G.R. No.

127358 March 31, 2005 On September 2, 1996, the Court of Appeals issued a Resolution increasing the
support pendente lite to P20,000.4Petitioner filed a motion for reconsideration
NOEL BUENAVENTURA, Petitioner, questioning the said Resolution.5
vs.
COURT OF APPEALS and ISABEL LUCIA SINGH On October 8, 1996, the appellate court promulgated a Decision dismissing
BUENAVENTURA, respondents. petitioners appeal for lack of merit and affirming in toto the trial courts
decision.6 Petitioner filed a motion for reconsideration which was denied. From
x-------------------x the abovementioned Decision, petitioner filed the instant Petition for Review
on Certiorari.
G.R. No. 127449 March 31, 2005
On November 13, 1996, through another Resolution, the Court of Appeals
NOEL BUENAVENTURA, Petitioner, denied petitioners motion for reconsideration of the September 2, 1996
vs. Resolution, which increased the monthly support for the son.7 Petitioner filed a
COURT OF APPEALS and ISABEL LUCIA SINGH Petition for Certiorari to question these two Resolutions.
BUENAVENTURA, Respondents.
On July 9, 1997, the Petition for Review on Certiorari8 and the Petition
DECISION for Certiorari9 were ordered consolidated by this Court.10
AZCUNA, J.: In the Petition for Review on Certiorari petitioner claims that the Court of
Appeals decided the case not in accord with law and jurisprudence, thus:
These cases involve a petition for the declaration of nullity of marriage, which
was filed by petitioner Noel Buenaventura on July 12, 1992, on the ground of 1. WHEN IT AWARDED DEFENDANT-APPELLEE MORAL DAMAGES
the alleged psychological incapacity of his wife, Isabel Singh Buenaventura, IN THE AMOUNT OF P2.5 MILLION AND EXEMPLARY DAMAGES OF
herein respondent. After respondent filed her answer, petitioner, with leave of P1 MILLION, WITH 6% INTEREST FROM THE DATE OF ITS DECISION,
court, amended his petition by stating that both he and his wife were WITHOUT ANY LEGAL AND MORAL BASIS;
psychologically incapacitated to comply with the essential obligations of
marriage. In response, respondent filed an amended answer denying the 2. WHEN IT AWARDED P100,000.00 ATTORNEYS FEES
allegation that she was psychologically incapacitated.1 AND P50,000.00 EXPENSES OF LITIGATION, PLUS COSTS, TO
DEFENDANT-APPELLEE, WITHOUT FACTUAL AND LEGAL BASIS;
On July 31, 1995, the Regional Trial Court promulgated a Decision, the
dispositive portion of which reads: 3. WHEN IT ORDERED PLAINTIFF-APPELLANT NOEL TO PAY
DEFENDANT-APPELLEE ONE-HALF OR P1,837,667.89 OUT OF HIS
WHEREFORE, judgment is hereby rendered as follows: RETIREMENT BENEFITS RECEIVED FROM THE FAR EAST BANK
AND TRUST CO., WITH 12% INTEREST THEREON FROM THE DATE
1) Declaring and decreeing the marriage entered into between plaintiff Noel A.
OF ITS DECISION, NOTWITHSTANDING THAT SAID RETIREMENT
Buenaventura and defendant Isabel Lucia Singh Buenaventura on July 4, 1979,
BENEFITS ARE GRATUITOUS AND EXCLUSIVE PROPERTY OF NOEL,
null and void ab initio;
AND ALSO TO DELIVER TO DEFENDANT-APPELLEE ONE-HALF OF
2) Ordering the plaintiff to pay defendant moral damages in the amount of 2.5 HIS SHARES OF STOCK WITH THE MANILA MEMORIAL PARK AND
million pesos and exemplary damages of 1 million pesos with 6% interest from THE PROVIDENT GROUP OF COMPANIES, ALTHOUGH SAID SHARES
the date of this decision plus attorneys fees of P100,000.00; OF STOCK WERE ACQUIRED BY NOEL BEFORE HIS MARRIAGE TO
RESPONDENT ISABEL AND ARE, THEREFORE, AGAIN HIS
3) Ordering the plaintiff to pay the defendant expenses of litigation EXCLUSIVE PROPERTIES; AND
of P50,000.00, plus costs;
4. WHEN IT AWARDED EXCLUSIVE CARE AND CUSTODY OVER THE
4) Ordering the liquidation of the assets of the conjugal partnership property[,] PARTIES MINOR CHILD TO DEFENDANT-APPELLEE WITHOUT
particularly the plaintiffs separation/retirement benefits received from the Far ASKING THE CHILD (WHO WAS ALREADY 13 YEARS OLD AT THAT
East Bank [and] Trust Company[,] by ceding, giving and paying to her fifty TIME) HIS CHOICE AS TO WHOM, BETWEEN HIS TWO PARENTS, HE
percent (50%) of the net amount of P3,675,335.79 or P1,837,667.89 together WOULD LIKE TO HAVE CUSTODY OVER HIS PERSON.11
with 12% interest per annum from the date of this decision and one-half (1/2)
of his outstanding shares of stock with Manila Memorial Park and Provident In the Petition for Certiorari, petitioner advances the following contentions:
Group of Companies;
THE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION
5) Ordering him to give a regular support in favor of his son Javy Singh WHEN IT REFUSED TO SET RESPONDENTS MOTION FOR
Buenaventura in the amount of P15,000.00 monthly, subject to modification as INCREASED SUPPORT FOR THE PARTIES SON FOR HEARING.12
the necessity arises;
THERE WAS NO NEED FOR THE COURT OF APPEALS TO INCREASE
6) Awarding the care and custody of the minor Javy Singh Buenaventura to his JAVYS MONTHLY SUPPORT OF P15,000.00 BEING GIVEN BY
mother, the herein defendant; and PETITIONER EVEN AT PRESENT PRICES.13

7) Hereby authorizing the defendant to revert back to the use of her maiden
family name Singh.
Let copies of this decision be furnished the appropriate civil registry and
registries of properties.
SO ORDERED.2
Petitioner appealed the above decision to the Court of Appeals. While the case
was pending in the appellate court, respondent filed a motion to increase
the P15,000 monthly support pendente lite of their son Javy Singh
Buenaventura. Petitioner filed an opposition thereto, praying that it be denied
or that such incident be set for oral argument.3
IN RESOLVING RESPONDENTS MOTION FOR THE INCREASE OF
JAVYS SUPPORT, THE COURT OF APPEALS SHOULD HAVE
EXAMINED THE LIST OF EXPENSES SUBMITTED BY RESPONDENT
IN THE LIGHT OF PETITIONERS OBJECTIONS THERETO, INSTEAD
OF MERELY ASSUMING THAT JAVY IS ENTITLED TO A P5,000
INCREASE IN SUPPORT AS SAID AMOUNT IS "TOO MINIMAL."14
LIKEWISE, THE COURT OF APPEALS SHOULD HAVE GIVEN
PETITIONER AN OPPORTUNITY TO PROVE HIS PRESENT INCOME TO
SHOW THAT HE CANNOT AFFORD TO INCREASE JAVYS SUPPORT.15
With regard to the first issue in the main case, the Court of Appeals articulated:
On Assignment of Error C, the trial court, after findings of fact ascertained from
the testimonies not only of the parties particularly the defendant-appellee but

1
likewise, those of the two psychologists, awarded damages on the basis of
Articles 21, 2217 and 2229 of the Civil Code of the Philippines.
Thus, the lower court found that plaintiff-appellant deceived the defendant-
appellee into marrying him by professing true love instead of revealing to her
that he was under heavy parental pressure to marry and that because of pride he
married defendant-appellee; that he was not ready to enter into marriage as in
fact his career was and always would be his first priority; that he was unable to
relate not only to defendant-appellee as a husband but also to his son, Javy, as
a father; that he had no inclination to make the marriage work such that in times
of trouble, he chose the easiest way out, that of leaving defendantappellee and
their son; that he had no desire to keep defendant-appellee and their son as
proved by his reluctance and later, refusal to reconcile after their separation;
that the aforementioned caused defendant-appellee to suffer mental anguish,
anxiety, besmirched reputation, sleepless nights not only in those years the
parties were together but also after and throughout their separation.
Plaintiff-appellant assails the trial courts decision on the ground that unlike
those arising from a breach in ordinary contracts, damages arising as a
consequence of marriage may not be awarded. While it is correct that there is,
as yet, no decided case by the Supreme Court where damages by reason of the
performance or non-performance of marital obligations were awarded, it does
not follow that no such award for damages may be made.
Defendant-appellee, in her amended answer, specifically prayed for moral and
exemplary damages in the total amount of 7 million pesos. The lower court, in
the exercise of its discretion, found full justification of awarding at least half of
what was originally prayed for. We find no reason to disturb the ruling of the
trial court.16
The award by the trial court of moral damages is based on Articles 2217 and 21
of the Civil Code, which read as follows:
ART. 2217. Moral damages include physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. Though incapable of pecuniary computation,
moral damages may be recovered if they are the proximate result of the
defendants wrongful act or omission.
ART. 21. Any person who wilfully causes loss or injury to another in a manner
that is contrary to morals, good customs or public policy shall compensate the
latter for the damage.
The trial court referred to Article 21 because Article 2219 17 of the Civil Code
enumerates the cases in which moral damages may be recovered and it mentions
Article 21 as one of the instances. It must be noted that Article 21 states that the
individual must willfully cause loss or injury to another. There is a need that
the act is willful and hence done in complete freedom. In granting moral
damages, therefore, the trial court and the Court of Appeals could not but have
assumed that the acts on which the moral damages were based were done
willfully and freely, otherwise the grant of moral damages would have no leg
to stand on.
On the other hand, the trial court declared the marriage of the parties null and
void based on Article 36 of the Family Code, due to psychological incapacity
of the petitioner, Noel Buenaventura. Article 36 of the Family Code states:
A marriage contracted by any party who, at the time of the celebration, was
psychologically incapacitated to comply with the essential marital obligations
of marriage, shall likewise be void even if such incapacity becomes manifest
only after its solemnization.
Psychological incapacity has been defined, thus:
. . . no less than a mental (not physical) incapacity that causes a party to be truly
incognitive of the basic marital covenants that concomitantly must be
assumed and discharged by the parties to the marriagewhich, as so
expressed by Article 68 of the Family Code, include their mutual obligations to
live together, observe love, respect and fidelity and render help and support.
There is hardly any doubt that the intendment of the law has been to confine the
meaning of "psychological incapacity" to the most serious cases of personality
disorders clearly demonstrative of an utter insensitivity or inability to give
meaning and significance to the marriage. . . .18
The Court of Appeals and the trial court considered the acts of the petitioner
after the marriage as proof of his psychological incapacity, and therefore a
product of his incapacity or inability to comply with the essential obligations of
marriage. Nevertheless, said courts considered these acts as willful and hence
as grounds for granting moral damages. It is contradictory to characterize acts
as a product of psychological incapacity, and hence beyond the control of the
party because of an innate inability, while at the same time considering the same
set of acts as willful. By declaring the petitioner as psychologically
incapacitated, the possibility of awarding moral damages on the same set of
facts was negated. The award of moral damages should be predicated, not on
the mere act of entering into the marriage, but on specific evidence that it was
done deliberately and with malice by a party who had knowledge of his or her
disability and yet willfully concealed the same. No such evidence appears to
have been adduced in this case.
For the same reason, since psychological incapacity means that one is truly
incognitive of the basic marital covenants that one must assume and discharge
as a consequence of marriage, it removes the basis for the contention that the
petitioner purposely deceived the private respondent. If the private respondent
was deceived, it was not due to a willful act on the part of the petitioner.
Therefore, the award of moral damages was without basis in law and in fact.
Since the grant of moral damages was not proper, it follows that the grant of
exemplary damages cannot stand since the Civil Code provides that exemplary
damages are imposed in addition to moral, temperate, liquidated or
compensatory damages.19
With respect to the grant of attorneys fees and expenses of litigation the trial
court explained, thus:
Regarding Attorneys fees, Art. 2208 of the Civil Code authorizes an award of
attorneys fees and expenses of litigation, other than judicial costs, when as in
this case the plaintiffs act or omission has compelled the defendant to litigate
and to incur expenses of litigation to protect her interest (par. 2), and where the
Court deems it just and equitable that attorneys fees and expenses of litigation
should be recovered. (par. 11)20
The Court of Appeals reasoned as follows:
On Assignment of Error D, as the award of moral and exemplary damages is
fully justified, the award of attorneys fees and costs of litigation by the trial
court is likewise fully justified.21
The acts or omissions of petitioner which led the lower court to deduce his
psychological incapacity, and his act in filing the complaint for the annulment
of his marriage cannot be considered as unduly compelling the private
respondent to litigate, since both are grounded on petitioners psychological
incapacity, which as explained above is a mental incapacity causing an utter
inability to comply with the obligations of marriage. Hence, neither can be a
ground for attorneys fees and litigation expenses. Furthermore, since the award
of moral and exemplary damages is no longer justified, the award of attorneys
fees and expenses of litigation is left without basis.
Anent the retirement benefits received from the Far East Bank and Trust Co.
and the shares of stock in the Manila Memorial Park and the Provident Group
of Companies, the trial court said:
The third issue that must be resolved by the Court is what to do with the assets
of the conjugal partnership in the event of declaration of annulment of the
marriage. The Honorable Supreme Court has held that the declaration of nullity
of marriage carries ipso facto a judgment for the liquidation of property
(Domingo v. Court of Appeals, et al., G.R. No. 104818, Sept. 17, 1993, 226
SCRA, pp. 572 573, 586). Thus, speaking through Justice Flerida Ruth P.
Romero, it was ruled in this case:
When a marriage is declared void ab initio, the law states that the final judgment
therein shall provide for the liquidation, partition and distribution of the
properties of the spouses, the custody and support of the common children and
the delivery of their presumptive legitimes, unless such matters had been
adjudicated in the previous proceedings.
The parties here were legally married on July 4, 1979, and therefore, all
property acquired during the marriage, whether the acquisition appears to have
been made, contracted or registered in the name of one or both spouses, is
2
presumed to be conjugal unless the contrary is proved (Art. 116, New Family
Code; Art. 160, Civil Code). Art. 117 of the Family Code enumerates what are
conjugal partnership properties. Among others they are the following:
1) Those acquired by onerous title during the marriage at the expense of the
common fund, whether the acquisition be for the partnership, or for only one of
the spouses;
2) Those obtained from the labor, industry, work or profession of either or both
of the spouses;
3) The fruits, natural, industrial, or civil, due or received during the marriage
from the common property, as well as the net fruits from the exclusive property
of each spouse. . . .
Applying the foregoing legal provisions, and without prejudice to requiring an
inventory of what are the parties conjugal properties and what are the exclusive
properties of each spouse, it was disclosed during the proceedings in this case
that the plaintiff who worked first as Branch Manager and later as Vice-
President of Far East Bank & Trust Co. received separation/retirement package
from the said bank in the amount of P3,701,500.00 which after certain
deductions amounting to P26,164.21 gave him a net amount of P3,675,335.79
and actually paid to him on January 9, 1995 (Exhs. 6, 7, 8, 9, 10, 11). Not having
shown debts or obligations other than those deducted from the said
retirement/separation pay, under Art. 129 of the Family Code "The net
remainder of the conjugal partnership properties shall constitute the profits,
which shall be divided equally between husband and wife, unless a different
proportion or division was agreed upon in the marriage settlement or unless
there has been a voluntary waiver or forfeiture of such share as provided in this
Code." In this particular case, however, there had been no marriage settlement
between the parties, nor had there been any voluntary waiver or valid forfeiture
of the defendant wifes share in the conjugal partnership properties. The
previous cession and transfer by the plaintiff of his one-half (1/2) share in their
residential house and lot covered by T.C.T. No. S-35680 of the Registry of
Deeds of Paraaque, Metro Manila, in favor of the defendant as stipulated in
their Compromise Agreement dated July 12, 1993, and approved by the Court
in its Partial Decision dated August 6, 1993, was actually intended to be in full
settlement of any and all demands for past support. In reality, the defendant
wife had allowed some concession in favor of the plaintiff husband, for were
the law strictly to be followed, in the process of liquidation of the conjugal
assets, the conjugal dwelling and the lot on which it is situated shall, unless
otherwise agreed upon by the parties, be adjudicated to the spouse with whom
their only child has chosen to remain (Art. 129, par. 9). Here, what was done
was one-half (1/2) portion of the house was ceded to defendant so that she will
not claim anymore for past unpaid support, while the other half was transferred
to their only child as his presumptive legitime.
Consequently, nothing yet has been given to the defendant wife by way of her
share in the conjugal properties, and it is but just, lawful and fair, that she be
given one-half (1/2) share of the separation/retirement benefits received by the
plaintiff the same being part of their conjugal partnership properties having
been obtained or derived from the labor, industry, work or profession of said
defendant husband in accordance with Art. 117, par. 2 of the Family Code. For
the same reason, she is entitled to one-half (1/2) of the outstanding shares of
stock of the plaintiff husband with the Manila Memorial Park and the Provident
Group of Companies.22
The Court of Appeals articulated on this matter as follows:
On Assignment of Error E, plaintiff-appellant assails the order of the trial court
for him to give one-half of his separation/retirement benefits from Far East
Bank & Trust Company and half of his outstanding shares in Manila Memorial
Park and Provident Group of Companies to the defendant-appellee as the
latters share in the conjugal partnership.
On August 6, 1993, the trial court rendered a Partial Decision approving the
Compromise Agreement entered into by the parties. In the same Compromise
Agreement, the parties had agreed that henceforth, their conjugal partnership is
dissolved. Thereafter, no steps were taken for the liquidation of the conjugal
partnership.
Finding that defendant-appellee is entitled to at least half of the
separation/retirement benefits which plaintiff-appellant received from Far East
Bank & Trust Company upon his retirement as Vice-President of said company
for the reason that the benefits accrued from plaintiffappellants service for the
bank for a number of years, most of which while he was married to defendant-
appellee, the trial court adjudicated the same. The same is true with the
outstanding shares of plaintiff-appellant in Manila Memorial Park and
Provident Group of Companies. As these were acquired by the plaintiff-
appellant at the time he was married to defendant-appellee, the latter is entitled
to one-half thereof as her share in the conjugal partnership. We find no reason
to disturb the ruling of the trial court.23
Since the present case does not involve the annulment of a bigamous marriage,
the provisions of Article 50 in relation to Articles 41, 42 and 43 of the Family
Code, providing for the dissolution of the absolute community or conjugal
partnership of gains, as the case may be, do not apply. Rather, the general rule
applies, which is that in case a marriage is declared void ab initio, the property
regime applicable and to be liquidated, partitioned and distributed is that of
equal co-ownership.
In Valdes v. Regional Trial Court, Branch 102, Quezon City,24 this Court
expounded on the consequences of a void marriage on the property relations of
the spouses and specified the applicable provisions of law:
The trial court correctly applied the law. In a void marriage, regardless of the
cause thereof, the property relations of the parties during the period of
cohabitation is governed by the provisions of Article 147 or Article 148, such
as the case may be, of the Family Code. Article 147 is a remake of Article 144
of the Civil Code as interpreted and so applied in previous cases; it provides:
ART. 147. When a man and a woman who are capacitated to marry each other,
live exclusively with each other as husband and wife without the benefit of
marriage or under a void marriage, their wages and salaries shall be owned by
them in equal shares and the property acquired by both of them through their
work or industry shall be governed by the rules on co-ownership.
In the absence of proof to the contrary, properties acquired while they lived
together shall be presumed to have been obtained by their joint efforts, work or
industry, and shall be owned by them in equal shares. For purposes of this
Article, a party who did not participate in the acquisition by the other party of
any property shall be deemed to have contributed jointly in the acquisition
thereof if the former's efforts consisted in the care and maintenance of the
family and of the household.
Neither party can encumber or dispose by acts inter vivos of his or her share in
the property acquired during cohabitation and owned in common, without the
consent of the other, until after the termination of their cohabitation.
When only one of the parties to a void marriage is in good faith, the share of
the party in bad faith in the co-ownership shall be forfeited in favor of their
common children. In case of default of or waiver by any or all of the common
children or their descendants, each vacant share shall belong to the respective
surviving descendants. In the absence of descendants, such share shall belong
to the innocent party. In all cases, the forfeiture shall take place upon
termination of the cohabitation.
This peculiar kind of co-ownership applies when a man and a woman, suffering
no legal impediment to marry each other, so exclusively live together as
husband and wife under a void marriage or without the benefit of marriage. The
term "capacitated" in the provision (in the first paragraph of the law) refers to
the legal capacityof a party to contract marriage, i.e., any "male or female of
the age of eighteen years or upwards not under any of the impediments
mentioned in Articles 37 and 38" of the Code.
Under this property regime, property acquired by both spouses through
their work and industry shall be governed by the rules on equal co-ownership.
Any property acquired during the union is prima facie presumed to have been
obtained through their joint efforts. A party who did not participate in the
acquisition of the property shall still be considered as having contributed thereto
jointly if said party's "efforts consisted in the care and maintenance of the family
household." Unlike the conjugal partnership of gains, the fruits of the couple's
separate property are not included in the co-ownership.
Article 147 of the Family Code, in substance and to the above extent, has
clarified Article 144 of the Civil Code; in addition, the law now expressly
provides that
3
(a) Neither party can dispose or encumber by act[s] inter vivos [of] his or her are deleted. The order giving respondent one-half of the retirement benefits of
share in co-ownership property, without the consent of the other, during the petitioner from Far East Bank and Trust Co. and one-half of petitioners shares
period of cohabitation; and of stock in Manila Memorial Park and in the Provident Group of Companies
is sustained but on the basis of the liquidation, partition and distribution
(b) In the case of a void marriage, any party in bad faith shall forfeit his or her of the co-ownership and not of the regime of conjugal partnership of gains.
share in the co-ownership in favor of their common children; in default thereof The rest of said Decision and Resolution are AFFIRMED.
or waiver by any or all of the common children, each vacant share shall belong
to the respective surviving descendants, or still in default thereof, to the The Petition for Review on Certiorari (G.R. No. 127358) contesting the Court
innocent party. The forfeiture shall take place upon the termination of the of Appeals Resolutions of September 2, 1996 and November 13, 1996 which
cohabitation or declaration of nullity of the marriage. increased the support pendente lite in favor of the parties son, Javy Singh
Buenaventura, is now MOOT and ACADEMIC and is, accordingly,
DISMISSED.
In deciding to take further cognizance of the issue on the settlement of the No costs.
parties' common property, the trial court acted neither imprudently nor
precipitately; a court which had jurisdiction to declare the marriage a nullity SO ORDERED.
must be deemed likewise clothed with authority to resolve incidental and
consequential matters. Nor did it commit a reversible error in ruling that
petitioner and private respondent own the "family home" and all their common
property in equal shares, as well as in concluding that, in the liquidation and
partition of the property owned in common by them, the provisions on co-
ownership under the Civil Code, not Articles 50, 51 and 52, in relation to
Articles 102 and 129, of the Family Code, should aptly prevail. The rules set up
to govern the liquidation of either the absolute community or the conjugal
partnership of gains, the property regimes recognized for valid and voidable
marriages (in the latter case until the contract is annulled), are irrelevant to the
liquidation of the co-ownership that exists between common-law spouses. The
first paragraph of Article 50 of the Family Code, applying paragraphs (2), (3),
(4) and (5) of Article 43, relates only, by its explicit terms,
to voidable marriages and, exceptionally, to void marriages under Article 40 of
the Code, i.e., the declaration of nullity of a subsequent marriage contracted by
a spouse of a prior void marriage before the latter is judicially declared void.
The latter is a special rule that somehow recognizes the philosophy and an old
doctrine that void marriages are inexistent from the very beginning and no
judicial decree is necessary to establish their nullity. In now requiring
for purposes of remarriage, the declaration of nullity by final judgment of the
previously contracted void marriage, the present law aims to do away with any
continuing uncertainty on the status of the second marriage. It is not then
illogical for the provisions of Article 43, in relation to Articles 41 and 42, of the
Family Code, on the effects of the termination of a subsequent marriage
contracted during the subsistence of a previous marriage to be made
applicable pro hac vice. In all other cases, it is not to be assumed that the law
has also meant to have coincident property relations, on the one hand, between
spouses in valid and voidable marriages (before annulment) and, on the other,
between common-law spouses or spouses of void marriages, leaving to ordain,
in the latter case, the ordinary rules on co-ownership subject to the provision of
Article 147 and Article 148 of the Family Code. It must be stressed,
nevertheless, even as it may merely state the obvious, that the provisions of the
Family Code on the "family home," i.e., the provisions found in Title V, Chapter
2, of the Family Code, remain in force and effect regardless of the property
regime of the spouses.25

Since the properties ordered to be distributed by the court a quo were found,
both by the trial court and the Court of Appeals, to have been acquired during
the union of the parties, the same would be covered by the co-ownership. No
fruits of a separate property of one of the parties appear to have been included
or involved in said distribution. The liquidation, partition and distribution of the
properties owned in common by the parties herein as ordered by the court a
quo should, therefore, be sustained, but on the basis of co-ownership and not of
the regime of conjugal partnership of gains.

As to the issue on custody of the parties over their only child, Javy Singh
Buenaventura, it is now moot since he is about to turn twenty-five years of age
on May 27, 200526 and has, therefore, attained the age of majority.

With regard to the issues on support raised in the Petition for Certiorari, these
would also now be moot, owing to the fact that the son, Javy Singh
Buenaventura, as previously stated, has attained the age of majority.

WHEREFORE, the Decision of the Court of Appeals dated October 8, 1996

and its Resolution dated December 10, 1996 which are contested in the Petition
for Review (G.R. No. 127449), are hereby MODIFIED, in that the award of
moral and exemplary damages, attorneys fees, expenses of litigation and costs

4
G.R. No. 124242 January 21, 2005
SAN LORENZO DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS, PABLO S. BABASANTA, SPS. MIGUEL LU and
PACITA ZAVALLA LU, respondents.
DECISION
TINGA, J.:
From a coaptation of the records of this case, it appears that respondents Miguel
Lu and Pacita Zavalla, (hereinafter, the Spouses Lu) owned two (2) parcels of
land situated in Sta. Rosa, Laguna covered by TCT No. T-39022 and TCT No.
T-39023 both measuring 15,808 square meters or a total of 3.1616 hectares.
On 20 August 1986, the Spouses Lu purportedly sold the two parcels of land to
respondent Pablo Babasanta, (hereinafter, Babasanta) for the price of fifteen
pesos (P15.00) per square meter. Babasanta made a downpayment of fifty
thousand pesos (P50,000.00) as evidenced by a memorandum receipt issued by
Pacita Lu of the same date. Several other payments totaling two hundred
thousand pesos (P200,000.00) were made by Babasanta.
Sometime in May 1989, Babasanta wrote a letter to Pacita Lu to demand the
execution of a final deed of sale in his favor so that he could effect full payment
of the purchase price. In the same letter, Babasanta notified the spouses about
having received information that the spouses sold the same property to another
without his knowledge and consent. He demanded that the second sale be
cancelled and that a final deed of sale be issued in his favor.
In response, Pacita Lu wrote a letter to Babasanta wherein she acknowledged
having agreed to sell the property to him at fifteen pesos (P15.00) per square
meter. She, however, reminded Babasanta that when the balance of the purchase
price became due, he requested for a reduction of the price and when she
refused, Babasanta backed out of the sale. Pacita added that she returned the
sum of fifty thousand pesos (P50,000.00) to Babasanta through Eugenio Oya.
On 2 June 1989, respondent Babasanta, as plaintiff, filed before the Regional
Trial Court (RTC), Branch 31, of San Pedro, Laguna, a Complaint for Specific
Performance and Damages1 against his co-respondents herein, the Spouses Lu.
Babasanta alleged that the lands covered by TCT No. T- 39022 and T-39023
had been sold to him by the spouses at fifteen pesos (P15.00) per square meter.
Despite his repeated demands for the execution of a final deed of sale in his
favor, respondents allegedly refused.
In their Answer,2 the Spouses Lu alleged that Pacita Lu obtained loans from
Babasanta and when the total advances of Pacita reached fifty thousand pesos
(P50,000.00), the latter and Babasanta, without the knowledge and consent of
Miguel Lu, had verbally agreed to transform the transaction into a contract to
sell the two parcels of land to Babasanta with the fifty thousand pesos
(P50,000.00) to be considered as the downpayment for the property and the
balance to be paid on or before 31 December 1987. Respondents Lu added that
as of November 1987, total payments made by Babasanta amounted to only two
hundred thousand pesos (P200,000.00) and the latter allegedly failed to pay the
balance of two hundred sixty thousand pesos (P260,000.00) despite repeated
demands. Babasanta had purportedly asked Pacita for a reduction of the price
from fifteen pesos (P15.00) to twelve pesos (P12.00) per square meter and when
the Spouses Lu refused to grant Babasantas request, the latter rescinded the
contract to sell and declared that the original loan transaction just be carried out
in that the spouses would be indebted to him in the amount of two hundred
thousand pesos (P200,000.00). Accordingly, on 6 July 1989, they purchased
Interbank Managers Check No. 05020269 in the amount of two hundred
thousand pesos (P200,000.00) in the name of Babasanta to show that she was
able and willing to pay the balance of her loan obligation.
Babasanta later filed an Amended Complaint dated 17 January 19903 wherein
he prayed for the issuance of a writ of preliminary injunction with temporary
restraining order and the inclusion of the Register of Deeds of Calamba, Laguna
as party defendant. He contended that the issuance of a preliminary injunction
was necessary to restrain the transfer or conveyance by the Spouses Lu of the
subject property to other persons.
The Spouses Lu filed their Opposition4 to the amended complaint contending
that it raised new matters which seriously affect their substantive rights under
the original complaint. However, the trial court in its Order dated 17 January
19905 admitted the amended complaint.
On 19 January 1990, herein petitioner San Lorenzo Development Corporation
(SLDC) filed a Motion for Intervention6 before the trial court. SLDC alleged
that it had legal interest in the subject matter under litigation because on 3 May
1989, the two parcels of land involved, namely Lot 1764-A and 1764-B, had
been sold to it in a Deed of Absolute Sale with Mortgage.7 It alleged that it was
a buyer in good faith and for value and therefore it had a better right over the
property in litigation.
In his Opposition to SLDCs motion for intervention,8 respondent Babasanta
demurred and argued that the latter had no legal interest in the case because the
two parcels of land involved herein had already been conveyed to him by the
Spouses Lu and hence, the vendors were without legal capacity to transfer or
dispose of the two parcels of land to the intervenor.
Meanwhile, the trial court in its Order dated 21 March 1990 allowed SLDC to
intervene. SLDC filed its Complaint-in-Intervention on 19 April
1990.9 Respondent Babasantas motion for the issuance of a preliminary
injunction was likewise granted by the trial court in its Order dated 11 January
199110 conditioned upon his filing of a bond in the amount of fifty thousand
pesos (P50,000.00).
SLDC in its Complaint-in-Intervention alleged that on 11 February 1989, the
Spouses Lu executed in its favor an Option to Buy the lots subject of the
complaint. Accordingly, it paid an option money in the amount of three hundred
sixteen thousand one hundred sixty pesos (P316,160.00) out of the total
consideration for the purchase of the two lots of one million two hundred sixty-
four thousand six hundred forty pesos (P1,264,640.00). After the Spouses Lu
received a total amount of six hundred thirty-two thousand three hundred
twenty pesos (P632,320.00) they executed on 3 May 1989 a Deed of Absolute
Sale with Mortgage in its favor. SLDC added that the certificates of title over
the property were delivered to it by the spouses clean and free from any adverse
claims and/or notice of lis pendens. SLDC further alleged that it only learned
of the filing of the complaint sometime in the early part of January 1990 which
prompted it to file the motion to intervene without delay. Claiming that it was
a buyer in good faith, SLDC argued that it had no obligation to look beyond the
titles submitted to it by the Spouses Lu particularly because Babasantas claims
were not annotated on the certificates of title at the time the lands were sold to
it.
After a protracted trial, the RTC rendered its Decision on 30 July 1993
upholding the sale of the property to SLDC. It ordered the Spouses Lu to pay
Babasanta the sum of two hundred thousand pesos (P200,000.00) with legal
interest plus the further sum of fifty thousand pesos (P50,000.00) as and for
attorneys fees. On the complaint-in-intervention, the trial court ordered the
Register of Deeds of Laguna, Calamba Branch to cancel the notice of lis
pendens annotated on the original of the TCT No. T-39022 (T-7218) and No.
T-39023 (T-7219).
Applying Article 1544 of the Civil Code, the trial court ruled that since both
Babasanta and SLDC did not register the respective sales in their favor,
ownership of the property should pertain to the buyer who first acquired
possession of the property. The trial court equated the execution of a public
instrument in favor of SLDC as sufficient delivery of the property to the latter.
It concluded that symbolic possession could be considered to have been first
transferred to SLDC and consequently ownership of the property pertained to
SLDC who purchased the property in good faith.
Respondent Babasanta appealed the trial courts decision to the Court of
Appeals alleging in the main that the trial court erred in concluding that SLDC
is a purchaser in good faith and in upholding the validity of the sale made by
the Spouses Lu in favor of SLDC.
Respondent spouses likewise filed an appeal to the Court of Appeals. They
contended that the trial court erred in failing to consider that the contract to sell
between them and Babasanta had been novated when the latter abandoned the
verbal contract of sale and declared that the original loan transaction just be
carried out. The Spouses Lu argued that since the properties involved were
conjugal, the trial court should have declared the verbal contract to sell between
Pacita Lu and Pablo Babasanta null and void ab initio for lack of knowledge
and consent of Miguel Lu. They further averred that the trial court erred in not
5
dismissing the complaint filed by Babasanta; in awarding damages in his favor
and in refusing to grant the reliefs prayed for in their answer.
On 4 October 1995, the Court of Appeals rendered its Decision11 which set
aside the judgment of the trial court. It declared that the sale between Babasanta
and the Spouses Lu was valid and subsisting and ordered the spouses to execute
the necessary deed of conveyance in favor of Babasanta, and the latter to pay
the balance of the purchase price in the amount of two hundred sixty thousand
pesos (P260,000.00). The appellate court ruled that the Absolute Deed of Sale
with Mortgage in favor of SLDC was null and void on the ground that SLDC
was a purchaser in bad faith. The Spouses Lu were further ordered to return all
payments made by SLDC with legal interest and to pay attorneys fees to
Babasanta.
SLDC and the Spouses Lu filed separate motions for reconsideration with the
appellate court.12 However, in a Manifestation dated 20 December 1995,13 the
Spouses Lu informed the appellate court that they are no longer contesting the
decision dated 4 October 1995.
In its Resolution dated 11 March 1996,14 the appellate court considered as
withdrawn the motion for reconsideration filed by the Spouses Lu in view of
their manifestation of 20 December 1995. The appellate court denied SLDCs
motion for reconsideration on the ground that no new or substantial arguments
were raised therein which would warrant modification or reversal of the courts
decision dated 4 October 1995.
Hence, this petition.
SLDC assigns the following errors allegedly committed by the appellate court:
THE COURT OF APPEALS ERRED IN HOLDING THAT SAN LORENZO
WAS NOT A BUYER IN GOOD FAITH BECAUSE WHEN THE SELLER
PACITA ZAVALLA LU OBTAINED FROM IT THE CASH ADVANCE
OF P200,000.00, SAN LORENZO WAS PUT ON INQUIRY OF A PRIOR
TRANSACTION ON THE PROPERTY.
THE COURT OF APPEALS ERRED IN FAILING TO APPRECIATE THE
ESTABLISHED FACT THAT THE ALLEGED FIRST BUYER,
RESPONDENT BABASANTA, WAS NOT IN POSSESSION OF THE
DISPUTED PROPERTY WHEN SAN LORENZO BOUGHT AND TOOK
POSSESSION OF THE PROPERTY AND NO ADVERSE CLAIM, LIEN,
ENCUMBRANCE OR LIS PENDENS WAS ANNOTATED ON THE
TITLES.
THE COURT OF APPEALS ERRED IN FAILING TO APPRECIATE THE
FACT THAT RESPONDENT BABASANTA HAS SUBMITTED NO
EVIDENCE SHOWING THAT SAN LORENZO WAS AWARE OF HIS
RIGHTS OR INTERESTS IN THE DISPUTED PROPERTY.
THE COURT OF APPEALS ERRED IN HOLDING THAT
NOTWITHSTANDING ITS FULL CONCURRENCE ON THE FINDINGS
OF FACT OF THE TRIAL COURT, IT REVERSED AND SET ASIDE THE
DECISION OF THE TRIAL COURT UPHOLDING THE TITLE OF SAN
LORENZO AS A BUYER AND FIRST POSSESSOR IN GOOD FAITH. 15
SLDC contended that the appellate court erred in concluding that it had prior
notice of Babasantas claim over the property merely on the basis of its having
advanced the amount of two hundred thousand pesos (P200,000.00) to Pacita
Lu upon the latters representation that she needed the money to pay her
obligation to Babasanta. It argued that it had no reason to suspect that Pacita
was not telling the truth that the money would be used to pay her indebtedness
to Babasanta. At any rate, SLDC averred that the amount of two hundred
thousand pesos (P200,000.00) which it advanced to Pacita Lu would be
deducted from the balance of the purchase price still due from it and should not
be construed as notice of the prior sale of the land to Babasanta. It added that at
no instance did Pacita Lu inform it that the lands had been previously sold to
Babasanta.
Moreover, SLDC stressed that after the execution of the sale in its favor it
immediately took possession of the property and asserted its rights as new
owner as opposed to Babasanta who has never exercised acts of ownership.
Since the titles bore no adverse claim, encumbrance, or lien at the time it was
sold to it, SLDC argued that it had every reason to rely on the correctness of the
certificate of title and it was not obliged to go beyond the certificate to
determine the condition of the property. Invoking the presumption of good faith,
it added that the burden rests on Babasanta to prove that it was aware of the
prior sale to him but the latter failed to do so. SLDC pointed out that the notice
of lis pendens was annotated only on 2 June 1989 long after the sale of the
property to it was consummated on 3 May 1989.1awphi1.nt
Meanwhile, in an Urgent Ex-Parte Manifestation dated 27 August 1999, the
Spouses Lu informed the Court that due to financial constraints they have no
more interest to pursue their rights in the instant case and submit themselves to
the decision of the Court of Appeals.16
On the other hand, respondent Babasanta argued that SLDC could not have
acquired ownership of the property because it failed to comply with the
requirement of registration of the sale in good faith. He emphasized that at the
time SLDC registered the sale in its favor on 30 June 1990, there was already a
notice of lis pendens annotated on the titles of the property made as early as 2
June 1989. Hence, petitioners registration of the sale did not confer upon it any
right. Babasanta further asserted that petitioners bad faith in the acquisition of
the property is evident from the fact that it failed to make necessary inquiry
regarding the purpose of the issuance of the two hundred thousand pesos
(P200,000.00) managers check in his favor.
The core issue presented for resolution in the instant petition is who between
SLDC and Babasanta has a better right over the two parcels of land subject of
the instant case in view of the successive transactions executed by the Spouses
Lu.
To prove the perfection of the contract of sale in his favor, Babasanta presented
a document signed by Pacita Lu acknowledging receipt of the sum of fifty
thousand pesos (P50,000.00) as partial payment for 3.6 hectares of farm lot
situated at Barangay Pulong, Sta. Cruz, Sta. Rosa, Laguna.17 While the receipt
signed by Pacita did not mention the price for which the property was being
sold, this deficiency was supplied by Pacita Lus letter dated 29 May
198918 wherein she admitted that she agreed to sell the 3.6 hectares of land to
Babasanta for fifteen pesos (P15.00) per square meter.
An analysis of the facts obtaining in this case, as well as the evidence presented
by the parties, irresistibly leads to the conclusion that the agreement between
Babasanta and the Spouses Lu is a contract to sell and not a contract of sale.
Contracts, in general, are perfected by mere consent,19 which is manifested by
the meeting of the offer and the acceptance upon the thing which are to
constitute the contract. The offer must be certain and the acceptance
absolute.20 Moreover, contracts shall be obligatory in whatever form they may
have been entered into, provided all the essential requisites for their validity are
present.21
The receipt signed by Pacita Lu merely states that she accepted the sum of fifty
thousand pesos (P50,000.00) from Babasanta as partial payment of 3.6 hectares
of farm lot situated in Sta. Rosa, Laguna. While there is no stipulation that the
seller reserves the ownership of the property until full payment of the price
which is a distinguishing feature of a contract to sell, the subsequent acts of the
parties convince us that the Spouses Lu never intended to transfer ownership to
Babasanta except upon full payment of the purchase price.
Babasantas letter dated 22 May 1989 was quite telling. He stated therein that
despite his repeated requests for the execution of the final deed of sale in his
favor so that he could effect full payment of the price, Pacita Lu allegedly
refused to do so. In effect, Babasanta himself recognized that ownership of the
property would not be transferred to him until such time as he shall have
effected full payment of the price. Moreover, had the sellers intended to transfer
title, they could have easily executed the document of sale in its required form
simultaneously with their acceptance of the partial payment, but they did not.
Doubtlessly, the receipt signed by Pacita Lu should legally be considered as a
perfected contract to sell.
The distinction between a contract to sell and a contract of sale is quite germane.
In a contract of sale, title passes to the vendee upon the delivery of the thing
sold; whereas in a contract to sell, by agreement the ownership is reserved in
the vendor and is not to pass until the full payment of the price. 22 In a contract
of sale, the vendor has lost and cannot recover ownership until and unless the
contract is resolved or rescinded; whereas in a contract to sell, title is retained
by the vendor until the full payment of the price, such payment being a positive
6
suspensive condition and failure of which is not a breach but an event that
prevents the obligation of the vendor to convey title from becoming effective.23
The perfected contract to sell imposed upon Babasanta the obligation to pay the
balance of the purchase price. There being an obligation to pay the price,
Babasanta should have made the proper tender of payment and consignation of
the price in court as required by law. Mere sending of a letter by the vendee
expressing the intention to pay without the accompanying payment is not
considered a valid tender of payment.24 Consignation of the amounts due in
court is essential in order to extinguish Babasantas obligation to pay the
balance of the purchase price. Glaringly absent from the records is any
indication that Babasanta even attempted to make the proper consignation of
the amounts due, thus, the obligation on the part of the sellers to convey title
never acquired obligatory force.
On the assumption that the transaction between the parties is a contract of sale
and not a contract to sell, Babasantas claim of ownership should nevertheless
fail.
Sale, being a consensual contract, is perfected by mere consent25 and from that
moment, the parties may reciprocally demand performance. 26 The essential
elements of a contract of sale, to wit: (1) consent or meeting of the minds, that
is, to transfer ownership in exchange for the price; (2) object certain which is
the subject matter of the contract; (3) cause of the obligation which is
established.27
The perfection of a contract of sale should not, however, be confused with its
consummation. In relation to the acquisition and transfer of ownership, it should
be noted that sale is not a mode, but merely a title. A mode is the legal means
by which dominion or ownership is created, transferred or destroyed, but title
is only the legal basis by which to affect dominion or ownership.28 Under
Article 712 of the Civil Code, "ownership and other real rights over property
are acquired and transmitted by law, by donation, by testate and intestate
succession, and in consequence of certain contracts, by tradition." Contracts
only constitute titles or rights to the transfer or acquisition of ownership, while
delivery or tradition is the mode of accomplishing the same. 29 Therefore, sale
by itself does not transfer or affect ownership; the most that sale does is to create
the obligation to transfer ownership. It is tradition or delivery, as a consequence
of sale, that actually transfers ownership.
Explicitly, the law provides that the ownership of the thing sold is acquired by
the vendee from the moment it is delivered to him in any of the ways specified
in Article 1497 to 1501.30 The word "delivered" should not be taken restrictively
to mean transfer of actual physical possession of the property. The law
recognizes two principal modes of delivery, to wit: (1) actual delivery; and (2)
legal or constructive delivery.
Actual delivery consists in placing the thing sold in the control and possession
of the vendee.31 Legal or constructive delivery, on the other hand, may be had
through any of the following ways: the execution of a public instrument
evidencing the sale;32 symbolical tradition such as the delivery of the keys of
the place where the movable sold is being kept; 33 traditio longa manu or by
mere consent or agreement if the movable sold cannot yet be transferred to the
possession of the buyer at the time of the sale;34 traditio brevi manu if the buyer
already had possession of the object even before the sale;35 and traditio
constitutum possessorium, where the seller remains in possession of the
property in a different capacity.36
Following the above disquisition, respondent Babasanta did not acquire
ownership by the mere execution of the receipt by Pacita Lu acknowledging
receipt of partial payment for the property. For one, the agreement between
Babasanta and the Spouses Lu, though valid, was not embodied in a public
instrument. Hence, no constructive delivery of the lands could have been
effected. For another, Babasanta had not taken possession of the property at any
time after the perfection of the sale in his favor or exercised acts of dominion
over it despite his assertions that he was the rightful owner of the lands. Simply
stated, there was no delivery to Babasanta, whether actual or constructive,
which is essential to transfer ownership of the property. Thus, even on the
assumption that the perfected contract between the parties was a sale, ownership
could not have passed to Babasanta in the absence of delivery, since in a
contract of sale ownership is transferred to the vendee only upon the delivery
of the thing sold.37
However, it must be stressed that the juridical relationship between the parties
in a double sale is primarily governed by Article 1544 which lays down the
rules of preference between the two purchasers of the same property. It
provides:
Art. 1544. If the same thing should have been sold to different vendees, the
ownership shall be transferred to the person who may have first taken
possession thereof in good faith, if it should be movable property.
Should it be immovable property, the ownership shall belong to the person
acquiring it who in good faith first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in
good faith was first in the possession; and, in the absence thereof, to the person
who presents the oldest title, provided there is good faith.
The principle of primus tempore, potior jure (first in time, stronger in right)
gains greater significance in case of double sale of immovable property. When
the thing sold twice is an immovable, the one who acquires it and first records
it in the Registry of Property, both made in good faith, shall be deemed the
owner.38 Verily, the act of registration must be coupled with good faith that
is, the registrant must have no knowledge of the defect or lack of title of his
vendor or must not have been aware of facts which should have put him upon
such inquiry and investigation as might be necessary to acquaint him with the
defects in the title of his vendor.39
Admittedly, SLDC registered the sale with the Registry of Deeds after it had
acquired knowledge of Babasantas claim. Babasanta, however, strongly argues
that the registration of the sale by SLDC was not sufficient to confer upon the
latter any title to the property since the registration was attended by bad faith.
Specifically, he points out that at the time SLDC registered the sale on 30 June
1990, there was already a notice of lis pendens on the file with the Register of
Deeds, the same having been filed one year before on 2 June 1989.
Did the registration of the sale after the annotation of the notice of lis
pendens obliterate the effects of delivery and possession in good faith which
admittedly had occurred prior to SLDCs knowledge of the transaction in favor
of Babasanta?
We do not hold so.
It must be stressed that as early as 11 February 1989, the Spouses Lu executed
the Option to Buy in favor of SLDC upon receiving P316,160.00 as option
money from SLDC. After SLDC had paid more than one half of the agreed
purchase price of P1,264,640.00, the Spouses Lu subsequently executed on 3
May 1989 a Deed of Absolute Salein favor or SLDC. At the time both deeds
were executed, SLDC had no knowledge of the prior transaction of the Spouses
Lu with Babasanta. Simply stated, from the time of execution of the first deed
up to the moment of transfer and delivery of possession of the lands to SLDC,
it had acted in good faith and the subsequent annotation of lis pendens has no
effect at all on the consummated sale between SLDC and the Spouses Lu.
A purchaser in good faith is one who buys property of another without notice
that some other person has a right to, or interest in, such property and pays a
full and fair price for the same at the time of such purchase, or before he has
notice of the claim or interest of some other person in the property.40 Following
the foregoing definition, we rule that SLDC qualifies as a buyer in good faith
since there is no evidence extant in the records that it had knowledge of the
prior transaction in favor of Babasanta. At the time of the sale of the property
to SLDC, the vendors were still the registered owners of the property and were
in fact in possession of the lands.l^vvphi1.net Time and again, this Court has
ruled that a person dealing with the owner of registered land is not bound to go
beyond the certificate of title as he is charged with notice of burdens on the
property which are noted on the face of the register or on the certificate of
title.41 In assailing knowledge of the transaction between him and the Spouses
Lu, Babasanta apparently relies on the principle of constructive notice
incorporated in Section 52 of the Property Registration Decree (P.D. No. 1529)
which reads, thus:
Sec. 52. Constructive notice upon registration. Every conveyance, mortgage,
lease, lien, attachment, order, judgment, instrument or entry affecting registered
land shall, if registered, filed, or entered in the office of the Register of Deeds
for the province or city where the land to which it relates lies, be constructive
notice to all persons from the time of such registering, filing, or entering.
7
However, the constructive notice operates as suchby the express wording of
Section 52from the time of the registration of the notice of lis pendens which
in this case was effected only on 2 June 1989, at which time the sale in favor of
SLDC had long been consummated insofar as the obligation of the Spouses Lu
to transfer ownership over the property to SLDC is concerned.

More fundamentally, given the superiority of the right of SLDC to the claim of
Babasanta the annotation of the notice of lis pendens cannot help Babasantas
position a bit and it is irrelevant to the good or bad faith characterization of
SLDC as a purchaser. A notice of lis pendens, as the Court held in Natao v.
Esteban,42 serves as a warning to a prospective purchaser or incumbrancer that
the particular property is in litigation; and that he should keep his hands off the
same, unless he intends to gamble on the results of the litigation." Precisely, in
this case SLDC has intervened in the pending litigation to protect its rights.
Obviously, SLDCs faith in the merit of its cause has been vindicated with the
Courts present decision which is the ultimate denouement on the controversy.

The Court of Appeals has made capital43 of SLDCs averment in its Complaint-
in-Intervention44 that at the instance of Pacita Lu it issued a check
for P200,000.00 payable to Babasanta and the confirmatory testimony of Pacita
Lu herself on cross-examination.45 However, there is nothing in the said
pleading and the testimony which explicitly relates the amount to the
transaction between the Spouses Lu and Babasanta for what they attest to is that
the amount was supposed to pay off the advances made by Babasanta to Pacita
Lu. In any event, the incident took place after the Spouses Lu had already
executed the Deed of Absolute Sale with Mortgage in favor of SLDC and
therefore, as previously explained, it has no effect on the legal position of
SLDC.

Assuming ex gratia argumenti that SLDCs registration of the sale had been
tainted by the prior notice of lis pendensand assuming further for the same
nonce that this is a case of double sale, still Babasantas claim could not prevail
over that of SLDCs. In Abarquez v. Court of Appeals,46 this Court had the
occasion to rule that if a vendee in a double sale registers the sale after he has
acquired knowledge of a previous sale, the registration constitutes a registration
in bad faith and does not confer upon him any right. If the registration is done
in bad faith, it is as if there is no registration at all, and the buyer who has taken
possession first of the property in good faith shall be preferred.

In Abarquez, the first sale to the spouses Israel was notarized and registered
only after the second vendee, Abarquez, registered their deed of sale with the
Registry of Deeds, but the Israels were first in possession. This Court awarded
the property to the Israels because registration of the property by Abarquez
lacked the element of good faith. While the facts in the instant case substantially
differ from that in Abarquez, we would not hesitate to rule in favor of SLDC on
the basis of its prior possession of the property in good faith. Be it noted that
delivery of the property to SLDC was immediately effected after the execution
of the deed in its favor, at which time SLDC had no knowledge at all of the
prior transaction by the Spouses Lu in favor of Babasanta.1a\^/phi1.net

The law speaks not only of one criterion. The first criterion is priority of entry
in the registry of property; there being no priority of such entry, the second is
priority of possession; and, in the absence of the two priorities, the third priority
is of the date of title, with good faith as the common critical element. Since
SLDC acquired possession of the property in good faith in contrast to
Babasanta, who neither registered nor possessed the property at any time,
SLDCs right is definitely superior to that of Babasantas.

At any rate, the above discussion on the rules on double sale would be purely
academic for as earlier stated in this decision, the contract between Babasanta
and the Spouses Lu is not a contract of sale but merely a contract to sell.
In Dichoso v. Roxas,47 we had the occasion to rule that Article 1544 does not
apply to a case where there was a sale to one party of the land itself while the
other contract was a mere promise to sell the land or at most an actual
assignment of the right to repurchase the same land. Accordingly, there was no
double sale of the same land in that case.

WHEREFORE, the instant petition is hereby GRANTED. The decision of the

Court of Appeals appealed from is REVERSED and SET ASIDE and the
decision of the Regional Trial Court, Branch 31, of San Pedro, Laguna is
REINSTATED. No costs.

SO ORDERED.

8
G.R. No. L-18536 March 31, 1965
JOSE B. AZNAR, plaintiff-appellant,
vs.
RAFAEL YAPDIANGCO, defendant-appellee;
TEODORO SANTOS, intervenor-appellee.
Florentino M. Guanlao for plaintiff-appellant.
Rafael Yapdiangco in his own behalf as defendant-appellee.
Lorenzo Sumulong, R. B. Hilao and B. S. Felipe for intervenor-appellee.
REGALA, J.:
This is an appeal, on purely legal questions, from a decision of the Court of
First Instance of Quezon City, Branch IV, declaring the intervenor-appellee,
Teodoro Santos, entitled to the possession of the car in dispute.
The records before this Court disclose that sometime in May, 1959, Teodoro
Santos advertised in two metropolitan papers the sale of his FORD FAIRLANE
500. In the afternoon of May 28, 1959, a certain L. De Dios, claiming to be a
nephew of Vicente Marella, went to the Santos residence to answer the ad.
However, Teodoro Santos was out during this call and only the latter's son,
Irineo Santos, received and talked with De Dios. The latter told the young
Santos that he had come in behalf of his uncle, Vicente Marella, who was
interested to buy the advertised car.
On being informed of the above, Teodoro Santos instructed his son to see the
said Vicente Marella the following day at his given address: 1642 Crisostomo
Street, Sampaloc, Manila. And so, in the morning of May 29, 1959, Irineo
Santos went to the above address. At this meeting, Marella agreed to buy the
car for P14,700.00 on the understanding that the price would be paid only after
the car had been registered in his name.
Irineo Santos then fetched his father who, together with L. De Dios, went to the
office of a certain Atty. Jose Padolina where the deed of the sale for the car was
executed in Marella's favor. The parties to the contract thereafter proceeded to
the Motor Vehicles Office in Quezon City where the registration of the car in
Marella's name was effected. Up to this stage of the transaction, the purchased
price had not been paid.
From the Motor Vehicles Office, Teodoro Santos returned to his house. He gave
the registration papers and a copy of the deed of sale to his son, Irineo, and
instructed him not to part with them until Marella shall have given the full
payment for the car. Irineo Santos and L. De Dios then proceeded to 1642
Crisostomo Street, Sampaloc, Manila where the former demanded the payment
from Vicente Marella. Marella said that the amount he had on hand then was
short by some P2,000.00 and begged off to be allowed to secure the shortage
from a sister supposedly living somewhere on Azcarraga Street, also in Manila.
Thereafter, he ordered L. De Dios to go to the said sister and suggested that
Irineo Santos go with him. At the same time, he requested the registration
papers and the deed of sale from Irineo Santos on the pretext that he would like
to show them to his lawyer. Trusting the good faith of Marella, Irineo handed
over the same to the latter and thereupon, in the company of L. De Dios and
another unidentified person, proceeded to the alleged house of Marella's sister.
At a place on Azcarraga, Irineo Santos and L. De Dios alighted from the car
and entered a house while their unidentified companion remained in the car.
Once inside, L. De Dios asked Irineo Santos to wait at the sala while he went
inside a room. That was the last that Irineo saw of him. For, after a considerable
length of time waiting in vain for De Dios to return, Irineo went down to
discover that neither the car nor their unidentified companion was there
anymore. Going back to the house, he inquired from a woman he saw for L. De
Dios and he was told that no such name lived or was even known therein.
Whereupon, Irineo Santos rushed to 1642 Crisostomo to see Marella. He found
the house closed and Marella gone. Finally, he reported the matter to his father
who promptly advised the police authorities.
That very same day, or on the afternoon of May 29, 1959 Vicente Marella was
able to sell the car in question to the plaintiff-appellant herein, Jose B. Aznar,
for P15,000.00. Insofar as the above incidents are concerned, we are bound by
the factual finding of the trial court that Jose B. Aznar acquired the said car
from Vicente Marella in good faith, for a valuable consideration and without
notice of the defect appertaining to the vendor's title.
While the car in question was thus in the possession of Jose B. Aznar and while
he was attending to its registration in his name, agents of the Philippine
Constabulary seized and confiscated the same in consequence of the report to
them by Teodoro Santos that the said car was unlawfully taken from him.
In due time, Jose B. Aznar filed a complaint for replevin against Captain Rafael
Yapdiangco, the head of the Philippine Constabulary unit which seized the car
in question Claiming ownership of the vehicle, he prayed for its delivery to him.
In the course of the litigation, however, Teodoro Santos moved and was allowed
to intervene by the lower court.
At the end of the trial, the lower court rendered a decision awarding the disputed
motor vehicle to the intervenor-appellee, Teodoro Santos. In brief, it ruled that
Teodoro Santos had been unlawfully deprived of his personal property by
Vicente Marella, from whom the plaintiff-appellant traced his right.
Consequently, although the plaintiff-appellant acquired the car in good faith
and for a valuable consideration from Vicente Marella, the said decision
concluded, still the intervenor-appellee was entitled to its recovery on the
mandate of Article 559 of the New Civil Code which provides:
ART. 559. The possession of movable property acquired in good faith is
equivalent to title. Nevertheless, one who lost any movable or has been
unlawfully deprived thereof, may recover it from the person in possession of
the same.
If the possessor of a movable lost or of which the owner has been unlawfully
deprived, has acquired it in good faith at a public sale, the owner cannot obtain
its return without reimbursing the price paid therefor.
From this decision, Jose B. Aznar appeals.
The issue at bar is one and simple, to wit: Between Teodoro Santos and the
plaintiff-appellant, Jose B. Aznar, who has a better right to the possession of
the disputed automobile?
We find for the intervenor-appellee, Teodoro Santos.
The plaintiff-appellant accepts that the car in question originally belonged to
and was owned by the intervenor-appellee, Teodoro Santos, and that the latter
was unlawfully deprived of the same by Vicente Marella. However, the
appellant contends that upon the facts of this case, the applicable provision of
the Civil Code is Article 1506 and not Article 559 as was held by the decision
under review. Article 1506 provides:
ART. 1506. Where the seller of goods has a voidable title thereto, but his, title
has not been voided at the time of the sale, the buyer acquires a good title to the
goods, provided he buys them in good faith, for value, and without notice of the
seller's defect of title.
The contention is clearly unmeritorious. Under the aforequoted provision, it is
essential that the seller should have a voidable title at least. It is very clearly
inapplicable where, as in this case, the seller had no title at all.
Vicente Marella did not have any title to the property under litigation because
the same was never delivered to him. He sought ownership or acquisition of it
by virtue of the contract. Vicente Marella could have acquired ownership or
title to the subject matter thereof only by the delivery or tradition of the car to
him.
Under Article 712 of the Civil Code, "ownership and other real rights over
property are acquired and transmitted by law, by donation, by testate and
intestate succession, and in consequence of certain contracts, by tradition." As
interpreted by this Court in a host of cases, by this provision, ownership is not
transferred by contract merely but by tradition or delivery. Contracts only
constitute titles or rights to the transfer or acquisition of ownership, while
delivery or tradition is the mode of accomplishing the same (Gonzales v. Rojas,
16 Phil. 51; Ocejo, Perez and Co. v. International Bank, 37 Phil. 631, Fidelity
and Deposit Co. v. Wilson, 8 Phil. 51; Kuenzle & Streiff v. Wacke & Chandler,
14 Phil. 610; Easton v. Diaz Co., 32 Phil. 180).
For the legal acquisition and transfer of ownership and other property rights,
the thing transferred must be delivered, inasmuch as, according to settled
jurisprudence, the tradition of the thing is a necessary and indispensable
requisite in the acquisition of said ownership by virtue of contract. (Walter
Laston v. E. Diaz & Co. & the Provincial Sheriff of Albay, supra.)
9
So long as property is not delivered, the ownership over it is not transferred by
contract merely but by delivery. Contracts only constitute titles or rights to the
transfer or acquisition of ownership, while delivery or tradition is the method
of accomplishing the same, the title and the method of acquiring it being
different in our law. (Gonzales v. Roxas, 16 Phil. 51)

In the case on hand, the car in question was never delivered to the vendee by
the vendor as to complete or consummate the transfer of ownership by virtue of
the contract. It should be recalled that while there was indeed a contract of sale
between Vicente Marella and Teodoro Santos, the former, as vendee, took
possession of the subject matter thereof by stealing the same while it was in the
custody of the latter's son.

There is no adequate evidence on record as to whether Irineo Santos voluntarily

delivered the key to the car to the unidentified person who went with him and
L. De Dios to the place on Azcarraga where a sister of Marella allegedly lived.
But even if Irineo Santos did, it was not the delivery contemplated by Article
712 of the Civil Code. For then, it would be indisputable that he turned it over
to the unidentified companion only so that he may drive Irineo Santos and De
Dios to the said place on Azcarraga and not to vest the title to the said vehicle
to him as agent of Vicente Marella. Article 712 above contemplates that the act
be coupled with the intent of delivering the thing. (10 Manresa 132)

The lower court was correct in applying Article 559 of the Civil Code to the
case at bar, for under it, the rule is to the effect that if the owner has lost a thing,
or if he has been unlawfully deprived of it, he has a right to recover it, not only
from the finder, thief or robber, but also from third persons who may have
acquired it in good faith from such finder, thief or robber. The said article
establishes two exceptions to the general rule of irrevindicability, to wit, when
the owner (1) has lost the thing, or (2) has been unlawfully deprived thereof. In
these cases, the possessor cannot retain the thing as against the owner, who may
recover it without paying any indemnity, except when the possessor acquired it
in a public sale. (Del Rosario v. Lucena, 8 Phil. 535; Varela v. Finnick, 9 Phil.
482; Varela v. Matute, 9 Phil. 479; Arenas v. Raymundo, 19 Phil.
46. Tolentino, id., Vol. II, p. 261.)

In the case of Cruz v. Pahati, et al., 52 O.G. 3053 this Court has already ruled
that

Under Article 559 of the new Civil Code, a person illegally deprived of any
movable may recover it from the person in possession of the same and the only
defense the latter may have is if he has acquired it in good faith at a public sale,
in which case, the owner cannot obtain its return without reimbursing the price
paid therefor. In the present case, plaintiff has been illegally deprived of his car
through the ingenious scheme of defendant B to enable the latter to dispose of
it as if he were the owner thereof. Plaintiff, therefore, can still recover
possession of the car even if it is in the possession of a third party who had
acquired it in good faith from defendant B. The maxim that "no man can transfer
to another a better title than he had himself" obtains in the civil as well as in the
common law. (U.S. v. Sotelo, 28 Phil. 147)

Finally, the plaintiff-appellant here contends that inasmuch as it was the

intervenor-appellee who had caused the fraud to be perpetrated by his misplaced
confidence on Vicente Marella, he, the intervenor-appellee, should be made to
suffer the consequences arising therefrom, following the equitable principle to
that effect. Suffice it to say in this regard that the right of the owner to recover
personal property acquired in good faith by another, is based on his being
dispossessed without his consent. The common law principle that where one of
two innocent persons must suffer by a fraud perpetrated by another, the law
imposes the loss upon the party who, by his misplaced confidence, has enabled
the fraud to be committed, cannot be applied in a case which is covered by an
express provision of the new Civil Code, specifically Article 559. Between a
common law principle and a statutory provision, the latter must prevail in this
jurisdiction. (Cruz v. Pahati, supra)

UPON ALL THE FOREGOING, the instant appeal is hereby dismissed and the
decision of the lower court affirmed in full. Costs against the appellant.

10
G.R. No. 91029 February 7, 1991
NORKIS DISTRIBUTORS, INC., petitioner,
vs.
THE COURT OF APPEALS & ALBERTO NEPALES, respondents.
Jose D. Palma for petitioner.
Public Attorney's Office for private respondent.
GRIO-AQUINO, J.:
Subject of this petition for review is the decision of the Court of Appeals
(Seventeenth Division) in CA-G.R. No. 09149, affirming with modification the
judgment of the Regional Trial Court, Sixth (6th) Judicial Region, Branch LVI.
Himamaylan, Negros Occidental, in Civil Case No. 1272, which was private
respondent Alberto Nepales' action for specific performance of a contract of
sale with damages against petitioner Norkis Distributors, Inc.
The facts borne out by the record are as follows:
Petitioner Norkis Distributors, Inc. (Norkis for brevity), is the distributor of
Yamaha motorcycles in Negros Occidental with office in Bacolod City with
Avelino Labajo as its Branch Manager. On September 20, 1979, private
respondent Alberto Nepales bought from the Norkis-Bacolod branch a brand
new Yamaha Wonderbike motorcycle Model YL2DX with Engine No. L2-
329401K Frame No. NL2-0329401, Color Maroon, then displayed in the
Norkis showroom. The price of P7,500.00 was payable by means of a Letter of
Guaranty from the Development Bank of the Philippines (DBP), Kabankalan
Branch, which Norkis' Branch Manager Labajo agreed to accept. Hence, credit
was extended to Nepales for the price of the motorcycle payable by DBP upon
release of his motorcycle loan. As security for the loan, Nepales would execute
a chattel mortgage on the motorcycle in favor of DBP. Branch Manager Labajo
issued Norkis Sales Invoice No. 0120 (Exh.1) showing that the contract of sale
of the motorcycle had been perfected. Nepales signed the sales invoice to
signify his conformity with the terms of the sale. In the meantime, however, the
motorcycle remained in Norkis' possession.
On November 6, 1979, the motorcycle was registered in the Land
Transportation Commission in the name of Alberto Nepales. A registration
certificate (Exh. 2) in his name was issued by the Land Transportation
Commission on November 6, 1979 (Exh. 2-b). The registration fees were paid
by him, evidenced by an official receipt, Exhibit 3.
On January 22, 1980, the motorcycle was delivered to a certain Julian Nepales
who was allegedly the agent of Alberto Nepales but the latter denies it (p. 15,
t.s.n., August 2, 1984). The record shows that Alberto and Julian Nepales
presented the unit to DBP's Appraiser-Investigator Ernesto Arriesta at the DBP
offices in Kabankalan, Negros Occidental Branch (p. 12, Rollo). The
motorcycle met an accident on February 3, 1980 at Binalbagan, Negros
Occidental. An investigation conducted by the DBP revealed that the unit was
being driven by a certain Zacarias Payba at the time of the accident (p.
33, Rollo). The unit was a total wreck (p. 36, t.s.n., August 2,1984; p. 13, Rollo),
was returned, and stored inside Norkis' warehouse.
On March 20, 1980, DBP released the proceeds of private respondent's
motorcycle loan to Norkis in the total sum of P7,500. As the price of the
motorcycle later increased to P7,828 in March, 1980, Nepales paid the
difference of P328 (p. 13, Rollo) and demanded the delivery of the motorcycle.
When Norkis could not deliver, he filed an action for specific performance with
damages against Norkis in the Regional Trial Court of Himamaylan, Negros
Occidental, Sixth (6th) Judicial Region, Branch LVI, where it was docketed as
Civil Case No. 1272. He alleged that Norkis failed to deliver the motorcycle
which he purchased, thereby causing him damages.
Norkis answered that the motorcycle had already been delivered to private
respondent before the accident, hence, the risk of loss or damage had to be borne
by him as owner of the unit.
After trial on the merits, the lower court rendered a decision dated August 27,
1985 ruling in favor of private respondent (p. 28, Rollo.) thus:
WHEREFORE, judgment is rendered in favor of the plaintiff and against the
defendants. The defendants are ordered to pay solidarity to the plaintiff the
present value of the motorcycle which was totally destroyed, plus interest
equivalent to what the Kabankalan Sub-Branch of the Development Bank of the
Philippines will have to charge the plaintiff on fits account, plus P50.00 per day
from February 3, 1980 until full payment of the said present value of the
motorcycle, plus P1,000.00 as exemplary damages, and costs of the litigation.
In lieu of paying the present value of the motorcycle, the defendants can deliver
to the plaintiff a brand-new motorcycle of the same brand, kind, and quality as
the one which was totally destroyed in their possession last February 3, 1980.
(pp. 28-29, Rollo.)
On appeal, the Court of appeals affirmed the appealed judgment on August 21,
1989, but deleted the award of damages "in the amount of Fifty (P50.00) Pesos
a day from February 3, 1980 until payment of the present value of the damaged
vehicle" (p35, Rollo). The Court of Appeals denied Norkis' motion for
reconsideration. Hence, this Petition for Review.
The principal issue in this case is who should bear the loss of the motorcycle.
The answer to this question would depend on whether there had already been a
transfer of ownership of the motorcycle to private respondent at the time it was
destroyed.
Norkis' theory is that:
. . . After the contract of sale has been perfected (Art. 1475) and even before
delivery, that is, even before the ownership is transferred to the vendee, the risk
of loss is shifted from the vendor to the vendee. Under Art. 1262, the obligation
of the vendor to deliver a determinate thing becomes extinguished if the thing
is lost by fortuitous event (Art. 1174), that is, without the fault or fraud of the
vendor and before he has incurred in delay (Art. 11 65, par. 3). If the thing sold
is generic, the loss or destruction does not extinguish the obligation (Art. 1263).
A thing is determinate when it is particularly designated or physically
segregated from all others of the same class (Art. 1460). Thus, the vendor
becomes released from his obligation to deliver the determinate thing sold while
the vendee's obligation to pay the price subsists. If the vendee had paid the price
in advance the vendor may retain the same. The legal effect, therefore, is that
the vendee assumes the risk of loss by fortuitous event (Art. 1262) after the
perfection of the contract to the time of delivery. (Civil Code of the Philippines,
Ambrosio Padilla, Vol. 5,1987 Ed., p. 87.)
Norkis concedes that there was no "actual" delivery of the vehicle. However, it
insists that there was constructive delivery of the unit upon: (1) the issuance of
the Sales Invoice No. 0120 (Exh. 1) in the name of the private respondent and
the affixing of his signature thereon; (2) the registration of the vehicle on
November 6, 1979 with the Land Transportation Commission in private
respondent's name (Exh. 2); and (3) the issuance of official receipt (Exh. 3) for
payment of registration fees (p. 33, Rollo).
That argument is not well taken. As pointed out by the private respondent, the
issuance of a sales invoice does not prove transfer of ownership of the thing
sold to the buyer. An invoice is nothing more than a detailed statement of the
nature, quantity and cost of the thing sold and has been considered not a bill of
sale (Am. Jur. 2nd Ed., Vol. 67, p. 378).
In all forms of delivery, it is necessary that the act of delivery whether
constructive or actual, be coupled with the intention of delivering the thing. The
act, without the intention, is insufficient (De Leon, Comments and Cases on
Sales, 1978 Ed., citing Manresa, p. 94).
When the motorcycle was registered by Norkis in the name of private
respondent, Norkis did not intend yet to transfer the title or ownership to
Nepales, but only to facilitate the execution of a chattel mortgage in favor of
the DBP for the release of the buyer's motorcycle loan. The Letter of Guarantee
(Exh. 5) issued by the DBP, reveals that the execution in its favor of a chattel
mortgage over the purchased vehicle is a pre-requisite for the approval of the
buyer's loan. If Norkis would not accede to that arrangement, DBP would not
approve private respondent's loan application and, consequently, there would
be no sale.
In other words, the critical factor in the different modes of effecting delivery,
which gives legal effect to the act, is the actual intention of the vendor to deliver,
and its acceptance by the vendee. Without that intention, there is no tradition
(Abuan vs. Garcia, 14 SCRA 759).
11
In the case of Addison vs. Felix and Tioco (38 Phil. 404, 408), this Court held:

The Code imposes upon the vendor the obligation to deliver the thing sold. The
thing is considered to be delivered when it is "placed in the hands and
possession of the vendee." (Civil Code, Art. 1462). It is true that the same article
declares that the execution of a public instrument is equivalent to the delivery
of the thing which is the object of the contract, but, in order that this symbolic
delivery may produce the effect of tradition, it is necessary that the vendor shall
have had such control over the thing sold that, at the moment of the sale, its
material delivery could have been made. It is not enough to confer upon the
purchaser the ownership and the right of possession. The thing sold must be
placed in his control. When there is no impediment whatever to prevent the
thing sold passing into the tenancy of the purchaser by the sole will of the
vendor, symbolic delivery through the execution of a public instrument is
sufficient. But if notwithstanding the execution of the instrument, the purchaser
cannot have the enjoyment and material tenancy of the thing and make use of it
himself or through another in his name, because such tenancy and enjoyment
are opposed by the interposition of another will, then fiction yields to reality-
the delivery has riot been effects .(Emphasis supplied.)

The Court of Appeals correctly ruled that the purpose of the execution of the
sales invoice dated September 20, 1979 (Exh. B) and the registration of the
vehicle in the name of plaintiff-appellee (private respondent) with the Land
Registration Commission (Exhibit C) was not to transfer to Nepales the
ownership and dominion over the motorcycle, but only to comply with the
requirements of the Development Bank of the Philippines for processing private
respondent's motorcycle loan. On March 20, 1980, before private respondent's
loan was released and before he even paid Norkis, the motorcycle had already
figured in an accident while driven by one Zacarias Payba. Payba was not
shown by Norkis to be a representative or relative of private respondent. The
latter's supposed relative, who allegedly took possession of the vehicle from
Norkis did not explain how Payba got hold of the vehicle on February 3, 1980.
Norkis' claim that Julian Nepales was acting as Alberto's agent when he
allegedly took delivery of the motorcycle (p. 20, Appellants' Brief), is
controverted by the latter. Alberto denied having authorized Julian Nepales to
get the motorcycle from Norkis Distributors or to enter into any transaction with
Norkis relative to said motorcycle. (p. 5, t.s.n., February 6, 1985). This
circumstances more than amply rebut the disputable presumption of delivery
upon which Norkis anchors its defense to Nepales' action (pp. 33-34, Rollo).

Article 1496 of the Civil Code which provides that "in the absence of an express
assumption of risk by the buyer, the things sold remain at seller's risk until the
ownership thereof is transferred to the buyer," is applicable to this case, for
there was neither an actual nor constructive delivery of the thing sold, hence,
the risk of loss should be borne by the seller, Norkis, which was still the owner
and possessor of the motorcycle when it was wrecked. This is in accordance
with the well-known doctrine of res perit domino.

WHEREFORE, finding no reversible error in the decision of the Court of

Appeals in CA-G.R. No. 09149, we deny the petition for review and hereby
affirm the appealed decision, with costs against the petitioner.

SO ORDERED.

12
G.R. No. 133879 November 21, 2001
EQUATORIAL REALTY DEVELOPMENT, INC., petitioner,
vs.
MAYFAIR THEATER, INC., respondent.
PANGANIBAN, J.:
General propositions do not decide specific cases. Rather, laws are interpreted
in the context of the peculiar factual situation of each proceeding. Each case has
its own flesh and blood and cannot be ruled upon on the basis of isolated clinical
classroom principles.
While we agree with the general proposition that a contract of sale is valid until
rescinded, it is equally true that ownership of the thing sold is not acquired by
mere agreement, but by tradition or delivery. The peculiar facts of the present
controversy as found by this Court in an earlier relevant Decision show that
delivery was not actually effected; in fact, it was prevented by a legally effective
impediment. Not having been the owner, petitioner cannot be entitled to the
civil fruits of ownership like rentals of the thing sold. Furthermore, petitioner's
bad faith, as again demonstrated by the specific factual milieu of said Decision,
bars the grant of such benefits. Otherwise, bad faith would be rewarded instead
of punished.
The Case
Filed before this Court is a Petition for Review1 under Rule 45 of the Rules of
Court, challenging the March 11, 1998 Order2 of the Regional Trial Court of
Manila (RTC), Branch 8, in Civil Case No. 97-85141. The dispositive portion
of the assailed Order reads as follows:
"WHEREFORE, the motion to dismiss filed by defendant Mayfair is hereby
GRANTED, and the complaint filed by plaintiff Equatorial is hereby
DISMISSED."3
Also questioned is the May 29, 1998 RTC Order4 denying petitioner's Motion
for Reconsideration.
The Facts
The main factual antecedents of the present Petition are matters of record,
because it arose out of an earlier case decided by this Court on November 21,
1996, entitled Equatorial Realty Development, Inc. v. Mayfair Theater,
Inc.5(henceforth referred to as the "mother case"), docketed as G.R No. 106063.
Carmelo & Bauermann, Inc. ("Camelo" ) used to own a parcel of land, together
with two 2-storey buildings constructed thereon, located at Claro M. Recto
Avenue, Manila, and covered by TCT No. 18529 issued in its name by the
Register of Deeds of Manila.
On June 1, 1967, Carmelo entered into a Contract of Lease with Mayfair
Theater Inc. ("Mayfair") for a period of 20 years. The lease covered a portion
of the second floor and mezzanine of a two-storey building with about 1,610
square meters of floor area, which respondent used as a movie house known as
Maxim Theater.
Two years later, on March 31, 1969, Mayfair entered into a second Contract of
Lease with Carmelo for the lease of another portion of the latter's property
namely, a part of the second floor of the two-storey building, with a floor area
of about 1,064 square meters; and two store spaces on the ground floor and the
mezzanine, with a combined floor area of about 300 square meters. In that
space, Mayfair put up another movie house known as Miramar Theater. The
Contract of Lease was likewise for a period of 20 years.
Both leases contained a provision granting Mayfair a right of first refusal to
purchase the subject properties. However, on July 30, 1978 within the 20-
year-lease term the subject properties were sold by Carmelo to Equatorial
Realty Development, Inc. ("Equatorial") for the total sum of P11,300,000,
without their first being offered to Mayfair.
As a result of the sale of the subject properties to Equatorial, Mayfair filed a
Complaint before the Regional Trial Court of Manila (Branch 7) for (a) the
annulment of the Deed of Absolute Sale between Carmelo and Equatorial, (b)
specific performance, and (c) damages. After trial on the merits, the lower court
rendered a Decision in favor of Carmelo and Equatorial. This case, entitled
"Mayfair" Theater, Inc. v. Carmelo and Bauermann, Inc., et al.," was docketed
as Civil Case No. 118019.
On appeal (docketed as CA-GR CV No. 32918), the Court of Appeals (CA)
completely reversed and set aside the judgment of the lower court.
The controversy reached this Court via G.R No. 106063. In this mother case, it
denied the Petition for Review in this wise:
"WHEREFORE, the petition for review of the decision of the Court of Appeals,
dated June 23, 1992, in CA-G.R. CV No. 32918, is HEREBY DENIED. The
Deed of Absolute Sale between petitioners Equatorial Realty Development, Inc.
and Carmelo & Bauermann, Inc. is hereby deemed rescinded; Carmelo &
Bauermann is ordered to return to petitioner Equatorial Realty Development the
purchase price. The latter is directed to execute the deeds and documents
necessary to return ownership to Carmelo & Bauermann of the disputed lots.
Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to buy the
aforesaid lots for P11,300,000.00."6
The foregoing Decision of this Court became final and executory on March 17,
1997. On April 25, 1997, Mayfair filed a Motion for Execution, which the trial
court granted.
However, Carmelo could no longer be located. Thus, following the order of
execution of the trial court, Mayfair deposited with the clerk of court a quo its
payment to Carmelo in the sum of P11,300,000 less; P847,000 as withholding
tax. The lower court issued a Deed of Reconveyance in favor of Carmelo and a
Deed of Sale in favor of Mayfair. On the basis of these documents, the Registry
of Deeds of Manila canceled Equatorial's titles and issued new Certificates of
Title7 in the name of Mayfair.
Ruling on Equatorial's Petition for Certiorari and Petition contesting the
foregoing manner of execution, the CA in its Resolution of November 20, 1998,
explained that Mayfair had no right to deduct the P847,000 as withholding tax.
Since Carmelo could no longer be located, the appellate court ordered Mayfair
to deposit the said sum with the Office of the Clerk of Court, Manila, to
complete the full amount of P11,300,000 to be turned over to Equatorial.
Equatorial questioned the legality of the above CA ruling before this Court in
G.R No. 136221 entitled "Equatorial Realty Development, Inc. v. Mayfair
Theater, Inc." In a Decision promulgated on May 12, 2000,8 this Court directed
the trial court to follow strictly the Decision in GR. No. 106063, the mother
case. It explained its ruling in these words:
"We agree that Carmelo and Bauermann is obliged to return the entire amount
of eleven million three hundred thousand pesos (P11,300,000.00) to Equatorial.
On the other hand, Mayfair may not deduct from the purchase price the amount
of eight hundred forty-seven thousand pesos (P847,000.00) as withholding tax.
The duty to withhold taxes due, if any, is imposed on the seller Carmelo and
Bauermann, Inc."9
Meanwhile, on September 18, 1997 barely five months after Mayfair had
submitted its Motion for Execution before the RTC of Manila, Branch 7
Equatorial filed with the Regional Trial Court of Manila, Branch 8, an action
for the collection of a sum of money against Mayfair, claiming payment of
rentals or reasonable compensation for the defendant's use of the subject
premises after its lease contracts had expired. This action was the progenitor of
the present case.
In its Complaint, Equatorial alleged among other things that the Lease Contract
covering the premises occupied by Maxim Theater expired on May 31, 1987,
while the Lease Contract covering the premises occupied by Miramar Theater
lapsed on March 31, 1989.10 Representing itself as the owner of the subject
premises by reason of the Contract of Sale on July 30, 1978, it claimed rentals
arising from Mayfair's occupation thereof.
Ruling of the RTC Manila, Branch 8
As earlier stated, the trial court dismissed the Complaint via the herein assailed
Order and denied the Motion for Reconsideration filed by Equatorial. 11
The lower court debunked the claim of petitioner for unpaid back rentals,
holding that the rescission of the Deed of Absolute Sale in the mother case did
not confer on Equatorial any vested or residual proprietary rights, even in
expectancy.
13
In granting the Motion to Dismiss, the court a quo held that the critical issue
was whether Equatorial was the owner of the subject property and could thus
enjoy the fruits or rentals therefrom. It declared the rescinded Deed of Absolute
Sale as avoid at its inception as though it did not happen."
The trial court ratiocinated as follows:
"The meaning of rescind in the aforequoted decision is to set aside. In the
case of Ocampo v. Court of Appeals, G.R. No. 97442, June 30, 1994, the
Supreme Court held that, 'to rescind is to declare a contract void in its inception
and to put an end as though it never were. It is not merely to terminate it and
release parties from further obligations to each other but to abrogate it from the
beginning and restore parties to relative positions which they would have
occupied had no contract ever been made.'
"Relative to the foregoing definition, the Deed of Absolute Sale between
Equatorial and Carmelo dated July 31, 1978 is void at its inception as though it
did not happen.
"The argument of Equatorial that this complaint for back rentals as 'reasonable
compensation for use of the subject property after expiration of the lease
contracts presumes that the Deed of Absolute Sale dated July 30, 1978 from
whence the fountain of Equatorial's all rights flows is still valid and existing.
xxx xxx xxx
"The subject Deed of Absolute Sale having been rescinded by the Supreme
Court, Equatorial is not the owner and does not have any right to demand
backrentals from the subject property. . .12
The trial court added: "The Supreme Court in the Equatorial case, G.R No.
106063, has categorically stated that the Deed of Absolute Sale dated July 31,
1978 has been rescinded subjecting the present complaint to res judicata."13
Hence, the present recourse.14
Issues
Petitioner submits, for the consideration of this Court, the following issues:15
"A
The basis of the dismissal of the Complaint by the Regional Trial Court not
only disregards basic concepts and principles in the law on contracts and in civil
law, especially those on rescission and its corresponding legal effects, but also
ignores the dispositive portion of the Decision of the Supreme Court in G.R.
No. 106063 entitled 'Equatorial Realty Development, Inc. & Carmelo &
Bauermann, Inc. vs. Mayfair Theater, Inc.'
"B.
The Regional Trial Court erred in holding that the Deed of Absolute Sale in
favor of petitioner by Carmelo & Bauermann, Inc., dated July 31, 1978, over
the premises used and occupied by respondent, having been 'deemed rescinded'
by the Supreme Court in G.R. No. 106063, is 'void at its inception as though it
did not happen.'
"C.
The Regional Trial Court likewise erred in holding that the aforesaid Deed of
Absolute Sale, dated July 31, 1978, having been 'deemed rescinded' by the
Supreme Court in G.R. No. 106063, petitioner 'is not the owner and does not
have any right to demand backrentals from the subject property,' and that the
rescission of the Deed of Absolute Sale by the Supreme Court does not confer
to petitioner 'any vested right nor any residual proprietary rights even in
expectancy.'
"D.
The issue upon which the Regional Trial Court dismissed the civil case, as
stated in its Order of March 11, 1998, was not raised by respondent in its Motion
to Dismiss.
"E.
The sole ground upon which the Regional Trial Court dismissed Civil Case No.
97-85141 is not one of the grounds of a Motion to Dismiss under Sec. 1 of Rule
16 of the 1997 Rules of Civil Procedure."
Basically, the issues can be summarized into two: (1) the substantive issue of
whether Equatorial is entitled to back rentals; and (2) the procedural issue of
whether the court a quo's dismissal of Civil Case No. 97-85141 was based on
one of the grounds raised by respondent in its Motion to Dismiss and covered
by Rule 16 of the Rules of Court.
This Court's Ruling
The Petition is not meritorious.
First Issue:
Ownership of Subject Properties
We hold that under the peculiar facts and circumstances of the case at bar, as
found by this Court en banc in its Decision promulgated in 1996 in the mother
case, no right of ownership was transferred from Carmelo to Equatorial in view
of a patent failure to deliver the property to the buyer.
Rental a Civil
Fruit of Ownership
To better understand the peculiarity of the instant case, let us begin with some
basic parameters. Rent is a civil fruit16 that belongs to the owner of the property
producing it17 by right of accession.18 Consequently and ordinarily, the rentals
that fell due from the time of the perfection of the sale to petitioner until its
rescission by final judgment should belong to the owner of the property during
that period.
By a contract of sale, "one of the contracting parties obligates himself to transfer
ownership of and to deliver a determinate thing and the other to pay therefor a
price certain in money or its equivalent."19
Ownership of the thing sold is a real right,20 which the buyer acquires only upon
delivery of the thing to him "in any of the ways specified in articles 1497 to
1501, or in any other manner signifying an agreement that the possession is
transferred from the vendor to the vendee."21 This right is transferred, not
merely by contract, but also by tradition or delivery.22 Non nudis pactis sed
traditione dominia rerum transferantur. And there is said to be delivery if and
when the thing sold "is placed in the control and possession of the
vendee."23 Thus, it has been held that while the execution of a public instrument
of sale is recognized by law as equivalent to the delivery of the thing
sold,24 such constructive or symbolic delivery, being merely presumptive, is
deemed negated by the failure of the vendee to take actual possession of the
land sold.25
Delivery has been described as a composite act, a thing in which both parties
must join and the minds of both parties concur. It is an act by which one party
parts with the title to and the possession of the property, and the other acquires
the right to and the possession of the same. In its natural sense, delivery means
something in addition to the delivery of property or title; it means transfer of
possession.26 In the Law on Sales, delivery may be either actual or constructive,
but both forms of delivery contemplate "the absolute giving up of the control
and custody of the property on the part of the vendor, and the assumption of the
same by the vendee."27
Possession Never
Acquired by Petitioner
Let us now apply the foregoing discussion to the present issue. From the
peculiar facts of this case, it is clear that petitioner never took actual
control and possession of the property sold, in view of respondent's timely
objection to the sale and the continued actual possession of the property. The
objection took the form of a court action impugning the sale which, as we know,
was rescinded by a judgment rendered by this Court in the mother case. It has
been held that the execution of a contract of sale as a form of constructive
delivery is a legal fiction. It holds true only when there is no impediment that
may prevent the passing of the property from the hands of the vendor into those
of the vendee.28 When there is such impediment, "fiction yields to reality the
delivery has not been effected."29
14
Hence, respondent's opposition to the transfer of the property by way of sale to
Equatorial was a legally sufficient impediment that effectively prevented the
passing of the property into the latter's hands.
This was the same impediment contemplated in Vda. de Sarmiento v.
Lesaca,30 in which the Court held as follows:
"The question that now arises is: Is there any stipulation in the sale in question
from which we can infer that the vendor did not intend to deliver outright the
possession of the lands to the vendee? We find none. On the contrary, it can be
clearly seen therein that the vendor intended to place the vendee in actual
possession of the lands immediately as can be inferred from the stipulation that
the vendee 'takes actual possession thereof . . . with full rights to dispose, enjoy
and make use thereof in such manner and form as would be most advantageous
to herself.' The possession referred to in the contract evidently refers to actual
possession and not merely symbolical inferable from the mere execution of the
document.
"Has the vendor complied with this express commitment? she did not. As
provided in Article 1462, the thing sold shall be deemed delivered when the
vendee is placed in the control and possession thereof, which situation does not
here obtain because from the execution of the sale up to the present the vendee
was never able to take possession of the lands due to the insistent refusal of
Martin Deloso to surrender them claiming ownership thereof. And although it
is postulated in the same article that the execution of a public document is
equivalent to delivery, this legal fiction only holds true when there is no
impediment that may prevent the passing of the property from the hands of the
vendor into those of the vendee. x x x."31
The execution of a public instrument gives rise, therefore, only to a prima facie
presumption of delivery. Such presumption is destroyed when the instrument
itself expresses or implies that delivery was not intended; or when by other
means it is shown that such delivery was not effected, because a third person
was actually in possession of the thing. In the latter case, the sale cannot be
considered consummated.
However, the point may be raised that under Article 1164 of the Civil Code,
Equatorial as buyer acquired a right to the fruits of the thing sold from the time
the obligation to deliver the property to petitioner arose.32 That time arose upon
the perfection of the Contract of Sale on July 30, 1978, from which moment the
laws provide that the parties to a sale may reciprocally demand
performance.33 Does this mean that despite the judgment rescinding the sale,
the right to the fruits34 belonged to, and remained enforceable by, Equatorial?
Article 1385 of the Civil Code answers this question in the negative, because
"[r]escission creates the obligation to return the things which were the object of
the contract, together with their fruits, and the price with its interest; x x x" Not
only the land and building sold, but also the rental payments paid, if any, had
to be returned by the buyer.
Another point. The Decision in the mother case stated that "Equatorial x x x has
received rents" from Mayfair "during all the years that this controversy has been
litigated." The Separate Opinion of Justice Teodoro Padilla in the mother case
also said that Equatorial was "deriving rental income" from the disputed
property. Even herein ponente'sSeparate Concurring Opinion in the mother
case recognized these rentals. The question now is: Do all these statements
concede actual delivery?
The answer is "No." The fact that Mayfair paid rentals to Equatorial during the
litigation should not be interpreted to mean either actual delivery or ipso facto
recognition of Equatorial's title.
The CA Records of the mother case 35 show that Equatorial as alleged buyer
of the disputed properties and as alleged successor-in-interest of Carmelo's
rights as lessor submitted two ejectment suits against Mayfair. Filed in the
Metropolitan Trial Court of Manila, the first was docketed as Civil Case No.
121570 on July 9, 1987; and the second, as Civil Case No. 131944 on May 28,
1990. Mayfair eventually won them both. However, to be able to maintain
physical possession of the premises while awaiting the outcome of the mother
case, it had no choice but to pay the rentals.
The rental payments made by Mayfair should not be construed as a recognition
of Equatorial as the new owner. They were made merely to avoid imminent
eviction. It is in this context that one should understand the aforequoted factual
statements in the ponencia in the mother case, as well as the Separate Opinion
of Mr. Justice Padilla and the Separate Concurring Opinion of the
herein ponente.
At bottom, it may be conceded that, theoretically, a rescissible contract is valid
until rescinded. However, this generalprinciple is not decisive to the issue of
whether Equatorial ever acquired the right to collect rentals. What is decisive is
the civil law rule that ownership is acquired, not by mere agreement, but by
tradition or delivery. Under the factual environment of this controversy as found
by this Court in the mother case, Equatorial was never put in actual and effective
control or possession of the property because of Mayfair's timely objection.
As pointed out by Justice Holmes, general propositions do not decide specific
cases. Rather, "laws are interpreted in the context of the peculiar factual
situation of each case. Each case has its own flesh and blood and cannot be
decided on the basis of isolated clinical classroom principles."36
In short, the sale to Equatorial may have been valid from inception, but it was
judicially rescinded before it could be consummated. Petitioner never acquired
ownership, not because the sale was void, as erroneously claimed by the trial
court, but because the sale was not consummated by a legally effective delivery
of the property sold.
Benefits Precluded by
Petitioner's Bad Faith
Furthermore, assuming for the sake of argument that there was valid delivery,
petitioner is not entitled to any benefits from the "rescinded" Deed of Absolute
Sale because of its bad faith. This being the law of the mother case decided in
1996, it may no longer be changed because it has long become final and
executory. Petitioner's bad faith is set forth in the following pertinent portions
of the mother case:
"First and foremost is that the petitioners acted in bad faith to render Paragraph
8 'inutile.'
xxx xxx xxx
"Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the
property in question rescissible. We agree with respondent Appellate Court that
the records bear out the fact that Equatorial was aware of the lease contracts
because its lawyers had, prior to the sale, studied the said contracts. As such,
Equatorial cannot tenably claim to be a purchaser in good faith, and, therefore,
rescission lies.
xxx xxx xxx
"As also earlier emphasized, the contract of sale between Equatorial and
Carmelo is characterized by bad faith, since it was knowingly entered into in
violation of the rights of and to the prejudice of Mayfair. In fact, as correctly
observed by the Court of Appeals, Equatorial admitted that its lawyers had
studied the contract of lease prior to the sale. Equatorial's knowledge of the
stipulations therein should have cautioned it to look further into the agreement
to determine if it involved stipulations that would prejudice its own interests.
xxx xxx xxx
"On the part of Equatorial, it cannot be a buyer in good faith because it bought
the property with notice and full knowledge that Mayfair had a right to or
interest in the property superior to its own. Carmelo and Equatorial took
unconscientious advantage of Mayfair."37 (Italics supplied)
Thus, petitioner was and still is entitled solely to he return of the purchase price
it paid to Carmelo; no more, no less. This Court has firmly ruled in the mother
case that neither of them is entitled to any consideration of equity, as both "took
unconscientious advantage of Mayfair."38
In the mother case, this Court categorically denied the payment of interest, a
fruit of ownership. By the same token, rentals, another fruit of ownership,
cannot be granted without mocking this Court's en banc Decision, which has
long become final.
Petitioner's claim of reasonable compensation for respondent's use and
occupation of the subject property from the time the lease expired cannot be
countenanced. If it suffered any loss, petitioner must bear it in silence, since it
15
had wrought that loss upon itself. Otherwise, bad faith would be rewarded "void" In short, it ruled on the ground raised; namely, bar by prior judgment.
instead of punished.@lawphil.net By granting the Motion, it disposed correctly, even if its legal reason for
nullifying the sale was wrong. The correct reasons are given in this Decision.
We uphold the trial court's disposition, not for the reason it gave, but for (a) the
patent failure to deliver the property and (b) petitioner's bad faith, as above WHEREFORE, the Petition is hereby DENIED. Costs against petitioner.itc-alf
discussed.
SO ORDERED.
Second Issue:itc-alf
Ground in Motion to Dismiss

Procedurally, petitioner claims that the trial court deviated from the accepted
and usual course of judicial proceedings when it dismissed Civil Case No. 97-
85141 on a ground not raised in respondent's Motion to Dismiss. Worse, it
allegedly based its dismissal on a ground not provided for in a motion to dismiss
as enunciated in the Rules of Court.@lawphil.net

We are not convinced A review of respondent's Motion to Dismiss Civil Case

No. 97-85141 shows that there were two grounds invoked, as follows:

"(A)

Plaintiff is guilty of forum-shopping.itc-alf

"(B)

Plaintiff's cause of action, if any, is barred by prior judgment."39

The court a quo ruled, inter alia, that the cause of action of petitioner plaintiff
in the case below) had been barred by a prior judgment of this Court in G.R No.
106063, the mother case.

Although it erred in its interpretation of the said Decision when it argued that
the rescinded Deed of Absolute Sale was avoid," we hold, nonetheless, that
petitioner's cause of action is indeed barred by a prior judgment of this Court.
As already discussed, our Decision in G.R No. 106063 shows that petitioner is
not entitled to back rentals, because it never became the owner of the disputed
properties due to a failure of delivery. And even assuming arguendo that there
was a valid delivery, petitioner's bad faith negates its entitlement to the civil
fruits of ownership, like interest and rentals.

Under the doctrine of res judicata or bar by prior judgment, a matter that has
been adjudicated by a court of competent jurisdiction must be deemed to have
been finally and conclusively settled if it arises in any subsequent litigation
between the same parties and for the same cause.40 Thus, "[a] final judgment on
the merits rendered by a court of competent jurisdiction is conclusive as to the
rights of the parties and their privies and constitutes an absolute bar to
subsequent actions involving the same claim, demand, or cause of action."41 Res
judicata is based on the ground that the "party to be affected, or some other with
whom he is in privity, has litigated the same matter in a former action in a court
of competent jurisdiction, and should not be permitted to litigate it again. 42

It frees the parties from undergoing all over again the rigors of unnecessary
suits and repetitive trials. At the same time, it prevents the clogging of court
dockets. Equally important, it stabilizes rights and promotes the rule of
law.@lawphil.net

We find no need to repeat the foregoing disquisitions on the first issue to show
satisfaction of the elements of res judicata. Suffice it to say that, clearly, our
ruling in the mother case bars petitioner from claiming back rentals from
respondent. Although the court a quo erred when it declared "void from
inception" the Deed of Absolute Sale between Carmelo and petitioner, our
foregoing discussion supports the grant of the Motion to Dismiss on the ground
that our prior judgment in G.R No. 106063 has already resolved the issue of
back rentals.

On the basis of the evidence presented during the hearing of Mayfair's Motion
to Dismiss, the trial court found that the issue of ownership of the subject
property has been decided by this Court in favor of Mayfair. We quote the RTC:

"The Supreme Court in the Equatorial case, G.R. No. 106063 has categorically
stated that the Deed of Absolute Sale dated July 31, 1978 has been rescinded
subjecting the present complaint to res judicata."43(Emphasis in the original)

Hence, the trial court decided the Motion to Dismiss on the basis of res judicata,
even if it erred in interpreting the meaning of "rescinded" as equivalent to

16
G.R. No. L-6584 October 16, 1911
INCHAUSTI AND CO., plaintiff-appellant,
vs.
ELLIS CROMWELL, Collector of Internal Revenue, defendant-appellee.
Haussermann, Cohn & Fisher, for appellant.
Acting Attorney-General Harvey, for 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 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.
17
The distinction between a contract of sale and one for work, labor, and materials
is tested by the inquiry whether the thing transferred is one no in existence and
which never would have existed but for the order of the party desiring to acquire
it, or a thing which would have existed and been the subject of sale to some
other person, even if the order had not been given. (Groves vs. Buck, 3 Maule
& S., 178; Towers vs. Osborne, 1 Strange, 506; Benjamin on Sales, 90.) It is
clear that in the case at bar the hemp was in existence in baled form before the
agreements of sale were made, or, at least, would have been in existence even
if none of the individual sales here in question had been consummated. It would
have been baled, nevertheless, for sale to someone else, since, according to the
agreed statement of facts, it is customary to sell hemp in bales. When a person
stipulates for the future sale of articles which he is habitually making, and which
at the time are not made or finished, it is essentially a contract of sale and not a
contract for labor. It is otherwise when the article is made pursuant to
agreement. (Lamb vs. Crafts, 12 Met., 353; Smith vs. N.Y.C. Ry. Co., 4 Keyes,
180; Benjamin on Sales, 98.) Where labor is employed on the materials of the
seller he can not maintain an action for work and labor. (Atkinson vs. Bell, 8
Barn. & C., 277; Lee vs. Griffin, 30 L.J.N. S.Q.B., 252; Prescott vs. Locke, 51
N.H., 94.) If the article ordered by the purchaser is exactly such as the plaintiff
makes and keeps on hand for sale to anyone, and no change or modification of
it is made at the defendant's request, it is a contract of sale, even though it may
be entirely made after, and in consequence of, the defendant's order for it.
(Garbutt s. Watson, 5 Barn. & Ald., 613; Gardner vs. Joy, 9 Met., 177;
Lamb vs. Crafts, 12 Met., 353; Waterman vs. Meigs, 4 Cush., 497.,
Clark vs. Nichols, 107 Mass., 547; May vs. Ward, 134 Mass., 127;
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. (Goddard vs. Binney, 115 Mass., 450.)
The operation of baling undoubtedly augments the value of the goods. We agree
that there can be no question that, if the value of the hemp were not augmented
to the amount of P1.75 per bale by said operation, the purchaser would not pay
that sum. If one buys a bale of hemp at a stipulated price of P20, well knowing
that there is an agreement on his part, express or implied, to pay an additional
amount of P1.75 for that bale, he considers the bale of hemp worth P21. 75. It
is agreed, as we have before stated, that hemp is sold in bales. Therefore, baling
is performed before the sale. The purchaser of hemp owes to the seller nothing
whatever by reason of their contract except the value of the hemp delivered.
That value, that sum which the purchaser pays to the vendee, is the true selling
price of the hemp, and every item which enters into such price is a part of such
selling price. By force of the custom prevailing among hemp dealers in the
Philippine Islands, a purchaser of hemp in the market, unless he expressly
stipulates that it shall be delivered to him in loose form, obligates himself to
purchase and pay for baled hemp. Wheher or not such agreement is express or
implied, whether it is actual or tacit, it has the same force. After such an
agreement has once been made by the purchaser, he has no right to insists
thereafter that the seller shall furnish him with unbaled hemp. It is undoubted
that the vendees, in the sales referred to in the case at bar, would have no right,
after having made their contracts, to insists on the delivery of loose hemp with
the purpose in view themselves to perform the baling and thus save 75 centavos
per bale. It is unquestioned that the seller, the plaintiff, would have stood upon
his original contract of sale, that is, the obligation to deliver baled hemp, and
would have forced his vendees to accept baled hemp, he himself retaining
among his own profits those which accrued from the proceed of baling.
We are of the opinion that the judgment appealed from must be affirmed,
without special finding as to costs, and it is so ordered.

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.
18
G.R. No. L-8506 August 31, 1956
CELESTINO CO & COMPANY, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
Office of the Solicitor General Ambrosio Padilla, Fisrt Assistant Solicitor
General Guillermo E. Torres and Solicitor Federico V. Sian for respondent.
BENGZON, J.:
Appeal from a decision of the Court of Tax Appeals.
Celestino Co & Company is a duly registered general copartnership doing
business under the trade name of "Oriental Sash Factory". From 1946 to 1951
it paid percentage taxes of 7 per cent on the gross receipts of its sash, door and
window factory, in accordance with section one hundred eighty-six of the
National Revenue Code imposing taxes on sale of manufactured articles.
However in 1952 it began to claim liability only to the contractor's 3 per cent
tax (instead of 7 per cent) under section 191 of the same Code; and having failed
to convince the Bureau of Internal Revenue, it brought the matter to the Court
of Tax Appeals, where it also failed. Said the Court:
To support his contention that his client is an ordinary contractor . . . counsel
presented . . . duplicate copies of letters, sketches of doors and windows and
price quotations supposedly sent by the manager of the Oriental Sash Factory
to four customers who allegedly made special orders to doors and window from
the said factory. The conclusion that counsel would like us to deduce from these
few exhibits is that the Oriental Sash Factory does not manufacture ready-made
doors, sash and windows for the public but only upon special order of its select
customers. . . . I cannot believe that petitioner company would take, as in fact it
has taken, all the trouble and expense of registering a special trade name for its
sash business and then orders company stationery carrying the bold
print "Oriental Sash Factory (Celestino Co & Company, Prop.) 926 Raon St.
Quiapo, Manila, Tel. No. 33076, Manufacturers of all kinds of doors, windows,
sashes, furniture, etc. used season-dried and kiln-dried lumber, of the best
quality workmanships" solely for the purpose of supplying the needs for doors,
windows and sash of its special and limited customers. One ill note that
petitioner has chosen for its tradename and has offered itself to the public as a
"Factory", which means it is out to do business, in its chosen lines on a big
scale. As a general rule, sash factories receive orders for doors and windows of
special design only in particular cases but the bulk of their sales is derived from
a ready-made doors and windows of standard sizes for the average home.
Moreover, as shown from the investigation of petitioner's book of accounts,
during the period from January 1, 1952 to September 30, 1952, it sold sash,
doors and windows worth P188,754.69. I find it difficult to believe that this
amount which runs to six figures was derived by petitioner entirely from its few
customers who made special orders for these items.
Even if we were to believe petitioner's claim that it does not manufacture ready-
made sash, doors and windows for the public and that it makes these articles
only special order of its customers, that does not make it a contractor within the
purview of section 191 of the national Internal Revenue Code. there are no less
than fifty occupations enumerated in the aforesaid section of the national
Internal Revenue Code subject to percentage tax and after reading carefully
each and every one of them, we cannot find under which the business of
manufacturing sash, doors and windows upon special order of customers fall
under the category of "road, building, navigation, artesian well, water workers
and other construction work contractors" are those who alter or repair buildings,
structures, streets, highways, sewers, street railways railroads logging roads,
electric lines or power lines, and includes any other work for the construction,
altering or repairing for which machinery driven by mechanical power is used.
(Payton vs. City of Anadardo 64 P. 2d 878, 880, 179 Okl. 68).
Having thus eliminated the feasibility off taxing petitioner as a contractor under
191 of the national Internal Revenue Code, this leaves us to decide the
remaining issue whether or not petitioner could be taxed with lesser strain and
more accuracy as seller of its manufactured articles under section 186 of the
same code, as the respondent Collector of Internal Revenue has in fact been
doing the Oriental Sash Factory was established in 1946.
The percentage tax imposed in section 191 of our Tax Code is generally a tax
on the sales of services, in contradiction with the tax imposed in section 186 of
the same Code which is a tax on the original sales of articles by the
manufacturer, producer or importer. (Formilleza's Commentaries and
Jurisprudence on the National Internal Revenue Code, Vol. II, p. 744). The fact
that the articles sold are manufactured by the seller does not exchange the
contract from the purview of section 186 of the National Internal Revenue Code
as a sale of articles.
There was a strong dissent; but upon careful consideration of the whole matter
are inclines to accept the above statement of the facts and the law. The important
thing to remember is that Celestino Co & Company habitually makes sash,
windows and doors, as it has represented in its stationery and advertisements to
the public. That it "manufactures" the same is practically admitted by appellant
itself. The fact that windows and doors are made by it only when customers
place their orders, does not alter the nature of the establishment, for it is obvious
that it only accepted such orders as called for the employment of such material-
moulding, frames, panels-as it ordinarily manufactured or was in a position
habitually to manufacture.
Perhaps the following paragraph represents in brief the appellant's position in
this Court:
Since the petitioner, by clear proof of facts not disputed by the respondent,
manufacturers sash, windows and doors only for special customers and upon
their special orders and in accordance with the desired specifications of the
persons ordering the same and not for the general market: since the doors
ordered by Don Toribio Teodoro & Sons, Inc., for instance, are not in existence
and which never would have existed but for the order of the party desiring it;
and since petitioner's contractual relation with his customers is that of a contract
for a piece of work or since petitioner is engaged in the sale of services, it
follows that the petitioner should be taxed under section 191 of the Tax Code
and NOT under section 185 of the same Code." (Appellant's brief, p. 11-12).
But the argument rests on a false foundation. Any builder or homeowner, with
sufficient money, may order windows or doors of the kind manufactured by this
appellant. Therefore it is not true that it serves special customers only or
confines its services to them alone. And anyone who sees, and likes, the doors
ordered by Don Toribio Teodoro & Sons Inc. may purchase from appellant
doors of the same kind, provided he pays the price. Surely, the appellant will
not refuse, for it can easily duplicate or even mass-produce the same doors-it is
mechanically equipped to do so.
That the doors and windows must meet desired specifications is neither here
nor there. If these specifications do not happen to be of the kind habitually
manufactured by appellant special forms for sash, mouldings of panels it
would not accept the order and no sale is made. If they do, the transaction
would be no different from a purchasers of manufactured goods held is stock
for sale; they are bought because they meet the specifications desired by the
purchaser.
Nobody will say that when a sawmill cuts lumber in accordance with the
peculiar specifications of a customer-sizes not previously held in stock for sale
to the public-it thereby becomes an employee or servant of the customer,1 not
the seller of lumber. The same consideration applies to this sash manufacturer.
The Oriental Sash Factory does nothing more than sell the goods that it mass-
produces or habitually makes; sash, panels, mouldings, frames, cutting them to
such sizes and combining them in such forms as its customers may desire.
On the other hand, petitioner's idea of being a contractor doing construction
jobs is untenable. Nobody would regard the doing of two window panels a
construction work in common parlance.2
Appellant invokes Article 1467 of the New Civil Code to bolster its contention
that in filing orders for windows and doors according to specifications, it did
not sell, but merely contracted for particular pieces of work or "merely sold its
services".
Said article reads as follows:
A contract for the delivery at a certain price of an article which the vendor in
the ordinary course of his business manufactures or procures for the general
market, whether the same is on hand at the time or not, is a contract of sale, but
if the goods are to be manufactured specially for the customer and upon his
special order, and not for the general market, it is contract for a piece of work.
19
It is at once apparent that the Oriental Sash Factory did not merely sell its
services to Don Toribio Teodoro & Co. (To take one instance) because it also
sold the materials. The truth of the matter is that it sold materials ordinarily
manufactured by it sash, panels, mouldings to Teodoro & Co., although
in such form or combination as suited the fancy of the purchaser. Such new
form does not divest the Oriental Sash Factory of its character as manufacturer.
Neither does it take the transaction out of the category of sales under Article
1467 above quoted, because although the Factory does not, in the ordinary
course of its business, manufacture and keep on stock doors of the kind sold to
Teodoro, it could stock and/or probably had in stock the sash, mouldings and
panels it used therefor (some of them at least).

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

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

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

The appealed decision is consequently affirmed. So ordered.

20
G.R. No. 71122 March 25, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ARNOLDUS CARPENTRY SHOP, INC. and COURT OF TAX
APPEALS, respondents.
The Solicitor General for petitioner.
Generoso Jacinto for 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).
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
21
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 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
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.
In the instant case, it may be that what is involved is a CARPENTRY SHOP.
But, in the same vein, there are also attendant facts herein to show habituality
of the production for the general public.
22
In this wise, it is noteworthy to again cite the findings of fact of the respondent
Tax Court:
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.]
(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?
(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].
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.

Sec. 187 (x) [now Sec. 157 (x)] of the Tax Code defines a manufacturer' as There is nothing illegal in taking advantage of tax exemptions. When the private
follows: respondent was still exporting less and producing locally more, the petitioner
did not question its classification as a manufacturer. But when in 1977 the
"Manufacturer" includes every person who by physical or chemical process private respondent produced locally less and exported more, petitioner did a
alters the exterior texture or form or inner substance of any raw material or turnabout and imposed the contractor's tax. By classifying the private
manufactured or partially manufactured product in such manner as to prepare it respondent as a contractor, petitioner would likewise take away the tax
for a special use or uses to which it could not have been in its original condition, exemptions granted under Sec. 202 for manufacturers. Petitioner's action finds
or who by any such process alters the quality or any such raw material or no support in the applicable law.
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 WHEREFORE, the Court hereby DENIES the Petition for lack of merit and
combines any such raw material or manufactured or partially manufactured AFFIRMS the Court of Tax Appeals decision in CTA Case No. 3357.
products with other materials or products of the same or different kinds and in
SO ORDERED.
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.

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. 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)].

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 which states:

Sec. 202. Articles not subject to percentage tax on sales. The following shall be
exempt from the percentage taxes imposed in Sections 194, 195, 196, 197, 198,
199, and 201:

xxx xxx xxx

(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.
23
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.
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
facts7 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.
24
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 .
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 alleged 17 that the petitioner,
"in the installation of the air conditioning system did not comply with the
specifications provided" in the 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:
GROUND FLOOR:
"A. RIGHT WING:
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, air handling unit air
ducts.
Defects Noted:
1. Deteriorated evaporative condenser panels, coils are full of scales and heavy
corrosion is very evident.
2. Defective gauges of compressors;
3. No belt guard on motor;
4. Main switch has no cover;
25
5. Desired room temperature not attained;
Aside from the above defects, the following were noted not installed although
provided in the specifications.
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.
4. Liquid level indicator for refrigerant not provided.
5. Suitable heat exchanger is not installed. This is an important component to
increase refrigeration efficiency.
6. Modulating thermostat not provided.
7. Water treatment device for evaporative condenser was not provided.
8. Liquid receiver not provided by sight glass.
B. LEFT WING:
Worthington Compressor Model 2VC4 is installed complete with 15 Hp electric
motor, 3 phase, 220 volts 60 cycles with starter.
Defects Noted:
Same as right wing. except No. 4, All other defects on right wing are common
to the left wing.
SECOND FLOOR: (Common up to EIGHT FLOORS)
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.
As stated in the specifications under, Section No. IV, the MELCO compressors
do not satisfy the conditions stated therein due to the following:
1. MELCO Compressors are not provided with automatic capacity unloader.
2. Not provided with oil pressure safety control.
3. Particular compressors do not have provision for renewal sleeves.
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 been replaced with bigger
crankshafts.
NINTH FLOOR:
Two (2) Worthington 2VC4 driven by 15 Hp, 3 phase, 220 volts, 60 cycles,
1750 rpm, Higgs motors with starters.
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).
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.
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 specifications18 , thus:
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, 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 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 naturally resulted to adversely affect the
operational effectiveness of the air-conditioning system which 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 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 Court19 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.
26
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:
"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
27
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 months from 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)."
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.

However, this is not a hard and fast rule. In Gicano v. Gegato,19 we held:

". . .(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
28
G.R. No. 115349 April 18, 1997
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and
ATENEO DE MANILA UNIVERSITY, respondents.
PANGANIBAN, J.:
In conducting researches and studies of social organizations and cultural values
thru its Institute of Philippine Culture, is the Ateneo de Manila University
performing the work of an independent contractor and thus taxable within the
purview of then Section 205 of the National Internal Revenue Code levying a
three percent contractor's tax? This 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 Appeals. 3
The Antecedent Facts
The antecedents as found by the Court of Appeals are reproduced hereinbelow,
the same being largely undisputed by the parties.
Private respondent is a non-stock, non-profit educational institution with
auxiliary units and branches all over the Philippines. One such auxiliary unit is
the Institute of Philippine Culture (IPC), which has no legal personality separate
and distinct from that of private respondent. The IPC is a Philippine unit
engaged in social science studies of Philippine society and culture.
Occasionally, it accepts sponsorships for its research activities from
international organizations, private foundations and government agencies.
On July 8, 1983, private respondent received from petitioner Commissioner of
Internal Revenue a demand letter dated June 3, 1983, assessing private
respondent the sum of P174,043.97 for alleged deficiency contractor's tax, and
an assessment dated June 27, 1983 in the sum of P1,141,837 for alleged
deficiency income tax, both for the fiscal year ended March 31, 1978. Denying
said tax liabilities, private respondent sent petitioner a letter-protest and
subsequently filed with the latter a memorandum contesting the validity of the
assessments.
On March 17, 1988, petitioner rendered a letter-decision canceling the
assessment for deficiency income tax but modifying the assessment for
deficiency contractor's tax by increasing the amount due to P193,475.55.
Unsatisfied, private respondent requested for a reconsideration or
reinvestigation of the modified assessment. At the same time, it filed in the
respondent court a petition for review of the said letter-decision of the
petitioner. While the petition was pending before the respondent court,
petitioner issued a final decision dated August 3, 1988 reducing the assessment
for deficiency contractor's tax from P193,475.55 to P46,516.41, exclusive of
surcharge and interest.
On July 12, 1993, the respondent court rendered the questioned decision which
dispositively reads:
WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE.
The deficiency contractor's tax assessment in the amount of P46,516.41
exclusive of surcharge and interest for the fiscal year ended March 31, 1978 is
hereby CANCELED. No pronouncement as to cost.
SO ORDERED.
Not in accord with said decision, petitioner has come to this Court via the
present petition for review raising the following issues:
1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE
PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT TO
SECTION 205 OF THE TAX CODE; and
2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3%
CONTRACTOR'S TAX UNDER SECTION 205 OF THE TAX CODE.
The pertinent portions of Section 205 of the National Internal Revenue Code,
as amended, provide:
Sec. 205. Contractor, proprietors or operators of dockyards, and others. A
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
Republic Act No. 5186:
xxx xxx xxx
The term "independent contractors" include persons (juridical or natural) not
enumerated above (but not including individuals subject to the occupation tax
under Section 12 of the Local Tax Code) whose activity consists essentially of
the sale of all kinds of services for a fee regardless of whether or not the
performance of the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees.
xxx xxx xxx
Petitioner contends that the respondent court erred in holding that private
respondent is not an "independent contractor" within the purview of Section
205 of the Tax Code. To petitioner, the term "independent contractor", as
defined by the Code, encompasses all kinds of services rendered for a fee and
that the only exceptions are the following:
a. Persons, association and corporations under contract for embroidery and
apparel for export and gross receipts of or from pioneer industry registered with
the Board of Investment under R.A. No. 5186;
b. Individuals occupation tax under Section 12 of the Local Tax Code (under
the old Section 182 [b] of the Tax Code); and
c. Regional or area headquarters established in the Philippines by multinational
corporations, including their alien executives, and which headquarters do not
earn or derive income from the Philippines and which act as supervisory,
communication and coordinating centers for their affiliates, subsidiaries or
branches in the Asia Pacific Region (Section 205 of the Tax Code).
Petitioner thus submits that since private respondent falls under the definition
of an "independent contractor" and is not among the 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:
29
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, 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 lawsand 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,
30
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 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.
31
G.R. No. L-11491 August 23, 1918
ANDRES QUIROGA, plaintiff-appellant,
vs.
PARSONS HARDWARE CO., defendant-appellee.
Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant.
Crossfield & O'Brien for appellee.
AVANCEA, J.:
On January 24, 1911, in this city of manila, a contract in the following tenor
was entered into by and between the plaintiff, as party of the first part, and J.
Parsons (to whose rights and obligations the present defendant later subrogated
itself), as party of the second part:
CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND
J. PARSONS, BOTH MERCHANTS ESTABLISHED IN MANILA, FOR
THE EXCLUSIVE SALE OF "QUIROGA" BEDS IN THE VISAYAN
ISLANDS.
ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his beds in
the Visayan Islands to J. Parsons under the following conditions:
(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for the
latter's establishment in Iloilo, and shall invoice them at the same price he has
fixed for sales, in Manila, and, in the invoices, shall make and allowance of a
discount of 25 per cent of the invoiced prices, as commission on the sale; and
Mr. Parsons shall order the beds by the dozen, whether of the same or of
different styles.
(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds received, within
a period of sixty days from the date of their shipment.
(C) The expenses for transportation and shipment shall be borne by M. Quiroga,
and the freight, insurance, and cost of unloading from the vessel at the point
where the beds are received, shall be paid by Mr. Parsons.
(D) If, before an invoice falls due, Mr. Quiroga should request its payment, said
payment when made shall be considered as a prompt payment, and as such a
deduction of 2 per cent shall be made from the amount of the invoice.
The same discount shall be made on the amount of any invoice which Mr.
Parsons may deem convenient to pay in cash.
(E) Mr. Quiroga binds himself to give notice at least fifteen days before hand
of any alteration in price which he may plan to make in respect to his beds, and
agrees that if on the date when such alteration takes effect he should have any
order pending to be served to Mr. Parsons, such order shall enjoy the advantage
of the alteration if the price thereby be lowered, but shall not be affected by said
alteration if the price thereby be increased, for, in this latter case, Mr. Quiroga
assumed the obligation to invoice the beds at the price at which the order was
given.
(F) Mr. Parsons binds himself not to sell any other kind except the "Quiroga"
beds.
ART. 2. In compensation for the expenses of advertisement which, for the
benefit of both contracting parties, Mr. Parsons may find himself obliged to
make, Mr. Quiroga assumes the obligation to offer and give the preference to
Mr. Parsons in case anyone should apply for the exclusive agency for any island
not comprised with the Visayan group.
ART. 3. Mr. Parsons may sell, or establish branches of his agency for the sale
of "Quiroga" beds in all the towns of the Archipelago where there are no
exclusive agents, and shall immediately report such action to Mr. Quiroga for
his approval.
ART. 4. This contract is made for an unlimited period, and may be terminated
by either of the contracting parties on a previous notice of ninety days to the
other party.
Of the three causes of action alleged by the plaintiff in his complaint, only two
of them constitute the subject matter of this appeal and both substantially
amount to the averment that the defendant violated the following obligations:
not to sell the beds at higher prices than those of the invoices; to have an open
establishment in Iloilo; itself to conduct the agency; to keep the beds on public
exhibition, and to pay for the advertisement expenses for the same; and to order
the beds by the dozen and in no other manner. As may be seen, with the
exception of the obligation on the part of the defendant to order the beds by the
dozen and in no other manner, none of the obligations imputed to the defendant
in the two causes of action are expressly set forth in the contract. But the
plaintiff alleged that the defendant was his agent for the sale of his beds in Iloilo,
and that said obligations are implied in a contract of commercial agency. The
whole question, therefore, reduced itself to a determination as to whether the
defendant, by reason of the contract hereinbefore transcribed, was a purchaser
or an agent of the plaintiff for the sale of his beds.
In order to classify a contract, due regard must be given to its essential clauses.
In the contract in question, what was essential, as constituting its cause and
subject matter, is that the plaintiff was to furnish the defendant with the beds
which the latter might order, at the price stipulated, and that the defendant was
to pay the price in the manner stipulated. The price agreed upon was the one
determined by the plaintiff for the sale of these beds in Manila, with a discount
of from 20 to 25 per cent, according to their class. Payment was to be made at
the end of sixty days, or before, at the plaintiff's request, or in cash, if the
defendant so preferred, and in these last two cases an additional discount was
to be allowed for prompt payment. These are precisely the essential features of
a contract of purchase and sale. There was the obligation on the part of the
plaintiff to supply the beds, and, on the part of the defendant, to pay their price.
These features exclude the legal conception of an agency or order to sell
whereby the mandatory or agent received the thing to sell it, and does not pay
its price, but delivers to the principal the price he obtains from the sale of the
thing to a third person, and if he does not succeed in selling it, he returns it. By
virtue of the contract between the plaintiff and the defendant, the latter, on
receiving the beds, was necessarily obliged to pay their price within the term
fixed, without any other consideration and regardless as to whether he had or
had not sold the beds.
It would be enough to hold, as we do, that the contract by and between the
defendant and the plaintiff is one of purchase and sale, in order to show that it
was not one made on the basis of a commission on sales, as the plaintiff claims
it was, for these contracts are incompatible with each other. But, besides,
examining the clauses of this contract, none of them is found that substantially
supports the plaintiff's contention. Not a single one of these clauses necessarily
conveys the idea of an agency. The words commission on sales used in clause
(A) of article 1 mean nothing else, as stated in the contract itself, than a mere
discount on the invoice price. The word agency, also used in articles 2 and 3,
only expresses that the defendant was the only one that could sell the plaintiff's
beds in the Visayan Islands. With regard to the remaining clauses, the least that
can be said is that they are not incompatible with the contract of purchase and
sale.
The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-
president of the defendant corporation and who established and managed the
latter's business in Iloilo. It appears that this witness, prior to the time of his
testimony, had serious trouble with the defendant, had maintained a civil suit
against it, and had even accused one of its partners, Guillermo Parsons, of
falsification. He testified that it was he who drafted the contract Exhibit A, and,
when questioned as to what was his purpose in contracting with the plaintiff,
replied that it was to be an agent for his beds and to collect a commission on
sales. However, according to the defendant's evidence, it was Mariano Lopez
Santos, a director of the corporation, who prepared Exhibit A. But, even
supposing that Ernesto Vidal has stated the truth, his statement as to what was
his idea in contracting with the plaintiff is of no importance, inasmuch as the
agreements contained in Exhibit A which he claims to have drafted, constitute,
as we have said, a contract of purchase and sale, and not one of commercial
agency. This only means that Ernesto Vidal was mistaken in his classification
of the contract. But it must be understood that a contract is what the law defines
it to be, and not what it is called by the contracting parties.
The plaintiff also endeavored to prove that the defendant had returned beds that
it could not sell; that, without previous notice, it forwarded to the defendant the
beds that it wanted; and that the defendant received its commission for the beds
sold by the plaintiff directly to persons in Iloilo. But all this, at the most only
shows that, on the part of both of them, there was mutual tolerance in the
performance of the contract in disregard of its terms; and it gives no right to
have the contract considered, not as the parties stipulated it, but as they
32
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.

33
G.R. No. L-47538 June 20, 1941
GONZALO PUYAT & SONS, INC., petitioner,
vs.
ARCO AMUSEMENT COMPANY (formerly known as Teatro
Arco), respondent.
Feria & Lao for petitioner.
J. W. Ferrier and Daniel Me. Gomez for respondent.
LAUREL, J.:
This is a petition for the issuance of a writ of certiorari to the Court of Appeals
for the purpose of reviewing its Amusement Company (formerly known as
Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat and Sons. Inc., defendant-
appellee."
It appears that the respondent herein brought an action against the herein
petitioner in the Court of First Instance of Manila to secure a reimbursement of
certain amounts allegedly overpaid by it on account of the purchase price of
sound reproducing equipment and machinery ordered by the petitioner from the
Starr Piano Company of Richmond, Indiana, U.S.A. The facts of the case as
found by the trial court and confirmed by the appellate court, which are
admitted by the respondent, are as follows:
In the year 1929, the "Teatro Arco", a corporation duly organized under the
laws of the Philippine Islands, with its office in Manila, was engaged in the
business of operating cinematographs. In 1930, its name was changed to Arco
Amusement Company. C. S. Salmon was the president, while A. B. Coulette
was the business manager. About the same time, Gonzalo Puyat & Sons, Inc.,
another corporation doing business in the Philippine Islands, with office in
Manila, in addition to its other business, was acting as exclusive agents in the
Philippines for the Starr Piano Company of Richmond, Indiana, U.S. A. It
would seem that this last company dealt in cinematographer equipment and
machinery, and the Arco Amusement Company desiring to equipt its
cinematograph with sound reproducing devices, approached Gonzalo Puyat &
Sons, Inc., thru its then president and acting manager, Gil Puyat, and an
employee named Santos. After some negotiations, it was agreed between the
parties, that is to say, Salmon and Coulette on one side, representing the
plaintiff, and Gil Puyat on the other, representing the defendant, that the latter
would, on behalf of the plaintiff, order sound reproducing equipment from the
Starr Piano Company and that the plaintiff would pay the defendant, in addition
to the price of the equipment, a 10 per cent commission, plus all expenses, such
as, freight, insurance, banking charges, cables, etc. At the expense of the
plaintiff, the defendant sent a cable, Exhibit "3", to the Starr Piano Company,
inquiring about the equipment desired and making the said company to quote
its price without discount. A reply was received by Gonzalo Puyat & Sons, Inc.,
with the price, evidently the list price of $1,700 f.o.b. factory Richmond,
Indiana. The defendant did not show the plaintiff the cable of inquiry nor the
reply but merely informed the plaintiff of the price of $1,700. Being agreeable
to this price, the plaintiff, by means of Exhibit "1", which is a letter signed by
C. S. Salmon dated November 19, 1929, formally authorized the order. The
equipment arrived about the end of the year 1929, and upon delivery of the same
to the plaintiff and the presentation of necessary papers, the price of $1.700,
plus the 10 per cent commission agreed upon and plus all the expenses and
charges, was duly paid by the plaintiff to the defendant.
Sometime the following year, and after some negotiations between the same
parties, plaintiff and defendants, another order for sound reproducing
equipment was placed by the plaintiff with the defendant, on the same terms as
the first order. This agreement or order was confirmed by the plaintiff by its
letter Exhibit "2", without date, that is to say, that the plaintiff would pay for
the equipment the amount of $1,600, which was supposed to be the price quoted
by the Starr Piano Company, plus 10 per cent commission, plus all expenses
incurred. The equipment under the second order arrived in due time, and the
defendant was duly paid the price of $1,600 with its 10 per cent commission,
and $160, for all expenses and charges. This amount of $160 does not represent
actual out-of-pocket expenses paid by the defendant, but a mere flat charge and
rough estimate made by the defendant equivalent to 10 per cent of the price of
$1,600 of the equipment.
About three years later, in connection with a civil case in Vigan, filed by one
Fidel Reyes against the defendant herein Gonzalo Puyat & Sons, Inc., the
officials of the Arco Amusement Company discovered that the price quoted to
them by the defendant with regard to their two orders mentioned was not the
net price but rather the list price, and that the defendants had obtained a discount
from the Starr Piano Company. Moreover, by reading reviews and literature on
prices of machinery and cinematograph equipment, said officials of the plaintiff
were convinced that the prices charged them by the defendant were much too
high including the charges for out-of-pocket expense. For these reasons, they
sought to obtain a reduction from the defendant or rather a reimbursement, and
failing in this they brought the present action.
The trial court held that the contract between the petitioner and the respondent
was one of outright purchase and sale, and absolved that petitioner from the
complaint. The appellate court, however, by a division of four, with one
justice dissenting held that the relation between petitioner and respondent
was that of agent and principal, the petitioner acting as agent of the respondent
in the purchase of the equipment in question, and sentenced the petitioner to
pay the respondent alleged overpayments in the total sum of $1,335.52 or
P2,671.04, together with legal interest thereon from the date of the filing of the
complaint until said amount is fully paid, as well as to pay the costs of the suit
in both instances. The appellate court further argued that even if the contract
between the petitioner and the respondent was one of purchase and sale, the
petitioner was guilty of fraud in concealing the true price and hence would still
be liable to reimburse the respondent for the overpayments made by the latter.
The petitioner now claims that the following errors have been incurred by the
appellate court:
I. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, segun
hechos, entre la recurrente y la recurrida existia una relacion implicita de
mandataria a mandante en la transaccion de que se trata, en vez de la de
vendedora a compradora como ha declarado el Juzgado de Primera Instncia de
Manila, presidido entonces por el hoy Magistrado Honorable Marcelino
Montemayor.
II. El Tribunal de Apelaciones incurrio en error de derecho al declarar que,
suponiendo que dicha relacion fuerra de vendedora a compradora, la recurrente
obtuvo, mediante dolo, el consentimiento de la recurrida en cuanto al precio de
$1,700 y $1,600 de las maquinarias y equipos en cuestion, y condenar a la
recurrente ha obtenido de la Starr Piano Company of Richmond, Indiana.
We sustain the theory of the trial court that the contract between the petitioner
and the respondent was one of purchase and sale, and not one of agency, for the
reasons now to be stated.
In the first place, the contract is the law between the parties and should include
all the things they are supposed to have been agreed upon. What does not appear
on the face of the contract should be regarded merely as "dealer's" or "trader's
talk", which can not bind either party. (Nolbrook v. Conner, 56 So., 576, 11
Am. Rep., 212; Bank v. Brosscell, 120 III., 161; Bank v. Palmer, 47 III., 92;
Hosser v. Copper, 8 Allen, 334; Doles v. Merrill, 173 Mass., 411.) The letters,
Exhibits 1 and 2, by which the respondent accepted the prices of $1,700 and
$1,600, respectively, for the sound reproducing equipment subject of its
contract with the petitioner, are clear in their terms and admit no other
interpretation that the respondent in question at the prices indicated which are
fixed and determinate. The respondent admitted in its complaint filed with the
Court of First Instance of Manila that the petitioner agreed to 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
34
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.

35
G.R. No. L-20871 April 30, 1971
KER & CO., LTD., petitioner,
vs.
JOSE B. LINGAD, as Acting Commissioner of Internal
Revenue, respondent.
Ross, Selph and Carrascoso for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong
and Special Atty. Balbino Gatdula, Jr. for 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 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
36
fide employees, who, for compensation or profit, sell or bring about sales or that forms the staple of their specialized competence. While it is to be admitted
purchases of merchandise for other persons or bring proposed buyers and sellers that counsel for petitioner did scrutinize with care the decision under review
together, or negotiate freights or other business for owners of vessels or other with a view to exposing what was considered its flaws, it cannot be said that
means of transportation, or for the shippers, or consignors or consignees of there was such a failure to apply what the law commands as to call for its
freight carried by vessels or other means of transportation. The term includes reversal. Instead, what cannot be denied is that the Court of Tax Appeals
commission merchants." 16 The controlling decision as to the test to be followed reached a result to which the Court in the recent Constantino decision gave the
as to who falls within the above definition of a commercial broker is that imprimatur of its approval.
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 WHEREFORE, the Court of Tax Appeals decision of October 19, 1962 is
ownership of the goods, even as it delivered possession unto the dealer for affirmed. With costs against petitioner.
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
37
G.R. No. 75198 October 18, 1988
SCHMID & OBERLY, INC., petitioner,
vs.
RJL MARTINEZ FISHING CORPORATION, respondent.
Sycip Salazar Hernandez & Gatmaitan Law Office for petitioner.
Siguion Reyna, Montecillo & Ongsiako Law Office for respondent.
CORTES, J.:
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
Corporation (hereafter to be referred to simply as "RJL MARTINEZ") to D.
Nagata Co., Ltd. of Japan (hereafter to be referred to simply as NAGATA CO.")
for twelve (12) defective "Nagata"-brand generators, plus consequential
damages, and attorneys fees.
The facts as found by the Court of Appeals, are as follows:
The findings of facts by the trial court (Decision, pp. 21-28, Record on Appeal)
shows: that the 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 the manufacturer,
the D. Nagata Co. Ltd., of Japan, that the defendant Schmid & Oberly Inc.
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. Nagata Co., Ltd., shipped to the plaintiff 12
electric generators, and the latter paid the amount of the purchase price; that the
12 generators were found to be factory defective; that the plaintiff informed the
defendant herein that it shall return the 12 generators as in fact three of the 12
were actually returned to the defendant; that the plaintiff sued the defendant on
the warranty; asking for rescission of the contract; that the defendant be ordered
to accept the generators and be ordered to pay back the purchase money; and
that the plaintiff asked for damages. (Record on Appeal, pp. 27-28) [CA
Decision, pp. 34; Rollo, pp. 47-48.]
On the basis thereof, the Court of Appeals affirmed the decision of the trial
court ordering petitioner to refund to private respondent the purchase price for
the twelve (12) generators and to accept delivery of the same and to pay s and
attorney's fees, with a slight modification as to the amount to be refunded. In its
resolution of the motion for reconsideration, the Court of Appeals further
modified the trial courts decision as to the award of consequential damages.
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.
Thus, after a careful scrutiny of the records, the Court has found the appellate
court's narration of facts incomplete. It failed to include certain material facts.
The facts are actually as follows:
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.
The first transaction was the sale of three (3) generators. In this transaction, it
is not disputed that SCHMID was the vendor of the generators. The company
supplied the generators from its stockroom; it was also SCHMID which
invoiced the sale.
The second transaction, which gave rise to the present controversy, involves
twelve (12) "Nagata"-brand generators. 'These are the facts surrounding this
particular transaction:
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:
"NAGATA" Single phase AC Alternators, 110/220 V, 60 cycles, 1800 rpm,
unity power factor, rectifier type and radio suppressor,, 5KVA (5KW) $546.75
@
It was stipulated that payment would be made by confirming an irrevocable
letter of credit in favor of NAGATA CO. Furthermore, among the General
Conditions of Sale appearing on the dorsal side of the Quotation is the
following:
Buyer will, upon request, promptly open irrevocable Letter of Credit in favor
of seller, in the amount stated on the face of this memorandum, specifying
shipment from any Foreign port to Manila or any safe Philippine port,
permitting partial shipments and providing that in the event the shippers are
unable to ship within the specified period due to strikes, lack of shipping space
or other circumstances beyond their reasonable control, Buyer agrees to extend
the said Letter of Credit for later shipment. The Letter of Credit shall otherwise
be subject to the conditions stated in this memorandum of contract. [Emphasis
supplied.]
Agreeing with the terms of the Quotation, RJL MARTINEZ opened a letter of
credit in favor of NAGATA CO. Accordingly, on November 20,1975,
SCHMID transmitted to NAGATA CO. an order [Exhibit "4"] for the twelve
(12) generators to be shipped directly to RJL MARTINEZ. NAGATA CO.
thereafter sent RJL MARTINEZ the bill of lading and its own invoice (Exhibit
"B") and, in accordance with the order, shipped the generators directly to RJL
MARTINEZ. The invoice states that "one (1) case of 'NAGATA' AC
Generators" consisting of twelve sets wasbought by order and for account
risk of Messrs. RJL Martinez Fishing Corporation.
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.
SCHMID replaced the three (3) generators subject of the first sale with
generators of a different brand.
As for the twelve (12) generators subject of the second transaction, the Japanese
technicians advised RJL 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 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".]
38
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:
... A foreign firm which does business through the middlemen acting in their
own names, such as indentors, 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 necessarily lead to the conclusion that NAGATA
CO., and not SCHMID, was the real seller in the case of the twelve (12)
generators in that:
(i) the signing of the quotation, which was under SCHMID's letter-head,
perfected the contract of sale (impliedly, as between the signatories thereto
i.e., RJL MARTINEZ and SCHMID);
(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 to waive direct payment, stipulating
delivery of payment instead to NAGATA CO. as supplier);
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 facts:
When RJL MARTINEZ complained to SCHMID that the generators were
defective, SCHMID immediately asked RJL MARTINEZ to send the defective
generators to its shop to determine what was wrong. SCHMID likewise
informed NAGATA CO. about the complaint of RJL MARTINEZ. When the
Japanese technicians arrived, SCHMID made available its technicians, its shop
39
and its testing equipment. After the generators were found to have factory
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.]
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.]
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 violation of the
old Corporation Law which provided:
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 nor more than one thousand
pesos or both such imprisonment and fine, in the discretion of the Court.
The facts do not bear out these contentions.
The first contention disregards the circumstances surrounding the second
transaction as distinguished from those surrounding the first transaction, as
noted above.
Neither does the solicitous manner by which SCHMID responded to RJL
MARTINEZ's complaint prove that the former was the seller of the generators.
As aptly stated by counsel, no indentor will just fold its hands when a client
complains about the goods it has bought upon the indentor's mediation. In its
desire to promote the product of the 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.
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 that
the latter could repair the defective generators.
The proposal of NAGATA CO. rejected by SCHMID that the latter undertake
the repair of the nine (9) other defective generators, with the former supplying
the replacement parts free of charge and subsequently reimbursing the latter for
labor costs [Exhibit "I"], cannot support the conclusion that SCHMID is vendor
of the generators of the second transaction or was acting "within the purview of
a seller."
Finally, the afore-quoted penal provision in the Corporation Law finds no
application to SCHMID and its officers and employees relative to the
transactions in the instant case. What the law seeks to prevent, through said
provision, is 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 was copied from the Rules
implementing Republic Act No. 5455, recognizes the distinct role of an
indentor, such that when a foreign corporation does business through such
indentor, the foreign corporation is not deemed doing business in the
Philippines.
In view of the above considerations, this Court rules that SCHMID was merely
acting as an indentor in the purchase 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.]
2. However, even as SCHMID was merely an indentor, there was nothing to
prevent it from voluntarily warranting that twelve (12) generators subject of the
second transaction are free from any hidden defects. In other words, SCHMID
may be held answerable for some other contractual obligation, if indeed it had
so bound itself. As stated above, an indentor is to some extent an agent of both
the vendor and the vendee. As such agent, therefore, he may expressly obligate
himself to undertake the obligations of his principal (See Art. 1897, Civil Code.)
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.
Again, we consider the facts.
The Quotation (Exhibit A is in writing. It is the repository of the contract
between RJL MARTINEZ and SCHMID. 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.]
The trial court, however, relied on the testimony of Patrocinio Balagtas, the
head of the Electrical Department of RJL MARTINEZ, to support the finding
that SCHMID did warrant the twelve (12) generators against defects.
Upon careful examination of Balagtas' testimony, what is at once apparent is
that Balagtas failed to disclose the 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, unless the
nature or terms and conditions of the warranty are known, it would not be
possible to determine whether there has been a breach thereof.
Moreover, a closer examination of the statements allegedly made by the
representative of SCHMID reveals that they merely constituted an expression
of opinion which cannot by any means be construed as a warranty [See Art.
1546, Civil Code.]
We quote from Balagtas' testimony:
Atty. CATRAL:
Q Did you not say at the start of your cross examination, Mr. Balagtas, that the
only participation you had in the acquisition of those twelve (12) units [of]
generators was your having issued a purchase order to your own company for
the purchase of the units?
ATTY. AQUINO:
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
40
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.

41
G.R. No. 117356 June 19, 2000
VICTORIAS MILLING CO., INC., petitioner,
vs.
COURT OF APPEALS and CONSOLIDATED SUGAR
CORPORATION, respondents.
DECISION
QUISUMBING, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of
Court assailing the decision of the Court of Appeals dated February 24, 1994,
in CA-G.R. CV No. 31717, as well as the respondent court's resolution of
September 30, 1994 modifying said decision. Both decision and resolution
amended the judgment dated February 13, 1991, of the Regional Trial Court of
Makati City, Branch 147, in Civil Case No. 90-118.
The facts of this case as found by both the trial and appellate courts are as
follows:
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 purchases. Among these was SLDR No. 1214M, which gave rise to the
instant case. Dated October 16, 1989, SLDR No. 1214M covers 25,000 bags of
sugar. Each bag contained 50 kilograms and priced at P638.00 per bag as "per
sales order VMC Marketing No. 042 dated October 16, 1989."1 The transaction
it covered was a "direct sale."2The SLDR also contains an additional note which
reads: "subject for (sic) availability of a (sic) stock at NAWACO (warehouse)."3
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 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-Refined Sugar (SDR) No. 1214
dated October 16, 1989 in the total quantity of 25,000 bags."4
On October 27, 1989, STM issued 16 checks in the total amount of
P31,900,000.00 with petitioner as payee. The latter, in turn, issued Official
Receipt No. 33743 dated October 27, 1989 acknowledging receipt of the said
checks in payment of 50,000 bags. Aside from SLDR No. 1214M, said checks
also covered SLDR No. 1213.
Private respondent CSC surrendered SLDR No. 1214M to the petitioner's
NAWACO warehouse and was allowed to withdraw sugar. However, after
2,000 bags had been released, petitioner refused to allow further withdrawals
of sugar against SLDR No. 1214M. CSC then sent petitioner a letter dated
January 23, 1990 informing it that SLDR No. 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.
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 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.
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, P3,000,000.00 as exemplary damages,
P2,200,000.00 as attorney's fees and litigation expenses.
Petitioner's primary defense a quo was that it was an unpaid seller for the
23,000 bags.8 Since STM had already drawn in full all the sugar corresponding
to the amount of its cleared checks, it could no longer authorize further delivery
of sugar to CSC. Petitioner also contended that it had no privity of contract with
CSC.
Petitioner explained that the SLDRs, which it had issued, were not documents
of title, but mere delivery receipts 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.
Petitioner also alleged that CSC did not pay for the SLDR and was actually
STM's co-conspirator to defraud it through a misrepresentation that CSC was
an innocent purchaser for value and in good faith. Petitioner then prayed that
CSC be ordered to pay it the following sums: P10,000,000.00 as moral
damages; P10,000,000.00 as exemplary damages; and P1,500,000.00 as
attorney's fees. Petitioner also prayed that cross-defendant STM be ordered to
pay it P10,000,000.00 in exemplary damages, and P1,500,000.00 as attorney's
fees.
Since no settlement was reached at pre-trial, the trial court heard the case on the
merits.
As earlier stated, the trial court rendered its judgment favoring private
respondent CSC, as follows:
"WHEREFORE, in view of the foregoing, the Court hereby renders judgment
in favor of the plaintiff and against defendant Victorias Milling Company:
"1) Ordering defendant Victorias Milling Company to deliver to the plaintiff
23,000 bags of refined sugar due under SLDR No. 1214;
"2) Ordering defendant Victorias Milling Company to pay the amount of
P920,000.00 as unrealized profits, the amount of P800,000.00 as exemplary
damages and the amount of P1,357,000.00, which is 10% of the acquisition
value of the undelivered bags of refined sugar in the amount of P13,570,000.00,
as attorney's fees, plus the costs.
"SO ORDERED."9
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.'
42
"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.
"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:
43
(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. 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.30 And 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.
44