G.R. No.
L-11827 July 31, 1961 interests on all the roads, improvements, and facilities in or outside said
FERNANDO A. GAITE, plaintiff-appellee,
vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES &
SMELTING CO., INC., SEGUNDINA VIVAS, FRNACISCO DANTE,
PACIFICO ESCANDOR and FERNANDO TY, defendants-appellants.
Alejo Mabanag for plaintiff-appellee.
Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-
appellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the Court of First Instance because the
claims involved aggregate more than P200,000.00.
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by
himself or in a representative capacity, of 11 iron lode mineral claims, known
as the Dawahan Group, situated in the municipality of Jose Panganiban,
province of Camarines Norte.
By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier
constituted and appointed plaintiff-appellee Fernando A. Gaite as his true
and lawful attorney-in-fact to enter into a contract with any individual or
juridical person for the exploration and development of the mining claims
aforementioned on a royalty basis of not less than P0.50 per ton of ore that
might be extracted therefrom. On March 19, 1954, Gaite in turn executed a
general assignment (Record on Appeal, pp. 17-19) conveying the
development and exploitation of said mining claims into the Larap Iron Mines,
a single proprietorship owned solely by and belonging to him, on the same
royalty basis provided for in Exhibit "3". Thereafter, Gaite embarked upon the
development and exploitation of the mining claims in question, opening and
paving roads within and outside their boundaries, making other
improvements and installing facilities therein for use in the development of
the mines, and in time extracted therefrom what he claim and estimated to be
approximately 24,000 metric tons of iron ore.
For some reason or another, Isabelo Fonacier decided to revoke the
authority granted by him to Gaite to exploit and develop the mining claims in
question, and Gaite assented thereto subject to certain conditions. As a
result, a document entitled "Revocation of Power of Attorney and Contract"
was executed on December 8, 1954 (Exhibit "A"),wherein Gaite transferred
to Fonacier, for the consideration of P20,000.00, plus 10% of the royalties
that Fonacier would receive from the mining claims, all his rights and
claims, the right to use the business name "Larap Iron Mines" and its
goodwill, and all the records and documents relative to the mines. In the
same document, Gaite transferred to Fonacier all his rights and interests
over the "24,000 tons of iron ore, more or less" that the former had already
extracted from the mineral claims, in consideration of the sum of P75,000.00,
P10,000.00 of which was paid upon the signing of the agreement, and
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)
will be paid from and out of the first letter of credit covering the first
shipment of iron ores and of the first amount derived from the local
sale of iron ore made by the Larap Mines & Smelting Co. Inc., its
assigns, administrators, or successors in interests.
To secure the payment of the said balance of P65,000.00, Fonacier
promised to execute in favor of Gaite a surety bond, and pursuant to the
promise, Fonacier delivered to Gaite a surety bond dated December 8, 1954
with himself (Fonacier) as principal and the Larap Mines and Smelting Co.
and its stockholders George Krakower, Segundina Vivas, Pacifico Escandor,
Francisco Dante, and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified,
however, that when this bond was presented to him by Fonacier together
with the "Revocation of Power of Attorney and Contract", Exhibit "A", on
December 8, 1954, he refused to sign said Exhibit "A" unless another bond
under written by a bonding company was put up by defendants to secure the
payment of the P65,000.00 balance of their price of the iron ore in the
stockpiles in the mining claims. Hence, a second bond, also dated December
8, 1954 (Exhibit "B"),was executed by the same parties to the first bond
Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as additional
surety, but it provided that the liability of the surety company would attach
only when there had been an actual sale of iron ore by the Larap Mines &
Smelting Co. for an amount of not less then P65,000.00, and that,
furthermore, the liability of said surety company would automatically expire
on December 8, 1955. Both bonds were attached to the "Revocation of
Power of Attorney and Contract", Exhibit "A", and made integral parts
thereof.
On the same day that Fonacier revoked the power of attorney he gave to
Gaite and the two executed and signed the "Revocation of Power of Attorney
and Contract", Exhibit "A", Fonacier entered into a "Contract of Mining
Operation", ceding, transferring, and conveying unto the Larap Mines and
Smelting Co., Inc. the right to develop, exploit, and explore the mining claims
in question, together with the improvements therein and the use of the name
"Larap Iron Mines" and its good will, in consideration of certain royalties.
Fonacier likewise transferred, in the same document, the complete title to the
approximately 24,000 tons of iron ore which he acquired from Gaite, to the
Larap & Smelting Co., in consideration for the signing by the company and its
stockholders of the surety bonds delivered by Fonacier to Gaite (Record on
Appeal, pp. 82-94).
Up to December 8, 1955, when the bond Exhibit "B" expired with respect to
the Far Eastern Surety and Insurance Company, no sale of the
approximately 24,000 tons of iron ore had been made by the Larap Mines &
Smelting Co., Inc., nor had the P65,000.00 balance of the price of said ore
been paid to Gaite by Fonacier and his sureties payment of said amount, on
the theory that they had lost right to make use of the period given them when
their bond, Exhibit "B" automatically expired (Exhibits "C" to "C-24"). And
when Fonacier and his sureties failed to pay as demanded by Gaite, the
latter filed the present complaint against them in the Court of First Instance of
Manila (Civil Case No. 29310) for the payment of the P65,000.00 balance of
the price of the ore, consequential damages, and attorney's fees.
All the defendants except Francisco Dante set up the uniform defense that
the obligation sued upon by Gaite was subject to a condition that the amount
of P65,000.00 would be payable out of the first letter of credit covering the
first shipment of iron ore and/or the first amount derived from the local sale of
the iron ore by the Larap Mines & Smelting Co., Inc.; that up to the time of
the filing of the complaint, no sale of the iron ore had been made, hence the
condition had not yet been fulfilled; and that consequently, the obligation was
not yet due and demandable. Defendant Fonacier also contended that only
7,573 tons of the estimated 24,000 tons of iron ore sold to him by Gaite was
actually delivered, and counterclaimed for more than P200,000.00 damages.
At the trial of the case, the parties agreed to limit the presentation of
evidence to two issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite
P65,000.00 become due and demandable when the defendants failed to
renew the surety bond underwritten by the Far Eastern Surety and Insurance
Co., Inc. (Exhibit "B"), which expired on December 8, 1955; and
(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to
defendant Fonacier were actually in existence in the mining claims when
these parties executed the "Revocation of Power of Attorney and Contract",
Exhibit "A."
On the first question, the lower court held that the obligation of the
defendants to pay plaintiff the P65,000.00 balance of the price of the
approximately 24,000 tons of iron ore was one with a term: i.e., that it would
be paid upon the sale of sufficient iron ore by defendants, such sale to be
effected within one year or before December 8, 1955; that the giving of
security was a condition precedent to Gait's giving of credit to defendants;
and that as the latter failed to put up a good and sufficient security in lieu of
the Far Eastern Surety bond (Exhibit "B") which expired on December 8,
1955, the obligation became due and demandable under Article 1198 of the
New Civil Code.
As to the second question, the lower court found that plaintiff Gaite did have
approximately 24,000 tons of iron ore at the mining claims in question at the
time of the execution of the contract Exhibit "A."
Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering
defendants to pay him, jointly and severally, P65,000.00 with interest at 6%
per annum from December 9, 1955 until payment, plus costs. From this
judgment, defendants jointly appealed to this Court.
During the pendency of this appeal, several incidental motions were
presented for resolution: a motion to declare the appellants Larap Mines &
Smelting Co., Inc. and George Krakower in contempt, filed by appellant
Fonacier, and two motions to dismiss the appeal as having become
academic and a motion for new trial and/or to take judicial notice of certain
documents, filed by appellee Gaite. The motion for contempt is unmeritorious
because the main allegation therein that the appellants Larap Mines &
Smelting Co., Inc. and Krakower had sold the iron ore here in question,
which allegedly is "property in litigation", has not been substantiated; and
even if true, does not make these appellants guilty of contempt, because
what is under litigation in this appeal is appellee Gaite's right to the payment
of the balance of the price of the ore, and not the iron ore itself. As for the
several motions presented by appellee Gaite, it is unnecessary to resolve
these motions in view of the results that we have reached in this case, which
we shall hereafter discuss.
The main issues presented by appellants in this appeal are:
(1) that the lower court erred in holding that the obligation of appellant
Fonacier to pay appellee Gaite the P65,000.00 (balance of the price of the
iron ore in question)is one with a period or term and not one with a
suspensive condition, and that the term expired on December 8, 1955; and
(2) that the lower court erred in not holding that there were only 10,954.5
tons in the stockpiles of iron ore sold by appellee Gaite to appellant Fonacier.
The first issue involves an interpretation of the following provision in the
contract Exhibit "A":
7. That Fernando Gaite or Larap Iron Mines hereby transfers to
Isabelo F. Fonacier all his rights and interests over the 24,000 tons
 of iron ore, more or less, above-referred to together with all his rights
and interests to operate the mine in consideration of the sum of
SEVENTY-FIVE THOUSAND PESOS (P75,000.00) which the latter
binds to pay as follows:
a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the
signing of this agreement.
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will
be paid from and out of the first letter of credit covering the first
shipment of iron ore made by the Larap Mines & Smelting Co., Inc.,
its assigns, administrators, or successors in interest.
We find the court below to be legally correct in holding that the shipment or
local sale of the iron ore is not a condition precedent (or suspensive) to the
payment of the balance of P65,000.00, but was only a suspensive period or
term. What characterizes a conditional obligation is the fact that its efficacy or
obligatory force (as distinguished from its demandability) is subordinated to
the happening of a future and uncertain event; so that if the suspensive
condition does not take place, the parties would stand as if the conditional
obligation had never existed. That the parties to the contract Exhibit "A" did
not intend any such state of things to prevail is supported by several
circumstances:
1) The words of the contract express no contingency in the buyer's obligation
to pay: "The balance of Sixty-Five Thousand Pesos (P65,000.00) will be paid
out of the first letter of credit covering the first shipment of iron ores . . ." etc.
There is no uncertainty that the payment will have to be made sooner or
later; what is undetermined is merely the exact date at which it will be made.
By the very terms of the contract, therefore, the existence of the obligation to
pay is recognized; only its maturity or demandability is deferred.
2) A contract of sale is normally commutative and onerous: not only does
each one of the parties assume a correlative obligation (the seller to deliver
and transfer ownership of the thing sold and the buyer to pay the price),but
each party anticipates performance by the other from the very start. While in
a sale the obligation of one party can be lawfully subordinated to an
uncertain event, so that the other understands that he assumes the risk of
receiving nothing for what he gives (as in the case of a sale of hopes or
expectations, emptio spei), it is not in the usual course of business to do so;
hence, the contingent character of the obligation must clearly appear.
Nothing is found in the record to evidence that Gaite desired or assumed to
run the risk of losing his right over the ore without getting paid for it, or that
Fonacier understood that Gaite assumed any such risk. This is proved by the
fact that Gaite insisted on a bond a to guarantee payment of the P65,000.00,
an not only upon a bond by Fonacier, the Larap Mines & Smelting Co., and
the company's stockholders, but also on one by a surety company; and the
fact that appellants did put up such bonds indicates that they admitted the
definite existence of their obligation to pay the balance of P65,000.00.
3) To subordinate the obligation to pay the remaining P65,000.00 to the sale
or shipment of the ore as a condition precedent, would be tantamount to
leaving the payment at the discretion of the debtor, for the sale or shipment
could not be made unless the appellants took steps to sell the ore.
Appellants would thus be able to postpone payment indefinitely. The
desireability of avoiding such a construction of the contract Exhibit "A" needs
no stressing.
4) Assuming that there could be doubt whether by the wording of the contract
the parties indented a suspensive condition or a suspensive period (dies ad
quem) for the payment of the P65,000.00, the rules of interpretation would
incline the scales in favor of "the greater reciprocity of interests", since sale is
essentially onerous. The Civil Code of the Philippines, Article 1378,
paragraph 1, in fine, provides:
If the contract is onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests.
and there can be no question that greater reciprocity obtains if the buyer'
obligation is deemed to be actually existing, with only its maturity (due date)
postponed or deferred, that if such obligation were viewed as non-existent or
not binding until the ore was sold.
The only rational view that can be taken is that the sale of the ore to Fonacier
was a sale on credit, and not an aleatory contract where the transferor,
Gaite, would assume the risk of not being paid at all; and that the previous
sale or shipment of the ore was not a suspensive condition for the payment
of the balance of the agreed price, but was intended merely to fix the future
date of the payment.
This issue settled, the next point of inquiry is whether appellants, Fonacier
and his sureties, still have the right to insist that Gaite should wait for the sale
or shipment of the ore before receiving payment; or, in other words, whether
or not they are entitled to take full advantage of the period granted them for
making the payment.
We agree with the court below that the appellant have forfeited the right court
below that the appellants have forfeited the right to compel Gaite to wait for
the sale of the ore before receiving payment of the balance of P65,000.00,
because of their failure to renew the bond of the Far Eastern Surety
Company or else replace it with an equivalent guarantee. The expiration of
the bonding company's undertaking on December 8, 1955 substantially
reduced the security of the vendor's rights as creditor for the unpaid
P65,000.00, a security that Gaite considered essential and upon which he
had insisted when he executed the deed of sale of the ore to Fonacier
(Exhibit "A"). The case squarely comes under paragraphs 2 and 3 of Article
1198 of the Civil Code of the Philippines:
"ART. 1198. The debtor shall lose every right to make use of the
period:
(1) . . .
(2) When he does not furnish to the creditor the guaranties or
securities which he has promised.
(3) When by his own acts he has impaired said guaranties or
securities after their establishment, and when through fortuitous
event they disappear, unless he immediately gives new ones equally
satisfactory.
Appellants' failure to renew or extend the surety company's bond upon its
expiration plainly impaired the securities given to the creditor (appellee
Gaite), unless immediately renewed or replaced.
There is no merit in appellants' argument that Gaite's acceptance of the
surety company's bond with full knowledge that on its face it would
automatically expire within one year was a waiver of its renewal after the
expiration date. No such waiver could have been intended, for Gaite stood to
lose and had nothing to gain barely; and if there was any, it could be
rationally explained only if the appellants had agreed to sell the ore and pay
Gaite before the surety company's bond expired on December 8, 1955. But
in the latter case the defendants-appellants' obligation to pay became
absolute after one year from the transfer of the ore to Fonacier by virtue of
the deed Exhibit "A.".
All the alternatives, therefore, lead to the same result: that Gaite acted within
his rights in demanding payment and instituting this action one year from and
after the contract (Exhibit "A") was executed, either because the appellant
debtors had impaired the securities originally given and thereby forfeited any
further time within which to pay; or because the term of payment was
originally of no more than one year, and the balance of P65,000.00 became
due and payable thereafter.
Coming now to the second issue in this appeal, which is whether there were
really 24,000 tons of iron ore in the stockpiles sold by appellee Gaite to
appellant Fonacier, and whether, if there had been a short-delivery as
claimed by appellants, they are entitled to the payment of damages, we
must, at the outset, stress two things: first, that this is a case of a sale of a
specific mass of fungible goods for a single price or a lump sum, the quantity
of "24,000 tons of iron ore, more or less," stated in the contract Exhibit "A,"
being a mere estimate by the parties of the total tonnage weight of the mass;
and second, that the evidence shows that neither of the parties had actually
measured of weighed the mass, so that they both tried to arrive at the total
quantity by making an estimate of the volume thereof in cubic meters and
then multiplying it by the estimated weight per ton of each cubic meter.
The sale between the parties is a sale of a specific mass or iron ore because
no provision was made in their contract for the measuring or weighing of the
ore sold in order to complete or perfect the sale, nor was the price of
P75,000,00 agreed upon by the parties based upon any such
measurement.(see Art. 1480, second par., New Civil Code). The subject
matter of the sale is, therefore, a determinate object, the mass, and not the
actual number of units or tons contained therein, so that all that was required
of the seller Gaite was to deliver in good faith to his buyer all of the ore found
in the mass, notwithstanding that the quantity delivered is less than the
amount estimated by them (Mobile Machinery & Supply Co., Inc. vs. York
Oilfield Salvage Co., Inc. 171 So. 872, applying art. 2459 of the Louisiana
Civil Code). There is no charge in this case that Gaite did not deliver to
appellants all the ore found in the stockpiles in the mining claims in
questions; Gaite had, therefore, complied with his promise to deliver, and
appellants in turn are bound to pay the lump price.
But assuming that plaintiff Gaite undertook to sell and appellants undertook
to buy, not a definite mass, but approximately 24,000 tons of ore, so that any
substantial difference in this quantity delivered would entitle the buyers to
recover damages for the short-delivery, was there really a short-delivery in
this case?
We think not. As already stated, neither of the parties had actually measured
or weighed the whole mass of ore cubic meter by cubic meter, or ton by ton.
Both parties predicate their respective claims only upon an estimated number
of cubic meters of ore multiplied by the average tonnage factor per cubic
meter.
Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in
the stockpiles of ore that he sold to Fonacier, while appellants contend that
by actual measurement, their witness Cirpriano Manlagit found the total
volume of ore in the stockpiles to be only 6.609 cubic meters. As to the
average weight in tons per cubic meter, the parties are again in
disagreement, with appellants claiming the correct tonnage factor to be 2.18
tons to a cubic meter, while appellee Gaite claims that the correct tonnage
factor is about 3.7.

In the face of the conflict of evidence, we take as the most reliable estimate
of the tonnage factor of iron ore in this case to be that made by Leopoldo F.
Abad, chief of the Mines and Metallurgical Division of the Bureau of Mines, a
government pensionado to the States and a mining engineering graduate of
the Universities of Nevada and California, with almost 22 years of experience
in the Bureau of Mines. This witness placed the tonnage factor of every cubic
meter of iron ore at between 3 metric tons as minimum to 5 metric tons as
maximum. This estimate, in turn, closely corresponds to the average tonnage
factor of 3.3 adopted in his corrected report (Exhibits "FF" and FF-1") by
engineer Nemesio Gamatero, who was sent by the Bureau of Mines to the
mining claims involved at the request of appellant Krakower, precisely to
make an official estimate of the amount of iron ore in Gaite's stockpiles after
the dispute arose.

Even granting, then, that the estimate of 6,609 cubic meters of ore in the
stockpiles made by appellant's witness Cipriano Manlagit is correct, if we
multiply it by the average tonnage factor of 3.3 tons to a cubic meter, the
product is 21,809.7 tons, which is not very far from the estimate of 24,000
tons made by appellee Gaite, considering that actual weighing of each unit of
the mass was practically impossible, so that a reasonable percentage of
error should be allowed anyone making an estimate of the exact quantity in
tons found in the mass. It must not be forgotten that the contract Exhibit "A"
expressly stated the amount to be 24,000 tons, more or less. (ch. Pine River
Logging & Improvement Co. vs U.S., 279, 46 L. Ed. 1164).

There was, consequently, no short-delivery in this case as would entitle

appellants to the payment of damages, nor could Gaite have been guilty of
any fraud in making any misrepresentation to appellants as to the total
quantity of ore in the stockpiles of the mining claims in question, as charged
by appellants, since Gaite's estimate appears to be substantially correct.

WHEREFORE, finding no error in the decision appealed from, we hereby

affirm the same, with costs against appellants.

Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De

Leon and Natividad, JJ., concur.
[G.R. No. 126376. November 20, 2003]
SPOUSES BERNARDO BUENAVENTURA and CONSOLACION
JOAQUIN, SPOUSES JUANITO EDRA and NORA JOAQUIN, SPOUSES
RUFINO VALDOZ and EMMA JOAQUIN, and NATIVIDAD JOAQUIN,
petitioners, vs. COURT OF APPEALS, SPOUSES LEONARDO JOAQUIN
and FELICIANA LANDRITO, SPOUSES FIDEL JOAQUIN and CONCHITA
BERNARDO, SPOUSES TOMAS JOAQUIN and SOLEDAD ALCORAN,
SPOUSES ARTEMIO JOAQUIN and SOCORRO ANGELES, SPOUSES
ALEXANDER MENDOZA and CLARITA JOAQUIN, SPOUSES
TELESFORO CARREON and FELICITAS JOAQUIN, SPOUSES DANILO
VALDOZ and FE JOAQUIN, and SPOUSES GAVINO JOAQUIN and LEA
ASIS, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari1[1] to annul the Decision2[2] dated
26 June 1996 of the Court of Appeals in CA-G.R. CV No. 41996. The Court
of Appeals affirmed the Decision3[3] dated 18 February 1993 rendered by
Branch 65 of the Regional Trial Court of Makati (trial court) in Civil Case No.
89-5174. The trial court dismissed the case after it found that the parties
executed the Deeds of Sale for valid consideration and that the plaintiffs did
not have a cause of action against the defendants.
The Facts
The Court of Appeals summarized the facts of the case as follows:
Defendant spouses Leonardo Joaquin and Feliciana Landrito are the parents
of plaintiffs Consolacion, Nora, Emma and Natividad as well as of defendants
Fidel, Tomas, Artemio, Clarita, Felicitas, Fe, and Gavino, all surnamed
JOAQUIN. The married Joaquin children are joined in this action by their
respective spouses.
Sought to be declared null and void ab initio are certain deeds of sale of real
property executed by defendant parents Leonardo Joaquin and Feliciana
Landrito in favor of their co-defendant children and the corresponding
certificates of title issued in their names, to wit:
1. Deed of Absolute Sale covering Lot 168-C-7 of subdivision plan
(LRC) Psd-256395 executed on 11 July 1978, in favor of defendant Felicitas
Joaquin, for a consideration of P6,000.00 (Exh. C), pursuant to which TCT
No. [36113/T-172] was issued in her name (Exh. C-1);
2. Deed of Absolute Sale covering Lot 168-I-3 of subdivision plan (LRC)
Psd-256394 executed on 7 June 1979, in favor of defendant Clarita Joaquin,
for a consideration of P1[2],000.00 (Exh. D), pursuant to which TCT No. S-
109772 was issued in her name (Exh. D-1);
3 Deed of Absolute Sale covering Lot 168-I-1 of subdivision plan (LRC)
Psd-256394 executed on 12 May 1988, in favor of defendant spouses Fidel
Joaquin and Conchita Bernardo, for a consideration of P54,[3]00.00 (Exh. E),
pursuant to which TCT No. 155329 was issued to them (Exh. E-1);
4. Deed of Absolute Sale covering Lot 168-I-2 of subdivision plan (LRC)
Psd-256394 executed on 12 May 1988, in favor of defendant spouses
Artemio Joaquin and Socorro Angeles, for a consideration of P[54,3]00.00
(Exh. F), pursuant to which TCT No. 155330 was issued to them (Exh. F-1);
and
5. Absolute Sale of Real Property covering Lot 168-C-4 of subdivision
plan (LRC) Psd-256395 executed on 9 September 1988, in favor of Tomas
Joaquin, for a consideration of P20,000.00 (Exh. G), pursuant to which TCT
No. 157203 was issued in her name (Exh. G-1).
[6. Deed of Absolute Sale covering Lot 168-C-1 of subdivision plan (LRC)
Psd-256395 executed on 7 October 1988, in favor of Gavino Joaquin, for a
consideration of P25,000.00 (Exh. K), pursuant to which TCT No. 157779
was issued in his name (Exh. K-1).]
In seeking the declaration of nullity of the aforesaid deeds of sale and
certificates of title, plaintiffs, in their complaint, aver:
- XX-
The deeds of sale, Annexes C, D, E, F, and G, [and K] are simulated as they
are, are NULL AND VOID AB INITIO because
a) Firstly, there was no actual valid consideration for the deeds
of sale xxx over the properties in litis;
b) Secondly, assuming that there was consideration in the
sums reflected in the questioned deeds, the properties are
more than three-fold times more valuable than the measly
sums appearing therein;
c) Thirdly, the deeds of sale do not reflect and express the true
intent of the parties (vendors and vendees); and
d) Fourthly, the purported sale of the properties in litis was the
result of a deliberate conspiracy designed to unjustly deprive
the rest of the compulsory heirs (plaintiffs herein) of their
legitime.
- XXI -
Necessarily, and as an inevitable consequence, Transfer Certificates of Title
Nos. 36113/T-172, S-109772, 155329, 155330, 157203 [and 157779] issued
by the Registrar of Deeds over the properties in litis xxx are NULL AND VOID
AB INITIO.
Defendants, on the other hand aver (1) that plaintiffs do not have a cause of
action against them as well as the requisite standing and interest to assail
their titles over the properties in litis; (2) that the sales were with sufficient
considerations and made by defendants parents voluntarily, in good faith,
and with full knowledge of the consequences of their deeds of sale; and (3)
that the certificates of title were issued with sufficient factual and legal
basis.4[4] (Emphasis in the original)
The Ruling of the Trial Court
Before the trial, the trial court ordered the dismissal of the case against
defendant spouses Gavino Joaquin and Lea Asis.5[5] Instead of filing an
Answer with their co-defendants, Gavino Joaquin and Lea Asis filed a Motion
to Dismiss.6[6] In granting the dismissal to Gavino Joaquin and Lea Asis, the
trial court noted that compulsory heirs have the right to a legitime but such
right is contingent since said right commences only from the moment of
death of the decedent pursuant to Article 777 of the Civil Code of the
Philippines.7[7]
After trial, the trial court ruled in favor of the defendants and dismissed the
complaint. The trial court stated:
In the first place, the testimony of the defendants, particularly that of the xxx
father will show that the Deeds of Sale were all executed for valuable
consideration. This assertion must prevail over the negative allegation of
plaintiffs.
And then there is the argument that plaintiffs do not have a valid cause of
action against defendants since there can be no legitime to speak of prior to
the death of their parents. The court finds this contention tenable. In
determining the legitime, the value of the property left at the death of the
testator shall be considered (Art. 908 of the New Civil Code). Hence, the
legitime of a compulsory heir is computed as of the time of the death of the
decedent. Plaintiffs therefore cannot claim an impairment of their legitime
while their parents live.
All the foregoing considered, this case is DISMISSED.
In order to preserve whatever is left of the ties that should bind families decedent. Plaintiffs therefore cannot claim an impairment of their legitime
together, the counterclaim is likewise DISMISSED. while their parents live.

No costs. With this posture taken by the Court, consideration of the errors assigned by
plaintiffs-appellants is inconsequential.
SO ORDERED.8[8]
WHEREFORE, the decision appealed from is hereby AFFIRMED, with costs
The Ruling of the Court of Appeals against plaintiffs-appellants.

The Court of Appeals affirmed the decision of the trial court. The appellate SO ORDERED.9[9]
court ruled:
Hence, the instant petition.
To the mind of the Court, appellants are skirting the real and decisive issue in
this case, which is, whether xxx they have a cause of action against Issues
appellees.
Petitioners assign the following as errors of the Court of Appeals:
Upon this point, there is no question that plaintiffs-appellants, like their
defendant brothers and sisters, are compulsory heirs of defendant spouses, 1. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
Leonardo Joaquin and Feliciana Landrito, who are their parents. However, CONVEYANCE IN QUESTION HAD NO VALID CONSIDERATION.
their right to the properties of their defendant parents, as compulsory heirs, is
merely inchoate and vests only upon the latters death. While still alive, 2. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT EVEN
defendant parents are free to dispose of their properties, provided that such
ASSUMING THAT THERE WAS A CONSIDERATION, THE SAME IS
dispositions are not made in fraud of creditors.
GROSSLY INADEQUATE.

Plaintiffs-appellants are definitely not parties to the deeds of sale in question. 3. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
Neither do they claim to be creditors of their defendant parents. DEEDS OF SALE DO NOT EXPRESS THE TRUE INTENT OF THE
Consequently, they cannot be considered as real parties in interest to assail
PARTIES.
the validity of said deeds either for gross inadequacy or lack of consideration
or for failure to express the true intent of the parties. In point is the ruling of
the Supreme Court in Velarde, et al. vs. Paez, et al., 101 SCRA 376, thus: 4. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
CONVEYANCE WAS PART AND PARCEL OF A CONSPIRACY AIMED AT
UNJUSTLY DEPRIVING THE REST OF THE CHILDREN OF THE
The plaintiffs are not parties to the alleged deed of sale and are not
SPOUSES LEONARDO JOAQUIN AND FELICIANA LANDRITO OF THEIR
principally or subsidiarily bound thereby; hence, they have no legal capacity
INTEREST OVER THE SUBJECT PROPERTIES.
to challenge their validity.
5. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
Plaintiffs-appellants anchor their action on the supposed impairment of their
PETITIONERS HAVE A GOOD, SUFFICIENT AND VALID CAUSE OF
legitime by the dispositions made by their defendant parents in favor of their
ACTION AGAINST THE PRIVATE RESPONDENTS.10[10]
defendant brothers and sisters. But, as correctly held by the court a quo, the
legitime of a compulsory heir is computed as of the time of the death of the
The Ruling of the Court
We find the petition without merit.
We will discuss petitioners legal interest over the properties subject of the
Deeds of Sale before discussing the issues on the purported lack of
consideration and gross inadequacy of the prices of the Deeds of Sale.
Whether Petitioners have a legal interest
over the properties subject of the Deeds of Sale
Petitioners Complaint betrays their motive for filing this case. In their
Complaint, petitioners asserted that the purported sale of the properties in
litis was the result of a deliberate conspiracy designed to unjustly deprive the
rest of the compulsory heirs (plaintiffs herein) of their legitime. Petitioners
strategy was to have the Deeds of Sale declared void so that ownership of
the lots would eventually revert to their respondent parents. If their parents
die still owning the lots, petitioners and their respondent siblings will then co-
own their parents estate by hereditary succession.11[11]
It is evident from the records that petitioners are interested in the properties
subject of the Deeds of Sale, but they have failed to show any legal right to
the properties. The trial and appellate courts should have dismissed the
action for this reason alone. An action must be prosecuted in the name of the
real party-in-interest.12[12]
[T]he question as to real party-in-interest is whether he is the party who
would be benefitted or injured by the judgment, or the party entitled to the
avails of the suit.
xxx
In actions for the annulment of contracts, such as this action, the real parties
are those who are parties to the agreement or are bound either principally or
subsidiarily or are prejudiced in their rights with respect to one of the
contracting parties and can show the detriment which would positively result
to them from the contract even though they did not intervene in it (Ibaez v.
Hongkong & Shanghai Bank, 22 Phil. 572 [1912]) xxx.
These are parties with a present substantial interest, as distinguished from a
mere expectancy or future, contingent, subordinate, or consequential
interest. The phrase present substantial interest more concretely is meant
such interest of a party in the subject matter of the action as will entitle him,
under the substantive law, to recover if the evidence is sufficient, or that he
has the legal title to demand and the defendant will be protected in a
payment to or recovery by him.13[13]
Petitioners do not have any legal interest over the properties subject of the
Deeds of Sale. As the appellate court stated, petitioners right to their parents
properties is merely inchoate and vests only upon their parents death. While
still living, the parents of petitioners are free to dispose of their properties. In
their overzealousness to safeguard their future legitime, petitioners forget
that theoretically, the sale of the lots to their siblings does not affect the value
of their parents estate. While the sale of the lots reduced the estate, cash of
equivalent value replaced the lots taken from the estate.
Whether the Deeds of Sale are void
for lack of consideration
Petitioners assert that their respondent siblings did not actually pay the
prices stated in the Deeds of Sale to their respondent father. Thus,
petitioners ask the court to declare the Deeds of Sale void.
A contract of sale is not a real contract, but a consensual contract. As a
consensual contract, a contract of sale becomes a binding and valid contract
upon the meeting of the minds as to price. If there is a meeting of the minds
of the parties as to the price, the contract of sale is valid, despite the manner
of payment, or even the breach of that manner of payment. If the real price is
not stated in the contract, then the contract of sale is valid but subject to
reformation. If there is no meeting of the minds of the parties as to the price,
because the price stipulated in the contract is simulated, then the contract is
void.14[14] Article 1471 of the Civil Code states that if the price in a contract
of sale is simulated, the sale is void.
It is not the act of payment of price that determines the validity of a contract
of sale. Payment of the price has nothing to do with the perfection of the
contract. Payment of the price goes into the performance of the contract.
Failure to pay the consideration is different from lack of consideration. The
former results in a right to demand the fulfillment or cancellation of the
obligation under an existing valid contract while the latter prevents the
existence of a valid contract.15[15]
Petitioners failed to show that the prices in the Deeds of Sale were absolutely
simulated. To prove simulation, petitioners presented Emma Joaquin
Valdozs testimony stating that their father, respondent Leonardo Joaquin,
told her that he would transfer a lot to her through a deed of sale without
need for her payment of the purchase price.16[16] The trial court did not find
the allegation of absolute simulation of price credible. Petitioners failure to
prove absolute simulation of price is magnified by their lack of knowledge of
their respondent siblings financial capacity to buy the questioned lots.17[17]
On the other hand, the Deeds of Sale which petitioners presented as
evidence plainly showed the cost of each lot sold. Not only did respondents
minds meet as to the purchase price, but the real price was also stated in the
Deeds of Sale. As of the filing of the complaint, respondent siblings have also
fully paid the price to their respondent father.18[18]
Whether the Deeds of Sale are void
for gross inadequacy of price
Petitioners ask that assuming that there is consideration, the same is grossly
inadequate as to invalidate the Deeds of Sale.
Articles 1355 of the Civil Code states:
Art. 1355. Except in cases specified by law, lesion or inadequacy of cause
shall not invalidate a contract, unless there has been fraud, mistake or
undue influence. (Emphasis supplied)
Article 1470 of the Civil Code further provides:
Art. 1470. Gross inadequacy of price does not affect a contract of sale,
except as may indicate a defect in the consent, or that the parties really
intended a donation or some other act or contract. (Emphasis supplied)
Petitioners failed to prove any of the instances mentioned in Articles 1355
and 1470 of the Civil Code which would invalidate, or even affect, the Deeds
of Sale. Indeed, there is no requirement that the price be equal to the exact
value of the subject matter of sale. All the respondents believed that they
received the commutative value of what they gave. As we stated in Vales v.
Villa:19[19]
Courts cannot follow one every step of his life and extricate him from bad
bargains, protect him from unwise investments, relieve him from one-sided
contracts, or annul the effects of foolish acts. Courts cannot constitute
themselves guardians of persons who are not legally incompetent. Courts
operate not because one person has been defeated or overcome by another,
but because he has been defeated or overcome illegally. Men may do foolish
things, make ridiculous contracts, use miserable judgment, and lose money
by them indeed, all they have in the world; but not for that alone can the law
intervene and restore. There must be, in addition, a violation of the law, the
commission of what the law knows as an actionable wrong, before the courts
are authorized to lay hold of the situation and remedy it. (Emphasis in the
original)
Moreover, the factual findings of the appellate court are conclusive on the
parties and carry greater weight when they coincide with the factual findings
of the trial court. This Court will not weigh the evidence all over again unless
there has been a showing that the findings of the lower court are totally
devoid of support or are clearly erroneous so as to constitute serious abuse
of discretion.20[20] In the instant case, the trial court found that the lots were
sold for a valid consideration, and that the defendant children actually paid
the purchase price stipulated in their respective Deeds of Sale. Actual
payment of the purchase price by the buyer to the seller is a factual finding
that is now conclusive upon us.
WHEREFORE, we AFFIRM the decision of the Court of Appeals in toto.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban, Ynares-Santiago, and Azcuna,
JJ., concur.
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.
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.
G.R. No. L-27044 June 30, 1975
THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND THE COURT
OF TAX APPEALS, respondents.
G.R. No. L-27452 June 30, 1975
ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF
TAX APPEALS, respondent.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor
General Felicisimo R. Rosete, Solicitor Lolita O. Gal-lang, and Special
Attorney Gemaliel H. Montalino for Commissioner of Internal Revenue,
etc.
Melquides C. Gutierrez, Jose U. Ong, Juan G. Collas, Jr., Luis Ma.
Guerrero and J.R. Balonkita for Engineering and Supply Company.
ESGUERRA, J.:
Petition for review on certiorari of the decision of the Court of Tax Appeals in
CTA Case No. 681, dated November 29, 1966, assessing a compensating
tax of P174,441.62 on the Engineering Equipment and Supply Company.
As found by the Court of Tax Appeals, and as established by the evidence on
record, the facts of this case are as follows:
Engineering Equipment and Supply Co. (Engineering for short), a domestic
corporation, is an engineering and machinery firm. As operator of an
integrated engineering shop, it is engaged, among others, in the design and
installation of central type air conditioning system, pumping plants and steel
fabrications. (Vol. I pp. 12-16 T.S.N. August 23, 1960)
On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now
Commissioner, of Internal Revenue denouncing Engineering for tax evasion
by misdeclaring its imported articles and failing to pay the correct percentage
taxes due thereon in connivance with its foreign suppliers (Exh. "2" p. 1 BIR
record Vol. I). Engineering was likewise denounced to the Central Bank (CB)
for alleged fraud in obtaining its dollar allocations. Acting on these
denunciations, a raid and search was conducted by a joint team of Central
Bank, (CB), National Bureau of Investigation (NBI) and Bureau of Internal
Revenue (BIR) agents on September 27, 1956, on which occasion
voluminous records of the firm were seized and confiscated. (pp. 173-177
T.S.N.)
On September 30, 1957, revenue examiners Quesada and Catudan reported
and recommended to the then Collector, now Commissioner, of Internal
Revenue (hereinafter referred to as Commissioner) that Engineering be
assessed for P480,912.01 as deficiency advance sales tax on the theory that
it misdeclared its importation of air conditioning units and parts and
accessories thereof which are subject to tax under Section 185(m)1 of the
Tax Code, instead of Section 186 of the same Code. (Exh. "3" pp. 59-63 BIR
rec. Vol. I) This assessment was revised on January 23, 1959, in line with the
observation of the Chief, BIR Law Division, and was raised to P916,362.56
representing deficiency advance sales tax and manufacturers sales tax,
inclusive of the 25% and 50% surcharges. (pp. 72-80 BIR rec. Vol. I)
On March 3, 1959. the Commissioner assessed against, and demanded
upon, Engineering payment of the increased amount and suggested that
P10,000 be paid as compromise in extrajudicial settlement of Engineering's
penal liability for violation of the Tax Code. The firm, however, contested the
tax assessment and requested that it be furnished with the details and
particulars of the Commissioner's assessment. (Exh. "B" and "15", pp. 86-88
BIR rec. Vol. I) The Commissioner replied that the assessment was in
accordance with law and the facts of the case.
On July 30, 1959, Engineering appealed the case to the Court of Tax
Appeals and during the pendency of the case the investigating revenue
examiners reduced Engineering's deficiency tax liabilities from P916,362.65
to P740,587.86 (Exhs. "R" and "9" pp. 162-170, BIR rec.), based on findings
after conferences had with Engineering's Accountant and Auditor.
On November 29, 1966, the Court of Tax Appeals rendered its decision, the
dispositive portion of which reads as follows:
For ALL THE FOREGOING CONSIDERATIONS, the
decision of respondent appealed from is hereby modified,
and petitioner, as a contractor, is declared exempt from the
deficiency manufacturers sales tax covering the period from
June 1, 1948. to September 2, 1956. However, petitioner is
ordered to pay respondent, or his duly authorized collection
agent, the sum of P174,141.62 as compensating tax and
25% surcharge for the period from 1953 to September 1956.
With costs against petitioner.
The Commissioner, not satisfied with the decision of the Court of Tax
Appeals, appealed to this Court on January 18, 1967, (G.R. No. L-27044).
On the other hand, Engineering, on January 4, 1967, filed with the Court of
Tax Appeals a motion for reconsideration of the decision abovementioned.
This was denied on April 6, 1967, prompting Engineering to file also with this
Court its appeal, docketed as G.R. No. L-27452.
Since the two cases, G.R. No. L-27044 and G.R. No. L-27452, involve the
same parties and issues, We have decided to consolidate and jointly decide
them.
Engineering in its Petition claims that the Court of Tax Appeals committed
the following errors:
1. That the Court of Tax Appeals erred in holding
Engineering Equipment & Supply Company liable to the 30%
compensating tax on its importations of equipment and
ordinary articles used in the central type air conditioning
systems it designed, fabricated, constructed and installed in
the buildings and premises of its customers, rather than to
the compensating tax of only 7%;
2. That the Court of Tax Appeals erred in holding
Engineering Equipment & Supply Company guilty of fraud in
effecting the said importations on the basis of incomplete
quotations from the contents of alleged photostat copies of
documents seized illegally from Engineering Equipment and
Supply Company which should not have been admitted in
evidence;
3. That the Court of Tax Appeals erred in holding
Engineering Equipment & Supply Company liable to the 25%
surcharge prescribed in Section 190 of the Tax Code;
4. That the Court of Tax Appeals erred in holding the
assessment as not having prescribed;
5. That the Court of Tax Appeals erred in holding
Engineering Equipment & Supply Company liable for the
sum of P174,141.62 as 30% compensating tax and 25%
surcharge instead of completely absolving it from the
deficiency assessment of the Commissioner.
The Commissioner on the other hand claims that the Court of Tax Appeals
erred:
1. In holding that the respondent company is a contractor
and not a manufacturer.
2. In holding respondent company liable to the 3%
contractor's tax imposed by Section 191 of the Tax Code
 instead of the 30% sales tax prescribed in Section 185(m) in
relation to Section 194(x) both of the same Code;
3. In holding that the respondent company is subject only to
the 30% compensating tax under Section 190 of the Tax
Code and not to the 30% advance sales tax imposed by
section 183 (b), in relation to section 185(m) both of the
same Code, on its importations of parts and accessories of
air conditioning units;
4. In not holding the company liable to the 50% fraud
surcharge under Section 183 of the Tax Code on its
importations of parts and accessories of air conditioning
units, notwithstanding the finding of said court that the
respondent company fraudulently misdeclared the said
importations;
5. In holding the respondent company liable for P174,141.62
as compensating tax and 25% surcharge instead of
P740,587.86 as deficiency advance sales tax, deficiency
manufacturers tax and 25% and 50% surcharge for the
period from June 1, 1948 to December 31, 1956.
The main issue revolves on the question of whether or not Engineering is a
manufacturer of air conditioning units under Section 185(m), supra, in
relation to Sections 183(b) and 194 of the Code, or a contractor under
Section 191 of the same Code.
The Commissioner contends that Engineering is a manufacturer and seller of
air conditioning units and parts or accessories thereof and, therefore, it is
subject to the 30% advance sales tax prescribed by Section 185(m) of the
Tax Code, in relation to Section 194 of the same, which defines a
manufacturer as follows:
Section 194. Words and Phrases Defined. In applying
the provisions of this Title, words and phrases shall be taken
in the sense and extension indicated below:
xxx xxx xxx
(x) "Manufacturer" includes every person who by physical or
chemical process alters the exterior texture or form or inner
substance of any raw material or manufactured or partially
manufactured products in such manner as to prepare it for a
special use or uses to which it could not have been put in its
original condition, or who by any such process alters the
quality of any such material or manufactured or partially
manufactured product so as to reduce it to marketable
shape, or prepare it for any of the uses of industry, or who by
any such process combines any such raw material or
manufactured or partially manufactured products with other
materials or products of the same or of different kinds and in
such manner that the finished product of such process of
manufacture can be put to special use or uses to which such
raw material or manufactured or partially manufactured
products in their original condition could not have been put,
and who in addition alters such raw material or
manufactured or partially manufactured products, or
combines the same to produce such finished products for
the purpose of their sale or distribution to others and not for
his own use or consumption.
In answer to the above contention, Engineering claims that it is not a
manufacturer and setter of air-conditioning units and spare parts or
accessories thereof subject to tax under Section 185(m) of the Tax Code, but
a contractor engaged in the design, supply and installation of the central type
of air-conditioning system subject to the 3% tax imposed by Section 191 of
the same Code, which is essentially a tax on the sale of services or labor of a
contractor rather than on the sale of articles subject to the tax referred to in
Sections 184, 185 and 186 of the Code.
The arguments of both the Engineering and the Commissioner call for a
clarification of the term contractor as well as the distinction between a
contract of sale and contract for furnishing services, labor and materials. The
distinction between a contract of sale and one for work, labor and materials is
tested by the inquiry whether the thing transferred is one not in existence and
which never would have existed but for the order of the party desiring to
acquire it, or a thing which would have existed and has been the subject of
sale to some other persons even if the order had not been given.2 If the
article ordered by the purchaser is exactly such as the plaintiff makes and
keeps on hand for sale to anyone, and no change or modification of it is
made at defendant's request, it is a contract of sale, even though it may be
entirely made after, and in consequence of, the defendants order for it.3
Our New Civil Code, likewise distinguishes a contract of sale from a contract
for a piece of work thus:
Art. 1467. A contract for the delivery at a certain price of an
article which the vendor in the ordinary course of his
business manufactures or procures for the general market,
whether the same is on hand at the time or not, is a contract
 of sale, but if the goods are to be manufactured specially for
the customer and upon his special order and not for the
general market, it is a contract for a piece of work.
The word "contractor" has come to be used with special reference to a
person who, in the pursuit of the independent business, undertakes to do a
specific job or piece of work for other persons, using his own means and
methods without submitting himself to control as to the petty details. (Araas,
Annotations and Jurisprudence on the National Internal Revenue Code, p.
318, par. 191 (2), 1970 Ed.) The true test of a contractor as was held in the
cases of Luzon Stevedoring Co., vs. Trinidad, 43, Phil. 803, 807-808, and La
Carlota Sugar Central vs. Trinidad, 43, Phil. 816, 819, would seem to be that
he renders service in the course of an independent occupation, representing
the will of his employer only as to the result of his work, and not as to the
means by which it is accomplished.
With the foregoing criteria as guideposts, We shall now examine whether
Engineering really did "manufacture" and sell, as alleged by the
Commissioner to hold it liable to the advance sales tax under Section
185(m), or it only had its services "contracted" for installation purposes to
hold it liable under section 198 of the Tax Code.
I money to buy the same." This is untenable in the light of the fact that air
After going over the three volumes of stenographic notes and the voluminous
record of the BIR and the CTA as well as the exhibits submitted by both
parties, We find that Engineering did not manufacture air conditioning units
for sale to the general public, but imported some items (as refrigeration
compressors in complete set, heat exchangers or coils, t.s.n. p. 39) which
were used in executing contracts entered into by it. Engineering, therefore,
undertook negotiations and execution of individual contracts for the design,
supply and installation of air conditioning units of the central type (t.s.n. pp.
20-36; Exhs. "F", "G", "H", "I", "J", "K", "L", and "M"), taking into consideration
in the process such factors as the area of the space to be air conditioned; the
number of persons occupying or would be occupying the premises; the
purpose for which the various air conditioning areas are to be used; and the
sources of heat gain or cooling load on the plant such as sun load, lighting,
and other electrical appliances which are or may be in the plan. (t.s.n. p. 34,
Vol. I) Engineering also testified during the hearing in the Court of Tax
Appeals that relative to the installation of air conditioning system,
Engineering designed and engineered complete each particular plant and
that no two plants were identical but each had to be engineered separately.
As found by the lower court, which finding4 We adopt
Engineering, in a nutshell, fabricates, assembles, supplies
and installs in the buildings of its various customers the
central type air conditioning system; prepares the plans and
specifications therefor which are distinct and different from
each other; the air conditioning units and spare parts or
accessories thereof used by petitioner are not the window
type of air conditioner which are manufactured, assembled
and produced locally for sale to the general market; and the
imported air conditioning units and spare parts or
accessories thereof are supplied and installed by petitioner
upon previous orders of its customers conformably with their
needs and requirements.
The facts and circumstances aforequoted support the theory that
Engineering is a contractor rather than a manufacturer.
The Commissioner in his Brief argues that "it is more in accord with reason
and sound business management to say that anyone who desires to have air
conditioning units installed in his premises and who is in a position and
willing to pay the price can order the same from the company (Engineering)
and, therefore, Engineering could have mass produced and stockpiled air
conditioning units for sale to the public or to any customer with enough
conditioning units, packaged, or what we know as self-contained air
conditioning units, are distinct from the central system which Engineering
dealt in. To Our mind, the distinction as explained by Engineering, in its Brief,
quoting from books, is not an idle play of words as claimed by the
Commissioner, but a significant fact which We just cannot ignore. As quoted
by Engineering Equipment & Supply Co., from an Engineering handbook by
L.C. Morrow, and which We reproduce hereunder for easy reference:
... there is a great variety of equipment in use to do this job
(of air conditioning). Some devices are designed to serve a
specific type of space; others to perform a specific function;
and still others as components to be assembled into a tailor-
made system to fit a particular building. Generally, however,
they may be grouped into two classifications unitary and
central system.
The unitary equipment classification includes those designs
such as room air conditioner, where all of the functional
components are included in one or two packages, and
installation involves only making service connection such as
electricity, water and drains. Central-station systems, often
referred to as applied or built-up systems, require the
 installation of components at different points in a building
and their interconnection.
The room air conditioner is a unitary equipment designed
specifically for a room or similar small space. It is unique
among air conditioning equipment in two respects: It is in the
electrical appliance classification, and it is made by a great
number of manufacturers.
There is also the testimony of one Carlos Navarro, a licensed Mechanical
and Electrical Engineer, who was once the Chairman of the Board of
Examiners for Mechanical Engineers and who was allegedly responsible for
the preparation of the refrigeration and air conditioning code of the City of
Manila, who said that "the central type air conditioning system is an
engineering job that requires planning and meticulous layout due to the fact
that usually architects assign definite space and usually the spaces they
assign are very small and of various sizes. Continuing further, he testified:
I don't think I have seen central type of air conditioning
machinery room that are exactly alike because all our
buildings here are designed by architects dissimilar to
existing buildings, and usually they don't coordinate and get
the advice of air conditioning and refrigerating engineers so
much so that when we come to design, we have to make
use of the available space that they are assigning to us so
that we have to design the different component parts of the
air conditioning system in such a way that will be
accommodated in the space assigned and afterwards the
system may be considered as a definite portion of the
building. ...
Definitely there is quite a big difference in the operation
because the window type air conditioner is a sort of
compromise. In fact it cannot control humidity to the desired
level; rather the manufacturers, by hit and miss, were able to
satisfy themselves that the desired comfort within a room
could be made by a definite setting of the machine as it
comes from the factory; whereas the central type system
definitely requires an intelligent operator. (t.s.n. pp. 301-305,
Vol. II)
The point, therefore, is this Engineering definitely did not and was not
engaged in the manufacture of air conditioning units but had its services
contracted for the installation of a central system. The cases cited by the
Commissioner (Advertising Associates, Inc. vs. Collector of Customs, 97,
Phil. 636; Celestino Co & Co. vs. Collector of Internal Revenue, 99 Phil. 841
and Manila Trading & Supply Co. vs. City of Manila, 56 O.G. 3629), are not in
point. Neither are they applicable because the facts in all the cases cited are
entirely different. Take for instance the case of Celestino Co where this Court
held the taxpayer to be a manufacturer rather than a contractor of sash,
doors and windows manufactured in its factory. Indeed, from the very start,
Celestino Co intended itself to be a manufacturer of doors, windows, sashes
etc. as it did register a special trade name for its sash business and ordered
company stationery carrying the bold print "ORIENTAL SASH FACTORY
(CELESTINO CO AND COMPANY, PROP.) 926 Raon St., Quiapo, Manila,
Tel. No. etc., Manufacturers of All Kinds of Doors, Windows ... ." Likewise,
Celestino Co never put up a contractor's bond as required by Article 1729 of
the Civil Code. Also, as a general rule, sash factories receive orders for
doors and windows of special design only in particular cases, but the bulk of
their sales is derived from ready-made doors and windows of standard sizes
for the average home, which "sales" were reflected in their books of accounts
totalling P118,754.69 for the period from January, 1952 to September 30,
1952, or for a period of only nine (9) months. This Court found said sum
difficult to have been derived from its few customers who placed special
orders for these items. Applying the abovestated facts to the case at bar, We
found them to he inapposite. Engineering advertised itself as Engineering
Equipment and Supply Company, Machinery Mechanical Supplies,
Engineers, Contractors, 174 Marques de Comillas, Manila (Exh. "B" and "15"
BIR rec. p. 186), and not as manufacturers. It likewise paid the contractors
tax on all the contracts for the design and construction of central system as
testified to by Mr. Rey Parker, its President and General Manager. (t.s.n. p.
102, 103) Similarly, Engineering did not have ready-made air conditioning
units for sale but as per testimony of Mr. Parker upon inquiry of Judge
Luciano of the CTA
Q Aside from the general components,
which go into air conditioning plant or
system of the central type which your
company undertakes, and the procedure
followed by you in obtaining and executing
contracts which you have already testified to
in previous hearing, would you say that the
covering contracts for these different
projects listed ... referred to in the list, Exh.
"F" are identical in every respect? I mean
every plan or system covered by these
different contracts are identical in standard
in every respect, so that you can reproduce
them?
 A No, sir. They are not all standard. On
the contrary, none of them are the same.
Each one must be designed and constructed
to meet the particular requirements, whether
the application is to be operated. (t.s.n. pp.
101-102)
What We consider as on all fours with the case at bar is the case of S.M.
Lawrence Co. vs. McFarland, Commissioner of Internal Revenue of the State
of Tennessee and McCanless, 355 SW 2d, 100, 101, "where the cause
presents the question of whether one engaged in the business of contracting
for the establishment of air conditioning system in buildings, which work
requires, in addition to the furnishing of a cooling unit, the connection of such
unit with electrical and plumbing facilities and the installation of ducts within
and through walls, ceilings and floors to convey cool air to various parts of
the building, is liable for sale or use tax as a contractor rather than a retailer
of tangible personal property. Appellee took the Position that appellant was
not engaged in the business of selling air conditioning equipment as such but
in the furnishing to its customers of completed air conditioning systems
pursuant to contract, was a contractor engaged in the construction or
improvement of real property, and as such was liable for sales or use tax as
the consumer of materials and equipment used in the consummation of
contracts, irrespective of the tax status of its contractors. To transmit the
warm or cool air over the buildings, the appellant installed system of ducts
running from the basic units through walls, ceilings and floors to registers.
The contract called for completed air conditioning systems which became
permanent part of the buildings and improvements to the realty." The Court
held the appellant a contractor which used the materials and the equipment
upon the value of which the tax herein imposed was levied in the
performance of its contracts with its customers, and that the customers did
not purchase the equipment and have the same installed.
Applying the facts of the aforementioned case to the present case, We see
that the supply of air conditioning units to Engineer's various customers,
whether the said machineries were in hand or not, was especially made for
each customer and installed in his building upon his special order. The air
conditioning units installed in a central type of air conditioning system would
not have existed but for the order of the party desiring to acquire it and if it
existed without the special order of Engineering's customer, the said air
conditioning units were not intended for sale to the general public. Therefore,
We have but to affirm the conclusion of the Court of Tax Appeals that
Engineering is a contractor rather than a manufacturer, subject to the
contractors tax prescribed by Section 191 of the Code and not to the
advance sales tax imposed by Section 185(m) in relation to Section 194 of
the same Code. Since it has been proved to Our satisfaction that
Engineering imported air conditioning units, parts or accessories thereof for
use in its construction business and these items were never sold, resold,
bartered or exchanged, Engineering should be held liable to pay taxes
prescribed under Section 1905 of the Code. This compensating tax is not a
tax on the importation of goods but a tax on the use of imported goods not
subject to sales tax. Engineering, therefore, should be held liable to the
payment of 30% compensating tax in accordance with Section 190 of the Tax
Code in relation to Section 185(m) of the same, but without the 50% mark up
provided in Section 183(b).
II
We take up next the issue of fraud. The Commissioner charged Engineering
with misdeclaration of the imported air conditioning units and parts or
accessories thereof so as to make them subject to a lower rate of percentage
tax (7%) under Section 186 of the Tax Code, when they are allegedly subject
to a higher rate of tax (30%) under its Section 185(m). This charge of fraud
was denied by Engineering but the Court of Tax Appeals in its decision found
adversely and said"
... We are amply convinced from the evidence presented by
respondent that petitioner deliberately and purposely
misdeclared its importations. This evidence consists of
letters written by petitioner to its foreign suppliers, instructing
them on how to invoice and describe the air conditioning
units ordered by petitioner. ... (p. 218 CTA rec.)
Despite the above findings, however, the Court of Tax Appeals absolved
Engineering from paying the 50% surcharge prescribe by Section 183(a) of
the Tax Code by reasoning out as follows:
The imposition of the 50% surcharge prescribed by Section
183(a) of the Tax Code is based on willful neglect to file the
monthly return within 20 days after the end of each month or
in case a false or fraudulent return is willfully made, it can
readily be seen, that petitioner cannot legally be held subject
to the 50% surcharge imposed by Section 183(a) of the Tax
Code. Neither can petitioner be held subject to the 50%
surcharge under Section 190 of the Tax Code dealing on
compensating tax because the provisions thereof do not
include the 50% surcharge. Where a particular provision of
the Tax Code does not impose the 50% surcharge as fraud
penalty we cannot enforce a non-existing provision of law
notwithstanding the assessment of respondent to the
contrary. Instances of the exclusion in the Tax Code of the
50% surcharge are those dealing on tax on banks, taxes on
 receipts of insurance companies, and franchise tax.
However, if the Tax Code imposes the 50% surcharge as
fraud penalty, it expressly so provides as in the cases of
income tax, estate and inheritance taxes, gift taxes, mining
tax, amusement tax and the monthly percentage taxes.
Accordingly, we hold that petitioner is not subject to the 50%
surcharge despite the existence of fraud in the absence of
legal basis to support the importation thereof. (p. 228 CTA
rec.)
We have gone over the exhibits submitted by the Commissioner evidencing
fraud committed by Engineering and We reproduce some of them hereunder
for clarity.
As early as March 18, 1953, Engineering in a letter of even date wrote to
Trane Co. (Exh. "3-K" pp. 152-155, BIR rec.) viz:
Your invoices should be made in the name of Madrigal &
Co., Inc., Manila, Philippines, c/o Engineering Equipment &
Supply Co., Manila, Philippines forwarding all
correspondence and shipping papers concerning this order
to us only and not to the customer.
When invoicing, your invoices should be exactly as detailed
in the customer's Letter Order dated March 14th, 1953
attached. This is in accordance with the Philippine import
licenses granted to Madrigal & Co., Inc. and such details
must only be shown on all papers and shipping documents
for this shipment. No mention of words air conditioning
equipment should be made on any shipping documents as
well as on the cases. Please give this matter your careful
attention, otherwise great difficulties will be encountered with
the Philippine Bureau of Customs when clearing the
shipment on its arrival in Manila. All invoices and cases
should be marked "THIS EQUIPMENT FOR RIZAL
CEMENT CO."
The same instruction was made to Acme Industries, Inc., San Francisco,
California in a letter dated March 19, 1953 (Exh. "3-J-1" pp. 150-151, BIR
rec.)
On April 6, 1953, Engineering wrote to Owens-Corning Fiberglass Corp.,
New York, U.S.A. (Exh. "3-1" pp. 147-149, BIR rec.) also enjoining the latter
from mentioning or referring to the term 'air conditioning' and to describe the
goods on order as Fiberglass pipe and pipe fitting insulation instead.
Likewise on April 30, 1953, Engineering threatened to discontinue the
forwarding service of Universal Transcontinental Corporation when it wrote
Trane Co. (Exh. "3-H" p. 146, BIR rec.):
It will be noted that the Universal Transcontinental
Corporation is not following through on the instructions which
have been covered by the above correspondence, and
which indicates the necessity of discontinuing the use of the
term "Air conditioning Machinery or Air Coolers". Our
instructions concerning this general situation have been sent
to you in ample time to have avoided this error in
terminology, and we will ask that on receipt of this letter that
you again write to Universal Transcontinental Corp. and
inform them that, if in the future, they are unable to
cooperate with us on this requirement, we will thereafter be
unable to utilize their forwarding service. Please inform them
that we will not tolerate another failure to follow our
requirements.
And on July 17, 1953 (Exh- "3-g" p. 145, BIR rec.) Engineering wrote Trane
Co. another letter, viz:
In the past, we have always paid the air conditioning tax on
climate changers and that mark is recognized in the
Philippines, as air conditioning equipment. This matter of
avoiding any tie-in on air conditioning is very important to us,
and we are asking that from hereon that whoever takes care
of the processing of our orders be carefully instructed so as
to avoid again using the term "Climate changers" or in any
way referring to the equipment as "air conditioning."
And in response to the aforequoted letter, Trane Co. wrote on July 30, 1953,
suggesting a solution, viz:
We feel that we can probably solve all the problems by
following the procedure outlined in your letter of March 25,
1953 wherein you stated that in all future jobs you would
enclose photostatic copies of your import license so that we
might make up two sets of invoices: one set describing
equipment ordered simply according to the way that they are
listed on the import license and another according to our
ordinary regular methods of order write-up. We would then
include the set made up according to the import license in
the shipping boxes themselves and use those items as our
actual shipping documents and invoices, and we will send
 the other regular invoice to you, by separate
correspondence. (Exh- No. "3-F-1", p. 144 BIR rec.)
Another interesting letter of Engineering is one dated August 27, 1955 (Exh.
"3-C" p. 141 BIR rec.)
In the process of clearing the shipment from the piers, one of
the Customs inspectors requested to see the packing list.
Upon presenting the packing list, it was discovered that the
same was prepared on a copy of your letterhead which
indicated that the Trane Co. manufactured air conditioning,
heating and heat transfer equipment. Accordingly, the
inspectors insisted that this equipment was being imported
for air conditioning purposes. To date, we have not been
able to clear the shipment and it is possible that we will be
required to pay heavy taxes on equipment.
The purpose of this letter is to request that in the future, no
documents of any kind should be sent with the order that
indicate in any way that the equipment could possibly be
used for air conditioning.
It is realized that this a broad request and fairly difficult to
accomplish and administer, but we believe with proper
caution it can be executed. Your cooperation and close
supervision concerning these matters will be appreciated.
(Emphasis supplied)
The aforequoted communications are strongly indicative of the fraudulent
intent of Engineering to misdeclare its importation of air conditioning units
and spare parts or accessories thereof to evade payment of the 30% tax.
And since the commission of fraud is altogether too glaring, We cannot agree
with the Court of Tax Appeals in absolving Engineering from the 50% fraud
surcharge, otherwise We will be giving premium to a plainly intolerable act of
tax evasion. As aptly stated by then Solicitor General, now Justice, Antonio
P. Barredo: 'this circumstance will not free it from the 50% surcharge
because in any case whether it is subject to advance sales tax or
compensating tax, it is required by law to truly declare its importation in the
import entries and internal revenue declarations before the importations
maybe released from customs custody. The said entries are the very
documents where the nature, quantity and value of the imported goods
declared and where the customs duties, internal revenue taxes, and other
fees or charges incident to the importation are computed. These entries,
therefore, serve the same purpose as the returns required by Section 183(a)
of the Code.'
Anent the 25% delinquency surcharge, We fully agree to the ruling made by
the Court of Tax Appeals and hold Engineering liable for the same. As held
by the lower court:
At first blush it would seem that the contention of petitioner
that it is not subject to the delinquency, surcharge of 25% is
sound, valid and tenable. However, a serious study and
critical analysis of the historical provisions of Section 190 of
the Tax Code dealing on compensating tax in relation to
Section 183(a) of the same Code, will show that the
contention of petitioner is without merit. The original text of
Section 190 of Commonwealth Act 466, otherwise known as
the National Internal Revenue Code, as amended by
Commonwealth Act No. 503, effective on October 1, 1939,
does not provide for the filing of a compensation tax return
and payment of the 25 % surcharge for late payment thereof.
Under the original text of Section 190 of the Tax Code as
amended by Commonwealth Act No. 503, the contention of
the petitioner that it is not subject to the 25% surcharge
appears to be legally tenable. However, Section 190 of the
Tax Code was subsequently amended by the Republic Acts
Nos. 253, 361, 1511 and 1612 effective October 1, 1946,
July 1, 1948, June 9, 1949, June 16, 1956 and August 24,
1956 respectively, which invariably provides among others,
the following:
... If any article withdrawn from the
customhouse or the post office without
payment of the compensating tax is
subsequently used by the importer for other
purposes, corresponding entry should be
made in the books of accounts if any are
kept or a written notice thereof sent to the
Collector of Internal Revenue and payment
of the corresponding compensating tax
made within 30 days from the date of such
entry or notice and if tax is not paid within
such period the amount of the tax shall be
increased by 25% the increment to be a part
of the tax.
Since the imported air conditioning units-and spare parts or accessories
thereof are subject to the compensating tax of 30% as the same were used
in the construction business of Engineering, it is incumbent upon the latter to
comply with the aforequoted requirement of Section 190 of the Code, by
posting in its books of accounts or notifying the Collector of Internal Revenue
that the imported articles were used for other purposes within 30 days. ...
Consequently; as the 30% compensating tax was not paid by petitioner
within the time prescribed by Section 190 of the Tax Code as amended, it is
therefore subject to the 25% surcharge for delinquency in the payment of the
said tax. (pp. 224-226 CTA rec.)
III
Lastly the question of prescription of the tax assessment has been put in
issue. Engineering contends that it was not guilty of tax fraud in effecting the
importations and, therefore, Section 332(a) prescribing ten years is
inapplicable, claiming that the pertinent prescriptive period is five years from
the date the questioned importations were made. A review of the record
however reveals that Engineering did file a tax return or declaration with the
Bureau of Customs before it paid the advance sales tax of 7%. And the
declaration filed reveals that it did in fact misdeclare its importations. Section
332 of the Tax Code which provides:
Section 332. Exceptions as to period of limitation of
assessment and collection of taxes.
(a) In the case of a false or fraudulent return with intent to
evade tax or of a failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such
tax may be begun without assessment at any time within ten
years after the discovery of the falsity, fraud or omission.
is applicable, considering the preponderance of evidence of fraud with the
intent to evade the higher rate of percentage tax due from Engineering. The,
tax assessment was made within the period prescribed by law and
prescription had not set in against the Government.
WHEREFORE, the decision appealed from is affirmed with the modification
that Engineering is hereby also made liable to pay the 50% fraud surcharge.
SO ORDERED.
G.R. No. L-11491 August 23, 1918
ANDRES QUIROGA, plaintiff-appellant,
vs.
PARSONS HARDWARE CO., defendant-appellee.
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 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.
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 sell to it the first sound reproducing equipment and machinery. The
third paragraph of the respondent's cause of action states:
 3. That on or about November 19, 1929, the herein plaintiff
(respondent) and defendant (petitioner) entered into an agreement,
under and by virtue of which the herein defendant was to secure
from the United States, and sell and deliver to the herein plaintiff,
certain sound reproducing equipment and machinery, for which the
said defendant, under and by virtue of said agreement, was to
receive the actual cost price plus ten per cent (10%), and was also to
be reimbursed for all out of pocket expenses in connection with the
purchase and delivery of such equipment, such as costs of
telegrams, freight, and similar expenses. (Emphasis ours.)
We agree with the trial judge that "whatever unforseen events might have
taken place unfavorable to the defendant (petitioner), such as change in
prices, mistake in their quotation, loss of the goods not covered by insurance
or failure of the Starr Piano Company to properly fill the orders as per
specifications, the plaintiff (respondent) might still legally hold the defendant
(petitioner) to the prices fixed of $1,700 and $1,600." This is incompatible
with the pretended relation of agency between the petitioner and the
respondent, because in agency, the agent is exempted from all liability in the
discharge of his commission provided he acts in accordance with the
instructions received from his principal (section 254, Code of Commerce),
and the principal must indemnify the agent for all damages which the latter
may incur in carrying out the agency without fault or imprudence on his part
(article 1729, Civil Code).
While the latters, Exhibits 1 and 2, state that the petitioner was to receive ten
per cent (10%) commission, this does not necessarily make the petitioner an
agent of the respondent, as this provision is only an additional price which
the respondent bound itself to pay, and which stipulation is not incompatible
with the contract of purchase and sale. (See Quiroga vs. Parsons Hardware
Co., 38 Phil., 501.)
In the second place, to hold the petitioner an agent of the respondent in the
purchase of equipment and machinery from the Starr Piano Company of
Richmond, Indiana, is incompatible with the admitted fact that the petitioner
is the exclusive agent of the same company in the Philippines. It is out of the
ordinary for one to be the agent of both the vendor and the purchaser. The
facts and circumstances indicated do not point to anything but plain ordinary
transaction where the respondent enters into a contract of purchase and sale
with the petitioner, the latter as exclusive agent of the Starr Piano Company
in the United States.
It follows that the petitioner as vendor is not bound to reimburse the
respondent as vendee for any difference between the cost price and the
sales price which represents the profit realized by the vendor out of the
transaction. This is the very essence of commerce without which merchants
or middleman would not exist.
The respondents contends that it merely agreed to pay the cost price as
distinguished from the list price, plus ten per cent (10%) commission and all
out-of-pocket expenses incurred by the petitioner. The distinction which the
respondents seeks to draw between the cost price and the list price we
consider to be spacious. It is to be observed that the twenty-five per cent
(25%) discount granted by the Starr piano Company to the petitioner is
available only to the latter as the former's exclusive agent in the Philippines.
The respondent could not have secured this discount from the Starr Piano
Company and neither was the petitioner willing to waive that discount in favor
of the respondent. As a matter of fact, no reason is advanced by the
respondent why the petitioner should waive the 25 per cent discount granted
it by the Starr Piano Company in exchange for the 10 percent commission
offered by the respondent. Moreover, the petitioner was not duty bound to
reveal the private arrangement it had with the Starr Piano Company relative
to such discount to its prospective customers, and the respondent was not
even aware of such an arrangement. The respondent, therefore, could not
have offered to pay a 10 per cent commission to the petitioner provided it
was given the benefit of the 25 per cent discount enjoyed by the petitioner. It
is well known that local dealers acting as agents of foreign manufacturers,
aside from obtaining a discount from the home office, sometimes add to the
list price when they resell to local purchasers. It was apparently to guard
against an exhorbitant additional price that the respondent sought to limit it to
10 per cent, and the respondent is estopped from questioning that additional
price. If the respondent later on discovers itself at the short end of a bad
bargain, it alone must bear the blame, and it cannot rescind the contract,
much less compel a reimbursement of the excess price, on that ground
alone. The respondent could not secure equipment and machinery
manufactured by the Starr Piano Company except from the petitioner alone;
it willingly paid the price quoted; it received the equipment and machinery as
represented; and that was the end of the matter as far as the respondent was
concerned. The fact that the petitioner obtained more or less profit than the
respondent calculated before entering into the contract or reducing the price
agreed upon between the petitioner and the respondent. Not every
concealment is fraud; and short of fraud, it were better that, within certain
limits, business acumen permit of the loosening of the sleeves and of the
sharpening of the intellect of men and women in the business world.
The writ of certiorari should be, as it is hereby, granted. The decision of the
appellate court is accordingly reversed and the petitioner is absolved from
the respondent's complaint in G. R. No. 1023, entitled "Arco Amusement
Company (formerly known as Teatro Arco), plaintiff-appellant, vs. Gonzalo
Puyat & Sons, Inc., defendants-appellee," without pronouncement regarding
costs. So ordered.
 YNARES-SANTIAGO, J.:

Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation

engaged in the sale of steel scaffoldings, while petitioner Sonny L. Lo, doing
business under the name and style Sans Enterprises, is a building
contractor. On February 22, 1990, petitioner ordered scaffolding equipments
from respondent worth P540,425.80. 21[1] He paid a downpayment in the
amount of P150,000.00. The balance was made payable in ten monthly
installments.

Respondent delivered the scaffoldings to petitioner. 22[2] Petitioner was able to

pay the first two monthly installments. His business, however, encountered
financial difficulties and he was unable to settle his obligation to respondent
despite oral and written demands made against him.23[3]

On October 11, 1990, petitioner and respondent executed a Deed of

Assignment,24[4] whereby petitioner assigned to respondent his receivables in
the amount of P335,462.14 from Jomero Realty Corporation. Pertinent
portions of the Deed provide:

WHEREAS, the ASSIGNOR is the contractor for the construction of a

residential house located at Greenmeadow Avenue, Quezon City owned by
Jomero Realty Corporation;

WHEREAS, in the construction of the aforementioned residential house, the

ASSIGNOR purchased on account scaffolding equipments from the
ASSIGNEE payable to the latter;

[G.R. No. 149420. October 8, 2003]

SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM PHIL., INC.,

respondent.

DECISION
WHEREAS, up to the present the ASSIGNOR has an obligation to the
ASSIGNEE for the purchase of the aforementioned scaffoldings now in the
amount of Three Hundred Thirty Five Thousand Four Hundred Sixty Two and
14/100 Pesos (P335,462.14);
NOW, THEREFORE, for and in consideration of the sum of Three Hundred
Thirty Five Thousand Four Hundred Sixty Two and 14/100 Pesos
(P335,462.14), Philippine Currency which represents part of the
ASSIGNORs collectible from Jomero Realty Corp., said ASSIGNOR hereby
assigns, transfers and sets over unto the ASSIGNEE all collectibles
amounting to the said amount of P335, 462.14;
And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and
assigns, the full power and authority to demand, collect, receive, compound,
compromise and give acquittance for the same or any part thereof, and in the
name and stead of the said ASSIGNOR;
And the ASSIGNOR does hereby agree and stipulate to and with said
ASSIGNEE, its successors and assigns that said debt is justly owing and due
to the ASSIGNOR for Jomero Realty Corporation and that said ASSIGNOR
has not done and will not cause anything to be done to diminish or discharge
said debt, or delay or to prevent the ASSIGNEE, its successors or assigns,
from collecting the same;
And the ASSIGNOR further agrees and stipulates as aforesaid that the said
ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at
times hereafter, at the request of said ASSIGNEE, its successors or assigns,
at his cost and expense, execute and do all such further acts and deeds as
shall be reasonably necessary to effectually enable said ASSIGNEE to
recover whatever collectibles said ASSIGNOR has in accordance with the
true intent and meaning of these presents. xxx25[5] (Italics supplied)
However, when respondent tried to collect the said credit from Jomero Realty
Corporation, the latter refused to honor the Deed of Assignment because it
claimed that petitioner was also indebted to it. 26[6] On November 26, 1990,
respondent sent a letter27[7] to petitioner demanding payment of his
obligation, but petitioner refused to pay claiming that his obligation had been
extinguished when they executed the Deed of Assignment.
Consequently, on January 10, 1991, respondent filed an action for recovery
of a sum of money against the petitioner before the Regional Trial Court of
Makati, Branch 147, which was docketed as Civil Case No. 91-074.28[8]
During the trial, petitioner argued that his obligation was extinguished with
the execution of the Deed of Assignment of credit. Respondent, for its part,
presented the testimony of its employee, Almeda Baaga, who testified that
Jomero Realty refused to honor the assignment of credit because it claimed
that petitioner had an outstanding indebtedness to it.
On August 25, 1994, the trial court rendered a decision 29[9] dismissing the
complaint on the ground that the assignment of credit extinguished the
obligation. The decretal portion thereof provides:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment
in favor of the defendant and against the plaintiff, dismissing the complaint
and ordering the plaintiff to pay the defendant attorneys fees in the amount of
P25,000.00.
Respondent appealed the decision to the Court of Appeals. On April 19,
2001, the appellate court rendered a decision,30[10] the dispositive portion of
which reads:
WHEREFORE, finding merit in this appeal, the court REVERSES the
appealed Decision and enters judgment ordering defendant-appellee Sonny
Lo to pay the plaintiff-appellant KJS ECO-FORMWORK SYSTEM
PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four Hundred
Sixty-Two and 14/100 (P335,462.14) with legal interest of 6% per annum
from January 10, 1991 (filing of the Complaint) until fully paid and attorneys
fees equivalent to 10% of the amount due and costs of the suit.
SO ORDERED.31[11]
In finding that the Deed of Assignment did not extinguish the obligation of the
petitioner to the respondent, the Court of Appeals held that (1) petitioner
failed to comply with his warranty under the Deed; (2) the object of the Deed
did not exist at the time of the transaction, rendering it void pursuant to
Article 1409 of the Civil Code; and (3) petitioner violated the terms of the
Deed of Assignment when he failed to execute and do all acts and deeds as
shall be necessary to effectually enable the respondent to recover the
collectibles.32[12]
Petitioner filed a motion for reconsideration of the said decision, which was
denied by the Court of Appeals.33[13]
In this petition for review, petitioner assigns the following errors:
I debtor offers another thing to the creditor who accepts it as equivalent of
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE
ERROR IN DECLARING THE DEED OF ASSIGNMENT (EXH. 4) AS
NULL AND VOID FOR LACK OF OBJECT ON THE BASIS OF A MERE
HEARSAY CLAIM.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
THE DEED OF ASSIGNMENT (EXH. 4) DID NOT EXTINGUISH
PETITIONERS OBLIGATION ON THE WRONG NOTION THAT
PETITIONER FAILED TO COMPLY WITH HIS WARRANTY
THEREUNDER.
III
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE
DECISION OF THE TRIAL COURT AND IN ORDERING PAYMENT OF
INTERESTS AND ATTORNEYS FEES.34[14]
The petition is without merit.
An assignment of credit is an agreement by virtue of which the owner of a
credit, known as the assignor, by a legal cause, such as sale, dacion en
pago, exchange or donation, and without the consent of the debtor, transfers
his credit and accessory rights to another, known as the assignee, who
acquires the power to enforce it to the same extent as the assignor could
enforce it against the debtor.35[15]
Corollary thereto, in dacion en pago, as a special mode of payment, the
payment of an outstanding debt. 36[16] In order that there be a valid dation in
payment, the following are the requisites: (1) There must be the performance
of the prestation in lieu of payment (animo solvendi) which may consist in the
delivery of a corporeal thing or a real right or a credit against the third person;
(2) There must be some difference between the prestation due and that
which is given in substitution (aliud pro alio); (3) There must be an agreement
between the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different from that
due.37[17] The undertaking really partakes in one sense of the nature of sale,
that is, the creditor is really buying the thing or property of the debtor,
payment for which is to be charged against the debtors debt. As such, the
vendor in good faith shall be responsible, for the existence and legality of the
credit at the time of the sale but not for the solvency of the debtor, in
specified circumstances.38[18]
Hence, it may well be that the assignment of credit, which is in the nature of
a sale of personal property,39[19] produced the effects of a dation in payment
which may extinguish the obligation. 40[20] However, as in any other contract of
sale, the vendor or assignor is bound by certain warranties. More specifically,
the first paragraph of Article 1628 of the Civil Code provides:
The vendor in good faith shall be responsible for the existence and legality of
the credit at the time of the sale, unless it should have been sold as doubtful;
but not for the solvency of the debtor, unless it has been so expressly
stipulated or unless the insolvency was prior to the sale and of common
knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to
warrant the existence and legality of the credit at the time of the sale or
assignment. When Jomero claimed that it was no longer indebted to
petitioner since the latter also had an unpaid obligation to it, it essentially
meant that its obligation to petitioner has been extinguished by
compensation.41[21] In other words, respondent alleged the non-existence of
the credit and asserted its claim to petitioners warranty under the
assignment. Therefore, it behooved on petitioner to make good its warranty
and paid the obligation.
Furthermore, we find that petitioner breached his obligation under the Deed of Assignment, to
wit: And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his
heirs, executors, administrators, or assigns, shall and will at times hereafter, at the request of
said ASSIGNEE, its successors or assigns, at his cost and expense, execute and do all such
further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE
to recover whatever collectibles said ASSIGNOR has in accordance with the true intent and
meaning of these presents.42[22] (underscoring ours)
Indeed, by warranting the existence of the credit, petitioner should be deemed to have ensured
the performance thereof in case the same is later found to be inexistent. He should be held liable
to pay to respondent the amount of his indebtedness.
Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay respondent the
sum of P335,462.14 with legal interest thereon. However, we find that the award by the Court of
Appeals of attorneys fees is without factual basis. No evidence or testimony was presented to
substantiate this claim. Attorneys fees, being in the nature of actual damages, must be duly
substantiated by competent proof.
WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals dated April 19,
2001 in CA-G.R. CV No. 47713, ordering petitioner to pay respondent the sum of P335,462.14
with legal interest of 6% per annum from January 10, 1991 until fully paid is AFFIRMED with
MODIFICATION. Upon finality of this Decision, the rate of legal interest shall be 12% per annum,
inasmuch as the obligation shall thereafter become equivalent to a forbearance of credit.43[23]
The award of attorneys fees is DELETED for lack of evidentiary basis.
SO ORDERED.