTE A
DEED OF ABSOLUTE SALE IN FAVOR OF THE [RESPONDENTS] AND TO SURRENDER THE
OWNER'S DUPLICATE COPY OF TCT NOS. T-18650 AND T-18651, WHICH WAS NOT PRAYED
FOR IN THE PRAYER IN THE COMPLAINT.
V. THAT THE [COURT OF APPEALS] ERRED IN FINDING BETTY TOLERO [AS] A BUYER [WHO]
FAILED TO TAKE STEPS IN INQUIRING FROM THE [RESPONDENTS] THE STATUS OF THE
PROPERTY IN QUESTION BEFORE HER PURCHASE, CONTRARY TO FACTS ESTABLISHED
BY EVIDENCE.
VI. THE [COURT OF APPEALS] ERRED IN CONSIDERING PETITIONER BETTY TOLERO A BUYER
IN BAD FAITH, IGNORING THE APPLICATION OF THE DOCTRINE IN THE RULING OF THE
SUPREME COURT IN THE CASE OF RODOLFO ALFONSO, ET AL. VS. COURT OF APPEALS,
G.R. NO. 63745.33
The main issues to be resolved are:
1) Whether or not the Deed of Conditional Sale was converted into a contract of lease;
2) Whether the Deed of Conditional Sale was a contract to sell or a contract of sale.
As regards the first issue, the Deed of Conditional Sale entered into by the Spouses Pacson and the Spouses Nabus
was not converted into a contract of lease. The 364 receipts issued to the Spouses Pacson contained either the
phrase "as partial payment of lot located in Km. 4" or "cash vale" or "cash vale (partial payment of lot located in Km.
4)," evidencing sale under the contract and not the lease of the property. Further, as found by the trial court, Joaquin
54
Pacsons non-signing of the second page of a carbon copy of the Deed of Conditional Sale was through sheer
inadvertence, since the original contract34 and the other copies of the contract were all signed by Joaquin Pacson
and the other parties to the contract.
On the second issue, petitioners contend that the contract executed by the respondents and the Spouses Nabus was
a contract to sell, not a contract of sale. They allege that the contract was subject to the suspensive condition of full
payment of the consideration agreed upon before ownership of the subject property could be transferred to the
vendees. Since respondents failed to pay the full amount of the consideration, having an unpaid balance
ofP57,544.84, the obligation of the vendors to execute the Deed of Absolute Sale in favor of respondents did not
arise. Thus, the subsequent Deed of Absolute Sale executed in favor of Betty Tolero, covering the same parcel of
land was valid, even if Tolero was aware of the previous deed of conditional sale.
Moreover, petitioners contend that respondents violated the stipulated condition in the contract that the monthly
installment to be paid was P2,000.00, as respondents gave meager amounts as low as P10.00.
Petitioners also assert that respondents allegation that Julie Nabus failure to bring the pertinent documents
necessary for the execution of the final deed of absolute sale, which was the reason for their not having paid the
balance of the purchase price, was untenable, and a lame and shallow excuse for violation of the Deed of
Conditional Sale. Respondents could have made a valid tender of payment of their remaining balance, as it had been
due for a long time, and upon refusal to accept payment, they could have consigned their payment to the court as
provided by law. This, respondents failed to do.
The Court holds that the contract entered into by the Spouses Nabus and respondents was a contract to sell, not a
contract of sale.
A contract of sale is defined in Article 1458 of the Civil Code, 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.
A contract of sale may be absolute or conditional.
Ramos v. Heruela35 differentiates a contract of absolute sale and a contract of conditional sale as follows:
Article 1458 of the Civil Code provides that a contract of sale may be absolute or conditional. A contract of sale is
absolute when title to the property passes to the vendee upon delivery of the thing sold. A deed of sale is absolute
when there is no stipulation in the contract that title to the property remains with the seller until full payment of the
purchase price. The sale is also absolute if there is no stipulation giving the vendor the right to cancel unilaterally the
contract the moment the vendee fails to pay within a fixed period. In a conditional sale, as in a contract to sell,
ownership remains with the vendor and does not pass to the vendee until full payment of the purchase price. The full
payment of the purchase price partakes of a suspensive condition, and non-fulfillment of the condition prevents the
obligation to sell from arising.36
Coronel v. Court of Appeals37 distinguished a contract to sell from a contract of sale, thus:
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 a contract to sell."42 The aforecited stipulation shows that the vendors reserved title to the subject property until full
element is lacking. In a contract to sell, the prospective seller explicitly reserves the transfer of title to the prospective payment of the purchase price.
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
If respondents paid the Spouses Nabus in accordance with the stipulations in the Deed of Conditional Sale, the
the purchase price. What the seller agrees or obliges himself to do is to fulfill his promise to sell the subject property
consideration would have been fully paid in June 1983. Thus, during the last week of January 1984, Julie Nabus
when the entire amount of the purchase price is delivered to him. In other words, the full payment of the purchase
approached Joaquin Pacson to ask for the full payment of the lot. Joaquin Pacson agreed to pay, but told her to
price partakes of a suspensive condition, the non-fulfilment of which prevents the obligation to sell from arising and,
return after four days as his daughter, Catalina Pacson, would have to go over the numerous receipts to determine
thus, ownership is retained by the prospective seller without further remedies by the prospective buyer.
the balance to be paid.

xxxx
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:
When Julie Nabus returned after four days, Joaquin Pacson sent Julie Nabus and his daughter, Catalina, to Atty.
Elizabeth Rillera for the execution of the deed of sale. Since Bate Nabus had already died, and was survived by Julie
and their minor daughter, Atty. Rillera required Julie Nabus to return in four days with the necessary documents such
as the deed of extrajudicial settlement, the transfer certificate of title in the names of Julie Nabus and minor Michelle
Nabus, and the guardianship papers of Michelle. However, Julie Nabus did not return.

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 if
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.
As vendees given possession of the subject property, the ownership of which was still with the vendors, the Pacsons
should have protected their interest and inquired from Julie Nabus why she did not return and then followed through
with full payment of the purchase price and the execution of the deed of absolute sale. The Spouses Pacson had the
legal remedy of consigning their payment to the court; however, they did not do so. A rumor that the property had
been sold to Betty Tolero prompted them to check the veracity of the sale with the Register of Deeds of the Province
of Benguet. They found out that on March 5, 1984, Julie Nabus sold the same property to Betty Tolero through a
Deed of Absolute Sale, and new transfer certificates of title to the property were issued to Tolero.1avvphi1
Thus, the Spouses Pacson filed this case for the annulment of the contract of absolute sale executed in favor of
Betty Tolero and the transfer certificates of title issued in her name.

A contract to sell as defined hereinabove, may not even be considered as a conditional contract of sale where the
Unfortunately for the Spouses Pacson, since the Deed of Conditional Sale executed in their favor was merely a
seller may likewise reserve title to the property subject of the sale until the fulfillment of a suspensive condition,
contract to sell, the obligation of the seller to sell becomes demandable only upon the happening of the suspensive
because in a conditional contract of sale, the first element of consent is present, although it is conditioned upon the
condition.43 The full payment of the purchase price is the positive suspensive condition, the failure of which is not a
happening of a contingent event which may or may not occur. If the suspensive condition is not fulfilled, the
breach of contract, but simply an event that prevented the obligation of the vendor to convey title from acquiring
perfection of the contract of sale is completely abated. However, if the suspensive condition is fulfilled, the contract of
binding force.44 Thus, for its non-fulfilment, there is no contract to speak of, the obligor having failed to perform the
sale is thereby perfected, such that if there had already been previous delivery of the property subject of the sale to
suspensive condition which enforces a juridical relation. 45 With this circumstance, there can be no rescission or
the buyer, ownership thereto automatically transfers to the buyer by operation of law without any further act having to
fulfilment of an obligation that is still non-existent, the suspensive condition not having occurred as yet.46 Emphasis
be performed by the seller.
should be made that the breach contemplated in Article 1191 of the New Civil Code is the obligors failure to comply
with an obligation already extant, not a failure of a condition to render binding that obligation. 47
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
The trial court, therefore, erred in applying Article 1191 of the Civil Code48 in this case by ordering fulfillment of the
him. The prospective seller still has to convey title to the prospective buyer by entering into a contract of absolute
obligation, that is, the execution of the deed of absolute sale in favor of the Spouses Pacson upon full payment of the
sale.38
purchase price, which decision was affirmed by the Court of Appeals. Ayala Life Insurance, Inc. v. Ray Burton
Development Corporation49 held:
Further, Chua v. Court of Appeals39 cited this distinction between a contract of sale and a contract to sell:
Evidently, before the remedy of specific performance may be availed of, there must be a breach of the contract.
In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold; in a contract to
sell, ownership is, by agreement, reserved in the vendor and is not to pass to the vendee until full payment of the
Under a contract to sell, the title of the thing to be sold is retained by the seller until the purchaser makes full
purchase price. Otherwise stated, in a contract of sale, the vendor loses ownership over the property and cannot
payment of the agreed purchase price. Such payment is a positive suspensive condition, the non-fulfillment of which
recover it until and unless the contract is resolved or rescinded; whereas, in a contract to sell, title is retained by the
is not a breach of contract but merely an event that prevents the seller from conveying title to the purchaser. The
vendor until full payment of the price. In the latter contract, payment of the price is a positive suspensive condition,
non-payment of the purchase price renders the contract to sell ineffective and without force and effect. Thus, a cause
failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from becoming
of action for specific performance does not arise.50
effective.40

Since the contract to sell was without force and effect, Julie Nabus validly conveyed the subject property to another
It is not the title of the contract, but its express terms or stipulations that determine the kind of contract entered into
buyer, petitioner Betty Tolero, through a contract of absolute sale, and on the strength thereof, new transfer
by the parties. In this case, the contract entitled "Deed of Conditional Sale" is actually a contract to sell. The contract
certificates of title over the subject property were duly issued to Tolero. 51
stipulated that "as soon as the full consideration of the sale has been paid by the vendee, the correspondingtransfer
documents shall be executed by the vendor to the vendee for the portion sold." 41 Where the vendor promises to
execute a deed of absolute sale upon the completion by the vendee of the payment of the price, the contract is only The Spouses Pacson, however, have the right to the reimbursement of their payments to the Nabuses, and are
entitled to the award of nominal damages. The Civil Code provides:

55
Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded
by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss
suffered by him.

Art. 2222. The court may award nominal damages in every obligation arising from any source enumerated in article
1157, or in every case where any property right has been invaded.

As stated by the trial court, under the Deed of Conditional Sale, respondents had the right to demand from petitioners
Julie and Michelle Nabus that the latter execute in their favor a deed of absolute sale when they were ready to pay
the remaining balance of the purchase price. The Nabuses had the corresponding duty to respect the respondents
right, but they violated such right, for they could no longer execute the document since they had sold the property to
Betty Tolero.52 Hence, nominal damages in the amount of P10,000.00 are awarded to respondents.

Respondents are not entitled to moral damages because contracts are not referred to in Article 221953 of the Civil
Code, which enumerates the cases when moral damages may be recovered. Article 2220 54 of the Civil Code allows
the recovery of moral damages in breaches of contract where the defendant acted fraudulently or in bad faith.
However, this case involves a contract to sell, wherein full payment of the purchase price is a positive suspensive
condition, the non-fulfillment of which is not a breach of contract, but merely an event that prevents the seller from
conveying title to the purchaser. Since there is no breach of contract in this case, respondents are not entitled to
moral damages.

In the absence of moral, temperate, liquidated or compensatory damages, exemplary damages cannot be granted
for they are allowed only in addition to any of the four kinds of damages mentioned. 55

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. CV No. 44941, dated
November 28, 2003, is REVERSED and SET ASIDE. Judgment is hereby rendered upholding the validity of the sale
of the subject property made by petitioners Julie Nabus and Michelle Nabus in favor of petitioner Betty Tolero, as
well as the validity of Transfer Certificates of Title Nos. T-18650 and T-18651 issued in the name of Betty Tolero.
Petitioners Julie Nabus and Michelle Nabus are ordered to reimburse respondents spouses Joaquin and Julia
Pacson the sum of One Hundred Twelve Thousand Four Hundred Fifty-Five Pesos and Sixteen Centavos
(P112,455.16), and to pay Joaquin and Julia Pacson nominal damages in the amount of Ten Thousand Pesos
(P10,000.00), with annual interest of twelve percent (12%) until full payment of the amounts due to Joaquin and Julia
Pacson.

No costs.

SO ORDERED.

56
G.R. No. 165168 July 9, 2010 Proceedings before the Regional Trial Court

SPS. NONILON (MANOY) and IRENE MONTECALVO, Petitioners, Trial on the merits ensued and the contending parties adduced their respective testimonial and documentary
vs. evidence before the trial court.
HEIRS (Substitutes) OF EUGENIA T. PRIMERO, represented by their Attorney-in-Fact, ALFREDO T.
PRIMERO, JR., Respondents.
Irene testified that after their Agreement for the purpose of negotiating the sale of Lot No. 263 failed to materialize,
she and Eugenia entered into an oral contract of sale and agreed that the amount of P40,000.00 she earlier paid
DECISION shall be considered as down payment. Irene claimed that she made several payments amounting to P293,000.00
which prompted Eugenia's daughters Corazon Calacat (Corazon) and Sylvia Primero (Sylvia) to ask Engr. Antonio
Ravacio (Engr. Ravacio) to conduct a segregation survey on the subject property. Thereafter, Irene requested
DEL CASTILLO, J.:
Eugenia to execute the deed of sale, but the latter refused to do so because her son, Atty. Alfredo Primero, Jr. (Atty.
Primero), would not agree.
Jurisprudence is replete with rulings that in civil cases, the party who alleges a fact has the burden of proving it.
Burden of proof is the duty of a party to present evidence on the facts in issue necessary to prove the truth of his
On March 22, 1999, herein respondents filed with the court a quo a "Notice of Death of the Defendant"6manifesting
claim or defense by the amount of evidence required by law.11 In this case, the petitioners awfully failed to discharge
that Eugenia passed away on February 28, 1999 and that the decedent's surviving legal heirs agreed to appoint their
their burden to prove by preponderance of evidence that the Agreement they entered into with respondents'
co-heir Atty. Primero, to act as their representative in said case. In an Order7 dated April 8, 1999, the trial court
predecessor-in-interest is a contract of sale and not a mere contract to sell, or that said Agreement was novated after
substituted the deceased defendant with Atty. Primero.
the latter subsequently entered into an oral contract of sale with them over a determinate portion of the subject
property more than a decade ago.
Respondents, on the other hand, presented the testimony of Atty. Primero to establish that Eugenia could not have
sold the disputed portion of Lot No. 263 to the petitioners. According to Atty. Primero, at the time of the signing of the
Petitioners filed this appeal from the Decision of the Court of Appeals (CA) affirming the Regional Trial Court's
Agreement on January 13, 1985, Eugenia's husband, Alfredo, was already dead. Eugenia merely managed or
(RTC's) dismissal of their action for specific performance where they sought to compel the respondents to convey
administered the subject property and had no authority to dispose of the same since it was a conjugal property. In
the property subject of their purported oral contract of sale.
addition, respondents asserted that the deposit of P40,000.00 was retained as rental for the subject property.

Factual Antecedents
Respondents likewise presented Sylvia, who testified that the receipts issued to petitioners were for the lot
rentals.8Another sister of Atty. Primero, Corazon, testified that petitioners were their tenants in subject land, which
The property involved in this case is a portion of a parcel of land known as Lot No. 263 located at Sabayle Street, she co-owns with her mother Eugenia.9 She denied having sold the purported 293-square meter portion of Lot No.
Iligan City. Lot No. 263 has an area of 860 square meters covered by Original Certificate of Title (OCT) No. 0- 263 to the petitioners.10
2712registered in the name of Eugenia Primero (Eugenia), married to Alfredo Primero, Sr. (Alfredo).
As rebuttal witness, petitioners presented Engr. Ravacio, a surveyor who undertook the segregation of the 293-
In the early 1980s, Eugenia leased the lot to petitioner Irene Montecalvo (Irene) for a monthly rental of P500.00. On square meter portion out of the subject property.11
January 13, 1985, Eugenia entered into an un-notarized Agreement3 with Irene, where the former offered to sell the
property to the latter for P1,000.00 per square meter. They agreed that Irene would deposit the amount ofP40,000.00
On October 22, 2001, the RTC rendered a Decision:12 (1) dismissing the complaint and the counterclaim for lack of
which shall form part of the down payment equivalent to 50% of the purchase price. They also stipulated that during
legal and factual bases; (2) ordering petitioners to pay respondents P2,500.00 representing rentals due, applying
the term of negotiation of 30 to 45 days from receipt of said deposit, Irene would pay the balance of P410,000.00 on
therefrom the amount deposited and paid; and (3) ordering petitioner to pay 12% legal interest from finality of
the down payment. In case Irene defaulted in the payment of the down payment, the deposit would be returned
decision until full payment of the amount due.13
within 10 days from the lapse of said negotiation period and the Agreement deemed terminated. However, if the
negotiations pushed through, the balance of the full value of P860,000.00 or the net amount of P410,000.00 would
be paid in 10 equal monthly installments from receipt of the down payment, with interest at the prevailing rate. Aggrieved, petitioners appealed the Decision of the trial court to the CA.

Irene failed to pay the full down payment within the stipulated 30-45-day negotiation period. Nonetheless, she Proceedings before the Court of Appeals
continued to stay on the disputed property, and still made several payments with an aggregate amount
ofP293,000.00. On the other hand, Eugenia did not return the P40,000.00 deposit to Irene, and refused to accept
Both parties filed their respective briefs before the appellate court. 14 Thereafter, on November 28, 2003, the CA
further payments only in 1992.
rendered a Decision15 affirming the RTC Decision.16

Thereafter, Irene caused a survey of Lot No. 263 and the segregation of a portion equivalent to 293 square meters in
Petitioners timely filed a Motion for Reconsideration.17 However, in a Resolution18 dated June 27, 2004, the CA
her favor. However, Eugenia opposed her claim and asked her to vacate the property. Then on May 13, 1996,
resolved to deny the same for lack of merit.19
Eugenia and the heirs of her deceased husband Alfredo filed a complaint for unlawful detainer against Irene and her
husband, herein petitioner Nonilon Montecalvo (Nonilon) before the Municipal Trial Court (MTC) of Iligan City. During
the preliminary conference, the parties stipulated that the issue to be resolved was whether their Agreement had Issues
been rescinded and novated. Hence, the MTC dismissed the case for lack of jurisdiction since the issue is not
susceptible of pecuniary estimation. The MTC's Decision dismissing the ejectment case became final as Eugenia
Petitioners thus filed this Petition for Review on Certiorari anchored on the following grounds.
and her children did not appeal therefrom.4

On June 18, 1996, Irene and Nonilon retaliated by instituting Civil Case No. II-3588 with the RTC of Lanao del Norte 1. WHETHER AN ORAL CONTRACT OF SALE OF A PORTION OF [A] LOT IS BINDING [UPON] THE
SELLER.
for specific performance, to compel Eugenia to convey the 293-square meter portion of Lot No. 263.5
57
 2. WHETHER A SELLER IN AN ORAL CONTRACT OF SALE OF A PORTION OF [A] LOT CAN BE
COMPELLED TO EXECUTE THE REQUIRED DEED OF SALE AFTER THE AGREED CONSIDERATION
WAS PAID AND POSSESSION THEREOF DELIVERED TO AND ENJOYED BY THE BUYER.
3. WHETHER THE BUYER HAS A RIGHT TO ENFORCE AN ORAL CONTRACT OF SALE AFTER THE
PORTION SOLD IS SEGREGATED BY AGREEMENT OF THE PARTIES.
4. WHETHER THE SELLER IS BOUND BY THE HANDWRITTEN RECEIPTS PREPARED AND SIGNED
BY HER EXPRESSLY INDICATING PAYMENTS OF LOTS.
5. WHETHER THE TRIAL COURT COULD RENDER A JUDGMENT ON ISSUES NOT DEFINED IN THE
PRE-TRIAL ORDER.
Our Ruling
The petition lacks merit.
The Agreement dated January 13, 1985 is a contract to sell. Hence, with petitioners' non-compliance with its terms
and conditions, the obligation of the respondents to deliver and execute the corresponding deed of sale never arose.
The CA found that the Agreement dated January 13, 1985 is not a contract of sale but a mere contract to sell, the
efficacy of which is dependent upon the resolutory condition that Irene pay at least 50% of the purchase price as
down payment within 30-45 days from the day Eugenia received the P40,000.00
deposit.20 Said court further found that such condition was admittedly not met. 21
Petitioners admit that the Agreement dated January 13, 1985 is at most, "a preliminary agreement for an eventual
contract."22 However, they argue that contrary to the findings of the appellate court, it was not only the buyer, Irene,
who failed to meet the condition of paying the balance of the 50% down payment. 23 They assert that the Agreement
explicitly required Eugenia to return the deposit of P40,000.00 within 10 days, in case Irene failed to pay the balance
of the 50% down payment within the stipulated period.24 Thus, petitioners posit that for the cancellation clause to
operate, two conditions must concur, namely, (1) buyer fails to pay the balance of the 50% down payment within the
agreed period and (2) seller should return the deposit of P40,000.00 within 10 days if the first condition was not
complied with. Petitioners conclude that since both seller and buyer failed to discharge their reciprocal obligations,
being in pari delictu, the seller could not repudiate their agreement to sell.
The petitioners' contention is without merit.
There is no dispute as to the due execution and existence of the Agreement. The issue thus presented is whether
the said Agreement is a contract of sale or a contract to sell. For a better understanding and resolution of the issue at
hand, it is apropos to reproduce herein the Agreement in haec verba:
Agreement
This Agreement, made and executed by and between:
EUGENIA T. PRIMERO, a Filipino of legal age and residing in Camague, Iligan City (hereinafter called the OWNER)
- and -
IRENE P. MONTECALVO, Filipino of legal age and presently residing at Sabayle St., Iligan City (hereinafter [called]
the INTERESTED PARTY);
58
WITNESSETH:
1. That the OWNER is the true and absolute owner of a parcel of land located at Sabayle St.
immediately fronting the St. Peter's College which is presently leased to the INTERESTED
PARTY;
2. That the property referred to contains an area of EIGHT HUNDRED SIXTY SQUARE
METERS at the value of One Thousand Pesos (P1,000.00) per square meters;
3. That this agreement is entered into for the purpose of negotiating the sale of the above
referred property between the same parties herein under the following terms and conditions, to
wit:
a) That the term of this negotiation is for a period of Thirty to Forty Five (30-45) days
from receipt of a deposit;
b) That Forty Thousand Pesos (P40,000.00) shall be deposited to demonstrate the
interest of the Interested Party to acquire the property referred to above, which deposit
shall not earn any interest;
c) That should the contract or agreement push through the deposit shall form part of
the down payment of Fifty percent (50%) of the total or full value. Otherwise the
deposit shall be returned within TEN (10) days from the lapse of the period of
negotiation;
4. That should this push through, the balance of Four Hundred Ten Thousand on the down
payment shall be made upon execution of the Agreement to Sell and the balance of the full
value of Eight Hundred Sixty Thousand or Four Hundred Ten Thousand Pesos shall be paid in
equal monthly installment within Ten (10) months from receipt of the down payment with [sic]
according to prevailing interest.
IN WITNESS WHEREOF, the parties have signed these presents in the City of Iligan this 13th day of January 1985.
(Signed) (Signed)
IRENE PEPITO MONTECALVO EUGENIA TORRES PRIMERO
SIGNED IN THE PRESENCE OF:
(Signed) (Signed)
In Salazar v. Court of Appeals,25 we distinguished a contract of sale from a contract to sell in that in a contract of sale
the title to the property passes to the buyer upon the delivery of the thing sold; in a contract to sell, ownership is, by
agreement, reserved in the seller and is not to pass to the buyer until full payment of the purchase price. Otherwise
stated, in a contract of sale, the seller loses ownership over the property and cannot recover it until and unless the
contract is resolved or rescinded; whereas, in a contract to sell, title is retained by the seller until full payment of the
price.26 In the latter contract, payment of the price is a positive suspensive condition, failure of which is not a breach
but an event that prevents the obligation of the vendor to convey title from becoming effective. 27
In the Agreement, Eugenia, as owner, did not convey her title to the disputed property to Irene since the Agreement
was made for the purpose of negotiating the sale of the 860-square meter property.28
On this basis, we are more inclined to characterize the agreement as a contract to sell rather than a contract of sale.
Although not by itself controlling, the absence of a provision in the Agreement transferring title from the owner to the buyer is taken as
a strong indication that the Agreement is a contract to sell.29
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.30 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.31 In other
words, the full payment of the purchase price partakes of a suspensive condition, the non-fulfillment 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.32 A
contract to sell is commonly entered into in order 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.33
In this case, the Agreement expressly provided that it was "entered into for the purpose of negotiating the sale of the above referred
property between the same parties herein x x x." The term of the negotiation shall be for a period of 30-45 days from receipt of
the P40,000.00 deposit and the buyer has to pay the balance of the 50% down payment amounting to P410,000.00 within the said
period of negotiation. Thereafter, an Agreement to Sell shall be executed by the parties and the remainder of the purchase price
amounting to another P410,000.00 shall be paid in 10 equal monthly installments from receipt of the down payment. The assumption
of both parties that the purpose of the Agreement was for negotiating the sale of Lot No. 263, in its entirety, for a definite price, with a
specific period for payment of a specified down payment, and the execution of a subsequent contract for the sale of the same on
installment payments leads to no other conclusion than that the predecessor-in-interest of the herein respondents and the herein
petitioner Irene entered into a contract to sell.
As stated in the Agreement, the payment of the purchase price, in installments within the period stipulated, constituted a positive
suspensive condition, the failure of which is not really a breach but an event that prevents the obligation of the seller to convey title in
accordance with Article 1184 of the Civil Code.34 Hence, for petitioners' failure to comply with the terms and conditions laid down in
the Agreement, the obligation of the predecessor-in-interest of the respondents to deliver and execute the corresponding deed of sale
never arose.
The fact that the predecessor-in-interest of the respondents failed to return the P40,000.00 deposit subsequent to the expiration of the
period of negotiation did not prevent the respondents from repudiating the Agreement. The obligation of the respondent to convey the
property never came to pass as the petitioners did not comply with the positive suspensive condition of full payment of the purchase
price within the period as stipulated.
The alleged oral contract of sale for the 293-square meter portion of the property was not proved by preponderant evidence. Hence,
petitioners cannot compel the successors-in-interest of the deceased Eugenia to execute a deed of absolute sale in their favor.
Petitioners alleged in their Complaint that in 1992, Eugenia refused to accept further payments and suggested that she will convey to
petitioners 293 square meters of her 860-square meter property, in proportion to payments already made. Thus, Eugenia caused the
segregation of the area where the petitioners' building now stands, consisting of 293 square meters.1avvphi1
In support of their contention, petitioners presented the testimony of Irene, who testified that Eugenia segregated for them an area of
293 square meters for the agreed price of P1,000.00 per square meter.35 The total purchase price allegedly agreed upon by the
parties, amounting to P293,000.00, corresponded to the amount of payments already made by Irene.36 They likewise presented (1)
82 receipts covering the period October 13, 1986 to July 10, 1994;37 (2) the testimony of the surveyor, Engr. Ravacio, to show that the
segregation survey of the 293-square meter portion of the property was made with the knowledge and consent of Eugenia; and (3)
the resulting subdivision plan.
On the other hand, respondents counter that the alleged contract of sale is contradicted by petitioners' own evidence.
We cannot sustain the contention of the petitioners. The primal issue to be resolved is whether the parties subsequently entered into
a contract of sale over the segregated 293-square meter portion of Lot No. 263. It is a fundamental principle that for a contract of sale
to be valid, the following elements must be present: (a) consent or meeting of the minds; (b) determinate subject matter; and (3) price
certain in money or its equivalent.38 Until the contract of sale is perfected, it cannot, as an independent source of obligation, serve as
a binding juridical relation between the parties.39
Contrary to petitioners' allegations that the 82 receipts indicated that they were issued "for payment of lot (at Sabayle)",40 a cursory
examination thereof shows that the receipts from 1986 to 1992 do not consistently indicate "Sabayle Lot" or "Sabayle Lot Deposit".
More than half of the receipts presented merely indicated receipt of differing sums of money from the petitioners. In addition, the
receipts for the years 1993 to 1994 do not establish installment payments for the purchase of the disputed portion of Lot No. 263.
Rather, the receipts indicate that the same were issued as proof of "cash advance",41 "cash for groceries, electric bill, water bill,
telephone/long distance",42"cash",43 "cash for mktg"44 and "x x x cash to be paid a month after".45 These are not consistent with the
59
allegation of the petitioners that they have paid the full amount of the purchase price for the 293-square meter portion of the lot by
1992.
Moreover, the testimony of petitioners' witness, surveyor Engr. Ravacio, shows that Eugenia was neither around when the survey
was conducted nor gave her express consent to the conduct of the same.46 On the other hand, respondents' witness, Sylvia, testified
that the receipts issued to the petitioners were for the lot rentals.47 In addition, respondents' third witness, Corazon, testified that
petitioners were their tenants in subject land, which she co-owns with her mother Eugenia, and disclaimed any sale of any portion of
their lot to the petitioners.48
Thirdly, since the surveyor himself, Engr. Ravacio, admitted that Eugenia did not give her express consent to the conduct of the
segregation plan, the resulting subdivision plan, submitted by the petitioners to the trial court to prove that Eugenia caused the
segregation of the 293-square meter area, cannot be appreciated.
Section 1 of Rule 133 of the Rules of Court provides that in civil cases, the party having the burden of proof must establish his case
by a preponderance of evidence. However, the evidence presented by the petitioners, as considered above, fails to convince this
Court that Eugenia gave her consent to the purported oral deed of sale for the 293-square meter portion of her property. We are
hence in agreement with the finding of the CA that there was no contract of sale between the parties. As a consequence, petitioners
cannot rightfully compel the successors-in-interest of Eugenia to execute a deed of absolute sale in their favor.
The courts below correctly modified the rental award to P2,500.00 per month.
Lastly, petitioners argue that the courts below erred in imposing a P2,500.00 monthly rental from 1985 onwards, since said amount is
far greater than the last agreed monthly rental (December 1984) of P500.00.
In its Decision, the CA affirmed the ruling of the RTC "that the trial court had authority to fix a reasonable value for the continued use
and occupancy of the leased premises after the termination of the lease contract, and that it was not bound by the stipulated rental in
the contract of lease since it is equally settled that upon termination or expiration of the contract of lease, the rental stipulated therein
may no longer be the reasonable value for the use and occupation of the premises as a result of the change or rise in values.
Moreover, the trial court can take judicial notice of the general increase in rentals of real estate especially of business
establishments".49 The appellate court likewise held that the petitioners failed to discharge their burden to show that the said price
was exorbitant or unconscionable.50 Hence, the CA found no reason to disturb the trial court's decision ordering the petitioners to
payP2,500.00 as monthly rentals.51 The appellate court further held that "to deprive Eugenia of the rentals due her as the owner-
lessor of the subject property would result to unjust enrichment on the part of Irene."52
The courts below correctly took judicial notice of the nature of the leased property subject of the case at bench based on its location
and commercial viability. As described in the Agreement, the property is immediately in front of St. Peter's College. 53 More
significantly, it is stated in the Declaration of Real Property submitted by the petitioners as evidence in the trial court, that the property
is used predominantly for commercial purposes.54 The assessment by the trial court of the area where the property is located is
therefore fairly grounded.
Furthermore, the trial court also had factual basis in arriving at the said conclusion, the same being based on the un-rebutted
testimony of a witness who is a real estate broker. With respect to the prevailing valuation of the property in litigation, witness Atty.
Primero, a licensed real estate broker testified that:
x x x There is no fixed pricing for each year because it always depends on the environment so that if the price in 1986, as you were
referring to 1986, it would have risen or increased from P1,000.00, then it would increase toP3,000.00, then it would increase
to P7,000.00 and again increase to P15,000.00 and right now the current price of property in that area is P25,000.00 per square
meter.55
The RTC rightly modified the rental award to P2,500.00 per month, considering that it is settled jurisprudence that courts may take
judicial notice of the general increase in rentals, particularly in business establishments.
WHEREFORE, the petition is DENIED. The November 28, 2003 Decision of the Court of Appeals affirming the October 22, 2001
Decision of the Regional Trial Court of Lanao del Norte, Branch 2, is hereby AFFIRMED.
SO ORDERED.
G.R. No. 188064 June 1, 2011 parties chose not to reduce into writing the other terms of their agreement mentioned in paragraph 11 of the
complaint. Besides, FSL Bank did not want to incorporate in the Deed of Conditional Sale of Real Properties with
Assumption of Mortgage any other side agreement between petitioner and respondent.
MILA A. REYES, Petitioner, vs.VICTORIA T. TUPARAN, Respondent.

Under the Deed of Conditional Sale of Real Properties with Assumption of Mortgage, respondent was bound to pay
D E C I S I O N MENDOZA, J.:
the petitioner a lump sum of 1.2 million pesos without interest as part of the purchase price in three (3) fixed
installments as follows:
Subject of this petition for review is the February 13, 2009 Decision1 of the Court of Appeals (CA) which affirmed with
modification the February 22, 2006 Decision2 of the Regional Trial Court, Branch 172, Valenzuela City (RTC), in Civil
a) 200,000.00 due January 31, 1991
Case No. 3945-V-92, an action for Rescission of Contract with Damages.

b) 200,000.00 due June 30, 1991

On September 10, 1992, Mila A. Reyes (petitioner) filed a complaint for Rescission of Contract with Damages
against Victoria T. Tuparan (respondent) before the RTC. In her Complaint, petitioner alleged, among others, that
she was the registered owner of a 1,274 square meter residential and commercial lot located in Karuhatan, c) 800,000.00 due December 31, 1991
Valenzuela City, and covered by TCT No. V-4130; that on that property, she put up a three-storey commercial
building known as RBJ Building and a residential apartment building; that since 1990, she had been operating a
Respondent, however, defaulted in the payment of her obligations on their due dates. Instead of paying the amounts
drugstore and cosmetics store on the ground floor of RBJ Building where she also had been residing while the other
due in lump sum on their respective maturity dates, respondent paid petitioner in small amounts from time to time. To
areas of the buildings including the sidewalks were being leased and occupied by tenants and street vendors.
compensate for her delayed payments, respondent agreed to pay petitioner an interest of 6% a month. As of August
31, 1992, respondent had only paid 395,000.00, leaving a balance of 805,000.00 as principal on the unpaid
In December 1989, respondent leased from petitioner a space on the ground floor of the RBJ Building for her installments and 466,893.25 as unpaid accumulated interest.
pawnshop business for a monthly rental of 4,000.00. A close friendship developed between the two which led to the
respondent investing thousands of pesos in petitioners financing/lending business from February 7, 1990 to May 27,
Petitioner further averred that despite her success in finding a prospective buyer for the subject real properties within
1990, with interest at the rate of 6% a month.
the 3-month period agreed upon, respondent reneged on her promise to allow the cancellation of their deed of
conditional sale. Instead, respondent became interested in owning the subject real properties and even wanted to
On June 20, 1988, petitioner mortgaged the subject real properties to the Farmers Savings Bank and Loan Bank, convert the entire property into a modern commercial complex. Nonetheless, she consented because respondent
Inc. (FSL Bank) to secure a loan of 2,000,000.00 payable in installments. On November 15, 1990, petitioners repeatedly professed friendship and assured her that all their verbal side agreement would be honored as shown by
outstanding account on the mortgage reached 2,278,078.13. Petitioner then decided to sell her real properties for the fact that since December 1990, she (respondent) had not collected any rentals from the petitioner for the space
at least 6,500,000.00 so she could liquidate her bank loan and finance her businesses. As a gesture of friendship, occupied by her drugstore and cosmetics store.
respondent verbally offered to conditionally buy petitioners real properties for 4,200,000.00 payable on installment
basis without interest and to assume the bank loan. To induce the petitioner to accept her offer, respondent offered
On March 19, 1992, the residential building was gutted by fire which caused the petitioner to lose rental income in
the following conditions/concessions:
the amount of 8,000.00 a month since April 1992. Respondent neglected to renew the fire insurance policy on the
subject buildings.
1. That the conditional sale will be cancelled if the plaintiff (petitioner) can find a buyer of said properties for
the amount of 6,500,000.00 within the next three (3) months provided all amounts received by the plaintiff
Since December 1990, respondent had taken possession of the subject real properties and had been continuously
from the defendant (respondent) including payments actually made by defendant to Farmers Savings and
collecting and receiving monthly rental income from the tenants of the buildings and vendors of the sidewalk fronting
Loan Bank would be refunded to the defendant with additional interest of six (6%) monthly;
the RBJ building without sharing it with petitioner.

2. That the plaintiff would continue using the space occupied by her and drugstore and cosmetics store
On September 2, 1992, respondent offered the amount of 751,000.00 only payable on September 7, 1992, as full
without any rentals for the duration of the installment payments;
payment of the purchase price of the subject real properties and demanded the simultaneous execution of the
corresponding deed of absolute sale.
3. That there will be a lease for fifteen (15) years in favor of the plaintiff over the space for drugstore and
cosmetics store at a monthly rental of only 8,000.00 after full payment of the stipulated installment
Respondents Answer
payments are made by the defendant;

Respondent countered, among others, that the tripartite agreement erroneously designated by the petitioner as a
4. That the defendant will undertake the renewal and payment of the fire insurance policies on the two (2)
Deed of Conditional Sale of Real Property with Assumption of Mortgage was actually a pure and absolute contract of
subject buildings following the expiration of the then existing fire insurance policy of the plaintiff up to the
sale with a term period. It could not be considered a conditional sale because the acquisition of contractual rights and
time that plaintiff is fully paid of the total purchase price of 4,200,000.00.3
the performance of the obligation therein did not depend upon a future and uncertain event. Moreover, the capital
gains and documentary stamps and other miscellaneous expenses and real estate taxes up to 1990 were supposed
After petitioners verbal acceptance of all the conditions/concessions, both parties worked together to obtain FSL to be paid by petitioner but she failed to do so.
Banks approval for respondent to assume her (petitioners) outstanding bank account. The assumption would be
part of respondents purchase price for petitioners mortgaged real properties. FSL Bank approved their proposal on
Respondent further averred that she successfully rescued the properties from a definite foreclosure by paying the
the condition that petitioner would sign or remain as co-maker for the mortgage obligation assumed by respondent.
assumed mortgage in the amount of 2,278,078.13 plus interest and other finance charges. Because of her
payment, she was able to obtain a deed of cancellation of mortgage and secure a release of mortgage on the subject
On November 26, 1990, the parties and FSL Bank executed the corresponding Deed of Conditional Sale of Real real properties including petitioners ancestral residential property in Sta. Maria, Bulacan.
Properties with Assumption of Mortgage. Due to their close personal friendship and business relationship, both

60
Petitioners claim for the balance of the purchase price of the subject real properties was baseless and unwarranted
because the full amount of the purchase price had already been paid, as she did pay more than 4,200,000.00, the
agreed purchase price of the subject real properties, and she had even introduced improvements thereon worth
more than 4,800,000.00. As the parties could no longer be restored to their original positions, rescission could not
be resorted to.
Respondent added that as a result of their business relationship, petitioner was able to obtain from her a loan in the
amount of 400,000.00 with interest and took several pieces of jewelry worth 120,000.00. Petitioner also failed and
refused to pay the monthly rental of 20,000.00 since November 16, 1990 up to the present for the use and
occupancy of the ground floor of the building on the subject real property, thus, accumulating arrearages in the
amount of 470,000.00 as of October 1992.
Ruling of the RTC
On February 22, 2006, the RTC handed down its decision finding that respondent failed to pay in full the 4.2 million
total purchase price of the subject real properties leaving a balance of 805,000.00. It stated that the checks and
receipts presented by respondent refer to her payments of the mortgage obligation with FSL Bank and not the
payment of the balance of 1,200,000.00. The RTC also considered the Deed of Conditional Sale of Real Property
with Assumption of Mortgage executed by and among the two parties and FSL Bank a contract to sell, and not a
contract of sale. It was of the opinion that although the petitioner was entitled to a rescission of the contract, it could
not be permitted because her non-payment in full of the purchase price "may not be considered as substantial and
fundamental breach of the contract as to defeat the object of the parties in entering into the contract."4 The RTC
believed that the respondents offer stated in her counsels letter dated September 2, 1992 to settle what she thought
was her unpaid balance of 751,000.00 showed her sincerity and willingness to settle her obligation. Hence, it would
be more equitable to give respondent a chance to pay the balance plus interest within a given period of time.
Finally, the RTC stated that there was no factual or legal basis to award damages and attorneys fees because there
was no proof that either party acted fraudulently or in bad faith.
Thus, the dispositive portion of the RTC Decision reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Allowing the defendant to pay the plaintiff within thirty (30) days from the finality hereof the amount of
805,000.00, representing the unpaid purchase price of the subject property, with interest thereon at 2% a
month from January 1, 1992 until fully paid. Failure of the defendant to pay said amount within the said
period shall cause the automatic rescission of the contract (Deed of Conditional Sale of Real Property with
Assumption of Mortgage) and the plaintiff and the defendant shall be restored to their former positions
relative to the subject property with each returning to the other whatever benefits each derived from the
transaction;
2. Directing the defendant to allow the plaintiff to continue using the space occupied by her for drugstore
and cosmetic store without any rental pending payment of the aforesaid balance of the purchase price.
3. Ordering the defendant, upon her full payment of the purchase price together with interest, to execute a
contract of lease for fifteen (15) years in favor of the plaintiff over the space for the drugstore and cosmetic
store at a fixed monthly rental of 8,000.00; and
4. Directing the plaintiff, upon full payment to her by the defendant of the purchase price together with
interest, to execute the necessary deed of sale, as well as to pay the Capital Gains Tax, documentary
stamps and other miscellaneous expenses necessary for securing the BIR Clearance, and to pay the real
estate taxes due on the subject property up to 1990, all necessary to transfer ownership of the subject
property to the defendant.
No pronouncement as to damages, attorneys fees and costs.
61
SO ORDERED.5
Ruling of the CA
On February 13, 2009, the CA rendered its decision affirming with modification the RTC Decision. The CA agreed
with the RTC that the contract entered into by the parties is a contract to sell but ruled that the remedy of rescission
could not apply because the respondents failure to pay the petitioner the balance of the purchase price in the total
amount of 805,000.00 was not a breach of contract, but merely an event that prevented the seller (petitioner) from
conveying title to the purchaser (respondent). It reasoned that out of the total purchase price of the subject property
in the amount of 4,200,000.00, respondents remaining unpaid balance was only 805,000.00. Since respondent
had already paid a substantial amount of the purchase price, it was but right and just to allow her to pay the unpaid
balance of the purchase price plus interest. Thus, the decretal portion of the CA Decision reads:
WHEREFORE, premises considered, the Decision dated 22 February 2006 and Order dated 22 December 2006 of
the Regional Trial Court of Valenzuela City, Branch 172 in Civil Case No. 3945-V-92 are AFFIRMED with
MODIFICATION in that defendant-appellant Victoria T. Tuparan is hereby ORDERED to pay plaintiff-
appellee/appellant Mila A. Reyes, within 30 days from finality of this Decision, the amount of 805,000.00
representing the unpaid balance of the purchase price of the subject property, plus interest thereon at the rate of 6%
per annum from 11 September 1992 up to finality of this Decision and, thereafter, at the rate of 12% per annum until
full payment. The ruling of the trial court on the automatic rescission of the Deed of Conditional Sale with Assumption
of Mortgage is hereby DELETED. Subject to the foregoing, the dispositive portion of the trial courts decision is
AFFIRMED in all other respects.
SO ORDERED.6
After the denial of petitioners motion for reconsideration and respondents motion for partial reconsideration,
petitioner filed the subject petition for review praying for the reversal and setting aside of the CA Decision anchored
on the following
ASSIGNMENT OF ERRORS
A. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN DISALLOWING THE
OUTRIGHT RESCISSION OF THE SUBJECT DEED OF CONDITIONAL SALE OF REAL PROPERTIES WITH
ASSUMPTION OF MORTGAGE ON THE GROUND THAT RESPONDENT TUPARANS FAILURE TO PAY
PETITIONER REYES THE BALANCE OF THE PURCHASE PRICE OF 805,000.00 IS NOT A BREACH OF
CONTRACT DESPITE ITS OWN FINDINGS THAT PETITIONER STILL RETAINS OWNERSHIP AND TITLE OVER
THE SUBJECT REAL PROPERTIES DUE TO RESPONDENTS REFUSAL TO PAY THE BALANCE OF THE
TOTAL PURCHASE PRICE OF 805,000.00 WHICH IS EQUAL TO 20% OF THE TOTAL PURCHASE PRICE OF
4,200,000.00 OR 66% OF THE STIPULATED LAST INSTALLMENT OF 1,200,000.00 PLUS THE INTEREST
THEREON. IN EFFECT, THE COURT OF APPEALS AFFIRMED AND ADOPTED THE TRIAL COURTS
CONCLUSION THAT THE RESPONDENTS NON-PAYMENT OF THE 805,000.00 IS ONLY A SLIGHT OR
CASUAL BREACH OF CONTRACT.
B. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN DISREGARDING AS
GROUND FOR THE RESCISSION OF THE SUBJECT CONTRACT THE OTHER FRAUDULENT AND
MALICIOUS ACTS COMMITTED BY THE RESPONDENT AGAINST THE PETITIONER WHICH BY
THEMSELVES SUFFICIENTLY JUSTIFY A DENIAL OF A GRACE PERIOD OF THIRTY (30) DAYS TO THE
RESPONDENT WITHIN WHICH TO PAY TO THE PETITIONER THE 805,000.00 PLUS INTEREST THEREON.
C. EVEN ASSUMING ARGUENDO THAT PETITIONER IS NOT ENTITLED TO THE RESCISSION OF THE
SUBJECT CONTRACT, THE COURT OF APPEALS STILL SERIOUSLY ERRED AND ABUSED ITS DISCRETION
IN REDUCING THE INTEREST ON THE 805,000.00 TO ONLY "6% PER ANNUM STARTING FROM THE DATE
OF FILING OF THE COMPLAINT ON SEPTEMBER 11, 1992" DESPITE THE PERSONAL COMMITMENT OF THE
RESPONDENT AND AGREEMENT BETWEEN THE PARTIES THAT RESPONDENT WILL PAY INTEREST ON
THE 805,000.00 AT THE RATE OF 6% MONTHLY STARTING THE DATE OF DELINQUENCY ON DECEMBER
31, 1991.
D. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN THE APPRECIATION
AND/OR MISAPPRECIATION OF FACTS RESULTING INTO THE DENIAL OF THE CLAIM OF PETITIONER
REYES FOR ACTUAL DAMAGES WHICH CORRESPOND TO THE MILLIONS OF PESOS OF RENTALS/FRUITS
OF THE SUBJECT REAL PROPERTIES WHICH RESPONDENT TUPARAN COLLECTED CONTINUOUSLY
SINCE DECEMBER 1990, EVEN WITH THE UNPAID BALANCE OF 805,000.00 AND DESPITE THE FACT THAT
RESPONDENT DID NOT CONTROVERT SUCH CLAIM OF THE PETITIONER AS CONTAINED IN HER
AMENDED COMPLAINT DATED APRIL 22, 2006.
E. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN THE APPRECIATION OF
FACTS RESULTING INTO THE DENIAL OF THE CLAIM OF PETITIONER REYES FOR THE 29,609.00 BACK
RENTALS THAT WERE COLLECTED BY RESPONDENT TUPARAN FROM THE OLD TENANTS OF THE
PETITIONER.
F. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN DENYING THE
PETITIONERS EARLIER "URGENT MOTION FOR ISSUANCE OF A PRELIMINARY MANDATORY AND
PROHIBITORY INJUNCTION" DATED JULY 7, 2008 AND THE "SUPPLEMENT" THERETO DATED AUGUST 4,
2008 THEREBY CONDONING THE UNJUSTIFIABLE FAILURE/REFUSAL OF JUDGE FLORO ALEJO TO
RESOLVE WITHIN ELEVEN (11) YEARS THE PETITIONERS THREE (3) SEPARATE "MOTIONS FOR
PRELIMINARY INJUNCTION/ TEMPORARY RESTRAINING ORDER, ACCOUNTING AND DEPOSIT OF RENTAL
INCOME" DATED MARCH 17, 1995, AUGUST 19, 1996 AND JANUARY 7, 2006 THEREBY PERMITTING THE
RESPONDENT TO UNJUSTLY ENRICH HERSELF BY CONTINUOUSLY COLLECTING ALL THE
RENTALS/FRUITS OF THE SUBJECT REAL PROPERTIES WITHOUT ANY ACCOUNTING AND COURT
DEPOSIT OF THE COLLECTED RENTALS/FRUITS AND THE PETITIONERS "URGENT MOTION TO DIRECT
DEFENDANT VICTORIA TUPARAN TO PAY THE ACCUMULATED UNPAID REAL ESTATE TAXES AND SEF
TAXES ON THE SUBJECT REAL PROPERTIES" DATED JANUARY 13, 2007 THEREBY EXPOSING THE
SUBJECT REAL PROPERTIES TO IMMINENT AUCTION SALE BY THE CITY TREASURER OF VALENZUELA
CITY.
G. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN DENYING THE
PETITIONERS CLAIM FOR MORAL AND EXEMPLARY DAMAGES AND ATTORNEYS FEES AGAINST THE
RESPONDENT.
In sum, the crucial issue that needs to be resolved is whether or not the CA was correct in ruling that there was no
legal basis for the rescission of the Deed of Conditional Sale with Assumption of Mortgage.
Position of the Petitioner
The petitioner basically argues that the CA should have granted the rescission of the subject Deed of Conditional
Sale of Real Properties with Assumption of Mortgage for the following reasons:
1. The subject deed of conditional sale is a reciprocal obligation whose outstanding characteristic is
reciprocity arising from identity of cause by virtue of which one obligation is correlative of the other.
2. The petitioner was rescinding not enforcing the subject Deed of Conditional Sale pursuant to Article
1191 of the Civil Code because of the respondents failure/refusal to pay the 805,000.00 balance of the
total purchase price of the petitioners properties within the stipulated period ending December 31, 1991.
3. There was no slight or casual breach on the part of the respondent because she (respondent)
deliberately failed to comply with her contractual obligations with the petitioner by violating the terms or
manner of payment of the 1,200,000.00 balance and unjustly enriched herself at the expense of the
petitioner by collecting all rental payments for her personal benefit and enjoyment.
Furthermore, the petitioner claims that the respondent is liable to pay interest at the rate of 6% per month on her
unpaid installment of 805,000.00 from the date of the delinquency, December 31, 1991, because she obligated
herself to do so.
62
Finally, the petitioner asserts that her claim for damages or lost income as well as for the back rentals in the amount
of 29,609.00 has been fully substantiated and, therefore, should have been granted by the CA. Her claim for moral
and exemplary damages and attorneys fees has been likewise substantiated.
Position of the Respondent
The respondent counters that the subject Deed of Conditional Sale with Assumption of Mortgage entered into
between the parties is a contract to sell and not a contract of sale because the title of the subject properties still
remains with the petitioner as she failed to pay the installment payments in accordance with their agreement.
Respondent echoes the RTC position that her inability to pay the full balance on the purchase price may not be
considered as a substantial and fundamental breach of the subject contract and it would be more equitable if she
would be allowed to pay the balance including interest within a certain period of time. She claims that as early as
1992, she has shown her sincerity by offering to pay a certain amount which was, however, rejected by the
petitioner.
Finally, respondent states that the subject deed of conditional sale explicitly provides that the installment payments
shall not bear any interest. Moreover, petitioner failed to prove that she was entitled to back rentals.
The Courts Ruling
The petition lacks merit.
The Court agrees with the ruling of the courts below that the subject Deed of Conditional Sale with Assumption of
Mortgage entered into by and among the two parties and FSL Bank on November 26, 1990 is a contract to sell and
not a contract of sale. The subject contract was correctly classified as a contract to sell based on the following
pertinent stipulations:
8. That the title and ownership of the subject real properties shall remain with the First Party until the full payment of
the Second Party of the balance of the purchase price and liquidation of the mortgage obligation of 2,000,000.00.
Pending payment of the balance of the purchase price and liquidation of the mortgage obligation that was assumed
by the Second Party, the Second Party shall not sell, transfer and convey and otherwise encumber the subject real
properties without the written consent of the First and Third Party.
9. That upon full payment by the Second Party of the full balance of the purchase price and the assumed mortgage
obligation herein mentioned the Third Party shall issue the corresponding Deed of Cancellation of Mortgage and the
First Party shall execute the corresponding Deed of Absolute Sale in favor of the Second Party.7
Based on the above provisions, the title and ownership of the subject properties remains with the petitioner until the
respondent fully pays the balance of the purchase price and the assumed mortgage obligation. Thereafter, FSL Bank
shall then issue the corresponding deed of cancellation of mortgage and the petitioner shall execute the
corresponding deed of absolute sale in favor of the respondent.
Accordingly, the petitioners obligation to sell the subject properties becomes demandable only upon the happening
of the positive suspensive condition, which is the respondents full payment of the purchase price. Without
respondents full payment, there can be no breach of contract to speak of because petitioner has no obligation yet to
turn over the title. Respondents failure to pay in full the purchase price is not the breach of contract contemplated
under Article 1191 of the New Civil Code but rather just an event that prevents the petitioner from being bound to
convey title to the respondent. The 2009 case of Nabus v. Joaquin & Julia Pacson8 is enlightening:
The Court holds that the contract entered into by the Spouses Nabus and respondents was a contract to sell, not a
contract of sale.
A contract of sale is defined in Article 1458 of the Civil Code, 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.
xxx
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 non-fulfillment 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.
xxx xxx xxx
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 if
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. 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 convey title to the prospective buyer by entering into a contract of absolute
sale.
63
Further, Chua v. Court of Appeals, cited this distinction between a contract of sale and a contract to sell:
In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold; in a contract to
sell, ownership is, by agreement, reserved in the vendor and is not to pass to the vendee until full payment of the
purchase price. Otherwise stated, in a contract of sale, the vendor loses ownership over the property and cannot
recover it until and unless the contract is resolved or rescinded; whereas, in a contract to sell, title is retained by the
vendor until full payment of the price. In the latter contract, payment of the price is a positive suspensive condition,
failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from becoming
effective.
It is not the title of the contract, but its express terms or stipulations that determine the kind of contract entered into
by the parties. In this case, the contract entitled "Deed of Conditional Sale" is actually a contract to sell. The contract
stipulated that "as soon as the full consideration of the sale has been paid by the vendee, the corresponding transfer
documents shall be executed by the vendor to the vendee for the portion sold." Where the vendor promises to
execute a deed of absolute sale upon the completion by the vendee of the payment of the price, the contract is only
a contract to sell." The aforecited stipulation shows that the vendors reserved title to the subject property until full
payment of the purchase price.
xxx
Unfortunately for the Spouses Pacson, since the Deed of Conditional Sale executed in their favor was merely a
contract to sell, the obligation of the seller to sell becomes demandable only upon the happening of the suspensive
condition. The full payment of the purchase price is the positive suspensive condition, the failure of which is not a
breach of contract, but simply an event that prevented the obligation of the vendor to convey title from
acquiring binding force. Thus, for its non-fulfilment, there is no contract to speak of, the obligor having failed to
perform the suspensive condition which enforces a juridical relation. With this circumstance, there can be no
rescission or fulfillment of an obligation that is still non-existent, the suspensive condition not having occurred as
yet. Emphasis should be made that the breach contemplated in Article 1191 of the New Civil Code is the obligors
failure to comply with an obligation already extant, not a failure of a condition to render binding that
obligation. [Emphases and underscoring supplied]
Consistently, the Court handed down a similar ruling in the 2010 case of Heirs of Atienza v. Espidol, 9 where it was
written:
Regarding the right to cancel the contract for non-payment of an installment, there is need to initially determine if
what the parties had was a contract of sale or a contract to sell. In a contract of sale, the title to the property passes
to the buyer upon the delivery of the thing sold. In a contract to sell, on the other hand, the ownership is, by
agreement, retained by the seller and is not to pass to the vendee until full payment of the purchase price. In the
contract of sale, the buyers non-payment of the price is a negative resolutory condition; in the contract to sell, the
buyers full payment of the price is a positive suspensive condition to the coming into effect of the agreement. In the
first case, the seller has lost and cannot recover the ownership of the property unless he takes action to set aside the
contract of sale. In the second case, the title simply remains in the seller if the buyer does not comply with the
condition precedent of making payment at the time specified in the contract. Here, it is quite evident that the contract
involved was one of a contract to sell since the Atienzas, as sellers, were to retain title of ownership to the land until
respondent Espidol, the buyer, has paid the agreed price. Indeed, there seems no question that the parties
understood this to be the case.
Admittedly, Espidol was unable to pay the second installment of P1,750,000.00 that fell due in December 2002. That
payment, said both the RTC and the CA, was a positive suspensive condition failure of which was notregarded a
breach in the sense that there can be no rescission of an obligation (to turn over title) that did not yet exist
since the suspensive condition had not taken place. x x x. [Emphases and underscoring supplied]
Thus, the Court fully agrees with the CA when it resolved: "Considering, however, that the Deed of Conditional Sale
was not cancelled by Vendor Reyes (petitioner) and that out of the total purchase price of the subject property in the
amount of 4,200,000.00, the remaining unpaid balance of Tuparan (respondent) is only 805,000.00, a substantial
amount of the purchase price has already been paid. It is only right and just to allow Tuparan to pay the said unpaid
balance of the purchase price to Reyes."10
Granting that a rescission can be permitted under Article 1191, the Court still cannot allow it for the reason that,
considering the circumstances, there was only a slight or casual breach in the fulfillment of the obligation.
Unless the parties stipulated it, rescission is allowed only when the breach of the contract is substantial and
fundamental to the fulfillment of the obligation. Whether the breach is slight or substantial is largely determined by
the attendant circumstances.11 In the case at bench, the subject contract stipulated the following important
provisions:
2. That the purchase price of 4,200,000.00 shall be paid as follows:
a) 278,078.13 received in cash by the First Party but directly paid to the Third Party as partial payment of
the mortgage obligation of the First Party in order to reduce the amount to 2,000,000.00 only as of
November 15, 1990;
b) 721,921.87 received in cash by the First Party as additional payment of the Second Party;
c) 1,200,000.00 to be paid in installments as follows:
her to settle, within a reasonable period of time, the balance of the unpaid purchase price. The Court agrees with the
courts below that the respondent showed her sincerity and willingness to comply with her obligation when she
offered to pay the petitioner the amount of 751,000.00.
On the issue of interest, petitioner failed to substantiate her claim that respondent made a personal commitment to
pay a 6% monthly interest on the 805,000.00 from the date of delinquency, December 31, 1991. As can be gleaned
from the contract, there was a stipulation stating that: "All the installments shall not bear interest." The CA was,
however, correct in imposing interest at the rate of 6% per annum starting from the filing of the complaint on
September 11, 1992.1avvphi1
Finally, the Court upholds the ruling of the courts below regarding the non-imposition of damages and attorneys
fees. Aside from petitioners self-serving statements, there is not enough evidence on record to prove that
respondent acted fraudulently and maliciously against the petitioner. In the case of Heirs of Atienza v. Espidol, 13 it
was stated:
Respondents are not entitled to moral damages because contracts are not referred to in Article 2219 of the Civil
Code, which enumerates the cases when moral damages may be recovered. Article 2220 of the Civil Code allows
the recovery of moral damages in breaches of contract where the defendant acted fraudulently or in bad faith.
However, this case involves a contract to sell, wherein full payment of the purchase price is a positive suspensive
condition, the non-fulfillment of which is not a breach of contract, but merely an event that prevents the seller from
conveying title to the purchaser. Since there is no breach of contract in this case, respondents are not entitled to
moral damages.

1. 200,000.00 payable on or before January 31, 1991; In the absence of moral, temperate, liquidated or compensatory damages, exemplary damages cannot be granted
for they are allowed only in addition to any of the four kinds of damages mentioned.
2. 200,000.00 payable on or before June 30, 1991;
WHEREFORE, the petition is DENIED.
3. 800,000.00 payable on or before December 31, 1991;
SO ORDERED.
Note: All the installments shall not bear any interest.

d) 2,000,000.00 outstanding balance of the mortgage obligation as of November 15, 1990 which is
hereby assumed by the Second Party.

xxx

3. That the Third Party hereby acknowledges receipts from the Second Party P278,078.13 as partial payment of the
loan obligation of First Party in order to reduce the account to only 2,000,000.00 as of November 15, 1990 to be
assumed by the Second Party effective November 15, 1990.12

From the records, it cannot be denied that respondent paid to FSL Bank petitioners mortgage obligation in the
amount of 2,278,078.13, which formed part of the purchase price of the subject property. Likewise, it is not disputed
that respondent paid directly to petitioner the amount of 721,921.87 representing the additional payment for the
purchase of the subject property. Clearly, out of the total price of 4,200,000.00, respondent was able to pay the
total amount of 3,000,000.00, leaving a balance of 1,200,000.00 payable in three (3) installments.

Out of the 1,200,000.00 remaining balance, respondent paid on several dates the first and second installments of
200,000.00 each. She, however, failed to pay the third and last installment of 800,000.00 due on December 31,
1991. Nevertheless, on August 31, 1992, respondent, through counsel, offered to pay the amount of 751,000.00,
which was rejected by petitioner for the reason that the actual balance was 805,000.00 excluding the interest
charges.

Considering that out of the total purchase price of 4,200,000.00, respondent has already paid the substantial
amount of 3,400,000.00, more or less, leaving an unpaid balance of only 805,000.00, it is right and just to allow

64
G.R. No. 200602 December 11, 2013
ACE FOODS, INC., Petitioner,
vs.
MICRO PACIFIC TECHNOLOGIES CO., LTD.1, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari2are the Decision3 dated October 21, 2011 and Resolution4 dated
February 8, 2012 of the Court of Appeals (CA) in CA-G.R. CV No. 89426 which reversed and set aside the
Decision5 dated February 28, 2007 of the Regional Trial Court of Makati, Branch 148 (RTC) in Civil Case No. 02-
1248, holding petitioner ACE Foods, Inc. (ACE Foods) liable to respondent Micro Pacific Technologies Co., Ltd.
(MTCL) for the payment of Cisco Routers and Frame Relay Products (subject products) amounting to P646,464.00
pursuant to a perfected contract of sale.
The Facts
ACE Foods is a domestic corporation engaged in the trading and distribution of consumer goods in wholesale and
retail bases,6 while MTCL is one engaged in the supply of computer hardware and equipment. 7
On September 26, 2001, MTCL sent a letter-proposal8 for the delivery and sale of the subject products to be installed
at various offices of ACE Foods. Aside from the itemization of the products offered for sale, the said proposal further
provides for the following terms, viz.:9
TERMS : Thirty (30) days upon delivery
VALIDITY : Prices are based on current dollar rate and subject to changes without prior notice.
DELIVERY : Immediate delivery for items on stock, otherwise thirty (30) to forty-five days upon receipt of [Purchase
Order]
WARRANTY : One (1) year on parts and services. Accessories not included in warranty.
On October 29, 2001, ACE Foods accepted MTCLs proposal and accordingly issued Purchase Order No.
10002310(Purchase Order) for the subject products amounting to P646,464.00 (purchase price). Thereafter, or on
March 4, 2002, MTCL delivered the said products to ACE Foods as reflected in Invoice No. 7733 11 (Invoice Receipt).
The fine print of the invoice states, inter alia, that "[t]itle to sold property is reserved in MICROPACIFIC
TECHNOLOGIES CO., LTD. until full compliance of the terms and conditions of above and payment of the
price"12(title reservation stipulation). After delivery, the subject products were then installed and configured in ACE
Foodss premises. MTCLs demands against ACE Foods to pay the purchase price, however, remained
unheeded.13Instead of paying the purchase price, ACE Foods sent MTCL a Letter14 dated September 19, 2002,
stating that it "ha[s] been returning the [subject products] to [MTCL] thru [its] sales representative Mr. Mark Anteola
who has agreed to pull out the said [products] but had failed to do so up to now."
Eventually, or on October 16, 2002, ACE Foods lodged a Complaint15 against MTCL before the RTC, praying that
the latter pull out from its premises the subject products since MTCL breached its "after delivery services" obligations
to it, particularly, to: (a) install and configure the subject products; (b) submit a cost benefit study to justify the
purchase of the subject products; and (c) train ACE Foodss technicians on how to use and maintain the subject
products. 16 ACE Foods likewise claimed that the subject products MTCL delivered are defective and not working. 17
65
For its part, MTCL, in its Answer with Counterclaim,18 maintained that it had duly complied with its obligations to ACE
Foods and that the subject products were in good working condition when they were delivered, installed and
configured in ACE Foodss premises. Thereafter, MTCL even conducted a training course for ACE Foodss
representatives/employees; MTCL, however, alleged that there was actually no agreement as to the purported "after
delivery services." Further, MTCL posited that ACE Foods refused and failed to pay the purchase price for the
subject products despite the latters use of the same for a period of nine (9) months. As such, MTCL prayed that ACE
Foods be compelled to pay the purchase price, as well as damages related to the transaction. 19
The RTC Ruling
On February 28, 2007, the RTC rendered a Decision, 20 directing MTCL to remove the subject products from ACE
Foodss premises and pay actual damages and attorney fees in the amounts of P200,000.00 and P100,000.00,
respectively.21
At the outset, it observed that the agreement between ACE Foods and MTCL is in the nature of a contract to sell. Its
conclusion was based on the fine print of the Invoice Receipt which expressly indicated that "title to sold property is
reserved in MICROPACIFIC TECHNOLOGIES CO., LTD. until full compliance of the terms and conditions of above
and payment of the price," noting further that in a contract to sell, the prospective seller explicitly reserves the
transfer of title to the prospective buyer, and said transfer is conditioned upon the full payment of the purchase
price.22 Thus, notwithstanding the execution of the Purchase Order and the delivery and installation of the subject
products at the offices of ACE Foods, by express stipulation stated in the Invoice Receipt issued by MTCL and
signed by ACE Foods, i.e., the title reservation stipulation, it is still the former who holds title to the products until full
payment of the purchase price therefor. In this relation, it noted that the full payment of the price is a positive
suspensive condition, the non-payment of which prevents the obligation to sell on the part of the seller/vendor from
materializing at all.23 Since title remained with MTCL, the RTC therefore directed it to withdraw the subject products
from ACE Foodss premises. Also, in view of the foregoing, the RTC found it unnecessary to delve into the
allegations of breach since the non-happening of the aforesaid suspensive condition ipso jure prevented the
obligation to sell from arising.24
Dissatisfied, MTCL elevated the matter on appeal.25
The CA Ruling
In a Decision26 dated October 21, 2011, the CA reversed and set aside the RTCs ruling, ordering ACE Foods to pay
MTCL the amount of P646,464.00, plus legal interest at the rate of 6% per annum to be computed from April 4, 2002,
and attorneys fees amounting to P50,000.00.27
It found that the agreement between the parties is in the nature of a contract of sale, observing that the said contract
had been perfected from the time ACE Foods sent the Purchase Order to MTCL which, in turn, delivered the subject
products covered by the Invoice Receipt and subsequently installed and configured them in ACE Foodss
premises.28 Thus, considering that MTCL had already complied with its obligation, ACE Foodss corresponding
obligation arose and was then duty bound to pay the agreed purchase price within thirty (30) days from March 5,
2002.29 In this light, the CA concluded that it was erroneous for ACE Foods not to pay the purchase price therefor,
despite its receipt of the subject products, because its refusal to pay disregards the very essence of reciprocity in a
contract of sale.30 The CA also dismissed ACE Foodss claim regarding MTCLs failure to perform its "after delivery
services" obligations since the letter-proposal, Purchase Order and Invoice Receipt do not reflect any agreement to
that effect.31
Aggrieved, ACE Foods moved for reconsideration which was, however, denied in a Resolution 32 dated February 8,
2012, hence, this petition.
The Issue Before the Court
The essential issue in this case is whether ACE Foods should pay MTCL the purchase price for the subject products.
 The Courts Ruling
The petition lacks merit.
A contract is what the law defines it to be, taking into consideration its essential elements, and not what the
contracting parties call it.33 The real nature of a contract may be determined from the express terms of the written
agreement and from the contemporaneous and subsequent acts of the contracting parties. However, in the
construction or interpretation of an instrument, the intention of the parties is primordial and is to be pursued.
The denomination or title given by the parties in their contract is not conclusive of the nature of its contents.34
The very essence of a contract of sale is the transfer of ownership in exchange for a price paid or
promised. 35This may be gleaned from Article 1458 of the Civil Code which defines a contract of sale as follows:
Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to
deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.
A contract of sale may be absolute or conditional. (Emphasis supplied)
Corollary thereto, a contract of sale is classified as a consensual contract, which means that the sale is perfected
by mere consent. No particular form is required for its validity. Upon perfection of the contract, the parties may
reciprocally demand performance, i.e., the vendee may compel transfer of ownership of the object of the sale, and
the vendor may require the vendee to pay the thing sold.36
In contrast, a contract to sell is defined as a bilateral contract whereby the prospective seller, while expressly
reserving the ownership of the property despite delivery thereof to the prospective buyer, binds himself to sell the
property exclusively to the prospective buyer upon fulfillment of the condition agreed upon, i.e., the full payment of
the purchase price. A contract to sell 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.37
In the present case, it has not been shown that the title reservation stipulation appearing in the Invoice Receipt had
been included or had subsequently modified or superseded the original agreement of the parties. The fact that the
Invoice Receipt was signed by a representative of ACE Foods does not, by and of itself, prove animus novandisince:
(a) it was not shown that the signatory was authorized by ACE Foods (the actual party to the transaction) to novate
the original agreement; (b) the signature only proves that the Invoice Receipt was received by a representative of
ACE Foods to show the fact of delivery; and (c) as matter of judicial notice, invoices are generally issued at the
consummation stage of the contract and not its perfection, and have been even treated as documents which are not
actionable per se, although they may prove sufficient delivery. 39 Thus, absent any clear indication that the title
reservation stipulation was actually agreed upon, the Court must deem the same to be a mere unilateral imposition
on the part of MTCL which has no effect on the nature of the parties original agreement as a contract of sale.
Perforce, the obligations arising thereto, among others, ACE Foodss obligation to pay the purchase price as well
as to accept the delivery of the goods,40 remain enforceable and subsisting.1wphi1
As a final point, it may not be amiss to state that the return of the subject products pursuant to a rescissory action 41is
neither warranted by ACE Foodss claims of breach either with respect to MTCLs breach of its purported "after
delivery services" obligations or the defective condition of the products - since such claims were not adequately
proven in this case. The rule is clear: each party must prove his own affirmative allegation; one who asserts the
affirmative of the issue has the burden of presenting at the trial such amount of evidence required by law to obtain a
favorable judgment, which in civil cases, is by preponderance of evidence. 42 This, however, ACE Foods failed to
observe as regards its allegations of breach. Hence, the same cannot be sustained.
WHEREFORE, the petition is DENIED. Accordingly, the Decision dated October 21, 2011 and Resolution dated
February 8, 2012 of the Court of Appeals in CA-G.R. CV No. 89426 are hereby AFFIRMED.
SO ORDERED.

In this case, the Court concurs with the CA that the parties have agreed to a contract of sale and not to a contract to
sell as adjudged by the RTC. Bearing in mind its consensual nature, a contract of sale had been perfected at the
precise moment ACE Foods, as evinced by its act of sending MTCL the Purchase Order, accepted the latters
proposal to sell the subject products in consideration of the purchase price of P646,464.00. From that point in time,
the reciprocal obligations of the parties i.e., on the one hand, of MTCL to deliver the said products to ACE Foods,
and, on the other hand, of ACE Foods to pay the purchase price therefor within thirty (30) days from delivery
already arose and consequently may be demanded. Article 1475 of the Civil Code makes this clear:

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.

At this juncture, the Court must dispel the notion that the stipulation anent MTCLs reservation of ownership of the
subject products as reflected in the Invoice Receipt, i.e., the title reservation stipulation, changed the complexion of
the transaction from a contract of sale into a contract to sell. Records are bereft of any showing that the said
stipulation novated the contract of sale between the parties which, to repeat, already existed at the precise moment
ACE Foods accepted MTCLs proposal. To be sure, novation, in its broad concept, may either be extinctive or
modificatory. It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the
place of the former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with
the amendatory agreement. In either case, however, novation is never presumed, and the animus novandi, whether
totally or partially, must appear by express agreement of the parties, or by their acts that are too clear and
unequivocal to be mistaken.38
66
G.R. No. 196251 July 9, 2014 Should the action against the Philippine Tourism Authority be denied, Castillo agreed to reimburse all the amounts
paid by Olivarez Realty Corporation. Paragraph D of the deed of conditional sale provides:
OLIVAREZ REALTY CORPORATION and DR. PABLO R. OLIVAREZ, Petitioner,
vs. D. In the event that the Court denie[s] the petition against the Philippine Tourism Authority, all sums received by
BENJAMIN CASTILLO, Respondent. [Castillo] shall be reimbursed to [Olivarez Realty Corporation] without interest[.]11

DECISION
LEONEN, J.:
Trial may be dispensed with and a summary judgment rendered if the case can be resolved judiciously by plain
resort to the pleadings, affidavits, depositions, and other papers filed by the parties.
This is a petition for review on certiorari1 of the Court of Appeals' decision2 dated July 20, 2010 and resolution3dated
March 18, 2011 in CAG.R. CV No. 91244.
The facts as established from the pleadings of the parties are as follows:
As to the "legitimate tenants" occupying the property, Olivarez Realty Corporation undertook to pay them
"disturbance compensation," while Castillo undertook to clear the land of the tenants within six months from the
signing of the deed of conditional sale. Should Castillo fail to clear the land within six months, Olivarez Realty
Corporation may suspend its monthly down payment until the tenants vacate the property. Paragraphs E and F of the
deed of conditional sale provide: E. That [Olivarez Realty Corporation] shall pay the disturbance compensation to
legitimate agricultural tenants and fishermen occupants which in no case shall exceed ONE MILLION FIVE
HUNDRED THOUSAND (P1,500,000.00) PESOS. Said amountshall not form part of the purchase price. In excess of
this amount, all claims shall be for the account of [Castillo];
F. That [Castillo] shall clear the land of [the] legitimate tenants within a period of six (6) months upon signing of this
Contract, and in case [Castillo] fails, [Olivarez Realty Corporation] shall have the right to suspend the monthly down
payment until such time that the tenants [move] out of the land[.]12

Benjamin Castillo was the registered owner of a 346,918-squaremeter parcel of land located in Laurel, Batangas,
covered by Transfer Certificate of Title No. T-19972.4 The Philippine Tourism Authority allegedly claimed ownership
of the sameparcel of land based on Transfer Certificate of Title No. T-18493.5 On April 5, 2000, Castillo and Olivarez
Realty Corporation, represented by Dr. Pablo R. Olivarez, entered into a contract of conditional sale 6 over the
property. Under the deed of conditional sale, Castillo agreed to sell his property to Olivarez Realty Corporation
forP19,080,490.00. Olivarez Realty Corporation agreed toa down payment of P5,000,000.00, to be paid according to
the following schedule:
The parties agreed thatOlivarez Realty Corporation may immediately occupy the property upon signing of the deed
of conditional sale. Should the contract be cancelled, Olivarez RealtyCorporation agreed to return the propertys
possession to Castillo and forfeit all the improvements it may have introduced on the property. Paragraph I of the
deed of conditional sale states:
I. Immediately upon signing thisContract, [Olivarez Realty Corporation] shall be entitled to occupy, possess and
develop the subject property. In case this Contract is canceled [sic], any improvement introduced by [the corporation]
on the property shall be forfeited in favor of [Castillo][.]13

DATE AMOUNT
On September 2, 2004, Castillo filed a complaint14 against Olivarez Realty Corporation and Dr. Olivarez with the
April 8, 2000 500,000.00 Regional Trial Court of Tanauan City, Batangas.

May 8, 2000 500,000.00 Castillo alleged that Dr. Olivarez convinced him into selling his property to Olivarez Realty Corporation on the
representation that the corporation shall be responsible in clearing the property of the tenants and in paying them
May 16, 2000 500,000.00
disturbance compensation. He further alleged that Dr. Olivarez solely prepared the deed of conditional sale and that
1,000,000.0 he was made to sign the contract with its terms "not adequately explained [to him] in Tagalog."15
June 8, 2000
0
After the parties had signed the deed of conditional sale, Olivarez Realty Corporation immediately took possession of
July 8, 2000 500,000.00 the property. However, the corporation only paid 2,500,000.00 ofthe purchase price. Contrary to the agreement, the
August 8, 2000 500,000.00 corporation did not file any action against the Philippine Tourism Authority to void the latters title to the property. The
corporation neither cleared the land of the tenants nor paid them disturbance compensation. Despite demand,
September 8, 2000 500,000.00 Olivarez Realty Corporation refused to fully pay the purchase price. 16

October 8, 2000 500,000.00

November 8, 2000 500,000.00 7 deed of conditional sale was a contract of adhesion, Castillo prayed for rescission of contract under Article 1191 of
As to the balance of P14,080,490.00, Olivarez Realty Corporation agreed to pay in 30 equal monthly installments
every eighth day of the month beginning in the month that the parties would receive a decision voiding the Philippine
Tourism Authoritys title to the property.8 Under the deed of conditional sale, Olivarez RealtyCorporation shall file the
action against the Philippine Tourism Authority "with the full assistance of [Castillo]." 9 Paragraph C of the deed of
conditional sale provides:
C. [Olivarez Realty Corporation] assumes the responsibility of taking necessary legal action thru Court to have the
claim/title TCT T-18493 of Philippine Tourism Authority over the above-described property be nullified and voided;
with the full assistance of [Castillo][.]10
67
Arguing that Olivarez Realty Corporation committed substantial breach of the contract of conditional sale and that the
the Civil Code of the Philippines. He further prayed that Olivarez Realty Corporation and Dr. Olivarez be made
solidarily liable for moral damages, exemplary damages, attorneys fees, and costs of suit. 17
In their answer,18 Olivarez Realty Corporation and Dr. Olivarez admitted that the corporation only paidP2,500,000.00
ofthe purchase price. In their defense, defendants alleged that Castillo failed to "fully assist"19 the corporation in filing
an action against the Philippine Tourism Authority. Neither did Castillo clear the property of the tenants within six
months from the signing of the deed of conditional sale. Thus, according to defendants, the corporation had "all the
legal right to withhold the subsequent payments to [fully pay] the purchase price." 20
Olivarez Realty Corporation and Dr. Olivarez prayedthat Castillos complaint be dismissed. By way of compulsory
counterclaim, they prayed for P100,000.00 litigation expenses and P50,000.00 attorneys fees.21
Castillo replied to the counterclaim,22 arguing that Olivarez Realty Corporation and Dr. Olivarez had no right to
litigation expenses and attorneys fees. According to Castillo, the deed of conditional sale clearly states that the
corporation "assume[d] the responsibility of taking necessary legal action"23 against the Philippine Tourism Authority,
yet the corporation did not file any case. Also, the corporation did not pay the tenants disturbance compensation. For
the corporations failure to fully pay the purchase price, Castillo claimed that hehad "all the right to pray for the
rescission of the [contract],"24 and he "should not be held liable . . . for any alleged damages by way of litigation
expenses and attorneys fees."25
On January 10, 2005, Castillo filed a request for admission,26 requesting Dr. Olivarez to admit under oath the
genuineness of the deed of conditional sale and Transfer Certificate of Title No. T-19972. He likewise requested Dr.
Olivarez to admit the truth of the following factual allegations:
1. That Dr. Olivarez is the president of Olivarez Realty Corporation;
2. That Dr. Olivarez offered to purchase the parcel of land from Castillo and that he undertook to clear the
property of the tenants and file the court action to void the Philippine Tourism Authoritys title to the
property;
3. That Dr. Olivarez caused the preparation of the deed of conditional sale;
4. That Dr. Olivarez signed the deed of conditional sale for and on behalf of Olivarez Realty Corporation;
5. That Dr. Olivarez and the corporation did not file any action against the Philippine Tourism Authority;
6. That Dr. Olivarez and the corporation did not pay the tenants disturbance compensation and failed to
clear the property of the tenants; and
7. That Dr. Olivarez and the corporation only paid P2,500,000.00 of the agreed purchase price.27
On January 25, 2005, Dr. Olivarez and Olivarez Realty Corporation filed their objections to the request for
admission,28 stating that they "reiterate[d] the allegations [and denials] in their [answer]." 29
The trial court conducted pre-trial conference on December 17, 2005.
On March 8, 2006, Castillo filed a motion for summary judgment and/or judgment on the pleadings. 30 He argued that
Olivarez Realty Corporation and Dr. Olivarez "substantially admitted the material allegations of [his]
complaint,"31 specifically:
32
1. That the corporation failed to fully pay the purchase price for his property;
2. That the corporation failed to file an action to void the Philippine Tourism Authoritys title to his
property;33and
3. That the corporation failed to clear the property of the tenants and pay them disturbance
compensation.34
Should judgment on the pleadings beimproper, Castillo argued that summary judgment may still be rendered asthere
is no genuine issue as to any material fact.35 He cited Philippine National Bank v. Noahs Ark Sugar Refinery36 as
authority.
Castillo attached to his motion for summary judgment and/or judgment on the pleadings his affidavit 37 and the
affidavit of a Marissa Magsino38 attesting to the truth of the material allegations of his complaint.
68
Olivarez Realty Corporation and Dr. Olivarez opposed39 the motion for summary judgment and/or judgment on the
pleadings, arguing that the motion was "devoid of merit."40 They reiterated their claim that the corporation withheld
further payments of the purchase price because "there ha[d] been no favorable decision voiding the title of the
Philippine Tourism Authority."41 They added that Castillo sold the property to another person and that the sale was
allegedly litigated in Quezon City.42
Considering that a title adverse to that of Castillos existed, Olivarez Realty Corporation and Dr. Olivarez argued that
the case should proceed to trial and Castillo be required to prove that his title to the property is "not spurious or fake
and that he had not sold his property to another person."43
In reply to the opposition to the motion for summary judgment and/or judgment on the pleadings, 44 Castillo
maintained that Olivarez Realty Corporation was responsible for the filing of an action against the Philippine Tourism
Authority. Thus, the corporation could not fault Castillo for not suing the PhilippineTourism Authority. 45 The
corporation illegally withheld payments of the purchase price.
As to the claim that the case should proceed to trial because a title adverse to his title existed, Castillo argued that
the Philippine Tourism Authoritys title covered another lot, not his property.46
During the hearing on August 3, 2006, Olivarez Realty Corporation and Dr. Olivarez prayed that they be given 30
days to file a supplemental memorandum on Castillos motion for summary judgment and/or judgment on the
pleadings.47
The trial court granted the motion. Itgave Castillo 20 days to reply to the memorandum and the corporation and Dr.
Olivarez 15 days to respond to Castillos reply.48
In their supplemental memorandum,49 Olivarez Realty Corporation and Dr. Olivarez argued that there was "an
obvious ambiguity"50 as to which should occur first the payment of disturbance compensation to the tenants or the
clearing of the property of the tenants.51 This ambiguity, according to defendants, is a genuine issue and "oughtto be
threshed out in a full blown trial."52
Olivarez Realty Corporation and Dr. Olivarez added that Castillo prayed for irreconcilable reliefs of reformation of
instrument and rescission of contract.53 Thus, Castillos complaint should be dismissed.
Castillo replied54 to the memorandum, arguing that there was no genuine issue requiring trial of the case. According
to Castillo, "common sense dictates . . . that the legitimate tenants of the [property] shall not vacate the premises
without being paid any disturbance compensation . . ."55 Thus, the payment of disturbance compensation should
occur first before clearing the property of the tenants.
With respect to the other issuesraised in the supplemental memorandum, specifically, that Castillo sold the property
to another person, he argued that these issues should not be entertained for not having been presented during pre-
trial.56
In their comment on the reply memorandum,57 Olivarez Realty Corporation and Dr. Olivarez reiterated their
arguments that certain provisions of the deed of conditional sale were ambiguous and that the complaint prayed for
irreconcilable reliefs.58
As to the additional issues raised in the supplemental memorandum, defendants argued that issues not raised and
evidence not identified and premarked during pre-trial may still be raised and presented during trial for good cause
shown. Olivarez Realty Corporation and Dr. Olivarez prayed that Castillos complaint be dismissed for lack of merit. 59
Ruling of the trial court
The trial court found that Olivarez Realty Corporation and Dr. Olivarezs answer "substantially [admitted the material
allegations of Castillos] complaint and [did] not . . . raise any genuine issue [as to any material fact]."60
Defendants admitted that Castillo owned the parcel of land covered by Transfer Certificate of Title No. T-19972. They
likewise admitted the genuineness of the deed of conditional sale and that the corporation only paidP2,500,000.00 of
the agreed purchase price.61
According to the trial court, the corporation was responsible for suing the Philippine Tourism Authority and for paying
the tenants disturbance compensation. Since defendant corporation neither filed any case nor paid the tenants
disturbance compensation, the trial court ruled that defendant corporation had no right to withhold payments from
Castillo.62
As to the alleged ambiguity of paragraphs E and F of the deed of conditional sale, the trial court ruled that Castillo
and his witness, Marissa Magsino, "clearly established"63 in their affidavits that the deed of conditional sale was a
contract of adhesion. The true agreement between the parties was that the corporation would both clear the land of
the tenants and pay them disturbance compensation.
With these findings, the trial court ruled that Olivarez Realty Corporation breached the contract ofconditional
sale.1wphi1 In its decision64 dated April 23, 2007, the trial court ordered the deed of conditional sale rescinded and
theP2,500,000.00 forfeited in favor of Castillo "as damages under Article 1191 of the Civil Code." 65
The trial court declared Olivarez Realty Corporation and Dr. Olivarez solidarily liable to Castillo for 500,000.00 as
moral damages, P50,000.00 as exemplary damages, and P50,000.00 as costs of suit.66
Ruling of the Court of Appeals
Olivarez Realty Corporation and Dr. Olivarez appealed to the Court of Appeals. 67
In its decision68 dated July 20, 2010, the Court of Appeals affirmed in totothe trial courts decision. According to the
appellate court, the trial court "did not err in its finding that there is no genuine controversy as to the facts involved [in
this case]."69 The trial court, therefore, correctly rendered summary judgment. 70
As to the trial courts award of damages, the appellatecourt ruled that a court may award damages through summary
judgment "if the parties contract categorically [stipulates] the respective obligations of the parties in case of
default."71 As found by the trial court,paragraph I of the deed of conditional sale categorically states that "in case [the
deed of conditional sale] is cancelled, any improvementintroduced by [Olivarez Realty Corporation] on the property
shall be forfeited infavor of [Castillo]."72 Considering that Olivarez Realty Corporation illegally retained possession of
the property, Castillo forewent rentto the property and "lost business opportunities." 73 TheP2,500,000.00 down
payment, according to the appellate court, shouldbe forfeited in favor of Castillo. Moral and exemplary damages and
costs ofsuit were properly awarded.
On August 11, 2010, Olivarez RealtyCorporation and Dr. Olivarez filed their motion for reconsideration,74 arguing that
the trial court exceeded its authority in forfeiting the P2,500,000.00 down payment and awarding P500,000.00 in
moral damages to Castillo. They argued that Castillo only prayed for a total of P500,000.00 as actual and moral
damages in his complaint.75 Appellants prayed that the Court of Appeals "take a second hard look"76 at the case and
reconsider its decision.
In the resolution77 dated March 18, 2011, the Court of Appeals denied the motion for reconsideration.
Proceedings before this court
Olivarez Realty Corporation and Dr. Olivarez filed their petition for review on certiorari 78 with this court.
Petitionersargue that the trial court and the Court of Appeals erred in awarding damages to Castillo. Under Section 3,
Rule 35 of the 1997 Rules ofCivil Procedure, summary judgment may be rendered except as to the amountof
damages. Thus, the Court of Appeals "violated the procedural steps in rendering summary judgment." 79
69
Petitioners reiterate that there are genuine issues ofmaterial fact to be resolved in this case. Thus, a full-blown trial is
required, and the trial court prematurely decided the case through summary judgment. They cite Torres v. Olivarez
Realty Corporation and Dr. Pablo Olivarez,80 a case decided by the Ninth Division of the Court of Appeals.
In Torres, Rosario Torres was the registeredowner of a parcel of land covered by Transfer Certificate of Title No. T-
19971. Under a deed of conditional sale, she sold her property to OlivarezRealty Corporation for P17,345,900.00.
When the corporation failed to fully pay the purchase price, she sued for rescission of contractwith damages. In their
answer, the corporation and Dr. Olivarez argued thatthey discontinued payment because Rosario Torres failed to
clear the land of the tenants.
Similar to Castillo, Torres filed a motion for summary judgment, which the trial court granted. On appeal, the Court of
Appeals set aside the trial courts summary judgment and remanded the case to the trial court for further
proceedings.81 The Court of Appeals ruled that the material allegations of the complaint "were directly disputed by
[the corporation and Dr. Olivarez] in their answer"82 when they argued that they refused to pay because Torres failed
to clear the land of the tenants.
With the Court of Appeals decision in Torres,Olivarez Realty Corporation and Dr. Olivarez argue that this case
should likewise be remanded to the trial court for further proceedings under the equipoise rule.
Petitioners maintain that Castillo availed himself of the irreconcilable reliefs of reformation of instrument and
rescission of contract.83 Thus, the trial court should have dismissed the case outright.
Petitioners likewise argue that the trial court had no jurisdiction to decide the case as Castillo failed topay the correct
docket fees.84 Petitioners argue that Castillo should have paid docket fees based on the propertys fair market value
since Castillos complaint is a real action.85
In his comment,86 Castillo maintains that there are no genuine issues as to any material fact inthis case. The trial
court, therefore, correctly rendered summary judgment.
As to petitioners claim that the trial court had no jurisdiction to decide the case, Castillo argues that he prayed for
rescission of contract in his complaint. This action is incapable of pecuniary estimation, and the Clerk of Court
properly computed the docket fees based on this prayer. 87 Olivarez Realty Corporation and Dr. Olivarez
replied,88reiterating their arguments in the petition for review on certiorari.
The issues for our resolution are the following:
I. Whether the trial court erred in rendering summary judgment;
II. Whether proper docket fees were paid in this case.
The petition lacks merit.
I
The trial court correctly rendered
summary judgment, as there were no
genuine issues of material fact in this case
Trial "is the judicial examination and determination of the issues between the parties to the action." 89 During trial,
parties "present their respective evidence of their claims and defenses."90 Parties to an action have the right "to a
plenary trial of the case"91 to ensure that they were given a right to fully present evidence on their respective claims.
There are instances, however, whentrial may be dispensed with. Under Rule 35 of the 1997 Rules of Civil Procedure,
a trial court may dispense with trial and proceed to decide a case if from the pleadings, affidavits, depositions, and
other papers on file, there is no genuine issue as to any material fact. In such a case, the judgment issued is called a
summary judgment.
A motion for summary judgment is filed either by the claimant or the defending party. 92 The trial court then hears the
motion for summary judgment. If indeed there are no genuine issues of material fact, the trial court shall issue
summary judgment. Section 3, Rule 35 of the 1997 Rules of Civil Procedure provides:
SEC. 3. Motion and proceedings thereon. The motion shall be served at least ten (10) days beforethe time
specified for the hearing. The adverse party may serve opposing affidavits, depositions, or admission at least three
(3) days before the hearing. After the hearing, the judgment sought shall be rendered forthwith ifthe pleadings,
supporting affidavits, depositions, and admissions on file, showthat, except as to the amount of damages, there is no
genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
An issue of material fact exists if the answer or responsive pleading filed specifically denies the material allegations
of fact set forth in the complaint or pleading. If the issue offact "requires the presentation of evidence, it is a genuine
issue of fact."93 However, if the issue "could be resolved judiciously by plain resort"94 to the pleadings, affidavits,
depositions, and other paperson file, the issue of fact raised is sham, and the trial court may resolve the action
through summary judgment.
A summary judgment is usually distinguished from a judgment on the pleadings. Under Rule 34 of the 1997 Rules of
Civil Procedure, trial may likewise be dispensed with and a case decided through judgment on the pleadings if the
answer filed fails to tender an issue or otherwise admits the material allegations of the claimants pleading. 95
Judgment on the pleadings is proper when the answer filed fails to tender any issue, or otherwise admitsthe material
allegations in the complaint.96 On the other hand, in a summary judgment, the answer filed tenders issues as specific
denials and affirmative defenses are pleaded, but the issues raised are sham, fictitious, or otherwise not genuine. 97
In this case, Olivarez Realty Corporation admitted that it did not fully pay the purchase price as agreed upon inthe
deed of conditional sale. As to why it withheld payments from Castillo, it set up the following affirmative defenses:
First, Castillo did not filea case to void the Philippine Tourism Authoritys title to the property; second,Castillo did not
clear the land of the tenants; third, Castillo allegedly sold the property to a third person, and the subsequent sale is
currently being litigated beforea Quezon City court.
Considering that Olivarez RealtyCorporation and Dr. Olivarezs answer tendered an issue, Castillo properly availed
himself of a motion for summary judgment.
However, the issues tendered by Olivarez Realty Corporation and Dr. Olivarezs answer are not genuine issues of
material fact. These are issues that can be resolved judiciously by plain resort to the pleadings, affidavits,
depositions, and other papers on file; otherwise, these issues are sham, fictitious, or patently unsubstantial.
Petitioner corporation refused to fully pay the purchase price because no court case was filed to void the Philippine
Tourism Authoritys title on the property. However, paragraph C of the deed of conditional sale is clear that petitioner
Olivarez Realty Corporation is responsible for initiating court action against the Philippine Tourism Authority:
C. [Olivarez Realty Corporation] assumes the responsibility of taking necessary legal action thru Court to have the
claim/title TCT T-18493 of Philippine Tourism Authority over the above-described property be nullified and voided;
with the full assistance of [Castillo].98
Castillos alleged failureto "fully assist"99 the corporation in filing the case is not a defense. As the trial court said,
"how can [Castillo] assist [the corporation] when [the latter] did not file the action [in the first place?]" 100
70
Neither can Olivarez Realty Corporation argue that it refused to fully pay the purchase price due to the Philippine
Tourism Authoritys adverse claim on the property. The corporation knew of this adverse claim when it entered into a
contract of conditional sale. It even obligated itself under paragraph C of the deed of conditional sale to sue the
Philippine Tourism Authority. This defense, therefore, is sham.
Contrary to petitioners claim, there is no "obvious ambiguity"101 as to which should occur first the payment of the
disturbance compensation or the clearing of the land within six months from the signing of the deed of conditional
sale. The obligations must be performed simultaneously. In this case, the parties should have coordinated to ensure
that tenants on the property were paid disturbance compensation and were made to vacate the property six months
after the signingof the deed of conditional sale.
On one hand, pure obligations, or obligations whose performance do not depend upon a future or uncertainevent, or
upon a past event unknown to the parties, are demandable at once. 102 On the other hand, obligations with a
resolutory period also take effect at once but terminate upon arrival of the day certain. 103
Olivarez Realty Corporations obligation to pay disturbance compensation is a pure obligation. The performance of
the obligation to pay disturbance compensation did not depend on any condition. Moreover, the deed of conditional
sale did not give the corporation a period to perform the obligation. As such, the obligation to pay disturbance
compensation was demandable at once. Olivarez RealtyCorporation should have paid the tenants disturbance
compensation upon execution of the deed of conditional sale.
With respect to Castillos obligation to clear the land of the tenants within six months from the signing of the contract,
his obligation was an obligation with a resolutory period. The obligation to clear the land of the tenants took effect at
once, specifically, upon the parties signing of the deed of conditional sale. Castillo had until October 2, 2000, six
months from April 5, 2000 when the parties signed the deed of conditional sale, to clear the land of the tenants.
Olivarez Realty Corporation, therefore, had no right to withhold payments of the purchase price. As the trial court
ruled, Olivarez Realty Corporation "can only claim non-compliance [of the obligation to clear the land of the tenants
in] October 2000."104 It said:
. . . it is clear that defendant [Olivarez Realty Corporation] should have paid the installments on the P5 million
downpayment up to October 8, 2000, or a total of P4,500,000.00. That is the agreement because the only time that
defendant [corporation] can claim non-compliance of the condition is after October, 2000 and so it has the clear
obligation topay up to the October 2000 the agreed installments. Since it paid only 2,500,000.00, then a violation of
the contract has already been committed. . . .105
The claim that Castillo sold the property to another is fictitious and was made in bad faith to prevent the trial court
from rendering summary judgment. Petitioners did not elaborate on this defense and insisted on revealing the
identity of the buyer only during trial.106 Even in their petition for review on certiorari, petitioners never disclosed the
name of this alleged buyer. Thus, as the trial court ruled, this defense did not tender a genuine issue of fact, with the
defense "bereft of details."107
Castillos alleged prayer for the irreconcilable reliefs of rescission of contract and reformation of instrument is not a
ground to dismiss his complaint. A plaintiff may allege two or more claims in the complaint alternatively or
hypothetically, either in one cause of action or in separate causes of action per Section 2, Rule 8 of the 1997 Rules
of Civil Procedure.108 It is the filing of two separatecases for each of the causes of action that is prohibited since the
subsequently filed case may be dismissed under Section 4, Rule 2 of the 1997 Rules of Civil Procedure 109 on
splitting causes of action.
As demonstrated, there are no genuineissues of material fact in this case. These are issues that can be resolved
judiciously by plain resort to the pleadings, affidavits, depositions, and other papers on file. As the trial court found,
Olivarez Realty Corporation illegally withheld payments of the purchase price. The trial court did not err in rendering
summary judgment.
 II
Castillo is entitled to cancel the contract
of conditional sale
Since Olivarez Realty Corporation illegally withheld payments of the purchase price, Castillo is entitled to cancel his
contract with petitioner corporation. However, we properly characterize the parties contract as a contract to sell, not
a contract of conditional sale.
In both contracts to sell and contracts of conditional sale, title to the property remains with the seller until the buyer
fully pays the purchase price.110 Both contracts are subject to the positive suspensive condition of the buyers full
payment of the purchase price.111
In a contract of conditional sale, the buyer automatically acquires title to the property upon full payment of the
purchase price.112 This transfer of title is "by operation of law without any further act having to be performed by the
seller."113 In a contract to sell, transfer of title to the prospective buyer is not automatic.114 "The prospective seller
[must] convey title to the property [through] a deed of conditional sale."115
The distinction is important to determine the applicable laws and remedies in case a party does not fulfill his or her
obligations under the contract. In contracts of conditional sale, our laws on sales under the Civil Code of the
Philippines apply. On the other hand, contracts to sell are not governed by our law on sales 116 but by the Civil Code
provisions on conditional obligations.
Specifically, Article 1191 of the Civil Code on the right to rescind reciprocal obligations does not apply to contracts to
sell.117 As this court explained in Ong v. Court of Appeals,118 failure to fully pay the purchase price in contracts to sell
is not the breach of contract under Article 1191.119 Failure to fully pay the purchase price is "merely an event which
prevents the [sellers] obligation to convey title from acquiring binding force." 120 This is because "there can be no
rescission of an obligation that is still nonexistent, the suspensive condition not having [happened]." 121
In this case, Castillo reserved his title to the property and undertook to execute a deed of absolute sale upon
Olivarez Realty Corporations full payment of the purchase price.122 Since Castillo still has to execute a deed of
absolute sale to Olivarez RealtyCorporation upon full payment of the purchase price, the transfer of title is
notautomatic. The contract in this case is a contract to sell.
As this case involves a contract tosell, Article 1191 of the Civil Code of the Philippines does not apply. The contract
to sell is instead cancelled, and the parties shall stand as if the obligation to sell never existed.123
Olivarez Realty Corporation shall return the possession of the property to Castillo. Any improvement that Olivarez
Realty Corporation may have introduced on the property shall be forfeited in favor of Castillo per paragraph I of the
deed of conditional sale:
I. Immediately upon signing thisContract, [Olivarez Realty Corporation] shall be entitled to occupy, possess and
develop the subject property. In case this Contract is cancelled, any improvement introduced by [Olivarez Realty
Corporation] on the property shall be forfeited in favor of [Castillo.] 124
As for prospective sellers, thiscourt generally orders the reimbursement of the installments paidfor the property when
setting aside contracts to sell.125 This is true especially ifthe propertys possession has not been delivered to the
prospective buyer prior to the transfer of title.
In this case, however, Castillo delivered the possession of the property to Olivarez Realty Corporation prior to the
transfer of title. We cannot order the reimbursement of the installments paid.
In Gomez v. Court of Appeals,126 the City of Manila and Luisa Gomez entered into a contract to sell over a parcel of
land. The city delivered the propertys possession to Gomez. She fully paid the purchase price for the property but
violated the terms of the contract to sell by renting out the property to other persons. This court set aside the contract
71
to sell for her violation of the terms of the contract to sell. It ordered the installments paid forfeited in favor of the City
of Manila "as reasonable compensation for [Gomezs] use of the [property]"127 for eight years.
In this case, Olivarez Realty Corporation failed to fully pay the purchase price for the property. It only
paidP2,500,000.00 out of the P19,080,490.00 agreed purchase price. Worse, petitioner corporation has been in
possession of Castillos property for 14 years since May 5, 2000 and has not paid for its use of the property.
Similar to the ruling in Gomez, we order the P2,500,000.00 forfeited in favor of Castillo as reasonable compensation
for Olivarez Realty Corporations use of the property.
III
Olivarez Realty Corporation is liable for
moral and exemplary damages and
attorneys fees
We note that the trial court erred in rendering summary judgment on the amount of damages. Under Section 3, Rule
35 of the 1997 Rules of Civil Procedure, summary judgment may be rendered, except as to the amount of damages.
In this case, the trial court erred in forfeiting the P2,500,000.00 in favor of Castillo as damages under Article 1191 of
the Civil Code of the Philippines. As discussed, there is nobreach of contract under Article 1191 in this case.
The trial court likewise erred inrendering summary judgment on the amount of moral and exemplary damages and
attorneys fees.
Nonetheless, we hold that Castillois entitled to moral damages, exemplary damages, and attorneys fees.
Moral damages may be awarded in case the claimant experienced physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. 128
As for exemplary damages, they are awarded in addition to moral damages by way of example or correction for the
public good.129 Specifically in contracts, exemplary damages may be awarded if the defendant acted in a wanton,
fraudulent,reckless, oppressive, or malevolent manner.130
Under the deed of conditional sale, Olivarez Realty Corporation may only suspend the monthly down payment in
case Castillo fails to clear the land of the tenants six months from the signing of the instrument. Yet, even before the
sixth month arrived, Olivarez Realty Corporation withheld payments for Castillos property. It evenused as a defense
the fact that no case was filed against the PhilippineTourism Authority when, under the deed of conditional sale,
Olivarez Realty Corporation was clearly responsible for initiating action against the Philippine Tourism Authority.
These are oppressive and malevolent acts, and we find Castillo entitled to P500,000.00 moral damages
andP50,000.00 exemplary damages:
Plaintiff Castillo is entitled to moral damages because of the evident bad faith exhibited by defendants in dealing with
him regarding the sale of his lot to defendant [Olivarez Realty Corporation]. He suffered much prejudice due to the
failure of defendants to pay him the balance of purchase price which he expected touse for his needs which caused
him wounded feelings, sorrow, mental anxiety and sleepless nights for which defendants should payP500,000.00 as
moral damages more than six (6) years had elapsed and defendants illegally and unfairly failed and refused to pay
their legal obligations to plaintiff, unjustly taking advantage of a poor uneducated man like plaintiff causing much
sorrow and financial difficulties. Moral damages in favor of plaintiff is clearly justified . . . [Castillo] is also entitled
to P50,000.00 as exemplary damages to serve as a deterrent to other parties to a contract to religiously comply with
their prestations under the contract.131
We likewise agree that Castillo is entitled to attorneys fees in addition to the exemplary damages.132 Considering
that Olivarez Realty Corporation refused to satisfy Castillosplainly valid, just, and demandable claim,133 the award
ofP50,000.00 as attorneys fees is in order. However, we find that Dr. Pablo R.Olivarez is not solidarily liable with
Olivarez Realty Corporation for the amount of damages.
Under Article 1207 of the Civil Code of the Philippines, there is solidary liability only when the obligation states it or
when the law or the nature of the obligation requires solidarity.134 In case of corporations, they are solely liable for
their obligations.135 The directors or trustees and officers are not liable with the corporation even if it is through their
acts that the corporation incurred the obligation. This is because a corporation is separate and distinct from the
persons comprising it.136
As an exception to the rule, directors or trustees and corporate officers may be solidarily liable with the corporation
for corporate obligations if they acted "in bad faith or with gross negligence in directing the corporate affairs."137
In this case, we find that Castillo failed to prove with preponderant evidence that it was through Dr. Olivarezs bad
faith or gross negligence that Olivarez Realty Corporation failed to fully pay the purchase price for the property. Dr.
Olivarezs alleged act of making Castillo sign the deed of conditional sale without explaining to the latter the deeds
terms in Tagalog is not reason to hold Dr. Olivarez solidarily liable with the corporation. Castillo had a choice not to
sign the deed of conditional sale. He could have asked that the deed of conditional sale be written in Tagalog. Thus,
Olivarez Realty Corporation issolely liable for the moral and exemplary damages and attorneys fees to Castillo.
IV
The trial court acquired jurisdiction over
Castillos action as he paid the correct
docket fees
Olivarez Realty Corporation and Dr. Olivarez claimed that the trial court had no jurisdiction to take cognizance of the
case. In the reply/motion to dismiss the complaint138 they filed with the Court of Appeals, petitioners argued that
Castillo failed to pay the correct amount of docket fees. Stating that this action is a real action, petitioners argued that
the docket fee Castillo paid should have been based on the fair market value of the property. In this case, Castillo
only paid 4,297.00, which is insufficient "if the real nature of the action was admitted and the fair market value of the
property was disclosed and made the basis of the amount of docket fees to be paid to the court." 139Thus, according
to petitioners, the case should be dismissed for lack of jurisdiction.
We would like to add the observations that since the action of petitioners [private respondents] against private
respondents [petitioners] is solely for annulment or rescission which is not susceptible of pecuniary estimation, the
action should not be confused and equated with the "value of the property" subject of the transaction; that by the very
nature of the case, the allegations, and specific prayer in the complaint, sans any prayer for recovery of money
and/or value of the transaction, or for actual or compensatory damages, the assessment and collection of the legal
fees should not be intertwined with the merits of the case and/or what may be its end result; and that to sustain
private respondents' [petitioners'] position on what the respondent court may decide after all, then the assessment
should be deferred and finally assessed only after the court had finally decided the case, which cannot be done
because the rules require that filing fees should be based on what is alleged and prayed for in the face of the
complaint and paid upon the filing of the complaint.142
Although we discussed that there isno rescission of contract to speak of in contracts of conditional sale, we hold that
an action to cancel a contract to sell, similar to an action for rescission of contract of sale, is an action incapable of
pecuniary estimation. Like any action incapable of pecuniary estimation, an action to cancel a contract to sell
"demands an inquiry into other factors"143 aside from the amount of money to be awarded to the claimant.
Specifically in this case, the trial court principally determined whether Olivarez Realty Corporation failed to pay
installments of the propertys purchase price as the parties agreed upon in the deed of conditional sale. The principal
natureof Castillos action, therefore, is incapable of pecuniary estimation.
All told, there is no issue that the parties in this case entered into a contract to sell a parcel of land and that Olivarez
Realty Corporation failed to fully pay the installments agreed upon.Consequently, Castillo is entitled to cancel the
contract to sell.
WHEREFORE, the petition for review on certiorari is DENIED. The Court of Appeals decision dated July 20, 2010
and in CA-G.R. CV No. 91244 is AFFIRMEDwith MODIFICATION.
The deed of conditional sale dated April 5, 2000 is declared CANCELLED. Petitioner Olivarez Realty Corporation
shall RETURN to respondent Benjamin Castillo the possession of the property covered by Transfer Certificate of
Title No. T-19972 together with all the improvements that petitioner corporation introduced on the property. The
amount of P2,500,000.00 is FORFEITED in favor of respondent Benjamin Castillo as reasonable compensation for
the use of petitioner Olivarez Realty Corporation of the property.

Petitioner Olivarez Realty Corporation shall PAY respondent Benjamin Castillo P500,000.00 as moral
Castillo countered that his action for rescission is an action incapable of pecuniary estimation. Thus, the Clerk of
damages,P50,000.00 as exemplary damages, and P50,000.00 as attorney's fees with interest at 6% per annum from
Court of the Regional Trial Court of Tanauan City did not err in assessing the docket fees based on his prayer.
the time this decision becomes final and executory until petitioner

We rule for Castillo. In De Leon v. Court of Appeals,140 this court held that an action for rescission of contract of sale
corporation fully pays the amount of damages.144
of real property is an action incapable of pecuniary estimation. In De Leon, the action involved a real property.
Nevertheless, this court held that "it is the nature of the action as one for rescission of contract which is
controlling."141 Consequently, the docket fees to be paid shall be for actions incapableof pecuniary estimation, SO ORDERED
regardless if the claimant may eventually recover the real property. This court said:

. . . the Court in Bautista v.Lim, held that an action for rescission of contract is one which cannot be estimated and
therefore the docket fee for its filing should be the flat amount of P200.00 as then fixed in the former Rule 141, 141,
5(10). Said this Court:

We hold that Judge Dalisay did not err in considering Civil Case No. V-144 as basically one for rescission or
annulment of contract which is not susceptible of pecuniary estimation (1 Moran's Comments on the Rules of Court,
1970 Ed, p. 55; Lapitan vs. Scandia, Inc., L-24668, July 31, 1968, 24 SCRA 479, 781-483).

Consequently, the fee for docketing it is P200, an amount already paid by plaintiff, now respondent Matilda
Lim.1wphi1(She should pay also the two pesos legal research fund fee, if she has not paid it, as required in Section
4 of Republic Act No. 3870, the charter of the U.P. Law Center).

Thus, although eventually the result may be the recovery of land, it is the nature of the action as one for rescission of
contract which is controlling. The Court of Appeals correctly applied these cases to the present one. As it said:
72
73