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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 short-delivery as
claimed by appellants, they are entitled to the payment
of damages, we must, at the outset, stress two
things: first, that this is a case of a sale of a specific
mass of fungible goods for a single price or a lump sum,
the quantity of "24,000 tons of iron ore, more or less,"
stated in the contract Exhibit "A," being a mere estimate
by the parties of the total tonnage weight of the mass;
and second, that the evidence shows that neither of the
parties had actually measured of weighed the mass, so
that they both tried to arrive at the total quantity by
making an estimate of the volume thereof in cubic
meters and then multiplying it by the estimated weight
per ton of each cubic meter.
The sale between the parties is a sale of a specific mass
or iron ore because no provision was made in their
contract for the measuring or weighing of the ore sold in
order to complete or perfect the sale, nor was the price
of P75,000,00 agreed upon by the parties based upon
any such measurement.(see Art. 1480, second par.,
New Civil Code). The subject matter of the sale is,
therefore, a determinate object, the mass, and not the
actual number of units or tons contained therein, so that
all that was required of the seller Gaite was to deliver in
good faith to his buyer all of the ore found in the mass,
notwithstanding that the quantity delivered is less than
the amount estimated by them (Mobile Machinery &
Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171
So. 872, applying art. 2459 of the Louisiana Civil Code).
There is no charge in this case that Gaite did not deliver
to appellants all the ore found in the stockpiles in the
mining claims in questions; Gaite had, therefore,
complied with his promise to deliver, and appellants in
turn are bound to pay the lump price.
But assuming that plaintiff Gaite undertook to sell and
appellants undertook to buy, not a definite mass, but
approximately 24,000 tons of ore, so that any substantial
difference in this quantity delivered would entitle the
buyers to recover damages for the short-delivery, was
there really a short-delivery in this case?
We think not. As already stated, neither of the parties
had actually measured or weighed the whole mass of
ore cubic meter by cubic meter, or ton by ton. Both
parties predicate their respective claims only upon an
estimated number of cubic meters of ore multiplied by
the average tonnage factor per cubic meter.
Now, appellee Gaite asserts that there was a total of
7,375 cubic meters in the stockpiles of ore that he sold
to Fonacier, while appellants contend that by actual
measurement, their witness Cirpriano Manlagit found
the total volume of ore in the stockpiles to be only 6.609
cubic meters. As to the average weight in tons per cubic
meter, the parties are again in disagreement, with
appellants claiming the correct tonnage factor to be 2.18
tons to a cubic meter, while appellee Gaite claims that
the correct tonnage factor is about 3.7.
In the face of the conflict of evidence, we take as the
most reliable estimate of the tonnage factor of iron ore in
this case to be that made by Leopoldo F. Abad, chief of
the Mines and Metallurgical Division of the Bureau of
Mines, a government pensionado to the States and a
mining engineering graduate of the Universities of
Nevada and California, with almost 22 years of
experience in the Bureau of Mines. This witness placed
the tonnage factor of every cubic meter of iron ore at
between 3 metric tons as minimum to 5 metric tons as
maximum. This estimate, in turn, closely corresponds to
the average tonnage factor of 3.3 adopted in his
corrected report (Exhibits "FF" and FF-1") by engineer
Nemesio Gamatero, who was sent by the Bureau of
Mines to the mining claims involved at the request of
appellant Krakower, precisely to make an official
estimate of the amount of iron ore in Gaite's stockpiles
after the dispute arose.
Even granting, then, that the estimate of 6,609 cubic
meters of ore in the stockpiles made by appellant's
witness Cipriano Manlagit is correct, if we multiply it by
the average tonnage factor of 3.3 tons to a cubic meter,
the product is 21,809.7 tons, which is not very far from
the estimate of 24,000 tons made by appellee Gaite,
considering that actual weighing of each unit of the mass
was practically impossible, so that a reasonable
percentage of error should be allowed anyone making
an estimate of the exact quantity in tons found in the
mass. It must not be forgotten that the contract Exhibit
"A" expressly stated the amount to be 24,000 tons, more
or less. (ch. Pine River Logging & Improvement Co. vs
U.S., 279, 46 L. Ed. 1164).
There was, consequently, no short-delivery in this case
as would entitle appellants to the payment of damages,
nor could Gaite have been guilty of any fraud in making
any misrepresentation to appellants as to the total
quantity of ore in the stockpiles of the mining claims in
question, as charged by appellants, since Gaite's
estimate appears to be substantially correct.
WHEREFORE, finding no error in the decision appealed
from, we hereby affirm the same, with costs against
appellants.



























































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

After trial, the trial court ruled in favor of the
defendants and dismissed the complaint. The trial court
stated:
In the first place, the testimony of the defendants,
particularly that of the xxx father will show that the
Deeds of Sale were all executed for valuable
consideration. This assertion must prevail over the
negative allegation of plaintiffs.
And then there is the argument that plaintiffs do not have
a valid cause of action against defendants since there
can be no legitime to speak of prior to the death of their
parents. The court finds this contention tenable. In
determining the legitime, the value of the property left at
the death of the testator shall be considered (Art. 908 of
the New Civil Code). Hence, the legitime of a
compulsory heir is computed as of the time of the death
of the decedent. Plaintiffs therefore cannot claim an
impairment of their legitime while their parents live.
All the foregoing considered, this case is DISMISSED.
In order to preserve whatever is left of the ties that
should bind families together, the counterclaim is
likewise DISMISSED.
No costs.
SO ORDERED.
[8]

The Ruling of the Court of Appeals
The Court of Appeals affirmed the decision of the
trial court. The appellate court ruled:
To the mind of the Court, appellants are skirting the real
and decisive issue in this case, which is, whether xxx
they have a cause of action against appellees.
Upon this point, there is no question that plaintiffs-
appellants, like their defendant brothers and sisters, are
compulsory heirs of defendant spouses, Leonardo
Joaquin and Feliciana Landrito, who are their
parents. However, their right to the properties of their
defendant parents, as compulsory heirs, is merely
inchoate and vests only upon the latters death. While
still alive, defendant parents are free to dispose of their
properties, provided that such dispositions are not made
in fraud of creditors.
Plaintiffs-appellants are definitely not parties to the
deeds of sale in question. Neither do they claim to be
creditors of their defendant parents. Consequently, they
cannot be considered as real parties in interest to assail
the validity of said deeds either for gross inadequacy or
lack of consideration or for failure to express the true
intent of the parties. In point is the ruling of the Supreme
Court in Velarde, et al. vs. Paez, et al., 101 SCRA 376,
thus:
The plaintiffs are not parties to the alleged deed of sale
and are not principally or subsidiarily bound thereby;
hence, they have no legal capacity to challenge their
validity.
Plaintiffs-appellants anchor their action on the supposed
impairment of their legitime by the dispositions made by
their defendant parents in favor of their defendant
brothers and sisters. But, as correctly held by the
court a quo, the legitime of a compulsory heir is
computed as of the time of the death of the
decedent. Plaintiffs therefore cannot claim an
impairment of their legitime while their parents live.
With this posture taken by the Court, consideration of the
errors assigned by plaintiffs-appellants is
inconsequential.
WHEREFORE, the decision appealed from is hereby
AFFIRMED, with costs against plaintiffs-appellants.
SO ORDERED.
[9]

Hence, the instant petition.
Issues
Petitioners assign the following as errors of the
Court of Appeals:
1. THE COURT OF APPEALS ERRED IN
NOT HOLDING THAT THE CONVEYANCE
IN QUESTION HAD NO VALID
CONSIDERATION.
2. THE COURT OF APPEALS ERRED IN
NOT HOLDING THAT EVEN ASSUMING
THAT THERE WAS A CONSIDERATION,
THE SAME IS GROSSLY INADEQUATE.
3. THE COURT OF APPEALS ERRED IN
NOT HOLDING THAT THE DEEDS
OF SALE DO NOT EXPRESS THE TRUE
INTENT OF THE PARTIES.
4. THE COURT OF APPEALS ERRED IN
NOT HOLDING THAT THE CONVEYANCE
WAS PART AND PARCEL OF A
CONSPIRACY AIMED AT UNJUSTLY
DEPRIVING THE REST OF THE
CHILDREN OF THE SPOUSES
LEONARDO JOAQUIN AND FELICIANA
LANDRITO OF THEIR INTEREST OVER
THE SUBJECT PROPERTIES.
5. THE COURT OF APPEALS ERRED IN
NOT HOLDING THAT PETITIONERS
HAVE A GOOD, SUFFICIENT AND VALID
CAUSE OF ACTION AGAINST THE
PRIVATE RESPONDENTS.
[10]

The Ruling of the Court
We find the petition without merit.
We will discuss petitioners legal interest over the
properties subject of the Deeds of Sale before
discussing the issues on the purported lack of
consideration and gross inadequacy of the prices of the
Deeds of Sale.
Whether Petitioners have a legal interest
over the properties subject of the Deeds of Sale
Petitioners Complaint betrays their motive for filing
this case. In their Complaint, petitioners asserted that
the purported sale of the properties in litis was the result
of a deliberate conspiracy designed to unjustly deprive
the rest of the compulsory heirs (plaintiffs herein) of their
legitime. Petitioners strategy was to have the Deeds of
Sale declared void so that ownership of the lots would
eventually revert to their respondent parents. If their
parents die still owning the lots, petitioners and their
respondent siblings will then co-own their parents estate
by hereditary succession.
[11]

It is evident from the records that petitioners are
interested in the properties subject of the Deeds of Sale,
but they have failed to show any legal right to the
properties. The trial and appellate courts should have
dismissed the action for this reason alone. An action
must be prosecuted in the name of the real party-in-
interest.
[12]

[T]he question as to real party-in-interest is whether he
is the party who would be benefitted or injured by the
judgment, or the party entitled to the avails of the suit.
x x x
In actions for the annulment of contracts, such as this
action, the real parties are those who are parties to the
agreement or are bound either principally or subsidiarily
or are prejudiced in their rights with respect to one of the
contracting parties and can show the detriment which
would positively result to them from the contract even
though they did not intervene in it (Ibaez v. Hongkong &
Shanghai Bank, 22 Phil. 572 [1912]) xxx.
These are parties with a present substantial interest, as
distinguished from a mere expectancy or future,
contingent, subordinate, or consequential interest. The
phrase present substantial interest more concretely is
meant such interest of a party in the subject matter of
the action as will entitle him, under the substantive law,
to recover if the evidence is sufficient, or that he has the
legal title to demand and the defendant will be protected
in a payment to or recovery by him.
[13]

Petitioners do not have any legal interest over the
properties subject of the Deeds of Sale. As the
appellate court stated, petitioners right to their parents
properties is merely inchoate and vests only upon their
parents death. While still living, the parents of
petitioners are free to dispose of their properties. In their
overzealousness to safeguard their future legitime,
petitioners forget that theoretically, the sale of the lots to
their siblings does not affect the value of their parents
estate. While the sale of the lots reduced the estate,
cash of equivalent value replaced the lots taken from the
estate.
Whether the Deeds of Sale are void for lack of
consideration
Petitioners assert that their respondent siblings did
not actually pay the prices stated in the Deeds of Sale to
their respondent father. Thus, petitioners ask the court
to declare the Deeds of Sale void.
A contract of sale is not a real contract, but a
consensual contract. As a consensual contract, a
contract of sale becomes a binding and valid contract
upon the meeting of the minds as to price. If there is a
meeting of the minds of the parties as to the price, the
contract of sale is valid, despite the manner of payment,
or even the breach of that manner of payment. If the
real price is not stated in the contract, then the contract
of sale is valid but subject to reformation. If there is no
meeting of the minds of the parties as to the price,
because the price stipulated in the contract is simulated,
then the contract is void.
[14]
Article 1471 of the Civil Code
states that if the price in a contract of sale is simulated,
the sale is void.
It is not the act of payment of price that determines
the validity of a contract of sale. Payment of the price
has nothing to do with the perfection of the
contract. Payment of the price goes into the
performance of the contract. Failure to pay the
consideration is different from lack of consideration. The
former results in a right to demand the fulfillment or
cancellation of the obligation under an existing valid
contract while the latter prevents the existence of a valid
contract.
[15]

Petitioners failed to show that the prices in the
Deeds of Sale were absolutely simulated. To prove
simulation, petitioners presented Emma Joaquin
Valdozs testimony stating that their father, respondent
Leonardo Joaquin, told her that he would transfer a lot to
her through a deed of sale without need for her payment
of the purchase price.
[16]
The trial court did not find the
allegation of absolute simulation of price
credible. Petitioners failure to prove absolute simulation
of price is magnified by their lack of knowledge of their
respondent siblings financial capacity to buy the
questioned lots.
[17]
On the other hand, the Deeds of Sale
which petitioners presented as evidence plainly showed
the cost of each lot sold. Not only did respondents
minds meet as to the purchase price, but the real price
was also stated in the Deeds of Sale. As of the filing of
the complaint, respondent siblings have also fully paid
the price to their respondent father.
[18]

Whether the Deeds of Sale are void for gross
inadequacy of price
Petitioners ask that assuming that there is
consideration, the same is grossly inadequate as to
invalidate the Deeds of Sale.
Articles 1355 of the Civil Code states:
Art. 1355. Except in cases specified by law, lesion or
inadequacy of cause shall not invalidate a
contract, unless there has been fraud, mistake or undue
influence. (Emphasis supplied)
Article 1470 of the Civil Code further provides:Art.
1470. Gross inadequacy of price does not affect a
contract of sale, except as may indicate a defect in the
consent, or that the parties really intended a donation or
some other act or contract. (Emphasis supplied)
Petitioners failed to prove any of the instances
mentioned in Articles 1355 and 1470 of the Civil Code
which would invalidate, or even affect, the Deeds of
Sale. Indeed, there is no requirement that the price be
equal to the exact value of the subject matter of sale. All
the respondents believed that they received the
commutative value of what they gave. As we stated
inVales v. Villa:
[19]

Courts cannot follow one every step of his life and
extricate him from bad bargains, protect him from unwise
investments, relieve him from one-sided contracts, or
annul the effects of foolish acts. Courts cannot
constitute themselves guardians of persons who are not
legally incompetent. Courts operate not because one
person has been defeated or overcome by another, but
because he has been defeated or
overcome illegally. Men may do foolish things, make
ridiculous contracts, use miserable judgment, and lose
money by them indeed, all they have in the world; but
not for that alone can the law intervene and
restore. There must be, in addition, aviolation of the law,
the commission of what the law knows as
an actionable wrong, before the courts are authorized to
lay hold of the situation and remedy it. (Emphasis in the
original)
Moreover, the factual findings of the appellate court
are conclusive on the parties and carry greater weight
when they coincide with the factual findings of the trial
court. This Court will not weigh the evidence all over
again unless there has been a showing that the findings
of the lower court are totally devoid of support or are
clearly erroneous so as to constitute serious abuse of
discretion.
[20]
In the instant case, the trial court found
that the lots were sold for a valid consideration, and that
the defendant children actually paid the purchase price
stipulated in their respective Deeds of Sale. Actual
payment of the purchase price by the buyer to the seller
is a factual finding that is now conclusive upon us.
WHEREFORE, we AFFIRM the decision of the
Court of Appeals in toto.
SO ORDERED.
G.R. No. L-8506 August 31, 1956
CELESTINO CO & COMPANY, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
Office of the Solicitor General Ambrosio Padilla, Fisrt
Assistant Solicitor General Guillermo E. Torres and
Solicitor Federico V. Sian for respondent.
BENGZON, J .:
Appeal from a decision of the Court of Tax Appeals.
Celestino Co & Company is a duly registered general
copartnership doing business under the trade name of
"Oriental Sash Factory". From 1946 to 1951 it paid
percentage taxes of 7 per cent on the gross receipts of
its sash, door and window factory, in accordance with
section one hundred eighty-six of the National Revenue
Code imposing taxes on sale of manufactured articles.
However in 1952 it began to claim liability only to the
contractor's 3 per cent tax (instead of 7 per cent) under
section 191 of the same Code; and having failed to
convince the Bureau of Internal Revenue, it brought the
matter to the Court of Tax Appeals, where it also failed.
Said the Court:
To support his contention that his client is an
ordinary contractor . . . counsel presented . . .
duplicate copies of letters, sketches of doors
and windows and price quotations supposedly
sent by the manager of the Oriental Sash
Factory to four customers who allegedly made
special orders to doors and window from the
said factory. The conclusion that counsel would
like us to deduce from these few exhibits is that
the Oriental Sash Factory does not manufacture
ready-made doors, sash and windows for the
public but only upon special order of its select
customers. . . . I cannot believe that petitioner
company would take, as in fact it has taken, all
the trouble and expense of registering a special
trade name for its sash business and then
orders company stationery carrying the bold
print "Oriental Sash Factory (Celestino Co &
Company, Prop.) 926 Raon St. Quiapo, Manila,
Tel. No. 33076, Manufacturers of all kinds of
doors, windows, sashes, furniture, etc. used
season-dried and kiln-dried lumber, of the best
quality workmanships" solely for the purpose of
supplying the needs for doors, windows and
sash of its special and limited customers. One ill
note that petitioner has chosen for its tradename
and has offered itself to the public as a
"Factory", which means it is out to do business,
in its chosen lines on a big scale. As a general
rule, sash factories receive orders for doors and
windows of special design only in particular
cases but the bulk of their sales is derived from
a ready-made doors and windows of standard
sizes for the average home. Moreover, as
shown from the investigation of petitioner's book
of accounts, during the period from January 1,
1952 to September 30, 1952, it sold sash, doors
and windows worth P188,754.69. I find it difficult
to believe that this amount which runs to six
figures was derived by petitioner entirely from its
few customers who made special orders for
these items.
Even if we were to believe petitioner's claim that
it does not manufacture ready-made sash, doors
and windows for the public and that it makes
these articles only special order of its customers,
that does not make it a contractor within the
purview of section 191 of the national Internal
Revenue Code. there are no less than fifty
occupations enumerated in the aforesaid section
of the national Internal Revenue Code subject to
percentage tax and after reading carefully each
and every one of them, we cannot find under
which the business of manufacturing sash,
doors and windows upon special order of
customers fall under the category of "road,
building, navigation, artesian well, water workers
and other construction work contractors" are
those who alter or repair buildings, structures,
streets, highways, sewers, street railways
railroads logging roads, electric lines or power
lines, and includes any other work for the
construction, altering or repairing for which
machinery driven by mechanical power is used.
(Payton vs. City of Anadardo 64 P. 2d 878, 880,
179 Okl. 68).
Having thus eliminated the feasibility off taxing
petitioner as a contractor under 191 of the
national Internal Revenue Code, this leaves us
to decide the remaining issue whether or not
petitioner could be taxed with lesser strain and
more accuracy as seller of its manufactured
articles under section 186 of the same code, as
the respondent Collector of Internal Revenue
has in fact been doing the Oriental Sash Factory
was established in 1946.
The percentage tax imposed in section 191 of
our Tax Code is generally a tax on the sales of
services, in contradiction with the tax imposed in
section 186 of the same Code which is a tax on
the original sales of articles by the manufacturer,
producer or importer. (Formilleza's
Commentaries and Jurisprudence on the
National Internal Revenue Code, Vol. II, p. 744).
The fact that the articles sold are manufactured
by the seller does not exchange the contract
from the purview of section 186 of the National
Internal Revenue Code as a sale of articles.
There was a strong dissent; but upon careful
consideration of the whole matter are inclines to accept
the above statement of the facts and the law. The
important thing to remember is that Celestino Co &
Company habitually makes sash, windows and doors, as
it has represented in its stationery and advertisements to
the public. That it "manufactures" the same is practically
admitted by appellant itself. The fact that windows and
doors are made by it only when customers place their
orders, does not alter the nature of the establishment, for
it is obvious that it only accepted such orders as called
for the employment of such material-moulding, frames,
panels-as it ordinarily manufactured or was in a position
habitually to manufacture.
Perhaps the following paragraph represents in brief the
appellant's position in this Court:
Since the petitioner, by clear proof of facts not
disputed by the respondent, manufacturers
sash, windows and doors only for special
customers and upon their special orders and in
accordance with the desired specifications of the
persons ordering the same and not for the
general market: since the doors ordered by Don
Toribio Teodoro & Sons, Inc., for instance, are
not in existence and which never would have
existed but for the order of the party desiring it;
and since petitioner's contractual relation with
his customers is that of a contract for a piece of
work or since petitioner is engaged in the sale of
services, it follows that the petitioner should be
taxed under section 191 of the Tax Code and
NOT under section 185 of the same Code."
(Appellant's brief, p. 11-12).
But the argument rests on a false foundation. Any
builder or homeowner, with sufficient money, may order
windows or doors of the kind manufactured by this
appellant. Therefore it is not true that it serves special
customers only or confines its services to them alone.
And anyone who sees, and likes, the doors ordered by
Don Toribio Teodoro & Sons Inc. may purchase from
appellant doors of the same kind, provided he pays the
price. Surely, the appellant will not refuse, for it can
easily duplicate or even mass-produce the same doors-it
is mechanically equipped to do so.
That the doors and windows must meet desired
specifications is neither here nor there. If these
specifications do not happen to be of the kind habitually
manufactured by appellant special forms for sash,
mouldings of panels it would not accept the order
and no sale is made. If they do, the transaction would be
no different from a purchasers of manufactured goods
held is stock for sale; they are bought because they
meet the specifications desired by the purchaser.
Nobody will say that when a sawmill cuts lumber in
accordance with the peculiar specifications of a
customer-sizes not previously held in stock for sale to
the public-it thereby becomes an employee or servant of
the customer,
1
not the seller of lumber. The same
consideration applies to this sash manufacturer.
The Oriental Sash Factory does nothing more than sell
the goods that it mass-produces or habitually makes;
sash, panels, mouldings, frames, cutting them to such
sizes and combining them in such forms as its
customers may desire.
On the other hand, petitioner's idea of being a contractor
doing construction jobs is untenable. Nobody would
regard the doing of two window panels a construction
work in common parlance.
2

Appellant invokes Article 1467 of the New Civil Code to
bolster its contention that in filing orders for windows and
doors according to specifications, it did not sell, but
merely contracted for particular pieces of work or
"merely sold its services".
Said article reads as follows:
A contract for the delivery at a certain price of an
article which the vendor in the ordinary course of
his business manufactures or procures for the
general market, whether the same is on hand at
the time or not, is a contract of sale, but if the
goods are to be manufactured specially for the
customer and upon his special order, and not for
the general market, it is contract for a piece of
work.
It is at once apparent that the Oriental Sash Factory did
not merely sell its services to Don Toribio Teodoro & Co.
(To take one instance) because it also sold the
materials. The truth of the matter is that it sold materials
ordinarily manufactured by it sash, panels, mouldings
to Teodoro & Co., although in such form or
combination as suited the fancy of the purchaser. Such
new form does not divest the Oriental Sash Factory of its
character as manufacturer. Neither does it take the
transaction out of the category of sales under Article
1467 above quoted, because although the Factory does
not, in the ordinary course of its business, manufacture
and keep on 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, J ose U. Ong, J uan G. Collas,
J r., Luis Ma. Guerrero and J .R. Balonkita for
Engineering and Supply Company.

ESGUERRA, J .:
Petition for review on certiorari of the decision of the
Court of Tax Appeals in CTA Case No. 681, dated
November 29, 1966, assessing a compensating tax of
P174,441.62 on the Engineering Equipment and Supply
Company.
As found by the Court of Tax Appeals, and as
established by the evidence on record, the facts of this
case are as follows:
Engineering Equipment and Supply Co. (Engineering for
short), a domestic corporation, is an engineering and
machinery firm. As operator of an integrated engineering
shop, it is engaged, among others, in the design and
installation of central type air conditioning system,
pumping plants and steel fabrications. (Vol. I pp. 12-16
T.S.N. August 23, 1960)
On July 27, 1956, one Juan de la Cruz, wrote the then
Collector, now Commissioner, of Internal Revenue
denouncing Engineering for tax evasion by misdeclaring
its imported articles and failing to pay the correct
percentage taxes due thereon in connivance with its
foreign suppliers (Exh. "2" p. 1 BIR record Vol. I).
Engineering was likewise denounced to the Central
Bank (CB) for alleged fraud in obtaining its dollar
allocations. Acting on these denunciations, a raid and
search was conducted by a joint team of Central Bank,
(CB), National Bureau of Investigation (NBI) and Bureau
of Internal Revenue (BIR) agents on September 27,
1956, on which occasion voluminous records of the firm
were seized and confiscated. (pp. 173-177 T.S.N.)
On September 30, 1957, revenue examiners Quesada
and Catudan reported and recommended to the then
Collector, now Commissioner, of Internal Revenue
(hereinafter referred to as Commissioner) that
Engineering be assessed for P480,912.01 as deficiency
advance sales tax on the theory that it misdeclared its
importation of air conditioning units and parts and
accessories thereof which are subject to tax under
Section 185(m)
1
of the Tax Code, instead of Section 186
of the same Code. (Exh. "3" pp. 59-63 BIR rec. Vol. I)
This assessment was revised on January 23, 1959, in
line with the observation of the Chief, BIR Law Division,
and was raised to P916,362.56 representing deficiency
advance sales tax and manufacturers sales tax,
inclusive of the 25% and 50% surcharges. (pp. 72-80
BIR rec. Vol. I)
On March 3, 1959. the Commissioner assessed against,
and demanded upon, Engineering payment of the
increased amount and suggested that P10,000 be paid
as compromise in extrajudicial settlement of
Engineering's penal liability for violation of the Tax Code.
The firm, however, contested the tax assessment and
requested that it be furnished with the details and
particulars of the Commissioner's assessment. (Exh. "B"
and "15", pp. 86-88 BIR rec. Vol. I) The Commissioner
replied that the assessment was in accordance with law
and the facts of the case.
On July 30, 1959, Engineering appealed the case to the
Court of Tax Appeals and during the pendency of the
case the investigating revenue examiners reduced
Engineering's deficiency tax liabilities from P916,362.65
to P740,587.86 (Exhs. "R" and "9" pp. 162-170, BIR
rec.), based on findings after conferences had with
Engineering's Accountant and Auditor.
On November 29, 1966, the Court of Tax Appeals
rendered its decision, the dispositive portion of which
reads as follows:
For ALL THE FOREGOING
CONSIDERATIONS, the decision of
respondent appealed from is hereby
modified, and petitioner, as a contractor,
is declared exempt from the deficiency
manufacturers sales tax covering the
period from June 1, 1948. to September
2, 1956. However, petitioner is ordered
to pay respondent, or his duly
authorized collection agent, the sum of
P174,141.62 as compensating tax and
25% surcharge for the period from 1953
to September 1956. With costs against
petitioner.
The Commissioner, not satisfied with the decision of the
Court of Tax Appeals, appealed to this Court on January
18, 1967, (G.R. No. L-27044). On the other hand,
Engineering, on January 4, 1967, filed with the Court of
Tax Appeals a motion for reconsideration of the decision
abovementioned. This was denied on April 6, 1967,
prompting Engineering to file also with this Court its
appeal, docketed as G.R. No. L-27452.
Since the two cases, G.R. No. L-27044 and G.R. No. L-
27452, involve the same parties and issues, We have
decided to consolidate and jointly decide them.
Engineering in its Petition claims that the Court of Tax
Appeals committed the following errors:
1. That the Court of Tax Appeals erred
in holding Engineering Equipment &
Supply Company liable to the 30%
compensating tax on its importations of
equipment and ordinary articles used in
the central type air conditioning systems
it designed, fabricated, constructed and
installed in the buildings and premises
of its customers, rather than to the
compensating tax of only 7%;
2. That the Court of Tax Appeals erred
in holding Engineering Equipment &
Supply Company guilty of fraud in
effecting the said importations on the
basis of incomplete quotations from the
contents of alleged photostat copies of
documents seized illegally from
Engineering Equipment and Supply
Company which should not have been
admitted in evidence;
3. That the Court of Tax Appeals erred
in holding Engineering Equipment &
Supply Company liable to the 25%
surcharge prescribed in Section 190 of
the Tax Code;
4. That the Court of Tax Appeals erred
in holding the assessment as not having
prescribed;
5. That the Court of Tax Appeals erred
in holding Engineering Equipment &
Supply Company liable for the sum of
P174,141.62 as 30% compensating tax
and 25% surcharge instead of
completely absolving it from the
deficiency assessment of the
Commissioner.
The Commissioner on the other hand claims that the
Court of Tax Appeals erred:
1. In holding that the respondent
company is a contractor and not a
manufacturer.
2. In holding respondent company liable
to the 3% contractor's tax imposed by
Section 191 of the Tax Code instead of
the 30% sales tax prescribed in Section
185(m) in relation to Section 194(x) both
of the same Code;
3. In holding that the respondent
company is subject only to the 30%
compensating tax under Section 190 of
the Tax Code and not to the 30%
advance sales tax imposed by section
183 (b), in relation to section 185(m)
both of the same Code, on its
importations of parts and accessories of
air conditioning units;
4. In not holding the company liable to
the 50% fraud surcharge under Section
183 of the Tax Code on its importations
of parts and accessories of air
conditioning units, notwithstanding the
finding of said court that the respondent
company fraudulently misdeclared the
said importations;
5. In holding the respondent company
liable for P174,141.62 as compensating
tax and 25% surcharge instead of
P740,587.86 as deficiency advance
sales tax, deficiency manufacturers tax
and 25% and 50% surcharge for the
period from June 1, 1948 to December
31, 1956.
The main issue revolves on the question of whether or
not Engineering is a manufacturer of air conditioning
units under Section 185(m), supra, in relation to Sections
183(b) and 194 of the Code, or a contractor under
Section 191 of the same Code.
The Commissioner contends that Engineering is a
manufacturer and seller of air conditioning units and
parts or accessories thereof and, therefore, it is subject
to the 30% advance sales tax prescribed by Section
185(m) of the Tax Code, in relation to Section 194 of the
same, which defines a manufacturer as follows:
Section 194. Words and Phrases
Defined. In applying the provisions of
this Title, words and phrases shall be
taken in the sense and extension
indicated below:
xxx xxx xxx
(x) "Manufacturer" includes every
person who by physical or chemical
process alters the exterior texture or
form or inner substance of any raw
material or manufactured or partially
manufactured products in such manner
as to prepare it for a special use or uses
to which it could not have been put in its
original condition, or who by any such
process alters the quality of any such
material or manufactured or partially
manufactured product so as to reduce it
to marketable shape, or prepare it for
any of the uses of industry, or who by
any such process combines any such
raw material or manufactured or partially
manufactured products with other
materials or products of the same or of
different kinds and in such manner that
the finished product of such process of
manufacture can be put to special use
or uses to which such raw material or
manufactured or partially manufactured
products in their original condition could
not have been put, and who in addition
alters such raw material or
manufactured or partially manufactured
products, or combines the same to
produce such finished products for the
purpose of their sale or distribution to
others and not for his own use or
consumption.
In answer to the above contention, Engineering claims
that it is not a manufacturer and setter of air-conditioning
units and spare parts or accessories thereof subject to
tax under Section 185(m) of the Tax Code, but a
contractor engaged in the design, supply and installation
of the central type of air-conditioning system subject to
the 3% tax imposed by Section 191 of the same Code,
which is essentially a tax on the sale of services or labor
of a contractor rather than on the sale of articles subject
to the tax referred to in Sections 184, 185 and 186 of the
Code.
The arguments of both the Engineering and the
Commissioner call for a clarification of the term
contractor as well as the distinction between a contract
of sale and contract for furnishing services, labor and
materials. The distinction between a contract of sale and
one for work, labor and materials is tested by the inquiry
whether the thing transferred is one not in existence and
which never would have existed but for the order of the
party desiring to acquire it, or a thing which would have
existed and has been the subject of sale to some other
persons even if the order had not been given.
2
If the
article ordered by the purchaser is exactly such as the
plaintiff makes and keeps on hand for sale to anyone,
and no change or modification of it is made at
defendant's request, it is a contract of sale, even though
it may be entirely made after, and in consequence of, the
defendants order for it.
3

Our New Civil Code, likewise distinguishes a contract of
sale from a contract for a piece of work thus:
Art. 1467. A contract for the delivery at a
certain price of an article which the
vendor in the ordinary course of his
business manufactures or procures for
the general market, whether the same is
on hand at the time or not, is a contract
of sale, but if the goods are to be
manufactured specially for the customer
and upon his special order and not for
the general market, it is a contract for a
piece of work.
The word "contractor" has come to be used with special
reference to a person who, in the pursuit of the
independent business, undertakes to do a specific job or
piece of work for other persons, using his own means
and methods without submitting himself to control as to
the petty details. (Araas, Annotations and
Jurisprudence on the National Internal Revenue Code,
p. 318, par. 191 (2), 1970 Ed.) The true test of a
contractor as was held in the cases of Luzon
Stevedoring Co., vs. Trinidad, 43, Phil. 803, 807-808,
and La Carlota Sugar Central vs. Trinidad, 43, Phil. 816,
819, would seem to be that he renders service in the
course of an independent occupation, representing the
will of his employer only as to the result of his work, and
not as to the means by which it is accomplished.
With the foregoing criteria as guideposts, We shall now
examine whether Engineering really did "manufacture"
and sell, as alleged by the Commissioner to hold it liable
to the advance sales tax under Section 185(m), or it only
had its services "contracted" for installation purposes to
hold it liable under section 198 of the Tax Code.
I
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
tailor-made system to fit a particular
building. Generally, however, they may
be grouped into two classifications
unitary and central system.
The unitary equipment classification
includes those designs such as room air
conditioner, where all of the functional
components are included in one or two
packages, and installation involves only
making service connection such as
electricity, water and drains. Central-
station systems, often referred to as
applied or built-up systems, require the
installation of components at different
points in a building and their
interconnection.
The room air conditioner is a unitary
equipment designed specifically for a
room or similar small space. It is unique
among air conditioning equipment in two
respects: It is in the electrical appliance
classification, and it is made by a great
number of manufacturers.
There is also the testimony of one Carlos Navarro, a
licensed Mechanical and Electrical Engineer, who was
once the Chairman of the Board of Examiners for
Mechanical Engineers and who was allegedly
responsible for the preparation of the refrigeration and
air conditioning code of the City of Manila, who said that
"the central type air conditioning system is an
engineering job that requires planning and meticulous
layout due to the fact that usually architects assign
definite space and usually the spaces they assign are
very small and of various sizes. Continuing further, he
testified:
I don't think I have seen central type of
air conditioning machinery room that are
exactly alike because all our buildings
here are designed by architects
dissimilar to existing buildings, and
usually they don't coordinate and get the
advice of air conditioning and
refrigerating engineers so much so that
when we come to design, we have to
make use of the available space that
they are assigning to us so that we have
to design the different component parts
of the air conditioning system in such a
way that will be accommodated in the
space assigned and afterwards the
system may be considered as a definite
portion of the building. ...
Definitely there is quite a big difference
in the operation because the window
type air conditioner is a sort of
compromise. In fact it cannot control
humidity to the desired level; rather the
manufacturers, by hit and miss, were
able to satisfy themselves that the
desired comfort within a room could be
made by a definite setting of the
machine as it comes from the factory;
whereas the central type system
definitely requires an intelligent
operator. (t.s.n. pp. 301-305, Vol. II)
The point, therefore, is this Engineering definitely did
not and was not engaged in the manufacture of air
conditioning units but had its services contracted for the
installation of a central system. The cases cited by the
Commissioner (Advertising Associates, Inc. vs. Collector
of Customs, 97, Phil. 636; Celestino Co & Co. vs.
Collector of Internal Revenue, 99 Phil. 841 and Manila
Trading & Supply Co. vs. City of Manila, 56 O.G. 3629),
are not in point. Neither are they applicable because the
facts in all the cases cited are entirely different. Take for
instance the case of Celestino Co where this Court held
the taxpayer to be a manufacturer rather than a
contractor of sash, doors and windows manufactured in
its factory. Indeed, from the very start, Celestino Co
intended itself to be a manufacturer of doors, windows,
sashes etc. as it did register a special trade name for its
sash business and ordered company stationery carrying
the bold print "ORIENTAL SASH FACTORY
(CELESTINO CO AND COMPANY, PROP.) 926 Raon
St., Quiapo, Manila, Tel. No. etc., Manufacturers of All
Kinds of Doors, Windows ... ." Likewise, Celestino Co
never put up a contractor's bond as required by Article
1729 of the Civil Code. Also, as a general rule, sash
factories receive orders for doors and windows of special
design only in particular cases, but the bulk of their sales
is derived from ready-made doors and windows of
standard sizes for the average home, which "sales" were
reflected in their books of accounts totalling P118,754.69
for the period from January, 1952 to September 30,
1952, or for a period of only nine (9) months. This Court
found said sum difficult to have been derived from its few
customers who placed special orders for these items.
Applying the abovestated facts to the case at bar, We
found them to he inapposite. Engineering advertised
itself as Engineering Equipment and Supply Company,
Machinery Mechanical Supplies, Engineers, Contractors,
174 Marques de Comillas, Manila (Exh. "B" and "15" BIR
rec. p. 186), and not as manufacturers. It likewise paid
the contractors tax on all the contracts for the design and
construction of central system as testified to by Mr. Rey
Parker, its President and General Manager. (t.s.n. p.
102, 103) Similarly, Engineering did not have ready-
made air conditioning units for sale but as per testimony
of Mr. Parker upon inquiry of Judge Luciano of the CTA

Q Aside from the
general components,
which go into air
conditioning plant or
system of the central
type which your
company undertakes,
and the procedure
followed by you in
obtaining and executing
contracts which you
have already testified to
in previous hearing,
would you say that the
covering contracts for
these different projects
listed ... referred to in
the list, Exh. "F" are
identical in every
respect? I mean every
plan or system covered
by these different
contracts are identical in
standard in every
respect, so that you can
reproduce them?
A No, sir. They are
not all standard. On the
contrary, none of them
are the same. Each one
must be designed and
constructed to meet the
particular requirements,
whether the application
is to be operated. (t.s.n.
pp. 101-102)
What We consider as on all fours with the case at bar is
the case of S.M. Lawrence Co. vs.
McFarland,Commissioner of Internal Revenue of the
State of Tennessee and McCanless, 355 SW 2d, 100,
101, "where the cause presents the question of whether
one engaged in the business of contracting for the
establishment of air conditioning system in buildings,
which work requires, in addition to the furnishing of a
cooling unit, the connection of such unit with electrical
and plumbing facilities and the installation of ducts within
and through walls, ceilings and floors to convey cool air
to various parts of the building, is liable for sale or use
tax as a contractor rather than a retailer of tangible
personal property. Appellee took the Position that
appellant was not engaged in the business of selling air
conditioning equipment as such but in the furnishing to
its customers of completed air conditioning systems
pursuant to contract, was a contractor engaged in the
construction or improvement of real property, and as
such was liable for sales or use tax as the consumer of
materials and equipment used in the consummation of
contracts, irrespective of the tax status of its contractors.
To transmit the warm or cool air over the buildings, the
appellant installed system of ducts running from the
basic units through walls, ceilings and floors to registers.
The contract called for completed air conditioning
systems which became permanent part of the buildings
and improvements to the realty." The Court held the
appellant a contractor which used the materials and the
equipment upon the value of which the tax herein
imposed was levied in the performance of its contracts
with its customers, and that the customers did not
purchase the equipment and have the same installed.
Applying the facts of the aforementioned case to the
present case, We see that the supply of air conditioning
units to Engineer's various customers, whether the said
machineries were in hand or not, was especially made
for each customer and installed in his building upon his
special order. The air conditioning units installed in a
central type of air conditioning system would not have
existed but for the order of the party desiring to acquire it
and if it existed without the special order of
Engineering's customer, the said air conditioning units
were not intended for sale to the general public.
Therefore, We have but to affirm the conclusion of the
Court of Tax Appeals that Engineering is a contractor
rather than a manufacturer, subject to the contractors tax
prescribed by Section 191 of the Code and not to the
advance sales tax imposed by Section 185(m) in relation
to Section 194 of the same Code. Since it has been
proved to Our satisfaction that Engineering imported air
conditioning units, parts or accessories thereof for use in
its construction business and these items were never
sold, resold, bartered or exchanged, Engineering should
be held liable to pay taxes prescribed under Section
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. "3-1" pp. 147-
149, BIR rec.) also enjoining the latter from mentioning
or referring to the term 'air conditioning' and to describe
the goods on order as Fiberglass pipe and pipe fitting
insulation instead. Likewise on April 30, 1953,
Engineering threatened to discontinue the forwarding
service of Universal Transcontinental Corporation when
it wrote Trane Co. (Exh. "3-H" p. 146, BIR rec.):
It will be noted that the Universal
Transcontinental Corporation is not
following through on the instructions
which have been covered by the above
correspondence, and which indicates
the necessity of discontinuing the use of
the term "Air conditioning Machinery or
Air Coolers". Our instructions
concerning this general situation have
been sent to you in ample time to have
avoided this error in terminology, and
we will ask that on receipt of this letter
that you again write to Universal
Transcontinental Corp. and inform them
that, if in the future, they are unable to
cooperate with us on this requirement,
we will thereafter be unable to utilize
their forwarding service. Please inform
them that we will not tolerate another
failure to follow our requirements.
And on July 17, 1953 (Exh- "3-g" p. 145, BIR rec.)
Engineering wrote Trane Co. another letter, viz:
In the past, we have always paid the air
conditioning tax on climate changers
and that mark is recognized in the
Philippines, as air conditioning
equipment. This matter of avoiding any
tie-in on air conditioning is very
important to us, and we are asking that
from hereon that whoever takes care of
the processing of our orders be carefully
instructed so as to avoid again using the
term "Climate changers" or in any way
referring to the equipment as "air
conditioning."
And in response to the aforequoted letter, Trane Co.
wrote on July 30, 1953, suggesting a solution, viz:
We feel that we can probably solve all
the problems by following the procedure
outlined in your letter of March 25, 1953
wherein you stated that in all future jobs
you would enclose photostatic copies of
your import license so that we might
make up two sets of invoices: one set
describing equipment ordered simply
according to the way that they are listed
on the import license and another
according to our ordinary regular
methods of order write-up. We would
then include the set made up according
to the import license in the shipping
boxes themselves and use those items
as our actual shipping documents and
invoices, and we will send the other
regular invoice to you, by separate
correspondence. (Exh- No. "3-F-1", p.
144 BIR rec.)
Another interesting letter of Engineering is one dated
August 27, 1955 (Exh. "3-C" p. 141 BIR rec.)
In the process of clearing the shipment
from the piers, one of the Customs
inspectors requested to see the packing
list. Upon presenting the packing list, it
was discovered that the same was
prepared on a copy of your letterhead
which indicated that the Trane Co.
manufactured air conditioning, heating
and heat transfer equipment.
Accordingly, the inspectors insisted that
this equipment was being imported for
air conditioning purposes.To date, we
have not been able to clear the
shipment and it is possible that we will
be required to pay heavy taxes on
equipment.
The purpose of this letter is to request
that in the future, no documents of any
kind should be sent with the order that
indicate in any way that the equipment
could possibly be used for air
conditioning.
It is realized that this a broad request
and fairly difficult to accomplish and
administer, but we believe with proper
caution it can be executed. Your
cooperation and close supervision
concerning these matters will be
appreciated. (Emphasis supplied)
The aforequoted communications are strongly indicative
of the fraudulent intent of Engineering to misdeclare its
importation of air conditioning units and spare parts or
accessories thereof to evade payment of the 30% tax.
And since the commission of fraud is altogether too
glaring, We cannot agree with the Court of Tax Appeals
in absolving Engineering from the 50% fraud surcharge,
otherwise We will be giving premium to a plainly
intolerable act of tax evasion. As aptly stated by then
Solicitor General, now Justice, Antonio P. Barredo: 'this
circumstance will not free it from the 50% surcharge
because in any case whether it is subject to advance
sales tax or compensating tax, it is required by law to
truly declare its importation in the import entries and
internal revenue declarations before the importations
maybe released from customs custody. The said entries
are the very documents where the nature, quantity and
value of the imported goods declared and where the
customs duties, internal revenue taxes, and other fees or
charges incident to the importation are computed. These
entries, therefore, serve the same purpose as the
returns required by Section 183(a) of the Code.'
Anent the 25% delinquency surcharge, We fully agree to
the ruling made by the Court of Tax Appeals and hold
Engineering liable for the same. As held by the lower
court:
At first blush it would seem that the
contention of petitioner that it is not
subject to the delinquency, surcharge of
25% is sound, valid and tenable.
However, a serious study and critical
analysis of the historical provisions of
Section 190 of the Tax Code dealing on
compensating tax in relation to Section
183(a) of the same Code, will show that
the contention of petitioner is without
merit. The original text of Section 190 of
Commonwealth Act 466, otherwise
known as the National Internal Revenue
Code, as amended by Commonwealth
Act No. 503, effective on October 1,
1939, does not provide for the filing of a
compensation tax return and payment of
the 25 % surcharge for late payment
thereof. Under the original text of
Section 190 of the Tax Code as
amended by Commonwealth Act No.
503, the contention of the petitioner that
it is not subject to the 25% surcharge
appears to be legally tenable. However,
Section 190 of the Tax Code was
subsequently amended by the Republic
Acts Nos. 253, 361, 1511 and 1612
effective October 1, 1946, July 1, 1948,
June 9, 1949, June 16, 1956 and
August 24, 1956 respectively, which
invariably provides among others, the
following:
... If any article
withdrawn from the
customhouse or the
post office without
payment of the
compensating tax is
subsequently used by
the importer for other
purposes,
corresponding entry
should be made in the
books of accounts if any
are kept or a written
notice thereof sent to
the Collector of Internal
Revenue and payment
of the corresponding
compensating tax made
within 30 days from the
date of such entry or
notice and if tax is not
paid within such period
the amount of the tax
shall be increased by
25% the increment to
be a part of the tax.
Since the imported air conditioning units-and spare parts
or accessories thereof are subject to the compensating
tax of 30% as the same were used in the construction
business of Engineering, it is incumbent upon the latter
to comply with the aforequoted requirement of Section
190 of the Code, by posting in its books of accounts or
notifying the Collector of Internal Revenue that the
imported articles were used for other purposes within 30
days. ... Consequently; as the 30% compensating tax
was not paid by petitioner within the time prescribed by
Section 190 of the Tax Code as amended, it is therefore
subject to the 25% surcharge for delinquency in the
payment of the said tax. (pp. 224-226 CTA rec.)
III
Lastly the question of prescription of the tax assessment
has been put in issue. Engineering contends that it was
not guilty of tax fraud in effecting the importations and,
therefore, Section 332(a) prescribing ten years is
inapplicable, claiming that the pertinent prescriptive
period is five years from the date the questioned
importations were made. A review of the record however
reveals that Engineering did file a tax return or
declaration with the Bureau of Customs before it paid the
advance sales tax of 7%. And the declaration filed
reveals that it did in fact misdeclare its importations.
Section 332 of the Tax Code which provides:
Section 332. Exceptions as to period
of limitation of assessment and
collection of taxes.
(a) In the case of a false or fraudulent
return with intent to evade tax or of a
failure to file a return, the tax may be
assessed, or a proceeding in court for
the collection of such tax may be begun
without assessment at any time within
ten years after the discovery of the
falsity, fraud or omission.
is applicable, considering the preponderance of
evidence of fraud with the intent to evade the higher rate
of percentage tax due from Engineering. The, tax
assessment was made within the period prescribed by
law and prescription had not set in against the
Government.
WHEREFORE, the decision appealed from is affirmed
with the modification that Engineering is hereby also
made liable to pay the 50% fraud surcharge.
SO ORDERED.
Makalintal, C.J., Castro, Makasiar and Martin, J J .,
concur.














































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


































SONNY LO, petitioner, vs. KJS ECO-FORMWORK
SYSTEM PHIL., INC., respondent.
D E C I S I O N
YNARES-SANTIAGO, J .:
Respondent KJS ECO-FORMWORK System Phil.,
Inc. is a corporation engaged in the sale of steel
scaffoldings, while petitioner Sonny L. Lo, doing
business under the name and style Sans Enterprises, is
a building contractor. On February 22, 1990, petitioner
ordered scaffolding equipments from respondent worth
P540,425.80.
[1]
He paid a downpayment in the amount of
P150,000.00. The balance was made payable in ten
monthly installments.
Respondent delivered the scaffoldings to
petitioner.
[2]
Petitioner was able to pay the first two
monthly installments. His business, however,
encountered financial difficulties and he was unable to
settle his obligation to respondent despite oral and
written demands made against him.
[3]

On October 11, 1990, petitioner and respondent
executed a Deed of Assignment,
[4]
whereby petitioner
assigned to respondent his receivables in the amount of
P335,462.14 from Jomero Realty Corporation. Pertinent
portions of the Deed provide:
WHEREAS, the ASSIGNOR is the contractor for the
construction of a residential house located
at Greenmeadow Avenue, Quezon City owned by
Jomero Realty Corporation;
WHEREAS, in the construction of the aforementioned
residential house, the ASSIGNOR purchased on account
scaffolding equipments from the ASSIGNEE payable to
the latter;
WHEREAS, up to the present the ASSIGNOR has an
obligation to the ASSIGNEE for the purchase of the
aforementioned scaffoldings now in the amount of Three
Hundred Thirty Five Thousand Four Hundred Sixty Two
and 14/100 Pesos (P335,462.14);
NOW, THEREFORE, for and in consideration of the sum
of Three Hundred Thirty Five Thousand Four Hundred
Sixty Two and 14/100 Pesos (P335,462.14), Philippine
Currency which represents part of the ASSIGNORs
collectible from Jomero Realty Corp., said ASSIGNOR
hereby assigns, transfers and sets over unto the
ASSIGNEE all collectibles amounting to the said amount
of P335, 462.14;
And the ASSIGNOR does hereby grant the ASSIGNEE,
its successors and assigns, the full power and authority
to demand, collect, receive, compound, compromise and
give acquittance for the same or any part thereof, and in
the name and stead of the said ASSIGNOR;
And the ASSIGNOR does hereby agree and stipulate to
and with said ASSIGNEE, its successors and assigns
that said debt is justly owing and due to the ASSIGNOR
for Jomero Realty Corporation and that said ASSIGNOR
has not done and will not cause anything to be done to
diminish or discharge said debt, or delay or to prevent
the ASSIGNEE, its successors or assigns, from
collecting the same;
And the ASSIGNOR further agrees and stipulates as
aforesaid that the said ASSIGNOR, his heirs, executors,
administrators, or assigns, shall and will at times
hereafter, at the request of said ASSIGNEE, its
successors or assigns, at his cost and expense, execute
and do all such further acts and deeds as shall be
reasonably necessary to effectually enable said
ASSIGNEE to recover whatever collectibles said
ASSIGNOR has in accordance with the true intent and
meaning of these presents. xxx
[5]
(Italics supplied)
However, when respondent tried to collect the said
credit from Jomero Realty Corporation, the latter refused
to honor the Deed of Assignment because it claimed that
petitioner was also indebted to it.
[6]
On November 26,
1990, respondent sent a letter
[7]
to petitioner demanding
payment of his obligation, but petitioner refused to pay
claiming that his obligation had been extinguished when
they executed the Deed of Assignment.
Consequently, on January 10, 1991, respondent
filed an action for recovery of a sum of money against
the petitioner before the Regional Trial Court of Makati,
Branch 147, which was docketed as Civil Case No. 91-
074.
[8]

During the trial, petitioner argued that his obligation
was extinguished with the execution of the Deed of
Assignment of credit. Respondent, for its part,
presented the testimony of its
employee, Almeda Baaga, who testified
that Jomero Realty refused to honor the assignment of
credit because it claimed that petitioner had an
outstanding indebtedness to it.
On August 25, 1994, the trial court rendered a
decision
[9]
dismissing the complaint on the ground that
the assignment of credit extinguished the obligation. The
decretal portion thereof provides:
WHEREFORE, in view of the foregoing, the Court
hereby renders judgment in favor of the defendant and
against the plaintiff, dismissing the complaint and
ordering the plaintiff to pay the defendant attorneys fees
in the amount of P25,000.00.
Respondent appealed the decision to the Court of
Appeals. On April 19, 2001, the appellate court
rendered a decision,
[10]
the dispositive portion of which
reads:
WHEREFORE, finding merit in this appeal, the court
REVERSES the appealed Decision and enters judgment
ordering defendant-appellee Sonny Lo to pay the
plaintiff-appellant KJS ECO-FORMWORK SYSTEM
PHILIPPINES, INC. Three Hundred Thirty Five
Thousand Four Hundred Sixty-Two and 14/100
(P335,462.14) with legal interest of 6% per annum
from January 10, 1991 (filing of the Complaint) until fully
paid and attorneys fees equivalent to 10% of the
amount due and costs of the suit.
SO ORDERED.
[11]

In finding that the Deed of Assignment did not
extinguish the obligation of the petitioner to the
respondent, the Court of Appeals held that (1) petitioner
failed to comply with his warranty under the Deed; (2)
the object of the Deed did not exist at the time of the
transaction, rendering it void pursuant to Article 1409 of
the Civil Code; and (3) petitioner violated the terms of
the Deed of Assignment when he failed to execute and
do all acts and deeds as shall be necessary to
effectually enable the respondent to recover the
collectibles.
[12]

Petitioner filed a motion for reconsideration of the
said decision, which was denied by the Court of
Appeals.
[13]

In this petition for review, petitioner assigns the
following errors:
I
THE HONORABLE COURT OF APPEALS
COMMITTED A GRAVE ERROR IN DECLARING
THE DEED OF ASSIGNMENT (EXH. 4) AS NULL
AND VOID FOR LACK OF OBJECT ON THE BASIS
OF A MERE HEARSAY CLAIM.
II
THE HONORABLE COURT OF APPEALS
ERRED IN HOLDING THAT THE DEED OF
ASSIGNMENT (EXH. 4) DID NOT
EXTINGUISH PETITIONERS OBLIGATION
ON THE WRONG NOTION THAT
PETITIONER FAILED TO COMPLY WITH HIS
WARRANTY THEREUNDER.
III
THE HONORABLE COURT OF APPEALS
ERRED IN REVERSING THE DECISION OF
THE TRIAL COURT AND IN ORDERING
PAYMENT OF INTERESTS AND
ATTORNEYS FEES.
[14]

The petition is without merit.
An assignment of credit is an agreement by virtue
of which the owner of a credit, known as the assignor, by
a legal cause, such as sale, dacion en pago, exchange
or donation, and without the consent of the debtor,
transfers his credit and accessory rights to another,
known as the assignee, who acquires the power to
enforce it to the same extent as the assignor could
enforce it against the debtor.
[15]

Corollary thereto, in dacion en pago, as a special
mode of payment, the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an
outstanding debt.
[16]
In order that there be a
valid dation in payment, the following are the requisites:
(1) There must be the performance of the prestation in
lieu of payment (animo solvendi) which may consist in
the delivery of a corporeal thing or a real right or a credit
against the third person; (2) There must be some
difference between the prestation due and that which is
given in substitution (aliud pro alio); (3) There must be
an agreement between the creditor and debtor that the
obligation is immediately extinguished by reason of the
performance of a prestation different from that
due.
[17]
The undertaking really partakes in one sense of
the nature of sale, that is, the creditor is really buying the
thing or property of the debtor, payment for which is to
be charged against the debtors debt. As such, the
vendor in good faith shall be responsible, for the
existence and legality of the credit at the time of the sale
but not for the solvency of the debtor, in specified
circumstances.
[18]

Hence, it may well be that the assignment of credit,
which is in the nature of a sale of personal
property,
[19]
produced the effects of a dation in payment
which may extinguish the obligation.
[20]
However, as in
any other contract of sale, the vendor or assignor is
bound by certain warranties. More specifically, the first
paragraph of Article 1628 of the Civil Code provides:
The vendor in good faith shall be responsible for the
existence and legality of the credit at the time of the sale,
unless it should have been sold as doubtful; but not for
the solvency of the debtor, unless it has been so
expressly stipulated or unless the insolvency was prior to
the sale and of common knowledge.
From the above provision, petitioner, as vendor or
assignor, is bound to warrant the existence and legality
of the credit at the time of the sale or
assignment. When Jomero claimed that it was no longer
indebted to petitioner since the latter also had an unpaid
obligation to it, it essentially meant that its obligation to
petitioner has been extinguished by compensation.
[21]
In
other words, respondent alleged the non-existence of
the credit and asserted its claim to petitioners warranty
under the assignment. Therefore, it behooved on
petitioner to make good its warranty and paid the
obligation.
Furthermore, we find that petitioner breached his
obligation under the Deed of Assignment, to wit:
And the ASSIGNOR further agrees and stipulates as
aforesaid that the said ASSIGNOR, his heirs, executors,
administrators, or assigns, shall and will at times
hereafter, at the request of said ASSIGNEE, its
successors or assigns, at his cost and expense, execute
and do all such further acts and deeds as shall be
reasonably necessary to effectually enable said
ASSIGNEE to recover whatever collectibles said
ASSIGNOR has in accordance with the true intent and
meaning of these presents.
[22]
(underscoring ours)
Indeed, by warranting the existence of the credit,
petitioner should be deemed to have ensured the
performance thereof in case the same is later found to
be inexistent. He should be held liable to pay to
respondent the amount of his indebtedness.
Hence, we affirm the decision of the Court of
Appeals ordering petitioner to pay respondent the sum of
P335,462.14 with legal interest thereon. However, we
find that the award by the Court of Appeals of attorneys
fees is without factual basis. No evidence or testimony
was presented to substantiate this claim. Attorneys
fees, being in the nature of actual damages, must be
duly substantiated by competent proof.
WHEREFORE, in view of the foregoing, the
Decision of the Court of Appeals dated April 19, 2001 in
CA-G.R. CV No. 47713, ordering petitioner to pay
respondent the sum of P335,462.14 with legal interest of
6% per annum from January 10, 1991 until fully paid
is AFFIRMED with MODIFICATION. Upon finality of this
Decision, the rate of legal interest shall be 12% per
annum, inasmuch as the obligation shall thereafter
become equivalent to a forbearance of credit.
[23]
The
award of attorneys fees is DELETED for lack of
evidentiary basis.
SO ORDERED.
Davide, Jr.,
C.J., (Chairman), Vitug, Carpio and Azcuna, JJ., concur.