THIRD DIVISION

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

ROMULO A. CORONEL, ALARICO A. CORONEL, ANNETTE A. CORONEL, ANNABELLE C.
GONZALES (for herself and on behalf of Floraida C. Tupper, as attorney-in-fact), CIELITO
A. CORONEL, FLORAIDA A. ALMONTE, and CATALINA BALAIS MABANAG, petitioners, vs.
THE COURT OF APPEALS, CONCEPCION D. ALCARAZ and RAMONA PATRICIA ALCARAZ,
assisted by GLORIA F. NOEL as attorney-in-fact,respondents.
DECISION
MELO, J.:
The petition before us has its roots in a complaint for specific performance to compel herein
petitioners (except the last named, Catalina Balais Mabanag) to consummate the sale of a parcel of land
with its improvements located along Roosevelt Avenue in Quezon City entered into by the parties
sometime in January 1985 for the price of P1,240,000.00.
The undisputed facts of the case were summarized by respondent court in this wise:
On January 19, 1985, defendants-appellants Romulo Coronel, et. al. (hereinafter referred to as Coronels)
executed a document entitled Receipt of Down Payment (Exh. A) in favor of plaintiff Ramona Patricia
Alcaraz (hereinafter referred to as Ramona) which is reproduced hereunder:
RECEIPT OF DOWN PAYMENT
P1,240,000.00 - Total amount
50,000.00 - Down payment
-----------------------------------------P1,190,000.00 - Balance
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty Thousand
Pesos purchase price of our inherited house and lot, covered by TCT No. 119627 of the Registry of
Deeds of Quezon City, in the total amount of P1,240,000.00.
We bind ourselves to effect the transfer in our names from our deceased father, Constancio P. Coronel,
the transfer certificate of title immediately upon receipt of the down payment above-stated.
On our presentation of the TCT already in or name, We will immediately execute the deed of absolute
sale of said property and Miss Ramona Patricia Alcaraz shall immediately pay the balance of
the P1,190,000.00.
Clearly, the conditions appurtenant to the sale are the following:

1. Ramona will make a down payment of Fifty Thousand (P50,000.00) pesos upon execution of the
document aforestated;
2. The Coronels will cause the transfer in their names of the title of the property registered in the name of
their deceased father upon receipt of the Fifty Thousand (P50,000.00) Pesos down payment;
3. Upon the transfer in their names of the subject property, the Coronels will execute the deed of absolute
sale in favor of Ramona and the latter will pay the former the whole balance of One Million One Hundred
Ninety Thousand (P1,190,000.00) Pesos.
On the same date (January 15, 1985), plaintiff-appellee Concepcion D. Alcaraz (hereinafter referred to as
Concepcion), mother of Ramona, paid the down payment of Fifty Thousand (P50,000.00) Pesos (Exh. B,
Exh. 2).
On February 6, 1985, the property originally registered in the name of the Coronels father was transferred
in their names under TCT No. 327043 (Exh. D; Exh 4)
On February 18, 1985, the Coronels sold the property covered by TCT No. 327043 to intervenor-appellant
Catalina B. Mabanag (hereinafter referred to as Catalina) for One Million Five Hundred Eighty Thousand
(P1,580,000.00) Pesos after the latter has paid Three Hundred Thousand (P300,000.00) Pesos (Exhs. F3; Exh. 6-C)
For this reason, Coronels canceled and rescinded the contract (Exh. A) with Ramona by depositing the
down payment paid by Concepcion in the bank in trust for Ramona Patricia Alcaraz.
On February 22, 1985, Concepcion, et. al., filed a complaint for a specific performance against the
Coronels and caused the annotation of a notice of lis pendens at the back of TCT No. 327403 (Exh. E;
Exh. 5).
On April 2, 1985, Catalina caused the annotation of a notice of adverse claim covering the same property
with the Registry of Deeds of Quezon City (Exh. F; Exh. 6).
On April 25, 1985, the Coronels executed a Deed of Absolute Sale over the subject property in favor of
Catalina (Exh. G; Exh. 7).
On June 5, 1985, a new title over the subject property was issued in the name of Catalina under TCT No.
351582 (Exh. H; Exh. 8).
(Rollo, pp. 134-136)
In the course of the proceedings before the trial court (Branch 83, RTC, Quezon City) the parties
agreed to submit the case for decision solely on the basis of documentary exhibits. Thus, plaintiffs therein
(now private respondents) proffered their documentary evidence accordingly marked as Exhibits A
through J, inclusive of their corresponding submarkings. Adopting these same exhibits as their own, then
defendants (now petitioners) accordingly offered and marked them as Exhibits 1 through 10, likewise
inclusive of their corresponding submarkings. Upon motion of the parties, the trial court gave them thirty
(30) days within which to simultaneously submit their respective memoranda, and an additional 15 days
within which to submit their corresponding comment or reply thereto, after which, the case would be
deemed submitted for resolution.

On April 14, 1988, the case was submitted for resolution before Judge Reynaldo Roura, who was
then temporarily detailed to preside over Branch 82 of the RTC of Quezon City. On March 1, 1989,
judgment was handed down by Judge Roura from his regular bench at Macabebe, Pampanga for
the Quezon City branch, disposing as follows:
WHEREFORE, judgment for specific performance is hereby rendered ordering defendant to execute in
favor of plaintiffs a deed of absolute sale covering that parcel of land embraced in and covered by
Transfer Certificate of Title No. 327403 (now TCT No. 331582) of the Registry of Deeds for Quezon City,
together with all the improvements existing thereon free from all liens and encumbrances, and once
accomplished, to immediately deliver the said document of sale to plaintiffs and upon receipt thereof, the
plaintiffs are ordered to pay defendants the whole balance of the purchase price amounting
to P1,190,000.00 in cash. Transfer Certificate of Title No. 331582 of the Registry of Deeds for Quezon
City in the name of intervenor is hereby canceled and declared to be without force and effect. Defendants
and intervenor and all other persons claiming under them are hereby ordered to vacate the subject
property and deliver possession thereof to plaintiffs. Plaintiffs claim for damages and attorneys fees, as
well as the counterclaims of defendants and intervenors are hereby dismissed.
No pronouncement as to costs.
So Ordered.
Macabebe, Pampanga for Quezon City, March 1, 1989.
(Rollo, p. 106)
A motion for reconsideration was filed by petitioners before the new presiding judge of the Quezon
City RTC but the same was denied by Judge Estrella T. Estrada, thusly:
The prayer contained in the instant motion, i.e., to annul the decision and to render anew decision by the
undersigned Presiding Judge should be denied for the following reasons: (1) The instant case became
submitted for decision as of April 14, 1988 when the parties terminated the presentation of their respective
documentary evidence and when the Presiding Judge at that time was Judge Reynaldo Roura. The fact
that they were allowed to file memoranda at some future date did not change the fact that the hearing of
the case was terminated before Judge Roura and therefore the same should be submitted to him for
decision; (2) When the defendants and intervenor did not object to the authority of Judge Reynaldo Roura
to decide the case prior to the rendition of the decision, when they met for the first time before the
undersigned Presiding Judge at the hearing of a pending incident in Civil Case No. Q-46145 on
November 11, 1988, they were deemed to have acquiesced thereto and they are now estopped from
questioning said authority of Judge Roura after they received the decision in question which happens to
be adverse to them; (3) While it is true that Judge Reynaldo Roura was merely a Judge-on-detail at this
Branch of the Court, he was in all respects the Presiding Judge with full authority to act on any pending
incident submitted before this Court during his incumbency. When he returned to his Official Station at
Macabebe, Pampanga, he did not lose his authority to decide or resolve cases submitted to him for
decision or resolution because he continued as Judge of the Regional Trial Court and is of co-equal rank
with the undersigned Presiding Judge. The standing rule and supported by jurisprudence is that a Judge
to whom a case is submitted for decision has the authority to decide the case notwithstanding his transfer
to another branch or region of the same court (Sec. 9, Rule 135, Rule of Court).
Coming now to the twin prayer for reconsideration of the Decision dated March 1, 1989 rendered in the
instant case, resolution of which now pertains to the undersigned Presiding Judge, after a meticulous

examination of the documentary evidence presented by the parties, she is convinced that the Decision of
March 1, 1989 is supported by evidence and, therefore, should not be disturbed.
IN VIEW OF THE FOREGOING, the Motion for Reconsideration and/or to Annul Decision and Render
Anew Decision by the Incumbent Presiding Judge dated March 20, 1989 is hereby DENIED.
SO ORDERED.
Quezon City, Philippines, July 12, 1989.
(Rollo, pp. 108-109)
Petitioners thereupon interposed an appeal, but on December 16, 1991, the Court of Appeals
(Buena, Gonzaga-Reyes, Abad-Santos (P), JJ.) rendered its decision fully agreeing with the trial court.
Hence, the instant petition which was filed on March 5, 1992. The last pleading, private respondents
Reply Memorandum, was filed on September 15, 1993. The case was, however, re-raffled to
undersigned ponente only on August 28, 1996, due to the voluntary inhibition of the Justice to whom the
case was last assigned.
While we deem it necessary to introduce certain refinements in the disquisition of respondent court in
the affirmance of the trial courts decision, we definitely find the instant petition bereft of merit.
The heart of the controversy which is the ultimate key in the resolution of the other issues in the case
at bar is the precise determination of the legal significance of the document entitled Receipt of Down
Payment which was offered in evidence by both parties.There is no dispute as to the fact that the said
document embodied the binding contract between Ramona Patricia Alcaraz on the one hand, and the
heirs of Constancio P. Coronel on the other, pertaining to a particular house and lot covered by TCT No.
119627, as defined in Article 1305 of the Civil Code of the Philippines which reads as follows:
Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect
to the other, to give something or to render some service.
While, it is the position of private respondents that the Receipt of Down Payment embodied a
perfected contract of sale, which perforce, they seek to enforce by means of an action for specific
performance, petitioners on their part insist that what the document signified was a mere executory
contract to sell, subject to certain suspensive conditions, and because of the absence of Ramona P.
Alcaraz, who left for the United States of America, said contract could not possibly ripen into a contract of
absolute sale.
Plainly, such variance in the contending parties contention is brought about by the way each
interprets the terms and/or conditions set forth in said private instrument. Withal, based on whatever
relevant and admissible evidence may be available on record, this Court, as were the courts below, is
now called upon to adjudge what the real intent of the parties was at the time the said document was
executed.
The Civil Code defines a contract of sale, thus:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or
its equivalent.
Sale, by its very nature, is a consensual contract because it is perfected by mere consent. The
essential elements of a contract of sale are the following:
a) Consent or meeting of the minds, that is, consent to transfer ownership in exchange for the price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.
Under this definition, a Contract to Sell may not be considered as a Contract of Sale because the
first essential element is lacking. In a contract to sell, the prospective seller explicitly reserves the transfer
of title to the prospective buyer, meaning, the prospective seller does not as yet agree or consent to
transfer ownership of the property subject of the contract to sell until the happening of an event, which for
present purposes we shall take as the full payment of the purchase price. What the seller agrees or
obliges himself to do is to fulfill his promise to sell the subject property when the entire amount of the
purchase price is delivered to him. In other words the full payment of the purchase price partakes of a
suspensive condition, the non-fulfillment of which prevents the obligation to sell from arising and thus,
ownership is retained by the prospective seller without further remedies by the prospective
buyer. In Roque vs. Lapuz (96 SCRA 741 [1980]), this Court had occasion to rule:
Hence, We hold that the contract between the petitioner and the respondent was a contract to sell where
the ownership or title is retained by the seller and is not to pass until the full payment of the price, such
payment being a positive suspensive condition and failure of which is not a breach, casual or serious, but
simply an event that prevented the obligation of the vendor to convey title from acquiring binding force.
Stated positively, upon the fulfillment of the suspensive condition which is the full payment of the
purchase price, the prospective sellers obligation to sell the subject property by entering into a contract of
sale with the prospective buyer becomes demandable as provided in Article 1479 of the Civil Code which
states:
Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the
promissor of the promise is supported by a consideration distinct from the price.
A contract to sell may thus be defined as a bilateral contract whereby the prospective seller, while
expressly reserving the ownership of the subject property despite delivery thereof to the prospective
buyer, binds himself to sell the said property exclusively to the prospective buyer upon fulfillment of the
condition agreed upon, that is, full payment of the purchase price.
A contract to sell as defined hereinabove, may not even be considered as a conditional contract of
sale where the seller may likewise reserve title to the property subject of the sale until the fulfillment of a
suspensive condition, because in a conditional contract of sale, the first element of consent is present,
although it is conditioned upon the happening of a contingent event which may or may not occur. If the
suspensive condition is not fulfilled, the perfection of the contract of sale is completely abated
(cf. Homesite and Housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984]). However, if the suspensive

condition is fulfilled, the contract of sale is thereby perfected, such that if there had already been previous
delivery of the property subject of the sale to the buyer, ownership thereto automatically transfers to the
buyer by operation of law without any further act having to be performed by the seller.
In a contract to sell, upon the fulfillment of the suspensive condition which is the full payment of the
purchase price, ownership will not automatically transfer to the buyer although the property may have
been previously delivered to him. The prospective seller still has to convey title to the prospective buyer
by entering into a contract of absolute sale.
It is essential to distinguish between a contract to sell and a conditional contract of sale specially in
cases where the subject property is sold by the owner not to the party the seller contracted with, but to a
third person, as in the case at bench. In a contract to sell, there being no previous sale of the property, a
third person buying such property despite the fulfillment of the suspensive condition such as the full
payment of the purchase price, for instance, cannot be deemed a buyer in bad faith and the prospective
buyer cannot seek the relief of reconveyance of the property. There is no double sale in such case. Title
to the property will transfer to the buyer after registration because there is no defect in the owner-sellers
title per se, but the latter, of course, may be sued for damages by the intending buyer.
In a conditional contract of sale, however, upon the fulfillment of the suspensive condition, the sale
becomes absolute and this will definitely affect the sellers title thereto. In fact, if there had been previous
delivery of the subject property, the sellers ownership or title to the property is automatically transferred to
the buyer such that, the seller will no longer have any title to transfer to any third person. Applying Article
1544 of the Civil Code, such second buyer of the property who may have had actual or constructive
knowledge of such defect in the sellers title, or at least was charged with the obligation to discover such
defect, cannot be a registrant in good faith. Such second buyer cannot defeat the first buyers title. In case
a title is issued to the second buyer, the first buyer may seek reconveyance of the property subject of the
sale.
With the above postulates as guidelines, we now proceed to the task of deciphering the real nature
of the contract entered into by petitioners and private respondents.
It is a canon in the interpretation of contracts that the words used therein should be given their
natural and ordinary meaning unless a technical meaning was intended (Tan vs. Court of Appeals, 212
SCRA 586 [1992]). Thus, when petitioners declared in the said Receipt of Down Payment that they -Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty Thousand
Pesos purchase price of our inherited house and lot, covered by TCT No. 1199627 of the Registry of
Deeds of Quezon City, in the total amount of P1,240,000.00.
without any reservation of title until full payment of the entire purchase price, the natural and ordinary idea
conveyed is that they sold their property.
When the Receipt of Down payment is considered in its entirety, it becomes more manifest that there
was a clear intent on the part of petitioners to transfer title to the buyer, but since the transfer certificate of
title was still in the name of petitioners father, they could not fully effect such transfer although the buyer
was then willing and able to immediately pay the purchase price. Therefore, petitioners-sellers undertook
upon receipt of the down payment from private respondent Ramona P. Alcaraz, to cause the issuance of a
new certificate of title in their names from that of their father, after which, they promised to present said
title, now in their names, to the latter and to execute the deed of absolute sale whereupon, the latter shall,
in turn, pay the entire balance of the purchase price.

The agreement could not have been a contract to sell because the sellers herein made no express
reservation of ownership or title to the subject parcel of land. Furthermore, the circumstance which
prevented the parties from entering into an absolute contract of sale pertained to the sellers themselves
(the certificate of title was not in their names) and not the full payment of the purchase price. Under the
established facts and circumstances of the case, the Court may safely presume that, had the certificate of
title been in the names of petitioners-sellers at that time, there would have been no reason why an
absolute contract of sale could not have been executed and consummated right there and then.
Moreover, unlike in a contract to sell, petitioners in the case at bar did not merely promise to sell the
property to private respondent upon the fulfillment of the suspensive condition. On the contrary, having
already agreed to sell the subject property, they undertook to have the certificate of title change to their
names and immediately thereafter, to execute the written deed of absolute sale.
Thus, the parties did not merely enter into a contract to sell where the sellers, after compliance by
the buyer with certain terms and conditions, promised to sell the property to the latter. What may be
perceived from the respective undertakings of the parties to the contract is that petitioners had already
agreed to sell the house and lot they inherited from their father, completely willing to transfer ownership of
the subject house and lot to the buyer if the documents were then in order. It just so happened, however,
that the transfer certificate of title was then still in the name of their father. It was more expedient to first
effect the change in the certificate of title so as to bear their names. That is why they undertook to cause
the issuance of a new transfer of the certificate of title in their names upon receipt of the down payment in
the amount of P50,000.00. As soon as the new certificate of title is issued in their names, petitioners were
committed to immediately execute the deed of absolute sale. Only then will the obligation of the buyer to
pay the remainder of the purchase price arise.
There is no doubt that unlike in a contract to sell which is most commonly entered into so as to
protect the seller against a buyer who intends to buy the property in installment by withholding ownership
over the property until the buyer effects full payment therefor, in the contract entered into in the case at
bar, the sellers were the ones who were unable to enter into a contract of absolute sale by reason of the
fact that the certificate of title to the property was still in the name of their father. It was the sellers in this
case who, as it were, had the impediment which prevented, so to speak, the execution of an contract of
absolute sale.
What is clearly established by the plain language of the subject document is that when the said
Receipt of Down Payment was prepared and signed by petitioners Romulo A. Coronel, et. al., the parties
had agreed to a conditional contract of sale, consummation of which is subject only to the successful
transfer of the certificate of title from the name of petitioners father, Constancio P. Coronel, to their names.
The Court significantly notes that this suspensive condition was, in fact, fulfilled on February 6, 1985
(Exh. D; Exh. 4). Thus, on said date, the conditional contract of sale between petitioners and private
respondent Ramona P. Alcaraz became obligatory, the only act required for the consummation thereof
being the delivery of the property by means of the execution of the deed of absolute sale in a public
instrument, which petitioners unequivocally committed themselves to do as evidenced by the Receipt of
Down Payment.
Article 1475, in correlation with Article 1181, both of the Civil Code, plainly applies to the case at
bench. Thus,
Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price.

From that moment, the parties may reciprocally demand performance, subject to the provisions of the law
governing the form of contracts.
Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of
those already acquired, shall depend upon the happening of the event which constitutes the condition.
Since the condition contemplated by the parties which is the issuance of a certificate of title in
petitioners names was fulfilled on February 6, 1985, the respective obligations of the parties under the
contract of sale became mutually demandable, that is, petitioners, as sellers, were obliged to present the
transfer certificate of title already in their names to private respondent Ramona P. Alcaraz, the buyer, and
to immediately execute the deed of absolute sale, while the buyer on her part, was obliged to forthwith
pay the balance of the purchase price amounting to P1,190,000.00.
It is also significant to note that in the first paragraph in page 9 of their petition, petitioners
conclusively admitted that:
3. The petitioners-sellers Coronel bound themselves to effect the transfer in our names from our
deceased father Constancio P. Coronel, the transfer certificate of title immediately upon
receipt of the downpayment above-stated". The sale was still subject to this suspensive
condition.(Emphasis supplied.)
(Rollo, p. 16)
Petitioners themselves recognized that they entered into a contract of sale subject to a suspensive
condition. Only, they contend, continuing in the same paragraph, that:
. . . Had petitioners-sellers not complied with this condition of first transferring the title to the property
under their names, there could be no perfected contract of sale. (Emphasis supplied.)
(Ibid.)
not aware that they have set their own trap for themselves, for Article 1186 of the Civil Code expressly
provides that:
Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.
Besides, it should be stressed and emphasized that what is more controlling than these mere
hypothetical arguments is the fact that the condition herein referred to was actually and indisputably
fulfilled on February 6, 1985, when a new title was issued in the names of petitioners as evidenced by
TCT No. 327403 (Exh. D; Exh. 4).
The inevitable conclusion is that on January 19, 1985, as evidenced by the document denominated
as Receipt of Down Payment (Exh. A; Exh. 1), the parties entered into a contract of sale subject to the
suspensive condition that the sellers shall effect the issuance of new certificate title from that of their
fathers name to their names and that, on February 6, 1985, this condition was fulfilled (Exh. D; Exh. 4).
We, therefore, hold that, in accordance with Article 1187 which pertinently provides Art. 1187. The effects of conditional obligation to give, once the condition has been fulfilled, shall retroact
to the day of the constitution of the obligation . . .

In obligations to do or not to do, the courts shall determine, in each case, the retroactive effect of the
condition that has been complied with.
the rights and obligations of the parties with respect to the perfected contract of sale became mutually
due and demandable as of the time of fulfillment or occurrence of the suspensive condition on February 6,
1985. As of that point in time, reciprocal obligations of both seller and buyer arose.
Petitioners also argue there could been no perfected contract on January 19, 1985 because they
were then not yet the absolute owners of the inherited property.
We cannot sustain this argument.
Article 774 of the Civil Code defines Succession as a mode of transferring ownership as follows:
Art. 774. Succession is a mode of acquisition by virtue of which the property, rights and obligations to the
extent and value of the inheritance of a person are transmitted through his death to another or others by
his will or by operation of law.
Petitioners-sellers in the case at bar being the sons and daughters of the decedent Constancio P.
Coronel are compulsory heirs who were called to succession by operation of law. Thus, at the point their
father drew his last breath, petitioners stepped into his shoes insofar as the subject property is concerned,
such that any rights or obligations pertaining thereto became binding and enforceable upon them. It is
expressly provided that rights to the succession are transmitted from the moment of death of the
decedent (Article 777, Civil Code; Cuison vs. Villanueva, 90 Phil. 850 [1952]).
Be it also noted that petitioners claim that succession may not be declared unless the creditors have
been paid is rendered moot by the fact that they were able to effect the transfer of the title to the property
from the decedents name to their names on February 6, 1985.
Aside from this, petitioners are precluded from raising their supposed lack of capacity to enter into an
agreement at that time and they cannot be allowed to now take a posture contrary to that which they took
when they entered into the agreement with private respondent Ramona P. Alcaraz. The Civil Code
expressly states that:
Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person relying thereon.
Having represented themselves as the true owners of the subject property at the time of sale, petitioners
cannot claim now that they were not yet the absolute owners thereof at that time.
Petitioners also contend that although there was in fact a perfected contract of sale between them
and Ramona P. Alcaraz, the latter breach her reciprocal obligation when she rendered impossible the
consummation thereof by going to the United States of America, without leaving her address, telephone
number, and Special Power of Attorney (Paragraphs 14 and 15, Answer with Compulsory Counterclaim to
the Amended Complaint, p. 2; Rollo, p. 43), for which reason, so petitioners conclude, they were correct in
unilaterally rescinding the contract of sale.
We do not agree with petitioners that there was a valid rescission of the contract of sale in the instant
case. We note that these supposed grounds for petitioners rescission, are mere allegations found only in
their responsive pleadings, which by express provision of the rules, are deemed controverted even if no

reply is filed by the plaintiffs (Sec. 11, Rule 6, Revised Rules of Court). The records are absolutely bereft
of any supporting evidence to substantiate petitioners allegations. We have stressed time and again that
allegations must be proven by sufficient evidence (Ng Cho Cio vs. Ng Diong, 110 Phil. 882 [1961]; Recaro
vs. Embisan, 2 SCRA 598 [1961]). Mere allegation is not an evidence (Lagasca vs. De Vera, 79 Phil. 376
[1947]).
Even assuming arguendo that Ramona P. Alcaraz was in the United States of America on February
6, 1985, we cannot justify petitioners-sellers act of unilaterally and extrajudicially rescinding the contract
of sale, there being no express stipulation authorizing the sellers to extrajudicially rescind the contract of
sale. (cf. Dignos vs. CA, 158 SCRA 375 [1988]; Taguba vs. Vda. De Leon, 132 SCRA 722 [1984])
Moreover, petitioners are estopped from raising the alleged absence of Ramona P. Alcaraz because
although the evidence on record shows that the sale was in the name of Ramona P. Alcaraz as the buyer,
the sellers had been dealing with Concepcion D. Alcaraz, Ramonas mother, who had acted for and in
behalf of her daughter, if not also in her own behalf. Indeed, the down payment was made by Concepcion
D. Alcaraz with her own personal Check (Exh. B; Exh. 2) for and in behalf of Ramona P. Alcaraz. There is
no evidence showing that petitioners ever questioned Concepcions authority to represent Ramona P.
Alcaraz when they accepted her personal check. Neither did they raise any objection as regards payment
being effected by a third person. Accordingly, as far as petitioners are concerned, the physical absence of
Ramona P. Alcaraz is not a ground to rescind the contract of sale.
Corollarily, Ramona P. Alcaraz cannot even be deemed to be in default, insofar as her obligation to
pay the full purchase price is concerned. Petitioners who are precluded from setting up the defense of the
physical absence of Ramona P. Alcaraz as above-explained offered no proof whatsoever to show that
they actually presented the new transfer certificate of title in their names and signified their willingness
and readiness to execute the deed of absolute sale in accordance with their agreement. Ramonas
corresponding obligation to pay the balance of the purchase price in the amount of P1,190,000.00 (as
buyer) never became due and demandable and, therefore, she cannot be deemed to have been in
default.
Article 1169 of the Civil Code defines when a party in a contract involving reciprocal obligations may
be considered in default, to wit:
Art. 1169. Those obliged to deliver or to do something, incur in delay from the time the obligee judicially
or extrajudicially demands from them the fulfillment of their obligation.
xxx
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. From the moment one of the parties
fulfill his obligation, delay by the other begins. (Emphasis supplied.)
There is thus neither factual nor legal basis to rescind the contract of sale between petitioners and
respondents.
With the foregoing conclusions, the sale to the other petitioner, Catalina B. Mabanag, gave rise to a
case of double sale where Article 1544 of the Civil Code will apply, to wit:
Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be
transferred to the person who may have first taken possession thereof in good faith, if it should be
movable property.

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith
first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the
possession; and, in the absence thereof to the person who presents the oldest title, provided there is
good faith.
The record of the case shows that the Deed of Absolute Sale dated April 25, 1985 as proof of the
second contract of sale was registered with the Registry of Deeds of Quezon City giving rise to the
issuance of a new certificate of title in the name of Catalina B. Mabanag on June 5, 1985. Thus, the
second paragraph of Article 1544 shall apply.
The above-cited provision on double sale presumes title or ownership to pass to the buyer, the
exceptions being: (a) when the second buyer, in good faith, registers the sale ahead of the first buyer, and
(b) should there be no inscription by either of the two buyers, when the second buyer, in good faith,
acquires possession of the property ahead of the first buyer. Unless, the second buyer satisfies these
requirements, title or ownership will not transfer to him to the prejudice of the first buyer.
In his commentaries on the Civil Code, an accepted authority on the subject, now a distinguished
member of the Court, Justice Jose C. Vitug, explains:
The governing principle is prius tempore, potior jure (first in time, stronger in right). Knowledge by the first
buyer of the second sale cannot defeat the first buyers rights except when the second buyer first registers
in good faith the second sale (Olivares vs. Gonzales, 159 SCRA 33). Conversely, knowledge gained by
the second buyer of the first sale defeats his rights even if he is first to register, since knowledge taints his
registration with bad faith (see also Astorga vs. Court of Appeals, G.R. No. 58530, 26 December
1984). In Cruz vs. Cabana (G.R. No. 56232, 22 June 1984, 129 SCRA 656), it was held that it is
essential, to merit the protection of Art. 1544, second paragraph, that the second realty buyer must act in
good faith in registering his deed of sale (citing Carbonell vs. Court of Appeals, 69 SCRA 99, Crisostomo
vs. CA, G.R. No. 95843, 02 September 1992).
(J. Vitug, Compendium of Civil Law and Jurisprudence, 1993 Edition, p. 604).
Petitioners point out that the notice of lis pendens in the case at bar was annotated on the title of the
subject property only on February 22, 1985, whereas, the second sale between petitioners Coronels and
petitioner Mabanag was supposedly perfected prior thereto or on February 18, 1985. The idea conveyed
is that at the time petitioner Mabanag, the second buyer, bought the property under a clean title, she was
unaware of any adverse claim or previous sale, for which reason she is a buyer in good faith.
We are not persuaded by such argument.
In a case of double sale, what finds relevance and materiality is not whether or not the second buyer
in good faith but whether or not said second buyer registers such second sale in good faith, that is,
without knowledge of any defect in the title of the property sold.
As clearly borne out by the evidence in this case, petitioner Mabanag could not have in good faith,
registered the sale entered into on February 18, 1985 because as early as February 22, 1985, a notice
of lis pendens had been annotated on the transfer certificate of title in the names of petitioners, whereas
petitioner Mabanag registered the said sale sometime in April, 1985. At the time of registration, therefore,
petitioner Mabanag knew that the same property had already been previously sold to private respondents,
or, at least, she was charged with knowledge that a previous buyer is claiming title to the same

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

[G.R. No. 120747. September 21, 2000]

VICENTE GOMEZ, as successor-in-interest of awardee LUISA GOMEZ, petitioner, vs. COURT OF
APPEALS, City of MANILA acting thru the City Tenants Security Committee now the Urban
Settlement Office, Register of Deeds of Manila, respondents.
DECISION
BUENA, J.:
Sought to be reversed in this petition for review on certiorari under Rule 45 of the Rules of Court is
the decision[1] of the Court of Appeals in C.A. G.R. Sp. No. 32101 promulgated on 22 February 1995
which annulled and set aside the decision of the Regional Trial Court of Manila, Branch 12 in Civil Case
No. 51930.
Impugned similarly is the resolution[2] of the Court of Appeals dated 29 June 1995 denying petitioners
motion for reconsideration.
From the records, we find the following antecedents:
Pursuant to the Land for the Landless Program of the City of Manila and in accordance with City
Ordinance No. 6880, the Office of City Mayor issued Resolution No. 16-A, [3] Series of 1978, dated 17 May
1978, which effectively set guidelines and criteria for the award of city home lots to qualified and
deserving applicants. Attached to said resolution and made as integral part thereof was a Contract to
Sell[4] that further laid down terms and conditions which the lot awardee must comply with.
On 30 June 1978, the City of Manila, through the City Tenants Security Committee (CTSC) presently
known as the Urban Settlement Office (URBAN), passed Resolution 17-78 [5] which in effect awarded to 46
applicants, 37 homelots in the former Ampil-Gorospe estate located in Tondo, Manila. Luisa Gomez,
predecessor-in-interest of herein petitioner Vicente Gomez, was awarded Lot 4, Block 1, subject to the
provisions of Resolution No. 3-78 of the CTSC and building, subdivision and zoning rules and regulations.
Consequently, a certificate of award [6]dated 02 July 1978 was granted by the CTSC in favor of Luisa
Gomez, who paid the purchase price of the lot in the amount of P3,556.00 on installment basis,[7] said
payments being duly covered by official receipts.
In 1979, Luisa Gomez traveled to the Unites States of America but returned to the Philippines in the
same year.
On 18 January 1980, Luisa Gomez finally paid in full the P 3,556.00 purchase price of the
lot. Despite the full payment, Luisa still paid in installment an amount of P8,244.00, in excess of the
purchase price, which the City of Manila, through the CTSC, accepted.Additionally, the lot was declared
for taxation purposes and the corresponding real estate taxes thereon paid from 1980-1988. In 1982,
Luisa, together with her spouse Daniel, left again for the United States of America where she died [8] on 09
January 1983. She is survived by her husband and four children, namely, Ramona G. Takorda, Edgardo
Gomez, Erlinda G. Pena, and Rebecca G. Dizon.[9]
Subsequently, in a memorandum dated 07 February 1984, the Urban Settlements Officer and
Member-Executive Secretary of the CTSC directed the Western Police District, City Hall Detachment, to

conduct an investigation regarding reported violations of the terms and conditions of the award committed
by the lot awardees.
Thus, on 23 November 1984, a team headed by Pfc. Reynaldo Cristobal of the Western Police
District, proceeded to the former Ampil-Gorospe estate where the subject lots are located, and conducted
an investigation of alleged violations thereat.
On 19 December 1984, team leader Pfc. Reynaldo Cristobal rendered an investigation
report[10] addressed to the City Mayor of Manila, as Chairman of the CTSC, stating, among others, the
following findings:
X X X After the said operation, it was found out that of all the lot awardees in the said estate, the following
were confirmed to have violated the terms and conditions of their respective awards as indicated opposite
their names, to wit:
X X X 2. Name of awardee : Daniel Gomez
Address : No. 2557-C Juan Luna St. Tondo, Manila
Violation: The place was found actually occupied by Mrs. Erlinda Perez and her family together
with Mr. Mignony Lorghas and family, who are paying monthly rentals of P 210.00 each to
Vicente Gomez, brother of awardee. Daniel Gomez is now presently residing in the United
States of America and only returns for vacation once in a while as a Balikbayan X X X.
Thus, on 01 July 1986, the CTSC, headed by then City Mayor Gemiliano Lopez, Jr. as Chairman,
issued Resolution No. 015-86,[11] adopting the findings of the investigation report submitted by Pfc.
Cristobal, and ordering the cancellation of the lot awards of Daniel Gomez and other awardees who were
found to have committed violations, and further declaring the forfeiture of payments made by said
awardees as reasonable compensation for the use of the homelots.
In a letter[12] dated 04 August 1986, herein petitioner Vicente Gomez, acting as attorney-in-fact [13] of
his brother Daniel Gomez (spouse of Luisa Gomez) asked for reconsideration of the CTSC resolution
revoking the award of the lot.
On 28 June 1988, Daniel Gomez, spouse of awardee Luisa Gomez, died in the United States of
America. Eventually, on 01 February 1989, the surviving children of the deceased spouses, who were
American citizens and residents of the United States of America, executed an affidavit of adjudication with
deed of donation[14] disposing gratuitously Lot No. 1, Block 4, in favor of their uncle Vicente Gomez.
On 20 February 1989, petitioner Vicente Gomez filed a memorandum [15] before the CTSC praying
that Resolution 15-86 be set aside and that the award of the lot be restored to Luisa Gomez, or her heirs
or successor-in-interest , preferably Vicente Gomez.
Thereafter, two supplemental memoranda, dated 26 July 1989 [16] and 10 January 1990,[17] were
submitted by petitioner before the CTSC reiterating the prayer in the initial memorandum.
On 05 February 1990, herein petitioner filed before the Regional Trial Court (RTC) of Manila, Branch
12, a petition for certiorari, prohibition and mandamus docketed as Civil Case No. 90-51930, entitled
Vicente Gomez, as successor-in-interest of Awardee, Luisa Gomez, petitioner, versus City Tenants
Security Committee (now Urban Settlement Office) and Register of Deeds of Manila, respondents.

In an order[18] dated 24 April 1990, the lower court directed the petitioner to amend its petition so as
to implead the proper government agency.
Hence, petitioner filed an amended petition[19] impleading the City of Manila as respondent, to which
the latter submitted an answer.[20]
Accordingly, after the presentation of evidence, the lower court promulgated its decision [21] dated 20
January 1993, the decretal portion of which reads:
Wherefore, the petition is hereby granted :
1. Ordering the City of Manila through its agency the City Tenants Security Committee (now Urban
Settlement Office) to set aside the order of cancellation of the award for Lot No. 4, Block 1 (formerly of the
Ampil-Gorospe estate) in favor of Luisa Gomez, her heirs and successor-in-interest, the herein petitioner;
2. Prohibiting the City of Manila through its agency including the Register of Deeds of Manila from
awarding the same lot and issuing the corresponding certificate of title therefor to any other person;
3. Ordering the City of Manila through its agency the City Tenants Security Committee (now Urban
Settlement Office) to execute a Deed of Absolute Sale over the aforementioned lot in favor of the
petitioner as successor-in-interest of the awardee and further ordering them to stop and/or refrain from
disturbing the peaceful physical possession thereof of (sic) the petitioner; and
4. Ordering the City of Manila through its agency the City Tenants Security Committee (now Urban
Settlement Office) to refund to the petitioner his overpayments amounting to P8,244.00 and to pay the
costs of suit.
On appeal, the Court of Appeals reversed the lower courts decision prompting petitioner to file a
motion for reconsideration which the appellate court denied via its assailed resolution dated 29 June
1995.
Hence, the instant appeal where the core of controversy revolves around the propriety of CTSCs act
of canceling the lot award, through Resolution No. 015-86, and further declaring the forfeiture of amounts
paid by the awardee, as reasonable compensation for the use of the home lot.
The petition is unmeritorious.
A thorough scrutiny of the records and an even more exhaustive perusal of the evidence, both
documentary and testimonial, would lead to the inevitable conclusion that the fact of cancellation of the
award covering Lot 4, Block 1, by the City of Manila, acting through the CTSC, was properly exercised
within the bounds of law and contractual stipulation between the parties.
Viewed broadly, petitioner anchors his case on the premise, albeit erroneous, that upon full payment
of the purchase price of the lot in January 1980, Luisa Gomez, actual awardee, already acquired a vested
right over the real property subject of the present controversy. Thus, according to petitioner, upon the
death of Luisa Gomez on 09 January 1983, the alleged vested right was transmitted by operation of law
to her lawful heirs, pursuant to Article 777 of the Civil Code. Additionally, petitioner submits that by virtue
of the affidavit of adjudication with Deed of Donation executed on 01 February 1989 in his favor by the
surviving children of Luisa, he, in effect, became the successor-in-interest of Luisa and thus entitled to
whatever rights enjoyed by the latter over the property.

In the light of existing law and jurisprudence and based on the evidence adduced, this Court finds
difficulty giving credence and weight to petitioners submissions. We therefore rule that the cancellation of
the award of Lot 4, Block 1, through the expediency of Resolution No. 015-86, was proper.
Primarily, it must be stressed that the contract entered into between the City of Manila and awardee
Luisa Gomez was not one of sale but a contract to sell, which, under both statutory and case law, has its
own attributes, peculiarities and effects.
Speaking through Mr. Justice Florenz Regalado, this Court in Adelfa Properties, Inc. vs. Court of
Appeals,[22] mapped out the bold distinctions between these species of contracts, to wit:
In a contract of sale, the title passes to the vendee upon the delivery of the thing sold; whereas in a
contract to sell, by agreement, the ownership is reserved in the vendor and is not to pass until the full
payment of the price. In a contract of sale, the vendor has lost and cannot recover ownership until and
unless the contract is resolved or rescinded; whereas in a contract to sell, title is retained by the vendor
until the full payment of the purchase price, such payment being a positive suspensive condition and
failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from
being effective. Thus, a deed of sale is considered absolute in nature where there is neither a stipulation
in the deed that title to the property sold is reserved in the seller until the full payment of the price, nor one
giving the vendor the right to unilaterally resolve the contract the moment the buyer fails to pay within a
fixed period.
To our mind, however, this pronouncement should not curtail the right of the parties in a contract to
sell to provide additional stipulations, nor bar them from imposing conditions relative to the transfer of
ownership.
To be sure, a contract of sale may either be absolute or conditional. One form of conditional sales is
what is now popularly termed as a Contract to Sell, where ownership or title is retained until the fulfillment
of a positive suspensive condition normally the payment of the purchase price in the manner agreed
upon.[23] (Emphasis ours)
From the above disquisition in Galang and applying Article 1306 of the Civil Code, the contracting
parties are accorded the liberality and freedom to establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided the same are not contrary to law, morals, good
custom, public order or public policy. In the law on contracts, such fundamental principle is known as the
autonomy of contracts.
Under the present circumstances, we see no hindrance that prohibits the parties from stipulating
other lawful conditions, aside from full payment of the purchase price, which they pledge to bind
themselves and upon which transfer of ownership depends.
In the instant case, we uphold the Contract to Sell, duly annexed and attached to Resolution 16-A,
which explicitly provides for additional terms and conditions upon which the lot awardees are
bound. Although unsigned, the Contract to Sell, in addition to the provisions of Resolution 16-A,
constitutes the law between the contracting parties. After all, under the law there exists a binding contract
between the parties whose minds have met on a certain matter notwithstanding that they did not affix their
signatures to its written form.[24]
For a contract, like a contract to sell, involves a meeting of minds between two persons whereby one
binds himself, with respect to the other, to give something or to render some service. Contracts, in
general, are perfected by mere consent, which is manifested by the meeting of the offer and the

acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain
and the acceptance absolute.[25]
As to the matter of acceptance, the same may be evidenced by some acts, or conduct,
communicated to the offeror, either in a formal or an informal manner, that clearly manifest the intention or
determination to accept the offer to buy or sell.[26]
In the case at bar, acceptance on the part of the vendee was manifested through a plethora of acts,
such as payment of the purchase price, declaration of the property for taxation purposes, and payment of
real estate taxes thereon, and similar acts showing vendee's assent to the contract.
Verily, Resolution 16-A and the Contract to Sell which was annexed, attached and made to form part
of said resolution, clearly laid down the terms and conditions which the awardee-vendee must comply
with. Accordingly, as an awardee, Luisa Gomez, her heirs and successors-in-interest alike, are dutybound to perform the correlative obligations embodied in Resolution 16-A and the Contract to Sell.
Resolution 16-A, Series of 1978, explicitly provides that aside from the requirement of Filipino
citizenship and legal age, the basic criteria for award of the lot pursuant to the Land for the Landless
Program of the City of Manila shall be the following:
a) Occupancy - The applicant must be the legal and actual or physical occupant of the lot in question at
the time of its acquisition by the City. He must be the owner of the house and lot, must be using the same
for his residential purposes, and must have had a lessee-lessor relationship with the previous owner of
the land or landed estate of which the subject lot is a part.
b) Non-ownership of land - The applicant and/or his spouse, if he is married, must not be an owner of
any parcel of land in Manila, Metropolitan Manila or elsewhere in the Philippines. Neither must he and/or
his spouse be a prospective owner or a buyer on installment basis of any lot other than that which he is
occupying and for which he is applying for award from the City.
c) Capacity to pay- The applicant must have such financial means and/or support as will enable him to
make regular payments of amortizations or installments for the lot if the same is awarded to him.
Of equal importance are the essential terms and conditions embraced in the Contract to Sell, which
awardee Luisa Gomez, her heirs and successors-in-interest, violated, to wit:
X X X Par.(3). The vendee shall occupy and use the lot exclusively for his/her residential purpose . X X
X
X X X Par. (5). The vendee hereby warrants and declares under oath that he/she is a bonafide and actual
occupant and tenant of the lot; X X X and that he/she fully understands that any false statement or
misrepresentation hereof (sic) shall be sufficient cause for the automatic cancellation of his/her rights
under this agreement as well as ground for criminal prosecution.
Par. (6). Until complete payment of the purchase price and compliance with all the vendees
obligations herein, title to the lot remains in the name of the owner. During the effectivity of this
agreement, however, the owner may transfer its title or assign its rights and interest under this agreement
to any person, corporation, bank or financial institution.
Title shall pass to the vendee upon execution of a final deed of sale in his/her favor. X X X

Par. (8). In order not to defeat the purpose of this social land reform program of the City of Manila,
and to prevent real estate speculations within twenty years from complete payment of the
purchase price and execution of the final deed of sale, the lot and residential house or
improvement thereon shall not be sold, transferred, mortgaged, leased or otherwise alienated or
encumbered without the written consent of the City Mayor.
Par. (9). During the effectivity of this agreement, the residential house or improvement thereon
shall not be leased, sold, transferred or otherwise alienated by the vendee without the written
consent of the owner. X X X
Par. (14). In the event that the vendee dies before full payment of the purchase price of the lot, his/her
surviving spouse, children heirs and/or successors-in-interest shall succeed in all his/her rights and
interest, as well as assume all/his/her obligations under this agreement.
Par. (15). This agreement shall be binding upon the heirs, executors and administrators of the
vendee. (emphasis ours)
Petitioner urges that awardee Luisa Gomez did not commit any violation of the lot award. On the
contrary, the records would indubitably show that Luisa Gomez, including her heirs and successors-ininterest, have performed acts that constitute gross, if not brazen, violation of the aforementioned terms
and conditions of the award, as evidenced by the investigation report submitted by Pfc. Cristobal, dated
19 December 1984.
Results of the investigation conducted on 23 November 1984, reveal that the lot was actually
occupied and leased by a certain Erlinda Perez and Mignony Lorghas, together with their respective
families, who were paying rentals to petitioner Vicente Gomez for the lease of the subject premises.
Moreover, in a conference held on 13 January 1989 at the Office of the Acting Urban Settlement
Officer, Lorghas admitted that she has been leasing the property and paying rent to petitioner Vicente
Gomez, thus:[27]
Atty. Bernardo: Mrs. Lorghas, how long have you been renting the property?
Mrs. Lorghas: I was living there since 1960 until today. I was renting a small room downfloor
(sic). When the family of Mr. Gomez died, kami na ang tumira sa itaas until now.
Atty. Bernardo : Magkano ang upa mo?
Mrs. Lorghas: P300 a month.
Atty. Bernardo: Kanino?
Mrs. Lorghas: Kay Vicente Gomez.
Atty. Bernardo: Meron bang resibo?
Mrs. Lorghas: Wala po.
Atty. Bernardo: Noong 1973, kayo na rin ang nakatira sa lugar ni Gomez.

Mrs. Lorghas: Opo.

Certainly, said acts constitute a brazen transgression of Resolution 16-A and clear contravention of
the Contract to Sell, specifically par. (3), (8) and (9) thereof.
The contract provides in no uncertain terms, that the abovementioned terms and conditions shall
bind the heirs, executors and administrators of the vendee. The contract further states that breach thereof
would result to the automatic cancellation of the vendees rights thereunder.
Thus, par.(10) (b) (a) of the Contract to Sell, which reads:
X X X any violation of the terms and conditions of this agreement shall automatically cause the
cancellation of the vendees rights under this agreement without necessity of prior notice or judicial
declaration X X X.
Such kind of stipulation was upheld by this Court in the Adelfa case where we categorically declared
that Article 1592 of the Civil Code, which requires rescission either by judicial action, or notarial act, does
not apply to a contract to sell.[28]
Moreover, judicial action for rescission of a contract is not necessary where the contract provides for
automatic rescission in case of breach,[29] as in the contract involved in the present controversy.
Likewise, this Court sustains the forfeiture of the payments made by awardee as reasonable
compensation for the use of the lot. At this juncture, par. (1) of the Contract to Sell furnishes support to
this conclusion:
X X X In case of the cancellation of the vendees rights under this agreement as hereinafter stipulated, all
payments made by him/her shall be forfeited and considered as rentals for the use of the lot X X X.
Further, Article 1486 of the Civil Code provides that a stipulation that the installments or rents paid
shall not be returned to the vendee or lessee shall be valid insofar as the same may not be
unconscionable under the circumstances.[30]
Applying the foregoing, we are of the considered view that the payment of the purchase price
of P3,556.00, constitutes fair and reasonable rental for the period in which said property was under the
control of awardee Luisa Gomez, her heirs and successors-in-interest. Undeniably, the awardee together
with her heirs and successors-in-interest, have gained benefits, financial or otherwise, for a period of eight
years - from the time of actual award of the lot to the time of cancellation thereof (1978-1986).
Nonetheless, we ought to stress that in the present case, forfeiture of the installments paid as
rentals, only applies to the purchase price of P3,556.00 and not to the overpayment of the amount
of P8,244.00.
Under these circumstances, the vendor should refund the amount of P8,244.00 representing the
overpayment made, plus interest, to be computed in accordance with the rule of thumb enunciated in the
landmark case of Eastern Shipping Lines, Inc. vs. Court of Appeals [31] and reiterated in the case
of Philippine National Bank vs. Court of Appeals.[32]

For us to uphold the forfeiture of the amount representing the overpayment would be to revolt
against the dictates of justice and fairness. A contrary ruling would unjustly enrich the vendor to the
prejudice of the vendee.
In the same vein, the provisions of Article 777 of the Civil Code notwithstanding, we hold that the
surviving children of awardee Luisa Gomez are not qualified transferees of Lot 4, Block 1 for failure to
conform with the prerequisites set by Resolution 16-A, to wit, Filipino citizenship and actual occupancy,
which in the present case, are basic criteria for the award of the lot, pursuant to the Land for the Landless
Program of the City of Manila.
The records reveal that the children of Luisa Gomez are American citizens and permanent residents
of the United States of America. Notably, Resolution 16-A specifically enumerates Filipino citizenship and
actual occupancy of the lot for residential purposes, as qualifications for entitlement to the lot award. For
this court to consider said surviving children as qualified awardee-transferees would render illusory the
purposes for which Resolution 16-A and the Land for the Landless Program of the City of Manila were
adopted.
Even assuming arguendo that the surviving children of Luisa Gomez are entitled to the lot by virtue
of Article 777 of the Civil Code, said heirs nevertheless abandoned their right when they violated the
terms and conditions of the award by donating the subject property to petitioner Vicente Gomez.
As paragraph (15) of the agreement provides that the heirs of the vendee shall be bound thereby, it
is then incumbent upon said heirs to render strict compliance with the provisions thereof.
In particular, paragraph (8) of the Contract proscribes the sale, transfer, mortgage, lease, alienation
or encumbrance of the lot, residential house, or improvement thereon, without the written consent of the
City Mayor, within a period of twenty (20) years from complete payment of the purchase price and
execution of the final deed of sale. The execution of the Deed of Donation by the surviving children of
Luisa Gomez on February 1, 1989, in favor of Vicente Gomez, was clearly within the prohibited period of
20 years from the full payment of the purchase price on January 18, 1980.
Without doubt, the prohibition applies to them.
Furthermore, the subject lot and residential house were occupied by, and leased to, third persons, in
crystalline and evident derogation of the terms of the award.
WHEREFORE, premises considered, the instant petition is DISMISSED for lack of merit, and the
assailed decision of the Court of Appeals with respect to the cancellation of the award of Lot 4, Block 1, is
AFFIRMED SUBJECT TO MODIFICATION as to the forfeiture of amounts paid by the vendee.
As modified, the City of Manila, is hereby ordered to refund with dispatch the amount of P8,244.00
representing the overpayment made by petitioner plus interest.
SO ORDERED.

G.R. No. 108346. July 11, 2001]

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners, vs. COURT OF APPEALS,
DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.
DECISION
PANGANIBAN, J.:
A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed
by the contract, entitles the injured party to rescind the obligation. Rescission abrogates the contract from
its inception and requires a mutual restitution of benefits received.
The Case

Before us is a Petition for Review on Certiorari [1] questioning the Decision[2] of the Court of Appeals
(CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its Resolution [3] dated December 29,
1992 denying petitioners motion for reconsideration.[4]
The dispositive portion of the assailed Decision reads:
WHEREFORE, the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and the Decision
dated November 14, 1990 dismissing the [C]omplaint is REINSTATED. The bonds posted by plaintiffsappellees and defendants-appellants are hereby RELEASED. [5]
The Facts

The factual antecedents of the case, as found by the CA, are as follows:
x x x. David Raymundo [herein private respondent] is the absolute and registered owner of a parcel of
land, together with the house and other improvements thereon, located at 1918 Kamias St., Dasmarias
Village, Makati and covered by TCT No. 142177. Defendant George Raymundo [herein private
respondent] is Davids father who negotiated with plaintiffs Avelina and Mariano Velarde [herein
petitioners] for the sale of said property, which was, however, under lease (Exh. 6, p. 232, Record of Civil
Case No. 15952).
On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. A; Exh. 1, pp. 11-12, Record) was
executed by defendant David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as vendee, with
the following terms and conditions:
xxxxxxxxx
That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS (P800,000.00),
Philippine currency, receipt of which in full is hereby acknowledged by the VENDOR from the VENDEE, to
his entire and complete satisfaction, by these presents the VENDOR herebySELLS, CEDES,
TRANSFERS, CONVEYS AND DELIVERS, freely and voluntarily, with full warranty of a legal and valid
title as provided by law, unto the VENDEE, her heirs, successors and assigns, the parcel of land
mentioned and described above, together with the house and other improvements thereon.

That the aforesaid parcel of land, together with the house and other improvements thereon, were
mortgaged by the VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila, to
secure the payment of a loan of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),
Philippine currency, as evidenced by a Real Estate Mortgage signed and executed by the VENDOR in
favor of the said Bank of the Philippine Islands, on______ and which Real Estate Mortgage was ratified
before Notary Public for Makati, _______, as Doc. No. ____, Page No. ___, Book No. ___, Series of 1986
of his Notarial Register.
That as part of the consideration of this sale, the VENDEE hereby assumes to pay the mortgage
obligations on the property herein sold in the amount of ONE MILLION EIGHT HUNDRED THOUSAND
PESOS (P1,800,000.00), Philippine currency, in favor of Bank of the Philippine Islands, in the name of the
VENDOR, and further agrees to strictly and faithfully comply with all the terms and conditions appearing
in the Real Estate Mortgage signed and executed by the VENDOR in favor of BPI, including interests and
other charges for late payment levied by the Bank, as if the same were originally signed and executed by
the VENDEE.
It is further agreed and understood by the parties herein that the capital gains tax and documentary
stamps on the sale shall be for the account of the VENDOR; whereas, the registration fees and transfer
tax thereon shall be for the account of the VENDEE. (Exh. A, pp. 11-12, Record).
On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the consent of her
husband, Mariano, executed an Undertaking (Exh. C, pp. 13-14, Record), the pertinent portions of which
read, as follows:
xxxxxxxxx
Whereas, as per Deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo the sum of
EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, and assume the mortgage
obligations on the property with the Bank of the Philippine Islands in the amount of ONE MILLION EIGHT
HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in accordance with the terms and
conditions of the Deed of Real Estate Mortgage dated _________, signed and executed by Mr. David A.
Raymundo with the said Bank, acknowledged before Notary Public for Makati, _____, as Doc. No. ___,
Page No. ___, Book No. __, Series of 1986 of his Notarial Register.
WHEREAS, while my application for the assumption of the mortgage obligations on the property is not yet
approved by the mortgagee Bank, I have agreed to pay the mortgage obligations on the property with the
Bank in the name of Mr. David A. Raymundo, in accordance with the terms and conditions of the said
Deed of Real Estate Mortgage, including all interests and other charges for late payment.
WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for purposes of
attesting and confirming our private understanding concerning the said mortgage obligations to be
assumed.
NOW, THEREFORE, for and in consideration of the foregoing premises, and the assumption of the
mortgage obligations of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),
Philippine currency, with the Bank of the Philippine islands, I, Mrs. Avelina D. Velarde, with the consent of
my husband, Mariano Z. Velarde, do hereby bind and obligate myself, my heirs, successors and assigns,
to strictly and faithfully comply with the following terms and conditions:
1. That until such time as my assumption of the mortgage obligations on the property purchased is
approved by the mortgagee bank, the Bank of the Philippine Islands, I shall continue to pay the said loan

in accordance with the terms and conditions of the Deed of Real Estate Mortgage in the name of Mr.
David A. Raymundo, the original Mortgagor.
2. That, in the event I violate any of the terms and conditions of the said Deed of Real Estate Mortgage, I
hereby agree that my downpayment of P800,000.00, plus all payments made with the Bank of the
Philippine Islands on the mortgage loan, shall be forfeited in favor of Mr. David A. Raymundo, as and by
way of liquidated damages, without necessity of notice or any judicial declaration to that effect, and Mr.
David A Raymundo shall resume total and complete ownership and possession of the property sold by
way of Deed of Sale with Assumption of Mortgage, and the same shall be deemed automatically
cancelled and be of no further force or effect, in the same manner as if (the) same had never been
executed or entered into.
3. That I am executing this Undertaking for purposes of binding myself, my heirs, successors and assigns,
to strictly and faithfully comply with the terms and conditions of the mortgage obligations with the Bank of
the Philippine Islands, and the covenants, stipulations and provisions of this Undertaking.
That, David A. Raymundo, the vendor of the property mentioned and identified above, [does] hereby
confirm and agree to the undertakings of the Vendee pertinent to the assumption of the mortgage
obligations by the Vendee with the Bank of the Philippine Islands. (Exh. C, pp. 13-14, Record).
This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.
It appears that the negotiated terms for the payment of the balance of P1.8 million was from the proceeds
of a loan that plaintiffs were to secure from a bank with defendants help. Defendants had a standing
approved credit line with the Bank of the Philippine Islands (BPI). The parties agreed to avail of this,
subject to BPIs approval of an application for assumption of mortgage by plaintiffs. Pending BPIs approval
o[f] the application, plaintiffs were to continue paying the monthly interests of the loan secured by a real
estate mortgage.
Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by the
aforementioned mortgage for three (3) months as follows: September 19, 1986 at P27,225.00; October
20, 1986 at P23,000.00; and November 19, 1986 at P23,925.00 (Exh. E, H & J, pp. 15, 17 and 18,
Record).
On December 15, 1986, plaintiffs were advised that the Application for Assumption of Mortgage with BPI
was not approved (Exh. J, p. 133, Record). This prompted plaintiffs not to make any further payment.
On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their non-payment
to the mortgage bank constitute[d] non-performance of their obligation (Exh. 3, p. 220, Record).
In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:
This is to advise you, therefore, that our client is willing to pay the balance in cash not later than January
21, 1987 provided: (a) you deliver actual possession of the property to her not later than January 15, 1987
for her immediate occupancy; (b) you cause the release of title and mortgage from the Bank of P.I. and
make the title available and free from any liens and encumbrances; and (c) you execute an absolute deed
of sale in her favor free from any liens or encumbrances not later than January 21, 1987. (Exhs. K, 4, p.
223, Record).

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

The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiagos
earlier Decision dismissing petitioners Complaint. Upholding the validity of the rescission made by private
respondents, the CA explained its ruling in this wise:
In the Deed of Sale with Assumption of Mortgage, it was stipulated that as part of the consideration of this
sale, the VENDEE (Velarde) would assume to pay the mortgage obligation on the subject property in the
amount of P1.8 million in favor of BPI in the name of the Vendor (Raymundo).Since the price to be paid
by the Vendee Velarde includes the downpayment of P800,000.00 and the balance of P1.8 million, and
the balance of P1.8 million cannot be paid in cash, Vendee Velarde, as part of the consideration of the
sale, had to assume the mortgage obligation on the subject property. In other words, the assumption of
the mortgage obligation is part of the obligation of Velarde, as vendee, under the contract. Velarde further
agreed to strictly and faithfully comply with all the terms and conditions appearing in the Real Estate
Mortgage signed and executed by the VENDOR in favor of BPI x x x as if the same were originally signed
and executed by the Vendee. (p.2, thereof, p.12, Record). This was reiterated by Velarde in the document
entitled Undertaking wherein the latter agreed to continue paying said loan in accordance with the terms
and conditions of the Deed of Real Estate Mortgage in the name of Raymundo. Moreover, it was
stipulated that in the event of violation by Velarde of any terms and conditions of said deed of real estate
mortgage, the downpayment of P800,000.00 plus all payments made with BPI or the mortgage loan
would be forfeited and the [D]eed of [S]ale with [A]ssumption of [M]ortgage would thereby be cancelled
automatically and of no force and effect (pars. 2 & 3, thereof, pp. 13-14, Record).
From these 2 documents, it is therefore clear that part of the consideration of the sale was the assumption
by Velarde of the mortgage obligation of Raymundo in the amount of P1.8 million. This would mean that
Velarde had to make payments to BPI under the [D]eed of [R]eal [E]state [M]ortgage in the name of
Raymundo. The application with BPI for the approval of the assumption of mortgage would mean that, in
case of approval, payment of the mortgage obligation will now be in the name of Velarde. And in the event
said application is disapproved, Velarde had to pay in full. This is alleged and admitted in Paragraph 5 of
the Complaint. Mariano Velarde likewise admitted this fact during the hearing on September 15, 1997 (p.
47, t.s.n., September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This being the case, the nonpayment of the mortgage obligation would result in a violation of the contract. And, upon Velardes failure

to pay the agreed price, the[n] Raymundo may choose either of two (2) actions - (1) demand fulfillment of
the contract, or (2) demand its rescission (Article 1191, Civil Code).
The disapproval by BPI of the application for assumption of mortgage cannot be used as an excuse for
Velardes non-payment of the balance of the purchase price. As borne out by the evidence, Velarde had to
pay in full in case of BPIs disapproval of the application for assumption of mortgage.What Velarde should
have done was to pay the balance of P1.8 million. Instead, Velarde sent Raymundo a letter dated January
7, 1987 (Exh. K, 4) which was strongly given weight by the lower court in reversing the decision rendered
by then Judge Ynares-Santiago. In said letter, Velarde registered their willingness to pay the balance in
cash but enumerated 3 new conditions which, to the mind of this Court, would constitute a new
undertaking or new agreement which is subject to the consent or approval of Raymundo. These 3
conditions were not among those previously agreed upon by Velarde and Raymundo. These are mere
offers or, at most, an attempt to novate. But then again, there can be no novation because there was no
agreement of all the parties to the new contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).
It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale with
Assumption of Mortgage would be deemed automatically cancelled and of no further force and effect, as if
the same had never been executed or entered into. While it is true that even if the contract expressly
provided for automatic rescission upon failure to pay the price, the vendee may still pay, he may do so
only for as long as no demand for rescission of the contract has been made upon him either judicially or
by a notarial act (Article 1592, Civil Code). In the case at bar, Raymundo sent Velarde a notarial notice
dated January 8, 1987 of cancellation/rescission of the contract due to the latters failure to comply with
their obligation. The rescission was justified in view of Velardes failure to pay the price (balance) which is
substantial and fundamental as to defeat the object of the parties in making the agreement. As adverted
to above, the agreement of the parties involved a reciprocal obligation wherein the obligation of one is a
resolutory condition of the obligation of the other, the non-fulfillment of which entitles the other party to
rescind the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage
obligation by appellees Velarde would create a right to demand payment or to rescind the contract, or to
criminal prosecution (Edca Publishing & Distribution Corporation vs. Santos, 184 SCRA 614). Upon
appellees failure, therefore, to pay the balance, the contract was properly rescinded (Ruiz vs. IAC, 184
SCRA 720). Consequently, appellees Velarde having violated the contract, they have lost their right to its
enforcement and hence, cannot avail of the action for specific performance (Voysaw vs. Interphil
Promotions, Inc., 148 SCRA 635).[10]
Hence, this appeal.[11]
The Issues

Petitioners, in their Memorandum,[12] interpose the following assignment of errors:

I.
The Court of Appeals erred in holding that the non-payment of the mortgage obligation resulted in a
breach of the contract.
II.
The Court of Appeals erred in holding that the rescission (resolution) of the contract by private
respondents was justified.
III.

The Court of Appeals erred in holding that petitioners January 7, 1987 letter gave three new
conditions constituting mere offers or an attempt to novate necessitating a new agreement between
the parties.
The Courts Ruling

The Petition is partially meritorious.

First Issue:

Breach of Contract

Petitioners aver that their nonpayment of private respondents mortgage obligation did not constitute
a breach of contract, considering that their request to assume the obligation had been disapproved by the
mortgagee bank. Accordingly, payment of the monthly amortizations ceased to be their obligation and,
instead, it devolved upon private respondents again.
However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay the
balance of the purchase price. As admitted by both parties, their agreement mandated that petitioners
should pay the purchase price balance of P1.8 million to private respondents in case the request to
assume the mortgage would be disapproved. Thus, on December 15, 1986, when petitioners received
notice of the banks disapproval of their application to assume respondents mortgage, they should have
paid the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering to make such payment
only upon the fulfillment of certain conditions not originally agreed upon in the contract of sale. Such
conditional offer to pay cannot take the place of actual payment as would discharge the obligation of a
buyer under a contract of sale.
In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate
thing, and the buyer to pay therefor a price certain in money or its equivalent. [13] Private respondents had
already performed their obligation through the execution of the Deed of Sale, which effectively transferred
ownership of the property to petitioner through constructive delivery. Prior physical delivery or possession
is not legally required, and the execution of the Deed of Sale is deemed equivalent to delivery.[14]
Petitioners, on the other hand, did not perform their correlative obligation of paying the contract price
in the manner agreed upon. Worse, they wanted private respondents to perform obligations beyond those
stipulated in the contract before fulfilling their own obligation to pay the full purchase price.
Second Issue

Validity of the Rescission

Petitioners likewise claim that the rescission of the contract by private respondents was not justified,
inasmuch as the former had signified their willingness to pay the balance of the purchase price only a little
over a month from the time they were notified of the disapproval of their application for assumption of
mortgage. Petitioners also aver that the breach of the contract was not substantial as would warrant a
rescission. They cite several cases[15] in which this Court declared that rescission of a contract would not
be permitted for a slight or casual breach. Finally, they argue that they have substantially performed their

obligation in good faith, considering that they have already made the initial payment of P800,000 and
three (3) monthly mortgage payments.
As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of the
mortgage obligations, as their nonperformance of their reciprocal obligation to pay the purchase price
under the contract of sale. Private respondents right to rescind the contract finds basis in Article 1191 of
the Civil Code, which explicitly provides as follows:
Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission even after he has chosen fulfillment, if the latter
should become impossible.
The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on
a breach of faith by the other party who violates the reciprocity between them. [16] The breach
contemplated in the said provision is the obligors failure to comply with an existing obligation. [17] When the
obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the
absence of any just cause for the court to determine the period of compliance, the court shall decree the
rescission.[18]
In the present case, private respondents validly exercised their right to rescind the contract, because
of the failure of petitioners to comply with their obligation to pay the balance of the purchase
price. Indubitably, the latter violated the very essence of reciprocity in the contract of sale, a violation that
consequently gave rise to private respondents right to rescind the same in accordance with law.
True, petitioners expressed their willingness to pay the balance of the purchase price one month
after it became due; however, this was not equivalent to actual payment as would constitute a faithful
compliance of their reciprocal obligation. Moreover, the offer to pay was conditioned on the performance
by private respondents of additional burdens that had not been agreed upon in the original contract. Thus,
it cannot be said that the breach committed by petitioners was merely slight or casual as would preclude
the exercise of the right to rescind.
Misplaced is petitioners reliance on the cases [19] they cited because the factual circumstances in
those cases are not analogous to those in the present one. In Song Fo there was, on the part of the
buyer, only a delay of twenty (20) days to pay for the goods delivered. Moreover, the buyers offer to pay
was unconditional and was accepted by the seller. In Zepeda, the breach involved a mere one-week
delay in paying the balance of P1,000, which was actually paid. In Tan, the alleged breach was private
respondents delay of only a few days, which was for the purpose of clearing the title to the property; there
was no reference whatsoever to the nonpayment of the contract price.
In the instant case, the breach committed did not merely consist of a slight delay in payment or an
irregularity; such breach would not normally defeat the intention of the parties to the contract. Here,
petitioners not only failed to pay the P1.8 million balance, but they also imposed upon private respondents
new obligations as preconditions to the performance of their own obligation. In effect, the qualified offer to
pay was a repudiation of an existing obligation, which was legally due and demandable under the contract
of sale. Hence, private respondents were left with the legal option of seeking rescission to protect their
own interest.
Mutual Restitution

Required in Rescission

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

Attempt to Novate

In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third issue
raised by petitioners. Suffice it to say that the three conditions appearing on the January 7, 1987 letter of
petitioners to private respondents were not part of the original contract. By that time, it was already
incumbent upon the former to pay the balance of the sale price. They had no right to demand
preconditions to the fulfillment of their obligation, which had become due.
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that private
respondents are ordered to return to petitioners the amount of P874,150, which the latter paid as a
consequence of the rescinded contract, with legal interest thereon from January 8, 1987, the date of
rescission. No pronouncement as to costs.
SO ORDERED.

G.R. No. 118114 December 7, 1995

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

PADILLA, J.:
This is a petition for review on certiorari of the decision 1 of the Court of Appeals, 2nd Division, in CA-G.R.
No. 36177, which affirmed the decision 2 of the Regional Trial Court of Himamaylan, Negros Occidental
holding that private respondent Edy de los Reyes had acquired ownership of Lot No. 1130 of the
Cadastral Survey of Hinigaran, Negros Occidental based on a document entitled "Declaration of Heirship
and Waiver of Rights", and ordering the dispossession of petitioner as leasehold tenant of the land for
failure to pay rentals.
The facts of the case are as follows:
The title to Lot No. 1130 of the Cadastral Survey of Hinigaran, Negros Occidental was evidenced by OCT
No. R-12179. The lot has an area of 13,720 sq. meters. The title was issued and is registered in the name
of spouses Santiago Vasquez and Lorenza Oruma. After both spouses died, their only son Felixberto
inherited the lot. In 1975, Felixberto executed a duly notarized document entitled "Declaration of Heirship
and Deed of Absolute Sale" in favor of Cosme Pido.
The evidence before the court a quo established that since 1960, petitioner Teodoro Acap had been the
tenant of a portion of the said land, covering an area of nine thousand five hundred (9,500) meters. When
ownership was transferred in 1975 by Felixberto to Cosme Pido, Acap continued to be the registered
tenant thereof and religiously paid his leasehold rentals to Pido and thereafter, upon Pido's death, to his
widow Laurenciana.
The controversy began when Pido died intestate and on 27 November 1981, his surviving heirs executed
a notarized document denominated as "Declaration of Heirship and Waiver of Rights of Lot No. 1130
Hinigaran Cadastre," wherein they declared; to quote its pertinent portions, that:
. . . Cosme Pido died in the Municipality of Hinigaran, Negros Occidental, he died
intestate and without any known debts and obligations which the said parcel of land is
(sic) held liable.
That Cosme Pido was survived by his/her legitimate heirs, namely: LAURENCIANA
PIDO, wife, ELY, ERVIN, ELMER, and ELECHOR all surnamed PIDO; children;
That invoking the provision of Section 1, Rule 74 of the Rules of Court, the abovementioned heirs do hereby declare unto [sic] ourselves the only heirs of the late Cosme
Pido and that we hereby adjudicate unto ourselves the above-mentioned parcel of land in
equal shares.
Now, therefore, We LAURENCIANA 3, ELY, ELMER, ERVIN and ELECHOR all surnamed
PIDO, do hereby waive, quitclaim all our rights, interests and participation over the said

parcel of land in favor of EDY DE LOS REYES, of legal age, (f)ilipino, married to
VIRGINIA DE LOS REYES, and resident of Hinigaran, Negros Occidental,
Philippines. . . . 4 (Emphasis supplied)
The document was signed by all of Pido's heirs. Private respondent Edy de los Reyes did not sign said
document.
It will be noted that at the time of Cosme Pido's death, title to the property continued to be registered in
the name of the Vasquez spouses. Upon obtaining the Declaration of Heirship with Waiver of Rights in his
favor, private respondent Edy de los Reyes filed the same with the Registry of Deeds as part of a notice
of an adverse claimagainst the original certificate of title.
Thereafter, private respondent sought for petitioner (Acap) to personally inform him that he (Edy) had
become the new owner of the land and that the lease rentals thereon should be paid to him. Private
respondent further alleged that he and petitioner entered into an oral lease agreement wherein petitioner
agreed to pay ten (10) cavans of palay per annum as lease rental. In 1982, petitioner allegedly complied
with said obligation. In 1983, however, petitioner refused to pay any further lease rentals on the land,
prompting private respondent to seek the assistance of the then Ministry of Agrarian Reform (MAR) in
Hinigaran, Negros Occidental. The MAR invited petitioner to a conference scheduled on 13 October 1983.
Petitioner did not attend the conference but sent his wife instead to the conference. During the meeting,
an officer of the Ministry informed Acap's wife about private respondent's ownership of the said land but
she stated that she and her husband (Teodoro) did not recognize private respondent's claim of ownership
over the land.
On 28 April 1988, after the lapse of four (4) years, private respondent filed a complaint for recovery of
possession and damages against petitioner, alleging in the main that as his leasehold tenant, petitioner
refused and failed to pay the agreed annual rental of ten (10) cavans of palay despite repeated demands.
During the trial before the court a quo, petitioner reiterated his refusal to recognize private respondent's
ownership over the subject land. He averred that he continues to recognize Cosme Pido as the owner of
the said land, and having been a registered tenant therein since 1960, he never reneged on his rental
obligations. When Pido died, he continued to pay rentals to Pido's widow. When the latter left for abroad,
she instructed him to stay in the landholding and to pay the accumulated rentals upon her demand or
return from abroad.
Petitioner further claimed before the trial court that he had no knowledge about any transfer or sale of the
lot to private respondent in 1981 and even the following year after Laurenciana's departure for abroad. He
denied having entered into a verbal lease tenancy contract with private respondent and that assuming
that the said lot was indeed sold to private respondent without his knowledge, R.A. 3844, as amended,
grants him the right to redeem the same at a reasonable price. Petitioner also bewailed private
respondent's ejectment action as a violation of his right to security of tenure under P.D. 27.
On 20 August 1991, the lower court rendered a decision in favor of private respondent, the dispositive
part of which reads:
WHEREFORE, premises considered, the Court renders judgment in favor of the plaintiff,
Edy de los Reyes, and against the defendant, Teodoro Acap, ordering the following, to
wit:
1. Declaring forfeiture of defendant's preferred right to issuance of a Certificate of Land
Transfer under Presidential Decree No. 27 and his farmholdings;

2. Ordering the defendant Teodoro Acap to deliver possession of said farm to plaintiff,
and;
3. Ordering the defendant to pay P5,000.00 as attorney's fees, the sum of P1,000.00 as
expenses of litigation and the amount of P10,000.00 as actual damages. 5
In arriving at the above-mentioned judgment, the trial court stated that the evidence had established that
the subject land was "sold" by the heirs of Cosme Pido to private respondent. This is clear from the
following disquisitions contained in the trial court's six (6) page decision:
There is no doubt that defendant is a registered tenant of Cosme Pido. However, when
the latter died their tenancy relations changed since ownership of said land was passed
on to his heirs who, by executing a Deed of Sale, which defendant admitted in his
affidavit, likewise passed on their ownership of Lot 1130 to herein plaintiff (private
respondent). As owner hereof, plaintiff has the right to demand payment of rental and the
tenant is obligated to pay rentals due from the time demand is made. . . . 6
xxx xxx xxx
Certainly, the sale of the Pido family of Lot 1130 to herein plaintiff does not of itself
extinguish the relationship. There was only a change of the personality of the lessor in the
person of herein plaintiff Edy de los Reyes who being the purchaser or transferee,
assumes the rights and obligations of the former landowner to the tenant Teodoro Acap,
herein defendant. 7
Aggrieved, petitioner appealed to the Court of Appeals, imputing error to the lower court when it ruled that
private respondent acquired ownership of Lot No. 1130 and that he, as tenant, should pay rentals to
private respondent and that failing to pay the same from 1983 to 1987, his right to a certificate of land
transfer under P.D. 27 was deemed forfeited.
The Court of Appeals brushed aside petitioner's argument that the Declaration of Heirship and Waiver of
Rights (Exhibit "D"), the document relied upon by private respondent to prove his ownership to the lot,
was excluded by the lower court in its order dated 27 August 1990. The order indeed noted that the
document was not identified by Cosme Pido's heirs and was not registered with the Registry of Deeds of
Negros Occidental. According to respondent court, however, since the Declaration of Heirship and Waiver
of Rights appears to have been duly notarized, no further proof of its due execution was necessary. Like
the trial court, respondent court was also convinced that the said document stands as prima facie proof of
appellee's (private respondent's) ownership of the land in dispute.
With respect to its non-registration, respondent court noted that petitioner had actual knowledge of the
subjectsale of the land in dispute to private respondent because as early as 1983, he (petitioner) already
knew of private respondent's claim over the said land but which he thereafter denied, and that in 1982, he
(petitioner) actually paid rent to private respondent. Otherwise stated, respondent court considered this
fact of rental payment in 1982 as estoppel on petitioner's part to thereafter refute private respondent's
claim of ownership over the said land. Under these circumstances, respondent court ruled that indeed
there was deliberate refusal by petitioner to pay rent for a continued period of five years that merited
forfeiture of his otherwise preferred right to the issuance of a certificate of land transfer.
In the present petition, petitioner impugns the decision of the Court of Appeals as not in accord with the
law and evidence when it rules that private respondent acquired ownership of Lot No. 1130 through the
aforementioned Declaration of Heirship and Waiver of Rights.

Hence, the issues to be resolved presently are the following:

1. WHETHER OR NOT THE SUBJECT DECLARATION OF HEIRSHIP AND WAIVER OF
RIGHTS IS A RECOGNIZED MODE OF ACQUIRING OWNERSHIP BY PRIVATE
RESPONDENT OVER THE LOT IN QUESTION.
2. WHETHER OR NOT THE SAID DOCUMENT CAN BE CONSIDERED A DEED OF
SALE IN FAVOR OF PRIVATE RESPONDENT OF THE LOT IN QUESTION.
Petitioner argues that the Regional Trial Court, in its order dated 7 August 1990, explicitly excluded the
document marked as Exhibit "D" (Declaration of Heirship, etc.) as private respondent's evidence because
it was not registered with the Registry of Deeds and was not identified by anyone of the heirs of Cosme
Pido. The Court of Appeals, however, held the same to be admissible, it being a notarized document,
hence, a prima facie proof of private respondents' ownership of the lot to which it refers.
Petitioner points out that the Declaration of Heirship and Waiver of Rights is not one of the recognized
modes of acquiring ownership under Article 712 of the Civil Code. Neither can the same be considered a
deed of sale so as to transfer ownership of the land to private respondent because no consideration is
stated in the contract (assuming it is a contract or deed of sale).
Private respondent defends the decision of respondent Court of Appeals as in accord with the evidence
and the law. He posits that while it may indeed be true that the trial court excluded his Exhibit "D" which is
the Declaration of Heirship and Waiver of Rights as part of his evidence, the trial court declared him
nonetheless owner of the subject lot based on other evidence adduced during the trial, namely, the notice
of adverse claim (Exhibit "E") duly registered by him with the Registry of Deeds, which contains the
questioned Declaration of Heirship and Waiver of Rights as an integral part thereof.
We find the petition impressed with merit.
In the first place, an asserted right or claim to ownership or a real right over a thing arising from a juridical
act, however justified, is not per se sufficient to give rise to ownership over the res. That right or title must
be completed by fulfilling certain conditions imposed by law. Hence, ownership and real rights are
acquired only pursuant to a legal mode or process. While title is the juridical justification, mode is the
actual process of acquisition or transfer of ownership over a thing in question. 8
Under Article 712 of the Civil Code, the modes of acquiring ownership are generally classified into two (2)
classes, namely, the original mode (i.e., through occupation, acquisitive prescription, law or intellectual
creation) and thederivative mode (i.e., through succession mortis causa or tradition as a result of certain
contracts, such as sale, barter, donation, assignment or mutuum).
In the case at bench, the trial court was obviously confused as to the nature and effect of the Declaration
of Heirship and Waiver of Rights, equating the same with a contract (deed) of sale. They are not the
same.
In a Contract of Sale, one of the contracting parties obligates himself to transfer the ownership of and to
deliver a determinate thing, and the other party to pay a price certain in money or its equivalent. 9
Upon the other hand, a declaration of heirship and waiver of rights operates as a public instrument when
filed with the Registry of Deeds whereby the intestate heirs adjudicate and divide the estate left by the

decedent among themselves as they see fit. It is in effect an extrajudicial settlement between the heirs
under Rule 74 of the Rules of Court. 10
Hence, there is a marked difference between a sale of hereditary rights and a waiver of hereditary rights.
The first presumes the existence of a contract or deed of sale between the parties. 11 The second is,
technically speaking, a mode of extinction of ownership where there is an abdication or intentional
relinquishment of a known right with knowledge of its existence and intention to relinquish it, in favor of
other persons who are co-heirs in the succession. 12 Private respondent, being then a stranger to the
succession of Cosme Pido, cannot conclusively claim ownership over the subject lot on the sole basis of
the waiver document which neither recites the elements of either a sale, 13 or a donation, 14 or any other
derivative mode of acquiring ownership.
Quite surprisingly, both the trial court and public respondent Court of Appeals concluded that a "sale"
transpired between Cosme Pido's heirs and private respondent and that petitioner acquired actual
knowledge of said sale when he was summoned by the Ministry of Agrarian Reform to discuss private
respondent's claim over the lot in question. This conclusion has no basis both in fact and in law.
On record, Exhibit "D", which is the "Declaration of Heirship and Waiver of Rights" was excluded by the
trial court in its order dated 27 August 1990 because the document was neither registered with the
Registry of Deeds nor identified by the heirs of Cosme Pido. There is no showing that private respondent
had the same document attached to or made part of the record. What the trial court admitted was Annex
"E", a notice of adverse claim filed with the Registry of Deeds which contained the Declaration of Heirship
with Waiver of rights and was annotated at the back of the Original Certificate of Title to the land in
question.
A notice of adverse claim, by its nature, does not however prove private respondent's ownership over the
tenanted lot. "A notice of adverse claim is nothing but a notice of a claim adverse to the registered owner,
the validity of which is yet to be established in court at some future date, and is no better than a notice
of lis pendenswhich is a notice of a case already pending in court." 15
It is to be noted that while the existence of said adverse claim was duly proven, there is no evidence
whatsoever that a deed of sale was executed between Cosme Pido's heirs and private respondent
transferring the rights of Pido's heirs to the land in favor of private respondent. Private respondent's right
or interest therefore in the tenanted lot remains an adverse claim which cannot by itself be sufficient to
cancel the OCT to the land and title the same in private respondent's name.
Consequently, while the transaction between Pido's heirs and private respondent may be binding
on both parties, the right of petitioner as a registered tenant to the land cannot be perfunctorily
forfeited on a mere allegation of private respondent's ownership without the corresponding proof
thereof.
Petitioner had been a registered tenant in the subject land since 1960 and religiously paid lease rentals
thereon. In his mind, he continued to be the registered tenant of Cosme Pido and his family (after Pido's
death), even if in 1982, private respondent allegedly informed petitioner that he had become the new
owner of the land.
Under the circumstances, petitioner may have, in good faith, assumed such statement of private
respondent to be true and may have in fact delivered 10 cavans of palay as annual rental for 1982 to
private respondent. But in 1983, it is clear that petitioner had misgivings over private respondent's claim
of ownership over the said land because in the October 1983 MAR conference, his wife Laurenciana
categorically denied all of private respondent's allegations. In fact, petitioner even secured a certificate

from the MAR dated 9 May 1988 to the effect that he continued to be the registered tenant of Cosme Pido
and not of private respondent. The reason is that private respondent never registered the Declaration of
Heirship with Waiver of Rights with the Registry of Deeds or with the MAR. Instead, he (private
respondent) sought to do indirectly what could not be done directly,i.e., file a notice of adverse claim on
the said lot to establish ownership thereover.
It stands to reason, therefore, to hold that there was no unjustified or deliberate refusal by petitioner to
pay the lease rentals or amortizations to the landowner/agricultural lessor which, in this case, private
respondent failed to establish in his favor by clear and convincing evidence. 16
Consequently, the sanction of forfeiture of his preferred right to be issued a Certificate of Land Transfer
under P.D. 27 and to the possession of his farmholdings should not be applied against petitioners, since
private respondent has not established a cause of action for recovery of possession against petitioner.
WHEREFORE, premises considered, the Court hereby GRANTS the petition and the decision of the
Court of Appeals dated 1 May 1994 which affirmed the decision of the RTC of Himamaylan, Negros
Occidental dated 20 August 1991 is hereby SET ASIDE. The private respondent's complaint for recovery
of possession and damages against petitioner Acap is hereby DISMISSED for failure to properly state a
cause of action, without prejudice to private respondent taking the proper legal steps to establish the legal
mode by which he claims to have acquired ownership of the land in question.
SO ORDERED.

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

GREGORIO FULE, petitioner, vs. COURT
BELARMINO, respondents.

OF

APPEALS,

NINEVETCH CRUZ

and

JUAN

DECISION
ROMERO, J.:
This petition for review on certiorari questions the affirmance by the Court of Appeals of the
decision[1] of the Regional Trial Court of San Pablo City, Branch 30, dismissing the complaint that prayed
for the nullification of a contract of sale of a 10-hectare property in Tanay, Rizal in consideration of the
amount of P40,000.00 and a 2.5 carat emerald-cut diamond (Civil Case No. SP-2455). The lower courts
decision disposed of the case as follows:
WHEREFORE, premises considered, the Court hereby renders judgment dismissing the complaint for
lack of merit and ordering plaintiff to pay:
1. Defendant Dra. Ninevetch M. Cruz the sum of P300,000.00 as and for moral damages and the sum
of P100,000.00 as and for exemplary damages;
2. Defendant Atty. Juan Belarmino the sum of P250,000.00 as and for moral damages and the sum
of P150,000.00 as and for exemplary damages;
3. Defendant Dra. Cruz and Atty. Belarmino the sum of P25,000.00 each as and for attorneys fees and
litigation expenses; and
4. The costs of suit.
SO ORDERED.
As found by the Court of Appeals and the lower court, the antecedent facts of this case are as
follows:
Petitioner Gregorio Fule, a banker by profession and a jeweler at the same time, acquired a 10-hectare
property in Tanay, Rizal (hereinafter Tanay property), covered by Transfer Certificate of Title No. 320725
which used to be under the name of Fr. Antonio Jacobe.The latter had mortgaged it earlier to the Rural
Bank of Alaminos (the Bank), Laguna, Inc. to secure a loan in the amount of P10,000.00, but the
mortgage was later foreclosed and the property offered for public auction upon his default.
In July 1984, petitioner, as corporate secretary of the bank, asked Remelia Dichoso and Oliva
Mendoza to look for a buyer who might be interested in the Tanay property. The two found one in the
person of herein private respondent Dr. Ninevetch Cruz. It so happened that at the time, petitioner had
shown interest in buying a pair of emerald-cut diamond earrings owned by Dr. Cruz which he had seen in
January of the same year when his mother examined and appraised them as genuine. Dr. Cruz, however,
declined petitioners offer to buy the jewelry for P100,000.00. Petitioner then made another bid to buy
them for US$6,000.00 at the exchange rate of $1.00 to P25.00. At this point, petitioner inspected said
jewelry at the lobby of the Prudential Bank branch in San Pablo City and then made a sketch
thereof. Having sketched the jewelry for twenty to thirty minutes, petitioner gave them back to Dr. Cruz

who again refused to sell them since the exchange rate of the peso at the time appreciated to P19.00 to a
dollar.
Subsequently, however, negotiations for the barter of the jewelry and the Tanay property ensued. Dr.
Cruz requested herein private respondent Atty. Juan Belarmino to check the property who, in turn, found
out that no sale or barter was feasible because the one-year period for redemption of the said property
had not yet expired at the time.
In an effort to cut through any legal impediment, petitioner executed on October 19, 1984, a deed of
redemption on behalf of Fr. Jacobe purportedly in the amount of P15,987.78, and on even date, Fr.
Jacobe sold the property to petitioner for P75,000.00. The haste with which the two deeds were executed
is shown by the fact that the deed of sale was notarized ahead of the deed of redemption. As Dr. Cruz
had already agreed to the proposed barter, petitioner went to Prudential Bank once again to take a look at
the jewelry.
In the afternoon of October 23, 1984, petitioner met Atty. Belarmino at the latters residence to
prepare the documents of sale.[2] Dr. Cruz herself was not around but Atty. Belarmino was aware that she
and petitioner had previously agreed to exchange a pair of emerald-cut diamond earrings for the Tanay
property. Atty. Belarmino accordingly caused the preparation of a deed of absolute sale while petitioner
and Dr. Cruz attended to the safekeeping of the jewelry.
The following day, petitioner, together with Dichoso and Mendoza, arrived at the residence of Atty.
Belarmino to finally execute a deed of absolute sale. Petitioner signed the deed and gave Atty. Belarmino
the amount of P13,700.00 for necessary expenses in the transfer of title over the Tanay property.
Petitioner also issued a certification to the effect that the actual consideration of the sale
was P200,000.00 and not P80,000.00 as indicated in the deed of absolute sale. The disparity between
the actual contract price and the one indicated on the deed of absolute sale was purportedly aimed at
minimizing the amount of the capital gains tax that petitioner would have to shoulder. Since the jewelry
was appraised only at P160,000.00, the parties agreed that the balance of P40,000.00 would just be paid
later in cash.
As pre-arranged, petitioner left Atty. Belarminos residence with Dichoso and Mendoza and headed
for the bank, arriving there at past 5:00 p.m. Dr. Cruz also arrived shortly thereafter, but the cashier who
kept the other key to the deposit box had already left the bank. Dr. Cruz and Dichoso, therefore, looked
for said cashier and found him having a haircut. As soon as his haircut was finished, the cashier returned
to the bank and arrived there at 5:48 p.m., ahead of Dr. Cruz and Dichoso who arrived at 5:55 p.m. Dr.
Cruz and the cashier then opened the safety deposit box, the former retrieving a transparent plastic or
cellophane bag with the jewelry inside and handing over the same to petitioner. The latter took the jewelry
from the bag, went near the electric light at the banks lobby, held the jewelry against the light and
examined it for ten to fifteen minutes. After a while, Dr. Cruz asked, Okay na ba iyan? Petitioner
expressed his satisfaction by nodding his head.
For services rendered, petitioner paid the agents, Dichoso and Mendoza, the amount of US$300.00
and some pieces of jewelry. He did not, however, give them half of the pair of earrings in question which
he had earlier promised.
Later, at about 8:00 oclock in the evening of the same day, petitioner arrived at the residence of Atty.
Belarmino complaining that the jewelry given to him was fake. He then used a tester to prove the alleged
fakery. Meanwhile, at 8:30 p.m., Dichoso and Mendoza went to the residence of Dr. Cruz to borrow her
car so that, with Atty. Belarmino, they could register the Tanay property. After Dr. Cruz had agreed to lend
her car, Dichoso called up Atty. Belarmino. The latter, however, instructed Dichoso to proceed

immediately to his residence because petitioner was there. Believing that petitioner had finally agreed to
give them half of the pair of earrings, Dichoso went posthaste to the residence of Atty. Belarmino only to
find petitioner already demonstrating with a tester that the earrings were fake. Petitioner then accused
Dichoso and Mendoza of deceiving him which they, however, denied. They countered that petitioner could
not have been fooled because he had vast experience regarding jewelry. Petitioner nonetheless took
back the US$300.00 and jewelry he had given them.
Thereafter, the group decided to go to the house of a certain Macario Dimayuga, a jeweler, to have
the earrings tested. Dimayuga, after taking one look at the earrings, immediately declared them
counterfeit. At around 9:30 p.m., petitioner went to one Atty. Reynaldo Alcantara residing at Lakeside
Subdivision in San Pablo City, complaining about the fake jewelry. Upon being advised by the latter,
petitioner reported the matter to the police station where Dichoso and Mendoza likewise executed sworn
statements.
On October 26, 1984, petitioner filed a complaint before the Regional Trial Court of San Pablo City
against private respondents praying, among other things, that the contract of sale over the Tanay property
be declared null and void on the ground of fraud and deceit.
On October 30, 1984, the lower court issued a temporary restraining order directing the Register of
Deeds of Rizal to refrain from acting on the pertinent documents involved in the transaction. On
November 20, 1984, however, the same court lifted its previous order and denied the prayer for a writ of
preliminary injunction.
After trial, the lower court rendered its decision on March 7, 1989. Confronting the issue of whether
or not the genuine pair of earrings used as consideration for the sale was delivered by Dr. Cruz to
petitioner, the lower court said:
The Court finds that the answer is definitely in the affirmative. Indeed, Dra. Cruz delivered (the) subject
jewelries (sic) into the hands of plaintiff who even raised the same nearer to the lights of the lobby of the
bank near the door. When asked by Dra. Cruz if everything was in order, plaintiff even nodded his
satisfaction (Hearing of Feb. 24, 1988). At that instance, plaintiff did not protest, complain or beg for
additional time to examine further the jewelries (sic). Being a professional banker and engaged in the
jewelry business plaintiff is conversant and competent to detect a fake diamond from the real
thing. Plaintiff was accorded the reasonable time and opportunity to ascertain and inspect the jewelries
(sic) in accordance with Article 1584 of the Civil Code. Plaintiff took delivery of the subject jewelries (sic)
before 6:00 p.m. of October 24, 1984. When he went at 8:00 p.m. that same day to the residence of Atty.
Belarmino already with a tester complaining about some fake jewelries (sic), there was already undue
delay because of the lapse of a considerable length of time since he got hold of subject jewelries
(sic). The lapse of two (2) hours more or less before plaintiff complained is considered by the Court as
unreasonable delay.[3]
The lower court further ruled that all the elements of a valid contract under Article 1458 of the Civil
Code were present, namely: (a) consent or meeting of the minds; (b) determinate subject matter, and (c)
price certain in money or its equivalent. The same elements, according to the lower court, were present
despite the fact that the agreement between petitioner and Dr. Cruz was principally a barter contract. The
lower court explained thus:
x x x. Plaintiffs ownership over the Tanay property passed unto Dra. Cruz upon the constructive delivery
thereof by virtue of the Deed of Absolute Sale (Exh. D). On the other hand, the ownership of Dra. Cruz
over the subject jewelries (sic) transferred to the plaintiff upon her actual personal delivery to him at the
lobby of the Prudential Bank. It is expressly provided by law that the thing sold shall be understood as

delivered, when it is placed in the control and possession of the vendee (Art. 1497, Civil Code; Kuenzle &
Straff vs. Watson & Co. 13 Phil. 26). The ownership and/or title over the jewelries (sic) was transmitted
immediately before 6:00 p.m. of October 24, 1984. Plaintiff signified his approval by nodding his head.
Delivery or tradition, is one of the modes of acquiring ownership (Art. 712, Civil Code).
Similarly, when Exhibit D was executed, it was equivalent to the delivery of the Tanay property in
favor of Dra. Cruz. The execution of the public instrument (Exh. D) operates as a formal or symbolic
delivery of the Tanay property and authorizes the buyer, Dra. Cruz to use the document as proof of
ownership (Florendo v. Foz, 20 Phil. 399). More so, since Exhibit D does not contain any proviso or
stipulation to the effect that title to the property is reserved with the vendor until full payment of the
purchase price, nor is there a stipulation giving the vendor the right to unilaterally rescind the contract the
moment the vendee fails to pay within a fixed period (Taguba v. Vda. De Leon, 132 SCRA 722; Luzon
Brokerage Co. Inc. vs. Maritime Building Co. Inc. 86 SCRA 305; Froilan v. Pan Oriental Shipping Co. et al.
12 SCRA 276).[4]
Aside from concluding that the contract of barter or sale had in fact been consummated when
petitioner and Dr. Cruz parted ways at the bank, the trial court likewise dwelt on the unexplained delay
with which petitioner complained about the alleged fakery. Thus:
x x x. Verily, plaintiff is already estopped to come back after the lapse of considerable length of time
to claim that what he got was fake. He is a Business Management graduate of La Salle University, Class
1978-79, a professional banker as well as a jeweler in his own right. Two hours is more than enough time
to make a switch of a Russian diamond with the real diamond. It must be remembered that in July 1984
plaintiff made a sketch of the subject jewelries (sic) at the Prudential Bank. Plaintiff had a tester at 8:00
p.m. at the residence of Atty. Belarmino. Why then did he not bring it out when he was examining the
subject jewelries (sic) at about 6:00 p.m. in the banks lobby? Obviously, he had no need for it after being
satisfied of the genuineness of the subject jewelries (sic). When Dra. Cruz and plaintiff left the bank both
of them had fully performed their respective prestations. Once a contract is shown to have been
consummated or fully performed by the parties thereto, its existence and binding effect can no longer be
disputed. It is irrelevant and immaterial to dispute the due execution of a contract if both of them have in
fact performed their obligations thereunder and their respective signatures and those of their witnesses
appear upon the face of the document (Weldon Construction v. CA G.R. No. L-35721, Oct. 12, 1987). [5]
Finally, in awarding damages to the defendants, the lower court remarked:
The Court finds that plaintiff acted in wanton bad faith. Exhibit 2-Belarmino purports to show that the
Tanay property is worth P25,000.00. However, also on that same day it was executed, the propertys worth
was magnified at P75,000.00 (Exh. 3-Belarmino). How could in less than a day (Oct. 19, 1984) the value
would (sic) triple under normal circumstances? Plaintiff, with the assistance of his agents, was able to
exchange the Tanay property which his bank valued only at P25,000.00 in exchange for a genuine pair of
emerald cut diamond worth P200,000.00 belonging to Dra. Cruz. He also retrieved the US$300.00 and
jewelries (sic) from his agents. But he was not satisfied in being able to get subject jewelries for a
song. He had to file a malicious and unfounded case against Dra. Cruz and Atty. Belarmino who are well
known, respected and held in high esteem in San Pablo City where everybody practically knows
everybody. Plaintiff came to Court with unclean hands dragging the defendants and soiling their clean and
good name in the process.Both of them are near the twilight of their lives after maintaining and nurturing
their good reputation in the community only to be stunned with a court case. Since the filing of this case
on October 26, 1984 up to the present they were living under a pall of doubt. Surely, this affected not only
their earning capacity in their practice of their respective professions, but also they suffered besmirched
reputations. Dra. Cruz runs her own hospital and defendant Belarmino is a well respected legal
practitioner.

The length of time this case dragged on during which period their reputation were (sic) tarnished and
their names maligned by the pendency of the case, the Court is of the belief that some of the damages
they prayed for in their answers to the complaint are reasonably proportionate to the sufferings they
underwent (Art. 2219, New Civil Code). Moreover, because of the falsity, malice and baseless nature of
the complaint defendants were compelled to litigate. Hence, the award of attorneys fees is warranted
under the circumstances (Art. 2208, New Civil Code).[6]
From the trial courts adverse decision, petitioner elevated the matter to the Court of Appeals. On
October 20, 1992, the Court of Appeals, however, rendered a decision [7]affirming in toto the lower courts
decision. His motion for reconsideration having been denied on October 19, 1993, petitioner now files the
instant petition alleging that:
I. THE TRIAL COURT ERRED IN DISMISSING PLAINTIFFS COMPLAINT AND IN HOLDING
THAT THE PLAINTIFF ACTUALLY RECEIVED A GENUINE PAIR OF EMERALD CUT
DIAMOND EARRING(S) FROM DEFENDANT CRUZ x x x;
II. THE TRIAL COURT ERRED IN AWARDING MORAL AND EXEMPLARY DAMAGES AND
ATTORNEYS FEES IN FAVOR OF DEFENDANTS AND AGAINST THE PLAINTIFF IN THIS
CASE; and
III.THE TRIAL COURT ERRED IN NOT DECLARING THE DEED OF SALE OF THE TANAY
PROPERTY (EXH. `D) AS NULL AND VOID OR IN NOT ANNULLING THE SAME, AND IN
FAILING TO GRANT REASONABLE DAMAGES IN FAVOR OF THE PLAINTIFF.[8]
As to the first allegation, the Court observes that petitioner is essentially raising a factual issue as it
invites us to examine and weigh anew the facts regarding the genuineness of the earrings bartered in
exchange for the Tanay property. This, of course, we cannot do without unduly transcending the limits of
our review power in petitions of this nature which are confined merely to pure questions of law. We
accord, as a general rule, conclusiveness to a lower courts findings of fact unless it is shown, inter alia,
that: (1) theconclusion is a finding grounded on speculations, surmises or conjectures; (2) the inference
is manifestly mistaken, absurd and impossible; (3) when there is a grave abuse of discretion; (4) when the
judgment is based on a misapprehension of facts; (5) when the findings of fact are conflicting; and (6)
when the Court of Appeals, in making its findings, went beyond the issues of the case and the same is
contrary to the admission of both parties. [9] We find nothing, however, that warrants the application of any
of these exceptions.
Consequently, this Court upholds the appellate courts findings of fact especially because these
concur with those of the trial court which, upon a thorough scrutiny of the records, are firmly grounded on
evidence presented at the trial. [10] To reiterate, this Courts jurisdiction is only limited to reviewing errors of
law in the absence of any showing that the findings complained of are totally devoid of support in the
record or that they are glaringly erroneous as to constitute serious abuse of discretion. [11]
Nonetheless, this Court has to closely delve into petitioners allegation that the lower courts decision
of March 7, 1989 is a ready-made one because it was handed down a day after the last date of the trial of
the case.[12] Petitioner, in this regard, finds it incrediblethat Judge J. Ausberto Jaramillo was able to write a
12-page single-spaced decision, type it and release it on March 7, 1989, less than a day after the last
hearing on March 6, 1989. He stressed that Judge Jaramillo replaced Judge Salvador de Guzman and
heard only his rebuttal testimony.
This allegation is obviously no more than a desperate effort on the part of petitioner to disparage the
lower courts findings of fact in order to convince this Court to review the same. It is noteworthy that Atty.

Belarmino clarified that Judge Jaramillo had issued the first order in the case as early as March 9, 1987 or
two years before the rendition of the decision. In fact, Atty. Belarmino terminated presentation of evidence
on October 13, 1987, while Dr. Cruz finished hers on February 4, 1989, or more than a month prior to the
rendition of the judgment. The March 6, 1989 hearing was conducted solely for the presentation of
petitioner's rebuttal testimony.[13] In other words, Judge Jaramillo had ample time to study the case and
write the decision because the rebuttal evidence would only serve to confirm or verify the facts already
presented by the parties.
The Court finds nothing anomalous in the said situation. No proof has been adduced that Judge
Jaramillo was motivated by a malicious or sinister intent in disposing of the case with dispatch. Neither is
there proof that someone else wrote the decision for him. The immediate rendition of the decision was no
more than Judge Jaramillos compliance with his duty as a judge to dispose of the courts business
promptly and decide cases within the required periods. [14] The two-year period within which Judge
Jaramillo handled the case provided him with all the time to study it and even write down its facts as soon
as these were presented to court. In fact, this Court does not see anything wrong in the practice of writing
a decision days before the scheduled promulgation of judgment and leaving the dispositive portion for
typing at a time close to the date of promulgation, provided that no malice or any wrongful conduct
attends its adoption.[15] The practice serves the dual purposes of safeguarding the confidentiality of draft
decisions and rendering decisions with promptness. Neither can Judge Jaramillo be made
administratively answerable for the immediate rendition of the decision. The acts of a judge which pertain
to his judicial functions are not subject to disciplinary power unless they are committed with fraud,
dishonesty, corruption or bad faith. [16] Hence, in the absence of sufficient proof to the contrary, Judge
Jaramillo is presumed to have performed his job in accordance with law and should instead be
commended for his close attention to duty.
Having disposed of petitioners first contention, we now come to the core issue of this petition which
is whether the Court of Appeals erred in upholding the validity of the contract of barter or sale under the
circumstances of this case.
The Civil Code provides that contracts are perfected by mere consent. From this moment, the parties
are bound not only to the fulfillment of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in keeping with good faith, usage and law. [17] A
contract of sale is perfected at the moment there is a meeting of the minds upon the thing which is the
object of the contract and upon the price. [18] Being consensual, a contract of sale has the force of law
between the contracting parties and they are expected to abide in good faith by their respective
contractual commitments. Article 1358 of the Civil Code which requires the embodiment of certain
contracts in a public instrument, is only for convenience, [19] and registration of the instrument only
adversely affects third parties.[20] Formal requirements are, therefore, for the benefit of third parties. Noncompliance therewith does not adversely affect the validity of the contract nor the contractual rights and
obligations of the parties thereunder.
It is evident from the facts of the case that there was a meeting of the minds between petitioner and
Dr. Cruz. As such, they are bound by the contract unless there are reasons or circumstances that warrant
its nullification. Hence, the problem that should be addressed in this case is whether or not under the
facts duly established herein, the contract can be voided in accordance with law so as to compel the
parties to restore to each other the things that have been the subject of the contract with their fruits, and
the price with interest.[21]
Contracts that are voidable or annullable, even though there may have been no damage to the
contracting parties are: (1) those where one of the parties is incapable of giving consent to a contract; and
(2) those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

[22]

Accordingly, petitioner now stresses before this Court that he entered into the contract in the belief that
the pair of emerald-cut diamond earrings was genuine. On the pretext that those pieces of jewelry turned
out to be counterfeit, however, petitioner subsequently sought the nullification of said contract on the
ground that it was, in fact, tainted with fraud [23] such that his consent was vitiated.
There is fraud when, through the insidious words or machinations of one of the contracting parties,
the other is induced to enter into a contract which, without them, he would not have agreed to. [24] The
records, however, are bare of any evidence manifesting that private respondents employed such insidious
words or machinations to entice petitioner into entering the contract of barter. Neither is there any
evidence showing that Dr. Cruz induced petitioner to sell his Tanay property or that she cajoled him to
take the earrings in exchange for said property. On the contrary, Dr. Cruz did not initially accede to
petitioners proposal to buy the said jewelry. Rather, it appears that it was petitioner, through his agents,
who led Dr. Cruz to believe that the Tanay property was worth exchanging for her jewelry as he
represented that its value was P400,000.00 or more than double that of the jewelry which was valued only
at P160,000.00. If indeed petitioners property was truly worth that much, it was certainly contrary to the
nature of a businessman-banker like him to have parted with his real estate for half its price. In short, it
was in fact petitioner who resorted to machinations to convince Dr. Cruz to exchange her jewelry for the
Tanay property.
Moreover, petitioner did not clearly allege mistake as a ground for nullification of the contract of
sale. Even assuming that he did, petitioner cannot successfully invoke the same. To invalidate a contract,
mistake must refer to the substance of the thing that is the object of the contract, or to those conditions
which have principally moved one or both parties to enter into the contract. [25] An example of mistake as to
the object of the contract is the substitution of a specific thing contemplated by the parties with another.
[26]
In his allegations in the complaint, petitioner insinuated that an inferior one or one that had only
Russian diamonds was substituted for the jewelry he wanted to exchange with his 10-hectare land. He,
however, failed to prove the fact that prior to the delivery of the jewelry to him, private respondents
endeavored to make such substitution.
Likewise, the facts as proven do not support the allegation that petitioner himself could be excused
for the mistake. On account of his work as a banker-jeweler, it can be rightfully assumed that he was an
expert on matters regarding gems. He had the intellectual capacity and the business acumen as a banker
to take precautionary measures to avert such a mistake, considering the value of both the jewelry and his
land. The fact that he had seen the jewelry before October 24, 1984 should not have precluded him from
having its genuineness tested in the presence of Dr. Cruz. Had he done so, he could have avoided the
present situation that he himself brought about. Indeed, the finger of suspicion of switching the genuine
jewelry for a fake inevitably points to him. Such a mistake caused by manifest negligence cannot
invalidate a juridical act.[27] As the Civil Code provides, (t)here is no mistake if the party alleging it knew
the doubt, contingency or risk affecting the object of the contract. [28]
Furthermore, petitioner was afforded the reasonable opportunity required in Article 1584 of the Civil
Code within which to examine the jewelry as he in fact accepted them when asked by Dr. Cruz if he was
satisfied with the same.[29] By taking the jewelry outside the bank, petitioner executed an act which was
more consistent with his exercise of ownership over it. This gains credence when it is borne in mind that
he himself had earlier delivered the Tanay property to Dr. Cruz by affixing his signature to the contract of
sale. That after two hours he later claimed that the jewelry was not the one he intended in exchange for
his Tanay property, could not sever the juridical tie that now bound him and Dr. Cruz. The nature and
value of the thing he had taken preclude its return after that supervening period within which anything
could have happened, not excluding the alteration of the jewelry or its being switched with an inferior kind.

Both the trial and appellate courts, therefore, correctly ruled that there were no legal bases for the
nullification of the contract of sale. Ownership over the parcel of land and the pair of emerald-cut diamond
earrings had been transferred to Dr. Cruz and petitioner, respectively, upon the actual and constructive
delivery thereof.[30] Said contract of sale being absolute in nature, title passed to the vendee upon delivery
of the thing sold since there was no stipulation in the contract that title to the property sold has been
reserved in the seller until full payment of the price or that the vendor has the right to unilaterally resolve
the contract the moment the buyer fails to pay within a fixed period. [31] Such stipulations are not manifest
in the contract of sale.
While it is true that the amount of P40,000.00 forming part of the consideration was still payable to
petitioner, its nonpayment by Dr. Cruz is not a sufficient cause to invalidate the contract or bar the transfer
of ownership and possession of the things exchanged considering the fact that their contract is silent as to
when it becomes due and demandable.[32]
Neither may such failure to pay the balance of the purchase price result in the payment of interest
thereon. Article 1589 of the Civil Code prescribes the payment of interest by the vendee for the period
between the delivery of the thing and the payment of the price in the following cases:
(1) Should it have been so stipulated;
(2) Should the thing sold and delivered produce fruits or income;
(3) Should he be in default, from the time of judicial or extrajudicial demand for the payment of
the price.
Not one of these cases obtains here. This case should, of course, be distinguished from De la Cruz v.
Legaspi,[33] where the court held that failure to pay the consideration after the notarization of the contract
as previously promised resulted in the vendees liability for payment of interest. In the case at bar, there is
no stipulation for the payment of interest in the contract of sale nor proof that the Tanay property produced
fruits or income. Neither did petitioner demand payment of the price as in fact he filed an action to nullify
the contract of sale.
All told, petitioner appears to have elevated this case to this Court for the principal reason of
mitigating the amount of damages awarded to both private respondents which petitioner considers as
exorbitant. He contends that private respondents do not deserve at all the award of damages. In fact, he
pleads for the total deletion of the award as regards private respondent Belarmino whom he considers a
mere nominal party because no specific claim for damages against him was alleged in the
complaint. When he filed the case, all that petitioner wanted was that Atty. Belarmino should return to him
the owners duplicate copy of TCT No. 320725, the deed of sale executed by Fr. Antonio Jacobe, the deed
of redemption and the check alloted for expenses. Petitioner alleges further that Atty. Belarmino should
not have delivered all those documents to Dr. Cruz because as the lawyer for both the seller and the
buyer in the sale contract, he should have protected the rights of both parties. Moreover, petitioner
asserts that there was no firm basis for damages except for Atty. Belarminos uncorroborated testimony.[34]
Moral and exemplary damages may be awarded without proof of pecuniary loss. In awarding such
damages, the court shall take into account the circumstances obtaining in the case and assess damages
according to its discretion.[35] To warrant the award of damages, it must be shown that the person to whom
these are awarded has sustained injury. He must likewise establish sufficient data upon which the court
can properly base its estimate of the amount of damages. [36] Statements of facts should establish such
data rather than mere conclusions or opinions of witnesses. [37] Thus:

x x x. For moral damages to be awarded, it is essential that the claimant must have satisfactorily
proved during the trial the existence of the factual basis of the damages and its causal
connection with the adverse partys acts. If the court has no proof or evidence upon which the
claim for moral damages could be based, such indemnity could not be outrightly awarded. The
same holds true with respect to the award of exemplary damages where it must be shown that
the party acted in a wanton, oppressive or malevolent manner.[38]
In this regard, the lower court appeared to have awarded damages on a ground analogous to
malicious prosecution under Article 2219(8) of the Civil Code [39] as shown by (1) petitioners wanton bad
faith in bloating the value of the Tanay property which he exchanged for a genuine pair of emerald-cut
diamond worth P200,000.00; and (2) his filing of a malicious and unfounded case against private
respondents who were well known, respected and held in high esteem in San Pablo City where
everybody practically knows everybody and whose good names in the twilight of their lives were soiled by
petitioners coming to court with unclean hands, thereby affecting their earning capacity in the exercise of
their respective professions and besmirching their reputation.
For its part, the Court of Appeals affirmed the award of damages to private respondents for these
reasons:
The malice with which Fule filed this case is apparent. Having taken possession of the genuine
jewelry of Dra. Cruz, Fule now wishes to return a fake jewelry to Dra. Cruz and, more than that,
get back the real property, which his bank owns. Fule has obtained a genuine jewelry which he
could sell anytime, anywhere and to anybody, without the same being traced to the original
owner for practically nothing. This is plain and simple, unjust enrichment.[40]
While, as a rule, moral damages cannot be recovered from a person who has filed a complaint
against another in good faith because it is not sound policy to place a penalty on the right to litigate, [41] the
same, however, cannot apply in the case at bar. The factual findings of the courts a quo to the effect
that petitioner filed this case because he was the victim of fraud; that he could not have been such a
victim because he should have examined the jewelry in question before accepting delivery thereof,
considering his exposure to the banking and jewelry businesses; and that he filed the action for the
nullification of the contract of sale with unclean hands, all deserve full faith and credit to support the
conclusion that petitioner was motivated more by ill will than a sincere attempt to protect his rights in
commencing suit against respondents.
As pointed out earlier, a closer scrutiny of the chain of events immediately prior to and on October
24, 1984 itself would amply demonstrate that petitioner was not simply negligent in failing to exercise due
diligence to assure himself that what he was taking in exchange for his property were genuine
diamonds. He had rather placed himself in a situation from which it preponderantly appears that his
seeming ignorance was actually just a ruse. Indeed, he had unnecessarily dragged respondents to face
the travails of litigation in speculating at the possible favorable outcome of his complaint when he should
have realized that his supposed predicament was his own making. We, therefore, see here no semblance
of an honest and sincere belief on his part that he was swindled by respondents which would entitle him
to redress in court. It must be noted that before petitioner was able to convince Dr. Cruz to exchange her
jewelry for the Tanay property, petitioner took pains to thoroughly examine said jewelry, even going to the
extent of sketching their appearance. Why at the precise moment when he was about to take physical
possession thereof he failed to exert extra efforts to check their genuineness despite the large
consideration involved has never been explained at all by petitioner. His acts thus failed to accord with
what an ordinary prudent man would have done in the same situation. Being an experienced banker and
a businessman himself who deliberately skirted a legal impediment in the sale of the Tanay property and
to minimize the capital gains tax for its exchange, it was actually gross recklessness for him to have

merely conducted a cursory examination of the jewelry when every opportunity for doing so was not
denied him. Apparently, he carried on his person a tester which he later used to prove the alleged fakery
but which he did not use at the time when it was most needed. Furthermore, it took him two more hours of
unexplained delay before he complained that the jewelry he received were counterfeit. Hence, we stated
earlier that anything could have happened during all the time that petitioner was in complete possession
and control of the jewelry, including the possibility of substituting them with fake ones, against which
respondents would have a great deal of difficulty defending themselves. The truth is that petitioner even
failed to successfully prove during trial that the jewelry he received from Dr. Cruz were not genuine. Add
to that the fact that he had been shrewd enough to bloat the Tanay propertys price only a few days after
he purchased it at a much lower value. Thus, it is our considered view that if this slew of circumstances
were connected, like pieces of fabric sewn into a quilt, they would sufficiently demonstrate that his acts
were not merely negligent but rather studied and deliberate.
We do not have here, therefore, a situation where petitioners complaint was simply found later to be
based on an erroneous ground which, under settled jurisprudence, would not have been a reason for
awarding moral and exemplary damages. [42] Instead, the cause of action of the instant case appears to
have been contrived by petitioner himself. In other words, he was placed in a situation where he could not
honestly evaluate whether his cause of action has a semblance of merit, such that it would require the
expertise of the courts to put it to a test. His insistent pursuit of such case then coupled with
circumstances showing that he himself was guilty in bringing about the supposed wrongdoing on which he
anchored his cause of action would render him answerable for all damages the defendant may suffer
because of it. This is precisely what took place in the petition at bar and we find no cogent reason to
disturb the findings of the courts below that respondents in this case suffered considerable damages due
to petitioners unwarranted action.
WHEREFORE, the decision of the Court of Appeals dated October 20, 1992 is hereby AFFIRMED in
toto. Dr. Cruz, however, is ordered to pay petitioner the balance of the purchase price of P40,000.00
within ten (10) days from the finality of this decision. Costs against petitioner.
SO ORDERED.

[G.R. No. 143513. November 14, 2001]

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

CORPORATION, petitioner, vs. FIRESTONE

CERAMICS,

DECISION
BELLOSILLO, J.:
A litigation is not simply a contest of litigants before the bar of public opinion; more than that, it is a
pursuit of justice through legal and equitable means. To prevent the search for justice from evolving into a
competition for public approval, society invests the judiciary with complete independence thereby
insulating it from demands expressed through any medium, the press not excluded. Thus, if the court
would merely reflect, and worse, succumb to the great pressures of the day, the end result, it is feared,
would be a travesty of justice.
In the early sixties, petitioner National Development Corporation (NDC), a government owned and
controlled corporation created under CA 182 as amended by CA 311 and PD No. 668, had in its disposal
a ten (10)-hectare property located along Pureza St., Sta. Mesa, Manila. The estate was popularly known
as the NDC compound and covered by Transfer Certificates of Title Nos. 92885, 110301 and 145470.
Sometime in May 1965 private respondent Firestone Ceramics Inc. (FIRESTONE) manifested its
desire to lease a portion of the property for its ceramic manufacturing business. On 24 August 1965 NDC
and FIRESTONE entered into a contract of lease denominated as Contract No. C-30-65 covering a
portion of the property measured at 2.90118 hectares for use as a manufacturing plant for a term of ten
(10) years, renewable for another ten (10) years under the same terms and conditions. [1] In consequence
of the agreement, FIRESTONE constructed on the leased premises several warehouses and other
improvements needed for the fabrication of ceramic products.
Three and a half (3-1/2) years later, or on 8 January 1969, FIRESTONE entered into a second
contract of lease with NDC over the latter's four (4)-unit pre-fabricated reparation steel warehouse stored
in Daliao, Davao. FIRESTONE agreed to ship the warehouse to Manila for eventual assembly within the
NDC compound. The second contract, denominated as Contract No. C-26-68, was for similar use as a
ceramic manufacturing plant and was agreed expressly to be "co-extensive with the lease of LESSEE
with LESSOR on the 2.60 hectare-lot."[2]
On 31 July 1974 the parties signed a similar contract concerning a six (6)-unit pre-fabricated steel
warehouse which, as agreed upon by the parties, would expire on 2 December 1978. [3] Prior to the
expiration of the aforementioned contract, FIRESTONE wrote NDC requesting for an extension of their
lease agreement. Consequently on 29 November 1978 the Board of Directors of NDC adopted Resolution
No. 11-78-117 extending the term of the lease, subject to several conditions among which was that in the
event NDC "with the approval of higher authorities, decide to dispose and sell these properties including
the lot, priority should be given to the LESSEE"[4] (underscoring supplied). On 22 December 1978, in
pursuance of the resolution, the parties entered into a new agreement for a ten-year lease of the property,

renewable for another ten (10) years, expressly granting FIRESTONE the first option to purchase the
leased premises in the event that it decided "to dispose and sell these properties including the lot . . . . "[5]
The contracts of lease conspicuously contain an identically worded provision requiring FIRESTONE
to construct buildings and other improvements within the leased premises worth several hundred
thousands of pesos.[6]
The parties' lessor-lessee relationship went smoothly until early 1988 when FIRESTONE, cognizant
of the impending expiration of their lease agreement with NDC, informed the latter through several letters
and telephone calls that it was renewing its lease over the property. While its letter of 17 March 1988 was
answered by Antonio A. Henson, General Manager of NDC, who promised immediate action on the
matter, the rest of its communications remained unacknowledged. [7] FIRESTONE's predicament worsened
when rumors of NDC's supposed plans to dispose of the subject property in favor of petitioner Polytechnic
University of the Philippines (PUP) came to its knowledge. Forthwith, FIRESTONE served notice on NDC
conveying its desire to purchase the property in the exercise of its contractual right of first refusal.
Apprehensive that its interest in the property would be disregarded, FIRESTONE instituted an action
for specific performance to compel NDC to sell the leased property in its favor. FIRESTONE averred that
it was pre-empting the impending sale of the NDC compound to petitioner PUP in violation of its leasehold
rights over the 2.60-hectare[8] property and the warehouses thereon which would expire in
1999. FIRESTONE likewise prayed for the issuance of a writ of preliminary injunction to enjoin NDC from
disposing of the property pending the settlement of the controversy.[9]
In support of its complaint, FIRESTONE adduced in evidence a letter of Antonio A. Henson dated 15
July 1988 addressed to Mr. Jake C. Lagonera, Director and Special Assistant to Executive Secretary
Catalino Macaraeg, reviewing a proposed memorandum order submitted to then President Corazon C.
Aquino transferring the whole NDC compound, including the leased property, in favor of petitioner
PUP. Attached to the letter was a draft of the proposed memorandum order as well as a summary of
existing leases on the subject property. The survey listed FIRESTONE as lessee of a portion of the
property, placed at 29,000[10] square meters, whose contract with NDC was set to expire on 31 December
1989[11] renewable for another ten (10) years at the option of the lessee. The report expressly recognized
FIRESTONE's right of first refusal to purchase the leased property "should the lessor decide to sell the
same."[12]
Meanwhile, on 21 February 1989 PUP moved to intervene and asserted its interest in the subject
property, arguing that a "purchaser pendente lite of property which is subject of a litigation is entitled to
intervene in the proceedings."[13] PUP referred to Memorandum Order No. 214 issued by then President
Aquino ordering the transfer of the whole NDC compound to the National Government, which in turn
would convey the aforementioned property in favor of PUP at acquisition cost. The issuance was
supposedly made in recognition of PUP's status as the "Poor Man's University" as well as its serious need
to extend its campus in order to accommodate the growing student population. The order of conveyance
of the 10.31-hectare property would automatically result in the cancellation of NDC's total obligation in
favor of the National Government in the amount of P57,193,201.64.
Convinced that PUP was a necessary party to the controversy that ought to be joined as party
defendant in order to avoid multiplicity of suits, the trial court granted PUP's motion to
intervene. FIRESTONE moved for reconsideration but was denied. On certiorari, the Court of Appeals
affirmed the order of the trial court. FIRESTONE came to us on review but in a Resolution dated 11 July
1990 we upheld PUP's inclusion as party-defendant in the present controversy.

Following the denial of its petition, FIRESTONE amended its complaint to include PUP and
Executive Secretary Catalino Macaraeg, Jr., as party-defendants, and sought the annulment
of Memorandum Order No. 214. FIRESTONE alleged that although Memorandum Order No. 214 was
issued "subject to such liens/leases existing [on the subject property]," PUP disregarded and violated its
existing lease by increasing the rental rate at P200,000.00 a month while demanding that it vacated the
premises immediately.[14] FIRESTONE prayed that in the event Memorandum Order No. 214 was not
declared unconstitutional, the property should be sold in its favor at the price for which it was sold to PUP
- P554.74 per square meter or for a total purchase price of P14,423,240.00.[15]
Petitioner PUP, in its answer to the amended complaint, argued in essence that the lease contract
covering the property had expired long before the institution of the complaint, and that further, the right of
first refusal invoked by FIRESTONE applied solely to the six-unit pre-fabricated warehouse and not the lot
upon which it stood.
After trial on the merits, judgment was rendered declaring the contracts of lease executed between
FIRESTONE and NDC covering the 2.60-hectare property and the warehouses constructed thereon valid
and existing until 2 June 1999. PUP was ordered and directed to sell to FIRESTONE the "2.6 hectare
leased premises or as may be determined by actual verification and survey of the actual size of the
leased properties where plaintiff's fire brick factory is located" at P1,500.00 per square meter considering
that, as admitted by FIRESTONE, such was the prevailing market price thereof.
The trial court ruled that the contracts of lease executed between FIRESTONE and NDC were
interrelated and inseparable because "each of them forms part of the integral system of plaintiff's brick
manufacturing plant x x x if one of the leased premises will be taken apart or otherwise detached from the
two others, the purpose of the lease as well as plaintiff's business operations would be rendered useless
and inoperative."[16] It thus decreed that FIRESTONE could exercise its option to purchase the property
until 2 June 1999 inasmuch as the 22 December 1978 contractembodied a covenant to renew the lease
for another ten (10) years at the option of the lessee as well as an agreement giving the lessee the right
of first refusal.
The trial court also sustained the constitutionality of Memorandum Order No. 214 which was not per
se hostile to FIRESTONE's property rights, but deplored as prejudicial thereto the "very manner with
which defendants NDC and PUP interpreted and applied the same, ignoring in the process that plaintiff
has existing contracts of lease protectable by express provisions in the Memorandum No. 214 itself." [17] It
further explained that the questioned memorandum was issued "subject to such liens/leases existing
thereon"[18] and petitioner PUP was under express instructions "to enter, occupy and take possession of
the transferred property subject to such leases or liens and encumbrances that may be existing
thereon"[19] (underscoring supplied).
Petitioners PUP, NDC and the Executive Secretary separately filed their Notice of Appeal, but a few
days thereafter, or on 3 September 1996, perhaps realizing the groundlessness and the futility of it all, the
Executive Secretary withdrew his appeal.[20]
Subsequently, the Court of Appeals affirmed the decision of the trial court ordering the sale of the
property in favor of FIRESTONE but deleted the award of attorney's fees in the amount of Three Hundred
Thousand Pesos (P300,000.00). Accordingly, FIRESTONE was given a grace period of six (6) months
from finality of the court's judgment within which to purchase the property in questioned in the exercise of
its right of first refusal. The Court of Appeals observed that as there was a sale of the subject property,
NDC could not excuse itself from its obligation TO OFFER THE PROPERTY FOR SALE FIRST TO
FIRESTONE BEFORE IT COULD TO OTHER PARTIES. The Court of Appeals held: "NDC cannot look
to Memorandum Order No. 214 to excuse or shield it from its contractual obligations to

FIRESTONE. There is nothing therein that allows NDC to disavow or repudiate the solemn engagement
that it freely and voluntarily undertook, or agreed to undertake." [21]
PUP moved for reconsideration asserting that in ordering the sale of the property in favor of
FIRESTONE the courts a quo unfairly created a contract to sell between the parties. It argued that the
"court cannot substitute or decree its mind or consent for that of the parties in determining whether or not
a contract (has been) perfected between PUP and NDC." [22] PUP further contended that since "a real
property located in Sta. Mesa can readily command a sum of P10,000.00 per square (meter)," the lower
court gravely erred in ordering the sale of the property at only P1,500.00 per square meter. PUP also
advanced the theory that the enactment of Memorandum Order No. 214 amounted to a withdrawal of the
option to purchase the property granted to FIRESTONE. NDC, for its part, vigorously contended that the
contracts of lease executed between the parties had expired without being renewed by FIRESTONE;
consequently, FIRESTONE was no longer entitled to any preferential right in the sale or disposition of the
leased property.
We do not see it the way PUP and NDC did. It is elementary that a party to a contract cannot
unilaterally withdraw a right of first refusal that stands upon valuable consideration. That principle was
clearly upheld by the Court of Appeals when it denied on 6 June 2000 the twin motions for reconsideration
filed by PUP and NDC on the ground that the appellants failed to advance new arguments substantial
enough to warrant a reversal of the Decision sought to be reconsidered. [23] On 28 June 2000 PUP filed an
urgent motion for an additional period of fifteen (15) days from 29 June 2000 or until 14 July 2000 within
which to file a Petition for Review on Certiorari of the Decision of the Court of Appeals.
On the last day of the extended period PUP filed its Petition for Review on Certiorari assailing
the Decision of the Court of Appeals of 6 December 1999 as well as the Resolution of 6 June 2000
denying reconsideration thereof. PUP raised two issues: (a) whether the courts a quo erred when they
"conjectured" that the transfer of the leased property from NDC to PUP amounted to a sale; and, (b)
whether FIRESTONE can rightfully invoke its right of first refusal. Petitioner posited that if we were to
place our imprimatur on the decisions of the courts a quo, "public welfare or specifically the constitutional
priority accorded to education" would greatly be prejudiced. [24]
Paradoxically, our paramount interest in education does not license us, or any party for that matter,
to destroy the sanctity of binding obligations. Education may be prioritized for legislative or budgetary
purposes, but we doubt if such importance can be used to confiscate private property such as
FIRESTONE's right of first refusal.
On 17 July 2000 we denied PUP's motion for extension of fifteen (15) days within which to appeal
inasmuch as the aforesaid pleading lacked an affidavit of service of copies thereof on the Court of
Appeals and the adverse party, as well as written explanation for not filing and serving the pleading
personally.[25]
Accordingly, on 26 July 2000 we issued a Resolution dismissing PUP's Petition for Review for having
been filed out of time. PUP moved for reconsideration imploring a resolution or decision on the merits of
its petition. Strangely, about the same time, several articles came out in the newspapers assailing the
denial of the petition. The daily papers reported that we unreasonably dismissed PUP's petition on
technical grounds, affirming in the process the decision of the trial court to sell the disputed property to
the prejudice of the government in the amount ofP1,000,000,000.00.[26] Counsel for petitioner PUP,
alleged that the trial court and the Court of Appeals "have decided a question of substance in a way
definitely not in accord with law or jurisprudence." [27]

At the outset, let it be noted that the amount of P1,000,000,000.00 as reported in the papers was
way too exaggerated, if not fantastic. We stress that NDC itself sold the whole 10.31-hectare property to
PUP at only P57,193,201.64 which represents NDC's obligation to the national government that was, in
exchange, written off. The price offered per square meter of the property was pegged
at P554.74. FIRESTONE's leased premises would therefore be worth only P14,423,240.00. From any
angle, this amount is certainly far below the ballyhooed price ofP1,000,000,000.00.
On 4 October 2000 we granted PUP's Motion for Reconsideration to give it a chance to ventilate its
right, if any it still had in the leased premises, thereby paving the way for a reinstatement of its Petition for
Review.[28] In its appeal, PUP took to task the courts a quo for supposedly"substituting or decreeing its
mind or consent for that of the parties (referring to NDC and PUP) in determining whether or not a
contract of sale was perfected." PUP also argued that inasmuch as "it is the parties alone whose minds
must meet in reference to the subject matter and cause," it concluded that it was error for the lower courts
to have decreed the existence of a sale of the NDC compound thus allowing FIRESTONE to exercise its
right of first refusal.
On the other hand, NDC separately filed its own Petition for Review and advanced arguments which,
in fine, centered on whether or not the transaction between petitioners NDC and PUP amounted to a sale
considering that ownership of the property remained with the government. [29]Petitioner NDC introduced
the novel proposition that if the parties involved are both government entities the transaction cannot be
legally called a sale.
In due course both petitions were consolidated.[30]
We believe that the courts a quo did not hypothesize, much less conjure, the sale of the disputed
property by NDC in favor of petitioner PUP. Aside from the fact that the intention of NDC and PUP to enter
into a contract of sale was clearly expressed in the Memorandum Order No. 214,[31]a close perusal of the
circumstances of this case strengthens the theory that the conveyance of the property from NDC to PUP
was one of absolute sale, for a valuable consideration, and not a mere paper transfer as argued by
petitioners.
A contract of sale, as defined in the Civil Code, is a contract where one of the parties obligates
himself to transfer the ownership of and to deliver a determinate thing to the other or others who shall pay
therefore a sum certain in money or its equivalent. [32] It is therefore a general requisite for the existence of
a valid and enforceable contract of sale that it be mutually obligatory, i.e., there should be a concurrence
of the promise of the vendor to sell a determinate thing and the promise of the vendee to receive and pay
for the property so delivered and transferred. The Civil Code provision is, in effect, a "catch-all" provision
which effectively brings within its grasp a whole gamut of transfers whereby ownership of a thing is ceded
for a consideration.
Contrary to what petitioners PUP and NDC propose, there is not just one party involved in the
questioned transaction. Petitioners NDC and PUP have their respective charters and therefore each
possesses a separate and distinct individual personality.[33] The inherent weakness of NDCs proposition
that there was no sale as it was only the government which was involved in the transaction thus reveals
itself. Tersely put, it is not necessary to write an extended dissertation on government owned and
controlled corporations and their legal personalities. Beyond cavil, a government owned and controlled
corporation has a personality of its own, distinct and separate from that of the government. [34] The
intervention in the transaction of the Office of the President through the Executive Secretary did not
change the independent existence of these entities. The involvement of the Office of the President was
limited to brokering the consequent relationship between NDC and PUP. But the withdrawal of the appeal
by the Executive Secretary is considered significant as he knew, after a review of the records, that the

transaction was subject to existing liens and encumbrances, particularly the priority to purchase the
leased premises in favor of FIRESTONE.
True that there may be instances when a particular deed does not disclose the real intentions of the
parties, but their action may nevertheless indicate that a binding obligation has been undertaken. Since
the conduct of the parties to a contract may be sufficient to establish the existence of an agreement and
the terms thereof, it becomes necessary for the courts to examine the contemporaneous behavior of the
parties in establishing the existence of their contract.
The preponderance of evidence shows that NDC sold to PUP the whole NDC compound, including
the leased premises, without the knowledge much less consent of private respondent FIRESTONE which
had a valid and existing right of first refusal.
All three (3) essential elements of a valid sale, without which there can be no sale, were attendant in
the "disposition" and "transfer" of the property from NDC to PUP - consent of the parties, determinate
subject matter, and consideration therefor.
Consent to the sale is obvious from the prefatory clauses of Memorandum Order No. 214 which
explicitly states the acquiescence of the parties to the sale of the property WHEREAS, PUP has expressed its willingness to acquire said NDC properties and NDC has
expressed its willingness to sell the properties to PUP (underscoring supplied).[35]
Furthermore, the cancellation of NDC's liabilities in favor of the National Government in the amount
of P57,193,201.64 constituted the "consideration" for the sale. As correctly observed by the Court of
AppealsThe defendants-appellants' interpretation that there was a mere transfer, and not a sale, apart from being
specious sophistry and a mere play of words, is too strained and hairsplitting. For it is axiomatic that every
sale imposes upon the vendor the obligation to transfer ownership as an essential element of the
contract. Transfer of title or an agreement to transfer title for a price paid, or promised to be paid, is the
very essence of sale (Kerr & Co. v. Lingad, 38 SCRA 524; Schmid & Oberly, Inc., v. RJL Martinez Fishing
Corp., 166 SCRA 493). At whatever legal angle we view it, therefore, the inescapable fact remains that all
the requisites of a valid sale were attendant in the transaction between co-defendants-appellants NDC
and PUP concerning the realities subject of the present suit. [36]
What is more, the conduct of petitioner PUP immediately after the transaction is in itself an
admission that there was a sale of the NDC compound in its favor. Thus, after the issuance
of Memorandum Order No. 214 petitioner PUP asserted its ownership over the property by posting
notices within the compound advising residents and occupants to vacate the premises. [37] In its Motion for
Intervention petitioner PUP also admitted that its interest as a "purchaser pendente lite" would be better
protected if it was joined as party-defendant in the controversy thereby confessing that it
indeed purchased the property.
In light of the foregoing disquisition, we now proceed to determine whether FIRESTONE should be
allowed to exercise its right of first refusal over the property. Such right was expressly stated by NDC and
FIRESTONE in par. XV of their third contract denominated as A-10-78 executed on 22 December 1978
which, as found by the courts a quo, was interrelated to and inseparable from their first contract
denominated as C-30-65 executed on 24 August 1965 and their second contract denominated as C-26-68
executed on 8 January 1969. Thus -

Should the LESSOR desire to sell the leased premises during the term of this Agreement, or any
extension thereof, the LESSOR shall first give to the LESSEE, which shall have the right of first option to
purchase the leased premises subject to mutual agreement of both parties. [38]
In the instant case, the right of first refusal is an integral and indivisible part of the contract of lease
and is inseparable from the whole contract. The consideration for the right is built into the reciprocal
obligations of the parties. Thus, it is not correct for petitioners to insist that there was no consideration
paid by FIRESTONE to entitle it to the exercise of the right, inasmuch as the stipulation is part and parcel
of the contract of lease making the consideration for the lease the same as that for the option.
It is a settled principle in civil law that when a lease contract contains a right of first refusal, the lessor
is under a legal duty to the lessee not to sell to anybody at any price until after he has made an offer to
sell to the latter at a certain price and the lessee has failed to accept it. [39] The lessee has a right that the
lessor's first offer shall be in his favor.
The option in this case was incorporated in the contracts of lease by NDC for the benefit of
FIRESTONE which, in view of the total amount of its investments in the property, wanted to be assured
that it would be given the first opportunity to buy the property at a price for which it would be
offered. Consistent with their agreement, it was then implicit for NDC to have first offered the leased
premises of 2.60 hectares to FIRESTONE prior to the sale in favor of PUP. Only if FIRESTONE failed to
exercise its right of first priority could NDC lawfully sell the property to petitioner PUP.
It now becomes apropos to ask whether the courts a quo were correct in fixing the proper
consideration of the sale at P1,500.00 per square meter. In contracts of sale, the basis of the right of first
refusal must be the current offer of the seller to sell or the offer to purchase of the prospective buyer. Only
after the lessee-grantee fails to exercise its right under the same terms and within the period
contemplated can the owner validly offer to sell the property to a third person, again, under the same
terms as offered to the grantee.[40] It appearing that the whole NDC compound was sold to PUP
for P554.74 per square meter, it would have been more proper for the courts below to have ordered the
sale of the property also at the same price. However, since FIRESTONE never raised this as an issue,
while on the other hand it admitted that the value of the property stood at P1,500.00 per square meter,
then we see no compelling reason to modify the holdings of the courts a quo that the leased premises be
sold at that price.
Our attention is invited by petitioners to Ang Yu Asuncion v. CA[41] in concluding that if our holding
in Ang Yu would be applied to the facts of this case then FIRESTONE's "option, if still subsisting, is not
enforceable," the option being merely a preparatory contract which cannot be enforced.
The contention has no merit. At the heels of Ang Yu came Equatorial Realty Development, Inc., v.
Mayfair Theater, Inc.,[42] where after much deliberation we declared, and so we hold, that a right of first
refusal is neither "amorphous nor merely preparatory" and can be enforced and executed according to its
terms. Thus, in Equatorial we ordered the rescission of the sale which was made in violation of the
lessee's right of first refusal and further ordered the sale of the leased property in favor of Mayfair Theater,
as grantee of the right. Emphatically, we held that "(a right of first priority) should be enforced according to
the law on contracts instead of the panoramic and indefinite rule on human relations." We then concluded
that the execution of the right of first refusal consists in directing the grantor to comply with his obligation
according to the terms at which he should have offered the property in favor of the grantee and at that
price when the offer should have been made.
One final word. Petitioner PUP should be cautioned against bidding for public sympathy by bewailing
the dismissal of its petition before the press. Such advocacy is not likely to elicit the compassion of this

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

G.R. No. L-11827

July 31, 1961

FERNANDO A. GAITE, plaintiff-appellee,

vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES & SMELTING CO., INC., SEGUNDINA
VIVAS, FRNACISCO DANTE, PACIFICO ESCANDOR and FERNANDO TY, defendants-appellants.
Alejo Mabanag for plaintiff-appellee.
Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-appellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the Court of First Instance because the claims involved aggregate
more than P200,000.00.
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in a
representative capacity, of 11 iron lode mineral claims, known as the Dawahan Group, situated in the
municipality of Jose Panganiban, province of Camarines Norte.
By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier constituted and appointed
plaintiff-appellee Fernando A. Gaite as his true and lawful attorney-in-fact to enter into a contract with any
individual or juridical person for the exploration and development of the mining claims aforementioned on
a royalty basis of not less than P0.50 per ton of ore that might be extracted therefrom. On March 19,
1954, Gaite in turn executed a general assignment (Record on Appeal, pp. 17-19) conveying the
development and exploitation of said mining claims into the Larap Iron Mines, a single proprietorship
owned solely by and belonging to him, on the same royalty basis provided for in Exhibit "3". Thereafter,
Gaite embarked upon the development and exploitation of the mining claims in question, opening and
paving roads within and outside their boundaries, making other improvements and installing facilities
therein for use in the development of the mines, and in time extracted therefrom what he claim and
estimated to be approximately 24,000 metric tons of iron ore.
For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to Gaite to
exploit and develop the mining claims in question, and Gaite assented thereto subject to certain
conditions. As a result, a document entitled "Revocation of Power of Attorney and Contract" was executed
on December 8, 1954 (Exhibit "A"),wherein Gaite transferred to Fonacier, for the consideration of
P20,000.00, plus 10% of the royalties that Fonacier would receive from the mining claims, all his rights
and interests on all the roads, improvements, and facilities in or outside said claims, the right to use the
business name "Larap Iron Mines" and its goodwill, and all the records and documents relative to the
mines. In the same document, Gaite transferred to Fonacier all his rights and interests over the "24,000
tons of iron ore, more or less" that the former had already extracted from the mineral claims, in
consideration of the sum of P75,000.00, P10,000.00 of which was paid upon the signing of the
agreement, and
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid from and out of the
first letter of credit covering the first shipment of iron ores and of the first amount derived from the
local sale of iron ore made by the Larap Mines & Smelting Co. Inc., its assigns, administrators, or
successors in interests.
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 shortdelivery 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.

[G.R. No. 115349. April 18, 1997]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS, THE COURT
OF TAX APPEALS and ATENEO DE MANILA UNIVERSITY, respondents.
DECISION
PANGANIBAN, J.:
In conducting researches and studies of social organizations and cultural values thru its Institute of
Philippine Culture, is the Ateneo de Manila University performing the work of an independent contractor
and thus taxable within the purview of then Section 205 of the National Internal Revenue Code levying a
three percent contractors tax? This question is answered by the Court in the negative as it resolves this
petition assailing the Decision[1] of the Respondent Court of Appeals [2] in CA-G.R. SP No. 31790
promulgated on April 27, 1994 affirming that of the Court of Tax Appeals. [3]
The Antecedent Facts
The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being
largely undisputed by the parties.
Private respondent is a non-stock, non-profit educational institution with auxiliary units and
branches all over the Philippines. One such auxiliary unit is the Institute of Philippine Culture
(IPC), which has no legal personality separate and distinct from that of private respondent. The
IPC is a Philippine unit engaged in social science studies of Philippine society and
culture. Occasionally, it accepts sponsorships for its research activities from international
organizations, private foundations and government agencies.
On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue
a demand letter dated June 3, 1983, assessing private respondent the sum of P174,043.97 for
alleged deficiency contractors tax, and an assessment dated June 27, 1983 in the sum
ofP1,141,837 for alleged deficiency income tax, both for the fiscal year ended March 31,
1978. Denying said tax liabilities, private respondent sent petitioner a letter-protest and
subsequently filed with the latter a memorandum contesting the validity of the assessments.
On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for
deficiency income tax but modifying the assessment for deficiency contractors tax by increasing
the amount due to P193,475.55. Unsatisfied, private respondent requested for a reconsideration
or reinvestigation of the modified assessment. At the same time, it filed in the respondent court a
petition for review of the said letter-decision of the petitioner. While the petition was pending
before the respondent court, petitioner issued a final decision dated August 3, 1988 reducing the
assessment for deficiency contractors tax from P193,475.55 to P46,516.41, exclusive of
surcharge and interest.
On July 12, 1993, the respondent court rendered the questioned decision which dispositively
reads:
WHEREFORE, in view of the foregoing, respondents decision is SET ASIDE. The
deficiency contractors tax assessment in the amount of P46,516.41 exclusive of
surcharge and interest for the fiscal year ended March 31, 1978 is hereby
CANCELED. No pronouncement as to cost.
SO ORDERED.
Not in accord with said decision, petitioner has come to this Court via the present petition for
review raising the following issues:
1)WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW
OF INDEPENDENT CONTRACTOR PURSUANT TO SECTION 205 OF THE
TAX CODE; and
2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3%
CONTRACTORS TAX UNDER SECTION 205 OF THE TAX CODE.
The pertinent portions of Section 205 of the National Internal Revenue Code, as amended,
provide:
Sec. 205. Contractor, proprietors or operators of dockyards, and others. - A
contractors tax of three per centum of the gross receipts is hereby imposed on the
following:

xxxxxxxxx
(16) Business agents and other independent contractors except persons, associations and
corporations under contract for embroidery and apparel for export, as well as their agents and
contractors and except gross receipts of or from a pioneer industry registered with the Board of
Investments under Republic Act No. 5186:
xxxxxxxxx
The term independent contractors include persons (juridical or natural) not enumerated above
(but not including individuals subject to the occupation tax under Section 12 of the Local Tax
Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless
of whether or not the performance of the service calls for the exercise or use of the physical or
mental faculties of such contractors or their employees.
xxxxxxxxx
Petitioner contends that the respondent court erred in holding that private respondent is not an
independent contractor within the purview of Section 205 of the Tax Code. To petitioner, the term
independent contractor, as defined by the Code, encompasses all kinds of services rendered for
a fee and that the only exceptions are the following:
a. Persons, association and corporations under contract for embroidery and apparel
for export and gross receipts of or from pioneer industry registered with the Board of
Investment under R.A. No. 5186;
b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old
Section 182 [b] of the Tax Code); and
c. Regional or area headquarters established in the Philippines by multinational
corporations, including their alien executives, and which headquarters do not earn or
derive income from the Philippines and which act as supervisory, communication and
coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific
Region (Section 205 of the Tax Code).
Petitioner thus submits that since private respondent falls under the definition of an independent
contractor and is not among the aforementioned exceptions, private respondent is therefore
subject to the 3% contractors tax imposed under the same Code. [4]
The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed
the assailed decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA
through this petition for review.
The Issues
Petitioner submits before us the following issues:
1) Whether or not private respondent falls under the purview of independent contractor
pursuant to Section 205 of the Tax Code
2) Whether or not private respondent is subject to 3% contractors tax under Section 205 of
the Tax Code.[5]
In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary
unit or branch -- the Institute of Philippine Culture -- performing the work of an independent contractor
and, thus, subject to the three percent contractors tax levied by then Section 205 of the National Internal
Revenue Code?
The Courts Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue Code germane to the case before us
read:
SEC. 205. Contractors, proprietors or operators of dockyards, and others. -- A contractors tax of
three per centum of the gross receipts is hereby imposed on the following:
xxxxxxxxx
(16) Business agents and other independent contractors, except persons,
associations and corporations under contract for embroidery and apparel for export,
as well as their agents and contractors, and except gross receipts of or from a pioneer
industry registered with the Board of Investments under the provisions of Republic Act
No. 5186;
xxxxxxxxx

The term independent contractors include persons (juridical or natural) not

enumerated above (but not including individuals subject to the occupation tax under
Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all
kinds of services for a fee regardless of whether or not the performance of the service
calls for the exercise or use of the physical or mental faculties of such contractors or
their employees.
The term independent contractor shall not include regional or area headquarters
established in the Philippines by multinational corporations, including their alien
executives, and which headquarters do not earn or derive income from the Philippines
and which act as supervisory, communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific Region.
The term gross receipts means all amounts received by the prime or principal
contractor as the total contract price, undiminished by amount paid to the
subcontractor, shall be excluded from the taxable gross receipts of the subcontractor.
Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila
University falls within the definition of an independent contractor and is not one of those mentioned as
excepted; hence, it is properly a subject of the three percent contractors tax levied by the foregoing
provision of law.[6] Petitioner states that the term independent contractor is not specifically defined so as to
delimit the scope thereof, so much so that any person who x x x renders physical and mental service for a
fee, is now indubitably considered an independent contractor liable to 3% contractors tax. [7] according to
petitioner, Ateneo has the burden of proof to show its exemption from the coverage of the law.
We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax
exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It
is obviously both illogical and impractical to determine who are exempted without first determining who
are covered by the aforesaid provision. The Commissioner should have determined first if private
respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes
and other burdens on the populace, before asking Ateneo to prove its exemption therefrom. The Court
takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that (a) statute will
not be construed as imposing a tax unless it does so clearly, expressly, andunambiguously. x x x (A) tax
cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the
provisions of a taxing act arenot to be extended by implication.[8] Parenthetically, in answering the
question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are to be
construed most strongly against the government and in favor of the subjects or citizens because burdens
are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import. [9]
To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the
independent contractor be engaged in the business of selling its services. Hence, to impose the three
percent contractors tax on Ateneos Institute of Philippine Culture, it should be sufficiently proven that the
private respondent is indeed selling its services for a fee in pursuit of an independent business. And it is
only after private respondent has been found clearly to be subject to the provisions of Sec. 205 that the
question of exemption therefrom would arise. Only after such coverage is shown does the rule of
construction -- that tax exemptions are to be strictly construed against the taxpayer -- come into play,
contrary to petitioners position. This is the main line of reasoning of the Court of Tax Appeals in its
decision,[10] which was affirmed by the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Services of its Institute of Philippine Culture
After reviewing the records of this case, we find no evidence that Ateneos Institute of Philippine
Culture ever sold its services for a fee to anyone or was ever engaged in a business apart from and
independently of the academic purposes of the university.
Stressing that it is not the Ateneo de Manila University per se which is being taxed, Petitioner
Commissioner of Internal Revenue contends that the tax is due on its activity of conducting
researches for a fee. The tax is due on the gross receipts made in favor of IPC pursuant to the contracts
the latter entered to conduct researches for the benefit primarily of its clients . The tax is imposed on the
exercise of a taxable activity. x x x [T]he sale of services of private respondent is made under a contract
and the various contracts entered into between private respondent and its clients are almost of the same
terms, showing, among others, the compensation and terms of payment. [11] (Underscoring supplied.)

In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show
that Ateneos IPC in fact contracted to sell its research services for a fee. Clearly then, as found by the
Court of Appeals and the Court of Tax Appeals, petitioners theory is inapplicable to the established factual
milieu obtaining in the instant case.
In the first place, the petitioner has presented no evidence to prove its bare contention that, indeed,
contracts for sale of services were ever entered into by the private respondent. As appropriately pointed
out by the latter:
An examination of the Commissioners Written Formal Offer of Evidence in the Court of Tax
Appeals shows that only the following documentary evidence was presented:
Exhibit 1 BIR letter of authority no. 331844
2 Examiners Field Audit Report
3 Adjustments to Sales/Receipts
4 Letter-decision of BIR Commissioner
Bienvenido A. Tan Jr.
None of the foregoing evidence even comes close to purport to be contracts between private respondent
and third parties.[12]
Moreover, the Court of Tax Appeals accurately and correctly declared that the funds received by the
Ateneo de Manila University are technically not a fee. They may however fall as gifts or donations which
are tax-exempt as shown by private respondents compliance with the requirement of Section 123 of the
National Internal Revenue Code providing for the exemption of such gifts to an educational institution. [13]
Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:
To our mind, private respondent hardly fits into the definition of an independent contractor.
For one, the established facts show that IPC, as a unit of the private respondent, is not engaged
in business. Undisputedly, private respondent is mandated by law to undertake research
activities to maintain its university status. In fact, the research activities being carried out by the
IPC is focused not on business or profit but on social sciences studies of Philippine society and
culture. Since it can only finance a limited number of IPCs research projects, private respondent
occasionally accepts sponsorship for unfunded IPC research projects from international
organizations, private foundations and governmental agencies. However, such sponsorships are
subject to private respondents terms and conditions, among which are, that the research is
confined to topics consistent with the private respondents academic agenda; that no proprietary
or commercial purpose research is done; and that private respondent retains not only the
absolute right to publish but also the ownership of the results of the research conducted by the
IPC. Quite clearly, the aforementioned terms and conditions belie the allegation that private
respondent is a contractor or is engaged in business.
For another, it bears stressing that private respondent is a non-stock, non-profit educational
corporation. The fact that it accepted sponsorship for IPCs unfunded projects is merely
incidental. For, the main function of the IPC is to undertake research projects under the
academic agenda of the private respondent. Moreover, the records do not show that in
accepting sponsorship of research work, IPC realized profits from such work. On the contrary,
the evidence shows that for about 30 years, IPC had continuously operated at a loss, which
means that sponsored funds are less than actual expenses for its research projects. That IPC
has been operating at a loss loudly bespeaks of the fact that education and not profit is the
motive for undertaking the research projects.
Then, too, granting arguendo that IPC made profits from the sponsored research projects, the
fact still remains that there is no proof that part of such earnings or profits was ever distributed
as dividends to any stockholder, as in fact none was so distributed because they accrued to the
benefit of the private respondent which is a non-profit educational institution. [14]
Therefore, it is clear that the funds received by Ateneos Institute of Philippine Culture are not given in
the concept of a fee or price in exchange for the performance of a service or delivery of an
object. Rather, the amounts are in the nature of an endowment or donation given by IPCs benefactors
solely for the purpose of sponsoring or funding the research with no strings attached. As found by the two
courts below, such sponsorships are subject to IPCs terms and conditions. No proprietary or commercial
research is done,and IPC retains the ownership of the results of the research, including the absolute right
to publish the same. The copyrights over the results of the research are owned by Ateneo and,
consequently, no portion thereof may be reproduced without its permission. [15] The amounts given to IPC,

therefore, may not be deemed, it bears stressing, as fees or gross receipts that can be subjected to the
three percent contractors tax.
It is also well to stress that the questioned transactions of Ateneos Institute of Philippine Culture
cannot be deemed either as a contract of sale or a contract for a piece of work. By the contract of sale,
one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate
thing, and the other to pay therefor a price certain in money or its equivalent. [16] By its very nature, a
contract of sale requires a transfer of ownership. Thus, Article 1458 of the Civil Code expressly makes the
obligation to transfer ownership as an essential element of the contract of sale, following modern codes,
such as the German and the Swiss. Even in the absence of this express requirement, however, most
writers, including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have considered
such transfer of ownership as the primary purpose of sale. Perez and Alguer follow the same view, stating
that the delivery of the thing does not mean a mere physical transfer, but is a means of transmitting
ownership. Transfer of title or an agreement to transfer it for a price paid or promised to be paid is the
essence of sale.[17] In the case of a contract for a piece of work, the contractor binds himself to execute a
piece of work for the employer, in consideration of a certain price or compensation. x x x If the contractor
agrees to produce the work from materials furnished by him, he shall deliver the thing produced to the
employer and transfer dominion over the thing. x x x. [18] Ineludably, whether the contract be one of sale or
one for a piece of work, a transfer of ownership is involved and a party necessarily walks away with an
object.[19] In the case at bench, it is clear from the evidence on record that there was no sale either of
objects or services because, as adverted to earlier, there was no transfer of ownership over the research
data obtained or the results of research projects undertaken by the Institute of Philippine Culture.
Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in
pursuance of maintaining Ateneos university status and not in the course of an independent business of
selling such research with profit in mind. This is clear from a reading of the regulations governing
universities:
31.In addition to the legal requisites an institution must meet, among others, the following
requirements before an application for university status shall be considered:
xxxxxxxxx
(e) The institution must undertake research and operate with a competent qualified
staff at least three graduate departments in accordance with the rules and standards
for graduate education. One of the departments shall be science and technology. The
competence of the staff shall be judged by their effective teaching, scholarly
publications and research activities published in its school journal as well as their
leadership activities in the profession.
(f) The institution must show evidence of adequate and stable financial resources and
support, a reasonable portion of which should be devoted to institutional development
and research. (underscoring supplied)
xxxxxxxxx
32. University status may be withdrawn, after due notice and hearing, for failure to maintain
satisfactorily the standards and requirements therefor.[20]
Petitioners contention that it is the Institute of Philippine Culture that is being taxed and not the
Ateneo is patently erroneous because the former is not an independent juridical entity that is separate
and distinct from the latter.
Factual Findings and Conclusions of the Court of Tax Appeals
Affirmed by the Court of Appeals Generally Conclusive
In addition, we reiterate that the Court of Tax Appeals is a highly specialized body specifically created
for the purpose of reviewing tax cases. Through its expertise, it is undeniably competent to determine the
issue of whether[21] Ateneo de Manila University may be deemed a subject of the three percent
contractors tax through the evidence presented before it. Consequently, as a matter of principle, this
Court will not set aside the conclusion reached by x x x the Court of Tax Appeals which is, by the very
nature of its function, dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless there has been an abuse or improvident
exercise of authority x x x. [22] This point becomes more evident in the case before us where the findings
and conclusions of both the Court of Tax Appeals and the Court of Appeals appear untainted by any
abuse of authority, much less grave abuse of discretion. Thus, we find the decision of the latter affirming
that of the former free from any palpable error.

Public Service, Not Profit, is the Motive

The records show that the Institute of Philippine Culture conducted its research activities at a huge
deficit of P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972 to
1985.[23] In fact, it was Ateneo de Manila University itself that had funded the research projects of the
institute, and it was only when Ateneo could no longer produce the needed funds that the institute sought
funding from outside. The testimony of Ateneos Director for Accounting Services, Ms. Leonor Wijangco,
provides significant insight on the academic and nonprofit nature of the institutes research activities done
in furtherance of the universitys purposes, as follows:
Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of
Philippine Culture) that as far as grants from sponsored research it is possible that the
grant sometimes is less than the actual cost. Will you please tell us in this case when the
actual cost is a lot less than the grant who shoulders the additional cost?
A The University.
Q Now, why is this done by the University?
A Because of our faculty development program as a university, because a university has to
have its own research institute.[24]
So, why is it that Ateneo continues to operate and conduct researches through its Institute of
Philippine Culture when it undisputedly loses not an insignificant amount in the process? The plain and
simple answer is that private respondent is not a contractor selling its services for a fee but an academic
institution conducting these researches pursuant to its commitments to education and, ultimately, to public
service. For the institute to have tenaciously continued operating for so long despite its accumulation of
significant losses,we can only agree with both the Court of Tax Appeals and the Court of Appeals that
education and not profit is [IPCs] motive for undertaking the research projects. [25]
WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court
of Appeals is hereby AFFIRMED in full.
SO ORDERED.

EN BANC
[G.R. No. 6584. October 16, 1911.]
INCHAUSTI & CO., Plaintiff-Appellant, v. ELLIS CROMWELL, Collector of Internal
Revenue,Defendant-Appellee.
Haussermann, Cohn & Fisher, for Appellant.
Acting Attorney-General Harvey, for Appellee.
SYLLABUS
1. TAXATION; SALE OF HEMP; TAXABLE VALUE. Where it is admitted by the parties that it is
customary to sell hemp in the market baled and not loose, it will be presumed that the price at which
hemp is quoted in the market is the price of baled hemp; and that prices stipulated in contracts for the
purchase and sale of hemp include the cost and expense of baling where the contracts are silent upon
that subject.
2. ID.; ID.; ID.; BALING EXPENSE PART OF PRICE. Under such conditions the cost and expense of
baling the hemp is a part of the purchase price and subject to a tax imposed by law on the gross amount
of sales of the dealers, and is not a sum paid for work, labor, and materials performed and furnished by
the vendor for the vendee.
3. ID.; ID.; ID.; "PRICE" DEFINED. The word "price" signifies the sum stipulated as the equivalent of
the thing sold and also every incident taken into consideration for the fixing of the price put to the debit of
the vendee and agreed to by him.
4. ID.; ID.; ID.; DISTINCTION BETWEEN SALE AND CONTRACT FOR 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 would never have existed but for the order
of the party desiring to acquire it, or a thing which would have existed and been the subject of sale to
some other person, even if the order had not been given.
5. ID.; ID.; ID.; FUTURE SALES. When a person stipulates for the future sale of articles which he is
habitually making, and which at the time are not made or finished, it is essentially a contract of sale and
not a contract for labor. It is otherwise where the article would not have been made but for the agreement;
and where the article ordered by the purchase is exactly such as the vendor makes and keeps on hand
for sale to anyone, and no change or modification of it is made at the vendees request, it is a contract of
sale even though it be entirely made after and in consequence of the vendees order for it.
6. ID.; ID.; ID.; BALING FOR GENERAL MARKET. In this case the baling was done for the general
market and was not something done by the plaintiff as a result of the particular contract between him and
his vendee.
DECISION
MORELAND, J.:
This is an appeal by the plaintiff from a judgment of the Court of First Instance of the city of Manila, the
Hon. Simplicio del Rosario presiding, dismissing the complaint upon the merits after trial, without costs.
The facts presented to this court are agreed upon by both parties, consisting, in so far as they are
material to a decision of the case, in the following:jgc:chanrobles.com.ph

"III. That the plaintiff firm for many years past has been and now is engaged in the business of buying and
selling at wholesale hemp, both for its own account and on commission.
"IV. That it is customary to sell hemp in bales which are made by compressing the loose fiber by means of
presses, covering two sides of the bale with matting, and fastening it by means of strips of rattan; that the
operation of baling hemp is designated among merchants by the word prensaje.
"V. That in all sales of hemp by the plaintiff firm, whether for its own account or on commission for others,
the price is quoted to the buyer at so much per picul, no mention being made of baling; but with the tacit
understanding, unless otherwise expressly agreed, that the hemp will be delivered in bales and that,
according to the custom prevailing among hemp merchants and dealers in the Philippine Islands, a
charge, the amount of which depends upon the then prevailing rate, is to be made against the buyer
under the denomination of prensaje. That this charge is made in the same manner in all cases, even
when the operation of baling was performed by the plaintiff or by its principal long before the contract of
sale was made. Two specimens of the ordinary form of account used in these operations are hereunto
appended, marked Exhibits A and B, respectively, and made a part hereof.
"VI. That the amount of the charge made against hemp buyers by the plaintiff firm and other sellers of
hemp under the denomination of prensaje during the period involved in this litigation was P1.75 per bale;
that the average cost of the rattan and matting used on each bale of hemp is fifteen (15) centavos and
that the average total cost of baling hemp is one (1) peso per bale.
"VII. That insurance companies in the Philippine Islands, in estimating the insurable value of hemp always
add to the quoted price of same the charge made by the seller under the denomination of prensaje.
"VIII. That the average weight of a bale of hemp is two (2) piculs (126.5 kilograms).
"IX. That between the first day of January, 1905, and the 31st day of March, 1910, the plaintiff firm, in
accordance with the custom mentioned in paragraph V hereof, collected and received, under the
denomination of prensaje, from purchasers of hemp sold by the said firm for its own account, in addition
to the price expressly agreed upon for the said hemp, sums aggregating P380,124.35; and between the
1st day of October, 1908, and the 1st day of March, 1910, collected for the account of the owners of hemp
sold by the plaintiff firm in Manila on commission, and under the said denomination of prensaje, in
addition to the price expressly agreed upon for said hemp, sums aggregating P31,080.
"X. That the plaintiff firm in estimating the amount due it as commissions on sales of hemp made by it for
its principals has always based the said amount on the total sum collected from the purchasers of the
hemp, including the charge made in each case under the denomination of prensaje.
"XI. That the plaintiff has always paid to the defendant or to his predecessor in the office of the Collector
of Internal Revenue the tax collectible under the provisions of section 139 of Act No. 1189 upon the selling
price expressly agreed upon for all hemp sold by the plaintiff firm both for its own account and on
commission, but has not, until compelled to do so as hereinafter stated, paid the said tax upon sums
received from the purchaser of such hemp under the denomination of prensaje.
"XII. That on the 29th day of April, 1910, the defendant, acting in his official capacity as Collector of
Internal Revenue of the Philippine Islands, made demand in writing upon the plaintiff firm for the payment
within the period of five (5) days of the sum of P1,370.68 as a tax of one-third of one per cent on the sums
of money mentioned in Paragraph IX hereof, and which the said defendant claimed to be entitled to
receive, under the provisions of the said section 139 of Act No. 1189, upon the said sums of money so
collected from purchasers of hemp under the denomination of prensaje.
"XIII. That on the 4th day of May, 1910, the plaintiff firm paid to the defendant under protest the said sum
of P1,370.69, and on the same date appealed to the defendant as Collector of Internal Revenue, against
the ruling by which the plaintiff firm was required to make said payment, but defendant overruled said

protest and adversely decided said appeal, and refused and still refuses to return to plaintiff the said sum
of P1,370.68 or any part thereof.
"XIV. Upon the facts above set forth it is contended by the plaintiff that the tax of P1,370.68 assessed by
the defendant upon the aggregate sum of said charges made against said purchasers of hemp by the
plaintiff during the period in question, under the denomination of prensaje as aforesaid, namely,
P411,204.35, is illegal upon the ground that the said charge does not constitute a part of the selling price
of the hemp, but is a charge made for the service of baling the hemp, and that the plaintiff firm is therefore
entitled to recover of the defendant the said sum of P1,370.68 paid to him under protest, together with all
interest thereon at the legal rate since its payment. and the costs of this action.
"Upon the facts above stated it is the contention of the defendant that the said charge made under the
denomination of prensaje is in truth and in fact a part of the gross value of the hemp sold and of its
actual selling price, and that therefore the tax imposed by section 139 of Act No. 1189 lawfully accrued on
said sums, that the collection thereof was lawfully and properly made and that therefore the plaintiff is not
entitled to recover back said sum or any part thereof; and that the defendant should have judgment
against plaintiff for his costs."cralaw virtua1aw library
Under these facts we are of the opinion that the judgment of the court below was right. It is one of the
stipulations in the statement of facts that it is customary to sell hemp in bales, and that the price quoted in
the market for hemp per picul is the price for the hemp baled. The fact is that among large dealers like the
plaintiff in this case it is practically impossible to handle hemp without its being baled, and it is admitted by
the statement of facts, as well as demonstrated by the documentary proof introduced in the case, that if
the plaintiff sold a quantity of hemp it would be the understanding, without words, that such hemp would
be delivered in bales, and that the purchase price would include the cost and expense of baling. In other
words, it is the fact as stipulated, as well as it would be the fact of necessity, that in all dealings in hemp in
the general market the selling price consists of the value of the hemp loose plus the cost and expense of
putting it into marketable form. In the sales made by the plaintiff, which are the basis of the controversy
here, there were no services performed by him for his vendee. There was agreement that services should
be performed. Indeed, at the time of such sales it was not known by the vendee whether the hemp was
then actually baled or not. All that he knew and all that concerned him was that the hemp should be
delivered to him baled. He did not ask the plaintiff to perform services for him, nor did the plaintiff agree to
do so. The contract was single and consisted solely in the sale and purchase of hemp. The purchaser
contracted for nothing else and the vendor agreed to deliver nothing else.
The word "price" signifies the sum stipulated as the equivalent of the thing sold and also every incident
taken into consideration for the fixing of the price, put to the debit of the vendee and agreed to by him. It is
quite possible that the plaintiff, in this case in connection with the hemp which he sold, had himself
already paid the additional expense of baling as a part of the purchase price which he paid and that he
himself had received the hemp baled from his vendor. It is quite possible also that such vendor of the
plaintiff may have received the same hemp from his vendor in baled form, that he paid the additional cost
of baling as a part of the purchase price which he paid. In such case the plaintiff performed no service
whatever for his vendee, nor did, the plaintiffs vendor perform any service for him.
The distinction between a contract of sale and one for work, labor, and materials is tested by the inquiry
whether the thing transferred is one 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 been the subject of sale to
some other person. even if the order had not been given. (Groves v. Buck, 3 Maule & S., 178; Towers v.
Osborne, 1 Strange, 506; Benjamin on Sales, 90.) It is clear that in the case at bar the hemp was in
existence in baled form before the agreements of sale were made, or, at least, would have been in
existence even if none of the individual sales here in question had been consummated. It would have
been baled, nevertheless, for sale to someone else, since, according to the agreed statement of facts, it is
customary to sell hemp in bales. When a person stipulates for the future sale of articles which he is
habitually making, and which at the time are not made or finished, it is essentially a contract of sale and
not a contract for labor. It is otherwise when the article is made pursuant to agreement. (Lamb v. Crafts,
12 Met., 353; Smith v. N. Y. C. Ry. Co., 4 Keyes, 180; Benjamin on Sales, 98.) Where labor is employed

on the materials of the seller he can not maintain an action for work and labor. (Atkinson v. Bell, 8 Barn. &
C., 277; Lee v. Griffin, 30 L. J. N. S. Q. B., 252; Prescott v. Locke, 51 N. H., 94.) If the article ordered by
the purchaser is exactly such as the plaintiff makes and keeps on hand for sale to anyone, and no change
or modification of it is made at the defendants request, it is a contract of sale, even though it may be
entirely made after, and in consequence of, the defendants order for it. (Garbutt v. Watson, 5 Barn. &
Ald., 613; Gardner v. Joy, 9 Met., 177; Lamb v. Crafts, 12 Met., 353; Waterman v. Meiks, 4 Cush., 497;
Clark v. Nichols, 107 Mass., 547; May v. Ward, 134 Mass., 127; Abbott v. Gilchrist, 38 Me., 260; Crocket v.
Scribner, 64 Me., 105; Pitkin v. Noyes, 48 N. H., 294; Prescott v. Locke, 51 N. H., 94; Ellison v. Brigham,
38 Vt., 64.) It has been held in Massachusetts that a contract to make is a contract of sale if the article
ordered is already substantially in existence at the time of the order and merely requires some alteration,
modification, or adaptation to the buyers wishes or purposes. (Mixer v. Howarth, 21 Pick., 205.) It is also
held in that state that a contract for the sale of an article which the vendor in the ordinary course of his
business manufactures or procures for the general market, whether the same is on hand at the time or
not, is a contract for the sale of goods to which the statute of frauds applies. But if the goods are to be
manufactured especially for the purchaser and upon his special order, and not for the general market, the
case is not within the statute. (Goddard v. Binney, 115 Mass., 450.)
It is clear to our minds that in the case at bar the baling was performed for the general market and was
not something done by plaintiff which was a result of any peculiar wording of the particular contract
between him and his vendee. It is undoubted that the plaintiff prepared his hemp for the general market.
This would be necessary One who exposes goods for sale in the market must have them in marketable
form. The hemp in question would not have been in that condition if it had not been baled. The baling,
therefore, was nothing peculiar to the contract between the plaintiff and his vendee. It was precisely the
same contract that was made by every other seller of hemp, engaged as was the plaintiff, and resulted
simply in the transfer of title to goods already prepared for the general market. The method of
bookkeeping and form of the account rendered is not controlling as to the nature of the contract made. It
is conceded in the case that a separate entry and charge would have been made for the baling even if the
plaintiff had not been the one who baled the hemp but, instead, had received it already baled from his
vendor. This indicates of necessity that the mere fact of entering a separate item for the baling of the
hemp is formal rather than essential and in no sense indicates in this case the real transaction between
the parties. It is indisputable that, if the plaintiff had bought the hemp in question already baled, and that
that was the hemp the sale of which formed the subject of this controversy, then the plaintiff would have
performed no service for his vendee and could not, therefore, lawfully charge for the rendition of such
service. It is, nevertheless, admitted that in spite of that fact he would still have made the double entry in
his invoice of sale to such vendee. This demonstrates the nature of the transaction and discloses, as we
have already said, that the entry of a separate charge for baling does not accurately describe the
transaction between the parties.
Section 139 [Act No. 1189] of the Internal Revenue Law provides that:jgc:chanrobles.com.ph
"There shall be paid by each merchant and manufacturer a tax at the rate of one-third of one per centum
on the gross value in money of all goods, wares and merchandise sold, bartered or exchanged in the
Philippine Islands, and that this tax shall be assessed on the actual selling price at which every such
merchant or manufacturer disposes of his commodities."cralaw virtua1aw library
The operation of baling undoubtedly augments the value of the goods. We agree that there can be no
question that, if the value of the hemp were not augmented to the amount of P1.75 per bale by said
operation, the purchaser would not pay that sum. If one buys a bale of hemp at a stipulated price of P20,
well knowing that there is an agreement on his part, express or implied, to pay an additional amount of
P1.75 for that bale, he considers the bale of hemp worth P21.75. It is agreed, as we have before stated,
that hemp is sold in bales. Therefore, baling is performed before the sale. The purchaser of hemp owes to
the seller nothing whatever by reason of their contract except the value of the hemp delivered. That value,
that sum which the purchaser pays to the vendee, is the true selling price of the hemp, and every item
which enters into such price is a part of such selling price. By force of the custom prevailing among hemp
dealers in the Philippine Islands, a purchaser of hemp in the market, unless he expressly stipulates that it
shall be delivered to him in loose form, obligates himself to purchase and pay for baled hemp. Whether or

not such agreement is express or implied, whether it is actual or tacit, it has the same force. After such an
agreement has once been made by the purchaser, he has no right to insist thereafter that the seller shall
furnish him with unbaled hemp. It is undoubted that the vendees, in the sales referred to in the case at
bar, would have had no right, after having made their contracts, to insist on the delivery of loose hemp
with the purpose in view themselves to perform the baling and thus save 75 centavos per bale. It is
unquestioned that the seller, the plaintiff, would have stood upon his original contract of sale, that is, the
obligation to deliver baled hemp, and would have forced his vendees to accept baled hemp, he himself
retaining among his own profits those which accrued from the process of baling.
We are of the opinion that the judgment appealed from must be affirmed, without special finding as to
costs, and it is so ordered.
Torres, Mapa, Johnson and Carson, 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 readymade 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 stockdoors of the kind sold to Teodoro, it could stock and/or
probably had in stock the sash, mouldings and panels it used therefor (some of them at least).
In our opinion when this Factory accepts a job that requires the use of extraordinary or additional
equipment, or involves services not generally performed by it-it thereby contracts for a piece of work
filing special orders within the meaning of Article 1467. The orders herein exhibited were not shown to be
special. They were merely orders for work nothing is shown to call them special requiring extraordinary
service of the factory.
The thought occurs to us that if, as alleged-all the work of appellant is only to fill orders previously made,
such orders should not be called special work, but regular work. Would a factory do business performing
only special, extraordinary or peculiar merchandise?
Anyway, supposing for the moment that the transactions were not sales, they were neither lease of
services nor contract jobs by a contractor. But as the doors and windows had been admittedly
"manufactured" by the Oriental Sash Factory, such transactions could be, and should be taxed as
"transfers" thereof under section 186 of the National Revenue Code.
The appealed decision is consequently affirmed. So ordered.

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, andLa Carlota Sugar Central vs. Trinidad, 43, Phil. 816, 819, would
seem to be that he renders service in the course of an independent occupation, representing the
will of his employer only as to the result of his work, and not as to the means by which it is
accomplished.
With the foregoing criteria as guideposts, We shall now examine whether Engineering really did
"manufacture" and sell, as alleged by the Commissioner to hold it liable to the advance sales tax
under Section 185(m), or it only had its services "contracted" for installation purposes to hold it
liable under section 198 of the Tax Code.

I
After going over the three volumes of stenographic notes and the voluminous record of the BIR
and the CTA as well as the exhibits submitted by both parties, We find that Engineering did not
manufacture air conditioning units for sale to the general public, but imported some items (as
refrigeration compressors in complete set, heat exchangers or coils, t.s.n. p. 39) which were used
in executing contracts entered into by it. Engineering, therefore, undertook negotiations and
execution of individual contracts for the design, supply and installation of air conditioning units of
the central type (t.s.n. pp. 20-36; Exhs. "F", "G", "H", "I", "J", "K", "L", and "M"), taking into
consideration in the process such factors as the area of the space to be air conditioned; the
number of persons occupying or would be occupying the premises; the purpose for which the
various air conditioning areas are to be used; and the sources of heat gain or cooling load on the
plant such as sun load, lighting, and other electrical appliances which are or may be in the plan.
(t.s.n. p. 34, Vol. I) Engineering also testified during the hearing in the Court of Tax Appeals that
relative to the installation of air conditioning system, Engineering designed and engineered
complete each particular plant and that no two plants were identical but each had to be
engineered separately.
As found by the lower court, which finding 4 We adopt
Engineering, in a nutshell, fabricates, assembles, supplies and installs in the
buildings of its various customers the central type air conditioning system;
prepares the plans and specifications therefor which are distinct and different from
each other; the air conditioning units and spare parts or accessories thereof used
by petitioner are not the window type of air conditioner which are manufactured,
assembled and produced locally for sale to the general market; and the imported
air conditioning units and spare parts or accessories thereof are supplied and
installed by petitioner upon previous orders of its customers conformably with
their needs and requirements.
The facts and circumstances aforequoted support the theory that Engineering is a contractor
rather than a manufacturer.
The Commissioner in his Brief argues that "it is more in accord with reason and sound business
management to say that anyone who desires to have air conditioning units installed in his
premises and who is in a position and willing to pay the price can order the same from the
company (Engineering) and, therefore, Engineering could have mass produced and stockpiled air
conditioning units for sale to the public or to any customer with enough money to buy the same."
This is untenable in the light of the fact that air conditioning units, packaged, or what we know as
self-contained air conditioning units, are distinct from the central system which Engineering dealt
in. To Our mind, the distinction as explained by Engineering, in its Brief, quoting from books, is
not an idle play of words as claimed by the Commissioner, but a significant fact which We just
cannot ignore. As quoted by Engineering Equipment & Supply Co., from an Engineering handbook
by L.C. Morrow, and which We reproduce hereunder for easy reference:
... there is a great variety of equipment in use to do this job (of air conditioning).
Some devices are designed to serve a specific type of space; others to perform a
specific function; and still others as components to be assembled into a tailormade 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 190 5 of the Code. This compensating tax is not a tax on the
importation of goods but a tax on the use of imported goods not subject to sales tax. Engineering,
therefore, should be held liable to the payment of 30% compensating tax in accordance with
Section 190 of the Tax Code in relation to Section 185(m) of the same, but without the 50% mark
up provided in Section 183(b).
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. "31" 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.

SECOND DIVISION
[G.R. No. 126444. December 4, 1998]
ALFONSO QUIJADA, CRESENTE QUIJADA, REYNELDA QUIJADA, DEMETRIO QUIJADA,
ELIUTERIA QUIJADA, EULALIO QUIJADA, and WARLITO QUIJADA, petitioners, vs. COURT
OF APPEALS, REGALADO MONDEJAR, RODULFO GOLORAN, ALBERTO ASIS,
SEGUNDINO RAS, ERNESTO GOLORAN, CELSO ABISO, FERNANDO BAUTISTA,
ANTONIO MACASERO, and NESTOR MAGUINSAY, respondents.
DECISION
MARTINEZ, J.:
Petitioners, as heirs of the late Trinidad Quijada, filed a complaint against private respondents for
quieting of title, recovery of possession and ownership of parcels of land with claim for attorney's fees and
damages. The suit was premised on the following facts found by the Court of Appeals, which is materially
the same as that found by the trial court:
"Plaintiffs-appellees (petitioners) are the children of the late Trinidad Corvera Vda. de Quijada. Trinidad
was one of the heirs of the late Pedro Corvera and inherited from the latter the two-hectare parcel of land
subject of the case, situated in the barrio of San Agustin, Talacogon, Agusan del Sur. On April 5, 1956,
Trinidad Quijada together with her sisters Leonila Corvera Vda. de Sequea and Paz Corvera Cabiltes and
brother Epapiadito Corvera executed a conditional deed of donation (Exh. C) of the two-hectare parcel of
land subject of the case in favor of the Municipality of Talacogon, the condition being that the parcel of
land shall be used solely and exclusively as part of the campus of the proposed provincial high school in
Talacogon. Apparently, Trinidad remained in possession of the parcel of land despite the donation. On
July 29, 1962, Trinidad sold one (1) hectare of the subject parcel of land to defendant-appellant Regalado
Mondejar (Exh. 1). Subsequently, Trinidad verbally sold the remaining one (1) hectare to defendantappellant (respondent) Regalado Mondejar without the benefit of a written deed of sale and evidenced
solely by receipts of payment. In 1980, the heirs of Trinidad, who at that time was already dead, filed a
complaint for forcible entry (Exh. E) against defendant-appellant (respondent) Regalado Mondejar, which
complaint was, however, dismissed for failure to prosecute (Exh. F). In 1987, the proposed provincial high
school having failed to materialize, the Sangguniang Bayan of the municipality of Talacogon enacted a
resolution reverting the two (2) hectares of land donated back to the donors (Exh. D). In the meantime,
defendant-appellant (respondent) Regalado Mondejar sold portions of the land to defendants-appellants
(respondents) Fernando Bautista (Exh. 5), Rodolfo Goloran (Exh. 6), Efren Guden (Exh. 7) and Ernesto
Goloran (Exh. 8).
"On July 5, 1988, plaintiffs-appellees (petitioners) filed this action against defendants-appellants
(respondents). In the complaint, plaintiffs-appellees (petitioners) alleged that their deceased mother never
sold, conveyed, transferred or disposed of the property in question to any person or entity much less to
Regalado Mondejar save the donation made to the Municipality of Talacogon in 1956; that at the time of
the alleged sale to Regalado Mondejar by Trinidad Quijada, the land still belongs to the Municipality of
Talacogon, hence, the supposed sale is null and void.

"Defendants-appellants (respondents), on the other hand, in their answer claimed that the land in dispute
was sold to Regalado Mondejar, the one (1) hectare on July 29, 1962, and the remaining one (1) hectare
on installment basis until fully paid. As affirmative and/or special defense, defendants-appellants
(respondents) alleged that plaintiffs' action is barred by laches or has prescribed.
"The court a quo rendered judgment in favor of plaintiffs-appellees (petitioners): firstly because 'Trinidad
Quijada had no legal title or right to sell the land to defendant Mondejar in 1962, 1966, 1967 and 1968,
the same not being hers to dispose of because ownership belongs to the Municipality of Talacogon'
(Decision, p. 4; Rollo, p. 39) and, secondly, that the deed of sale executed by Trinidad Quijada in favor of
Mondejar did not carry with it the conformity and acquiescence of her children, more so that she was
already 63 years old at the time, and a widow (Decision, p. 6; Rollo, p. 41)."[1]
The dispositive portion of the trial court's decision reads:
"WHEREFORE, viewed from the above perceptions, the scale of justice having tilted in favor of the
plaintiffs, judgment is, as it is hereby rendered:
1) ordering the Defendants to return and vacate the two (2) hectares of land to Plaintiffs as
described in Tax Declaration No. 1209 in the name of Trinidad Quijada;
2) ordering any person acting in Defendants' behalf to vacate and restore the peaceful
possession of the land in question to Plaintiffs;
3) ordering the cancellation of the Deed of Sale executed by the late Trinidad Quijada in favor of
Defendant Regalado Mondejar as well as the Deeds of Sale/Relinquishments executed by
Mondejar in favor of the other Defendants;
4) ordering Defendants to remove their improvements constructed on the questioned lot;
5) ordering the Defendants to pay Plaintiffs, jointly and severally, the amount of P10,000.00
representing attorney's fees;
6) ordering Defendants to pays the amount of P8,000.00 as expenses of litigation; and
7) ordering Defendants to pay the sum of P30,000.00 representing moral damages.
SO ORDERED."[2]
On appeal, the Court of Appeals reversed and set aside the judgment a quo[3] ruling that the sale
made by Trinidad Quijada to respondent Mondejar was valid as the4 former retained an inchoate interest
on the lots by virtue of the automatic reversion clause in the deed of donation. [4]Thereafter, petitioners
filed a motion for reconsideration. When the CA denied their motion, [5] petitioners instituted a petition for
review to this Court arguing principally that the sale of the subject property made by Trinidad Quijada to
respondent Mondejar is void, considering that at that time, ownership was already transferred to the
Municipality of Talacogon. On the contrary, private respondents contend that the sale was valid, that they
are buyers in good faith, and that petitioners' case is barred by laches. [6]
We affirm the decision of the respondent court.

The donation made on April 5, 1956 by Trinidad Quijada and her brother and sisters [7] was subject to
the condition that the donated property shall be "used solely and exclusively as a part of the campus of
the proposed Provincial High School in Talacogon." [8] The donation further provides that should "the
proposed Provincial High School be discontinued or if the same shall be opened but for some reason or
another, the same may in the future be closed" the donated property shall automatically revert to the
donor.[9] Such condition, not being contrary to law, morals, good customs, public order or public policy was
validly imposed in the donation.[10]
When the Municipality's acceptance of the donation was made known to the donor, the former
became the new owner of the donated property -- donation being a mode of acquiring and transmitting
ownership[11] - notwithstanding the condition imposed by the donee. The donation is perfected once the
acceptance by the donee is made known to the donor. [12] Accordingly, ownership is immediately
transferred to the latter and that ownership will only revert to the donor if the resolutory condition is not
fulfilled.
In this case, that resolutory condition is the construction of the school. It has been ruled that when a
person donates land to another on the condition that the latter would build upon the land a school, the
condition imposed is not a condition precedent or a suspensive condition but a resolutory one. [13] Thus, at
the time of the sales made in 1962 towards 1968, the alleged seller (Trinidad) could not have sold the lots
since she had earlier transferred ownership thereof by virtue of the deed of donation. So long as the
resolutory condition subsists and is capable of fulfillment, the donation remains effective and the donee
continues to be the owner subject only to the rights of the donor or his successors-in-interest under the
deed of donation. Since no period was imposed by the donor on when must the donee comply with the
condition, the latter remains the owner so long as he has tried to comply with the condition within a
reasonable period. Such period, however, became irrelevant herein when the donee-Municipality
manifested through a resolution that it cannot comply with the condition of building a school and the same
was made known to the donor.Only then - when the non-fulfillment of the resolutory condition was brought
to the donor's knowledge - that ownership of the donated property reverted to the donor as provided in
the automatic reversion clause of the deed of donation.
The donor may have an inchoate interest in the donated property during the time that ownership of
the land has not reverted to her. Such inchoate interest may be the subject of contracts including a
contract of sale. In this case, however, what the donor sold was the land itself which she no longer
owns. It would have been different if the donor-seller sold her interests over the property under the deed
of donation which is subject to the possibility of reversion of ownership arising from the non-fulfillment of
the resolutory condition.
As to laches, petitioners' action is not yet barred thereby. Laches presupposes failure or neglect for
an unreasonable and unexplained length of time, to do that which, by exercising due diligence, could or
should have been done earlier;[14] "it is negligence or omission to assert a right within a reasonable time,
thus, giving rise to a presumption that the party entitled to assert it either has abandoned or declined to
assert it."[15] Its essential elements of:
a) Conduct on the part of the defendant, or of one under whom he claims, giving rise to the
situation complained of;
b) Delay in asserting complainant's right after he had knowledge of the defendant's conduct and
after he has an opportunity to sue;
c) Lack of knowledge or notice on the part of the defendant that the complainant would assert
the right on which he bases his suit; and,

d) Injury or prejudice to the defendant in the event relief is accorded to the complainant." [16]
are absent in this case. Petitioners' cause of action to quiet title commenced only when the property
reverted to the donor and/or his successors-in-interest in 1987. Certainly, when the suit was initiated the
following year, it cannot be said that petitioners had slept on their rights for a long time.The 1960's sales
made by Trinidad Quijada cannot be the reckoning point as to when petitioners' cause of action
arose. They had no interest over the property at that time except under the deed of donation to which
private respondents were not privy. Moreover, petitioners had previously filed an ejectment suit against
private respondents only that it did not prosper on a technicality.
Be that at it may, there is one thing which militates against the claim of petitioners. Sale, being a
consensual contract, is perfected by mere consent, which is manifested the moment there is a meeting of
the minds[17] as to the offer and acceptance thereof on three (3) elements: subject matter, price and terms
of payment of the price.[18] ownership by the seller on the thing sold at the time of the perfection of the
contract of sale is not an element for its perfection. What the law requires is that the seller has the right to
transfer ownership at the time the thing sold is delivered. [19]Perfection per se does not transfer ownership
which occurs upon the actual or constructive delivery of the thing sold. [20] A perfected contract of sale
cannot be challenged on the ground of non-ownership on the part of the seller at the time of its perfection;
hence, the sale is still valid.
The consummation, however, of the perfected contract is another matter. It occurs upon the
constructive or actual delivery of the subject matter to the buyer when the seller or her successors-ininterest subsequently acquires ownership thereof. Such circumstance happened in this case when
petitioners -- who are Trinidad Quijada's heirs and successors-in-interest -- became the owners of the
subject property upon the reversion of the ownership of the land to them. Consequently, ownership is
transferred to respondent Mondejar ands those who claim their right from him. Article 1434 of the New
Civil Code supports the ruling that the seller's "title passes by operation of law to the buyer." [21] This rule
applies not only when the subject matter of the contract of sale is goods, [22] but also to other kinds of
property, including real property.[23]
There is also no merit in petitioners' contention that since the lots were owned by the municipality at
the time of the sale, they were outside the commerce of men under Article 1409 (4) of the NCC; [24] thus,
the contract involving the same is inexistent and void from the beginning.However, nowhere in Article
1409 (4) is it provided that the properties of a municipality, whether it be those for public use or its
patrimonial property[25] are outside the commerce of men. Besides, the lots in this case were conditionally
owned by the municipality. To rule that the donated properties are outside the commerce of men would
render nugatory the unchallenged reasonableness and justness of the condition which the donor has the
right to impose as owner thereof. Moreover, the objects referred to as outsides the commerce of man are
those which cannot be appropriated, such as the open seas and the heavenly bodies.
With respect to the trial courts award of attorneys fees, litigation expenses and moral damages, there
is neither factual nor legal basis thereof. Attorneys fees and expenses of litigation cannot, following the
general rule in Article 2208 of the New Civil Code, be recovered in this case, there being no stipulation to
that effect and the case does not fall under any of the exceptions. [26] It cannot be said that private
respondents had compelled petitioners to litigate with third persons. Neither can it be ruled that the former
acted in gross and evident bad faith in refusing to satisfy the latters claims considering that private
respondents were under an honest belief that they have a legal right over the property by virtue of the
deed of sale. Moral damages cannot likewise be justified as none of the circumstances enumerated under
Articles 2219[27] and 2220[28] of the New Civil Code concur in this case.

WHEREFORE, by virtue of the foregoing, the assailed decision of the Court of Appeals is
AFFIRMED.
SO ORDERED.
Melo (Acting Chairman), Puno, and Mendoza, JJ., concur.

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.
Avancea, C.J., Diaz, Moran and Horrilleno, JJ., concur.

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

PHILIPPINE LAWIN BUS, CO., MASTER TOURS & TRAVEL CORP., MARCIANO TAN, ISIDRO TAN,
ESTEBAN TAN and HENRY TAN, petitioners, vs. COURT OF APPEALS and ADVANCE
CAPITAL CORPORATION,respondents.
DECISION
PARDO, J.:
The Case
The case is a petition for review via certiorari of the decision of the Court of Appeals,[1] reversing that
of the trial court[2] and sentencing petitioners as follows:
WHEREFORE, the appealed decision should be, as it is hereby REVERSED and SET ASIDE. In lieu
thereof, a new one is hereby rendered ordering the defendants-appellees to pay, jointly and solidarily, in
favor of plaintiff-appellant Advance Capital Corporation, the following amounts:
1. P16,484,994.42, the principal obligation under the two promissory note Nos. 003 and 00037 plus
interest and penalties;
2. P100,000.00 for loss of goodwill and good reputation;
3. An amount equivalent to 10% of the collectible amount, plus P50,000, as acceptance fee and P500 per
appearance, as and for attorneys fees: and
4. P100,000 as litigation expenses.
Costs shall be taxed against defendant-appellees.
SO ORDERED.[3]
The Facts
The facts, as found by the Court of Appeals, are as follows:
On 7 August 1990 plaintiff Advance Capital Corporation, a licensed lending investor, extended a loan to
defendant Philippine Lawin Bus Company (hereafter referred to as LAWIN), in the amount of
P8,000,000.00 payable within a period of one (1) year, as evidenced by a Credit Agreement (Exhibits B to
B-4-B). The defendant, through Marciano Tan, its Executive Vice President, executed Promissory Note
No. 003, for the amount of P8,000,000.00 (Exhs. C to C-1).
To guarantee payment of the loan, defendant Lawin executed in favor of plaintiff the following documents:
(1) A Deed of Chattel Mortgage wherein 9 units of buses were constituted as collaterals (Exhibits F to F7): (2) A joint and several UNDERTAKING of defendant Master Tours and Travel Corporation dated 07
August 1990, signed by Isidro Tan and Marciano Tan (Exhs. H to H-1): and (3) A joint and several
UNDERTAKING dated 21 August 1990, executed and signed by Esteban, Isidro, Marciano and Henry, all
surnamed Tan (Exhs. I to I-6).
Out of the P8,000,000.00 loan, P1,800,000.00 was paid. Thus, on 02 November 1990, defendant Bus
Company was able to avail an additional loan of P2,000,000.00 for one (1) month under Promissory Note
00028 (Exhs. J-J-1).
Defendant LAWIN failed to pay the aforementioned promissory note and the same was renewed on 03
December 1990 to become due on or before 01 February 1991, under Promissory Note 00037 (Exh. K).
On 15 May 1991 for failure to pay the two promissory notes, defendant LAWIN was granted a loan restructuring for two (2) months to mature on 31 July 1991.
Despite the restructuring, defendant LAWIN failed to pay. Thus, plaintiff foreclosed the mortgaged buses
and as the sole bidder thereof, the amount of P2,000,000.00 was accepted by the deputy sheriff
conducting the sale and credited to the account of defendant LAWIN.
Thereafter, on 27 May 1992, identical demand letters were sent to the defendants to pay their obligation
(Exhs. X to CC). Despite repeated demands, the defendants failed to pay their indebtedness which
totaled of P16,484,992.42 as of 31 July 1992 (Exhs. DD-DD-1).
Thus, the suit for sum of money, wherein the plaintiff prays that defendants solidarily pay plaintiff as of
July 31, 1992 the sum of (a) P16,484,994.12 as principal obligation under the two promissory notes Nos.
003 and 00037, plus interests and penalties: (b) P300,000.00 for loss of good will and good business
reputation: (c) attorneys fees amounting to P100,000.00 as acceptance fee and a sum equivalent to 10%
of the collectible amount, and P500.00 as appearance fee; (d) P200,000.00 as litigation expenses; (e)
exemplary damages in an amount to be awarded at the courts discretion; and (f) the costs.
On 04 September 1993, a writ of preliminary injunction was issued with respect to movable and
immovable properties of the defendants.
In answer to the complaint, defendants-appellees assert by way of special and affirmative defense, that
there was already an arrangement as to the full settlement of the loan obligation by way of:

17.A. Sale of the nine (9) units passenger buses the proceeds of which will be credited against the loan
amount as full payment thereof; or in the alternative.
17.B. Plaintiff will shoulder and bear the cost of rehabilitating the buses, with the amount thereof to be
included in the total obligation of defendant Lawin and the bus operated, with the earnings thereof to be
applied to the loan obligation of defendant Lawin. (p. 4 Answer; p. 166, rec.)
Defendants further assert that the foreclosure sale was in violation of the aforequoted arrangement and
prayed for the nullification of the same and the dismissal of the complaint. [4]
On 28 June 1995, the trial court rendered a decision dismissing the complaint, as follows:
WHEREFORE, judgment is rendered as follows:
1. Dismissing the complaint for lack of merit;
2. Declaring the foreclosure and auction sale null and void;
3. Declaring the obligation or indebtedness of defendants EXTINGUISHED;
4. Declaring the writ of attachment issued in this case null and void and, therefore, is hereby declared
dissolved; and
5. Ordering the Sheriff of this Branch or whoever is in possession, to return all the personal properties
attached in this case to the owner/s thereof within one (1) week from the finality of this decision;
6. Dismissing defendants counterclaim for lack of sufficient merit.
No pronouncement as to costs.
SO ORDERED.[5]
In time, respondent Advance Capital Corporation appealed from the decision to the Court of Appeals.
[6]

On 30 September 1997, the Court of Appeals promulgated a decision reversing that of the trial court,
the dispositive portion of which is set out in the opening paragraph of this decision.
Hence, this appeal.[7]
The Issue
The issue raised is whether there was dacion en pago between the parties upon the surrender or
transfer of the mortgaged buses to the respondent. [8]
The Courts Ruling
We deny the petition, with modification.
The issue raised is factual. In an appeal via certiorari, we may not review the factual findings of the
Court of Appeals.[9] When supported by substantial evidence, the findings of fact of the Court of Appeals
are conclusive and binding on the parties and are not reviewable by this Court, [10] unless the case falls
under any of the recognized exceptions to the rule. [11]
Petitioner failed to prove that the case falls within the exceptions. [12] The Supreme Court is not a trier
of facts.[13] It is not our function to review, examine and evaluate or weigh the probative value of the
evidence presented.[14] A question of fact would arise in such event.[15]
Nonetheless, we agree with the Court of Appeals that there was no dacion en pago that took place
between the parties.
In dacion en pago, property is alienated to the creditor in satisfaction of a debt in money. [16] It is the
delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent
of the performance of the obligation.[17] It extinguishes the obligation to the extent of the value of the thing
delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement,
express or implied, or by their silence, consider the thing as equivalent to the obligation, in which case the
obligation is totally extinguished."[18]
Article 1245 of the Civil Code provides that the law on sales shall govern an agreement of dacion en
pago. A contract of sale is perfected at the moment there is a meeting of the minds of the parties thereto
upon the thing which is the object of the contract and upon the price. [19] In Filinvest Credit Corporation v.
Philippine Acetylene Co., Inc., we said:
x x x. In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor
who accepts it as equivalent of payment of an outstanding obligation. The undertaking really partakes in
one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor,
payment for which is to be charged against the debtors debt. As such, the essential elements of a
contract of sale, namely, consent, object certain, and cause or consideration must be present. In its
modern concept, what actually takes place in dacion en pago is an objective novation of the
obligation where the thing offered as an accepted equivalent of the performance of an obligation
is considered as the object of the contract of sale, while the debt is considered as the purchase price. In

any case, common consent is an essential prerequisite, be it sale or novation, to have the effect of totally
extinguishing the debt or obligation.[20]
In this case, there was no meeting of the minds between the parties on whether the loan of the
petitioners would be extinguished by dacion en pago. The petitioners anchor their claim solely on the
testimony of Marciano Tan that he proposed to extinguish petitioners obligation by the surrender of the
nine buses to the respondent acceded to as shown by receipts its representative made.[21] However, the
receipts executed by respondents representative as proof of an agreement of the parties that delivery of
the buses to private respondent would result in extinguishing petitioners obligation do not in any way
reflect the intention of the parties that ownership thereof by respondent would be complete and
absolute. The receipts show that the two buses were delivered to respondent in order that it would take
custody for the purpose of selling the same. The receipts themselves in fact show that petitioners
deemed respondent as their agent in the sale of the two vehicles whereby the proceeds thereof would be
applied in payment of petitioners indebtedness to respondent. Such an agreement negates transfer of
absolute ownership over the property to respondent, as in a sale. Thus, in Philippine National Bank v.
Pineda[22] we held that where machinery and equipment were repossessed to secure the payment of a
loan obligation and not for the purpose of transferring ownership thereof to the creditor in satisfaction of
said loan, no dacion en pago was ever accomplished.
The Fallo
IN VIEW WHEREOF, the Court DENIES the petition and AFFIRMS the decision of the Court of
Appeals[23] with MODIFICATION as follows:
WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE. In lieu thereof, judgment is
hereby rendered ordering defendants-appellees to pay, jointly and severally, plaintiff-appellant Advance
Capital Corp. the following amounts:
(1) P16,484,994.42, the principal obligation under the two promissory notes plus 12% per annum from the
finality of this decision until fully paid;
(2) P50,000.00 as attorneys fees;
(3) Costs of suit.
All other monetary awards are deleted.
SO ORDERED.

G.R. No. 82508 September 29, 1989

FILINVEST CREDIT CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, JOSE SY BANG and ILUMINADA TAN SY BANG,*respondents.
Labaquis, Loyola, Angara and Associates for petitioner.
Alfredo 1. Raya for private respondents.
SARMIENTO, J.:
This is a petition for review on certiorari of the decision, 1 dated March 17, 1988, of the Court of Appeals
which affirmed with modification the decision 2 of the Regional Trial Court of Quezon, Branch LIX, Lucena
City. The controversy stemmed from the following facts: The private respondents, the spouses Jose Sy
Bang and Iluminada Tan, were engaged in the sale of gravel produced from crushed rocks and used for
construction purposes. In order to increase their production, they engaged the services of Mr. Ruben
Mercurio, the proprietor of Gemini Motor Sales in Lucena City, to look for a rock crusher which they could
buy. Mr. Mercurio referred the private respondents to the Rizal Consolidated Corporation which then had
for sale one such machinery described as:
ONE UNIT LIPPMAN PORTABLE CRUSHING PLANT (RECONDITIONED) [sic]
JAW CRUSHER-10xl6 DOUBLE ROLL CRUSHER 16x16
3 UNITS PRODUCT CONVEYOR
75 HP ELECTRIC MOTOR
8 PCS. BRAND NEW TIRES CHASSIS NO. 19696 GOOD RUNNING CONDITION 3
Oscar Sy Bang, a brother of private respondent Jose Sy Bang, went to inspect the machine at the Rizal
Consolidated's plant site. Apparently satisfied with the machine, the private respondents signified their
intent to purchase the same. They were however confronted with a problem-the rock crusher carried a
cash price tag of P 550,000.00. Bent on acquiring the machinery, the private respondents applied for
financial assistance from the petitioner, Filinvest Credit Corporation. The petitioner agreed to extend to
the private respondents financial aid on the following conditions: that the machinery be purchased in the
petitioner's name; that it be leased (with option to purchase upon the termination of the lease period) to
the private respondents; and that the private respondents execute a real estate mortgage in favor of the
petitioner as security for the amount advanced by the latter. Accordingly, on May 18,1981, a contract of
lease of machinery (with option to purchase) was entered into by the parties whereby the private
respondents agreed to lease from the petitioner the rock crusher for two years starting from July 5, 1 981
payable as follows:
P10,000.00 - first 3 months
23,000.00 - next 6 months
24,800.00 - next 15 months
The contract likewise stipulated that at the end of the two-year period, the machine would be owned by
the private respondents. Thus, the private respondents issued in favor of the petitioner a check for
P150,550.00, as initial rental (or guaranty deposit), and twenty-four (24) postdated checks corresponding
to the 24 monthly rentals. In addition, to guarantee their compliance with the lease contract, the private
respondents executed a real estate mortgage over two parcels of land in favor of the petitioner. The rock
crusher was delivered to the private respondents on June 9, 1981. Three months from the date of
delivery, or on September 7, 1981, however, the private respondents, claiming that they had only tested
the machine that month, sent a letter-complaint to the petitioner, alleging that contrary to the 20 to 40 tons
per hour capacity of the machine as stated in the lease contract, the machine could only process 5 tons of
rocks and stones per hour. They then demanded that the petitioner make good the stipulation in the lease
contract. They followed that up with similar written complaints to the petitioner, but the latter did not,
however, act on them. Subsequently, the private respondents stopped payment on the remaining checks
they had issued to the petitioner. 5
As a consequence of the non-payment by the private respondents of the rentals on the rock crusher as
they fell due despite the repeated written demands, the petitioner extrajudicially foreclosed the real estate
mortgage. 6 On April 18, 1983, the private respondents received a Sheriff s Notice of Auction Sale
informing them that their mortgaged properties were going to be sold at a public auction on May 25, 1983
at 10:00 o'clock in the morning at the Office of the Provincial Sheriff in Lucena City to satisfy their
indebtedness to the petitioner. 7 To thwart the impending auction of their properties, the private
respondents filed before the Regional Trial Court of Quezon, on May 4, 1983, 8 a complaint against the

petitioner, for the rescission of the contract of lease, annullment of the real estate mortgage, and for
injunction and damages, with prayer for the issuance of a writ of preliminary injunction. 9 On May 23,
1983, three days before the scheduled auction sale, the trial court issued a temporary restraining order
commanding the Provincial Sheriff of Quezon, and the petitioner, to refrain and desist from proceeding
with the public auction. 10 Two years later, on September 4, 1985, the trial court rendered a decision in
favor of the private respondents, the dispositive portion of which reads:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
1. making the injunction permanent;
2. rescinding the contract of lease of the machinery and equipment and ordering the
plaintiffs to return to the defendant corporation the machinery subject of the lease
contract, and the defendant corporation to return to plaintiffs the sum of P470,950.00 it
received from the latter as guaranty deposit and rentals with legal interest thereon until
the amount is fully restituted;
3. annulling the real estate mortgage constituted over the properties of the plaintiffs
covered by Transfer Certificate of Title Nos. T32480 and T-5779 of the Registry of Deeds
of Lucena City;
4. ordering the defendant corporation to pay plaintiffs P30,000.00 as attorney's fees and
the costs of the suit.
SO ORDERED. 11
Dissatisfied with the trial court's decision, the petitioner elevated the case to the respondent Court of
Appeals.
On March 17, 1988, the appellate court, finding no error in the appealed judgment, affirmed the same in
toto. 12Hence, this petition.
Before us, the petitioner reasserts that the private respondents' cause of action is not against it (the
petitioner), but against either the Rizal Consolidated Corporation, the original owner-seller of the subject
rock crusher, or Gemini Motors Sales which served as a conduit facilitator of the purchase of the said
machine. The petitioner argues that it is a financing institution engaged in quasi-banking activities,
primarily the lending of money to entrepreneurs such as the private respondents and the general public,
but certainly not the leasing or selling of heavy machineries like the subject rock crusher. The petitioner
denies being the seller of the rock crusher and only admits having financed its acquisition by the private
respondents. Further, the petitioner absolves itself of any liability arising out of the lease contract it signed
with the private respondents due to the waiver of warranty made by the latter. The petitioner likewise
maintains that the private respondents being presumed to be knowledgeable about machineries, should
be held responsible for the detection of defects in the machine they had acquired, and on account of that,
they are estopped from claiming any breach of warranty. Finally, the petitioner interposed the defense of
prescription, invoking Article 1571 of the Civil Code, which provides:
Art. 1571. Actions arising from the provisions of the preceding ten articles shall be barred after six
months, from the delivery of the thing sold.
We find the petitioner's first contention untenable. While it is accepted that the petitioner is a financing
institution, it is not, however, immune from any recourse by the private respondents. Notwithstanding the
testimony of private respondent Jose Sy Bang that he did not purchase the rock crusher from the
petitioner, the fact that the rock crusher was purchased from Rizal Consolidated Corporation in the name
and with the funds of the petitioner proves beyond doubt that the ownership thereof was effectively
transferred to it. It is precisely this ownership which enabled the petitioner to enter into the "Contract of
Lease of Machinery and Equipment" with the private respondents.
Be that as it may, the real intention of the parties should prevail. The nomenclature of the agreement
cannot change its true essence, i.e., a sale on installments. It is basic that a contract is what the law
defines it and the parties intend it to be, not what it is called by the parties. 13 It is apparent here thatthe
intent of the parties to the subject contract is for the so-called rentals to be the installment payments.
Upon the completion of the payments, then the rock crusher, subject matter of the contract, would
become the property of the private respondents. This form of agreement has been criticized as a lease
only in name. Thus in Vda. de Jose v. Barrueco 14 we stated:
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a bargain
in that form, for one reason or another, have frequently resorted to the device of making contracts in the
form of leases either with options to the buyer to purchase for a small consideration at the end of term,
provided the so-called rent has been duly paid, or with stipulations that if the rent throughout the term is

paid, title shall thereupon vest in the lessee. It is obvious that such transactions are leases only in name.
The so-called rent must necessarily be regarded as payment of the price in installments since the due
payment of the agreed amount results, by the terms of bargain, in the transfer of title to the lessee. 15
The importance of the criticism is heightened in the light of Article 1484 of the new Civil Code which
provides for the remedies of an unpaid seller of movables on installment basis.
Article 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage or the thing sold, if one has been constituted, should
the vendee's failure to pay cover two or more installments. In this case, he shall have no
further action against the purchaser to recover any unpaid balance of the price. Any
agreement to the contrary shall be void.
Under the aforequoted provision, the seller of movables in installments, in case the buyer fails to pay two
or more installments may elect to pursue either of the following remedies: (1) exact fulfillment by the
purchaser of the obligation; (2) cancel the sale; or (3) foreclose the mortgage on the purchased property if
one was constituted thereon. It is now settled that the said remedies are alternative and not cumulative
and therefore, the exercise of one bars the exercise of the others.
Indubitably, the device contract of lease with option to buy is at times resorted to as a means to
circumvent Article 1484, particularly paragraph (3) thereof.Through the set-up, the vendor, by retaining
ownership over the property in the guise of being the lessor, retains, likewise, the right to repossess the
same, without going through the process of foreclosure, in the event the vendee-lessee defaults in the
payment of the installments. There arises therefore no need to constitute a chattel mortgage over the
movable sold. More important, the vendor, after repossessing the property and, in effect, canceling the
contract of sale, gets to keep all the installments-cum-rentals already paid. It is thus for these reasons that
Article 1485 of the new Civil Code provides that:
Article 1485. The preceding article shall be applied to contracts purporting to be leases of
personal property with option to buy, when the lessor has deprived the lessee of
possession or enjoyment of the thing. (Emphasis ours.)
Unfortunately, even with the foregoing findings, we however fail to find any reason to hold the petitioner
liable for the rock crusher's failure to produce in accordance with its described capacity. According to the
petitioner, it was the private respondents who chose, inspected, and tested the subject machinery. It was
only after they had inspected and tested the machine, and found it to their satisfaction, that the private
respondents sought financial aid from the petitioner. These allegations of the petitioner had never been
rebutted by the private respondents. In fact, they were even admitted by the private respondents in the
contract they signed. Thus:
LESSEE'S SELECTION, INSPECTION AND VERIFICATION.-The LESSEE hereby confirms and
acknowledges that he has independently inspected and verified the leased property and has selected and
received the same from the Dealer of his own choosing in good order and excellent running and operating
condition and on the basis of such verification, etc. the LESSEE has agreed to enter into this Contract." 16
Moreover, considering that between the parties, it is the private respondents, by reason of their business,
who are presumed to be more knowledgeable, if not experts, on the machinery subject of the contract,
they should not therefore be heard now to complain of any alleged deficiency of the said machinery. It is
their failure or neglect to exercise the caution and prudence of an expert, or, at least, of a prudent man, in
the selection, testing, and inspection of the rock crusher that gave rise to their difficulty and to this conflict.
A well- established principle in law is that between two parties, he, who by his negligence caused the loss,
shall bear the same.
At any rate, even if the private respondents could not be adjudged as negligent, they still are precluded
from imputing any liability on the petitioner. One of the stipulations in the contract they entered into with
the petitioner is an express waiver of warranties in favor of the latter. By so signing the agreement, the
private respondents absolved the petitioner from any liability arising from any defect or deficiency of the
machinery they bought. The stipulation on the machine's production capacity being "typewritten" and that
of the waiver being "printed" does not militate against the latter's effectivity. As such, whether "a capacity
of 20 to 40 tons per hour" is a condition or a description is of no moment. What stands is that the private
respondents had expressly exempted the petitioner from any warranty whatsoever. Their Contract of
Lease Of Machinery And Equipment states:

WARRANTY-LESSEE absolutely releases the lessor from any liability whatsoever as to any and all
matters in relation to warranty in accordance with the provisions hereinafter stipulated. 17
Taking into account that due to the nature of its business and its mode of providing financial assistance to
clients, the petitioner deals in goods over which it has no sufficient know-how or expertise, and the
selection of a particular item is left to the client concerned, the latter, therefore, shoulders the
responsibility of protecting himself against product defects. This is where the waiver of warranties is of
paramount importance. Common sense dictates that a buyer inspects a product before purchasing it
(under the principle of caveat emptor or "buyer beware") and does not return it for defects discovered
later on, particularly if the return of the product is not covered by or stipulated in a contract or warranty. In
the case at bar, to declare the waiver as non-effective, as the lower courts did, would impair the obligation
of contracts. Certainly, the waiver in question could not be considered a mere surplusage in the contract
between the parties. Moreover, nowhere is it shown in the records of the case that the private respondent
has argued for its nullity or illegality. In any event, we find no ambiguity in the language of the waiver or
the release of warranty. There is therefore no room for any interpretation as to its effect or applicability visa- vis the deficient output of the rock crusher. Suffice it to say that the private respondents have validly
excused the petitioner from any warranty on the rock crusher. Hence, they should bear the loss for any
defect found therein.
WHEREFORE, the Petition is GRANTED; the Decision of the Court of Appeals dated March 17, 1988 is
hereby REVERSED AND SET ASIDE, and another one rendered DISMISSING the complaint. Costs
against the private respondents.
SO ORDERED.