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[G.R. No. L-27289. April 15, 1985.

]
JUAN AGUINALDO,

Substituted

by

MARINA

and

PRIMITIVO AGUINALDO, plaintiffs-

appellants, vs. JOSE ESTEBAN and FRANCISCA SARMIENTO,defendants-appellees.

Crisostomo M. Diokno for plaintiff-appellants.


Andres Franco for defendants-appellees.

SYLLABUS
1. CIVIL LAW; CONTRACTS; DEED OF TRANSFER; LACK OF CONSIDERATION; RENDERS DOCUMENT NULL AND
VOID; CASE AT BAR. It is significant to note that herein plaintiff-appellant was not even a witness in the document when
his father who is of low intelligence, illiterate and could not even sign his name, affixed his thumbmark in the document in
question. It would appear that the execution of the contract was made behind his back and/or without giving notice to him.
Stated differently, if the transaction was on the level, why was not plaintiff-appellant asked to sign as a witness to the
document. It may be true that the contract was read to the old man but it is doubtful if he understood the meaning of its
contents. The contract was so written that anyone could believe he was only giving his property by way of mortgage, not as
a sale. For instance, in paragraph 2 thereof, it reads ". . . ay isinasangla at patuloyan ipaaari ko sa nasabing magasawa ang
lupang nabanggit ko sa itaas, . . ." In some Tagalog provinces the word "Sangla" means "Bilihan Mabibiling Muli" or "Pacto
de Retro." By this contract, the vendee-a-retro takes possession of the property as owner until the same is repurchased or
redeemed. On the other hand, mortgage is understood as "Prenda." In the case at bar, defendants-appellees took
possession of the property on March 26, 1955 when they started giving Jose Aguinaldo the fifty centavos (P0.50) a day. It
would appear then that the money which he has been receiving from the Estebans come from his own property. In effect,
there was no consideration for the transfer of the property - be it sale, mortgage or Pacto Comisario.

DECISION

RELOVA, J p:
In Civil Case No. 6977, the Court of First Instance of Rizal declared the contract, entitled: "Sanglaan ng Isang Lupa na
Patuluyan Ipaaari," valid and binding contract of sale and dismissed the complaint as well as the counterclaim with costs
against the plaintiff. From said judgment of the lower court, appeal was taken to this Court, "the same involving, as it does, a
question of law." (p. 25, Rollo) prLL
Plaintiff Juan Aguinaldo in his complaint alleged, among others, that on June 23, 1958, defendants, through fraud, deceit
and misrepresentations and exercising undue pressure, influence and advantage, procured the thumbmark of
Jose Aguinaldo, father of plaintiff, to be affixed on subject contract; that defendants caused the cancellation of Tax
Declaration No. 4004, Rizal (1948) in the name of Jose Aguinaldo and the issuance in lieu thereof of Tax Declaration No.
10725-Rizal in the names of defendant spouses; that the document in question on which Jose Aguinaldo affixed his
thumbmark is not true and genuine, as the thumbmark appearing thereon is a forgery; that it contains terms and conditions
which partake the nature of "pacto comisario" which render same null and void; that it does not fix a period for the payment
of the loan nor does it state the duration of the mortgage; that plaintiff is the sole successor-in-interest and legal heir of
Jose Aguinaldo who died intestate in October 1960; that defendants having no right to win and possess the property in
question are withholding the possession thereof from plaintiff and consequently deprived plaintiff of the fruits of said
property; and that by reason of the willful and malevolent acts of defendants, plaintiff suffered moral and actual damages in
the amount of P4,000.00.

In their answer, defendants claim absolute ownership of subject property upon the death of Jose Aguinaldo in October 1960
on the theory that the document in controversy is one of sale and not one of mortgage.
The parties, through their respective counsels, agreed to submit the case for decision solely on whether the contract in
question, Annex "A" of the complaint, is one of mortgage or of sale.
When plaintiff Juan Aguinaldo died intestate on August 6, 1966, his heirs, namely: Marina and Primitivo, both
surnamed Aguinaldo, petitioned the trial court that they be substituted as party plaintiffs in lieu of their deceased
father. LibLex
It is the position of plaintiffs-appellants that the document in question, Annex "A" of the complaint, is null and void because it
contains stipulations which partake of the nature of "pacto comisario." On the other hand, the defendants contend that the
contract is a valid sale and, as such, it passed the title to them.

Hereunder is the contract in question:


"SANGLAAN NG ISANG LUPA-CANAVERAL NA PATULUYAN IPAAARI.
HAYAG SA SINO MAN MAKAKABASA:
"Na, ako JOSE AGUINALDO, Pilipino, balo, may karampatan gulang, tubo at naninirahan sa Bo.
Bambang, Tagig, Rizal, Kapuluan Pilipinas, sa pamamagitan nito ay
ISINASAYSAY KO AT PINAGTITIBAY:
"1. Na, sarili at tunay kong pagaari dahil sa ipinagkaloob sa akin ng aking amain Martin Concepcion
(patay) ang isang parcelang lupa-canaveral, at ang lupang ito ay napagkikilala at naliligiran ng mga
pagaaring lupa ng mga kahangganan kagaya ng mga sumusunod:
'Isang parcelang lupa-canaveral na nasa pook ng Bo. Bambang, Tagig, Rizal, at
siyang lupang nakatala sa Tax Declaration No. 4004-Rizal (1948), sa Tanggapan ng Tasador
ng lupa sa lalawigan ng Rizal, Pasig, Rizal, at valor ameliarado ng P70.00 at napaloob sa mga
pagaaring lupa ng mga kahangganan kagaya ng mga sumusunod: Sa Norte, Antonio Silvestre
at Pedro Sarmiento; sa Este, Domingo Luga; sa Sur, Dionisio Dionisio at Pedro Sarmiento, at
sa Weste, Tomas Cruz'
"2. Na, alang-alang sa halagang LIMANG DAAN AT APATNAPUNG PISO (P540.00), salaping Pilipino
na sa kasalukuyan ay ating ginagamit, ay natanggap ko na, sa hindi biglaan kung hindi LIMANGPUNG
SENTIMOS (P0.50) lamang araw-araw magbuhat pa nuong Marzo 26, 1955, at ang kabuuang halaga
ng halagang nabanggit sa itaas nito, sa oras na ito, ay kusang loob kong tinanggap sa magasawang
JOSE ESTEBAN at FRANCISCA SARMIENTO, mga Pilipino, may karampatan gulang, naninirahan at
may padalahan sulat sa Bo. Bambang, Tagig, Rizal, ay ISINASANGLA AT PATULOYAN IPAARI KO sa
nasabing magasawa ang lupang nabanggit ko sa Itaas, sa aming mga kasunduan kagaya ng mga
sumusunod:
"NA

AKO,

JOSE AGUINALDO AY

PAKAKANIN

HABANG

NABUBUHAY

NG

MAGASAWANG JOSE ESTEBAN AT FRANCISCA SARMIENTO, O NG KANILANG KAHALILI


AT TAGAPAGMANA, AT BILANG KABAYARAN NAMAN SA HALAGANG LIMANG DAAN AT
APATNAPUNG

PISO

(P540.00) AT

PAGPAPAKAIN

SA AKIN

NG MAGASAWANG

JOSE ESTEBAN AT FRANCISCA SARMIENTO, ORAS NA AKO AY MAMATAY SILA


(JOSE ESTEBAN AT FRANCISCA SARMIENTO) NA ANG LUBOSAN MAGMAMAYARI NG
AKING LUPANG ISINANGLANG ITO SA KANILA, SAPAGKAT ANG LAHAT NG AKING
KARAPATAN SA LUPA, NGAYON PA AY IPINAGKAKALOOB KO SA KANILA SA ILALIM NG
KASUNDUAN.'
"3. Na, ang lupa-canaveral na isinasangla ko sa pamamagitan ng kasulatan ito na ipaaring patuluyan ay
pinamomosiyonan ng mag-asawang Jose Esteban at Francisca Sarmiento, nuong pang Marzo 26,
1955.

"4. Na, ang lupang akin binabanggit sa kasulatan ito, ay hindi ko ipinagkakautang sa kanino man tao,
na maliban sa magasawang Jose Esteban at Francisca Sarmiento.
"5. Na, ang lupa kong ito na siyang nakatala sa Tax Declaration No. 4004-Rizal (1948), ay hindi
nakatala sa bisa ng Batas Blg. 496 o maging sa Hipotecaria Espaola, at napagkasunduan ang
kasulatan ito, ay nais ipatala sa bisa ng Batas Blg. 3344, at sinusugan.
"SA KATUNAYAN NG LAHAT KONG IPINAHAYAG SA DOKUMENTONG ITO, ay inilagda ko ang aking
pangalan at apelyedo dito sa Lunsod ng Maynila, Pilipinas, ngayong ika _____ ng Hunyo 1958, sa
harap ng dalawang saksi.
(Thumbmark)
JOSE AGUINALDO
Nagsangla
SUMASANGAYON SA MGA ALITUNTUNIN:
(Sgd.) JOSE ESTEBAN
Pinagsanglaan

(Sgd.) FRANCISCA SARMIENTO


Pinagsanglaan
MGA SAKSI:
(Sgd.) Illegible (Sgd.) Eugenia S. Relon.
ACKNOWLEDGMENT"
(pp. 7-10, Record on Appeal)
There is merit in the appeal.
On the issue as to whether or not the subject contract is one of sale or of mortgage, an inquiry into the surrounding facts
would disclose the intention of the parties and thereby determine the truth of plaintiff-appellant's allegation that his father,
Jose Aguinaldo, was misled into affixing his thumbmark on the said contract. llcd
Plaintiff-appellant, Juan Aguinaldo, is the son of Jose and it is indeed intriguing why defendants-appellees, who are not
related at all to the old man, would give him fifty centavos (P0.50) everyday beginning May 26, 1955. The contract in
question was executed in June 1958, or after three (3) years from the time the daily amount of half-a-peso was given the old
man. Thereafter, the defendants-appellees saw to it that the recipient of the money would execute the contract, entitled:
Sanglaan ng isang lupang-canaveral na Patuluyang Ipaaari."
It is significant to note that herein plaintiff-appellant was not even a witness in the document when his father who is of low
intelligence, illiterate and could not even sign his name, affixed his thumbmark in the document in question. It would appear
that the execution of the contract was made behind his back and/or without giving notice to him. Stated differently, if the
transaction was on the level, why was not plaintiff-appellant asked to sign as a witness to the document. It may be true that
the contract was read to the old man but it is doubtful if he understood the meaning of its contents. The contract was so
written that anyone could believe he was only giving his property by way of mortgage, not as a sale. For instance, in
paragraph 2 thereof, it reads ". . . ay isinasangla at patuloyan ipaaari ko sa nasabing magasawa ang lupang nabanggit ko sa
itaas, . . ." In some Tagalog provinces the word "Sangla" means "Bilihan Mabibiling Muli" or "Pacto de Retro." By this
contract, the vendee-a-retro takes possession of the property as owner until the same is repurchased or redeemed. On the
other hand, mortgage is understood as "Prenda."
In the case at bar, defendants-appellees took possession of the property on March 26, 1955 when they started giving
Jose Aguinaldo the fifty centavos (P0.50) a day. It would appear then that the money which he has been receiving from the
Estebans come from his own property. In effect, there was no consideration for the transfer of the property - be it sale,
mortgage or Pacto Comisario.

WHEREFORE, the decision of the trial court, dated August 16, 1966, is REVERSED and the contract "Sanglaan ng Isang
Lupa-Canaveral na Patuluyan Ipaaari" is declared null and void, and the deceased plaintiff Juan Aguinaldo is declared as
the true and lawful owner of subject property.
Further, defendants-appellees are hereby ordered to transfer and deliver the possession of subject property to the said
deceased plaintiff Juan Aguinaldo's heirs, Marina Aguinaldo and Primitivo Aguinaldo, who substituted him as plaintiffs in this
case and/or their respective heirs and successors; and the Provincial Assessor of Rizal is directed to cancel Tax Declaration
No. 10725 (Rizal) in the name of defendants-appellees, Jose Esteban and Francisca Sarmiento, and in lieu thereof issue
another in the name of the deceased plaintiff Juan Aguinaldo's heirs, Marina Aguinaldo and Primitivo Aguinaldo.LibLex
SO ORDERED.
Teehankee, Plana, Gutierrez, Jr., De la Fuente and Alampay, JJ., concur.
Melencio-Herrera, J., took no part.
||| (Aguinaldo v. Esteban, G.R. No. L-27289, [April 15, 1985], 220 PHIL 319-325)

[G.R. No. 156437. March 1, 2004.]


NATIONAL HOUSING AUTHORITY, petitioner, vs. GRACE BAPTIST CHURCH and the COURT OF
APPEALS, respondents.

YNARES-SANTIAGO, J p:
This is a petition for review under Rule 45 of the Rules of Court, seeking to reverse the Decision of the Court of Appeals
dated February 26, 2001, 1 and its Resolution dated November 8, 2002, 2 which modified the decision of the Regional Trial
Court of Quezon City, Branch 90, dated February 25, 1997. 3
On

June

13,

1986,

respondent Grace Baptist Church (hereinafter,

the Church)

wrote

letter

to

petitioner National Housing Authority (NHA), manifesting its interest in acquiring Lots 4 and 17 of the General Mariano
Alvarez Resettlement Project in Cavite. 4 In its letter-reply dated July 9, 1986, petitioner informed respondent:
In reference to your request letter dated 13 June 1986, regarding your application for Lots 4 and 17,
Block C-3-CL, we are glad to inform you that your request was granted and you may now visit our
Project Office at General Mariano Alvarez for processing of your application to purchase said lots.
We hereby advise you also that prior to approval of such application and in accordance with our existing
policies and guidelines, your other accounts with us shall be maintained in good standing. 5
Respondent entered into possession of the lots and introduced improvements thereon. 6

On February 22, 1991, the NHA's Board of Directors passed Resolution No. 2126, approving the sale of the subject lots to
respondent Church at the price of P700.00 per square meter, or a total price of P430,500.00. 7 The Church was duly
informed of this Resolution through a letter sent by the NHA. 8
On April 8, 1991, the Church tendered to the NHA a managers check in the amount of P55,350.00, purportedly in full
payment of the subject properties. 9 The Churchinsisted that this was the price quoted to them by the NHA Field Office, as
shown by an unsigned piece of paper with a handwritten computation scribbled thereon. 10Petitioner NHA returned the
check, stating that the amount was insufficient considering that the price of the properties have changed. The Church made
several demands on the NHA to accept their tender of payment, but the latter refused. Thus, the Church instituted a
complaint for specific performance and damages against the NHA with the Regional Trial Court of Quezon City, 11 where it
was docketed as Civil Case No. Q-91-9148.
On February 25, 1997, the trial court rendered its decision, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Ordering the defendant to reimburse to the plaintiff the amount of P4,290.00 representing the
overpayment made for Lots 1, 2, 3, 18, 19 and 20;
2. Declaring that there was no perfected contract of sale with respect to Lots 4 and 17 and ordering the
plaintiff to return possession of the property to the defendant and to pay the latter reasonable rental for
the use of the property at P200.00 per month computed from the time it took possession thereof until
finally vacated. Costs against defendant.
SO ORDERED. 12
On appeal, the Court of Appeals, affirmed the trial courts finding that there was indeed no contract of sale between the
parties. However, petitioner was ordered to execute the sale of the lots to Grace Baptist Church at the price of P700.00 per
square meter, with 6% interest per annum from March 1991. The dispositive portion of the Court of Appeals decision, dated
February 26, 2001, reads:
WHEREFORE, the appealed Decision is hereby AFFIRMED with the MODIFICATION that defendantappellee NHA is hereby ordered to sell to plaintiff-appellant GraceBaptist Church Lots 4 and 17 at the
price of P700.00 per square meter, or a total cost P430,000.00 with 6% interest per annum from March,
1991 until full payment in cash.
SO ORDERED. 13
The appellate court ruled that the NHA's Resolution No. 2126, which earlier approved the sale of the subject lots
to Grace Baptist Church at the price of P700.00 per square meter, has not been revoked at any time and was therefore still
in effect. As a result, the NHA was estopped from fixing a different price for the subject properties. Considering further that
the Church had been occupying the subject lots and even introduced improvements thereon, the Court of Appeals ruled that,
in the interest of equity, it should be allowed to purchase the subject properties. 14
Petitioner NHA filed a Motion for Reconsideration which was denied in a Resolution dated November 8, 2002. Hence, the
instant petition for review on the sole issue of: Can the NHA be compelled to sell the subject lots to Grace Baptist Church in
the absence of any perfected contract of sale between the parties?
Petitioner submits that the Court cannot compel it to sell the subject property to Grace Baptist Church without violating its
freedom to contract. 15 Moreover, it contends that equity should be applied only in the absence of any law governing the
relationship between the parties, and that the law on sales and the law on contracts in general apply to the present case. 16
We find merit in petitioners submission.
Petitioner NHA is not estopped from selling the subject lots at a price equal to their fair market value, even if it failed to
expressly revoke Resolution No. 2126. It is, after all, hornbook law that the principle of estoppel does not operate against the
Government for the act of its agents, 17 or, as in this case, their inaction. HTcDEa
On the application of equity, it appears that the crux of the controversy involves the characterization of equity in the context
of contract law. Preliminarily, we reiterate that this Court, while aware of its equity jurisdiction, is first and foremost, a court of
law. While equity might tilt on the side of one party, the same cannot be enforced so as to overrule positive provisions of law
in favor of the other. 18 Thus, before we can pass upon the propriety of an application of equitable principles in the case at
bar, we must first determine whether or not positive provisions of law govern.

It is a fundamental rule that contracts, once perfected, bind both contracting parties, and obligations arising therefrom have
the force of law between the parties and should be complied with in good faith. 19 However, it must be understood that
contracts are not the only source of law that govern the rights and obligations between the parties. More specifically, no
contractual stipulation may contradict law, morals, good customs, public order or public policy. 20 Verily, the
mere inexistence of a contract, which would ordinarily serve as the law between the parties, does not automatically authorize
disposing of a controversy based on equitable principles alone. Notwithstanding the absence of a perfected contract
between the parties, their relationship may be governed by other existing laws which provide for their reciprocal rights and
obligations.
It must be remembered that contracts in which the Government is a party are subject to the same rules of contract law which
govern the validity and sufficiency of contract between individuals. All the essential elements and characteristics of a
contract in general must be present in order to create a binding and enforceable Government contract. 21
It appearing that there is no dispute that this case involves an unperfected contract, the Civil Law principles governing
contracts should apply. In Vda. de Urbano v. Government Service Insurance System, 22 it was ruled that a qualified
acceptance constitutes a counter-offer as expressly stated by Article 1319 of the Civil Code. In said case, petitioners offered
to redeem mortgaged property and requested for an extension of the period of redemption. However, the offer was not
accepted by the GSIS. Instead, it made a counter-offer, which petitioners did not accept. Petitioners again offer to pay the
redemption price on staggered basis. In deciding said case, it was held that when there is absolutely no acceptance of an
offer or if the offer is expressly rejected, there is no meeting of the minds. Since petitioners offer was denied twice by GSIS,
it was held that there was clearly no meeting of the minds and, thus, no perfected contract. All that is established was a
counter-offer. 23
In the case at bar, the offer of the NHA to sell the subject property, as embodied in Resolution No. 2126, was similarly not
accepted by the respondent. 24 Thus, the alleged contract involved in this case should be more accurately denominated
as inexistent. There being no concurrence of the offer and acceptance, it did not pass the stage of generation to the point of
perfection. 25 As such, it is without force and effect from the very beginning or from its incipiency, as if it had never been
entered into, and hence, cannot be validated either by lapse of time or ratification. 26 Equity can not give validity to a void
contract, 27 and this rule should apply with equal force to inexistent contracts.
We note from the records, however, that the Church, despite knowledge that its intended contract of sale with the NHA had
not been perfected, proceeded to introduce improvements on the disputed land. On the other hand, the NHA knowingly
granted the Church temporary use of the subject properties and did not prevent the Church from making improvements
thereon. Thus, the Church and the NHA, who both acted in bad faith, shall be treated as if they were both in good faith. 28 In
this connection, Article 448 of the Civil Code provides:
The owner of the land on which anything has been built, sown or planted in good faith, shall have the
right to appropriate as his own the works, sowing or planting, after payment of the indemnity provided
for in articles 546 and 548, or to oblige the one who built or planted to pay the price of the land, and the
one who sowed, the proper rent. However, the builder or planter cannot be obliged to buy the land and if
its value is considerably more than that of the building or trees. In such case, he shall pay reasonable
rent, if the owner of the land does not choose to appropriate the building or trees after proper indemnity.
The parties shall agree upon the terms of the lease and in case of disagreement, the court shall fix the
terms thereof.
Pursuant to our ruling in Depra v. Dumlao, 29 there is a need to remand this case to the trial court, which shall conduct the
appropriate proceedings to assess the respective values of the improvements and of the land, as well as the amounts of
reasonable rentals and indemnity, fix the terms of the lease if the parties so agree, and to determine other matters
necessary for the proper application of Article 448, in relation to Articles 546 and 548, of the Civil Code.
WHEREFORE, in view of the foregoing, the petition is GRANTED. The Court of Appeals' Decision dated February 26, 2001
and Resolution dated November 8, 2002 are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of
Quezon City-Branch 90, dated February 25, 1997, is REINSTATED. This case is REMANDED to the Regional Trial Court of
Quezon City, Branch 90, for further proceedings consistent with Articles 448 and 546 of the Civil Code.

[G.R. No. 127540. October 17, 2001.]


EUGENIO DOMINGO,

CRISPIN

MANGABAT

and

SAMUEL

CAPALUNGAN, petitioners, vs.

HON. COURT OF APPEALS, FELIPE C. RIGONAN and CONCEPCION R. RIGONAN, respondents.

EUGENIO DOMINGO,

CRISPIN

MANGABAT

and

SAMUEL

CAPALUNGAN, petitioners, vs. HON. COURT OF APPEALS, THE DIRECTOR OF LANDS, and
FELIPE C. RIGONAN and CONCEPCION R. RIGONAN, respondents.

Herman D. Coloma for petitioners.


Eddie Tamondong for private respondents.

SYNOPSIS
Subject parcels of land were previously owned by Paulina Rigonan. Private respondents claimed that Paulina
sold them the lots in 1965. Petitioners, however, alleged that they are the closest surviving relatives of Paulina and they
inherited the lots from her when she died in 1966. Here in issue is the existence and due execution of the alleged deed
of sale.
The Court ruled in the negative on the issue posed. First, no original deed of sale was ever presented, only a
carbon copy thereof. No witness directly testified on the execution of the deed of sale and the carbon copy bore only the
alleged thumbprint of Paulina. Second, the carbon copy contained filled-in blanks and alterations; it showed
intercalations and discrepancies when compared to supposed copies in existence. Third, Paulina was never asked to
vacate the purportedly sold premises; in fact, they were still included in her will which was notarized by the same notary
public who allegedly notarized the supposed deed of sale. Fourth, at the purported execution of the deed, the Court
noted that Paulina was already incapacitated by impaired mental faculties due to advanced years. Lastly, the
consideration here is only P850 for 9 lots, a house and a bodega. The Court agreed that said amount was grossly
inadequate for a valid sale.

SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE; JUDGMENT; THAT DECIDING JUDGE PRESIDED ONLY ONCE OVER THE
HEARINGS HAS NO ADVERSE EFFECT ON THE DECISION. While the trial judge deciding the case presided over the
hearings of the case only once, this circumstance could not have an adverse effect on his decision. The continuity of a court
and the efficacy of its proceedings are not affected by the death, resignation or cessation from the service of the presiding
judge. A judge may validly render a decision although he has only partly heard the testimony of the witnesses. After all, he
could utilize and rely on the records of the case, including the transcripts of testimonies heard by the former presiding judge.
2. ID.; ID.; CERTIFICATION AGAINST FORUM-SHOPPING; COMPLIANCE; PRESENT WHEN ONE WAS ATTACHED IN
THE COPY INTENDED FOR THE COURT. On the matter of the certification against forum-shopping, petitioners aver that
they attached one in the copy intended for this Court. This is substantial compliance. A deviation from a rigid enforcement of
the rules may be allowed to attain their prime objective for, after all, the dispensation of justice is the core reason for the
court's existence.
3. ID.; ID.; APPEAL; REVIEW OF THE CONTRADICTORY FINDINGS OF THE TRIAL COURT AND COURT OF APPEALS.
While the issues raised in this petition might appear to be mainly factual, this petition is properly given due course
because of the contradictory findings of the trial court and the Court of Appeals. Further, the latter court apparently
overlooked certain relevant facts which justify a different conclusion. Moreover, a compelling sense to make sure that justice

is done, and done rightly in the light of the issues raised herein, constrains us from relying on technicalities alone to resolve
this petition.
4. CIVIL LAW; CONTRACTS; DEED OF SALE; DOUBTFUL IN THE PRESENCE OF VARIOUS IRREGULARITIES.
Irregularities abound regarding the execution and registration of the alleged deed of sale. The original was nowhere to be
found and none could be presented at the trial. The carbon copy on file, which is allegedly a duplicate original, shows
intercalations and discrepancies when compared to purported copies in existence. Furthermore, it appears that the alleged
vendor was never asked to vacate the premises she had purportedly sold. The alleged vendor's continued possession of the
property in this case throws an inverse implication, a serious doubt on the due execution of the deed of sale. Noteworthy, the
same parcels of land involved in the alleged sale were still included in the will subsequently executed by Paulina and
notarized by the same notary public, Atty. Tagatag. These circumstances, taken together, militate against unguarded
acceptance of the due execution and genuineness of the alleged deed of sale.
5. ID.; ID.; CONSIDERATION; NOT APPRECIATED WHEN AMOUNT THEREOF DUBIOUS. We have to take into
account the element of consideration for the sale. The price allegedly paid by private respondents for nine (9) parcels,
including the three parcels in dispute, a house and a warehouse, raises further questions. Consideration is the why of a
contract, the essential reason which moves the contracting parties to enter into the contract. On record, there is unrebutted
testimony that Paulina as landowner was financially well off. She loaned money to several people. We see no apparent and
compelling reason for her to sell the subject parcels of land with a house and warehouse at a meager price of P850 only.
6. ID.; ID.; CONSENT; NOT APPRECIATED WHEN THERE IS INCAPACITY DUE TO ADVANCED YEARS IMPAIRING THE
MENTAL FACULTY OF A PARTY. The general rule is that a person is not incompetent to contract merely because of
advanced years or by reason of physical infirmities. However, when such age or infirmities have impaired the mental
faculties so as to prevent the person from properly, intelligently, and firmly protecting her property rights then she is
undeniably incapacitated. The unrebutted testimony of Zosima Domingo shows that at the time of the alleged execution of
the deed, Paulina was already incapacitated physically and mentally. She narrated that Paulina played with her waste and
urinated in bed. Given these circumstances, there is in our view sufficient reason to seriously doubt that she consented to
the sale of and the price for her parcels of land. Moreover, there is no receipt to show that said price was paid to and
received by her.
QUISUMBING, J p:
This petition 1 seeks to annul the decision of the Court of Appeals dated August 29, 1996, which set aside the decision of
the Regional Trial Court of Batac, Ilocos Norte, Branch 17, in Civil Case No. 582-17 for reivindicacion consolidated with
Cadastral Case No. 1. 2 The petition likewise seeks to annul the resolution dated December 11, 1996, denying petitioners'
motion for reconsideration.
The facts of this case, culled from the records, are as follows:
Paulina Rigonan owned three (3) parcels of land, located at Batac and Espiritu, Ilocos Norte, including the house and
warehouse on one parcel. She allegedly sold them to private respondents, the spouses Felipe and Concepcion Rigonan,
who claim to be her relatives. In 1966, herein petitioners Eugenio Domingo, Crispin Mangabat and Samuel Capalungan,
who claim to be her closest surviving relatives, allegedly took possession of the properties by means of stealth, force and
intimidation, and refused to vacate the same. Consequently, on February 2, 1976, herein respondent Felipe Rigonan filed a
complaint for reivindicacion against petitioners in the Regional Trial Court of Batac, Ilocos Norte. On July 3, 1977, he
amended the complaint and included his wife as co-plaintiff. They alleged that they were the owners of the three parcels of
land through the deed of sale executed by Paulina Rigonan on January 28, 1965; that since then, they had been in
continuous possession of the subject properties and had introduced permanent improvements thereon; and that defendants
(now petitioners) entered the properties illegally, and they refused to leave them when asked to do so.
Herein petitioners, as defendants below, contested plaintiffs' claims. According to defendants, the alleged deed of absolute
sale was void for being spurious as well as lacking consideration. They said that Paulina Rigonan did not sell her properties
to anyone. As her nearest surviving kin within the fifth degree of consanguinity, they inherited the three lots and the
permanent improvements thereon when Paulina died in 1966. They said they had been in possession of the contested
properties for more than 10 years. Defendants asked for damages against plaintiffs. HAICTD

During trial, Juan Franco, Notary Public Evaristo P. Tagatag 3 and plaintiff Felipe Rigonan testified for plaintiffs (private
respondents now).
Franco testified that he was a witness to the execution of the questioned deed of absolute sale. However, when crossexamined and shown the deed he stated that the deed was not the document he signed as a witness, but rather it was the
will and testament made by Paulina Rigonan.
Atty. Tagatag testified that he personally prepared the deed, he saw Paulina Rigonan affix her thumbprint on it and he signed
it both as witness and notary public. He further testified that he also notarized Paulina's last will and testament dated
February 19, 1965. The will mentioned the same lots sold to private respondents. When asked why the subject lots were still
included in the last will and testament, he could not explain. Atty. Tagatag also mentioned that he registered the original
deed of absolute sale with the Register of Deeds.
Plaintiff Felipe Rigonan claimed that he was Paulina's close relative. Their fathers were first cousins. However, he could not
recall the name of Paulina's grandfather. His claim was disputed by defendants, who lived with Paulina as their close kin. He
admitted the discrepancies between the Register of Deeds' copy of the deed and the copy in his possession. But he
attributed them to the representative from the Office of the Register of Deeds who went to plaintiffs' house after that Office
received a subpoena duces tecum. According to him, the representative showed him blanks in the deed and then the
representative filled in the blanks by copying from his (plaintiffs) copy.
Counsel for defendants (petitioners herein) presented as witnesses Jose Flores, the owner of the adjacent lot; Ruben
Blanco, then acting Registrar of Deeds in Ilocos Norte; and Zosima Domingo, wife of defendant Eugenio Domingo.
Jose Flores testified that he knew defendants, herein petitioners, who had lived on the land with Paulina Rigonan since he
could remember and continued to live there even after Paulina's death. He said he did not receive any notice nor any offer to
sell the lots from Paulina, contrary to what was indicated in the deed of sale that the vendor had notified all the adjacent
owners of the sale. He averred he had no knowledge of any sale between Paulina and private respondents.
Ruben Blanco, the acting Registrar of Deeds, testified that only the carbon copy, also called a duplicate original, of the deed
of sale was filed in his office, but he could not explain why this was so.
Zosima Domingo testified that her husband, Eugenio Domingo, was Paulina's nephew. Paulina was a first cousin of
Eugenio's father. She also said that they lived with Paulina and her husband, Jose Guerson, since 1956. They took care of
her, spent for her daily needs and medical expenses, especially when she was hospitalized prior to her death. She stated
that Paulina was never badly in need of money during her lifetime. aSEDHC
On March 23, 1994, the trial court rendered judgment in favor of defendants (now the petitioners). It disposed:
WHEREFORE, premises considered, judgment is hereby rendered in favor of defendants and against
the plaintiffs, and as prayed for, the Amended Complaint is herebyDISMISSED.
Defendants are hereby declared, by virtue of intestate succession, the lawful owners and possessors of
the house including the bodega and the three (3) parcels of land in suit and a Decree of Registration
adjudicating the ownership of the said properties to defendants is hereby issued.
The alleged deed of sale (Exhs. "A", "A-1", "1" and "1-a") is hereby declared null and void and fake and
the prayer for the issuance of a writ of preliminary injunction is hereby denied.
Plaintiffs are hereby ordered to pay defendants:
a) P20,000.00 as moral damages;
b) P10,000.00 as exemplary damages;
c) P10,000.00 attorney's fees and other litigation expenses.
No pronouncement as to costs. 4
Private respondents herein appealed to the Court of Appeals.
On August 29, 1996, the CA reversed the trial court's decision, thus:
WHEREFORE, the decision dated March 23, 1994 is hereby SET ASIDE. The plaintiffs-appellants
Felipe Rigonan and Concepcion Rigonan are declared the owners of the properties under litigation and

the defendants-appellees are hereby ordered to VACATE the subject properties and SURRENDER the
possession thereof to the heirs of the plaintiffs-appellants.
Costs against the defendants-appellees. 5
Hence, this petition assigning the following as errors:
I
THE RESPONDENT COURT OF APPEALS HAS DECIDED QUESTIONS OF LEGAL SUBSTANCE AND SIGNIFICANCE
NOT IN ACCORDANCE WITH THE EVIDENCE, LAW AND WITH THE APPLICABLE DECISIONS OF THIS HONORABLE
COURT.
II
THAT THE FINDINGS OF RESPONDENT COURT OF APPEALS ARE CONTRARY TO THOSE OF THE TRIAL COURT
AND CLEARLY VIOLATES THE RULE THAT THE FACTUAL FINDINGS OF TRIAL COURTS ARE ENTITLED TO GREAT
WEIGHT AND RESPECT ON APPEAL, ESPECIALLY WHEN SAID FINDINGS ARE ESTABLISHED BY UNREBUTTED
TESTIMONIAL AND DOCUMENTARY EVIDENCE.
III
THAT THE FINDINGS AND CONCLUSIONS OF RESPONDENT COURT OF APPEALS ARE GROUNDED ENTIRELY ON
SPECULATIONS, SURMISES, CONJECTURES, OR ON INFERENCES MANIFESTLY MISTAKEN.
IV
THAT THE RESPONDENT COURT OF APPEALS MANIFESTLY OVERLOOKED CERTAIN RELEVANT FACTS NOT
DISPUTED BY THE PARTIES AND WHICH, IF PROPERLY CONSIDERED, WOULD JUSTIFY A DIFFERENT
CONCLUSION.
V
THAT THE FINDINGS OF FACT OF RESPONDENT COURT OF APPEALS ARE PREMISED ON SUPPOSED ABSENCE
OF EVIDENCE BUT IS CONTRADICTED BY THE EVIDENCE ON RECORD THUS CONSTITUTES GRAVE ABUSE OF
DISCRETION. 6
The basic issue for our consideration is, did private respondents sufficiently establish the existence and due execution of the
Deed of Absolute and Irrevocable Sale of Real Property? Marked as Exhibits "A", "A-1", "1" and "1-a", this deed purportedly
involved nine (9) parcels of land, inclusive of the three (3) parcels in dispute, sold at the price of P850 by Paulina Rigonan to
private respondents on January 28, 1965, at Batac, Ilocos Norte. 7 The trial court found the deed "fake," being a carbon
copy with no typewritten original presented; and the court concluded that the document's execution "was tainted with
alterations, defects, tamperings, and irregularities which render it null and void ab initio." 8
Petitioners argue that the Court of Appeals erred in not applying the doctrine that factual findings of trial courts are entitled to
great weight and respect on appeal, especially when said findings are established by unrebutted testimonial and
documentary evidence. They add that the Court of Appeals, in reaching a different conclusion, had decided the case
contrary to the evidence presented and the law applicable to the case. Petitioners maintain that the due execution of the
deed of sale was not sufficiently established by private respondents, who as plaintiffs had the burden of proving it. First, the
testimonies of the two alleged instrumental witnesses of the sale, namely, Juan Franco and Efren Sibucao, were dispensed
with and discarded when Franco retracted his oral and written testimony that he was a witness to the execution of the
subject deed. As a consequence, the appellate court merely relied on Atty. Tagatag's (the notary public) testimony, which
was incredible because aside from taking the double role of a witness and notary public, he was a paid witness. Further his
testimony, that the subject deed was executed in the house of Paulina Rigonan, was rebutted by Zosima Domingo, Paulina's
housekeeper, who said that she did not see Atty. Tagatag, Juan Franco and Efren Sibucao in Paulina's house on the alleged
date of the deed's execution.
Secondly, petitioners said that private respondents failed to account for the typewritten original of the deed of sale and that
the carbon copy filed with the Register of Deeds was only a duplicate which contained insertions and erasures. Further, the
carbon copy was without an affidavit of explanation, in violation of the Administrative Code as amended, which requires that
if the original deed of sale is not presented or available upon registration of the deed, the carbon copy or so-called "duplicate
original" must be accompanied by an affidavit of explanation, otherwise, registration must be denied. 9

Thirdly, petitioners aver that the consideration of only P850 for the parcels of land sold, together with a house and a
warehouse, was another indication that the sale was fictitious because no person who was financially stable would sell said
property at such a grossly inadequate consideration.
Lastly, petitioners assert that there was abundant evidence that at the time of the execution of the deed of sale, Paulina
Rigonan was already senile. She could not have consented to the sale by merely imprinting her thumbmark on the deed.
In their comment, private respondents counter that at the outset the petition must be dismissed for it lacks a certification
against forum-shopping. Nonetheless, even disregarding this requirement, the petition must still be denied in due course for
it does not present any substantial legal issue, but factual or evidentiary ones which were already firmly resolved by
the Court of Appeals based on records and the evidence presented by the parties. Private respondents' claim that the
factual determination by the trial court lacks credibility for it was made by the trial judge who presided only in one hearing of
the case. The trial judge could not validly say that the deed of absolute sale was "fake" because no signature was forged,
according to private respondents; and indeed a thumbmark, said to be the seller's own, appears thereon. ECcDAH
In their reply, petitioners said that the copy of the petition filed with this Court was accompanied with a certification against
forum-shopping.

If

private

respondents'

copy

did

not

contain

same

certification,

this

was

only

due

to

inadvertence. Petitioners ask for the Court's indulgence for anyway there was substantial compliance with Revised Circular
No. 28-91.
On the contention that here only factual issues had been raised, hence not the proper subject for review by this Court,
petitioners reply that this general rule admits of exceptions, as when the factual findings of the Court of Appeals and the trial
court are contradictory; when the findings are grounded entirely on speculations, surmises or conjectures; and when
the Court of Appeals overlooked certain relevant facts not disputed by the parties which if properly considered would justify a
different conclusion. All these, according to petitioners, are present in this case.
Before proceeding to the main issue, we shall first settle procedural issues raised by private respondents.
While the trial judge deciding the case presided over the hearings of the case only once, this circumstance could not have
an adverse effect on his decision. The continuity of a court and the efficacy of its proceedings are not affected by the death,
resignation or cessation from the service of the presiding judge. A judge may validly render a decision although he has only
partly heard the testimony of the witnesses. 10 After all, he could utilize and rely on the records of the case, including the
transcripts of testimonies heard by the former presiding judge.
On the matter of the certification against forum-shopping, petitioners aver that they attached one in the copy intended for this
Court. This is substantial compliance. A deviation from a rigid enforcement of the rules may be allowed to attain their prime
objective for, after all, the dispensation of justice is the core reason for the court's existence. 11

While the issues raised in this petition might appear to be mainly factual, this petition is properly given due course because
of the contradictory findings of the trial court and the Court of Appeals. Further, the latter court apparently overlooked certain
relevant facts which justify a different conclusion. 12 Moreover, a compelling sense to make sure that justice is done, and
done rightly in the light of the issues raised herein, constrains us from relying on technicalities alone to resolve this petition.
Now, on the main issue. Did private respondents establish the existence and due execution of the deed of sale? Our finding
is in the negative. First, note that private respondents as plaintiffs below presented only a carbon copy of this deed. When
the Register of Deeds was subpoenaed to produce the deed, no original typewritten deed but only a carbon copy was
presented to the trial court. Although the Court of Appeals calls it a "duplicate original," the deed contained filled in blanks
and alterations. None of the witnesses directly testified to prove positively and convincingly Paulina's execution of the original
deed of sale. The carbon copy did not bear her signature, but only her alleged thumbprint. Juan Franco testified during the
direct examination that he was an instrumental witness to the deed. However, when cross-examined and shown a copy of
the subject deed, he retracted and said that said deed of sale was not the document he signed as witness. 13 He declared
categorically he knew nothing about it. 14

We note that another witness, Efren Sibucao, whose testimony should have corroborated Atty. Tagatag's, was not presented
and his affidavit was withdrawn from the court, 15 leaving only Atty. Tagatag's testimony, which aside from being
uncorroborated, was self-serving.
Secondly, we agree with the trial court that irregularities abound regarding the execution and registration of the alleged deed
of sale. On record, Atty. Tagatag testified that he himself registered the original deed with the Register of Deeds. 16 Yet, the
original was nowhere to be found and none could be presented at the trial. Also, the carbon copy on file, which is allegedly a
duplicate original, shows intercalations and discrepancies when compared to purported copies in existence. The
intercalations were allegedly due to blanks left unfilled by Atty. Tagatag at the time of the deed's registration. The blanks
were allegedly filled in much later by a representative of the Register of Deeds. In addition, the alleged other copies of the
document bore different dates of entry: May 16, 1966, 10:20 A.M. 17 and June 10, 1966, 3:16 P.M., 18 and different entry
numbers: 66246, 74389 19 and 64369. 20 The deed was apparently registered long after its alleged date of execution and
after Paulina's death on March 20, 1966. 21 Admittedly, the alleged vendor Paulina Rigonan was not given a copy. 22
Furthermore, it appears that the alleged vendor was never asked to vacate the premises she had purportedly sold. Felipe
testified that he had agreed to let Paulina stay in the house until her death. 23 In Alcos v. IAC, 162 SCRA 823 (1988), the
buyer's immediate possession and occupation of the property was deemed corroborative of the truthfulness and authenticity
of the deed of sale. The alleged vendor's continued possession of the property in this case throws an inverse implication, a
serious doubt on the due execution of the deed of sale. Noteworthy, the same parcels of land involved in the alleged sale
were still included in the will subsequently executed by Paulina and notarized by the same notary public, Atty.
Tagatag. 24 These circumstances, taken together, militate against unguarded acceptance of the due execution and
genuineness of the alleged deed of sale. CTIEac
Thirdly, we have to take into account the element of consideration for the sale. The price allegedly paid by private
respondents for nine (9) parcels, including the three parcels in dispute, a house and a warehouse, raises further questions.
Consideration is the why of a contract, the essential reason which moves the contracting parties to enter into the
contract. 25 On record, there is unrebutted testimony that Paulina as landowner was financially well off. She loaned money
to several people. 26 We see no apparent and compelling reason for her to sell the subject parcels of land with a house and
warehouse at a meager price of P850 only.
In Rongavilla vs. CA, 294 SCRA 289 (1998), private respondents were in their advanced years, and were not in dire need of
money, except for a small amount of P2,000 which they said were loaned by petitioners for the repair of their house's roof.
We ruled against petitioners, and declared that there was no valid sale because of lack of consideration.
In the present case, at the time of the execution of the alleged contract, Paulina Rigonan was already of advanced age and
senile. She died an octogenarian on March 20, 1966, barely over a year when the deed was allegedly executed on January
28, 1965, but before copies of the deed were entered in the registry allegedly on May 16 and June 10, 1966. The general
rule is that a person is not incompetent to contract merely because of advanced years or by reason of physical
infirmities. 27 However, when such age or infirmities have impaired the mental faculties so as to prevent the person from
properly, intelligently, and firmly protecting her property rights then she is undeniably incapacitated. The unrebutted
testimony of Zosima Domingo shows that at the time of the alleged execution of the deed, Paulina was already incapacitated
physically and mentally. She narrated that Paulina played with her waste and urinated in bed. Given these circumstances,
there is in our view sufficient reason to seriously doubt that she consented to the sale of and the price for her parcels of land.
Moreover, there is no receipt to show that said price was paid to and received by her. Thus, we are in agreement with the
trial court's finding and conclusion on the matter:
The whole evidence on record does not show clearly that the fictitious P850.00 consideration was ever
delivered to the vendor. Undisputably, the P850.00 consideration for the nine (9) parcels of land
including the house and bodega is grossly and shockingly inadequate, and the sale is null and
void ab initio. 28
WHEREFORE, the petition is GRANTED. The decision and resolution of the Court of Appeals dated August 29, 1996 and
December 11, 1996, respectively, are REVERSED and SET ASIDE. The decision of the Regional Trial Court of Batac, Ilocos
Norte, Branch 17, dated March 23, 1994, is REINSTATED.

Costs against private respondents.


SO ORDERED.
Bellosillo, Mendoza, Buena and De Leon Jr., JJ., concur.
||| (Domingo v. Court of Appeals, G.R. No. 127540, [October 17, 2001], 419 PHIL 651-664)

[G.R. No. 59266. February 29, 1988.]


SILVESTRE DIGNOS and ISABEL LUMUNGSOD, petitioners, vs. HON. COURT OF APPEALS and
ATILANO G. JABIL, respondents.

SYLLABUS
1. CIVIL LAW; CONTRACTS; DEED OF SALE; ABSOLUTE IN NATURE WHERE THERE IS NO PROVISION THAT TITLE
IS RESERVED TO THE VENDOR OR UNILATERALLY GIVING THE VENDOR THE RIGHT TO RESCIND CONTRACT.
It has been held that a deed of sale is absolute in nature although denominated as a "Deed of Conditional Sale" where
nowhere in the contract in question is a proviso or stipulation to the effect that title to the property sold is reserved in the
vendor until full payment of the purchase price, nor is there a stipulation giving the vendor the right to unilaterally rescind the
contract the moment the vendee fails to pay within a fixed period (Taguba v. Vda. de Leon, 132 SCRA 722; Luzon Brokerage
Co., Inc. v. Maritime Building Co., Inc., 86 SCRA 305). A careful examination of the contract shows that there is no such
stipulation reserving the title of the property on the vendors nor does it give them the right to unilaterally rescind the contract
upon non-payment of the balance thereof within a fixed period.
2. ID.; ID.; SALE; ELEMENTS. On the contrary, all the elements of a valid contract of sale under Article 1458 of the Civil
Code, are present, such as: (1) consent or meeting of the minds; (2) determinate subject matter; and (3) price certain in
money or its equivalent.
3. ID.; ID.; OWNERSHIP IS TRANSFERRED BY DELIVERY OF THE THING SOLD. In addition, Article 1477 of the same
Code provides that "The ownership of the thing sold shall be transferred to the vendee upon actual or constructive delivery
thereof." As applied in the case of Froilan v. Pan Oriental Shipping Co., et al. (12 SCRA 276), this Court held that in the
absence of stipulation to the contrary, the ownership of the thing sold passes to the vendee upon actual or constructive
delivery thereof.
4. ID.; ID.; ID.; ID.; ACTUAL DELIVERY IN CASE AT BAR. While it may be conceded that there was no constructive
delivery of the land sold in the case at bar, as subject Deed of Sale is a private instrument, it is beyond question that there
was actual delivery thereof. As found by the trial court, the Dignos spouses delivered the possession of the land in question
to Jabil as early as March 27, 1965 so that the latter constructed thereon Sally's Beach Resort also known as Jabil's Beach
Resort in March, 1965; Mactan White Beach Resort on January 15, 1966 and Bevirlyn's Beach Resort on September 1,
1965. Such facts were admitted by petitioner spouses (Decision, Civil Case No. 23-L; Record on Appeal, p. 108).
5. ID.; ID.; ID.; SLIGHT DELAY IN THE PERFORMANCE OF OBLIGATION, NOT SUFFICIENT GROUND FOR
RESCISSION. It has been ruled, however, that "where time is not of the essence of the agreement, a slight delay on the
part of one party in the performance of his obligation is not a sufficient ground for the rescission of the agreement" (Taguba
v. Vda. de Leon, supra). Considering that private respondent has only a balance of P4,000.00 and was delayed in payment
only for one month, equity and justice mandate as in the aforecited case that Jabil be given an additional period within which
to complete payment of the purchase price.

DECISION

BIDIN, J p:
This is a petition for review on certiorari seeking the reversal of the: (1) Decision* of the 9th Division, Court of Appeals dated
July 31, 1981, affirming with modification the Decision** dated August 25, 1972 of the Court of First Instance of Cebu in Civil
Case No. 23-L entitled Atilano G. Jabil vs. Silvestre T. Dignos and Isabela Lumungsod de Dignos and Panfilo Jabalde, as
Attorney-in-Fact of Luciano Cabigas and Jovita L. de Cabigas; and (2) its Resolution dated December 16, 1981, denying
defendant-appellant's (Petitioner's) motion for reconsideration, for lack of merit.
The undisputed facts as found by the Court of Appeals are as follows:
"The Dignos spouses were owners of a parcel of land, known as Lot No. 3453, of the cadastral survey
of Opon, Lapu-Lapu City. On June 7, 1965, appellants (petitioners) Dignos spouses sold the said parcel
of land to plaintiff-appellant (respondent Atilano J. Jabil) for the sum of P28,000.00, payable in two
installments, with an assumption of indebtedness with the First Insular Bank of Cebu in the sum of
P12,000.00, which was paid and acknowledged by the vendors in the deed of sale (Exh. C) executed in
favor of plaintiff-appellant, and the next installment in the sum of P4,000.00 to be paid on or before
September 15, 1965.
"On November 25, 1965, the Dignos spouses sold the same land in favor of defendants spouses,
Luciano Cabigas and Jovita L. De Cabigas, who were then U.S. citizens, for the price of P35,000.00. A
deed of absolute sale (Exh. J, also marked Exh. 3) was executed by the Dignos spouses in favor of the
Cabigas spouses, and which was registered in the Office of the Register of Deeds pursuant to the
provisions of Act No. 3344.
"As the Dignos spouses refused to accept from plaintiff-appellant the balance of the purchase price of
the land, and as plaintiff- appellant discovered the second sale made by defendants-appellants to the
Cabigas spouses, plaintiff-appellant brought the present suit." (Rollo, pp. 27-28)
After due trial, the Court of First Instance of Cebu rendered its Decision on August 25, 1972, the decretal portion of which
reads:
"WHEREFORE, the Court hereby declares the deed of sale executed on November 25, 1965 by
defendant Isabela L. de Dignos in favor of defendant Luciano Cabigas, a citizen of the United States of
America, null and void ab initio, and the deed of sale executed by defendants Silvestre T. Dignos and
Isabela Lumungsod de Dignos not rescinded. Consequently, the plaintiff Atilano G. Jabil is hereby
ordered to pay the sum, of Sixteen Thousand Pesos (P16,000.00) to the defendants-spouses upon the
execution of the Deed of Absolute Sale of Lot No. 3453, Opon Cadastre and when the decision of this
case becomes final and executory.
"The plaintiff Atilano G. Jabil is ordered to reimburse the defendants Luciano Cabigas and Jovita L. de
Cabigas, through their attorney-in-fact, Panfilo Jabalde, reasonable amount corresponding to the
expenses or costs of the hollow block fence, so far constructed.
"It is further ordered that defendants-spouses Silvestre T. Dignos and Isabela Lumungsod de Dignos
should return to defendants-spouses Luciano Cabigas and Jovita L. de Cabigas the sum of P35,000.00,
as equity demands that nobody shall enrich himself at the expense of another.
"The writ of preliminary injunction issued on September 23, 1966, automatically becomes permanent in
virtue of this decision.
"With costs against the defendants."
From the foregoing, the plaintiff (respondent herein) and defendants-spouses (petitioners herein) appealed to the Court of
Appeals, which appeal was docketed therein as CA-G.R. No. 54393-R, "Atilano G. Jabil v. Silvestre T. Dignos, et al."

On July 31, 1981, the Court of Appeals affirmed the decision of the lower court except as to the portion ordering Jabil to pay
for the expenses incurred by the Cabigas spouses for the building of a fence upon the land in question. The dispositive
portion of said decision of the Court of Appeals reads:
"IN VIEW OF THE FOREGOING CONSIDERATIONS, except as to the modification of the judgment as
pertains to plaintiff-appellant above indicated, the judgment appealed from is hereby AFFIRMED in all
other respects.
"With costs against defendants-appellants.
"SO ORDERED.
"Judgment MODIFIED."
A motion for reconsideration of said decision was filed by the defendants-appellants (petitioners) Dignos spouses, but on
December 16, 1981, a resolution was issued by the Court of Appeals denying the motion for lack of merit.
Hence, this petition.
In the resolution of February 10, 1982, the Second Division of this Court denied the petition for lack of merit. A motion for
reconsideration of said resolution was filed on March 16, 1982. In the resolution dated April 26, 1982, respondents were
required to comment thereon, which comment was filed on May 11, 1982 and a reply thereto was filed on July 26, 1982 in
compliance with the resolution of June 16, 1982 . On August 9, 1982, acting on the motion for reconsideration and on all
subsequent pleadings filed, this Court resolved to reconsider its resolution of February 10, 1982 and to give due course to
the instant petition. On September 6, 1982, respondents filed a rejoinder to reply of petitioners which was noted on the
resolution of September 20, 1982.
Petitioners raised the following assignment of errors:
I
THE COURT OF APPEALS COMMITTED A GRAVE ERROR OF LAW IN GROSSLY, INCORRECTLY
INTERPRETING THE TERMS OF THE CONTRACT, EXHIBIT C, HOLDING IT AS AN ABSOLUTE
SALE, EFFECTIVE TO TRANSFER OWNERSHIP OVER THE PROPERTY IN QUESTION TO THE
RESPONDENT AND NOT MERELY A CONTRACT TO SELL OR PROMISE TO SELL; THE COURT
ALSO ERRED IN MISAPPLYING ARTICLE 1371 AS WARRANTING READING OF THE AGREEMENT,
EXHIBIT C, AS ONE OF ABSOLUTE SALE, DESPITE THE CLARITY OF THE TERMS THEREOF
SHOWING IT IS A CONTRACT OF PROMISE TO SELL.
II
THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN INCORRECTLY APPLYING AND
OR IN MISAPPLYING ARTICLE 1592 OF THE NEW CIVIL CODE AS WARRANTING THE
ERRONEOUS CONCLUSION THAT THE NOTICE OF RESCISSION, EXHIBIT G, IS INEFFECTIVE
SINCE IT HAS NOT BEEN JUDICIALLY DEMANDED NOR IS IT A NOTARIAL ACT.
III
THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN REJECTING THE APPLICABILITY
OF ARTICLES 2208, 2217 and 2219 OF THE NEW CIVIL CODE AND ESTABLISHED
JURISPRUDENCE AS TO WARRANT THE AWARD OF DAMAGES AND ATTORNEY'S FEES TO
PETITIONERS.
IV
PLAINTIFF'S COMPLAINT FOR SPECIFIC PERFORMANCE SHOULD HAVE BEEN DISMISSED, HE
HAVING COME TO COURT WITH UNCLEAN HANDS.
V
BY AND LARGE, THE COURT OF APPEALS COMMITTED AN ERROR IN AFFIRMING WITH
MODIFICATION THE DECISION OF THE TRIAL COURT DUE TO GRAVE MISINTERPRETATION,

MISAPPLICATION AND MISAPPREHENSION OF THE TERMS OF THE QUESTIONED CONTRACT


AND THE LAW APPLICABLE THERETO.

The foregoing assignment of errors may be synthesized into two main issues, to wit:
I. Whether or not subject contract is a deed of absolute sale or a contract to sell.
II. Whether or not there was a valid rescission thereof.
There is no merit in this petition.
It is significant to note that this petition was denied by the Second Division of this Court in its Resolution dated February 10,
1982 for lack of merit, but on motion for reconsideration and on the basis of all subsequent pleadings filed, the petition was
given due course.
I.
The contract in question (Exhibit C) is a Deed of Sale, with the following conditions:
"1. That Atilano G. Jabil is to pay the amount of Twelve Thousand Pesos (P12,000.00) Philippine
Currency as advance payment;
"2. That Atilano G. Jabil is to assume the balance of Twelve Thousand Pesos (P12,000.00) Loan from
the First Insular Bank of Cebu;
"3. That Atilano G. Jabil is to pay the said spouses the balance of Four Thousand Pesos (P4,000.00) on
or before September 15, 1965.
"4. That the said spouses agreed to defend the said Atilano G. Jabil from other claims on the said
property;
"5. That the spouses agrees to sign a final deed of absolute sale in favor of Atilano G. Jabil over the
above-mentioned property upon the payment of the balance of Four Thousand Pesos." (Original
Record, pp. 10-11)
In their motion for reconsideration, petitioners reiterated their contention that the Deed of Sale (Exhibit "C") is a mere
contract to sell and not an absolute sale; that the same is subject to two (2) positive suspensive conditions, namely: the
payment of the balance of P4,000.00 on or before September 15, 1965 and the immediate assumption of the mortgage of
P12,000.00 with the First Insular Bank of Cebu. It is further contended that in said contract, title or ownership over the
property was expressly reserved in the vendor, the Dignos spouses, until the suspensive condition of full and punctual
payment of the balance of the purchase price shall have been met. So that there is no actual sale until full payment is made
(Rollo, pp. 51-52).
In bolstering their contention that Exhibit "C" is merely a contract to sell, petitioners aver that there is absolutely nothing in
Exhibit "C" that indicates that the vendors thereby sell, convey or transfer their ownership to the alleged vendee. Petitioners
insist that Exhibit "C" (or 6) is a private instrument and the absence of a formal deed of conveyance is a very strong
indication that the parties did not intend "transfer of ownership and title but only a transfer after full payment" (Rollo, p. 52).
Moreover, petitioners anchored their contention on the very terms and conditions of the contract, more particularly paragraph
four which reads, "that said spouses has agreed to sell the herein mentioned property to Atilano G. Jabil . . ." and condition
number five which reads, "that the spouses agrees to sign a final deed of absolute sale over the mentioned property upon
the payment of the balance of four thousand pesos."
Such contention is untenable.
By and large, the issues in this case have already been settled by this Court in analogous cases.
Thus, it has been held that a deed of sale is absolute in nature although denominated as a "Deed of Conditional Sale" where
nowhere in the contract in question is a proviso or stipulation to the effect that title to the property sold is reserved in the
vendor until full payment of the purchase price, nor is there a stipulation giving the vendor the right to unilaterally rescind the

contract the moment the vendee fails to pay within a fixed period (Taguba v. Vda. de Leon, 132 SCRA 722; Luzon Brokerage
Co., Inc. v. Maritime Building Co., Inc., 86 SCRA 305).
A careful examination of the contract shows that there is no such stipulation reserving the title of the property on the vendors
nor does it give them the right to unilaterally rescind the contract upon non-payment of the balance thereof within a fixed
period.
On the contrary, all the elements of a valid contract of sale under Article 1458 of the Civil Code, are present, such as: (1)
consent or meeting of the minds; (2) determinate subject matter; and (3) price certain in money or its equivalent. In
addition, Article 1477 of the same Code provides that "The ownership of the thing sold shall be transferred to the vendee
upon actual or constructive delivery thereof. As applied in the case of Froilan v. Pan Oriental Shipping Co., et al. (12 SCRA
276), this Court held that in the absence of stipulation to the contrary, the ownership of the thing sold passes to the vendee
upon actual or constructive delivery thereof.
While it may be conceded that there was no constructive delivery of the land sold in the case at bar, as subject Deed of Sale
is a private instrument, it is beyond question that there was actual delivery thereof. As found by the trial court, the Dignos
spouses delivered the possession of the land in question to Jabil as early as March 27, 1965 so that the latter constructed
thereon Sally's Beach Resort also known as Jabil's Beach Resort in March, 1965; Mactan White Beach Resort on January
15, 1966 and Bevirlyn's Beach Resort on September 1, 1965. Such facts were admitted by petitioner spouses (Decision,
Civil Case No. 23-L; Record on Appeal, p. 108).
Moreover, the Court of Appeals in its resolution dated December 16, 1981 found that the acts of petitioners,
contemporaneous with the contract, clearly show that an absolute deed of sale was intended by the parties and not a
contract to sell.
Be that as it may, it is evident that when petitioners sold said land to the Cabigas spouses, they were no longer owners of
the same and the sale is null and void.
II.
Petitioners claim that when they sold the land to the Cabigas spouses, the contract of sale was already rescinded.
Applying the rationale of the case of Taguba v. Vda. de Leon (supra) which is on all fours with the case at bar, the contract of
sale being absolute in nature is governed by Article 1592 of the Civil Code. It is undisputed that petitioners never notified
private respondents Jabil by notarial act that they were rescinding the contract, and neither did they file a suit in court to
rescind the sale. The most that they were able to show is a letter of Cipriano Amistad who, claiming to be an emissary of
Jabil, informed the Dignos spouses not to go to the house of Jabil because the latter had no money and further advised
petitioners to sell the land in litigation to another party (Record on Appeal, p. 23). As correctly found by the Court of Appeals,
there is no showing that Amistad was properly authorized by Jabil to make such extra judicial rescission for the latter who,
on the contrary, vigorously denied having sent Amistad to tell petitioners that he was already waiving his rights to the land in
question. Under Article 1358 of the Civil Code, it is required that acts and contracts which have for their object the
extinguishment of real rights over immovable property must appear in a public document.
Petitioners laid considerable emphasis on the fact that private respondent Jabil had no money on the stipulated date of
payment on September 15, 1965 and was able to raise the necessary amount only by mid-October, 1965.
It has been ruled, however, that "where time is not of the essence of the agreement, a slight delay on the part of one party in
the performance of his obligation is not a sufficient ground for the rescission of the agreement" (Taguba v. Vda. de
Leon, supra). Considering that private respondent has only a balance of P4,000.00 and was delayed in payment only for one
month, equity and justice mandate as in the aforecited case that Jabil be given an additional period within which to complete
payment of the purchase price.
WHEREFORE, the petition filed is hereby Dismissed for lack of merit and the assailed decision of the Court of Appeals is
Affirmed in toto.
SO ORDERED
[G.R. No. 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.

SYLLABUS
1. SALES; INTERPRETATION OF CONTRACT. For the classification of contracts, due regard must be paid
to their essential clauses. In the contract in the instant case, what was essential, constituting its cause and subject
matter, was that the plaintiff was to furnish the defendant with the beds which the latter might order, at the stipulated
price, and that the defendant was to pay this price in the manner agreed upon. 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 that of the defendant, to pay their price. These features exclude the legal conception of an agency or older to sell
whereby the mandatary or agent receives 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, Held:
That this contract is one of purchase and sale, and not of commercial agency.
2. ID., ID. The testimony of the person who drafted this contract, to the effect that his purpose was to be an
agent for the beds and to collect a commission on the sales, is of no importance to prove that the contract was one of
agency, inasmuch as the agreements contained in the contract constitute, according to law, covenants of purchase and
sale, and not of commercial agency. 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.
3. ID.; ID. The fact that the contracting parties did not perform the contract in accordance with its terms, only
shows mutual tolerance and gives no right to have the contract considered, not as the parties stipulated it, but as they
performed it.
4. ID.; ID. Only the acts of the contracting parties, subsequent to and in connection with, the performance of
the contract must be considered in the interpretation of 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
5. ID.; ID. The defendant obligated itself to order the beds from the plaintiff by the dozen. Held: That the
effect of a breach of this clause by the defendant 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.

DECISION

AVANCEA, J p:
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 OFQUIROGA 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 an allowance of a discount of 25 per cent of the invoiced prices, as commission
on the sales; and Mr. Parsonsshall 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 within 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, reduces 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
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 purpose of making this return, the defendant, in its 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.
||| (Quiroga v. Parsons Hardware Co., G.R. No. 11491, [August 23, 1918], 38 PHIL 501-507)

[G.R. No. L-20871. April 30, 1971.]


KER & CO.,

LTD., petitioner, vs. JOSE

B. LINGAD,

as Acting

Commissioner

of Internal

Revenue, respondent.

Ross, Selph & Carrascoso for petitioner.


Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Atty. Balbino Gatdula, Jr. for respondent.

SYLLABUS
1. TAXATION; NATIONAL INTERNAL REVENUE CODE; COMMERCIAL BROKER, DEFINED; TEST FOLLOWED IN
DETERMINING WHO FALLS WITHIN THE DEFINITION. According to the National Internal Revenue Code a commercial
broker "includes all persons, other than importers, manufacturers, producers, or bona fide employees, who, for
compensation or profit, sell or bring about sales or purchases of merchandise for other persons or bring proposed buyers
and sellers together, or negotiate freights or other business for owners of vessels or other means of transportation, or for the
shippers, or consignors or consignees of freight carried by vessels or other means of transportation. The term includes
commission merchants [Section 194(t)]." The controlling decision as to the test to be followed as to who falls within the
above definition of a commercial broker is that of Commissioner of Internal Revenue v. Constantino L-25926, February 27,

1970, 31 SCRA 779. In the language of Justice J.B.L. Reyes, who penned the opinion: "Since the company retained
ownership of the goods, even as it delivered possession unto the dealer for resale to customers, the price and terms of
which were subject to the company's control, the relationship between the company and the dealer is one of agency, . . ." An
excerpt from Salisbury v. Brooks [94 SE 117 (1917)] cited in support of such a view follows: "'The difficulty in distinguishing
between contracts of sale and the creation of an agency to sell has led to the establishment of rules by the application of
which this difficulty may be solved. The decisions say the transfer of title or agreement to transfer it for a price paid or
promised is the essence of sale. If such transfer puts the transferee in the attitude or position of an owner and makes him
liable to the transferor as a debtor for the agreed price, and not merely as an agent who must account for the proceeds of a
resale, the transaction is a sale; while the essence of an agency to sell is the delivery to an agent, not as his property, but as
the property of the principal, who remains the owner and has the right to control sales, fix the price, and terms, demand and
receive the proceeds less the agent's commission upon sales made."'
2. ID.; ID.; ID.; ID.; APPLICATION IN CASE AT BAR. The mere disclaimer in a contract that an entity like petitioner is not
"the agent or legal representative . . . for any purpose whatsoever" does not suffice to yield the conclusion that it is an
independent merchant if the control over the goods for resale of the goods consigned is pervasive in character. The terms of
the contract, as noted, speak quite clearly. There is lacking that degree of ambiguity sufficient to give rise to serious doubt as
to what was contemplated by the parties. A reading thereof discloses that the relationship arising therefrom was not one of
seller and purchaser. If it were thus intended, then it would not have included covenants which in their totality would negate
the concept of a firm acquiring as vendee goods from another. Instead, the stipulations were so worded as to lead to no
other conclusion than that the control by the United States Rubber International over the goods in question is, in the
language of the Constantino opinion, "pervasive". The insistence on a relationship opposed to that apparent from the
language employed might even yield the impression that such a mode of construction was resorted to in order that the
applicability of a taxing statute might be rendered nugatory. Certainly, such a result is to be avoided.

DECISION

FERNANDO, J p:
Petitioner Ker & Co., Ltd. would have us reverse a decision of the Court of Tax Appeals, holding it liable as a commercial
broker under Section 194(t) of the National Internal Revenue Code. Its plea, notwithstanding the vigorous effort of its
counsel, is not sufficiently persuasive. An obstacle, well-nigh insuperable, stands in the way. The decision under review
conforms to and is in accordance with the controlling doctrine announced in the recent case of Commissioner of Internal
Revenue v. Constantino. 1 The decisive test, as therein set forth, is the retention of the ownership of the goods delivered to
the possession of the dealer, like herein petitioner, for resale to customers, the price and terms remaining subject to the
control of the firm consigning such goods. The facts, as found by respondent Court, to which we defer, unmistakably indicate
that such a situation does exist. The juridical consequences must inevitably follow. We affirm.
It was shown that petitioner was assessed by the then Commissioner of Internal Revenue Melecio R. Domingo the sum of
P20,272.33 as the commercial broker's percentage tax, surcharge, and compromise penalty for the period from July 1, 1949
to December 31, 1953. There was a request on the part of petitioner for the cancellation of such assessment, which request
was turned down. As a result, it filed a petition for review with the Court of Tax Appeals. In its answer, the then
Commissioner Domingo maintained his stand that petitioner should be taxed in such amount as a commercial broker. In the
decision now under review, promulgated on October 19, 1962, the Court of Tax Appeals held petitioner taxable except as to
the compromise penalty of P500.00, the amount due from it being fixed at P19,772.33.
Such liability arose from a contract of petitioner with the United States Rubber International, the former being referred to as
the Distributor and the latter specifically designated as the Company. The contract was to apply to transactions between the
former and petitioner, as Distributor, from July 1, 1948 to continue in force until terminated by their party giving to the other
sixty days' notice. 2 The shipments would cover products "for consumption in Cebu, Bohol, Leyte, Samar, Jolo, Negros
Oriental, and Mindanao except [the] province of Davao", petitioner, as Distributor, being precluded from disposing such
products elsewhere than in the above places unless written consent would first be obtained from the Company. 3 Petitioner,

as Distributor, is required to exert every effort to have the shipment of the products in the maximum quantity and to promote
in every way the sale thereof. 4 The prices, discounts, terms of payment, terms of delivery and other conditions of sale were
subject to change in the discretion of the Company. 5
Then came this crucial stipulation: "The Company shall from time to time consign to the Distributor and the Distributor will
receive, accept and/or hold upon consignment the products specified under the terms of this agreement in such quantities
as in the judgment of the Company may be necessary for the successful solicitation and maintenance of business in the
territory, and the Distributor agrees that responsibility for the final sale of all goods delivered shall rest with him. All goods on
consignment shall remain the property of the Company until sold by the Distributor to the purchaser or purchasers, but all
sales made by the Distributor shall be in his name, in which case the sale price of all goods sold less the discount given to
the Distributor by the Company in accordance with the provision of paragraph 13 of this agreement, whether or not such sale
price shall have been collected by the Distributor from the purchaser or purchasers, shall immediately be paid and remitted
by the Distributor to the Company. It is further agreed that this agreement does not constitute Distributor the agent or legal
representative of the Company for any purpose whatsoever. Distributor is not granted any right or authority to assume or to
create any obligation or responsibility, express or implied, in behalf of or in the name of the Company, or to bind the
Company in any manner or thing whatsoever." 6
All specifications for the goods ordered were subject to acceptance by the Company with petitioner, as Distributor, required
to accept such goods shipped as well as to clear the same through customs and to arrange for delivery in its warehouse in
Cebu City. Moreover, orders are to be filled in whole or in part from the stocks carried by the Company's neighboring
branches, subsidiaries or other sources of Company's brands. 7 Shipments were to be invoiced at prices to be agreed upon,
with the customs duties being paid by petitioner, as Distributor, for account of the Company. 8 Moreover, all resale prices,
lists, discounts and general terms and conditions of local resale were to be subject to the approval of the Company and to
change from time to time in its discretion. 9 The dealer, as Distributor, is allowed a discount of ten percent on the net amount
of sales of merchandise made under such agreement. 10 On a date to be determined by the Company, the petitioner, as
Distributor, was required to report to it data showing in detail all sales during the month immediately preceding, specifying
therein the quantities, sizes and types together with such information as may be required for accounting purposes, with the
Company rendering an invoice on sales as described to be dated as of the date of inventory and sales report. As Distributor,
petitioner had to make payment on such invoice or invoices on due date with the Company being privileged at its option to
terminate and cancel the agreement forthwith upon the failure to comply with this obligation. 11 The Company, at its own
expense, was to keep the consigned stock fully insured against loss or damage by fire or as a result of fire, the policy of such
insurance to be payable to it in the event of loss. Petitioner, as Distributor, assumed full responsibility with reference to the
stock and its safety at all times; and upon request of the Company at any time, it was to render inventory of the existing
stock which could be subject to change. 12 There was furthermore this equally tell-tale covenant: "Upon the termination or
any cancellation of this agreement all goods held on consignment shall be held by the Distributor for the account of the
Company, without expense to the Company, until such time as provision can be made by the Company for disposition." 13

The issue with the Court of Tax Appeals, as with us now, is whether the relationship thus created is one of vendor and
vendee or of broker and principal. Not that there would have been the slightest doubt were it not for the categorical denial in
the contract that petitioner was not constituted as "the agent or legal representative of the Company for any purpose
whatsoever." It would be, however, to impart to such an express disclaimer a meaning it should not possess to ignore what is
manifestly the role assigned to petitioner considering the instrument as a whole. That would be to lose sight altogether of
what has been agreed upon. The Court of Tax Appeals was not misled. In the language of the decision now on appeal:
"That the petitioner Ker & Co., Ltd. is, by contractual stipulation, an agent of U.S. Rubber International is borne out by the
facts that petitioner can dispose of the products of the Company only to certain persons or entities and within stipulated
limits, unless excepted by the contract or by the Rubber Company (Par. 2); that it merely receives, accepts and/or holds
upon consignment the products, which remain properties of the latter company (Par. 8); that every effort shall be made by
petitioner to promote in every way the sale of the products (Par. 3); that sales made by petitioner are subject to approval by
the company (Par. 12); that on dates determined by the rubber company, petitioner shall render a detailed report showing
sales during the month (Par. 14); that the rubber company shall invoice the sales as of the dates of inventory and sales
report (Par. 14); that the rubber company agrees to keep the consigned goods fully insured under insurance policies payable

to it in case of loss (Par. 15); that upon request of the rubber company at any time, petitioner shall render an inventory of the
existing stock which may be checked by an authorized representative of the former (Par. 15); and that upon termination or
cancellation of the Agreement, all goods held on consignment shall be held by petitioner for the account of the rubber
company until their disposition is provided for by the latter (Par. 19). All these circumstances are irreconcilably antagonistic
to the idea of an independent merchant." 14 Hence its conclusion: "However, upon analysis of the contract, as a whole,
together with the actual conduct of the parties in respect thereto, we have arrived at the conclusion that the relationship
between them is one of brokerage or agency." 15 We find ourselves in agreement, notwithstanding the able brief filed on
behalf of petitioner by its counsel. As noted at the outset, we cannot heed petitioner's plea for reversal.
1. According to the National Internal Revenue Code, a commercial broker "includes all persons, other than importers,
manufacturers, producers, or bona fide employees, who, for compensation or profit, sell or bring about sales or purchases of
merchandise for other persons or bring proposed buyers and sellers together, or negotiate freights or other business for
owners of vessels or other means of transportation, or for the shippers, or consignors or consignees of freight carried by
vessels or other means of transportation. The term includes commission merchants." 16 The controlling decision as to the
test to be followed as to who falls within the above definition of a commercial broker is that of Commissioner of Internal
Revenue v. Constantino. 17 In the language of Justice J.B.L. Reyes, who penned the opinion: "Since the company retained
ownership of the goods, even as it delivered possession unto the dealer for resale to customers, the price and terms of
which were subject to the company's control, the relationship between the company and the dealer is one of
agency, . . .." 18 An excerpt from Salisbury v. Brooks 19 cited in support of such a view follows:" 'The difficulty in
distinguishing between contracts of sale and the creation of an agency to sell has led to the establishment of rules by the
application of which this difficulty may be solved. The decisions say the transfer of title or agreement to transfer it for a price
paid or promised is the essence of sale. If such transfer puts the transferee in the attitude or position of an owner and makes
him liable to the transferor as a debtor for the agreed price and not merely as an agent who must account for the proceeds
of a resale, the transaction is a sale; while the essence of an agency to sell is the delivery to an agent, not as his property,
but as the property of the principal, who remains the owner and has the right to control sales, fix the price, and terms,
demand and receive the proceeds less the agent's commission upon sales made.'" 20 The opinion relied on the work of
Mechem on Sales as well as Mechem on Agency. Williston and Tiedman, both of whom wrote treatises on Sales, were
likewise referred to.
Equally relevant is this portion of the Salisbury opinion: "It is difficult to understand or appreciate the necessity or presence
of these mutual requirements and obligations on any theory other than that of a contract of agency. Salisbury was to furnish
the mill and put the timber owned by him into a marketable condition in the form of lumber; Brooks was to furnish the funds
necessary for that purpose, sell the manufactured product, and account therefor to Salisbury upon the specific terms of the
agreement, less the compensation fixed by the parties in lieu of interest on the money advanced and for services as agent.
These requirements and stipulations are inconsistent with any other conception of the contract. If it constitutes an agreement
to sell, they are meaningless. But they cannot be ignored. They were placed there for some purpose, doubtless as the result
of definite antecedent negotiations therefore, consummated by the final written expression of the agreement." 21Hence the
Constantino opinion could categorically affirm that the mere disclaimer in a contract that an entity like petitioner is not "the
agent or legal representative . . . for any purpose whatsoever" does not suffice to yield the conclusion that it is an
independent merchant if the control over the goods for resale of the goods consigned is pervasive in character. The Court of
Tax Appeals decision now under review pays fealty to such an applicable doctrine.
2. No merit therefore attaches to the first error imputed by petitioner to the Court of Tax Appeals. Neither did such Court fail
to appreciate in its true significance the act and conduct pursued in the implementation of the contract by both the United
States Rubber International and petitioner, as was contended in the second assignment of error. Petitioner ought to have
been aware that there was no need for such an inquiry. The terms of the contract, as noted, speak quite clearly. There is
lacking that degree of ambiguity sufficient to give rise to serious doubt as to what was contemplated by the parties. A
reading thereof discloses that the relationship arising therefrom was not one of seller and purchaser. If it were thus intended,
then it would not have included covenants which in their totality would negate the concept of a firm acquiring as vendee
goods from another. Instead, the stipulations were so worded as to lead to no other conclusion than that the control by the
United States Rubber International over the goods in question is, in the language of the Constantino opinion, "pervasive".
The insistence on a relationship opposed to that apparent from the language employed might even yield the impression that

such: mode of construction was resorted to in order that the applicability of a taxing statute might be rendered nugatory.
Certainly, such a result is to be avoided.
Nor is it to be lost sight of that on a matter left to the discretion of the Court of Tax Appeals which has developed an
expertise in view of its function being limited solely to the interpretation of revenue laws, this Court is prepared to substitute
its own judgment unless a grave abuse of discretion is manifest. It would be to frustrate the objective for which administrative
tribunals are created if the judiciary, absent such a showing, is to ignore their appraisal on a matter that forms the staple of
their specialized competence. While it is to be admitted that counsel for petitioner did scrutinize with care the decision under
review with a view to exposing what was considered its flaws, it cannot be said that there was such a failure to apply what
the law commands as to call for its reversal. Instead, what cannot be denied is that the Court of Tax Appeals reached a
result to which the Court in the recent Constantino decision gave the imprimatur of its approval.
WHEREFORE, the Court of Tax Appeals decision of October 19, 1962 is affirmed. With costs against petitioner.

[G.R. No. 6584. October 16, 1911.]


INCHAUSTI &

CO., plaintiff-appellant, vs.

ELLIS CROMWELL,

Collector

of

Internal

Revenue, defendant-appellee.

Haussermann, Cohn & Fisher, for appellant.


Acting Attorney-General Harvey, for appellee.

SYLLABUS
1. TAXATION; SALE OF HEMP; TAXABLE VALUE. Where it is admitted by the parties that it is customary to
sell hemp in the market baled and not loose, it will be presumed that the price at which hemp is quoted in the market is
the price of baled hemp; and that prices stipulated in contracts for the purchase and sale of hemp include the cost and
expense of baling where the contracts are silent upon that subject.
2. ID.; ID.; ID.; BALING EXPENSE PART OF PRICE. Under such conditions the cost and expense of baling
the hemp is a part of the purchase price and subject to a tax imposed by law on the gross amount of sales of the
dealers, and is not a sum paid for work, labor, and materials performed and furnished by the vendor for the vendee.
3. ID.; ID.; ID.; "PRICE" DEFINED. The word "price" signifies the sum stipulated as the equivalent of the
thing sold and also every incident taken into consideration for the fixing of the price put to the debit of the vendee and
agreed to by him.
4. ID.; ID.; ID.; DISTINCTION BETWEEN SALE AND CONTRACT FOR LABOR AND MATERIALS. The
distinction between a contract of sale and one for work, labor, and materials, is tested by the inquiry whether the thing
transferred is one not in existence and which would never have existed but for the order of the party desiring to acquire
it, or a thing which would have existed and been the subject of sale to some other person, even if the order had not
been given.
5. ID.; ID.; ID.; FUTURE SALES. When a person stipulates for the future sale of articles which he is
habitually making, and which at the time are not made or finished, it is essentially a contract of sale and not a contract
for labor. It is otherwise where the article would not have been made but for the agreement; and where the article
ordered by the purchase is exactly such as the vendor makes and keeps on hand for sale to anyone, and no change or
modification of it is made at the vendee's request, it is a contract of sale even though it be entirely made after and in
consequence of the vendee's order for it.
6. ID.; ID.; ID.; BALING FOR GENERAL MARKET. In this case the baling was done for the general market
and was not something done by the plaintiff as a result of the particular contract between him and his vendee.

DECISION

MORELAND, J p:
This is an appeal by the plaintiff from a judgment of the Court of First Instance of the city of Manila, the Hon.
Simplicio del Rosario presiding, dismissing the complaint upon the merits after trial, without costs.
The facts presented to this court are agreed upon by both parties, consisting, in so far as they are material to a
decision of the case, in the following:
"III. That the plaintiff firm for many years past has been and now is engaged in the business of
buying and selling at wholesale hemp, both for its own account and on commission.
"IV. That it is customary to sell hemp in bales which are made by compressing the loose fiber
by means of presses, covering two sides of the bale with matting, and fastening it by means of strips of
rattan; that the operation of baling hemp is designated among merchants by the word 'prensaje.
"V. That in all sales of hemp by the plaintiff firm, whether for its own account or on commission
for others, the price is quoted to the buyer at so much per picul, no mention being made of baling; but
with the tacit understanding, unless otherwise expressly agreed, that the hemp will be delivered in bales
and that, according to the custom prevailing among hemp merchants and dealers in the Philippine
Islands, a charge, the amount of which depends upon the then prevailing rate, is to be made against the
buyer under the denomination of 'prensaje.' That this charge is made in the same manner in all cases,
even when the operation of baling was performed by the plaintiff or by its principal long before the
contract of sale was made. Two specimens of the ordinary form of account used in these operations are
hereunto appended, marked Exhibits A and B, respectively, and made a part hereof.
"VI. That the amount of the charge made against hemp buyers by the plaintiff firm and other
sellers of hemp under the denomination of 'prensaje' during the period involved in this litigation was
P1.75 per bale; that the average cost of the rattan and matting used on each bale of hemp is fifteen (15)
centavos and that the average total cost of baling hemp is one (1) peso per bale.
"VII. That insurance companies in the Philippine Islands, in estimating the insurable value of
hemp always add to the quoted price of same the charge made by the seller under the denomination of
'prensaje.'
"VIII. That the average weight of a bale of hemp is two (2) piculs (126.5 kilograms).
"IX. That between the first day of January, 1905, and the 31st day of March, 1910, the plaintiff
firm, in accordance with the custom mentioned in paragraph Vhereof, collected and received, under the
denomination of 'prensaje,' from purchasers of hemp sold by the said firm for its own account, in
addition to the price expressly agreed upon for the said hemp, sums aggregating P380,124.35; and
between the 1st day of October, 1908, and the 1st day of March, 1910, collected for the account of the
owners of hemp sold by the plaintiff firm in Manila on commission, and under the said denomination of
'prensaje,' in addition to the price expressly agreed upon for said hemp, sums aggregating P31,080.
"X. That the plaintiff firm in estimating the amount due it as commissions on sales of hemp
made by it for its principals has always based the said amount on the total sum collected from the
purchasers of the hemp, including the charge made in each case under the denomination of 'prensaje.
"XI. That the plaintiff has always paid to the defendant or to his predecessor in the office of the
Collector of Internal Revenue the tax collectible under the provisions of section 139 of Act No.
1189 upon the selling price expressly agreed upon for all hemp sold by the plaintiff firm both for its own
account and on commission, but has not, until compelled to do so as hereinafter stated, paid the said
tax upon sums received from the purchaser of such hemp under the denomination of 'prensaje.'

"XII. That on the 29th day of April, 1910, the defendant, acting in his official capacity as
Collector of Internal Revenue of the Philippine Islands, made demand in writing upon the plaintiff firm for
the payment within the period of five (5) days of the sum of P1,370.68 as a tax of one-third of one per
cent on the sums of money mentioned in Paragraph IX hereof, and which the said defendant claimed to
be entitled to receive, under the provisions of the said section 139 of Act No. 1189, upon the said sums
of money so collected from purchasers of hemp under the denomination of 'prensaje.'
"XIII. That on the 4th day of May, 1910, the plaintiff firm paid to the defendant under protest the
said sum of P1,370.69, and on the same date appealed to the defendant as Collector of Internal
Revenue, against the ruling by which the plaintiff firm was required to make said payment, but defendant
overruled said protest and adversely decided said appeal, and refused and still refuses to return to
plaintiff the said sum of P1,370.68 or any part thereof.
"XIV. Upon the facts above set forth it is contended by the plaintiff that the tax of P1,370.68
assessed by the defendant upon the aggregate sum of said charges made against said purchasers of
hemp by the plaintiff during the period in question, under the denomination of 'prensaje' as aforesaid,
namely, P411,204.35, is illegal upon the ground that the said charge does not constitute a part of the
selling price of the hemp, but is a charge made for the service of baling the hemp, and that the plaintiff
firm is therefore entitled to recover of the defendant the said sum of P1,370.68 paid to him under
protest, together with all interest thereon at the legal rate since its payment. and the costs of this action.
"Upon the facts above stated it is the contention of the defendant that the said charge made
under the denomination of 'prensaje' is in truth and in fact a part of the gross value of the hemp sold and
of its actual selling price, and that therefore the tax imposed by section 139 of Act No. 1189 lawfully
accrued on said sums, that the collection thereof was lawfully and properly made and that therefore the
plaintiff is not entitled to recover back said sum or any part thereof; and that the defendant should have
judgment against plaintiff for his costs."
Under these facts we are of the opinion that the judgment of the court below was right. It is one of the
stipulations in the statement of facts that it is customary to sell hemp in bales, and that the price quoted in the market for
hemp per picul is the price for the hemp baled. The fact is that among large dealers like the plaintiff in this case it is
practically impossible to handle hemp without its being baled, and it is admitted by the statement of facts, as well as
demonstrated by the documentary proof introduced in the case, that if the plaintiff sold a quantity of hemp it would be
the understanding, without words, that such hemp would be delivered in bales, and that the purchase price would
include the cost and expense of baling. In other words, it is the fact as stipulated, as well as it would be the fact of
necessity, that in all dealings in hemp in the general market the selling price consists of the value of the hemp loose
plus the cost and expense of putting it into marketable form. In the sales made by the plaintiff, which are the basis of the
controversy here, there were no services performed by him for his vendee. There was agreement that services should
be performed. Indeed, at the time of such sales it was not known by the vendee whether the hemp was then actually
baled or not. All that he knew and all that concerned him was that the hemp should be delivered to him baled. He did
not ask the plaintiff to perform services for him, nor did the plaintiff agree to do so. The contract was single and
consisted solely in the sale and purchase of hemp. The purchaser contracted for nothing else and the vendor agreed to
deliver nothing else.

The word "price" signifies the sum stipulated as the equivalent of the thing sold and also every incident taken
into consideration for the fixing of the price, put to the debit of the vendee and agreed to by him. It is quite possible that
the plaintiff, in this case in connection with the hemp which he sold, had himself already paid the additional expense of
baling as a part of the purchase price which he paid and that he himself had received the hemp baled from his vendor. It
is quite possible also that such vendor of the plaintiff may have received the same hemp from his vendor in baled form,
that he paid the additional cost of baling as a part of the purchase price which he paid. In such case the plaintiff
performed no service whatever for his vendee, nor did, the plaintiff's vendor perform any service for him.
The distinction between a contract of sale and one for work, labor, and materials is tested by the inquiry
whether the thing transferred is one not in existence and which never would have existed but for the order of the party

desiring to acquire it, or a thing which would have existed and been the subject of sale to some other person. even if the
order had not been given. (Groves vs. Buck, 3 Maule & S., 178; Towers vs. Osborne, 1 Strange, 506; Benjamin on
Sales, 90.) It is clear that in the case at bar the hemp was in existence in baled form before the agreements of sale were
made, or, at least, would have been in existence even if none of the individual sales here in question had been
consummated. It would have been baled, nevertheless, for sale to someone else, since, according to the agreed
statement of facts, it is customary to sell hemp in bales. When a person stipulates for the future sale of articles which he
is habitually making, and which at the time are not made or finished, it is essentially a contract of sale and not a contract
for labor. It is otherwise when the article is made pursuant to agreement. (Lamb vs. Crafts, 12 Met., 353; Smith vs. N. Y.
C. Ry. Co., 4 Keyes, 180; Benjamin on Sales, 98.) Where labor is employed on the materials of the seller he can not
maintain an action for work and labor. (Atkinson vs. Bell, 8 Barn. & C., 277; Lee vs. Griffin, 30 L. J. N. S. Q. B., 252;
Prescott vs. Locke, 51 N. H., 94.) If the article ordered by the purchaser is exactly such as the plaintiff makes and keeps
on hand for sale to anyone, and no change or modification of it is made at the defendant's request, it is a contract of
sale, even though it may be entirely made after, and in consequence of, the defendant's order for it. (Garbutt vs.
Watson, 5 Barn. & Ald., 613; Gardner vs. Joy, 9 Met., 177; Lamb vs. Crafts, 12 Met., 353; Waterman vs. Meiks, 4 Cush.,
497; Clark vs. Nichols, 107 Mass., 547; May vs. Ward, 134 Mass., 127; Abbott vs. Gilchrist, 38 Me., 260; Crocket vs.
Scribner, 64 Me., 105; Pitkin vs. Noyes, 48 N. H., 294; Prescott vs. Locke, 51 N. H., 94; Ellison vs. Brigham, 38 Vt., 64. )
It has been held in Massachusetts that a contract to make is a contract of sale if the article ordered is already
substantially in existence at the time of the order and merely requires some alteration, modification, or adaptation to the
buyer's wishes or purposes. (Mixer vs. Howarth, 21 Pick., 205.) It is also held in that state that a contract for the sale of
an article which the vendor in the ordinary course of his business manufactures or procures for the general market,
whether the same is on hand at the time or not, is a contract for the sale of goods to which the statute of frauds applies.
But if the goods are to be manufactured especially for the purchaser and upon his special order, and not for the general
market, the case is not within the statute. (Goddard vs. Binney, 115 Mass., 450.)
It is clear to our minds that in the case at bar the baling was performed for the general market and was not
something done by plaintiff which was a result of any peculiar wording of the particular contract between him and his
vendee. It is undoubted that the plaintiff prepared his hemp for the general market. This would be necessary One who
exposes goods for sale in the market must have them in marketable form. The hemp in question would not have been in
that condition if it had not been baled. The baling, therefore, was nothing peculiar to the contract between the plaintiff
and his vendee. It was precisely the same contract that was made by every other seller of hemp, engaged as was the
plaintiff, and resulted simply in the transfer of title to goods already prepared for the general market. The method of
bookkeeping and form of the account rendered is not controlling as to the nature of the contract made. It is conceded in
the case that a separate entry and charge would have been made for the baling even if the plaintiff had not been the
one who baled the hemp but, instead, had received it already baled from his vendor. This indicates of necessity that the
mere fact of entering a separate item for the baling of the hemp is formal rather than essential and in no sense indicates
in this case the real transaction between the parties. It is indisputable that, if the plaintiff had bought the hemp in
question already baled, and that that was the hemp the sale of which formed the subject of this controversy, then the
plaintiff would have performed no service for his vendee and could not, therefore, lawfully charge for the rendition of
such service. It is, nevertheless, admitted that in spite of that fact he would still have made the double entry in his
invoice of sale to such vendee. This demonstrates the nature of the transaction and discloses, as we have already said,
that the entry of a separate charge for baling does not accurately describe the transaction between the parties.
Section 139 [Act No. 1189] of the Internal Revenue Law provides that:
"There shall be paid by each merchant and manufacturer a tax at the rate of one-third of one
per centum on the gross value in money of all goods, wares and merchandise sold, bartered or
exchanged in the Philippine Islands, and that this tax shall be assessed on the actual selling price at
which every such merchant or manufacturer disposes of his commodities."
The operation of baling undoubtedly augments the value of the goods. We agree that there can be no question
that, if the value of the hemp were not augmented to the amount of P1.75 per bale by said operation, the purchaser
would not pay that sum. If one buys a bale of hemp at a stipulated price of P20, well knowing that there is an agreement
on his part, express or implied, to pay an additional amount of P1.75 for that bale, he considers the bale of hemp worth
P21.75. It is agreed, as we have before stated, that hemp is sold in bales. Therefore, baling is performed before the

sale. The purchaser of hemp owes to the seller nothing whatever by reason of their contract except the value of the
hemp delivered. That value, that sum which the purchaser pays to the vendee, is the true selling price of the hemp, and
every item which enters into such price is a part of such selling price. By force of the custom prevailing among hemp
dealers in the Philippine Islands, a purchaser of hemp in the market, unless he expressly stipulates that it shall be
delivered to him in loose form, obligates himself to purchase and pay for baled hemp. Whether or not such agreement is
express or implied, whether it is actual or tacit, it has the same force. After such an agreement has once been made by
the purchaser, he has no right to insist thereafter that the seller shall furnish him with unbaled hemp. It is undoubted that
the vendees, in the sales referred to in the case at bar, would have had no right, after having made their contracts, to
insist on the delivery of loose hemp with the purpose in view themselves to perform the baling and thus save 75
centavos per bale. It is unquestioned that the seller, the plaintiff, would have stood upon his original contract of sale, that
is, the obligation to deliver baled hemp, and would have forced his vendees to accept baled hemp, he himself retaining
among his own profits those which accrued from the process of baling.
We are of the opinion that the judgment appealed from must be affirmed, without special finding as to costs,
and it is so ordered.
Torres, Mapa, Johnson and Carson, JJ., concur.
||| (Inchausti & Co. v. Cromwell, G.R. No. 6584, [October 16, 1911], 20 PHIL 345-354)

[G.R. No. 153033. June 23, 2005.]

DEL MONTE PHILIPPINES, INC., petitioner, vs. NAPOLEON N. ARAGONES, respondent.

CARPIO MORALES, J p:
The decision in the present Petition for Review on Certiorari hinges on the nature of the contract denominated "Supply
Agreement" 1 which was forged between Dynablock Enterprises, represented by its Manager herein respondent Napoleon
N. Aragones (Aragones) and Mega-Engineering Services in joint venture with WAFF Construction System Corporation
(MEGA-WAFF) whether it was one of sale or for a piece of work.
On September 18, 1988, herein petitioner Del Monte Philippines Inc. (DMPI) entered into an "Agreement" 2 with MEGAWAFF, represented by "Managing Principal" Edilberto Garcia (Garcia), whereby the latter undertook "the supply and
installation of modular pavement" at DMPI's condiments warehouse at Cagayan de Oro City within 60 calendar days from
signing of the agreement.
To source its supply of concrete blocks to be installed on the pavement of the DMPI warehouse, MEGA-WAFF, as
CONTRACTOR represented by Garcia, entered into a "Supply Agreement" with Dynablock Enterprises, represented by
herein respondent Aragones, as SUPPLIER, under the following terms:
1. ITEMS TO BE SUPPLIED
The SUPPLIER at its own expense shall provide the CONTRACTOR with labor and all materials,
equipment, tools and supplies necessary and incident thereto, the required concrete blocks at the
contractor's specified casting site, all in accordance with the terms and conditions of this agreement,
as well as the requirements of the project specifications and provisions with respect to the
fabrication of concrete blocks.
2. PRICE
The CONTRACTOR will pay the supplier in consideration for the full and total performance of the above
undertaking, inclusive of all applicable taxes, the unit price of P7.00 per supplied and accepted piece.
This price is based on the assumption that the cost per bag of premium cement is P54.00 and
aggregate at P95.00 per cu. m. Any increase of the above raw materials shall be to the account of the
contractor. All taxes shall be for the account of the contractor. TacESD
3. PLANT/EQUIPMENT
3.1 The machines for the fabrication/casting of the concrete blocks, including all necessary
equipment and accessories, shall be provided by the SUPPLIER. The machines and
equipment shall be mobilized and made operational at the specified casting
location/stockpiling yard designated and provided by the CONTRACTOR.
3.2 The SUPPLIER shall ensure that all plant facilities/equipment must, at all times,
be accessible for inspection by the representatives of the CONTRACTOR.
3.3 The SUPPLIER shall ensure that the plant/casting machines actual operating capacities
shall not be lower than 75,000 pieces every month. If at any time within the life of this
agreement the plant/casting machines are proven to be operating below the required
minimum capacity as aforesaid, the SUPPLIER shall be obliged to take the necessary
actions to upgrade the plant/casting machines and/or make the necessary
rehabilitation to increase the capacity to the required level.
4. QUALITY OF MATERIALS
4.1 The SUPPLIER guarantees that all materials supplied to the CONTRACTOR shall meet the
approved specifications (Attached Annex "A") at 5,000 pci.
In this connection, the CONTRACTOR shall assign an inspector at the casting site to ensure
that all items supplied shall conform with the approved standards.

4.2 The CONTRACTOR may reject any finished product or materials which do not pass the
approved standards.
4.3 There shall be a system of sampling the output of the plant and/or each casting machine
for testing in accordance with the quality standards specified. Result of such sampling
tests shall be the basis for acceptance or rejection of the finished materials.
4.4 Where the CONTRACTOR has provided materials to the SUPPLIER to be incorporated
into the SUPPLIER's production, as in the case of cement and aggregates, the cost of
such materials which becomes part of the rejected products due to faulty
batching/mixing/curing shall be for the account of the SUPPLIER.
5. MATERIALS AND OTHER PROVISIONS SUPPLIED BY THE CONTRACTOR
5.1 All the materials are for the account of the SUPPLIER. The CONTRACTOR shall,
however, provide all the cement and aggregates requirement for the fabrication
of the concrete blocks, in which the corresponding cost shall be deducted from the
periodical proceeds due to the SUPPLIER.
5.2 The CONTRACTOR shall provide and make available to the SUPPLIER the following
provisions/facilities free of charge:
a) Casting/Fabrication Area
b) Stockpile Area
c) Warehouse for Cement
d) An all-weather working shed for workers
e) Night Watchers IaHSCc
5.3 The CONTRACTOR shall arrange for the installation of electrical and water facilities for the
work in which the cost of electricity and water actually consumed shall be borne by
the SUPPLIER.
5.4 The SUPPLIER shall be responsible for all materials already turned over by the
CONTRACTOR at the casting area. The responsibility, however, of the SUPPLIER on
the finished products ceases upon loading of the same to the CONTRACTOR's truck
on way to the project site.
6. OBLIGATIONS OF SUPPLIER
6.1 To fabricate and provide the required block machines in such number adequate to
cope up with time schedule.
6.2 To provide concrete mixers: one (1) unit of two-bagger, and two (2) units of one-bagger.
6.3 To provide drying racks, measuring boxes, wheel borrows and other necessary hand
tools.
6.4 To supervise and provide the required manpower for the operation and production of
concrete blocks.
6.5 To undertake the following:
a) mixing and formulation of proper mix.
b) to consolidate, form and compress the blocks.
c) to unload the formed blocks into the drying racks.
d) after initial setting of blocks, to unload and arrange them to wooden pallets.

e) curing of blocks as per approved standards.


7. OTHER OBLIGATIONS OF CONTRACTOR
7.1 To provide tarpaulin or canvas or plastic sheets to cover blocks during the seasoning stage.
7.2 To provide forklift and wooden pallets.
8. EXCLUSIVITY OF PRODUCTION
8.1 Effective upon the execution of this agreement, the SUPPLIER binds itself to devote the
entire plant/casting machines and its accessories for the CONTRACTOR's
exclusive use and full operation and production of the required concrete blocks for
the intended project.
8.2 The SUPPLIER or his agents or representatives shall not, directly or indirectly, enter into
any contract, agreement, concessions or transactions of whatever nature or kind with
the project owner or of its representative which will affect the rights, interest or
participation of the CONTRACTOR in regard to the execution and accomplishment of
the project.
8.3 In case of violation of this exclusivity clause, utmost fidelity and good faith being of the
essence, the CONTRACTOR shall have the right to demand reasonable amount of
damages or terminate this agreement upon due notice.
9. CONDITIONS OF PAYMENT
9.1 Upon mobilization of the casting machines, equipments accessories and making some
operational at the casting area by the SUPPLIER, the CONTRACTOR shall advance
to the supplier a downpayment or mobilization fund of TEN THOUSAND (P10,000.00)
PESOS per machine. Said mobilization fee shall be deducted from the proceeds of
the SUPPLIER at two (2) equal installments beginning at the first billing. THEDCA
9.2 The SUPPLIER shall present its billing every fifteen days based on the below indicated
payment schedule:
a) Billing from 1st/day/month to 15th day payable after fifteen days from the date the
billing is submitted.
b) Billing from the 16th day of the month to the 31st day of the month, payable after
fifteen days from the date the billing is submitted.
10. EFFECTIVITY OF CONTRACT
This agreement shall be co-terminus with the terms of the contract for the project and/or upon
completion of all requirements therefor; PROVIDED, However, that if for some reason or another the
production of the concrete blocks is temporarily suspended, this agreement shall remain in force and
effective for a period of fifteen (15) days from the date of the cessation of production. In case the said
grace period expires without the production having resumed, the CONTRACTOR shall be obliged to pay
reasonable compensation for the period of suspension counted from the expiration of the said grace
period.
11. PERFORMANCE BOND
The SUPPLIER shall post a SURETY/PERFORMANCE BOND in such sums which may be deemed
adequate to secure its faithful compliance of the terms and conditions of this agreement.
12. PENALTY CLAUSE
In the event the SUPPLIER fails to meet the requirements demanded in this agreement or when the
SUPPLIER is in delay in the performance of its obligation to the prejudice of the CONTRACTOR, the

SUPPLIER shall answer for the corresponding damages equivalent to one-tenth (1/10) of the rated
monthly production capacity. (Emphasis and underscoring supplied). 3
Aragones thereupon started assembling the machines for the fabrication/casting of the concrete blocks which MEGA-WAFF
specified to be hexagonal shaped. MEGA-WAFF, through Garcia, later directed Aragones to instead fabricate machines
for S shaped blocks. DaCEIc
As stated in the "Agreement" between DMPI and MEGA-WAFF, the deadline for the installation of the pavement of the
warehouse was November 18, 1988, but it was not met. As extended, the installation was finished on or about February 28,
1989, but MEGA-WAFF was, in accordance with its agreement with DMPI, penalized for the delay, albeit at a reduced
amount.
Aragones, having in the meantime gotten wind of MEGA-WAFF & DMPI's "Agreement," more particularly the imposition of a
penalty by DMPI for the delay in the completion of the installation of the warehouse pavement, appealed to DMPI, by letter of
March 4, 1989, 4 for leniency in the imposition of the penalty which "would affect [him] also although [he] was not a direct
party to the contract," he inviting attention to the "intricacy and enormity of the job involved."

Aragones later failed to collect from MEGA-WAFF the full payment of the concrete blocks. He thus sent DMPI a letter
dated March 10, 1989, 5 received by the latter on March 13, 1989, 6 advising it of MEGA-WAFF's unpaid obligation and
requesting it to earmark and withhold the amount of P188,652.65 "from [MEGA-WAFF's] billing" to be paid directly to him
"[l]est Garcia collects and fails to pay [him]."
DMPI, in the meantime, verbally advised Aragones to secure a court order directing it to withhold payment of the amount
due MEGA-WAFF for, in the absence of such court order, DMPI was under its agreement with MEGA-WAFF obliged to
release full payment within 30 days from acceptance of the completed work.
It appears that Aragones reiterated his request to DMPI for direct payment to him, by letter of March 28, 1989. 7 This was
followed by another letter dated April 6, 19898 which was received on April 8, 1989 9 by DMPI, copy of which it referred to
Garcia, by letter of April 27, 1989, 10 for his comment.
By letter of May 3, 1989 11 addressed to DMPI, Garcia, commenting on Aragones' April 6, 1989 letter, stated:
xxx xxx xxx
If there is somebody who have (sic) justifiable ground to complain, it is MEGA-WAFF against
Atty. Aragones for all the miseries and embarrassment we had suffered due to the factors attributable to
Atty. Aragones Dynablock Enterprises.
For proper evaluation of things and to give both parties a fair chance, we enclosed (sic) pertinent papers
for your perusal.
As contractor and businessman, it is our firm policy not to take advantage of other people and definitely
not to renegade (sic) from commitments/obligations.
We are willing to pay Atty. Aragones but based on the actual accomplishment and amount only due to
him as per reconciliation furnished to him. (attached)
We sincerely hope that the facts we had presented will suffice, and please accept our apology for
whatever inconvenience it has caused you and we pray that this matter of payments be settled soon for
the general benefit of all concerned.
xxx xxx xxx (Underscoring supplied).
It turned out that DMPI had, on or about April 6, 1989, released to MEGA-WAFF a check dated April 4, 1989 in the amount
of P157,863.77 representing DMPI's balance of its obligation to MEGA-WAFF.

Aragones was thus prompted to file on May 25, 1989 a complaint 12 for sum of money (P188,652.65) with damages against
Garcia and/or MEGA-WAFF and DMPI before the Regional Trial Court (RTC) of Lanao del Norte which was raffled to Branch
5 thereof. SEAHID
Aragones impleaded DMPI on the strength of Articles 1729 and 1467 of the Civil Code, he contending that it was liable to
him who put labor upon or furnished materials for a piece of work.
By his July 14, 1989 Answer, 13 Garcia, without disputing the amount being collected by Aragones, justified his "refusal to
satisfy [Aragones'] demand" by claiming thatAragones defaulted in his obligation under the "Supply Agreement".
DMPI, by its Answer 14 of June 25, 1989, pleaded that Aragones had no cause of action against it as it had no privity of
contract with him; that it had already paid MEGA-WAFF the full amount due it; and that it had not committed any actionable
wrong against Aragones.
Aragones later filed an Amended Complaint, 15 with leave of court, "to cure certain formal defects in the original complaint
as to the designation of parties . . ."
DMPI also later filed a Motion for Leave to File an Amended Answer with Cross-Claim against Garcia and WAFF President
Francisco Castro 16 which the trial court granted. In the Amended Answer with Cross Claim, 17 DMPI alleged, inter alia, that
"[i]n the event [Aragones] succeeds in obtaining a judgment [against] DMPI, that said judgment should be charged to and
paid by the cross-defendants who have collected the full contract price of the Agreement wherein [Aragones] claims the
rights of a subcontractor, plus consequential damages" (underscoring in the original).
The trial court, upon the following issues:
a. Whether or not [Aragones] has still a collectible amount of P188,652.65 from defendants Garcia and
Castro;
b. Whether or not defendant DMPI may also be held accountable for this unpaid obligation of defendant
Garcia/MEGA-WAFF;
c. Whether or not the remaining balance of defendant DMPI account payable is P188,652.65 insisted by
defendant Garcia/MEGA-WAFF or only P157,863.77 insisted by defendant DMPI;
d. Whether or not the parties are entitled to damages pleaded;
e. Whether or not there was delay in the performance of the respective obligations of either party or
both;
f. Assuming that defendant DMPI is liable to plaintiff, whether or not cross defendant Garcia/MEGAWAFF shall be liable to DMPI for reimbursement. 18
found for the plaintiff Aragones in light of the following considerations:
Those who put their labor upon or furnish materials for a piece of work undertaken by the contractor
have an action against the owner up to the amount owing from the latter to the contractor at the time the
claim is made. However, the following shall not prejudice the laborers, employees and furnishers of
materials:
(1) Payments made by the owner of the contractor before they are due;
(2) Renunciation by the contractor of any amount due him from the owner.
This article is subject to the provisions of special laws (1597a)
(Article 1729, New Civil Code, [emphasis supplied]).
In interpreting the foregoing provision, the Supreme Court made the following pertinent pronouncement:
"Article 1729 is promulgated to protect the laborers and the materialmen from being taken
advantage of by unscrupulous contractors and from possible connivance between owners
and contractors." (Velasco vs. C.A. 95 Phils. (sic) (616-641). DIEcHa

"The legal issue that arises is whether or not GSIS is liable to the petitioners for the cost of the
materials and labor furnished by them in construction of the 63 houses now owned by the
GSIS and for the construction of which no payment has been made on the balance due to
petitioners. Our considered view is and we so hold that even in equity alone, GSIS should pay
the petitioners, without prejudice to its securing indemnity from Laigo Realty Corp." (Velaso vs.
C.A., 95 Phils. (sic) 616-641 [emphasis and underscoring supplied]).
Moreover, anent this matter another decisional rule, says:
"Although there was no privity of contract between plaintiff and defendant Joven, Inc., there is
sufficient evidence showing that he had really supplied stones and sands to said defendant
and also removed dirt and soil from its construction site. And it is this main point which calls for
resolution in the light of the provisions of Art. 1729 of the New Civil Code, to determine whether
or not defendant corporation is liable for materials supplied and services rendered by the
plaintiff. It is quite clear that the owner of the building, Joven Inc. is liable for materials and
labor furnished to the contractor"up to the amount owing from the latter to the contractor" and
to enforce such liability, the law allows the person furnishing labor or materials to bring
his right of action directly against the owner." (Flores vs. Ruelo, CA 52 OG 850, [emphasis
and underscoring supplied]).
Of course, while defendant DMPI is indeed directly liable to pay plaintiff the cost of the construction
material (modular paving blocks) sought to be collected, this defendant has also a right of recourse
against cross defendant Garcia/MEGA-WAFF for reimbursement of whatever amount it will be required
here to pay plaintiff, otherwise it would result in making defendant Garcia/MEGA-WAFF enrich itself at
the expense of defendant DMPI. Additionally since the evidence on record shows that plaintiff was
compelled to litigate this matter if only to collect a just and demandable obligation, the refusal of these
defendants to pay their obligation upon demand could not be justified in law, thus both defendants
should be condemned to pay exemplary damages in the amount of P20,000.00 each and attorney's
fees in the amount of P10,000.00 each, including the cost of this suit. (Underscoring supplied) 19
The trial court accordingly rendered judgment in favor of Aragones by decision 20 of September 11, 1992, the dispositive
portion of which reads:
WHEREFORE, the foregoing premises considered, the Court finds that there is ample reason in law
and preponderant evidence on record to sustain the cause of action of plaintiff asserted against both
defendants, thus judgment is now rendered granting the following relief:
a. That the defendants Garcia/MEGA-WAFF and DMPI shall be liable to jointly and severally
pay plaintiff the unpaid cost of the modular paving blocks construction material which
he delivered to defendant DMPI priced at P188,652.65 and in the event that
defendant DMPI will be made to pay the full amount of this particular obligation, the
defendant Garcia MEGA-WAFF must reimburse said defendant such amount;
b. That this unpaid obligation sought to be collected must bear legal interest of 12% per annum
from the time there was an extrajudicial demand made by plaintiff last March 01,
1989; and
c. Lastly, these defendants are condemned that each pay plaintiff P20,000.00 for exemplary
damages and P10,000.00 for attorney's fees, including the cost of this suit.
SO ORDERED. (Emphasis and underscoring supplied). 21
On appeal to the Court of Appeals (CA) by only DMPI, upon the following assigned errors:
I
THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF DID NOT INCUR DELAY AND VIOLATE
ITS SUPPLY AGREEMENT WITH DEFENDANT MEGA-WAFF;

II
THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANT MEGA-WAFF'S LIABILITY TO
PLAINTIFF IS P188,652.65 BECAUSE AS STIPULATED IN THE SUPPLY AGREEMENT, THE
CEMENT AND AGGREGATES USED IN THE MANUFACTURE OF THE BLOCKS WERE ADVANCED
BY MEGA-WAFF, THE COST OF WHICH WILL BE DEDUCED FROM PLAINTIFF'S BILLINGS;

III.
THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANT DMPI IS ALSO LIABLE TO
PLAINTIFF FOR ANY LIABILITY OF MEGA-WAFF UNDER THE SUPPLY AGREEMENT; cDAEIH
IV.
ASSUMING EX GRATIA ARGUMENTI THAT DMPI IS LIABLE TO PLAINTIFF'S AID LIABILITY
CANNOT EXCEED THE SUM OF P157,863.77 BALANCE OF THE CONTRACT PRICE BETWEEN
DMPI AND MEGA-WAFF, LESS AGREED PENALTY FOR LATE DELIVERY AS LIQUIDATED
DAMAGES;
V.
THE TRIAL COURT ERRED IN HOLDING DEFENDANT DMPI LIABLE TO PLAINTIFF FOR
ATTORNEY'S FEES AND COSTS OF COLLECTION CONSIDERING THAT IT HAD THE RIGHT TO
RESIST PAYMENT BECAUSE IT HAS NO PRIVITY OF CONTRACT BETWEEN PLAINTIFF AND
DEFENDANT MEGA-WAFF, (Underscoring supplied), 22
the CA, by decision of September 19, 2001 23 subject of the petition at bar, affirmed the trial court's decision in this
wise:
At this juncture it is well to note that the Supply Agreement was in the nature of a contract for a piece of
work. The distinction between a contract of sale and one for work, labor and materials is tested by
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 but has been the subject
of sale to some other persons even if the order had not been given. If the article ordered by the
purchaser is exactly such as the seller makes and keeps on hand for sale to anyone, and no change or
modification of it is made at purchaser's request, it is a contract of sale even though it may be entirely
made after, and in consequence of the purchaser's order for it. [Commissioner of Internal Revenue vs.
Engineering Equipment and Supply Company, G.R. No. L-27044, June 30, 1975]
In the case at bench, the modular paving blocks are not exactly what the plaintiff-appellee makes and
keeps on hand for sale to anyone, but with a modification that the same be "S" in shape. Hence, the
agreement falls within the ambit of Article 1467 making Article 1729 likewise applicable in the instant
case.
As regard the issue of privity of contracts, We need to add only that Article 1311 of the New Civil Code
which DMPI invokes is not applicable where the situation contemplated in Article 1729 obtains. The
intention of the latter provision is to protect the laborers and the materialmen from being taken
advantage of by unscrupulous contractors and from possible connivance between owners and
contractors. Thus, a constructive vinculum or contractual privity is created by this provision, by way of
exception to the principle underlying Article 1311 between the owner, on the one hand, and those who
furnish labor and/or materials, on the other. [Velasco vs. Court of Appeals, G.R. No. L-47544, January
28, 1980]
As a matter of fact, insofar as the laborers are concerned, by a special law, Act no. 3959, otherwise
known as "An Act making it obligatory for any person, company, firm or corporation owning any work of
any kind executed by contract to require the contractor to furnish a bond guaranteeing the payment of

the laborers." they are given added protection by requiring contractors to file bonds guaranteeing
payment to them.
It is true that defendant-appellant had already fully paid its obligation to defendant Garcia however, the
former's payment to the latter does not extinguish its legal obligation to plaintiff-appellee because such
payment was irregular. The former should have taken care not to pay to such contractor the full amount
which he is entitled to receive by virtue of the contract, until he shall have shown that he first paid the
wages of the laborer employed in said work, by means of an affidavit made and subscribed by said
contractor before a notary public or other officer authorized by law to administer oaths. There is no
showing that defendant appellant DMPI, as owner of the building, complied with this requirement laid
down in Act No. 3959. Hence, under Section 2 of said law, said defendant-appellant is responsible,
jointly and severally with the general contractor, for the payment to plaintiff-appellee as subcontractor. CcAITa
In this connection, while, indeed, Article 1729 refers to the laborers and materialmen themselves, under
the peculiar circumstances of this case, it is but fair and just that plaintiff-appellee be deemed as suing
for the reimbursement of what they have already paid the laborers and materialmen, as otherwise he
would be unduly prejudiced while either defendant-appellant DMPI or defendant Garcia would enrich
themselves at plaintiff-appellee's expense.
Be that as it may, We so hold that plaintiff-appellee has a lawful claim against defendant-appellant
DMPI, owner of the constructed warehouse since it disregarded the notice of claim of plaintiff-appellee,
at a time when the amounts owing from defendant-appellant DMPI to defendant GARCIA were more
than sufficient to pay for plaintiff-appellee's claim. The least that defendant-appellant should have done
was to withhold payment of the balance still owing to defendant Garcia as until the claim of plaintiffappellee was clarified. (Italics in the original; emphasis and underscoring supplied). 24
Its Motion for Reconsideration having been denied by the CA, DMPI (hereinafter referred to as petitioner) lodged the present
Petition for Review on Certiorari, faulting the CA:
I.
. . . IN FINDING THAT DMPI WAS LIABLE TO RESPONDENT ARAGONES FOR THE UNPAID PRICE
OF THE CONCRETE PAVING BLOCKS OWED BY MEGA-WAFF TO THE LATTER.
A. . . . IN FINDING THAT THE CONTRACT FOR THE SUPPLY OF THE CONCRETE PAVING BLOCKS
WAS NOT A SALE BUT ONE FOR A PIECE OF WORK.
B. . . . IN HOLDING DMPI LIABLE BASED UPON THE PROVISIONS OF ARTICLE 1729 OF THE
CIVIL CODE AND ACT 3959, WHICH ARE INAPPLICABLE.
II.
. . . IN FAILING TO AWARD MORAL DAMAGES, ATTORNEY'S FEES, AND LITIGATION EXPENSES
TO DMPI ON ITS COUNTERCLAIM. 25
As reflected above, only petitioner appealed the trial court's decision. MEGA-WAFF did not appeal. The decision as to it then
is final and executory.
Petitioner, in the main, contends that while the CA correctly stated the test in determining whether a transfer is a sale or one
for a piece of work, it failed to properly apply the same.
Applying the "nature of the object" test, petitioner insists that the concrete block to be produced by Aragones under the
"Supply Agreement" represented by Garcia clearly shows that the contract was one of sale, advancing the following reasons:
1.4.1 First, the concrete paving blocks were . . . capable of being mass-produced
1.4.2 Second, save for the shape, there was here no consideration of any special needs or
requirements of DMPI taken into account in the design or manufacture of the concrete paving blocks. 26

Petitioner cites the following ruling in Commissioner of Internal Revenue v. Arnoldus Carpentry Shop, Inc.: 27
. . . As can be clearly seen from the wordings of Art. 1467, what determines whether the contract is one
of work or of sale is whether the thing has been "manufactured specially for the customer and upon his
special order." Thus, if the thing is specially done on the order of another, this is a contract for a piece of
work. If, on the other hand, the thing is manufactured or procured for the general market in the
ordinary course of one's business, it is a contract of sale." (Italics and emphasis in the original;
underscoring supplied), 28
and argues that "given habituality of business and the ability to mass-produce the article ordered, that customers
requires (sic) certain specifications is of no moment, the transaction remains one of sale."
Petitioner further cites, among other authorities, the following ruling in Celestino Co. v. Collector of Internal Revenue: 29
. . . The important thing to remember is that Celestino & Co. 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 of
such materials-moulding, frames, panels as it ordinarily manufactured or was in a position habitually
to manufacture. cCTAIE
xxx xxx xxx
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 of
sash, mouldings, panels it would not accept the order and no sale is made. If they do, the
transaction would be no different from purchaser of manufactured goods held in stock for sale; they are
bought because they meet 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, 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.
xxx xxx xxx
. . . Such new form does not divest the Oriental Sash Factory of its character as manufacturer.
Neither does it take the transaction out of the category of sales under Article 1467 above quoted,
because although the Factory does not, in the ordinary course of its business, manufacture and
keep on stock doors of the kind sold to Teodoro, it could and/or probably had in stock the sash,
mouldings and panels it used therefor (some of them at least). (Emphasis in the original;
underscoring supplied).
Petitioner concludes that as the "Supply Agreement" between Aragones and MEGA-WAFF was one of sale to which it
(petitioner) was not privy, it cannot be held liable for any obligation arising therefrom.

Dodging liability for the damages ("exemplary and . . . attorney's fees including the cost of this suit") awarded to Aragones,
petitioner claims that it was in fact the one which was injured by Aragones' filing in bad faith of a complaint bereft of cause of
action and "at best, [one] barred by full payment of the amount due to MEGA-WAFF," on account of which it is entitled to
moral damages in the amount of P50,000.00 pursuant to Article 2217 of the Civil Code, and to attorney's fees and expenses
of litigation in the amount of at least P30,000.00 plus P2,500.00 per hearing pursuant to Article 2208 of the Civil Code.
The petition fails.

The authorities petitioner cited in fact show that the nature of the "Supply Agreement" between Aragones and MEGA-WAFF
was one for a piece of work.
Contrary to petitioner's claim that "save for the shape, there was no consideration of any special needs or requirements of
DMPI taken into account in the design or manufacture of the concrete paving blocks," the "Supply Agreement" is replete with
specifications, terms or conditions showing that it was one for a piece of work.
As reflected in the highlighted and underscored above-quoted provisions of the "Supply Agreement," as well as other
evidence on record, the machines Aragones was obliged to fabricate were those for casting the concrete blocks specified by
Garcia. Aragones did not have those kind of machines in his usual business, hence, the special order.
While initially Garcia specified that the machines to be fabricated should be for hexagon shaped blocks, he later
asked Aragones to instead fabricate machines for casting S shaped blocks.
In accordance with the "Supply Agreement," Garcia furnished the cement and aggregates for the fabrication of the blocks
and Aragones fabricated three (3) machines for S shaped blocks which were delivered at the casting site on different dates.
And the "entire plant/casting machines and . . . accessories" were, as dictated under the "Supply Agreement," devoted
by Aragones "for [MEGA-WAFF]'s exclusive use. HCTEDa
There can be no gainsaying that the specifications/conditions in the "Supply Agreement" and the admitted subsequent
directive of Garcia for Aragones to fabricate machines for casting S shaped, instead of hexagon shaped blocks, show that
the concrete blocks were "manufactured specifically for, and upon the special order" of Garcia.
That Garcia supplied the cement and aggregates and that the entire made-to-order casting machines and accessories used
in the manufacture of those unusual shaped blocks were agreed upon to be devoted only "for the exclusive use" of MEGAWAFF should belie petitioner's contention that the concrete blocks were mass-produced and catered to the general market
in the ordinary course of Aragones' business.
Under Art. 1467 then of the Civil Code which provides:
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. (Emphasis and underscoring supplied),
the "Supply Agreement" was decidedly a contract for a piece of work.
Following Art. 1729 of the Civil Code which provides:
ART. 1729. Those who put their labor upon or furnish materials for a piece of work undertaken by the
contractor have an action against the owner up to the amount owing from the latter to the contractor at
the time the claim is made. . . .
xxx xxx xxx (Underscoring supplied),
Aragones having specially fabricated three casting machines and furnished some materials for the production of the
concrete blocks specially ordered and specified by MEGA-WAFF which were to be and indeed they were for
the exclusive use of MEGA-WAFF, he has a cause of action upon petitioner up to the amount it owed MEGA-WAFF at
the time Aragones made his claim to petitioner.
As Velasco v. CA 30 explains, the intention of Art. 1729 is
to protect the laborers and materialmen from being taken advantage of by unscrupulous contractors and
from possible connivance between owners and contractors. Thus, a constructive vinculum or
contractual privity is created by this provision, by way of exception to the principle underlying Article
1311 between the owner, on the one hand, and those who furnish labor and/or materials, on the other.
In fine, a constructive vinculum or contractual privity was created between petitioner and Aragones.

Respecting petitioner's disclaimer of liability for damages and its claim for moral damages, attorney's fees and expenses of
litigation, the trial court's disposition thereof, to wit:
. . . since the evidence on record shows that [Aragones] was compelled to litigate this matter if only to
collect a just and demandable obligation, the refusal of [DMPI and MEGA-WAFF] to pay their obligation
upon demand could not be justified by law, thus both . . . should be condemned to pay exemplary
damages in the amount of P20,000.00 each and attorney's fees in the amount of P10,000.00 each
including . . . costs of this suit" (underscoring supplied),
merits this Court's approval.
Why should not petitioner be liable for damages? Aragones' request, based on a provision of law, to petitioner for it to pay
directly to him his account receivable from MEGA-WAFF/Garcia out of petitioner's account payable to MEGA-WAFF was
made before petitioner's obligation to it was due. Yet petitioner settled such obligation to MEGA-WAFF on or about April 6,
1989 when it released to it its check-payment. For petitioner to harp on its undertaking under its "Agreement" with MEGAWAFF to pay its full obligation thereunder within 30 days from complete installation of the pavement by MEGA-WAFF unless
a court injunction could be produced by Aragones is too shallow, under the facts and circumstances surrounding the case, to
merit consideration. SHTEaA
Petitioner's referral for comment of Garcia, by letter of April 27, 1989, on Aragones' April 6, 1989 reiterative letter for the
withholding of the release of so much amount to MEGA-WAFF even after it (petitioner) had already released on or about
April 6, 1989 its check-full payment to MEGA-WAFF reflects a futile attempt to cover-up the apparent "connivance" between
it and contractor MEGA-WAFF to the prejudice of Aragones, leaving him no option but to litigate.
As for the assailed citation by the appellate court of Act No. 3959 (which requires a person or firm owning any work of any
kind executed by contract to put up a bond guaranteeing the payment of the laborers) as additional justification to hold
petitioner liable to Aragones, indeed, said Act had been repealed in 1974 by P.D. No. 442(The Labor Code of the
Philippines).
WHEREFORE, in light of the foregoing discussions, the petition is hereby DENIED.
Costs against petitioner.
SO ORDERED.
Panganiban, Sandoval-Gutierrez, Corona and Garcia, JJ., concur.
||| (Del Monte Phil. Inc. v. Aragones, G.R. No. 153033, [June 23, 2005], 499 PHIL 748-769)

[G.R. No. L-8506. August 31, 1956.]


CELESTINO CO & COMPANY, petitioner, vs. COLLECTOR OF INTERNAL REVENUE, respondent.

Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres and Solicitor
Federico V. Sian for respondent.

SYLLABUS
1. MANUFACTURER;

FILING

ORDERS

ACCORDING

TO

SPECIFICATIONS

DOES

NOT

ALTER

CHARACTER OF ESTABLISHMENT. A factory which habitually makes sash, windows and doors, and sells the
goods to the public is a manufacturer. The fact that the windows and doors are made by it only when customers place
their orders and according to such form or combination as suit the fancy of the purchasers does not alter the
nature of the establishment.

DECISION

BENGZON, J p:
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 NationalRevenue Code
imposing taxes on sales 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 for doors
and windows 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, furnitures, etc. used season-dried and
kiln-dried lumber, of the best quality workmanship' solely for the purpose of supplying the needs for
doors, windows and sash of its special and limited customers. One will 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 ready-made
doors and windows of standard sizes for the average home. Moreover, as shown from the
investigation of petitioner's books 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 upon special order of its
customers,

that

does

not

make

it

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 one under which the business enterprise of petitioner could
appropriately

fall.

It

would

require

stretch of the

law

and

much

effort

to

make

the

business of manufacturing sash, doors and windows upon special order of customers fall under the
category of 'road, building, navigation, artesian well, water works and other construction work
contractors; filling contractors' as enumerated in the section being invoked by petitioner's counsel.
Construction work contractors are those who alter or repair buildings, structures, streets, highways,
sewers, street railways, railroads, logging roads, electric, steam or water plants telegraph and telephone
plants and lines, 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 of taxing petitioner as a contractor under section
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 since 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 NationalInternal 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 ofthe
National Internal Revenue Code as a sale of articles."
There was a strong dissent; but upon careful consideration of the whole matter we are inclined 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 materials-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, manufactures
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 onlyconfines 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 of sash, mouldings or 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 as construction work in common parlance. 2
Appellant invokes Article 1467 of the New Civil Code to bolster its contention that in filing orders for windows
and doors according to specifications, it did not sell, but merely contracted for particular pieces of work or "merely sold
its services".

Said article reads as follows:


"A contract for the delivery at a certain price of an article which the vendor in the ordinary
course of his business manufactures or procures for the general market, whether the same is on hand
at the time or not, is a contract of sale, but if the goods are to be manufactured specially for the
customer and upon his special order, and not for the general market, it is contract for a piece of work."
It is at once apparent that the Oriental Sash Factory did not merely sell its services to Don Toribio Teodoro
& Co. (To take one instance) because it also sold the materials. The truth of the matter is that it sold materials ordinarily
manufactured by it sash, panels, mouldings to Teodoro & Co., although in such form or combination as suited the
fancy of the purchaser. Such new form does not divest the Oriental Sash Factory of its character as manufacturer.
Neither does it take the transaction out of the category of sales under Article 1467 above quoted, because although the
Factory does not, in the ordinary course of its business, manufacture and keep on stock doors of the kind sold to
Teodoro, it could stock and/or probably had in stock the sash, mouldings and panels it used therefor (some of them at
least).

In our opinion when this Factory accepts a job that requires the use of extraordinary or additional equipment,
or involves services not generally performed by it it thereby contracts for a piece of work filling 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, butregular work. Would a factory do business performing only special,
extraordinary or preculiar 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.
Paras, C.J., Padilla, Montemayor, Bautista Angelo, Concepcion, Reyes, J.B.L., and Felix, JJ., concur.
Footnote
1 2.With all the consequences in Article 1729 New Civil Code and Act No. 3959 (bond of contractor).
||| (Celestino Co & Co. v. Collector of Internal Revenue, G.R. No. L-8506, [August 31, 1956], 99 PHIL 841-847)

[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,respondents.

Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete, Solicitor Lolita O. Gallang and Special Attorney Gemaliel H . Mantolino for Commissioner of Internal Revenue, etc.
Melquiades C . Gutierrez, Jose U . Ong, Juan G. Collas, Jr., Luis Ma. Guerrero and J . R. Balonkita for Engineering
Equipment and Supply Company.

SYNOPSIS
Denounced for misdeclaring its imported articles, for non-payment of the correct percentage taxes due thereon and for fraud
in obtaining its dollar allocations, Engineering Equipment and Supply Company (Engineering for short) was raided and
searched by a joint team of Central Bank, National Bureau of Investigation and the Bureau of Internal Revenue agents on
September 27, 1956. Voluminous records were seized on the basis of which the BIR assessed Engineering for deficiency
advance sales tax. The assessment was contested and later elevated on appeal to the Court of Tax Appeals. During the
pendency of the case, the revenue examiners reduced the deficiency tax liabilities from P916, 362.65 to P740,587.86. The
Tax Court declared Engineering as a contractor exempt from the deficiency manufacturer's sales tax covering the period
from June 1948 to September 1956, but liable for the amount of P174,141.62 as compensating tax and 25% surcharge for
the period from 1953 to September 1956. It also upheld the Commissioner's finding of fraud but absolved Engineering from
paying the 50% surcharge prescribed by Section 183(a) of the Tax Code. From this decision, both the Commissioner and
Engineering appealed, which appeals the Supreme Court consolidated and decided jointly.
Decision affirmed with the modification that Engineering is made liable to pay 50% fraud surcharge. cdasia

SYLLABUS
1. CONTRACTS; DISTINCTION BETWEEN CONTRACT OF SALE AND CONTRACT OF SERVICES; TEST. 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 but has been the subject of sale to some other persons even if the order had not been
given. If the article ordered by the purchaser is exactly such as the seller makes and keeps on hand for sale to anyone, and
no change or modification of it is made at purchaser's request, it is a contract of sale even though it may be entirely made
after, and in consequence of the purchaser's order for it.
2. ID.; ID.; MEANING OF "CONTRACTOR". The word "contractor" is 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. The test of a contractor is 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.
3. TAXATION; FACTS AND CIRCUMSTANCES SHOWING THAT TAXPAYER IS CONTRACTOR NOT A MANUFACTURER.
Where a taxpayer did not manufacture air conditioning units which it used to execute individual contracts for the design
and installation of the central type air conditioning units, taking into consideration the area to be air-conditioned, the number
of occupants of the premises, the purpose for which the air-conditioned area is to be used, 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, and
completely designing and engineering each plant so that no two plants are identical, said taxpayer is not a manufacturer or
seller of air conditioning units but a contractor of labor or services and, therefore, is not subject to the 30% advanced sales
tax prescribed in Section 185(m) of the Tax Code, but to the 3% tax on the sale of services or labor imposed by Section 191
of the same Code.
4. ID.; ID.; LIABILITY FOR PAYMENT OF CONTRACTOR'S TAX. Where a taxpayer fabricates, assembles, supplies and
installs in the building of its various customers central type air conditioning systems, prepares the plans and specifications
therefor which are distinct and different from each other, the air conditioning units and spare parts or accessories used not
being of the window type which are manufactured, assembled and produced for sale to the general market but are supplied
and installed upon previous orders of its customers conformably with their needs and requirements, such taxpayer is not a
manufacturer subject to the 30% advance sales tax prescribed in Section 185 (m) in relation to Section 194 of the Tax Code,
but is a contractor subject to the 3% tax imposed by Section 191 of the same Code.
5. ID.; ID.; TAXPAYER WHO ADVERTISES ITSELF AS A CONTRACTOR AND PAYS CONTRACTOR'S FEE IS A
CONTRACTOR NOT A MANUFACTURER. Where, as in the case at bar, the taxpayer advertises itself as an
"ENGINEERING EQUIPMENT, EQUIPMENT SUPPLY COMPANY, ENGINEERS AND CONTRACTORS"; pays the
contractor's tax on all contracts for design and construction of central type air conditioning systems, and does not have
ready-made air-conditioning units for sale, but must design and construct each unit to meet the particular requirements of its
customers, said taxpayer is considered a contractor rather than a manufacturer for purposes of the Tax Code.
6. ID.; COMPENSATING TAX; IMPORTER OF GOODS FOR USE IN CONSTRUCTION BUSINESS LIABLE TO PAY
COMPENSATING TAX, WITHOUT THE 50% MARKUP. One who imports air conditioning units, parts or accessories for
use in his construction business and does not sell, resell, barter or exchange said items is liable to pay the compensating tax
prescribed under Section 190 of the Tax Code, in relation to Section 185(m) thereof. But since the compensating tax is not a
tax on the importation of goods but a tax on the use of imported goods not subject to sales, the taxpayer is not liable to pay
the 50% markup provided in Section 183(b).
7. ID.; TAX FRAUD; MISDECLARATION OF IMPORTATION, A BASIS FOR PAYMENT OF SURCHARGE. A taxpayer is
required by law to truly declare his importation in the import entries and internal revenue declarations before the importations
may be released. The entries are the very documents where the nature, quantity and value of imported goods are declared
and charges incident to importation are computed. These entries serve the same purpose as the returns required by Section
183(a) of the Code. Thus, where a taxpayer, by requiring its foreign supplier to change the nomenclature of air conditioning
parts and accessories, succeeded in misdeclaring its importation so as to make them subject to the lower rate of 7%
percentage tax under Section 186 of the Tax Code, thereby evading the payment of the 30% tax under Section 185(m)
thereof, said taxpayer is subject to the payment of the 50% fraud surcharge prescribed by Section 183(a).
8. ID.; DELINQUENCY SURCHARGE; PENALTY FOR FAILURE TO PAY COMPENSATING TAX ON TIME. If the articles
imported by a taxpayer is subject to compensating tax of 30%, it is incumbent upon it to comply with the requirements of
Section 190 of the Tax 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. If the compensating tax of 30% is not paid by it within the
time prescribed by law, it is subject to the 25% surcharge for delinquency in the payment of said tax.
9. ID.; TAX ASSESSMENTS; PRESCRIPTIVE PERIOD FOR ASSESSMENT OF FRAUDULENT RETURNS; APPLICABLE
PROVISION; INSTANT CASE. Section 332 of the Tax Code provides that 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. In the
instant case, the tax assessment was made within the period prescribed by law and prescription had not set in against the
Government.

DECISION

ESGUERRA, J p:
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. I 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 content 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 prescribe 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 seller 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 359 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. 301-335, 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 be 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 war 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 the 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 again 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.
"3F-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 locating 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 the 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 is 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 are 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 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 know
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 compensating 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 Republic Acts Nos. 48, 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 looks 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, JJ ., concur.

Footnotes

1.Section 185.Percentage tax on sales of . . ., refrigerators and others. There shall be levied, assessed, and collected
once only on every original sale, barter, exchange, or similar transaction intended to transfer ownership of, or title
to, the other articles herein below enumerated, a tax equivalent to thirty percentum of the gross selling price or
gross value in money of the articles gold, bartered, exchanged or transferred, such tax to be paid by the
manufacturer or producers, Provided: That where the articles enumerated herein below are manufactured out of
materials subject to tax under this section, the total cost of such materials, as duly established, shall be
deductible from the gross selling price or gross value in money of such manufactured articles.
xxx xxx xxx
5."Section 190. Compensating tax. All persons residing or doing business in the Philippines, who purchase or receive
from without the Philippines any commodities, goods, wares or merchandise, excepting those subject to specific
taxes under Title IV of this Code, shall pay on the total value thereof at the time they are received by such
persons, including freight, insurance, commission and all similar charges, a compensating tax equivalent to the
percentage taxes imposed under this Title on original transactions effected by merchants, importers or
manufacturers, such tax to be paid before the withdrawal or removal of said commodities, goods, wares or
merchandise from the custom house or the post office. Provided. However, That merchants, importers, and
manufacturers, who are subject to the tax under Sections 184, 185 or 189 of this Title, shall not be required to
pay the herein tax imposed where such commodities, goods wares or merchandise purchased or received by
them from without the Philippines are to be sold, resold, bartered or exchanged or are to be used in the
manufacture or preparation of articles for sale, barter or exchange and are to form part thereof. And Provided,
Further, that the tax imposed in this section shall not apply to articles to be used by the importer himself in the
manufacturer or preparation of articles subject to specific tax, or those for consignment abroad and are to form
part thereof. 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 written notice thereof sent to the Collector of Internal Revenue and
payment of the corresponding compensating tax made within 10 days from the date of such entry or notice. If the
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". (As amended by R.A. 253, effective July 1948)

[G.R. No. 47538. June 20, 1941.]


GONZALO PUYAT & SONS, INC., petitioner, vs. ARCO AMUSEMENT COMPANY (formerly known
as Teatro Arco), respondent.

Feria & La O for petitioner.


J. W. Ferrier and Daniel Me. Gomez for respondent.

SYLLABUS
CONTRACTS; PURCHASE AND SALE; INTERPRETATION. 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 "dealers" or "traders talk", which can not bind either party. (Nolbrook v. Conner,
56 So., 576; 11 Am. Rep., 212; Bank v. Brosscell, 120 Ill., 161; Bank v. Palmer, 47 Ill., 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 admint of no other interpretation than that the respondent agreed to purchase from the petitioner
the equipment 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.

DECISION

LAUREL, J p:
This is a petition for the issuance of a writ of certiorari to the Court of Appeals for the purpose of reviewing its
decision in civil case G. R. No. 1023, entitled "Arco Amusement Company (formerly known as Teatro Arco), plaintiffappellant, 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 its 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 are 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 cinematograph equipment and
machinery, and the Arco Amusement Company desiring to equip 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 Star 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 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 the 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 defendant, 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 order above
mentioned was not the net price but rather the list price, and that the defendant 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 expenses. 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 the 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 the 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 declarer 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 Instancia de Manila, presidido entonces por el hoy Magistrado Honorable Marceliano
Montemayor.
"II. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, suponiendo que
dicha relacion fuera 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 a devolver ala recurrida la diferencia o descuento de 25 por ciento
que la recurrente la diferencia o descuento de 25 por ciento que 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 Ill., 161; Bank v. Palmer, 47 Ill., 92; Hosser v. Copper, 8 Allen, 334; Doles v. Merrill, 173 Mass., 411.) The
letters, Exhibits 1 and 2, 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 of no other
interpretation than that the respondent agreed to purchase from the petitioner the equipment 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." (Italics 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 letters, 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 to not point to anything but plain ordinary transaction
where the respondent enters into a contract 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 respondent 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
respondent 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 is exchange for the 10 per cent 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 of purchase and sale, is no ground for rescinding the contract of purchase and sale, is
no ground for rescinding 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 and Sons, Inc.,
defendant-appellee," without pronouncement regarding costs. So ordered.
Avancea, C. J., Diaz, Moran and Horrilleno, JJ., concur.
||| (Gonzalo Puyat & Sons, Inc. v. Arco Amusement Co., G.R. No. 47538, [June 20, 1941], 72 PHIL 402-409)

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


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

F.M. Poonin & Associates for petitioner.


Byron V. Belarmino for respondent Belarmino.

NINEVETCH

CRUZ

and

JUAN

Victorino F. Javier, Jr. for respondent Cruz.

SYNOPSIS
Petitioner acquired a 10-hectare property in Tanay, Rizal. He exchanged his Tanay property for a pair of emerald-cut
diamond earrings owned by Dr. Ninevetch Cruz. Atty. Belarmino prepared the deed of absolute sale while petitioner and Dr.
Cruz attended to the safekeeping of the jewelry. Petitioner signed the deed. HIETAc
Claiming that the jewelry was a counterfeit, petitioner filed a complaint with the RTC praying that the contract of sale over the
Tanay property be declared null and void on the ground of fraud and deceit.
The lower court ruled that the contract was valid. Petitioner elevated the matter to the Court of Appeals, which affirmed in
toto the lower court's decision. Hence, this petition.
It is evident from the facts of the case that there was a meeting of the minds between petitioner and Dr. Cruz. The issue is
whether under the facts the contract can be voided in accordance with law so as to compel the parties to restore to each
other the things that have been the subject of the contract with their fruits, and the price with interest.
Contracts that are voidable or annullable, even though there may have been no damage to the contracting parties are: (1)
those where one of the parties is incapableof giving consent to a contract, and (2) those where the consent is vitiated by
mistake, violence, intimidation, undue influence or fraud. The records are bare of any evidence manifesting that private
respondents employed such insidious words or machinations to entice petitioner into entering the contract of barter. Neither
did Dr. Cruz cajole petitioner to sell his Tanay property in exchange for the earrings. In fact, Dr. Cruz did not initially accede
to petitioner's proposal to buy the jewelry. It was petitioner, through his agents, who led Dr. Cruz to believe that the Tanay
property was worth exchanging for her jewelry.
Both the trial and appellate courts correctly ruled that there were no legal bases for the nullification of the
contract of sale. AHacIS

SYLLABUS
1. CIVIL LAW; CONTRACTS; CONTRACTS ARE PERFECTED BY MERE CONSENT; REQUIREMENT THAT CERTAIN
CONTRACTS BE IN A PUBLIC INSTRUMENT IS ONLY FOR CONVENIENCE. The Civil Code provides that contracts
are perfected by mere consent. From this moment, the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith,
usage and law. A contract of sale is perfected at the moment there is a meeting of the minds upon the thing which is the
object of the contract and upon the price. Being consensual, a contract of sale has the force of law between the contracting
parties and they are expected to abide in good faith by their respective contractual commitments. Article 1358 of the Civil
Code which requires the embodiment of certain contracts in a public instrument, is only for convenience, and
registration of the instrument only adversely affects third parties. Formal requirements are, therefore, for the benefit of third
parties. Non-compliance therewith does not adversely affect the validity of the contract nor the contractual rights and
obligations of the parties thereunder.
2. ID.; FRAUD; DEFINED; IN THE PRESENT CASE, THERE IS NO EVIDENCE THAT FRAUD WAS EMPLOYED. There
is fraud when, through the insidious words or machinations of one of the contracting parties, the other is induced to enter
into a contract which, without them, he would not have agreed to. The records, however, are bare of any evidence
manifesting that private respondents employed such insidious words or machinations to entice petitioner into entering the
contract of barter. Neither is there any evidence showing that Dr. Cruz induced petitioner to sell his Tanay property or that
she cajoled him to take the earrings in exchange for said property. On the contrary, Dr. Cruz did not initially accede to
petitioner's proposal to buy the said jewelry. Rather, it appears that it was petitioner, through his agents, who led Dr. Cruz to
believe that the Tanay property was worth exchanging for her jewelry.

3. ID.; BOTH THE TRIAL AND APPELLATE COURTS CORRECTLY RULED THAT THERE WAS NO LEGAL BASIS FOR
THE NULLIFICATION OF THE CONTRACT OF SALE. Both the trial and appellate courts, therefore, correctly ruled that
there were no legal bases for the nullification of the contract of sale. Ownership over the parcel ofland and the
pair of emerald-cut diamond earrings had been transferred to Dr. Cruz and petitioner, respectively, upon the actual and
constructive delivery thereof. Said contract of sale being absolute in nature, title passed to the vendee upon delivery of the
thing sold since there was no stipulation in the contract that title to the property sold has been reserved in the seller until full
payment of the price or that the vendor has the right to unilaterally resolve the contract the moment the buyer fails to pay
within a fixed period. Such stipulations are not manifest in the contract of sale.
4. ID.; DAMAGES; MORAL AND EXEMPLARY DAMAGES MAY BE AWARDED WITHOUT PROOF OF PECUNIARY LOSS.
Moral and exemplary damages may be awarded without proof of pecuniary loss. In awarding such damages,
the court shall take into account the circumstances obtaining in the case and assess damages according to its discretion. To
warrant the award of damages, it must be shown that the person to whom these are awarded has sustained injury. He must
likewise establish sufficient data upon which the court can properly base its estimate of the amount of damages.
Statements of facts should establish such data rather than mere conclusions or opinions of witnesses. DAaIEc
5. ID.; ID.; INSTANT CASE IS EXCEPTION TO THE RULE THAT MORAL DAMAGES CANNOT BE RECOVERED FROM A
PERSON WHO HAS FILED A COMPLAINT AGAINST ANOTHER IN GOOD FAITH. As a rule, moral damages cannot be
recovered from a person who has filed a complaint against another in good faith because it is not sound policy to place a
penalty on the right to litigate, the same, however, cannot apply in the case at bar. The factual findings of the courts a quo to
the effect that petitioner filed this case because he was the victim of fraud; that he could not have been such a victim
because he should have examined the jewelry in question before accepting delivery thereof, considering his exposure to the
banking and jewelry businesses; and that he filed the action for the nullification of the contract ofsale with unclean hands, all
deserve full faith and credit to support the conclusion that petitioner was motivated more by ill will than a sincere attempt to
protect his rights in commencing suit against respondents.

DECISION

ROMERO, J p:
This petition for review on certiorari questions the affirmance by the Court of Appeals of the decision 1 of the Regional
Trial Court of San Pablo City, Branch 30, dismissing the complaint that prayed for the nullification of a contract of sale of a
10-hectare property in Tanay, Rizal in consideration of the amount of P40,000.00 and a 2.5 carat emerald-cut diamond (Civil
Case No. SP-2455). The lower court's decision disposed of the case as follows:
"WHEREFORE, premises considered, the Court hereby renders judgment dismissing the complaint for
lack of merit and ordering plaintiff to pay:
1. Defendant Dra. Ninevetch M. Cruz the sum of P300,000.00 as and for moral damages and the
sum of P100,000.00 as and for exemplary damages;
2. Defendant Atty. Juan Belarmino the sum of P250,000.00 as and for moral damages and the
sum of P150,000.00 as and for exemplary damages;
3. Defendant Dra. Cruz and Atty. Belarmino the sum of P25,000.00 each as and for attorney's fees and
litigation expenses; and
4. The costs of suit.
SO ORDERED."
As found by the Court of Appeals and the lower court, the antecedent facts of this case are as follows:

Petitioner Gregorio Fule, a banker by profession and a jeweler at the same time, acquired a 10-hectare property in Tanay,
Rizal (hereinafter "Tanay property"), covered by Transfer Certificate of Title No. 320725 which used to be under the
name of Fr. Antonio Jacobe. The latter had mortgaged it earlier to the Rural Bank of Alaminos (the Bank), Laguna, Inc. to
secure a loan in the amount of P10,000.00, but the mortgage was later foreclosed and the property offered for public auction
upon his default.
In July 1984, petitioner, as corporate secretary of the bank, asked Remelia Dichoso and Oliva Mendoza to look for a buyer
who might be interested in the Tanay property. The two found one in the person of herein private respondent Dr. Ninevetch
Cruz. It so happened that at the time, petitioner had shown interest in buying a pair of emerald-cut diamond earrings owned
by Dr. Cruz which he had seen in January of the same year when his mother examined and appraised them as genuine. Dr.
Cruz, however, declined petitioner's offer to buy the jewelry for P100,000.00. Petitioner then made another bid to buy them
for US$6,000.00 at the exchange rate of$1.00 to P25.00. At this point, petitioner inspected said jewelry at the lobby of the
Prudential Bank branch in San Pablo City and then made a sketch thereof. Having sketched the jewelry for twenty to thirty
minutes, petitioner gave them back to Dr. Cruz who again refused to sell them since the exchange rate of the peso at the
time appreciated to P19.00 to a dollar.
Subsequently, however, negotiations for the barter of the jewelry and the Tanay property ensued. Dr. Cruz requested herein
private respondent Atty. Juan Belarmino to check the property who, in turn, found out that no sale or barter was feasible
because the one-year period for redemption of the said property had not yet expired at the time.

In an effort to cut through any legal impediment, petitioner executed on October 19, 1984, a deed of redemption on
behalf of Fr. Jacobe purportedly in the amount ofP15,987.78, and on even date, Fr. Jacobe sold the property to petitioner for
P75,000.00. The haste with which the two deeds were executed is shown by the fact that the deed of sale was notarized
ahead of the deed of redemption. As Dr. Cruz had already agreed to the proposed barter, petitioner went to Prudential Bank
once again to take a look at the jewelry.
In the afternoon of October 23, 1984, petitioner met Atty. Belarmino at the latter's residence to prepare the
documents of sale. 2 Dr. Cruz herself was not around but Atty. Belarmino was aware that she and petitioner had previously
agreed to exchange a pair of emerald-cut diamond earrings for the Tanay property. Atty. Belarmino accordingly caused the
preparation of a deed of absolute sale while petitioner and Dr. Cruz attended to the safekeeping of the jewelry.
The following day, petitioner, together with Dichoso and Mendoza, arrived at the residence of Atty. Belarmino to finally
execute a deed of absolute sale. Petitioner signed the deed and gave Atty. Belarmino the amount of P13,700.00 for
necessary expenses in the transfer of title over the Tanay property. Petitioner also issued a certification to the effect that the
actual consideration of the sale was P200,000.00 and not P80,000.00 as indicated in the deed of absolute sale. The
disparity between the actual contract price and the one indicated on the deed of absolute sale was purportedly aimed at
minimizing the amount of the capital gains tax that petitioner would have to shoulder. Since the jewelry was appraised only
at P160,000.00, the parties agreed that the balance of P40,000.00 would just be paid later in cash.
As pre-arranged, petitioner left Atty. Belarmino's residence with Dichoso and Mendoza and headed for the bank, arriving
there at past 5:00 p.m. Dr. Cruz also arrived shortly thereafter, but the cashier who kept the other key to the deposit box had
already left the bank. Dr. Cruz and Dichoso, therefore, looked for said cashier and found him having a haircut. As soon as
his haircut was finished, the cashier returned to the bank and arrived there at 5:48 p.m., ahead of Dr. Cruz and Dichoso who
arrived at 5:55 p.m. Dr. Cruz and the cashier then opened the safety deposit box, the former retrieving a transparent plastic
or cellophane bag with the jewelry inside and handing over the same to petitioner. The latter took the jewelry from the bag,
went near the electric light at the bank's lobby, held the jewelry against the light and examined it for ten to fifteen minutes.
After a while, Dr. Cruz asked, "Okay na ba iyan?" Petitioner expressed his satisfaction by nodding his head.
For services rendered, petitioner paid the agents, Dichoso and Mendoza, the amount of US$300.00 and some
pieces of jewelry. He did not, however, give them half ofthe pair of earrings in question which he had earlier promised.
Later, at about 8:00 o'clock in the evening of the same day, petitioner arrived at the residence of Atty. Belarmino complaining
that the jewelry given to him was fake. He then used a tester to prove the alleged fakery. Meanwhile, at 8:30 p.m., Dichoso
and Mendoza went to the residence of Dr. Cruz to borrow her car so that, with Atty. Belarmino, they could register the Tanay

property. After Dr. Cruz had agreed to lend her car, Dichoso called up Atty. Belarmino. The latter, however, instructed
Dichoso to proceed immediately to his residence because petitioner was there. Believing that petitioner had finally agreed to
give them half of the pair of earrings, Dichoso went posthaste to the residence of Atty. Belarmino only to find petitioner
already demonstrating with a tester that the earrings were fake. Petitioner then accused Dichoso and Mendoza of deceiving
him which they, however, denied. They countered that petitioner could not have been fooled because he had vast experience
regarding jewelry. Petitioner nonetheless took back the US$300.00 and jewelry he had given them.
Thereafter, the group decided to go to the house of a certain Macario Dimayuga, a jeweler, to have the earrings tested.
Dimayuga, after taking one look at the earrings, immediately declared them counterfeit. At around 9:30 p.m., petitioner went
to one Atty. Reynaldo Alcantara residing at Lakeside Subdivision in San Pablo City, complaining about the fake jewelry.
Upon being advised by the latter, petitioner reported the matter to the police station where Dichoso and Mendoza likewise
executed sworn statements. LexLib
On October 26, 1984, petitioner filed a complaint before the Regional Trial Court of San Pablo City against private
respondents praying, among other things, that the contract of sale over the Tanay property be declared null and void on the
ground of fraud and deceit.
On October 30, 1984, the lower court issued a temporary restraining order directing the Register of Deeds of Rizal to refrain
from acting on the pertinent documents involved in the transaction. On November 20, 1984, however, the same court lifted
its previous order and denied the prayer for a writ of preliminary injunction.
After trial, the lower court rendered its decision on March 7, 1989. Confronting the issue of whether or not the genuine
pair of earrings used as consideration for the sale was delivered by Dr. Cruz to petitioner, the lower court said:
"The Court finds that the answer is definitely in the affirmative. Indeed, Dra. Cruz delivered (the) subject
jewelries (sic) into the hands of plaintiff who even raised the same nearer to the lights of the lobby of the
bank near the door. When asked by Dra. Cruz if everything was in order, plaintiff even nodded his
satisfaction (Hearing ofFeb. 24, 1988). At that instance, plaintiff did not protest, complain or beg for
additional time to examine further the jewelries (sic). Being a professional banker and engaged in the
jewelry business plaintiff is conversant and competent to detect a fake diamond from the real thing.
Plaintiff was accorded the reasonable time and opportunity to ascertain and inspect the jewelries (sic) in
accordance with Article 1584 of the Civil Code. Plaintiff took delivery of the subject jewelries (sic) before
6:00 p.m. of October 24, 1984. When he went at 8:00 p.m. that same day to the residence of Atty.
Belarmino already with a tester complaining about some fake jewelries (sic), there was already undue
delay because of the lapse of a considerable length of time since he got hold of subject jewelries (sic).
The lapse of two (2) hours more or less before plaintiff complained is considered by the Court as
unreasonable delay." 3
The lower court further ruled that all the elements of a valid contract under Article 1458 of the Civil Code were present,
namely: (a) consent or meeting of the minds; (b) determinate subject matter, and (c) price certain in money or its equivalent.
The same elements, according to the lower court, were present despite the fact that the agreement between petitioner and
Dr. Cruz was principally a barter contract. The lower court explained thus:
". . . Plaintiff's ownership over the Tanay property passed unto Dra. Cruz upon the constructive delivery
thereof by virtue of the Deed of Absolute Sale (Exh. D). On the other hand, the ownership of Dra. Cruz
over the subject jewelries (sic) transferred to the plaintiff upon her actual personal delivery to him at the
lobby of the Prudential Bank. It is expressly provided by law that the thing sold shall be understood as
delivered, when it is placed in the control and possession of the vendee (Art. 1497, Civil Code; Kuenzle
& Straff vs. Watson & Co. 13 Phil. 26). The ownership and/or title over the jewelries (sic) was
transmitted immediately before 6:00 p.m. ofOctober 24, 1984. Plaintiff signified his approval by nodding
his head. Delivery or tradition, is one of the modes of acquiring ownership (Art. 712, Civil Code).
Similarly, when Exhibit D was executed, it was equivalent to the delivery of the Tanay property in
favor of Dra. Cruz. The execution of the public instrument (Exh. D) operates as a formal or symbolic
delivery of the Tanay property and authorizes the buyer, Dra. Cruz to use the document as

proof of ownership (Florendo v. Foz, 20 Phil. 399). More so, since Exhibit D does not contain any
proviso or stipulation to the effect that title to the property is reserved with the vendor until full
payment ofthe purchase price, nor is there a stipulation giving the vendor the right to unilaterally rescind
the contract the moment the vendee fails to pay within a fixed period (Taguba v. Vda. De Leon, 132
SCRA 722; Luzon Brokerage Co. Inc. vs. Maritime Building Co. Inc. 86 SCRA 305; Froilan v. Pan
Oriental Shipping Co. et al. 12 SCRA 276)." 4
Aside from concluding that the contract of barter or sale had in fact been consummated when petitioner and Dr. Cruz parted
ways at the bank, the trial court likewise dwelt on the unexplained delay with which petitioner complained about the alleged
fakery. Thus:
". . . Verily, plaintiff is already estopped to come back after the lapse of considerable length of time to
claim that what he got was fake. He is a Business Management graduate of La Salle University, Class
1978-79, a professional banker as well as a jeweler in his own right. Two hours is more than enough
time to make a switch of a Russian diamond with the real diamond. It must be remembered that in July
1984 plaintiff made a sketch of the subject jewelries (sic) at the Prudential Bank. Plaintiff had a tester at
8:00 p.m. at the residence of Atty. Belarmino. Why then did he not bring it out when he was examining
the subject jewelries (sic) at about 6:00 p.m. in the bank's lobby? Obviously, he had no need for it after
being satisfied of the genuineness of the subject jewelries (sic). When Dra. Cruz and plaintiff left the
bank bothof them had fully performed their respective prestations. Once a contract is shown to have
been consummated or fully performed by the parties thereto, its existence and binding effect can no
longer be disputed. It is irrelevant and immaterial to dispute the due execution of a contract if
both of them have in fact performed their obligations thereunder and their respective signatures and
those of their witnesses appear upon the face of the document (Weldon Construction v. CA G.R. No. L35721, Oct. 12, 1987)." 5

Finally, in awarding damages to the defendants, the lower court remarked:


"The Court finds that plaintiff acted in wanton bad faith. Exhibit 2-Belarmino purports to show that the
Tanay property is worth P25,000.00. However, also on that same day it was executed, the property's
worth was magnified at P75,000.00 (Exh. 3-Belarmino). How could in less than a day (Oct. 19, 1984)
the value would (sic) triple under normal circumstances? Plaintiff, with the assistance of his agents, was
able to exchange the Tanay property which his bank valued only at P25,000.00 in exchange for a
genuine pair of emerald cut diamond worth P200,000.00 belonging to Dra. Cruz. He also retrieved the
US$300.00 and jewelries (sic) from his agents. But he was not satisfied in being able to get subject
jewelries for a song. He had to file a malicious and unfounded case against Dra. Cruz and Atty.
Belarmino who are well known, respected and held in high esteem in San Pablo City where everybody
practically knows everybody. Plaintiff came to Court with unclean hands dragging the defendants and
soiling their clean and good name in the process. Both of them are near the twilight of their lives after
maintaining and nurturing their good reputation in the community only to be stunned with a court case.
Since the filing of this case on October 26, 1984 up to the present they were living under a pall ofdoubt.
Surely, this affected not only their earning capacity in their practice of their respective professions, but
also they suffered besmirched reputations. Dra. Cruz runs her own hospital and defendant Belarmino is
a well respected legal practitioner. The length of time this case dragged on during which period their
reputation were (sic) tarnished and their names maligned by the pendency of the case,
the Court is of the belief that some of the damages they prayed for in their answers to the complaint are
reasonably proportionate to the sufferings they underwent (Art. 2219, New Civil Code). Moreover,
because of the falsity, malice and baseless nature ofthe complaint defendants were compelled to
litigate. Hence, the award of attorney's fees is warranted under the circumstances (Art. 2208, New Civil
Code)." 6

From the trial court's adverse decision, petitioner elevated the matter to the Court of Appeals. On October 20, 1992,
the Court of Appeals, however, rendered a decision7 affirming in toto the lower court's decision. His motion for
reconsideration having been denied on October 19, 1993, petitioner now files the instant petition alleging that:
"I. THE TRIAL COURT ERRED IN DISMISSING PLAINTIFF'S COMPLAINT AND IN HOLDING THAT
THE PLAINTIFF ACTUALLY RECEIVED A GENUINE PAIR OF EMERALD CUT DIAMOND
EARRING(S) FROM DEFENDANT CRUZ . . .;
II. THE TRIAL COURT ERRED IN AWARDING MORAL AND EXEMPLARY DAMAGES AND
ATTORNEY'S FEES IN FAVOR OF DEFENDANTS AND AGAINST THE PLAINTIFF IN THIS CASE;
and
III. THE TRIAL COURT ERRED IN NOT DECLARING THE DEED OF SALE OF THE TANAY
PROPERTY (EXH. 'D') AS NULL AND VOID OR IN NOT ANNULLING THE SAME, AND IN FAILING
TO GRANT REASONABLE DAMAGES IN FAVOR OF THE PLAINTIFF." 8
As to the first allegation, the Court observes that petitioner is essentially raising a factual issue as it invites us to examine
and weigh anew the facts regarding the genuineness of the earrings bartered in exchange for the Tanay property.
This, of course, we cannot do without unduly transcending the limits of our review power in petitions of this nature which are
confined merely to pure questions of law. We accord, as a general rule, conclusiveness to a lower court's findings of fact
unless it is shown, inter alia, that: (1) the conclusion is a finding grounded on speculations, surmises or conjectures; (2) the
inference is manifestly mistaken, absurd and impossible; (3) when there is a grave abuse of discretion; (4) when the
judgment is based on a misapprehension of facts; (5) when the findings of fact are conflicting; and (6) when
the Court of Appeals, in making its findings, went beyond the issues of the case and the same is contrary to the
admission of both parties. 9 We find nothing, however, that warrants the application of any of these exceptions.
Consequently, this Court upholds the appellate court's findings of fact especially because these concur with those of the
trial court which, upon a thorough scrutiny ofthe records, are firmly grounded on evidence presented at the trial. 10 To
reiterate, this Court's jurisdiction is only limited to reviewing errors of law in the absence ofany showing that the findings
complained of are totally devoid of support in the record or that they are glaringly erroneous as to constitute serious
abuse of discretion.11
Nonetheless, this Court has to closely delve into petitioner's allegation that the lower court's decision of March 7, 1989 is a
"ready-made" one because it was handed down a day after the last date of the trial of the case. 12 Petitioner, in this regard,
finds it incredible that Judge J. Ausberto Jaramillo was able to write a 12-page single-spaced decision, type it and release it
on March 7, 1989, less than a day after the last hearing on March 6, 1989. He stressed that Judge Jaramillo replaced Judge
Salvador de Guzman and heard only his rebuttal testimony.
This allegation is obviously no more than a desperate effort on the part of petitioner to disparage the lower court's
findings of fact in order to convince this Court to review the same. It is noteworthy that Atty. Belarmino clarified that Judge
Jaramillo had issued the first order in the case as early as March 9, 1987 or two years before the rendition of the decision. In
fact, Atty. Belarmino terminated presentation of evidence on October 13, 1987, while Dr. Cruz finished hers on February 4,
1989, or more than a month prior to the rendition of the judgment. The March 6, 1989 hearing was conducted solely for the
presentation of petitioner's rebuttal testimony. 13 In other words, Judge Jaramillo had ample time to study the case and write
the decision because the rebuttal evidence would only serve to confirm or verify the facts already presented by the parties.
The Court finds nothing anomalous in the said situation. No proof has been adduced that Judge Jaramillo was motivated by
a malicious or sinister intent in disposing ofthe case with dispatch. Neither is there proof that someone else wrote the
decision for him. The immediate rendition of the decision was no more than Judge Jaramillo's compliance with his duty as a
judge to "dispose of the court's business promptly and decide cases within the required periods." 14 The two-year period
within which Judge Jaramillo handled the case provided him with all the time to study it and even write down its facts as
soon as these were presented to court. In fact, thisCourt does not see anything wrong in the practice of writing a decision
days before the scheduled promulgation of judgment and leaving the dispositive portion for typing at a time close to the
date of promulgation, provided that no malice or any wrongful conduct attends its adoption. 15 The practice serves the dual
purposes ofsafeguarding the confidentiality of draft decisions and rendering decisions with promptness. Neither can Judge

Jaramillo be made administratively answerable for the immediate rendition of the decision. The acts of a judge which pertain
to his judicial functions are not subject to disciplinary power unless they are committed with fraud, dishonesty, corruption or
bad faith. 16 Hence, in the absence of sufficient proof to the contrary, Judge Jaramillo is presumed to have performed his job
in accordance with law and should instead be commended for his close attention to duty.
Having disposed of petitioner's first contention, we now come to the core issue of this petition which is whether
the Court of Appeals erred in upholding the validity ofthe contract of barter or sale under the circumstances of this case.
The Civil Code provides that contracts are perfected by mere consent. From this moment, the parties are bound not only to
the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may
be in keeping with good faith, usage and law. 17 A contract of sale is perfected at the moment there is a meeting of the
minds upon the thing which is the object of the contract and upon the price. 18 Being consensual, a contract of sale has the
force oflaw between the contracting parties and they are expected to abide in good faith by their respective contractual
commitments. Article 1358 of the Civil Code which requires the embodiment of certain contracts in a public instrument, is
only for convenience, 19 and registration of the instrument only adversely affects third parties. 20Formal requirements are,
therefore, for the benefit of third parties. Non-compliance therewith does not adversely affect the validity of the contract nor
the contractual rights and obligations of the parties thereunder.
It is evident from the facts of the case that there was a meeting of the minds between petitioner and Dr. Cruz. As such, they
are bound by the contract unless there are reasons or circumstances that warrant its nullification. Hence, the problem that
should be addressed in this case is whether or not under the facts duly established herein, the contract can be voided in
accordance with law so as to compel the parties to restore to each other the things that have been the subject of the contract
with their fruits, and the price with interest. 21
Contracts that are voidable or annullable, even though there may have been no damage to the contracting parties are: (1)
those where one of the parties is incapableof giving consent to a contract; and (2) those where the consent is vitiated by
mistake, violence, intimidation, undue influence or fraud. 22 Accordingly, petitioner now stresses before this Court that he
entered into the contract in the belief that the pair of emerald-cut diamond earrings was genuine. On the pretext that those
pieces ofjewelry turned out to be counterfeit, however, petitioner subsequently sought the nullification of said contract on the
ground that it was, in fact, "tainted with fraud" 23such that his consent was vitiated.

There is fraud when, through the insidious words or machinations of one of the contracting parties, the other is induced to
enter into a contract which, without them, he would not have agreed to. 24 The records, however, are bare of any evidence
manifesting that private respondents employed such insidious words or machinations to entice petitioner into entering the
contract of barter. Neither is there any evidence showing that Dr. Cruz induced petitioner to sell his Tanay property or that
she cajoled him to take the earrings in exchange for said property. On the contrary, Dr. Cruz did not initially accede to
petitioner's proposal to buy the said jewelry. Rather, it appears that it was petitioner, through his agents, who led Dr. Cruz to
believe that the Tanay property was worth exchanging for her jewelry as he represented that its value was P400,000.00 or
more than double that of the jewelry which was valued only at P160,000.00. If indeed petitioner's property was truly worth
that much, it was certainly contrary to the nature of a businessman-banker like him to have parted with his real estate for half
its price. In short, it was in fact petitioner who resorted to machinations to convince Dr. Cruz to exchange her jewelry for the
Tanay property.
Moreover, petitioner did not clearly allege mistake as a ground for nullification of the contract of sale. Even assuming that he
did, petitioner cannot successfully invoke the same. To invalidate a contract, mistake must "refer to the substance of the
thing that is the object of the contract, or to those conditions which have principally moved one or both parties to enter into
the contract." 25 An example of mistake as to the object of the contract is the substitution of a specific thing contemplated by
the parties with another. 26 In his allegations in the complaint, petitioner insinuated that an inferior one or one that had only
Russian diamonds was substituted for the jewelry he wanted to exchange with his 10-hectare land. He, however, failed to
prove the fact that prior to the delivery of the jewelry to him, private respondents endeavored to make such substitution.
Likewise, the facts as proven do not support the allegation that petitioner himself could be excused for the "mistake." On
account of his work as a banker-jeweler, it can be rightfully assumed that he was an expert on matters regarding gems. He

had the intellectual capacity and the business acumen as a banker to take precautionary measures to avert such a mistake,
considering the value of both the jewelry and his land. The fact that he had seen the jewelry before October 24, 1984 should
not have precluded him from having its genuineness tested in the presence of Dr. Cruz. Had he done so, he could have
avoided the present situation that he himself brought about. Indeed, the finger of suspicion of switching the genuine jewelry
for a fake inevitably points to him. Such a mistake caused by manifest negligence cannot invalidate a juridical act. 27 As the
Civil Code provides, "(t)here is no mistake if the party alleging it knew the doubt, contingency or risk affecting the
object of the contract." 28
Furthermore, petitioner was afforded the reasonable opportunity required in Article 1584 of the Civil Code within which to
examine the jewelry as he in fact accepted them when asked by Dr. Cruz if he was satisfied with the same. 29 By taking the
jewelry outside the bank, petitioner executed an act which was more consistent with his exercise of ownership over it. This
gains credence when it is borne in mind that he himself had earlier delivered the Tanay property to Dr. Cruz by affixing his
signature to the contract of sale. That after two hours he later claimed that the jewelry was not the one he intended in
exchange for his Tanay property, could not sever the juridical tie that now bound him and Dr. Cruz. The nature and
value of the thing he had taken preclude its return after that supervening period within which anything could have happened,
not excluding the alteration of the jewelry or its being switched with an inferior kind. LibLex
Both the trial and appellate courts, therefore, correctly ruled that there were no legal bases for the nullification of the
contract of sale. Ownership over the parcel ofland and the pair of emerald-cut diamond earrings had been transferred to Dr.
Cruz and petitioner, respectively, upon the actual and constructive delivery thereof. 30Said contract of sale being absolute in
nature, title passed to the vendee upon delivery of the thing sold since there was no stipulation in the contract that title to the
property sold has been reserved in the seller until full payment of the price or that the vendor has the right to unilaterally
resolve the contract the moment the buyer fails to pay within a fixed period. 31 Such stipulations are not manifest in the
contract of sale.
While it is true that the amount of P40,000.00 forming part of the consideration was still payable to petitioner, its nonpayment
by Dr. Cruz is not a sufficient cause to invalidate the contract or bar the transfer of ownership and possession of the things
exchanged considering the fact that their contract is silent as to when it becomes due and demandable. 32
Neither may such failure to pay the balance of the purchase price result in the payment of interest thereon. Article
1589 of the Civil Code prescribes the payment ofinterest by the vendee "for the period between the delivery of the thing and
the payment of the price" in the following cases:
"(1) Should it have been so stipulated;
(2) Should the thing sold and delivered produce fruits or income;
(3) Should he be in default, from the time of judicial or extrajudicial demand for the payment of the
price."
Not one of these cases obtains here. This case should, of course, be distinguished from De la
Cruz v. Legaspi, 33 where the court held that failure to pay the consideration after the notarization of the contract as
previously promised resulted in the vendee's liability for payment of interest. In the case at bar, there is no stipulation for
the payment of interest in the contract of sale nor proof that the Tanay property produced fruits or income. Neither did
petitioner demand paymentof the price as in fact he filed an action to nullify the contract of sale.
All told, petitioner appears to have elevated this case to this Court for the principal reason of mitigating the
amount of damages awarded to both private respondents which petitioner considers as "exorbitant." He contends that
private respondents do not deserve at all the award of damages. In fact, he pleads for the total deletion ofthe award as
regards private respondent Belarmino whom he considers a mere "nominal party" because "no specific claim for damages
against him" was alleged in the complaint. When he filed the case, all that petitioner wanted was that Atty. Belarmino should
return to him the owner's duplicate copy of TCT No. 320725, the deed ofsale executed by Fr. Antonio Jacobe, the
deed of redemption and the check allotted for expenses. Petitioner alleges further that Atty. Belarmino should not have
delivered all those documents to Dr. Cruz because as the "lawyer for both the seller and the buyer in the sale contract, he
should have protected the rights of both parties." Moreover, petitioner asserts that there was no firm basis for damages
except for Atty. Belarmino's uncorroborated testimony. 34

Moral and exemplary damages may be awarded without proof of pecuniary loss. In awarding such damages, the court shall
take into account the circumstances obtaining in the case and assess damages according to its discretion. 35 To warrant the
award of damages, it must be shown that the person to whom these are awarded has sustained injury. He must likewise
establish

sufficient

data

upon

amount of damages. 36 Statementsof facts

which
should

the court can


establish

such

properly
data

rather

base

its

than

mere

estimate of the
conclusions

or

opinions of witnesses. 37 Thus:


". . . For moral damages to be awarded, it is essential that the claimant must have satisfactorily proved
during the trial the existence of the factual basis of the damages and its causal connection with the
adverse party's acts. If the court has no proof or evidence upon which the claim for moral damages
could be based, such indemnity could not be outrightly awarded. The same holds true with respect to
the award of exemplary damages where it must be shown that the party acted in a wanton, oppressive
or malevolent manner." 38
In this regard, the lower court appeared to have awarded damages on a ground analogous to malicious prosecution
under Article 2219(8) of the Civil Code 39 as shown by (1) petitioner's "wanton bad faith" in bloating the value of the Tanay
property which he exchanged for "a genuine pair of emerald-cut diamond worth P200,000.00;" and (2) his filing of a
"malicious and unfounded case" against private respondents who were "well known, respected and held in high esteem in
San Pablo City where everybody practically knows everybody" and whose good names in the "twilight of their lives" were
soiled by petitioner's coming to court with "unclean hands," thereby affecting their earning capacity in the exercise of their
respective professions and besmirching their reputation.
For its part, the Court of Appeals affirmed the award of damages to private respondents for these reasons:
"The malice with which Fule filed this case is apparent. Having taken possession of the genuine
jewelry of Dra. Cruz, Fule now wishes to return a fake jewelry to Dra. Cruz and, more than that, get back
the real property, which his bank owns. Fule has obtained a genuine jewelry which he could sell
anytime, anywhere and to anybody, without the same being traced to the original owner for practically
nothing. This is plain and simple, unjust enrichment." 40

While, as a rule, moral damages cannot be recovered from a person who has filed a complaint against another in good faith
because it is not sound policy to place a penalty on the right to litigate, 41 the same, however, cannot apply in the case at
bar. The factual findings of the courts a quo to the effect that petitioner filed this case because he was the victim of fraud;
that he could not have been such a victim because he should have examined the jewelry in question before accepting
delivery thereof, considering his exposure to the banking and jewelry businesses; and that he filed the action for the
nullification of the contract of sale with unclean hands, all deserve full faith and credit to support the conclusion that
petitioner was motivated more by ill will than a sincere attempt to protect his rights in commencing suit against respondents.
As pointed out earlier, a closer scrutiny of the chain of events immediately prior to and on October 24, 1984 itself would
amply demonstrate that petitioner was not simply negligent in failing to exercise due diligence to assure himself that what he
was taking in exchange for his property were genuine diamonds. He had rather placed himself in a situation from which it
preponderantly appears that his seeming ignorance was actually just a ruse. Indeed, he had unnecessarily dragged
respondents to face the travails of litigation in speculating at the possible favorable outcome of his complaint when he should
have realized that his supposed predicament was his own making. We, therefore, see here no semblance of an honest and
sincere belief on his part that he was swindled by respondents which would entitle him to redress in court. It must be noted
that before petitioner was able to convince Dr. Cruz to exchange her jewelry for the Tanay property, petitioner took pains to
thoroughly examine said jewelry, even going to the extent of sketching their appearance. Why at the precise moment when
he was about to take physical possession thereof he failed to exert extra efforts to check their genuineness despite the large
consideration involved has never been explained at all by petitioner. His acts thus failed to accord with what an ordinary
prudent man would have done in the same situation. Being an experienced banker and a businessman himself who
deliberately skirted a legal impediment in the sale of the Tanay property and to minimize the capital gains tax for its
exchange, it was actually gross recklessness for him to have merely conducted a cursory examination of the jewelry when
every opportunity for doing so was not denied him. Apparently, he carried on his person a tester which he later used to prove

the alleged fakery but which he did not use at the time when it was most needed. Furthermore, it took him two more
hours ofunexplained delay before he complained that the jewelry he received were counterfeit. Hence, we stated earlier that
anything could have happened during all the time that petitioner was in complete possession and control of the jewelry,
including the possibility of substituting them with fake ones, against which respondents would have a great deal of difficulty
defending themselves. The truth is that petitioner even failed to successfully prove during trial that the jewelry he received
from Dr. Cruz were not genuine. Add to that the fact that he had been shrewd enough to bloat the Tanay property's price
only a few days after he purchased it at a much lower value. Thus, it is our considered view that if this slew of circumstances
were connected, like pieces of fabric sewn into a quilt, they would sufficiently demonstrate that his acts were not merely
negligent but rather studied and deliberate. prcd
We do not have here, therefore, a situation where petitioner's complaint was simply found later to be based on an erroneous
ground which, under settled jurisprudence, would not have been a reason for awarding moral and exemplary
damages. 42 Instead, the cause of action of the instant case appears to have been contrived by petitioner himself. In other
words, he was placed in a situation where he could not honestly evaluate whether his cause of action has a
semblance ofmerit, such that it would require the expertise of the courts to put it to a test. His insistent pursuit of such case
then coupled with circumstances showing that he himself was guilty in bringing about the supposed wrongdoing on which he
anchored his cause of action would render him answerable for all damages the defendant may suffer because of it. This is
precisely what took place in the petition at bar and we find no cogent reason to disturb the findings of the courts below that
respondents in this case suffered considerable damages due to petitioner's unwarranted action.
WHEREFORE, the decision of the Court of Appeals dated October 20, 1992 is hereby AFFIRMED in toto. Dr. Cruz,
however, is ordered to pay petitioner the balance of the purchase price of P40,000.00 within ten (10) days from the
finality of this decision. Costs against petitioner.
SO ORDERED.
Narvasa, C .J ., Kapunan and Purisima, JJ ., concur.
||| (Fule v. Court of Appeals, G.R. No. 112212, [March 2, 1998], 350 PHIL 349-372)

[G.R. No. 69259. January 26, 1988.]


DELPHER TRADES CORPORATION, and DELFIN
PACHECO petitioners, vs. INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES,
INC.,respondents.

SYLLABUS
1. CORPORATION LAW; STOCKHOLDER; STOCK SUBSCRIPTION AS MEANS OF BECOMING A STOCKHOLDER IN A
CORPORATION. After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock
directly from the corporation or from individual owners thereof (Salmon, Dexter & Co.v. Unson, 47 Phil. 649, citing Bole v.
Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original
unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos became
stockholders of the corporation by subscription. "The essence of the stock subscription is an agreement to take and pay for
original unissued shares of a corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 430).
2. ID.; SHARES OF STOCK; NO-PAR VALUE SHARES, CONSTRUED. "A no-par value share does not purport to
represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole

number of such shares of the issuing corporation. The holder of no-par shares may see from the certificate itself that he is
only an aliquot sharer in the assets of the corporation. But this character of proportionate interest is not hidden beneath a
false appearance of a given sum in money, as in the case of par value shares. The capital stock of a corporation issuing only
no-par value shares is not set forth by a stated amount of money, but instead is expressed to be divided into a stated
number of shares, such as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the
assets of the corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par
value of shares, the attention of persons interested in the financial condition of a corporation is focused upon the value of
assets and the amount of its debts." (Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the
Philippines, Vol. III, 1980 Edition, p. 107)
3. ID.; INCORPORATION OF A CORPORATION; INVESTMENT IN ANOTHER WAY TO CHANGE NATURE OF
OWNERSHIP; CASE AT BAR. It is to be stressed that by their ownership of the 2,500 no par shares of stock, the
Pachecos have control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also
belong to the same family group. In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they
really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form
by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes.
4. TAXATION; RESORT TO LEGAL MEANS TO DECREASE PAYMENT OF TAXES BY A TAXPAYER; RIGHT CANNOT BE
DOUBTED. The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to
by the Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether
avoid them, by means which the law permits, cannot be doubted." (Liddell & Co., Inc. v. The collector of Internal Revenue, 2
SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596).
5. CIVIL LAW; DEED OF EXCHANGE; NOT CONSIDERED A DEED OF SALE. The "Deed of Exchange" of property
between the Pachecos and Delpher TradesCorporation cannot be considered a contract of sale. There was no transfer of
actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one
form to another. The ownership remained in the same hands. Hence, the private respondent has no basis for its claim of a
right of first refusal under the lease contract.

DECISION

GUTIERREZ, JR., J p:
The petitioners question the decision of the Intermediate Appellate Court which sustained the private respondent's
contention that the deed of exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land
to Delpher Trades Corporation in exchange for 2,500 shares of stock was actually a deed of sale which violated a right of
first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
"In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of
real estate identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now Valenzuela),
Province of Bulacan (now Metro Manila) which is covered by Transfer Certificate of Title No. T-4240 of
the Bulacan land registry.
"On April 3, 1974, the said co-owners leased to Construction Components International Inc. the same
property and providing that during the existence or after the term of this lease the lessor should he
decide to sell the property leased shall first offer the same to the lessee and the letter has the priority to
buy under similar conditions (Exhibits A to A-5)
"On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and
obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed
conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive)

"The contract of lease, as well as the assignment of lease were annotated at the back of the title, as per
stipulation of the parties (Exhs. A to D-3 inclusive)
"On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco
and defendant Delpher Trades Corporation whereby the former conveyed to the latter the leased
property (TCT No. T-4240) together with another parcel of land also located in Malinta Estate,
Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of defendant corporation with a total
value of P1,500,000.00 (Exhs. C to C-5, inclusive)" (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement,
respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in its favor under
conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco and Delphin
Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion of the decision reads:
"ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiff's
preferential right to acquire the subject property (right of first refusal) and ordering the defendants and
all persons deriving rights therefrom to convey the said property to plaintiff who may offer to acquire the
same at the rate of P14.00 per square meter, more or less, for Lot 1095 whose area is 27,169 square
meters only. Without pronouncement as to attorney's fees and costs. (Appendix I; Rec., pp. 246-247)."
(Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's decision.
We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying the petition and gave
it due course.
The petitioners allege that:
"The denial of the petition will work great injustice to the petitioners, in that:
"1. Respondent Hydro Pipes Philippines, Inc. ('private respondent') will acquire from petitioners a parcel
of industrial land consisting of 27,169 square meters or 2.7 hectares (located right after the Valenzuela,
Bulacan exit of the toll expressway) for only P14/sq. meter, or a total of P380,366, although the
prevailing value thereof is approximately P300/sq. meter or P8.1 Million;
"2. Private respondent is allowed to exercise its right of first refusal even if there is no 'sale' or transfer of
actual ownership interests by petitioners to third parties; and
"3. Assuming arguendo that there has been a transfer of actual ownership interests, private respondent
will

acquire

the

land not under

'similar

conditions'

by

which

it

was

transferred

to

petitioner Delpher Trades Corporation, as provided in the same contractual provision invoked by private
respondent." (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed by the Pachecos on
the one hand and the Delpher TradesCorporation on the other was meant to be a contract of sale which, in effect, prejudiced
the private respondent's right of first refusal over the leased property included in the "deed of exchange."
Eduardo

Neria,

certified

public

accountant

and

son-in-law

of

the

late

Pelagia

Pacheco

testified

that Delpher Trades Corporation is a family corporation; that the corporation was organized by the children of the two
spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned
in common the parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over the property through
the corporation and to avoid taxes; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095
which had been leased to Hydro Pipes Philippines, were transferred to the corporation; that the leased property was
transferred to the corporation by virtue of a deed of exchange of property; that in exchange for these properties, Pelagia and
Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in the corporation

because the other owners only owned 2,000 shares; and that at the time of incorporation, he knew all about the contract of
lease of Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration, they refer to this scheme as
"estate planning." (p. 252, Rollo) LibLex

Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of the subject parcel of
land since the Pachecos remained in control of the property. Thus, the petitioners allege: "Considering that the beneficial
ownership and control of petitioner corporation remained in the hands of the original co-owners, there was no transfer of
actual ownership interests over the land when the same was transferred to petitioner corporation in exchange for the latter's
shares of stock. The transfer of ownership, if anything, was merely in form but not in substance. In reality, petitioner
corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the corporation and the co-owners should be
deemed to be the same, there being in substance and in effect an identity of interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they
exchanged the land for shares of stocks in their own corporation. "Hence, such transfer is not within the letter, or even spirit
of the contract. There is a sale when ownership is transferred for a price certain in money or its equivalent (Art. 1468, Civil
Code) while there is a barter or exchange when one thing is given in consideration of another thing (Art. 1638, Civil Code)."
(pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and distinct
from the Pachecos. Thus, it contends that it cannot be said that Delpher Trades Corporation is the Pacheco's same alter ego
or conduit; that petitioner Delfin Pacheco, having treated Delpher TradesCorporation as such a separate and distinct
corporate entity, is not a party who may allege that this separate corporate existence should be disregarded. It maintains that
there was actual transfer of ownership interests over the leased property when the same was transferred
to Delpher Trades Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the
corporation or from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil. 649, citing Bole v. Fulton [1912], 233
Pa., 609). In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original unissued no par value
shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos became stockholders of the corporation by
subscription. "The essence of the stock subscription is an agreement to take and pay for original unissued shares of a
corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani, Commentaries and Jurisprudence on the Commercial
Laws of the Philippines, Vol. III, 1980 Edition, p. 430) It is significant that the Pachecos took no par value shares in exchange
for their properties.
"A no-par value share does not purport to represent any stated proportionate interest in the capital stock
measured by value, but only an aliquot part of the whole number of such shares of the issuing
corporation. The holder of no-par shares may see from the certificate itself that he is only an aliquot
sharer in the assets of the corporation. But this character of proportionate interest is not hidden beneath
a false appearance of a given sum in money, as in the case of par value shares. The capital stock of a
corporation issuing only no-par value shares is not set forth by a stated amount of money, but instead is
expressed to be divided into a stated number of shares, such as, 1,000 shares. This indicates that a
shareholder of 100 such shares is an aliquot sharer in the assets of the corporation, no matter what
value they may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the
attention of persons interested in the financial condition of a corporation is focused upon the value of
assets and the amount of its debts." (Agbayani, Commentaries and Jurisprudence on the Commercial
Laws of the Philippines, Vol. III, 1980 Edition, p. 107)
Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a square
meter was turned over to the family's corporation for only P14.00 a square meter. LexLib
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation.
Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group.

In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their
properties

and

change

the

nature

of

their

ownership

from

unincorporated

to

incorporated

form

by

organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
"Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses Hernandez
and Pacheco in connection with their execution of a deed of exchange on the properties
for no par value shares of the defendant corporation?
"A Yes, sir.
COURT:
"Q What do you mean by 'point of view'?
"A To take advantage for both spouses and corporation in entering in the deed of exchange.
ATTY. LINSANGAN:
"Q (What do you mean by 'point of view'?) What are these benefits to the spouses of this deed of
exchange?
"A Continuous control of the property, tax exemption benefits, and other inherent benefits in a
corporation.
"Q What are these advantages to the said spouses from the point of view of taxation in entering
in the deed of exchange?
"A Having fulfilled the conditions in the income tax law, providing for tax free exchange of
property, they were able to execute the deed of exchange free from income tax and
acquire a corporation.
"Q What provision in the income tax law are you referring to?
"A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-par. (2)
Exceptions regarding the provision which I quote: 'No gain or loss shall also be
recognized if a person exchanges his property for stock in a corporation of which as a
result of such exchange said person alone or together with others not exceeding four
persons gains control of said corporation.'
"Q Did you explain to the spouses this benefit at the time you executed the deed of exchange?
"A Yes, sir.
"Q You also, testified during the last hearing that the decision to have no par value share in the
defendant corporation was for the purpose of flexibility. Can you explain flexibility in
connection with the ownership of the property in question?
"A There is flexibility in using no par value shares as the value is determined by the board of
directors in increasing capitalization. The board can fix the value of the shares
equivalent to the capital requirements of the corporation.
"Q Now also from the point of taxation, is there any flexibility in the holding by the corporation of
the property in question?
"A Yes, since a corporation does not die it can continue to hold on to the property indefinitely for
a period of at least 50 years. On the other hand, if the property is held by the spouse
the property will be tied up in succession proceedings and the consequential payments
of estate and inheritance taxes when an owner dies.
"Q Now what advantage is this continuity in relation to ownership by a particular person of
certain properties in respect to taxation?
"A The property is not subjected to taxes on succession as the corporation does not die.
"Q So the benefit you are talking about are inheritance taxes?
"A Yes, sir." (pp. 3-5, tsn., December 15, 1981).
The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the
Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid

them, by means which the law permits, cannot be doubted." (Liddell & Co., Inc. v. The Collector of Internal Revenue, 2
SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596). LLjur
The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a
contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family
merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, the private
respondent has no basis for its claim of a right of first refusal under the lease contract.
WHEREFORE,

the

instant

petition

is

hereby

GRANTED.

The

questioned

decision

and

resolution

of

the

then Intermediate Appellate Court are REVERSED and SET ASIDE. The amended complaint in Civil Case No. 885-V-79 of
the then Court of First Instance of Bulacan is DISMISSED. No costs.
SO ORDERED.
Fernan, Bidin and Cortes, JJ., concur.
Feliciano, J., took no part.
||| (Delpher Trades Corp. v. Intermediate Appellate Court, G.R. No. 69259, [January 26, 1988])

[G.R. No. 82508. September 29, 1989.]


FILINVEST CREDIT CORPORATION, petitioner, vs. THE COURT OF APPEALS, JOSE SY BANG
and ILUMINADA TAN-SY BANG, * respondents.

Labaquis, Loyola, Angara and Associates for petitioner.


Alfredo I. Raya for private respondents.

SYLLABUS
1. CIVIL LAW; OWNERSHIP; FINANCING INSTITUTION AS OWNER IS NOT IMMUNE FRAOM ANY RECOURSE FROM
BUYER; CASE AT BAR. Bent on acquiring a rock crusher, the private respondents applied for financial assistance from
the petitioner, FILINVEST Credit Corporation. The petitioner agreed to extend to the private respondents financial aid on the
following conditions: that the machinery be purchased in the petitioner's name; that it be leased (with option to purchase
upon the termination of the lease period) to the private respondents; and that the private respondents execute a real estate
mortgage in favor of the petitioner as security for the amount advanced by the latter. Held: While it is accepted that the
petitioner is a financing institution, it is not, however, immune from any recourse by the private respondents. Notwithstanding
the testimony of private respondent Jose Sy Bang that he did not purchase the rock crusher from the petitioner, the fact that
the rock crusher was purchased from Rizal Consolidated Corporation in the name and with the funds of the petitioner proves
beyond doubt that the ownership thereof was effectively transferred to it. It is precisely this ownership which enabled the
petitioner to enter into the "Contract of Lease of Machinery and Equipment" with the private respondents.
2. ID.; CONTRACTS; INTERPRETATION; A CONTRACT IS WHAT THE LAW DEFINES IT AND THE PARTIES INTEND IT
TO BE, NOT WHAT IF IS CALLED BY THE PARTIES. The real intention of the parties should prevail. The
nomenclature of the agreement cannot change its true essence, i.e., a sale on installments. It is basic that a contract is what
the law defines it and the parties intend it to be, not what it is called by the parties. It is apparent here that the intent of the
parties to the subject contract is for the so-called rentals to be the installment payments. Upon the completion of the
payments, then the rock crusher, subject matter of the contract, would become the property of the private respondents. This
form of agreement has been criticized as a lease only in name.

3. ID.; SPECIAL CONTRACTS; SALES; REMEDIES OF SELLER OF MOVABLES PAYABLE IN INSTALLMENTS WHERE
BUYER FAILS TO PAY TWO OR MORE INSTALLMENTS; REMEDIES ARE ALTERNATIVE NOT CUMULATIVE. Under
Article 1484 of the New Civil Code, the seller of movables in installments, in case the buyer fails to pay two or more
installments, may elect to pursue either of the following remedies: (1) exact fulfillment by the purchaser of the obligation; (2)
cancel the sale; or (3) foreclose the mortgage on the purchased property if one was constituted thereon. It is now settled that
the said remedies are alternative and not cumulative and therefore, the exercise of one bars the exercise of the others.
4. ID.; ID.; ID.; CONTRACT OF LEASE WITH OPTION TO BUY, RESORTED TO AS A MEANS OF CIRCUMVENT
ARTICLE 1484 OF NEW CIVIL CODE. Indubitably, the device contract of lease with option to buy is at times
resorted to as a means to circumvent Article 1484, particularly paragraph (3) thereof. Through the set-up, the vendor, by
retaining ownership over the property in the guise of being the lessor, retains, likewise, the right to repossess the same,
without going through the process of foreclosure, in the event the vendee-lessee defaults in the payment of the installments.
There arises therefore no need to constitute a chattel mortgage over the movable sold. More important, the vendor, after
repossessing the property and, in effect, canceling the contract of sale, gets to keep all the installments-cum-rentals already
paid.
5. ID.; QUASI-DELICTS, NEGLIGENCE; BETWEEN TWO PARTIES, HE WHO BY HIS NEGLIGENCE CAUSED THE
LOSS, SHALL BEAR THE SAME. Considering that between the parties, it is the private respondents, by reason of their
business, who are presumed to be more knowledgeable, if not experts, on the machinery subject of the contract, they should
not therefore be heard now to complain of any alleged deficiency of the said machinery. It is their failure or neglect to
exercise the caution and prudence of an expert, or, at least, of a prudent man, in the selection, testing, and inspection of the
rock crusher that gave rise to their difficulty and to this conflict. A well-established principle in law is that between two
parties, he, who by his negligence caused the loss, shall bear the same.
6. ID.; SPECIAL CONTRACTS; SALES; WARRANTY; EXPRESS WAIVER OF WARRANTIES ABSOLVED SELLER FROM
ANY LIABILITY ARISING FROM ANY DEFECT OR DEFICIENCY OF MACHINERY; CASE AT BAR. At any rate, even if
the private respondents could not be adjudged as negligent, they still are precluded from imputing any liability on the
petitioner. One of the stipulations in the contract they entered into with the petitioner is an express waiver of warranties in
favor of the latter. By so signing the agreement, the private respondents absolved the petitioner from any liability arising from
any defect or deficiency of the machinery they bought. The stipulation on the machine's production capacity being
"typewritten" and that of the waiver being "printed" does not militate against the latter's effectivity. As such, whether "a
capacity of 20 to 40 tons per hour" is a condition or a description is of no moment. What stands is that the private
respondents had expressly exempted the petitioner from any warranty whatsoever.
7. ID.; ID.; ID.; ID.; BUYER SHOULD INSPECT A PRODUCT BEFORE PURCHASE AND NOT RETURN IT FOR DEFECTS
DISCOVERED LATER ON. Taking into account that due to the nature of its business and its mode of providing financial
assistance to clients, the petitioner deals in goods over which it has no sufficient know-how or expertise, and the
selection of a particular item is left to the client concerned, the latter, therefore, shoulders the responsibility of protecting
himself against product defects. This is where the waiver of warranties is of paramount importance. Common sense dictates
that a buyer inspects a product before purchasing it (under the principle of caveat emptor or "buyer beware") and does not
return it for defects discovered later on, particularly if the return of the product is not covered by or stipulated in a contract or
warranty.
8. ID.; ID.; ID.; ID.; WAIVER NOT CONSIDERED A MERE SUPRLUSAGE IN CONTRACT. to declare the waiver as noneffective, as the lower courts did, would impair the obligation of contracts. Certainly, the waiver in question could not be
considered a mere surplusage in the contract between the parties. Moreover, nowhere is it shown in the records of the case
that the private respondent has argued for its nullity or illegality. In any event, we find no ambiguity in the language of the
waiver or the release of warranty. There is therefore no room for any interpretation as to its effect or applicability vis-a-vis the
deficient output of the rock crusher. Suffice it to say that the private respondents have validly excused the petitioner from any
warranty on the rock crusher. Hence, they should bear the loss for any defect found therein.

DECISION

SARMIENTO, J p:
This is a petition for review on certiorari of the decision, 1 dated March 17, 1988, of the Court of Appeals which affirmed with
modification the decision 2 of the Regional Trial Court of Quezon, Branch LIX, Lucena City. LLjur
The controversy stemmed from the following facts:
The private respondents, the spouses Jose Sy Bang and Iluminada Tan, were engaged in the sale of gravel produced from
crushed rocks and used for construction purposes. In order to increase their production, they engaged the services of Mr.
Ruben Mercurio, the proprietor of Gemini Motor Sales in Lucena City, to look for a rock crusher which they could buy. Mr.
Mercurio referred the private respondents to the Rizal Consolidated Corporation which then had for sale one such machinery
described as:
ONE UNIT LIPPMAN PORTABLE CRUSHING PLANT
(RECONDITIONED) [sic]
JAW CRUSHER 10 x 16
DOUBLE ROLL CRUSHER 16x16
3 UNITS PRODUCT CONVEYOR
75 HP ELECTRIC MOTOR
8 PCS. BRAND NEW TIRES
CHASSIS NO. 19696
GOOD RUNNING CONDITION 3
Oscar Sy Bang, a brother of private respondent Jose Sy Bang, went to inspect the machine at the Rizal Consolidated's plant
site. Apparently satisfied with the machine, the private respondents signified their intent to purchase the same. They were
however confronted with a problem the rock crusher carried a cash price tag ofP550,000.00. Bent on acquiring the
machinery, the private respondents applied for financial assistance from the petitioner, FILINVEST Credit Corporation. The
petitioner agreed to extend to the private respondents financial aid on the following conditions: that the machinery be
purchased in the petitioner's name; that it be leased (with option to purchase upon the termination of the lease period) to the
private respondents; and that the private respondents execute a real estate mortgage in favor of the petitioner as security for
the amount advanced by the latter.
Accordingly, on May 18, 1981, a contract of lease of machinery (with option to purchase) was entered into by the parties
whereby the private respondents agreed to lease from the petitioner the rock crusher for two years starting from July 5, 1981
payable as follows:
P10,000.00 first 3 months
23,000.00 next 6 months
24,800.00 next 15 months 4
The contract likewise stipulated that at the end of the two-year period, the machine would be owned by the private
respondents. Thus, the private respondents issued in favor of the petitioner a check for P150,550.00, as initial rental (or
guaranty deposit), and twenty-four (24) postdated checks corresponding to the 24 monthly rentals. In addition, to guarantee
their compliance with the lease contract, the private respondents executed a real estate mortgage over two parcels of land in
favor of the petitioner. The rock crusher was delivered to the private respondents on June 9, 1981.

Three months from the date of delivery, or on September 7, 1981, however, the private respondents, claiming that they had
only tested the machine that month, sent a letter-complaint to the petitioner, alleging that contrary to the 20 to 40 tons per
hour capacity of the machine as stated in the lease contract, the machine could only process 5 tons of rocks and stones per
hour. They then demanded that the petitioner make good the stipulation in the lease contract. They followed that up with
similar written complaints to the petitioner, but the latter did not, however, act on them. Subsequently, the private
respondents stopped payment on the remaining checks they had issued to the petitioner. 5
As a consequence of the non-payment by the private respondents of the rentals on the rock crusher as they fell due despite
the repeated written demands, the petitioner extrajudicially foreclosed the real estate mortgage. 6 On April 18, 1983, the

private respondents received a Sheriff s Notice of Auction Sale informing them that their mortgaged properties were going to
be sold at a public auction on May 25, 1983 at 10:00 o'clock in the morning at the Office of the Provincial Sheriff in Lucena
City to satisfy their indebtedness to the petitioner. 7 To thwart the impending auction of their properties, the private
respondents filed before the Regional TrialCourt of Quezon, on May 4, 1983, 8 a complaint against the petitioner, for the
rescission of the contract of lease, annulment of the real estate mortgage, and for injunction and damages, with prayer for
the issuance of a writ of preliminary injunction. 9 On May 23, 1983, three days before the scheduled auction sale, the
trial courtissued a temporary restraining order commanding the Provincial Sheriff of Quezon, and the petitioner, to refrain
and desist from proceeding with the public auction. 10Two years later, on September 4, 1985, the trial court rendered a
decision in favor of the private respondents, the dispositive portion of which reads:
WHEREFORE, PREMISES CONSIDERED, Judgment is hereby rendered:
1. making the injunction permanent;
2. rescinding the contract of lease of the machinery and equipment and ordering the plaintiffs to return
to the defendant corporation the machinery subject of the lease contract, and the defendant corporation
to return to plaintiffs the sum of P470,950.00 it received from the latter as guaranty deposit and rentals
with legal interest thereon until the amount is fully restituted;
3. annulling the real estate mortgage constituted over the properties of the plaintiffs covered by Transfer
Certificate of Title Nos. T-32480 and T-5779 of the Registry of Deeds of Lucena City;
4. ordering the defendant corporation to pay plaintiffs P30,000.00 as attorney's fees and the costs of the
suit.
SO ORDERED. 11
Dissatisfied with the trial court's decision, the petitioner elevated the case to the respondent Court of Appeals.
On March 17, 1988, the appellate court, finding no error in the appealed judgment, affirmed the same in toto. 12 Hence, this
petition.
Before us, the petitioner reasserts that the private respondents' cause of action is not against it (the petitioner), but against
either the Rizal Consolidated Corporation, the original owner-seller of the subject rock crusher, or Gemini Motors Sales
which served as a conduit-facilitator of the purchase of the said machine. The petitioner argues that it is a financing
institution engaged in quasi-banking activities, primarily the lending of money to entrepreneurs such as the private
respondents and the general public, but certainly not the leasing or selling of heavy machineries like the subject rock
crusher. The petitioner denies being the seller of the rock crusher and only admits having financed its acquisition by the
private respondents. Further, the petitioner absolves itself of any liability arising out of the lease contract it signed with the
private respondents due to the waiver of warranty made by the latter. The petitioner likewise maintains that the private
respondents being presumed to be knowledgeable about machineries, should be held responsible for the
detection of defects in the machine they had acquired, and on account of that, they are estopped from claiming any
breach of warranty. Finally, the petitioner interposed the defense of prescription, invoking Article 1571 of the Civil Code,
which provides:
Art. 1571. Actions arising from the provisions of the preceding ten articles shall be barred after six
months, from the delivery of the thing sold.
We find the petitioner's first contention untenable. While it is accepted that the petitioner is a financing institution, it is not,
however, immune from any recourse by the private respondents. Notwithstanding the testimony of private respondent Jose
Sy Bang that he did not purchase the rock crusher from the petitioner, the fact that the rock crusher was purchased from
Rizal Consolidated Corporation in the name and with the funds of the petitioner proves beyond doubt that the ownership
thereof was effectively transferred to it. It is precisely this ownership which enabled the petitioner to enter into the
"Contract of Lease of Machinery and Equipment" with the private respondents. LLphil
Be that as it may, the real intention of the parties should prevail. The nomenclature of the agreement cannot change its true
essence, i.e., a sale on installments. It is basic that a contract is what the law defines it and the parties intend it to be, not
what it is called by the parties. 13 It is apparent here that the intent of the parties to the subject contract is for the so-called

rentals to be the installment payments. Upon the completion of the payments, then the rock crusher, subject matter of the
contract, would become the property of the private respondents. This form of agreement has been criticized as a lease only
in name. Thus in Vda. de Jose v. Barrueco, 14 we stated:
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a
bargain in that form, for one reason or another, have frequently resorted to the device of making
contracts in the form of leases either with options to the buyer to purchase for a small consideration at
the end of term, provided the so-called rent has been duly paid, or with stipulations that if the rent
throughout the term is paid, title shall thereupon vest in the lessee. It is obvious that such transactions
are leases only in name. The so-called rent must necessarily be regarded as payment of the price in
installments since the due payment of the agreed amount results, by the terms of bargain, in the
transfer of title to the lessee. 15
The importance of the criticism is heightened in the light of Article 1484 of the new Civil Code which provides for the
remedies of an unpaid seller of movables in installment basis.
Article 1484. In a contract of sale of personal property the price of which is payable in installments, the
vendor may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage or the thing sold, if one has been constituted, should the vendee's
failure to pay cover two or more installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.
Under the aforequoted provision, the seller of movables in installments, in case the buyer fails to pay two or more
installments, may elect to pursue either of the following remedies: (1) exact fulfillment by the purchaser of the obligation; (2)
cancel the sale; or (3) foreclose the mortgage on the purchased property if one was constituted thereon. It is now settled that
the said remedies are alternative and not cumulative and therefore, the exercise of one bars the exercise of the others.
Indubitably, the device contract of lease with option to buy is at times resorted to as a means to circumvent Article
1484, particularly paragraph (3) thereof. Through the set-up, the vendor, by retaining ownership over the property in the
guise of being the lessor, retains, likewise, the right to repossess the same, without going through the process of foreclosure,
in the event the vendee-lessee defaults in the payment of the installments. There arises therefore no need to constitute a
chattel mortgage over the movable sold. More important, the vendor, after repossessing the property and, in effect,
canceling the contract of sale, gets to keep all the installments-cum-rentals already paid. It is thus for these reasons that
Article 1485 of the new Civil Code provides that:
Article 1485. The preceding article shall be applied to contracts purporting to be leases of personal
property with option to buy, when the lessor has deprived the lessee of possession or enjoyment of the
thing. (Emphasis ours.)
Unfortunately, even with the foregoing findings, we however fail to find any reason to hold the petitioner liable for the rock
crusher's failure to produce in accordance with its described capacity. According to the petitioner, it was the private
respondents who chose, inspected, and tested the subject machinery. It was only after they had inspected and tested the
machine, and found it to their satisfaction, that the private respondents sought financial aid from the petitioner. These
allegations of the petitioner had never been rebutted by the private respondents. In fact, they were even admitted by the
private respondents in the contract they signed. Thus:
LESSEE'S SELECTION, INSPECTION AND VERIFICATION. The LESSEE hereby confirms and
acknowledges that he has independently inspected and verified the leased property and has selected
and received the same from the Dealer of his own choosing in good order and excellent running and
operating condition and on the basisof such verification, etc. the LESSEE has agreed to enter into this
Contract." 16

Moreover, considering that between the parties, it is the private respondents, by reason of their business, who are
presumed to be more knowledgeable, if not experts, on the machinery subject of the contract, they should not therefore
be heard now to complain of any alleged deficiency of the said machinery. It is their failure or neglect to exercise the
caution and prudence of an expert, or, at least, of a prudent man, in the selection, testing, and inspection of the rock
crusher that gave rise to their difficulty and to this conflict. A well-established principle in law is that between two parties,
he, who by his negligence caused the loss, shall bear the same.
At any rate, even if the private respondents could not be adjudged as negligent, they still are precluded from imputing any
liability on the petitioner. One of the stipulations in the contract they entered into with the petitioner is an express
waiver of warranties in favor of the latter. By so signing the agreement, the private respondents absolved the petitioner from
any liability arising from any defect or deficiency of the machinery they bought. The stipulation on the machine's production
capacity being "typewritten" and that of the waiver being "printed" does not militate against the latter's effectivity. As such,
whether "a capacity of 20 to 40 tons per hour" is a condition or a description is of no moment. What stands is that the private
respondents had expressly exempted the petitioner from any warranty whatsoever. Their Contract of Lease Of Machinery
And Equipment states:
WARRANTY LESSEE absolutely releases the lessor from any liability whatsoever as to any and all
matters in relation to warranty in accordance with the provisions hereinafter stipulated. 17
Taking into account that due to the nature of its business and its mode of providing financial assistance to clients, the
petitioner deals in goods over which it has no sufficient know-how or expertise, and the selection of a particular item is left to
the client concerned, the latter, therefore, shoulders the responsibility of protecting himself against product defects. This is
where the waiver of warranties is of paramount importance. Common sense dictates that a buyer inspects a product before
purchasing it (under the principle of caveat emptor or "buyer beware") and does not return it for defects discovered later on,
particularly if the return of the product is not covered by or stipulated in a contract or warranty. In the case at bar, to declare
the waiver as non-effective, as the lower courts did, would impair the obligation ofcontracts. Certainly, the waiver in question
could not be considered a mere surplusage in the contract between the parties. Moreover, nowhere is it shown in the
records of the case that the private respondent has argued for its nullity or illegality. In any event, we find no ambiguity in the
language of the waiver or the release ofwarranty. There is therefore no room for any interpretation as to its effect or
applicability vis-a-vis the deficient output of the rock crusher. Suffice it to say that the private respondents have validly
excused the petitioner from any warranty on the rock crusher. Hence, they should bear the loss for any defect found
therein. prLL
WHEREFORE, the Petition is GRANTED; the Decision of the Court of Appeals dated March 17, 1988 is hereby REVERSED
AND SET ASIDE, and another one rendered DISMISSING the complaint. Costs against the private respondents.
SO ORDERED.
Melencio-Herrera, Paras and Regalado, JJ., concur.
Padilla, J., No part, former counsel of petitioner-corporation.
||| (Filinvest Credit Corp. v. Court of Appeals, G.R. No. 82508, [September 29, 1989], 258 PHIL 812-824)

[G.R. No. L-11668. April 1, 1918.]


ANTONIO ENRIQUEZ DE LA CAVADA, plaintiff-appellee, vs. ANTONIO DIAZ, defendant-appellant.

Ramon Diokno for appellant.


Alfrado Chicote and Jose Arnaiz for appellee.

SYLLABUS
1. EVIDENCE; LEGALITY OF THAT ADDUCED BY AGREEMENT OF PARTIES BEFORE THE CLERK OF
COURT. There is nothing in the law nor in public policy which prohibits the parties in civil litigation from entering into
an agreement that the evidence to be presented in the case should be adduced before the clerk of the court. The law
concedes to parties litigant, generally, the right to have their proof taken in the presence of the judge. Such a right is a
renounceable one in civil cases. In a civil action the parties litigant have a right to agree, outside of the court, upon the
facts in litigation. Under certain conditions, the parties litigant have a right to take the deposition of witnesses and
submit the sworn statements in the form to the court. The proof, as it was submitted to the court in the present case, by
virtue of said agreement, was in effect in the form of the a deposition of the various witnesses. Having agreed to the
method of taking the proof, and the same having been taken in compliance with said agreement, it is now too late to
deny and repudiate the effect of their agreement. Not only is there no law prohibiting the parties from entering into an
agreement to submit their proof to the clerk in civil cases, but it may be highly convenient, not only to the parties, but to
busy courts.
2. CONTRACTS; PROMISE AS CONSIDERATION ("CAUSA"). A promise made by one party, if made in the
forms required by the law, may be a good consideration, for a promise made by another party. In other words, the
consideration need not be passed from one to another at the time the contract is entered into. The consideration need
not be paid at the time of the promise. The one promise is a consideration for the other.
3. ID.; OPTIONAL CONTRACTS, DEFINED. An optional contract is a privilege existing in one person, for
which he had paid a consideration, which gives him the right to buy, for example, certain merchandise or certain
specified property, from another person if he chooses, at any time within the agreed period at a fixed price. The contract
of option is a separate and distinct contract from the contract which the parties may enter into upon contract is just as
important as the consideration for any other kind of contract.
JOHNSON, J p:

This action was instituted by the plaintiff for the purpose of requiring the defendant to comply with a certain
"contract of option" to purchase a certain piece or parcel of land described in said contract and for damages for a
noncompliance with said contract. After the close of the trial the Honorable James A. Ostrand, judge, rendered a
judgment the dispositive part of which is as follows:
"Wherefore it is hereby ordered adjudged that the defendant, within the period of thirty days
from the date upon which this decision becomes final, convey to the plaintiff a good and sufficient title in
fee simple to the Court of Land Registration, upon payment or legal tender of payment by said plaintiff of
the sum of thirty thousand pesos (P30,000) in cash, and upon said plaintiff giving security approved by
this court for the payment within the term of 6 years from the date of the conveyance for the additional
sum of forty thousand pesos (P40,000) with interest at the rate of 6 per cent per annum.
"It is further ordered and adjudged that in the event of the failure of the defendant to execute
the conveyance as aforesaid, the plaintiff have and recover judgment against him, the said defendant,
for the sum of twenty thousand pesos (P20,000), with interest at the rate of six per cent (6 per cent per
annum from the date upon which the conveyance should have been made). It is also ordered."
From that judgment the defendant appealed and made several assignments of error.
It appears from the record that on the 15th day of November 1912 the defendant and the plaintiff entered into
the following "contract of option:"
"(Exhibit A.)
"CONTRACT OF OPTION.
"I, the undersigned, Antonio Diaz, of legal age, with personal registration certificate Number F855949m issued at Pitogo, Tayabas, January 16, 1912, and temporarily residing in Manila, P. I., do
hereby grant an option to Antonio Enriquez to purchase my hacienda at Pitogo consisting of 100 and
odd hectares, within the period necessary for the approval and issuance of a Torrens title thereto by the
Government for which he may pay me either the sum of thirty thousand pesos (P30,000), Philippine
currency, in cash, or within the period of six (6) years, beginning with the date of the purchase, the sum
of forty thousand pesos (P40,000), Philippine currency, at six per cent interest per annum, with due
security for the payment of the said property described as follows, to wit:
"About one hundred hectares of land in Pitogo, Tayabas, containing about 20,000 coconut
tress and 10,000 nipa-palm trees, all belonging to me, which I hereby sell to Antonio
Enriquez de la Cavada for seventy thousand pesos, under the condition herein specified.
"I declared that Antonio Enriquez is the sole person who has, and shall have, during the period
of this option, the right to purchase the property above-mentioned.
"I likewise declare that Antonio Enriquez shall be free to resell the said property at whatever
price he may desire, provided that he should comply with the stipulations covenanted with me.
"In witness of my entire conformity with the foregoing, I hereunto affix my signature, in Manila,
P. I., this 15th day November, 1912.
(Sgd.) "ANTONIO DIAZ.
"Signed in the presence of:
(Sgd.) "J. VALDS DIAZ."
"(Exhibit B.)
"P. I., November 15, 1912.
"Sr. Don ANTONIO DIAZ,
"Calle Victoria, No. 125, W. C.,
Manila, P. I.

"DEAR SIR: I have the honor to inform you that, in conformity with the letter of option in my
favor of even date, I will buy you coconut plantation in Pitogo, containing one hundred hectares,
together with all the coconut and nipa-palm trees planted thereon, under the following conditions:
"1. I shall send a surveyor to survey the said property, and to apply to the Government for a
Torrens title therefor, and, if the expenses incurred for the same should not exceed P1,000, I shall pay
the P500 and you the other P500; Provided, however, that you shall give the surveyor all necessary
assistance during his stay at the hacienda.
"2. I shall pay the purchase price to you in conformity with our letter of option of this date, and
after the Torrens title shall have been officially approved.
"Your respectfully,
(Sgd.) "A. ENRIQUEZ.
"I acknowledge receipt of, and conform with, the foregoing.
(Sgd.) "ANTONIO DIAZ."
It appears from the record that soon after the execution of said contract, and in part compliance with the terms
thereof, the defendant presented two petitions in the Court of Land Registration (Nos. 13909 and 13919), each for the
purpose of obtaining the registration of a part of the "Hacienda de Pitogo." Said petitions were granted, and each parcel
was registered and a certificate of title was issued for each part under the Torrens system to the defendant herein. Later,
and pretending to comply with the terms of said contract, the defendant offered to transfer to the plaintiff one of said
parcels only, which was a part of said "hacienda." The plaintiff refused to accept said certificate for a part only of said
"hacienda" upon the ground (a) that it was only a part of the "Hacienda de Pitogo," and (b) under the contract (Exhibits
A and B) he was entitled to a transfer to him a all said "hacienda."
Theory of the defendant is that the contract of sale of said "Hacienda de Pitogo" included only 100 hectares,
more or less, of said "hacienda," and that offering to convey to the plaintiff a portion of said "hacienda," and that by
offering to convey to the plaintiff a portion of said "hacienda" composed of "100 hectares, more or less," he thereby
complied with the terms of the contract. The theory of the plaintiff is that he had purchased all of said "hacienda," and
that the same contained, at least, 100 hectares, more or less. The lower court sustained the contention of the plaintiff, to
wit, that the sale was a sale of the "Hacienda de Pitogo" and not a sale of a part of it, and rendered a judgment requiring
the defendant to comply with the terms of the contract by transferring to the plaintiff, proper deeds of conveyance, all of
said "hacienda," or to pay in lieu thereof the sum of P20,000 damages, together with 6 per cent interest from the date
upon which said conveyance should have been made.
After issue had been joined between the plaintiff and defendant upon their pleadings, they entered into the
following agreement with reference to the method of presenting their proof:
"The attorneys for the parties in this case make the following stipulations:
"1. Each of the litigating parties shall present his evidence before Don Felipe Canillas,
assistant clerk of the Court of First Instance of Manila, who, for such purpose, should be appointed
commissioner.
"2. Said commissioner shall set a day and hour for the presentation of the evidence abovementioned, both oral and documentary, and in the stenographic notes shall have record entered of all
objections made to the evidence by either party, in order that they may afterwards be decided by the
court.
"3. The transcription of the stenographic notes, containing the record of the evidence taken,
shall be paid for in equal shares by both parties.
"4. At the close of the taking of the evidence, each of the parties shall file his brief in respect to
such evidence, whereupon the case as it then stands shall be submitted to the decision of the court.
"The parties request the court to approve this agreement in the part thereof which refers to the
proceedings in this case.

"Manila, P. I., December 21, 1914.


(Sgd.) "ANTONIO V. HERRERO. (Sgd.) ALFREDO CHICOTE.
"Approved:
(Sgd.) "Geo R. Harvey,
"Judge."
Said agreement was approved by the lower court, and proof was taken in accordance therewith. The
defendant-appellant now alleges, giving several reasons therefor, that the proof was improperly practiced, and that the
judge was without authority to decide the cause upon proof taken in the manner agreed upon by the respective parties.
The defendant-appellant makes no contention that was not permitted to present all the proof he desired to present. he
makes no contention that he has been prejudiced in any manner whatsoever by virtue of the method agreed upon for
taking the testimony.
There is nothing in the law nor in public policy which prohibits the parties in a civil litigation from making the
agreement above quoted. While the law concedes to parties litigant, generally, the right to have their proof taken in the
presence of the judge, such a right is a renounceable one. In a civil action the parties litigant have a right to agree,
outside of the court, upon the facts in litigation. Under certain conditions the parties litigant have a right to take the
depositions of witnesses and submit the sworn statements in that form to the court. The proof, as it was submitted to the
court in the present case, by virtue of said agreement, was, in effect, in the form of a deposition of the various witnesses
presented. Having agreed to the method of taking the proof, and the same having been taking in compliance with said
agreement, it is now too late, there being no law to the contrary, for them to deny and repudiate the effect of their
agreement. (Biunas vs. Mora, R.G. No. 11464, March 11, 1918; Behr vs. Levy Hermanos, R.G. No. 12211, March 19,
1918. 1)
Not only is there no law prohibiting the parties from entering into an agreement to submit their proof to the
court in civil actions as was done in the present case, but it may be a method highly convenient, not only to the parties,
but to busy courts. The judgment of the lower court, therefore, should not be modified or reversed on account of the first
assignment of error.
In the second assignment of error, the appellant alleges (a) that the lower court committed an error in declaring
the contract (Exhibits A and B) a valid obligation, for the reason that it had not been admitted in evidence , and (b) that
the same was null for a failure of consideration. Upon the first question, an examination of the proof shows that said
contract (Exhibits A and B) was offered in evidence and admitted as proof without objection. Said contract was,
therefore, properly presented to the court as proof. Not only was the contract before the court by reason of its having
been presented in evidence, but defendant himself made said contract an integral part of his pleadings. The defendant
admitted the execution and delivery of the contract, and alleged that he made an effort to comply with its terms. His only
defense is that he sold to the plaintiff a part of the "hacienda" only and that he offered, in compliance with the terms of
the contract, to convey to the plaintiff all of the land which he had promised to sell.
With reference to the second objection, to wit, that there was no consideration for said contract it may be said
(a) that the contract was for the sale of a definite parcel of land: (b) that it was reduced to writing; (c) that the defendant
promised to convey to the plaintiff said parcel of land; (d) that the plaintiff promised to pay therefor the sum of P70,000
in the manner prescribed in said contract; (e) that the defendant admitted the execution and delivery of the contract and
alleged that he made an effort to comply with the same (par. 3 of defendant's answer) and requested the plaintiff to
comply with his part of the contract; and (f) that no defense or prevention was made in the lower court that there was no
consideration for his contract. Having admitted the execution and delivery of the contract, having admitted an attempt to
comply with its terms, and having failed in the court below to raise any question whatsoever concerning the inadequacy
of consideration, it is rather late, in the face of said admissions, to raise that question for the first time in this court. The
only dispute between the parties in the lower court was whether or not the defendant contended that he had complied
with the terms of his contract by offering to convey to the plaintiff a part of the said "hacienda". The defendant
contended that he had complied with the terms of his contract by offering to convey to the plaintiff a part of said
"hacienda" only. That was the only question presented to the lower court and that was only question decided.

A promise made by one party, if made in accordance with the forms required by the law, may be a good
consideration (causa) for a promise made by another party. (Art. 1274, Civil Code.) In other words, the consideration
(causa) need not pass from one to the other at the time the contract is entered into. For example, A promises to sell a
certain parcel of land to B for the sum of P70,000. If A, by virtue of the promise of B to P70,000, promises to sell said
parcel of land to B for said sum, then the contract is complete, provided they have complied with the forms required by
the law. Of course, A cannot enforce a compliance with the contract and require B to pay said sum until he has
complied with his part of the contract. In the present case, the defendant promised to convey the land in question to the
plaintiff as soon as the same could be registered. The plaintiff promised to pay to the defendant P70,000 therefor in
accordance with the terms of their contract. The plaintiff stood ready to comply with his part of the contract. The
defendant, even though he had obtained a registered title to said parcel of land, refused to comply with his promise. All
of the conditions of the contract on the part of the defendant had been concluded, except delivering the deeds of
transfer. Of course, if the defendant had been unable to obtain a registration of his title, or if he had violated the terms of
the alleged optional contract by selling the same to some other person than the plaintiff, then he might have raised the
objection that he had received nothing from the plaintiff for the option which he had conceded. That condition, of course,
would have presented a different question from the one which we have before us. The said contract (Exhibits A and B)
was not, in fact, an "optional contract" as that phrase in generally used. Reading the said contract from its four corners it
is clearly an absolute promise to sell a definite parcel of land for a fixed price upon definite conditions. The defendant
promised to convey to the plaintiff the land in question as soon as the same was registered under the Torrens system,
and the plaintiff promised to pay to the defendant the sum of P70,000, under the condition named, upon the happening
of that event. The contract was not, in fact, what is generally known as a "contract of option." It differs very essentially
from a contract of option. An optional contract is a privilege existing in one person, for which he had paid a
consideration, which gives him the right to buy, for example, certain merchandise of certain specified property, from
another person, if he chooses, at any time within the agreed period, at a fixed price. The contract of option is a separate
and distinct contract from the contract which the parties may enter into upon the consummation of the option. A
consideration for an optional contract is just as important as the consideration for any other kind of contract. If there was
no consideration for the contract of option, then it cannot be enforced any more than any other contract where no
consideration exists. To illustrate, A and B the sum of P100,000 for the option of buying his property within the period of
30 days. While it is true that the conditions upon which A promises to buy the property at the end of the period
mentioned are usually fixed in the option, the consideration from the consideration of the contract with reference to
which the option exists. A contract of option is a contract by virtue of the terms of which the parties thereto promise and
obligate themselves to enter into another contract at a future time, upon the happening of certain events, or the
fulfillment of certain conditions.
Upon the other hand, suppose that the defendant had complied with his part of the contract and had tendered
the deeds of transfer of the "Hacienda dePitogo." in accordance with its terms and had demanded the payments
specified in the contract, and the plaintiff refused to comply what then would have been the rights of the defendant?
Might he not have successfully maintained an action for the specific performance of the contract, or for the damages
resulting from the breach of said contract? When the defendant alleged that he had complied with his part of the
contract (par. 3 of defendant's answer) and demanded that plaintiff should immediately comply with his part of the
same, he evident was laying the foundation for an action damages, the nullification or a specific compliance with
contract.
The appellant contends that contract which he made was not with the plaintiff but with Rosenstock, Elser & Co.
That question was not presented in the court below. The contract in question shows, upon its face, that the defendant
made the same with the plaintiff. Not having raised the question in the court below, and having admitted the execution
and delivery of the contract in question with the plaintiff, we are of opinion that his admission is conclusive upon that
question (par. 1 of special defense of defendant's answer) and need not be further discussed.
The appellant further contends that the action was premature, for the reason that the plaintiff had not paid nor
offered to pay the price agreed upon, under the conditions named, for the land in question. That question was not raised
in the court below, which fact, ordinarily, would be a sufficient answer to the contention of the appellant. It may be
added, however, that the defendant could not demand the payment until he had offered the deeds of conveyance, in
accordance with the terms of the contract. He did not offer to comply with the terms of his contract. True it is that he

offered to comply partially with the terms of the contract, but not fully. While the payment must be simultaneous with the
delivery of the deeds of conveyance, the payment need not be made until deed of conveyance is offered. The plaintiff
stood ready and willing to perform his part of the contract immediately upon on the part of the defendant. (Arts. 1258
and 1451 of Civil Code.)

In the fifth assignment of error the appellant contends that the lower court committed an error in not declaring
that the defendant was not obligated to sell the "Hacienda de Pitogo" to the plaintiff "por incumplimiento, renuncia,
abandono y negligencia del mismo demandante, etc." (For nonfulfillment, renunciation, abandonment and negligence of
plaintiff himself, etc.) That question was not presented to the court below. But even though it had been the record shows
that the plaintiff, at all times, insisted upon a compliance with the terms of the contract on the part of the defendant,
standing ready to comply with his part of the same.
The appellant contends in his sixth assignment of error that the plaintiff had not suffered the damages
complained of, to wit, in the sum of P20,000. The only proof upon the question of damages suffered by the plaintiff for
the noncompliance with the terms of the contract in question on the part of defendant is that the plaintiff, in
contemplation of the compliance with the terms of the contract on the part of the defendant, entered into a contract with
a third party to sell the said "hacienda" at a profit of P30,000. That proof is not disputed. No attempt was made in the
lower court to deny that fact. The proof shows that the person with whom the plaintiff had entered into a conditional sale
of the land in question had made a deposit for the purpose of guaranteeing the final consummation of the that contract.
By reason of the failure of the defendant to comply with the contract here in question, the plaintiff was obliged to return
the sum deposited by said third party with a promise to pay damages. The record does not show why the plaintiff did not
ask for damages in the sum of P30,000. He asked for a judgment only in the sum of P20,000. He now asks that the
judgment of the lower court modified and that he be given a judgment for P30,000. Considering the fact that he neither
asked for a judgment for more than P20,000 nor appealed from the judgment of the lower court, his request now cannot
be granted. We find no reason for modifying the judgment of the lower court by virtue of the sixth assignment of error.
In the seventh assignment of error the appellant contends that the contract of sale was not in effect a contract
of sale. He alleges that the contract was, in fact, a contract by virtue of which the plaintiff promised to find a buyer for
the parcel of land in question; that the plaintiff was not in fact the purchaser; that only obligation that the plaintiff
assumed was to find some third person who would purchase the land from the defendant. Again, it would be sufficient to
say, in answer to that presented in the court below, and for that reason it is improperly presented now for the first time.
In addition, however, it may be added that the defendant, in his answer, admitted that he not only sold the land in
question, but offered to transfer the same to the plaintiff, in compliance with the contract. (See answer of defendant.)
In the eight assignment of error the appellant contends that the lower court committed an error in its order
requiring him to convey to the plaintiff the "Hacienda de Pitogo," for the reason that the plaintiff had not demanded a
transfer of said property, and for the additional reason that a portion of said "hacienda" had already been sold to a third
person. With reference to the first contention, the record clearly shows that the plaintiff was constantly insisting upon
compliance with the terms of the contract, to wit, a conveyance to him of the "Hacienda de Pitogo" by the defendant.
Naturally, he refused, under the contract, to accept a conveyance of a part only be said "hacienda." With reference to
the second contention, it may be said that the mere fact that the defendant had sold a part of the "hacienda" to other
person, is no sufficient reason for not requiring a strict compliance with the terms of his contract with the plaintiff, or to
answer in damages for his failure. (Arts. 1101 and 1251 of the Civil Code.)
In view of all of the foregoing, and after a consideration of the facts and the law applicable thereto, we are
persuaded that there is no reason given in the record justifying a modification or reversal of the judgment of the lower
court. The same is, therefore, hereby affirmed, with costs. So ordered.
Arellano, C.J., Torres, Street, Malcolm, and Fisher, JJ., concur.
||| (de la Cavada v. Diaz, G.R. No. L-11668, [April 1, 1918], 37 PHIL 982-994)

[G.R. No. L-25494. June 14, 1972.]


NICOLAS SANCHEZ, plaintiff-appellee, vs. SEVERINA RIGOS, defendant-appellant.

Santiago F . Bautista for plaintiff-appellee.


Jesus G. Villamar for defendant-appellee.

SYLLABUS
1. CIVIL LAW; CONTRACTS; CONTRACT TO BUY AND SELL; OPTION WITHOUT CONSIDERATION; CASE AT BAR.
Where both parties indicated in the instrument in the caption, as an "Option to Purchase," and under the provisions thereof,
the defendant "agreed, promised and committed" herself to sell the land therein described to the plaintiff for P1,510.00, but
there is nothing in the contract to indicate that her aforementioned agreement, promise and undertaking is supported by a
consideration "distinct from the price" stipulated for the sale of the land, it is not a "contract to buy and sell." It merely granted
plaintiff an "option" to buy.
2. ID.; ID.; ID.; ID.; ARTICLES 1354 AND 1479, NEW CIVIL CODE; APPLICABILITY. It should be noted that: Article 1354
applies to contracts in general, whereas the second paragraph of Article 1479 refers to "sales" in particular, and, more
specifically, to "an accepted unilateral promise to buy or to sell."
3. ID.; ID.; REQUISITE OF A UNILATERAL PROMISE IN ORDER TO BIND PROMISOR; BURDEN OF PROOF REST
UPON PROMISEE. In order that a unilateral promise may be "binding" upon the promisor, Article 1479 requires the
concurrence of a condition namely, that the promise be "supported by a consideration distinct from the price." Accordingly,
the promisee can not compel the promisor to comply with the promise, unless the former establishes the existence of said
distinct consideration. In other words, the promisee has the burden of proving such consideration.
4. ID.; ID.; WHERE A UNILATERAL PROMISE TO SELL GENERATED TO A BILATERAL CONTRACT OF PURCHASE
AND SALE; ARTICLES 1324 AND 1479, NCC., NO DISTINCTION. This Court itself, in the case of Atkins, Kroll & Co.,
Inc. vs. Cua Hian Tek (102 Phil., 948), decided later than Southwestern Sugar & Molasses Co. vs. Atlantic & Pacific Co., 97
Phil., 249, saw no distinction between Articles 1324 and 1479 of the Civil Code and applied the former where a unilateral
promise to sell similar to the one sued upon was involved, treating such promise as an option which, although not binding as
a contract in itself for lack of a separate consideration, nevertheless generated a bilateral contract of purchase and sale
upon acceptance. In other words, since there may be no valid contract without a cause or consideration promisor is not

bound by his promise and may, accordingly withdraw it. Pending notice of its withdrawal, his accepted promise partakes,
however, of the nature of an offer to sell which, if accepted, results in a perfected contract of sale.
5. REMEDIAL LAW; PLEADINGS AND PRACTICE; JUDGMENT ON THE PLEADINGS; IMPLIED ADMISSION.
Defendant explicitly averred in her answer, and pleaded as a special defense, the absence of said consideration for her
promise to sell and, by joining in the petition for a judgment on the pleadings, plaintiff has impliedly admitted the truth of said
averment in defendant's answer.
6. STATUTORY CONSTRUCTION; INTERPRETATION OF PROVISIONS OF SAME LAW; CARDINAL RULE. The view
that an option to sell can still be withdrawn, even if accepted, if the same is not supported by any consideration, has the
advantage of avoiding a conflict between Article 1324 on the general principles on contracts and 1479 on sales
of the Civil Code, in line with the cardinal rule of statutory construction that, in construing different provisions of one and the
same law or code, such interpretation should be favored as will reconcile or harmonize said provisions and avoid a conflict
between the same. Indeed, the presumption is that, in the process of drafting the Code, its author has maintained a
consistent philosophy or position. Moreover, the decision in Southwestern Sugar & Molasses Co. vs. Atlantic Gulf & Pacific
Co., supra, holding that Article 1324 is modified by Article 1479 of the Civil Code, in effect, considers the latter as an
exception to the former, and exceptions are not favored, unless the intention to the contrary is clear, and it is not so, insofar
as said two (2) articles are concerned. What is more, the reference, in both the second paragraph of Article 1479 and Article
1324, to an option or promise supported by or founded upon a consideration, strongly suggests that the two (2) provisions
intended to enforce or implement the same principle.
ANTONIO, J., concurring opinion:
1. CIVIL LAW; CONTRACTS; OPTION TO SELL; EFFECT OF ACCEPTANCE. I fully agree with the abandonment of the
view previously adhered to in Southwestern Sugar & Molasses Co. vs. Atlantic Gulf and Pacific Co. (97 Phil., 249), which
holds that an option to sell can still be withdrawn, even if accepted if the same is not supported by any consideration, and the
reaffirmance of the doctrine in Atkins, Kroll & Co. Inc. vs. Cua Hian Tech (102 Phil., 948), holding that "an option implies . . .
the legal obligation to keep the offer (to sell) open for the time specified"; that it could be withdrawn before acceptance, if
there was no consideration for the option, but once the "offer to sell" is accepted, a bilateral promise to sell and to buy
ensues, and the offeree ipso facto assumes the obligations of a purchaser.
2. ID.; ID.; ID.; OPTION WITHOUT CONSIDERATION IS A MERE OFFER TO SELL, NOT BINDING UNTIL ACCEPTED.
If the option to sell is given without a consideration, it is a mere offer to sell, which is not binding until accepted. If, however,
acceptance is made before a withdrawal, it constitutes a binding contract of sale. The concurrence of both acts the offer
and the acceptance could in such event generate a contract.
3. ID.; ID.; ID.; WITHDRAWAL OF OFFER BEFORE ACCEPTANCE, OFFER IMPLIES AN OBLIGATION ON THE PART OF
OFFEROR. While the law permits the offeror to withdraw the offer at any time before acceptance even before the period
has expired, some writers hold the view, that the offeror can not exercise this right in an arbitrary or capricious manner. This
is upon the principle that an offer implies an obligation on the part of the offeror to maintain it for such length of time as to
permit the offeree to decide whether to accept or not, and therefore cannot arbitrarily revoke the offer without being liable for
damages which the offeree may suffer. A contrary view would remove the stability and security of business transactions.
4. ID.; ID.; ID.; A BILATERAL RECIPROCAL CONTRACT; CASE AT BAR. Where, as in the present case, the trial court
found that the "Plaintiff (Nicolas Sanchez) had offered the sum of P1,510.00 before any withdrawal from the contract has
been made by the Defendant (Severina Rigos)," and Rigos' offer to sell was accepted bySanchez, before she could
withdraw her offer, a bilateral reciprocal contract to sell and to buy was generated.

DECISION

CONCEPCION, J p:

Appeal from a decision of the Court of First Instance of Nueva Ecija to the Court of Appeals, which certified the case to Us,
upon the ground that it involves a question purely of law.
The record shows that, on April 3, 1961, plaintiff Nicolas Sanchez and defendant Severina Rigos executed an instrument,
entitled "Option to Purchase," whereby Mrs.Rigos "agreed, promised and committed . . . to sell" to Sanchez, for the sum of
P1,510.00, a parcel of land situated in the barrios of Abar and Sibot, municipality of San Jose, province of Nueva Ecija, and
more particularly described in Transfer Certificate of Title No. NT-12528 of said province, within two (2) years from said date
with the understanding that said option shall be deemed "terminated and elapsed," if "Sanchez shall fail to exercise his right
to buy the property" within the stipulated period. Inasmuch as several tenders of payment of the sum of P1,510.00, made
by Sanchez within said period, were rejected by Mrs. Rigos, on March 12, 1963, the former deposited said amount with the
Court of First Instance of Nueva Ecija and commenced against the latter the present action, for specific performance and
damages.
After the filing of defendant's answer admitting some allegations of the complaint, denying other allegations thereof, and
alleging, as special defense, that the contract between the parties "is a unilateral promise to sell, and the same being
unsupported by any valuable consideration, by force of the New Civil Code, is null and void" on February 11, 1964, both
parties, assisted by their respective counsel, jointly moved for a judgment on the pleadings. Accordingly, on February 28,
1964, the lower court rendered judgment for Sanchez, ordering Mrs. Rigos to accept the sum judicially consigned by him
and to execute, in his favor, the requisite deed of conveyance. Mrs. Rigos was, likewise, sentenced to pay P200.00, as
attorney's fees, and the costs. Hence, this appeal by Mrs. Rigos.
This case admittedly hinges on the proper application of Article 1479 of our Civil Code, which provides:
"ART. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.
"An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon
the promissor if the promise is supported by a consideration distinct from the price."
In his complaint plaintiff alleges that, by virtue of the option under consideration, "defendant agreed and committed to sell"
and "the plaintiff agreed and committed to buy" the land described in the option, copy of which was annexed to said pleading
as Annex A thereof and is quoted on the margin. 1 Hence, plaintiff maintains that the promise contained in the contract is
"reciprocally demandable," pursuant to the first paragraph of said Article 1479. Although defendant had really "agreed,
promised and committed" herself to sell the land to the plaintiff, it is not true that the latter had, in turn, "agreed and
committed himself" to buy said property Said Annex A does not bear out plaintiff's allegation to this effect. What is more,
since Annex A has bean made "an integral part" of his complaint, the provisions of said instrument form part "and
parcel" 2 of said pleading.

The option did not impose upon plaintiff the obligation to purchase defendant's property. Annex A is not a "contract to buy
and sell." It merely granted plaintiff an "option" to buy. And both parties so understood it, as indicated by the caption, "Option
to Purchase," given by them to said instrument. Under the provisions thereof, the defendant "agreed, promised and
committed" herself to sell the land therein described to the plaintiff for P1,510.00, but there is nothing in the contract to
indicate that her aforementioned agreement, promise and undertaking is supported by a consideration "distinct from the
price" stipulated for the sale of the land.
Relying upon Article 1354 of our Civil Code, the lower court presumed the existence of said consideration, and this would
seem to be the main factor that influenced its decision in plaintiff's favor. It should be noted, however, that:
(1) Article 1354 applies to contracts in general, whereas the second paragraph of Article 1479 refers to "sales" in particular,
and, more specifically, to "an accepted unilateral promise to buy or to sell." In other words, Article 1479 is controlling in the
case at bar.
(2) In order that said unilateral promise may be "binding" upon the promisor, Article 1479 requires the concurrence of a
condition, namely, that the promise be "supported by a consideration distinct from the price." Accordingly, the promisee
can not compel the promisor to comply with the promise, unless the former establishes the existence of said distinct

consideration. In other words, the promisee has the burden of proving such consideration. Plaintiff herein has not even
alleged the existence thereof in his complaint.
(3) Upon the other hand, defendant explicitly averred in her answer, and pleaded as a special defense, the absence of said
consideration for her promise to sell and, by joining in the petition for a judgment on the pleadings, plaintiff has impliedly
admitted the truth of said averment in defendant's answer. Indeed, as early as March 14, 1908, it had been held, in
Bauermann v. Casas, 3 that:
"One who prays for judgment on the pleadings without offering proof as to the truth of hie own
allegations, and without giving the opposing party an opportunity to introduce evidence, must be
understood to admit the truth of all the material and relevant allegations of the opposing party, and to
rest his motion for judgment on those allegations taken together with such of his own as are admitted in
the pleading. (La Yebana Company vs. Sevilla, 9 Phil. 210)." (Emphasis supplied.).
This view was reiterated in Evangelista V. De la Rosa 4 and Mercy's Incorporated v. Herminia Verde. 5
Squarely in point is Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific Co., 6 from which We quote:
"The main contention of appellant is that the option granted to appellee to sell to it barge No. 10 for the
sum of P30,000 under the terms stated above has no legal effect because it is not supported by any
consideration and in support thereof it invokes article 1479 of the new Civil Code, The article provides:.
'ART. 1479. A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.
'An accepted unilateral promise to buy or sell a determinate thing for a price certain is
binding upon the promisor if the promise is supported by a consideration distinct from the
price.'
"On the other hand, appellee contends that, even granting that the 'offer of option' is not supported by
any consideration, that option became binding on appellant when the appellee gave notice to it of its
acceptance, and that having accepted it within the period of option, the offer can no longer be withdrawn
and in any event such withdrawal is ineffective. In support of this contention, appellee invokes article
1324 of the Civil Code which provides:
'ART. 1324. When the offerer has allowed the offeree a certain period to accept, the
offer may be withdrawn at any time before acceptance by communicating such withdrawal,
except when the option is founded upon consideration, as something paid or promised.'
"There is no question that under article 1479 of the new Civil Code 'an option to sell,' or 'a promise to
buy or to sell,' as used in said article, to be valid must be 'supported by a consideration distinct from the
price.' This is clearly inferred from the context of said article that a unilateral promise to buy or to
sell, even if accepted, is only binding if supported by a consideration. In other words, 'an accepted
unilateral promise' can only have a binding effect if supported by a consideration, which means that the
option can still be withdrawn, even if accepted, if the same is not supported by any consideration. Here it
is not disputed that the option is without consideration. It can therefore be withdrawn notwithstanding the
acceptance made of it by appellee.
"It is true that under article 1324 of the new Civil Code, the general rule regarding offer and acceptance
is that, when the offerer gives to the offeree a certain period to accept, 'the offer may be withdrawn at
any time before acceptance' except when the option is founded upon consideration, but this general rule
must be interpreted as modified by the provision of article 1479 above referred to, which applies to 'a
promise to buy and sell' specifically. As already stated, this rule requires that a promise to sell to be
valid must be supported by a consideration distinct from the price.
"We are net oblivious of the existence of American authorities which hold that an offer, once accepted,
cannot be withdrawn, regardless of whether it is supported or not by a consideration (12 Am. Jur. 528).
These authorities, we note, uphold the general rule applicable to offer and acceptance as contained in

our new Civil Code. But we are prevented from applying them in view of the specific provision embodied
in article 1479. While under the 'offer of option' in question appellant has assumed a clear obligation to
sell its barge to appellee and the option has been exercised in accordance with its terms, and there
appears to be no valid or justifiable reason for appellant to withdraw its offer, this Court cannot adopt a
different attitude because the law on the matter is clear. Our imperative duty is to apply it unless
modified by Congress." 7
However, this Court itself, in the case of Atkins, Kroll and Co., Inc. v. Cua Hian Tek, 8 decided later than Southwestern Sugar
& Molasses Co. v. Atlantic Gulf & Pacific Co.,9 saw no distinction between Articles 1324 and 1479 of the Civil Code and
applied the former where a unilateral promise to sell similar to the one sued upon here was involved, treating such promise
as an option which, although not binding as a contract in itself for lack of a separate consideration, nevertheless generated a
bilateral contract of purchase and sale upon acceptance. Speaking through Associate Justice, later Chief Justice, Cesar
Bengzon, this Court said:
"Furthermore, an option is unilateral: a promise to sell at the price fixed whenever the offeree should
decide to exercise his option within the specified time. After accepting the promise and before he
exercises his option, the holder of the option is not bound to buy. He is free either to buy or not to buy
later. In this case however, upon accepting herein petitioner's offer a bilateral promise to sell and to buy
ensued, and the respondent ipso facto assumed the obligation of a purchaser. He did not just get the
right subsequently to buy or not to buy. It was not a mere option then; it was bilateral contract of sale.
"Lastly, even supposing that Exh. A granted an option which is not binding for lack of consideration, the
authorities hold that.
'If the option is given without a consideration, it is a mere offer of a contract of sale,
which is not binding until accepted. If, however, acceptance is made before a withdrawal, it
constitutes a binding contract of sale, even though the option was not supported by a sufficient
consideration. . . . ' (77 Corpus Juris Secundum p. 652. See also 27 Ruling Case Law 339 and
cases cited.')
'It can be taken for granted, as contended by the defendant, that the option contract was not valid for
lack of consideration. But it was, at least, an offer to sell, which was accepted by latter, and of the
acceptance the offerer had knowledge before said offer was withdrawn. The concurrence of both acts
the offer and the acceptance could at all events have generated a contract, if none there was before
(arts. 1254 and 1262 of the Civil Code).' (Zayco vs. Serra, 44 Phil. 331.)"
In other words, since there may be no valid contract without a cause or consideration, the promisor is not bound by his
promise and may, accordingly, withdraw it. Pending notice of its withdrawal, his accepted promise partakes, however, of the
nature of an offer to sell which, if accepted, results in a perfected contract of sale.
This view has the advantage of avoiding a conflict between Articles 1324 on the general principles on contracts and
1479 on sales of the Civil Code, in line with the cardinal rule of statutory construction that, in construing different
provisions of one and the same law or code, such interpretation should be favored as will reconcile or harmonize said
provisions and avoid a conflict between the same. Indeed, the presumption is that, in the process of drafting the Code, its
author has maintained a consistent philosophy or position. Moreover, the decision in Southwestern Sugar & Molasses Co. v.
Atlantic Gulf & pacific Co., 10 holding that Art. 1324 ismodified by Art. 1479 of the Civil Code, in effect, considers the latter
as an exception to the former, and exceptions are not favored, unless the intention to the contrary is clear, and it is not so,
insofar as said two (2) articles are concerned. What is more, the reference, in both the second paragraph of Art. 1479 and
Art. 1324, to an option or promise supported by or founded upon a consideration, strongly suggests that the two (2)
provisions intended to enforce or implement the same principle.

Upon mature deliberation, the Court is of the considered opinion that it should, as it hereby reiterates the doctrine laid down
in the Atkins, Kroll & Co. case, and that, insofar all inconsistent therewith, the view adhered to in the South western Sugar &
Molasses Co. case should be deemed abandoned or modified.

WHEREFORE, the decision appealed from is hereby affirmed, with costs against defendant-appellant Severina Rigos. It is
so ordered.
Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee, Barredo and Makasiar, JJ., concur.
Castro, J., did not take part.
||| (Sanchez v. Rigos, G.R. No. L-25494, [June 14, 1972], 150-A PHIL 714-725)
[G.R. No. 117355. April 5, 2002.]
RIVIERA FILIPINA, INC., petitioner, vs. COURT OF APPEALS, JUAN L. REYES, (now deceased),
substituted by his heirs, namely, Estefania B. Reyes, Juanita R. de la Rosa, Juan B. Reyes, Jr.
and Fidel B. Reyes, PHILIPPINE CYPRESS CONSTRUCTION & DEVELOPMENT CORPORATION,
CORNHILL TRADING CORPORATION and URBAN DEVELOPMENT BANK, respondents.

Fortunato Gupit, Jr. for petitioner.


Ireneo Santos Juan and Mendoza Lacson Mison & Garcia for private respondents.
Guerrero Ortega Aquino and Roque Law Offices for respondent Urban Bank.

SYNOPSIS
On November 23, 1982, respondent Juan L. Reyes executed a Contract of Lease with Right of First Refusal
with Riviera Filipina, Inc. involving a parcel of land located along EDSA, Quezon City. Subsequently, the said land was
extrajudicially foreclosed by Prudential Bank. To redeem the subject property, Reyes offered to sell the subject property
to Riviera, through its President Vicente C. Angeles, but there was a disagreement as to the price. On December 4,
1988, Reyes offered the subject property to Rolando P. Traballo, President of Cypress Construction & Development
Corporation. The following day, Traballo bargained for P5,300.00 per square meter. Reyes accepted the same.
However, since Traballo did not have the amount at that moment, Reyes told him to look for a partner for that purpose.
In January 1989, Reyes decided to approach anew Riviera but the latter insisted on his offer of P5,000 only. In February
1989, Cypress and its partner, Cornhill Trading Corporation, were able to come up with the amount sufficient to cover
the redemption money, with which Reyes paid to the Prudential Bank. Thereafter, Rivieraclaimed that its right of first
refusal under the lease contract was violated, thus, it filed a suit to compel Reyes, Cypress, Cornhill and Urban
Development Bank to transfer the disputed title of the land in its favor upon payment of the price paid by Cypress and
Cornhill. After trial, the court a quo dismissed the complaint as well as the counterclaims and cross-claims. On appeal,
the appellate court affirmed the decision of the trial court in its entirety. Hence, this petition.
The Court ruled that nary a howl of protest or shout of defiance spewed forth from Riviera's lips, as it was, but
a seemingly whimper of acceptance when the counsel of Reyes strongly expressed in a letter dated December 5, 1989
that Riviera had lost its right of first refusal. Riviera cannot now be heard that had it been informed of the offer of Five
Thousand Three Hundred Pesos (P5,300) of Cypress and Cornhill it would have matched said price. Its stubborn
approach in its negotiations with Reyes showed crystal clear that there was never any need to disclose such information
and doing so would be just a futile effort on the part ofReyes. Reyes was under no obligation to disclose the same.
Pursuant to Article 1339 of the New Civil Code, silence or concealment, by itself, does not constitute fraud, unless there
is a special duty to disclose certain facts, or unless according to good faith and the usages of commerce the
communication should be made.

SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE; DISTINCTIONS BETWEEN RULE 45 AND RULE 65. The distinctions between
Rule 45 and 65 are far and wide, the most notable of which is that errors of jurisdiction are best reviewed in a special civil

action for certiorari under Rule 65, while errors of judgment are correctible only by appeal in a petition for review under Rule
45. The rationale for the distinction is simple. When a court exercises its jurisdiction an error committed while so engaged
does not deprive it of the jurisdiction being exercised when the error is committed. If it did, every error committed by
a court would deprive it of its jurisdiction and every erroneous judgment would be a void judgment. This cannot be allowed.
The administration of justice would not countenance such a rule. Thus, an error ofjudgment that the court may commit in the
exercise of its jurisdiction is not correctible through the original special civil action of certiorari. Appeal from a final
disposition of the Court of Appeals, as in the case at bar, is by way of a petition for review under Rule 45. DTESIA
2. CIVIL LAW; OBLIGATIONS AND CONTRACTS; LEASE; RIGHT OF FIRST REFUSAL; THERE MUST BE
IDENTITY OF TERMS AND CONDITIONS TO BE OFFERED TO THE LESSEE AND ALL OTHER PROSPECTIVE
BUYERS. [I]n 1997, in Paraaque Kings Enterprises, Inc. v. Court of Appeals, the Court affirmed the nature of and the
concomitant rights and obligations of parties under a right of first refusal. The Court, summarizing the rulings in Guzman,
Bocaling & Co. v. Bonnevie and Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., held that in order to have full
compliance with the contractual right granting petitioner the first option to purchase, the sale of the properties for the price
for which they were finally sold to a third person should have likewise been first offered to the former. Further, there should
be identity of terms and conditions to be offered to the buyer holding a right of first refusal if such right is not to be rendered
illusory. Lastly, the basis of the right of first refusal must be the current offer to sell of the seller or offer to purchase of any
prospective buyer. Thus, the prevailing doctrine is that a right of first refusal means identity of terms and conditions to be
offered to the lessee and all other prospective buyers and a contract of sale entered into in violation of a right of first
refusal ofanother person, while valid, is rescissible.
3. STATUTORY CONSTRUCTION; LAWS ARE INTERPRETED IN THE CONTEXT OF THE PECULIAR FACTUAL
SITUATION OF EACH PROCEEDING. [W]e must remember that general propositions do not decide specific cases.
Rather, laws are interpreted in the context of the peculiar factual situation of each proceeding. Each case has its own flesh
and blood and cannot be ruled upon on the basis of isolated clinical classroom principles. Analysis and construction should
not be limited to the words used in the contract, as they may not accurately reflect the parties' true intent. The court must
read a contract as the average person would read it and should not give it a strained or forced construction.
4. ID.; OBLIGATIONS AND CONTRACTS; INTERPRETATION OF CONTRACTS; INTENTION OF THE PARTIES SHALL
BE ACCORDED PRIMORDIAL CONSIDERATION. [T]he cardinal rule in the interpretation of contracts that the
intention of the parties shall be accorded primordial consideration and in case of doubt, their contemporaneous and
subsequent acts shall be principally considered. Where the parties to a contract have given it a practical construction by
their conduct as by acts in partial performance, such construction may be considered by the court in construing the contract,
determining its meaning and ascertaining the mutual intention of the parties at the time for contracting. The parties' practical
construction of their contract has been characterized as a clue or index to, or as evidence of, their intention or meaning and
as an important, significant, convincing, persuasive, or influential factor in determining the proper construction of the
contract. cHSIAC
5. ID.; ID.; LEASE; RIGHT OF FIRST REFUSAL; PROPERLY COMPLIED WITH BY LESSOR IN CASE AT BAR. As
clearly shown by the records and transcripts of the case, the actions of the parties to the contract of lease, Reyes
and Riviera, shaped their understanding and interpretation of the lease provision "right of first refusal" to mean simply that
should the lessor Reyes decide to sell the leased property during the term of the lease, such sale should first be offered to
the lessee Riviera. And that is what exactly ensued between Reyes and Riviera, a series of negotiations on the price per
square meter of the subject property with neither party, especially Riviera, unwilling to budge from his offer, as evidenced by
the exchange of letters between the two contenders. It can clearly be discerned from Riviera's letters dated December 2,
1988 and February 4, 1989 that Riviera was so intractable in its position and took obvious advantage of the
knowledge of the time element in its negotiations with Reyes as the redemption period of the subject foreclosed property
drew near. Riviera strongly exhibited a "take-it or leave-it" attitude in its negotiations with Reyes. It quoted its "fixed and final"
price as Five Thousand Pesos (P5,000.00) and not any peso more. It voiced out that it had other properties to consider so
Reyes should decide and make known its decision "within fifteen days." Riviera, in its letter dated February 4, 1989,
admittedly, even downgraded its offer when Reyes offered anew the property to it, such that whatever amount Reyes initially
receives from Riviera would absolutely be insufficient to pay off the redemption price of the subject property. Naturally, Reyes
had to disagree with Riviera's highly disadvantageous offer.

6. ID.; ID.; FRAUD; NOT CONSTITUTED BY SILENCE OR CONCEALMENT UNLESS THERE IS A SPECIAL DUTY TO
DISCLOSE CERTAIN FACTS. Nary a howl of protest or shout of defiance spewed forth from Riviera's lips, as it was, but a
seemingly whimper of acceptance when the counsel of Reyes strongly expressed in a letter dated December 5, 1989
that Riviera had lost its right of first refusal. Riviera cannot now be heard that had it been informed of the offer of Five
Thousand Three Hundred Pesos (P5,300.00) of Cypress and Cornhill it would have matched said price. Its stubborn
approach in its negotiations with Reyes showed crystal-clear that there was never any need to disclose such information and
doing so would be just a futile effort on the part of Reyes. Reyes was under no obligation to disclose the same. Pursuant to
Article 1339 of the New Civil Code, silence or concealment, by itself, does not constitute fraud unless there is a special duty
to disclose certain facts, or unless according to good faith and the usages of commerce the communication should be made.
We apply the general rule in the case at bar since Riviera failed to convincingly show that either of the exceptions are
relevant to the case at bar.

7. ID.; ID.; COURT HAS NO RIGHT TO MAKE NEW CONTRACTS FOR THE PARTIES OR IGNORE, THOSE ALREADY
MADE BY THEM. In sum, the Court finds that in the interpretation of the right of first refusal as understood by the parties
herein, the question as to what is to be included therein or what is meant by the same, as in all other provisions of the
contract, is for the parties and not for the court to determine, and this question may not be resolved by what the parties
might have provided had they thought about it, which is evident from Riviera claims, or by what the court might conclude
regarding abstract fairness. The Court would be rewriting the contract of Reyes and Riviera under the guise of construction
were we to interpret the right of first refusal as Riviera propounds it, despite a contrary construction as exhibited by its
actions. A court, even the Supreme Court, has no right to make new contracts for the parties or ignore those already made
by them, simply to avoid seeming hardships. Neither abstract justice nor the rule of liberal construction justifies the
creation of a contract for the parties which they did not make themselves or the imposition upon one party to a contract of an
obligation not assumed. cTECHI
8. REMEDIAL LAW; CIVIL PROCEDURE; PARTIES TO CIVIL ACTIONS; FAILURE OF COUNSEL TO COMPLY WITH HIS
DUTY TO INFORM THE COURT OF THE DEATH OF HIS CLIENT WILL NOT INVALIDATE THE PROCEEDINGS; CASE
AT BAR. Section 16 and 17 of Rule 3 of the Revised Rules of Court, upon which Riviera anchors its argument, has
already been amended by the 1997 Rules of Civil Procedure. Even applying the old Rules, the failure of a counsel to comply
with his duty under Section 16 of Rule 3of the Revised Rules of Court, to inform the court of the death of his client and no
substitution of such is effected, will not invalidate the proceedings and the judgment thereon if the action survives the
death of such party, as this case does, since the death of Reyes did not extinguish his civil personality. The
appellate court was well within its jurisdiction to proceed as it did with the case since the death of a party is not subject to its
judicial notice. Needless to stress, the purpose behind the rule on substitution of parties is the protection of the right of every
party to due process. This purpose has been adequately met in this case since both parties argued their respective positions
through their pleadings in the trial court and the appellate court. Besides, the Court has already acquired jurisdiction over the
heirs of Reyes by voluntarily submitting themselves to our jurisdiction.

DECISION

DE LEON, JR., J p:
Before us is a petition for review on certiorari of the Decision 1 of the Court of Appeals 2 dated June 6, 1994 in CA-G.R. CV
No. 26513 affirming the Decision 3 dated March 20, 1990 of the Regional Trial Court of Quezon City, Branch 89 dismissing
Civil Case No. Q-89-3371.
Civil Case No. Q-89-3371 is a suit instituted by Riviera Filipina, Inc. (Riviera) on August 31, 1989 4 to compel the defendants
therein Juan L. Reyes, now deceased, Philippine Cypress Construction & Development Corporation (Cypress), Cornhill
Trading Corporation (Cornhill) and Urban Development Bank to transfer the title covering a 1,018 square meter
parcel of land located along EDSA, Quezon City for alleged violation of Riviera's right of first refusal.

It appears that on November 23, 1982, respondent Juan L. Reyes (Reyes, for brevity) executed a Contract of Lease
with Riviera. The ten-year (10) renewable lease ofRiviera, which started on August 1, 1982, involved a 1,018 square meter
parcel of land located along Edsa, Quezon City, covered and described in Transfer Certificate ofTitle No. 186326 of the
Registry of Deeds of Quezon City in the name of Juan L. Reyes. 5
The said parcel of land was subject of a Real Estate Mortgage executed by Reyes in favor of Prudential Bank. Since the loan
with Prudential Bank remained unpaid upon maturity, the mortgagee bank extrajudicially foreclosed the mortgage thereon.
At the public auction sale, the mortgagee bank emerged as the highest bidder. The redemption period was set to expire on
March 7, 1989. Realizing that he could not possibly raise in time the money needed to redeem the subject property, Reyes
decided to sell the same. 6
Since paragraph 11 of the lease contract expressly provided that the "LESSEE shall have the right of first refusal should the
LESSOR decide to sell the property during the term of the lease," 7 Reyes offered to sell the subject property to Riviera,
through its President Vicente C. Angeles, for Five Thousand Pesos (P5,000.00) per square meter. However, Angeles
bargained for Three Thousand Five Hundred Pesos (P3,500.00) per square meter. Since Reyes was not amenable to the
said price and insisted on Five Thousand Pesos (P5,000.00) per square meter, Angeles requested Reyes to allow him to
consult the other members of the Board of Directors of Riviera. 8
Seven (7) months later, or sometime in October 1988, Angeles communicated with Reyes Riviera's offer to purchase the
subject property for Four Thousand Pesos (P4,000.00) per square meter. However, Reyes did not accept the offer. This time
he asked for Six Thousand Pesos (P6,000.00) per square meter since the value of the property in the area had appreciated
in view of the plans of Araneta to develop the vicinity. 9
In a letter dated November 2, 1988, Atty. Irineo S. Juan, acting as counsel for Reyes, informed Riviera that Reyes was
selling the subject property for Six Thousand Pesos (P6,000.00) per square meter, net of capital gains and transfer taxes,
registration fees, notarial fees and all other attendant charges. He further stated therein that:
In this connection, conformably to the provisions stipulated in Paragraph/Item No. 11 of your
CONTRACT OF LEASE (Doc. No. 365, Page No. 63, Book No. X, Series of1982, of the Notarial
Registry of Notary Public Leovillo S. Agustin), notice is served upon your goodselves for you to exercise
"the right of first refusal" in the sale of said property, for which purpose you are hereby given a
period of ten (10) days from your receipt hereof within which to thus purchase the same under the terms
and conditions aforestated, and failing which you shall be deemed to have thereby waived such preemptive right and my client shall thereafter be absolutely free to sell the subject property to interested
buyers. 10
To answer the foregoing letter and confirm their telephone conversation on the matter, Riviera sent a letter dated November
22, 1988 to Atty. Juan, counsel for Reyes, expressing Riviera's interest to purchase the subject property and that Riviera is
already negotiating with Reyes which will take a couple of days to formalize. 11 Rivieraincreased its offer to Five Thousand
Pesos (P5,000.00) per square meter but Reyes did not accede to said price as it was still lower than his quoted price of Six
Thousand Pesos (P6,000.00) per square meter. 12 Angeles asked Reyes to give him until the end of November 1988
for Riviera's final decision.
In a letter dated December 2, 1988, Angeles wrote Reyes confirming Riviera's intent to purchase the subject property for the
fixed and final 13 price of Five Thousand Pesos (P5,000.00) per square meter, complete payment within sixty (60) to ninety
(90) days which "offer is what we feel should be the market price of your property."Angeles asked that the decision of Reyes
and his written reply to the offer be given within fifteen (15) days since there are also other properties being offered to them
at the moment. 14
In response to the foregoing letter, Atty. Juan sent a letter to Riviera dated December 5, 1988 informing Riviera that Riviera's
offer is not acceptable to his client. He further expressed, "let it be made clear that, much as it is the earnest desire of my
client to really give you the preference to purchase the subject property, you have unfortunately failed to take
advantage of such opportunity and thus lost your right of first refusal in sale of said property." 15
Meanwhile, on December 4, 1988, Reyes confided to Rolando P. Traballo, a close family friend and President of Cypress,
his predicament about the nearing expiry dateof the redemption period of the foreclosed mortgaged property with Prudential

Bank, the money for which he could not raise on time thereby offering the subject property to him for Six Thousand Pesos
(P6,000.00) per square meter. Traballo expressed interest in buying the said property, told Reyes that he will study the
matter and suggested for them to meet the next day. 16
They met the next day, December 5, 1988, at which time Traballo bargained for Five Thousand Three Hundred Pesos
(P5,300.00) per square meter. After considering the reasons cited by Traballo for his quoted price, Reyes accepted the
same. However, since Traballo did not have the amount with which to pay Reyes, he told the latter that he will look for a
partner for that purpose. 17 Reyes told Traballo that he had already afforded Riviera its right of first refusal but they cannot
agree becauseRiviera's final offer was for Five Thousand Pesos (P5,000.00) per square meter. 18
Sometime in January 1989, apprehensive of the impending expiration in March 1989 of the redemption period of the
foreclosed mortgaged property with Prudential Bank and the deal between Reyes and Traballo was not yet formally
concluded, Reyes decided to approach anew Riviera. For this purpose, he requested his nephew, Atty. Estanislao Alinea, to
approach Angeles and find out if the latter was still interested in buying the subject property and ask him to raise his offer for
the purchase ofthe said property a little higher. As instructed, Atty. Alinea met with Angeles and asked the latter to increase
his offer of Five Thousand Pesos. (P5,000.00) per square meter but Angeles said that his offer is Five Thousand Pesos
(P5,000.00) per square meter. 19

Following the meeting, Angeles sent a letter dated February 4, 1989 to Reyes, through Atty. Alinea, that his offer is Five
Thousand Pesos (P5,000.00) per square meter payment of which would be fifty percent (50%) down within thirty (30) days
upon submission of certain documents in three (3) days, the balance payable in five (5) years in equal monthly installments
at twelve percent (12%) interest in diminishing balance. 20 With the terms of this second offer, Angeles admittedly
downgraded the previous offer of Riviera on December 2, 1988. 21
Atty. Alinea conveyed to Reyes Riviera's offer of Five Thousand Pesos (P5,000.00) per square meter but Reyes did not
agree. Consequently, Atty. Alinea contacted again Angeles and asked him if he can increase his price. Angeles, however,
said he cannot add anymore. 22 Reyes did not expressly offer his subject property to Riviera at the price of Five Thousand
Three Hundred Pesos (P5,300.00) per square meter. 23
Sometime in February 1989, Cypress and its partner in the venture, Cornhill Trading Corporation, were able to come up with
the amount sufficient to cover the redemption money, with which Reyes paid to the Prudential Bank to redeem the subject
property. 24 On May 1, 1989, a Deed of Absolute Sale covering the subject property was executed by Reyes in
favor of Cypress and Cornhill for the consideration of Five Million Three Hundred Ninety-Five Thousand Four Hundred Pesos
(P5,395,400.00). 25 On the same date, Cypress and Cornhill mortgaged the subject property to Urban Development Bank
for Three Million Pesos (P3,000,000.00). 26
Thereafter, Riviera sought from Reyes, Cypress and Cornhill a resale of the subject property to it claiming that its right of first
refusal under the lease contract was violated. After several unsuccessful attempts, 27 Riviera filed the suit to compel Reyes,
Cypress, Cornhill and Urban Development Bank to transfer the disputed title to the land in favor of Riviera upon its
payment of the price paid by Cypress and Cornhill.
Following trial on the merits, the trial court dismissed the complaint of Riviera as well as the counterclaims and crossclaims of the other parties. 28 It ruled that the defendants therein did not violate Riviera's right of first refusal, ratiocinating in
this wise:
Resolving the first issue, this Court takes note that since the beginning of the negotiation between the
plaintiff and defendant Reyes for the purchase of the property, in question, the plaintiff was firm and
steadfast in its position, expressed in writing by its President Vicente Angeles, that it was not willing to
buy the said property higher than P5,000.00, per square meter, which was far lower than the asking
price of defendant Reyes for P6,000.00, per square meter, undoubtedly, because, in its perception, it
would be difficult for other parties to buy the property, at a higher price than what it was offering, since it
is in occupation of the property, as lessee, the term of which was to expire after about four (4) years
more.

On the other hand, it was obvious, upon the basis of the last ditch effort of defendant Reyes, thru his
nephew, Atty. Alinea, to have the plaintiff buy the property, in question, that he was willing to sell the
said property at a price less than P6,000.00 and a little higher than P5,000.00, per square meter,
precisely, because Atty. Alinea, in behalf of his uncle, defendant Reyes, sought plaintiff's Angeles and
asked him to raise his price a little higher, indicating thereby the willingness of defendant Reyes to sell
said property at less than his offer of P6,000.00, per square meter.
This being the case, it can hardly be validly said by the plaintiff that he was deprived of his right of first
refusal to buy the subject property at a price of P5,300.00, per square meter which is the amount
defendants Cypress/Cornhill bought the said property from defendant Reyes. For, it was again given
such an opportunity to exercise its right of first refusal by defendant Reyes had it only signified its
willingness to increase a little higher its purchase price above P5,000.00, per square meter, when its
President, Angeles, was asked by Atty. Alinea to do so, instead of adamantly sticking to its offer of only
P5,000.00 per square meter, by reason of which, therefore, the plaintiff had lost, for the second time, its
right of first refusal, even if defendant Reyes did not expressly offer to sell to it the subject land at
P5,300.00, per square meter, considering that by the plea of Atty. Alinea, in behalf of defendant Reyes,
for it to increase its price a little, the plaintiff is to be considered as having forfeited again its right of first
refusal, it having refused to budged from its regid (sic) offer to buy the subject property at no more than
P5,000.00, per square meter.
As such, this Court holds that it was no longer necessary for the defendant Reyes to expressly and
categorically offer to the plaintiff the subject property at P5,300.00, per square meter, in order that he
can comply with his obligation to give first refusal to the plaintiff as stipulated in the Contract of Lease,
the plaintiff having had already lost its right of first refusal, at the first instance, by refusing to buy the
said property at P6,000.00, per square meter, which was the asking price of defendant Reyes, since to
do so would be a useless ceremony and would only be an exercise in futility, considering the firm and
unbending position of the plaintiff, which defendant Reyes already knew, that the plaintiff, at any event,
was not amenable to increasing its price at over P5,000.00, per square meter.
Dissatisfied with the decision of the trial court, both parties appealed to the Court of Appeals. 29 However, the
appellate court, through its Special Seventh Division, rendered a Decision dated June 6, 1994 which affirmed the
decision of the trial court in its entirety. 30 In sustaining the decision of the trial court, the Court of Appealsadopted the
above-quoted ratiocination of the trial court and further added:
To put things in its proper perspective in accordance with the peculiar attendant circumstances herein,
particular stress should be given to RIVIERA's uncompromising counter offer of only P5,000.00 per
square meter on all the occasions when REYES offered the subject property to it. RIVIERA, in its letter
to REYES dated December 2, 1988 (Exhibit "D", p. 68, Rollo) justified its rigid offer by saying that "the
above offer is what we feel should be the market price of your property." If that be the case, We are
convinced, the same manner that REYES was, that RIVIERA was unwilling to increase its counter offer
at any present or future time. RIVIERA's unilateral valuation ofthe subject property thus binds him, it
cannot now be heard to claim that it could have upped its offer had it been informed of CYPRESS' and
CORNHILL'S offer ofP5,000.00 (sic) per square meter. Defendants CYPRESS and CORNHILL were
therefore right in saying that:
On the basic assumption that RIVIERA really meant what it said in its letter,
DR. REYES could not be faulted for believing that RIVIERA was definitely NOT
WILLING TO PAY MORE THAN P5,000.00 PER SQUARE METER ON HIS
PROPERTY. The fault lies with the deceptive and insincere words of RIVIERA. Injustice
(sic) and equity, RIVIERA must be deemed in estoppel in now belatedly asserting that it
would have been willing to pay a price higher than P5,000.00 . . . ." (DefendantsAppellees Cypress' and Cornhill's Brief, p. 8)

For this reason, no adverse inference can be drawn from REYES' failure to disclose to RIVIERA the
intervening counter-offer of CYPRESS and CORNHILL.
It would have been far different had REYES' non-disclosure of CYPRESS' and CORNHILL's counteroffer to RIVIERA resulted in the sale of the subject property at equal or less than RIVIERA's offer; in
which case, REYES would have been rightly accused of cunningly circumventing RIVIERA's right of first
refusal. But the incontrovertible antecedents obtaining here clearly reveal REYES' earnest efforts in
respecting RIVIERA's contractual right to initially purchase the subject property. Not only once but
twice did REYES approach RIVIERA, the last one being the most telling indication of REYES'
sincerest intention in RIVIERA eventually purchasing the subject property if only the latter would
increase a little its offer of P5,000.00 per square meter. And to this REYES was desperately willing to
accede to despite the financial quandary he was then in as the expiration of the redemption period drew
closer and closer, and despite the better offer of CYPRESS and CORNHILL. REYES unquestionably
had displayed good faith. Can the same be said of RIVIERA? We do not think so. It appears
that RIVIERA all along was trying to push REYES' back against the wall, for RIVIERAwas wellaware of REYES' precarious financial needs at that time, and by clinging to its offer, REYES might
eventually succumb to its offer out of sheer desperation.RIVIERA was, to be frank, whimsically
exercising its contractual right to the prejudice of REYES who had commendably given RIVIERA extra
leeway in exercising it. And to this We say that no amount of jurisprudence RIVIERA might avail of for
the purpose of construing the right of first refusal, however enlightening and persuasive they may be,
will cover-up for its arrogant exercise of its right as can be gleaned from the factual premises. Equity in
this case tilts in favor of defendants REYES, CYPRESS and CORNHILL that the consummated sale
between them concerning the subject property be given this Court's imprimatur, for if RIVIERA lost its
opportunity to acquire it, it has only itself to blame. For after all, REYES' fundamental and intrinsic
right of ownership which necessarily carries with it the exclusive right to dispose ofit to whoever he
pleases, must ultimately prevail over RIVIERA's right of first refusal which it unscrupulously tried to
exercise.

From this decision, Riviera filed a motion for reconsideration, 31 but the appellate court denied the same in a Resolution
dated September 22, 1994. 32
Hence, Riviera interposed the instant petition anchored on the following errors: 33
I
THE

HONORABLE COURT OF APPEALS COMMITTED

TANTAMOUNT

TO

LACK

OR

EXCESS OF ITS

GRAVE

JURISDICTION

ABUSE OF DISCRETION
IN

RULING

THAT

PETITIONER RIVIERA FILIPINA, INC. ALREADY LOST ITS RIGHT OF FIRST REFUSAL.
II
THE

HONORABLE COURT OF APPEALS COMMITTED

GRAVE

ABUSE OF DISCRETION

TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN NOT FINDING THAT IT WAS THE
PETITIONER, NOT RESPONDENT JUAN L. REYES, WHICH HAD BEEN THOROUGHLY DECEIVED
BY THE LATTER OUT OF ITS RIGHTS TO ITS CONTINUING PREJUDICE.
III
THE

HONORABLE COURT OF APPEALS COMMITTED

GRAVE

ABUSE OF DISCRETION

TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN DENYING RECONSIDERATION.


IV
THE

HONORABLE COURT OF APPEALS COMMITTED

GRAVE

ABUSE OF DISCRETION

TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN DECIDING PETITIONER'S APPEAL


AT A TIME WHEN THE PRINCIPAL APPELLEE IS ALLEGEDLY DEAD AND NO PROPER

SUBSTITUTION OF THE ALLEGED DECEASED PARTY HAS BEEN MADE; HENCE, THE
DECISION OF THE COURT OF APPEALS AND ITS RESOLUTION DENYING RECONSIDERATION,
IS NULL AND VOID.
At the outset, we note that, while Riviera alleges that the Court of Appeals committed grave abuse of discretion amounting to
lack or excess of jurisdiction, the instant petition is, as it should be, treated as a petition for review under Rule 45 and not as
a special civil action for certiorari under Rule 65 of the Revised Rules of Court, now the 1997 Rules of Civil Procedure.
The distinctions between Rule 45 and 65 are far and wide, the most notable of which is that errors of jurisdiction are best
reviewed in a special civil action for certiorariunder Rule 65, while errors of judgment are correctable only by appeal in a
petition for review under Rule 45. 34 The rationale for the distinction is simple. When a courtexercises its jurisdiction an error
committed while so engaged does not deprive it of the jurisdiction being exercised when the error is committed. If it did,
every error committed by a court would deprive it of its jurisdiction and every erroneous judgment would be a void judgment.
This cannot be allowed. The administration of justice would not countenance such a rule. Thus, an error of judgment that
the court may commit in the exercise of its jurisdiction is not correctable through the original special civil
action of certiorari. 35 Appeal from a final disposition of the Court of Appeals, as in the case at bar, is by way of a petition for
review under Rule 45. 36
In the petition at bar, Riviera posits the view that its right of first refusal was totally disregarded or violated by Reyes by the
latter's sale of the subject property to Cypress and Cornhill. It contends that the right of first refusal principally amounts to a
right to match in the sense that it needs another offer for the right to be exercised.
The concept and interpretation of the right of first refusal and the consequences of a breach thereof evolved in Philippine
juristic sphere only within the last decade. It all started in 1992 with Guzman, Bocaling & Co. v. Bonnevie 37 where
the Court held that a lease with a proviso granting the lessee the right of first priority "all things and conditions being equal"
meant that there should be identity of the terms and conditions to be offered to the lessee and all other prospective buyers,
with the lessee to enjoy the right of first priority. A deed of sale executed in favor of a third party who cannot be deemed a
purchaser in good faith, and which is in violation of a right of first refusal granted to the lessee is not voidable under the
Statute of Frauds but rescissible under Articles 1380 to 1381 (3) of the New Civil Code.
Subsequently in 1994, in the case of Ang Yu Asuncion v. Court of Appeals, 38 the Court en banc departed from the doctrine
laid down in Guzman, Bocaling & Co. v. Bonnevie and refused to rescind a contract of sale which violated the right of first
refusal. The Court held that the so-called "right of first refusal" cannot be deemed a perfected contract of sale under Article
1458 of the New Civil Code and, as such, a breach thereof decreed under a final judgment does not entitle the aggrieved
party to a writ of execution of the judgment but to an action for damages in a proper forum for the purpose.
In the 1996 case of Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., 39 the Court en banc reverted back to the
doctrine in Guzman Bocaling & Co. v. Bonnevie stating that rescission is a relief allowed for the protection of one of the
contracting parties and even third persons from all injury and damage the contract may cause or to protect some
incompatible and preferred right by the contract.
Thereafter in 1997, in Paraaque Kings Enterprises, Inc. v. Court of Appeals, 40 the Court affirmed the nature of and the
concomitant rights and obligations of parties under a right of first refusal. The Court, summarizing the rulings in Guzman,
Bocaling & Co. v. Bonnevie and Equatorial Realty Development, Inc. v. Mayfair Theater, Inc.,held that in order to have full
compliance with the contractual right granting petitioner the first option to purchase, the sale of the properties for the price
for which they were finally sold to a third person should have likewise been first offered to the former. Further, there should
be identity of terms and conditions to be offered to the buyer holding a right of first refusal if such right is not to be rendered
illusory. Lastly, the basis of the right of first refusal must be the current offer to sell of the seller or offer to purchase of any
prospective buyer.
Thus, the prevailing doctrine is that a right of first refusal means identity of terms and conditions to be offered to the lessee
and all other prospective buyers and a contract of sale entered into in violation of a right of first refusal of another person,
while valid, is rescissible.
However, we must remember that general propositions do not decide specific cases. Rather, laws are interpreted in the
context of the peculiar factual situation of each proceeding. Each case has its own flesh and blood and cannot be ruled upon

on the basis of isolated clinical classroom principles. 41 Analysis and construction should not be limited to the words used in
the contract, as they may not accurately reflect the parties' true intent. 42 The court must read a contract as the average
person would read it and should not give it a strained or forced construction. 43
In the case at bar, the Court finds relevant and significant the cardinal rule in the interpretation of contracts that the
intention of the parties shall be accorded primordial consideration and in case of doubt, their contemporaneous and
subsequent acts shall be principally considered. 44 Where the parties to a contract have given it a practical construction by
their conduct as by acts in partial performance, such construction may be considered by the court in construing the contract,
determining its meaning and ascertaining the mutual intention of the parties at the time for contracting. The parties' practical
construction of their contract has been characterized as a clue or index to, or as evidence of, their intention or meaning and
as an important, significant, convincing, persuasive, or influential factor in determining the proper construction of the
contract. 45
An examination of the attendant particulars of the case do not persuade us to uphold Riviera's view. As clearly shown by the
records and transcripts of the case, the actions of the parties to the contract of lease, Reyes and Riviera, shaped their
understanding and interpretation of the lease provision "right of first refusal" to mean simply that should the lessor Reyes
decide to sell the leased property during the term of the lease, such sale should first be offered to the lessee Riviera. And
that is what exactly ensued between Reyes and Riviera, a series of negotiations on the price per square meter of the subject
property with neither party, especially Riviera, unwilling to budge from his offer, as evidenced by the exchange of letters
between the two contenders.
It can clearly be discerned from Riviera's letters dated December 2, 1988 and February 4, 1989 that Riviera was so
intractable in its position and took obvious advantageof the knowledge of the time element in its negotiations with Reyes as
the redemption period of the subject foreclosed property drew near. Riviera strongly exhibited a "take-it or leave-it" attitude in
its negotiations with Reyes. It quoted its "fixed and final" price as Five Thousand Pesos (P5,000.00) and not any peso more.
It voiced out that it had other properties to consider so Reyes should decide and make known its decision "within fifteen
days." Riviera, in its letter dated February 4, 1989, admittedly, even downgraded its offer when Reyes offered anew the
property to it, such that whatever amount Reyes initially receives from Riviera would absolutely be insufficient to pay off the
redemption price of the subject property. Naturally, Reyes had to disagree with Riviera's highly disadvantageous offer.
Nary a howl of protest or shout of defiance spewed forth from Riviera's lips, as it were, but a seemingly
whimper of acceptance when the counsel of Reyes strongly expressed in a letter dated December 5, 1989 that Riviera had
lost its right of first refusal. Riviera cannot now be heard that had it been informed of the offer of Five Thousand Three
Hundred Pesos (P5,300.00) of Cypress and Cornhill it would have matched said price. Its stubborn approach in its
negotiations with Reyes showed crystal-clear that there was never any need to disclose such information and doing so
would be just a futile effort on the part of Reyes. Reyes was under no obligation to disclose the same. Pursuant to Article
1339 46 of the New Civil Code, silence or concealment, by itself, does not constitute fraud, unless there is a special duty to
disclose certain facts, or unless according to good faith and the usages of commerce the communication should be
made. 47 We apply the general rule in the case at bar since Riviera failed to convincingly show that either of the exceptions
are relevant to the case at bar.

In sum, the Court finds that in the interpretation of the right of first refusal as understood by the parties herein, the question
as to what is to be included therein or what is meant by the same, as in all other provisions of the contract, is for the parties
and not for the court to determine, and this question may not be resolved by what the parties might have provided had they
thought about it, which is evident from Riviera claims, or by what the court might conclude regarding abstract fairness.48
The Court would be rewriting the contract of Reyes and Riviera under the guise of construction were we to interpret the
right of first refusal as Riviera propounds it, despite a contrary construction as exhibited by its actions. A court, even the
Supreme Court, has no right to make new contracts for the parties or ignore those already made by them, simply to avoid
seeming hardships. Neither abstract justice nor the rule of liberal construction justifies the creation of a contract for the
parties which they did not make themselves or the imposition upon one party to a contract of an obligation not assumed. 49

On the last error attributed to the Court of Appeals which is the effect on the jurisdiction of the appellate court of the nonsubstitution of Reyes, who died during the pendency of the appeal, the Court notes that when Riviera filed its petition with
this Court and assigned this error, it later filed on October 27, 1994 a Manifestation 50with the Court of Appeals stating that
it has discovered that Reyes is already dead, in view of which the appellate court issued a Resolution dated December 16,
1994 which noted the manifestation of Riviera and directed the counsel of Reyes to submit a copy of the latter's death
certificate and to file the proper motion for substitution of party. 51 Complying therewith, the necessary motion for
substitution of deceased Reyes, who died on January 7, 1994, was filed by the heirs, namely, Estefania B. Reyes, Juanita R.
de la Rosa, Juan B. Reyes, Jr. and Fidel B. Reyes. 52 Acting on the motion for substitution, the Court of Appeals granted the
same. 53
Notwithstanding

the

foregoing, Section

16 54 and

17 55 of Rule

3 of the

Revised

Rules of Court,

upon

which Riviera anchors its argument, has already been amended by the 1997 Rules of Civil Procedure. 56 Even applying the
old Rules, the failure of a counsel to comply with his duty under Section 16 of Rule 3 of the Revised Rules ofCourt, to inform
the court of the death of his client and no substitution of such is effected, will not invalidate the proceedings and the
judgment thereon if the action survives the death of such party, 57 as this case does, since the death of Reyes did not
extinguish his civil personality. The appellate court was well within its jurisdiction to proceed as it did with the case since the
death of a party is not subject to its judicial notice. Needless to stress, the purpose behind the rule on substitution of parties
is the protection of the right of every party to due process. This purpose has been adequately met in this case since both
parties argued their respective positions through their pleadings in the trial court and the appellate court. Besides,
the Court has already acquired jurisdiction over the heirs of Reyes by voluntarily submitting themselves to our jurisdiction. 58
In view of all the foregoing, the Court is convinced that the appellate court committed no reversible error in its challenged
Decision.
WHEREFORE, the instant petition is hereby DENIED, and the Decision of the Court of Appeals dated June 6, 1994 in CAG.R. CV No. 26513 is AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Bellosillo, Mendoza and Quisumbing, JJ., concur.
||| (Riviera Filipina, Inc. v. Court of Appeals, G.R. No. 117355, [April 5, 2002], 430 PHIL 8-31)

[G.R. No. 163244. June 22, 2009.]


SPOUSES JOSE T. VALENZUELA and
GLORIA VALENZUELA, petitioners, vs. KALAYAAN DEVELOPMENT & INDUSTRIAL
CORPORATION, respondent.

DECISION

PERALTA, J. p
This is a petition for review on certiorari assailing the Decision 1 dated January 23, 2004 of the Court of Appeals in CA-G.R.
CV No. 69814, and its Resolution 2 dated April 20, 2004, denying petitioners' motion for reconsideration.
The factual and procedural antecedents are as follows:
Kalayaan Development and Industrial Corporation (Kalayaan) is the owner of a parcel of land covered by Transfer Certificate
of Title (TCT) No. T-133026 3 issued by the Register of Deeds of Metro Manila, District III. Later, petitioners, Spouses Jose
T. Valenzuela and Gloria Valenzuela (Gloria), occupied the said property and introduced several improvements thereon.
When Kalayaan discovered that the lot was being illegally occupied by the petitioners, it demanded that they immediately
vacate the premises and surrender possession thereof. Petitioners then negotiated with Kalayaan to purchase the portion of
the lot they were occupying. On August 5, 1994, the parties executed a Contract to Sell 4 wherein they stipulated that
petitioners would purchase 236 square meters of the subject property for P1,416,000.00. Petitioners initially gave
P500,000.00 upon signing the contract and agreed to pay the balance of P916,000.00 in twelve (12) equal monthly
installments, or P76,333.75 a month until fully paid. 5The parties also agreed that, in case petitioners failed to pay any of the
installments, they would be liable for liquidated penalty at the rate of 3% a month compounded monthly until fully paid. It was
also stipulated that Kalayaan shall execute the corresponding deed of absolute sale over the subject property only upon full
payment of the total purchase price. 6
Thereafter, petitioners made the following payments: P70,000.00 on October 20, 1994; P70,000.00 on November 23, 1994;
and P68,000.00 on December 20, 1994, or a total of P208,000.00. After these payments, petitioners failed to pay the agreed
monthly installments.
In a letter 7 dated September 6, 1995, petitioners requested Kalayaan that they be issued a deed of sale for the 118 sq. m.
portion of the lot where their house was standing, considering that they no longer had the resources to pay the remaining
balance. They reasoned that, since they had already paid one-half of the purchase price, or a total of P708,000.00
representing 118 sq. m. of the subject property, they should be issued a deed of sale for the said portion of the property.
In a letter 8 dated December 15, 1995, Kalayaan reminded petitioners of their unpaid balance and asked that they settle it
within the next few days. In a demand letter 9dated January 30, 1996, Kalayaan, through counsel, demanded that petitioners
pay their outstanding obligation, including the agreed penalties, within ten (10) days from receipt of the letter, or they would
be constrained to file the necessary actions against them. Again, in a letter 10 dated March 30, 1996, Kalayaan gave
petitioners another opportunity to settle their obligation within a period of ten (10) days from receipt thereof. aIcETS
On June 13, 1996, petitioners wrote Atty. Atilano Huaben Lim, then counsel of Kalayaan, and requested him to intercede on
their behalf and to propose to Kalayaanthat Gloria's sister, Juliet Flores Giron (Juliet), was willing to assume payment of the
remaining balance for the 118 sq. m. portion of the subject property at P10,000.00 a month. 11 Petitioners stated that they
had already separated the said 118 sq. m. portion and had the property surveyed by a licensed geodetic engineer to
determine the unpaid portion of the property that needed to be separated from their lot.
On January 20, 1997, March 20, 1997, April 20, 1997, June 20, 1997, July 20, 1997, September 20, 1997, October 20,
1997, and December 20, 1997, Juliet made payments of P10,000.00 per month to Kalayaan, which the latter accepted for
and in behalf of her sister Gloria. 12
Thereafter, Kalayaan's in-house counsel, Atty. Reynaldo Romero, demanded that petitioners pay their outstanding obligation.
However, his demands remained unheeded. Thus, on June 19, 1998, Kalayaan filed a Complaint for Rescission of Contract
and Damages 13 against petitioners before the Regional Trial Court (RTC) of Caloocan City, Branch 126, which was later
docketed as Civil Case No. C-18378.
On September 3, 1998, petitioners filed their Answer with Counterclaim 14 praying, among other things, that the RTC
dismiss the complaint and for Kalayaan to deliver the corresponding TCT to the subject property, so that the same may be

cancelled and a new one issued in the name of the petitioners. Petitioners also prayed for the award of exemplary damages,
moral damages, attorney's fees, and cost of suit. 15
After filing their respective pleadings, trial on the merits ensued. On August 2, 2000, the RTC rendered a Decision 16 in
favor of Kalayaan, rescinding the contract between the parties; ordering the petitioners to vacate the premises; and to pay
the amount of P100,000.00 as attorney's fees. The decretal portion of the Decision reads:
IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered rescinding the contract between the
plaintiff and the defendants and ordering the defendants and all persons claiming rights under them to
vacate the premises and to surrender possession thereof to the plaintiff. Moreover, defendants shall pay
the amount of P100,000.00 as attorney's fees.
The counterclaim of the defendants is hereby ordered DISMISSED for lack of merit.
SO ORDERED. 17
Aggrieved, petitioners sought recourse before the Court of Appeals (CA) in their appeal docketed as CA-G.R. CV No.
163244. Petitioners argued that the RTC erred when:
IT RULED THAT THE PLAINTIFF-APPELLEE MADE A VALID FORMAL DEMAND UPON THE
DEFENDANTS-APPELANTS

TO

PAY

THE

LATTER'S

DUE

AND

OUTSTANDING

OBLIGATION; HCacTI
IT RULED THAT THE PRINCIPLE OF NOVATION OF AN EXISTING OBLIGATION IS NOT
APPLICABLE IN THE INSTANT CASE;
IT RULED THAT THE PRINCIPLE OF RESCISSION IS APPLICABLE IN THE CASE AND THAT THE
PLAINTIFF-APPELLEE IS ENTITLED THERETO VIS--VIS THE DEFENDANTS-APPELLANTS;
IT FAILED TO RULE THAT THE PLAINTIFF-APPELLEE IS BARRED BY ESTOPPEL FROM ASKING
FOR THE RESCISSION OF THE CONTRACT TO SELL.
IT RULED THAT THE DEFENDANTS-APPELLANTS DID NOT HAVE THE FINANCIAL CAPACITY TO
PAY

THE

REMAINING

BALANCE

OF

THE

OBLIGATION

AND

THAT,

CONSEQUENTLY,

COMPLIANCE WITH THE TERMS OF THE SAID OBLIGATION HAS BECOME IMPOSSIBLE.
IT RULED THAT THE PLAINTIFF-APPELLEE IS ENTITLED TO ITS CLAIM FOR ATTORNEY'S FEES
AND THE COST OF SUIT. 18
On January 23, 2004, the CA rendered a Decision affirming the Decision of the RTC, the dispositive portion of which reads:
WHEREFORE, premises considered, the assailed decision dated August 2, 2000 is hereby
AFFIRMED, and the present appeal is hereby DISMISSED for lack of merit.
SO ORDERED. (Emphasis supplied.) 19
Petitioners filed a Motion for Reconsideration, 20 but it was denied for lack of merit in a Resolution 21 dated April 20, 2004.
Hence, the present petition assigning the following errors: CAIaHS
I.THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO APPLY THE PROVISIONS OF
THE NEW CIVIL CODE REGARDING SUBSTANTIAL PERFORMANCE IN THE JUST
RESOLUTION OF THE PETITIONERS' APPEAL.
II.THE HONORABLE COURT OF APPEALS SHOULD HAVE APPLIED THE APPLICABLE
PROVISIONS OF THE LAW VIS--VIS THE RESCISSION OF CONTRACTS TO SELL REAL
PROPERTY, SPECIFICALLY THE REQUIREMENT OF A PRIOR AND VALIDLY NOTARIZED
LETTER OF DEMAND.

III.THE HONORABLE COURT OF APPEALS FAILED TO APPLY TO THE INSTANT CASE THE
PERTINENT PROVISIONS OF THE NEW CIVIL CODE REGARDING THE PRINCIPLE OF
NOVATION AS A MODE OF EXTINGUISHING AN OBLIGATION.
IV.THE AWARD, BY THE COURT OF APPEALS, OF ATTORNEY'S FEES, WAS NOT IN ACCORD
WITH THE FACTS AND THE LAW.
Petitioners maintain that they should have been entitled to get at least one-half of the subject property, because payment
equivalent to its value has been made to, and received by Kalayaan. Petitioners posit that the RTC should have applied
Article 1234 22 of the Civil Code to the present case, considering that it has been factually established that they were able to
pay at least one-half of the total obligation in good faith.
Petitioners contend that Kalayaan allowed Juliet to continue with the payment of the other half of the property in installments
of P10,000.00 a month. They also insist that they or Juliet was not given proper demand. They maintain that the demand
letters that were previously sent to them were for their previous obligation withKalayaan and not for the new agreement
between Juliet and Kalayaan to assume payment of the unpaid portion of the subject property. Petitioners aver that, for a
demand of rescission to be valid, it is an absolute requirement that should be made by way of a duly notarized written notice.
Petitioners likewise claim that there was a valid novation in the present case. They aver that the CA failed to see that the
original contract between the petitioners andKalayaan was altered, changed, modified and restructured, as a consequence
of the change in the person of the principal debtor and the monthly amortization to be paid for the subject property. When
they

agreed

to

monthly

amortization

of

P10,000.00

per

month,

the

original

contract

was

changed;

and Kalayaan recognized Juliet's capacity to pay, as well as her designation as the new debtor. The original contract was
novated and the principal obligation to pay for the remaining half of the subject property was transferred from petitioners to
Juliet. When Kalayaan accepted the payments made by the new debtor, Juliet, it waived its right to rescind the previous
contract. Thus, the action for rescission filed by Kalayaan against them, was unfounded, since the contract sought to be
rescinded was no longer in existence.

Finally, petitioners question the RTC's award of attorney's fees. They maintain that there was no basis for the RTC to have
awarded the same. They claim that Kalayaanwas not forced, by their acts, to litigate, because Juliet was offering to pay the
installments, but the offer was denied by Kalayaan. Moreover, since there were no awards for moral and exemplary
damages, the award of attorney's fees would have no basis and should be deleted.
The petition is devoid of merit.
In the present case, the nature and characteristics of a contract to sell is determinative of the propriety of the remedy of
rescission and the award of attorney's fees. SIAEHC
Under a contract to sell, the seller retains title to the thing to be sold until the purchaser fully pays the agreed purchase price.
The full payment is a positive suspensive condition, the non-fulfillment of which is not a breach of contract, but merely an
event that prevents the seller from conveying title to the purchaser. The non-payment of the purchase price renders the
contract to sell ineffective and without force and effect. 23 Unlike a contract of sale, where the title to the property passes to
the vendee upon the delivery of the thing sold, in a contract to sell, ownership is, by agreement, reserved to the vendor and
is not to pass to the vendee until full payment of the purchase price. Otherwise stated, in a contract of sale, the vendor loses
ownership over the property and cannot recover it until and unless the contract is resolved or rescinded; whereas, in a
contract to sell, title is retained by the vendor until full payment of the purchase price. In the latter contract, payment of the
price is a positive suspensive condition, failure of which is not a breach but an event that prevents the obligation of the
vendor to convey title from becoming effective. 24
Since the obligation of respondent did not arise because of the failure of petitioners to fully pay the purchase price, Article
1191 25 of the Civil Code would have no application.
Rayos v. Court of Appeals 26 elucidates:
Construing the contracts together, it is evident that the parties executed a contract to sell and not a
contract of sale. The petitioners retained ownership without further remedies by the respondents until

the payment of the purchase price of the property in full. Such payment is a positive suspensive
condition, failure of which is not really a breach, serious or otherwise, but an event that prevents
the obligation of the petitioners to convey title from arising, in accordance with Article 1184 of
the Civil Code. . . .
xxx xxx xxx
The non-fulfillment by the respondent of his obligation to pay, which is a suspensive condition
to the obligation of the petitioners to sell and deliver the title to the property, rendered the
contract to sell ineffective and without force and effect. The parties stand as if the conditional
obligation had never existed.Article 1191 of the New Civil Code will not apply because it
presupposes an obligation already extant. There can be no rescission of an obligation that is
still non-existing, the suspensive condition not having happened.
The parties' contract to sell explicitly provides that Kalayaan "shall execute and deliver the corresponding deed of absolute
sale over" the subject property to the petitioners "upon full payment of the total purchase price." Since petitioners failed to
fully pay the purchase price for the entire property, Kalayaan's obligation to convey title to the property did not arise.
Thus, Kalayaan may validly cancel the contract to sell its land to petitioner, not because it had the power to rescind the
contract, but because their obligation thereunder did not arise.
Petitioners failed to pay the balance of the purchase price. Such payment is a positive suspensive condition, failure of which
is not a breach, serious or otherwise, but an event that prevents the obligation of the seller to convey title from
arising. 27 The non-fulfillment by petitioners of their obligation to pay, which is a suspensive condition for the obligation
of Kalayaan to sell and deliver the title to the property, rendered the Contract to Sell ineffective and without force and effect.
The parties stand as if the conditional obligation had never existed. 28 Inasmuch as the suspensive condition did not take
place, Kalayaan cannot be compelled to transfer ownership of the property to petitioners.
As regards petitioners' claim of novation, we do not give credence to petitioners' assertion that the contract to sell was
novated when Juliet was allegedly designated as the new debtor and substituted the petitioners in paying the balance of the
purchase price.
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which
extinguishes or modifies the first, either by changing the object or principal conditions, or by substituting another in place of
the debtor, or by subrogating a third person in the rights of the creditor. 29
Article 1292 of the Civil Code provides that "[i]n order that an obligation may be extinguished by another which substitutes
the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other". Novation is never presumed. Parties to a contract must expressly agree that they are
abrogating their old contract in favor of a new one. In the absence of an express agreement, novation takes place only when
the old and the new obligations are incompatible on every point. 30 The test of incompatibility is whether or not the two
obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the
latter obligation novates the first. 31 TCADEc
Thus, in order that a novation can take place, the concurrence of the following requisites are indispensable:
1)There must be a previous valid obligation;
2)There must be an agreement of the parties concerned to a new contract;
3)There must be the extinguishment of the old contract; and
4)There must be the validity of the new contract.
In the instant case, none of the requisites are present. There is only one existing and binding contract between the parties,
because Kalayaan never agreed to the creation of a new contract between them or Juliet. True, petitioners may have offered
that they be substituted by Juliet as the new debtor to pay for the remaining obligation. Nonetheless, Kalayaan did not
acquiesce to the proposal.

Its acceptance of several payments after it demanded that petitioners pay their outstanding obligation did not modify their
original contract. Petitioners, admittedly, have been in default; and Kalayaan's acceptance of the late payments is, at best, an
act of tolerance on the part of Kalayaan that could not have modified the contract.
As to the partial payments made by petitioners from September 16, 1994 to December 20, 1997, amounting to P788,000.00,
this Court resolves that the said amount be returned to the petitioners, there being no provision regarding forfeiture of
payments made in the Contract to Sell. To rule otherwise will be unjust enrichment on the part of Kalayaan at the expense of
the petitioners.
Also, the three percent (3%) penalty interest appearing in the contract is patently iniquitous and unconscionable as to
warrant the exercise by this Court of its judicial discretion. Article 2227 of the Civil Code provides that "liquidated damages,
whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable." A
perusal of the Contract to Sell reveals that the three percent (3%) penalty interest on unpaid monthly installments (per
condition No. 3) would translate to a yearly penalty interest of thirty-six percent (36%).
Although this Court on various occasions has eliminated altogether the three percent (3%) penalty interest for being
unconscionable, 32 We are not inclined to do the same in the present case. A reduction is more consistent with fairness and
equity. We should not lose sight of the fact that Kalayaan remains an unpaid seller and that it has suffered, one way or
another, from petitioners' non-performance of its contractual obligations. In view of such glaring reality, We invoke the
authority granted to us by Article 1229 33 of the Civil Code, and as equity dictates, the penalty interest is accordingly
reimposed at a reduced rate of one percent (1%) interest per month, or twelve percent (12%) per annum, 34 to be deducted
from the partial payments made by the petitioners. aDACcH
As to the award of attorney's fees, the undeniable source of the present controversy is the failure of petitioners to pay the
balance of the purchase price. It is elementary that when attorney's fees is awarded, they are so adjudicated, because it is in
the nature of actual damages suffered by the party to whom it is awarded, as he was constrained to engage the services of
a counsel to represent him for the protection of his interest. 35 Thus, although the award of attorney's fees to Kalayaanwas
warranted by the circumstances obtained in this case, we find it equitable to reduce the award from P100,000.00 to
P50,000.00.
WHEREFORE, premises considered, the Decision of the Regional Trial Court in Civil Case No. C-18378, dated August 2,
2000, is hereby MODIFIED to the extent that the contract between the parties is cancelled and the attorney's fees is reduced
to P50,000.00. Respondent is further ordered to refund the amount paid by the petitioners after deducting the penalty
interest due. In all other aspects, the Decision stands.
Subject to the above disquisitions, the Decision dated January 23, 2004 and the Resolution dated April 20, 2004, of the
Court of Appeals in CA-G.R. CV No. 69814, areAFFIRMED.
[G.R. No. 83851. March 3, 1993.]
VISAYAN SAWMILL COMPANY,

INC.,

and

ANG

TAY, petitioners, vs. THE

HONORABLE COURT OF APPEALS and RJH TRADING, represented by RAMON J. HIBIONADA,


proprietor, respondents.

Saleto J. Erames and Edilberto V. Logronio for petitioners.


Eugenio O. Original for private respondent.

SYLLABUS
1. CIVIL LAW; CONTRACT TO SELL; EFFECT OF VENDEE'S FAILURE TO COMPLY WITH POSITIVE SUSPENSIVE
CONDITION; CASE AT BAR. The petitioner corporation's obligation to sell is unequivocally subject to a positive
suspensive condition, i.e., the private respondent's opening, making or indorsing of an irrevocable and unconditional
letter of credit. The former agreed to deliver the scrap iron only upon payment of the purchase price by means of an

irrevocable and unconditional letterof credit. Otherwise stated, the contract is not one of sale where the buyer acquired
ownership over the property subject to the resolutory condition that the purchase price would be paid after delivery. Thus,
there was to be no actual sale until the opening, making or indorsing of the irrevocable and unconditional letter of credit.
Since what obtains in the case at bar is a mere promise to sell, the failure of the private respondent to comply with the
positive suspensive condition cannot even be considered a breach casual or serious but simply an event that
prevented the obligation of petitioner corporation to convey title from acquiring binding force. InLuzon Brokerage Co., Inc. vs.
Maritime Building Co., Inc., this Court stated: ". . . The upshot of all these stipulations is that in seeking the
ouster of Maritime for failure to pay the price as agreed upon, Myers was not rescinding (or more properly, resolving) the
contract, but precisely enforcing it according to its express terms. In its suit Myers was not seeking restitution to it of the
ownership of the thing sold (since it was never disposed of), such restoration being the logical consequence of the
fulfillment of a resolutory condition, express or implied (Article 1190); neither was it seeking a declaration that its obligation
to sell was extinguished. What it sought was a judicial declaration that because the suspensive condition (full and punctual
payment) had not been fulfilled, its obligation to sell to Maritime never arose or never became effective and, therefore, it
(Myers) was entitled to repossess the property object of the contract, possession being a mere incident to its
right ofownership. It is elementary that, as stated by Castan, -- 'b) Si la condicion suspensiva llega a faltar, la obligacion se
tiene por no existente, y el acreedor pierde todo derecho, incluso el de utilizar las medidas conservativas.'(3 Castan,
Derecho Civil, 7a Ed., p. 107). (Also Puig Pea, Der. Civ., T. IV (1), p. 113).'"
2. ID.; ID.; ID.; RESCISSION. The obligation of the petitioner corporation to sell did not arise; it therefore cannot be
compelled by specific performance to comply with its prestation. In short, Article 1191 of the Civil Code does not apply; on
the contrary, pursuant to Article 1597 of the Civil Code, the petitioner corporation may totally rescind, as it did in this case,
the contract. Said Article provides: "ART. 1597. Where the goods have not been delivered to the buyer, and the buyer has
repudiated the contract of sale, or has manifested his inability to perform his obligations, thereunder, or has committed a
breach thereof, the seller may totally rescind the contract of sale by giving notice of his election so to do to the buyer."
3. ID.; ID.; IN CASE AT BAR, VENDOR'S CONSENT TO DIGGING UP AND GATHERING OF SCRAP IRON NOT
CONSTRUED AS DELIVERY THEREOF; REASONS THEREFOR. Paragraph 6 of the Complaint reads: "6. That on May
17, 1983 Plaintiff with the consent of defendant Ang Tay sent his men to the stockyard of Visayan Sawmill Co., Inc. at
Cawitan, Sta. Catalina, Negros Oriental to dig and gather the scrap iron and stock the same for weighing." This permission
or consent can, by no stretch of the imagination, be construed as delivery of the scrap iron in the sense that, as held by the
public respondent, citing Article 1497 of the Civil Code, petitioners placed the private respondent in control and possession
thereof. In the first place, said Article 1497 falls under the Chapter Obligations of the Vendor, which is found in Title VI
(Sales), Book IV of the Civil Code. As such, therefore, the obligation imposed therein is premised on an existing obligation to
deliver the subject of the contract. In the instant case, in view of the private respondent's failure to comply with the positive
suspensive condition earlier discussed, such an obligation had not yet arisen. In the second place, it was a mere
accommodation to expedite the weighing and hauling of the iron in the event that the sale would materialize. The private
respondent was not thereby placed in possession of and control over the scrap iron. Thirdly, We cannot even assume the
conversion of the initial contract or promise to sell into a contract of sale by the petitioner corporation's alleged implied
delivery of the scrap iron because its action and conduct in the premises do not support this conclusion. Indeed, petitioners
demanded the fulfillment of the suspensive condition and eventually cancelled the contract.
4. ID.; CONTRACTS; DAMAGES; MORAL DAMAGES; PURPOSE OF AWARD THEREOF; EXEMPLARY DAMAGES. In
contracts, such as in the instant case, moral damages may be recovered if defendants acted fraudulently and in bad faith,
while exemplary damages may only be awarded if defendants acted in a wanton, fraudulent, reckless, oppressive or
malevolent manner. In the instant case, the refusal of the petitioners to deliver the scrap iron was founded on the nonfulfillment by the private respondent of a suspensive condition. It cannot, therefore, be said that the herein petitioners had
acted fraudulently and in bad faith or in a wanton, reckless, oppressive or malevolent manner. What this Court stated
in Inhelder Corp. vs. Court of Appeals needs to be stressed anew: "At this juncture, it may not be amiss to remind Trial
Courts to guard against the award of exhorbitant (sic) damages that are way out of proportion to the environmental
circumstances of a case and which, time and again, this Court has reduced or eliminated. Judicial discretion granted to the
Courts in the assessment of damages must always be exercised with balanced restraint and measured objectivity." For,
indeed, moral damages are emphatically not intended to enrich a complainant at the expense of the defendant. They are
awarded only to enable the injured party to obtain means, diversion or amusements that will serve to obviate the moral

suffering he has undergone, by reason of the defendant's culpable action. Its award is aimed at the restoration, within the
limits of the possible, of the spiritual status quo ante, and it must be proportional to the suffering inflicted.
ROMERO, J., dissenting:
1. CIVIL LAW; CONTRACT OF SALE; DEFINED; WHEN PERFECTED; CASE AT BAR. Article 1458 of the Civil Code
has this definition: "By a contract of sale, one of the contracting parties obligates himself to transfer the ownership of and to
deliver a determinate thing and the other to pay therefor a price certain in money or its equivalent." Article 1475 gives the
significance of this mutual undertaking of the parties, thus: "The contract of sale is perfected at the moment there is a
meeting ofminds upon the thing which is the object of the contract and upon the price. From that moment, the parties may
reciprocally demand performance, subject to the provisions of the law governing the form of contracts." Thus, when the
parties entered into the contract entitled "Purchase and Sale of Scrap Iron" on May 1, 1983, the contract reached the
stage of perfection, there being a meeting of the' minds upon the object which is the subject matter of the contract and the
price which is the consideration. Applying Article 1475 of the Civil Code, from that moment, the parties may reciprocally
demand performance of the obligations incumbent upon them, i.e., delivery by the vendor and payment by the vendee.
2. ID.; ID.; DELIVERY; HOW ACCOMPLISHED; CASE AT BAR. From the time the seller gave access to the buyer to
enter his premises, manifesting no objection thereto but even sending 18 or 20 people to start the operation, he has placed
the goods in the control and possession of the vendee and delivery is effected. For according to Article 1497, "The thing sold
shall be understood as delivered when it is placed in the control and possession of the vendee." Such action or real delivery
(traditio) is the act that transfers ownership. Under Article 1496 of the Civil Code, "The ownership of the thing sold is
acquired by the vendee from the moment it is delivered to him in any of the ways specified in Articles 1497 to 1501, or in any
other manner signifying an agreement that the possession is transferred from the vendor to the vendee."
3. ID.; ID.; PROVISION IN CONTRACT REGARDING MODE OF PAYMENT NOT ESSENTIAL REQUISITE THEREOF;
WHEN PROVISION CONSIDERED A SUSPENSIVE CONDITION. a provision in the contract regarding the
mode of payment, like the requirement for the opening of the Letter of Credit in this case, is not among the essential
requirements of a contract of sale enumerated in Articles 1305 and 1474, the absence of any of which will prevent the
perfection of the contract from happening. Likewise, it must be emphasized that not every provision regarding payment
should automatically be classified as a suspensive condition. To do so would change the nature of most contracts of sale
into contracts to sell. For a provision in the contract regarding the payment of the price to be considered a suspensive
condition, the parties must have made this clear in certain and unambiguous terms, such as for instance, by reserving or
withholding title to the goods until full payment by the buyer. This was a pivotal circumstance in the Luzon Brokerage case
where the contract in question was replete with very explicit provisions such as the following: "Title to the properties
subject of this contract remains with the Vendor and shall pass to, and be transferred in the name of the Vendee only upon
complete payment of the full price . . .;" 10 the Vendor (Myers) will execute and deliver to the Vendee a definite and absolute
Deed of Sale upon full payment of the Vendee . . .; and "should the Vendee fail to pay any of the monthly installments, when
due, or otherwise fail to comply with any of the terms and conditions herein stipulated, then this Deed of Conditional Sale
shall automatically and without any further formality, become null and void." It is apparent from a careful reading of Luzon
Brokerage, as well as the cases which preceded it and the subsequent ones applying its doctrines, that the mere
insertion of the price and the mode of payment among the terms and conditions of the agreement will not necessarily make
it a contract to sell. The phrase in the contract "on the following terms and conditions" is standard form which is not to be
construed as imposing a condition, whether suspensive or resolutory, in the sense of the happening of a future and
uncertain event upon which an obligation is made to depend. There must be a manifest understanding that the agreement is
in what may be referred to as "suspended animation" pending compliance with provisions regarding payment. The
reservation of title to the object of the contract in the seller is one such manifestation. Hence, it has been decided in the
case of Dignos v. Court of Appeals that, absent a proviso in the contract that the title to the property is reserved in the
vendor until full payment of the purchase price or a stipulation giving the vendor the right to unilaterally rescind the contract
the moment the vendee fails to pay within the fixed period, the transaction is an absolute contract of sale and not a contract
to sell.

4. ID.;

ID.;

CONTRACT OF SALE

DISTINGUISHED

FROM

CONTRACT

TO

SELL;

EFFECT OF NON-

PAYMENT OF PURCHASE PRICE; EFFECT OF DELIVERY ON OWNERSHIPOF OBJECT OF CONTRACT. In a


contract of sale, the non-payment of the price is a resolutory condition which extinguishes the transaction that, for a time,
existed and discharges the obligations created thereunder. On the other hand, "the parties may stipulate that ownership in
the thing shall not pass to the purchaser until he has fully paid the price." In such a contract to sell, the full payment of the
price is a positive suspensive condition, such that in the event of non-payment, the obligationof the seller to deliver and
transfer ownership never arises. Stated differently, in a contract to sell, ownership is not transferred upon delivery of property
but upon full payment of the purchase price. Consequently, in a contract of sale, after delivery of the object of the contract
has been made, the seller loses ownership and cannot recover the same unless the contract is rescinded. But in the
contract to sell, the seller retains ownership and the buyer's failure to pay cannot even be considered a breach, whether
casual or substantial, but an event that prevented the seller's duty to transfer title to the object of the contract.
5. ID.; ID.; CASE OF SYCIP V. NATIONAL COCONUT CORPORATION, ET AL., G.R. NO. L-6618, APRIL 28, 1956,
DISTINGUISHED FROM CASE AT BAR. Worthy ofmention before concluding is Sycip v. National Coconut Corporation,
et al. since, like this case, it involves a failure to open on time the Letter of Credit required by the seller. In Sycip, after the
buyer offered to buy 2,000 tons of copra, the seller sent a telegram dated December 19, 1946 to the buyer accepting the
offer but on condition that the latter opens a Letter of Credit within 48 hours. It was not until December 26, 1946, however,
that the Letter of Credit was opened. The Court, speaking through Justice Bengzon, held that because of the delay in the
opening of the Letter of Credit; the seller was not obliged to deliver the goods. Two factors distinguish Sycip from the case at
bar. First, while there has already been a perfected contract of sale in the instant case, the parties in Sycip were still
undergoing the negotiation process. The seller's qualified acceptance in Sycip served as a counter offer which prevented the
contract from being perfected. Only an absolute and unqualified acceptance of a definite offer manifests the consent
necessary to perfect a contract. Second, the Court found in Sycip that time was of the essence for the seller who was
anxious to sell to other buyers should the offeror fail to open the Letter of Credit within the stipulated time. In contrast, there
are no indicia in this case that can lead one to conclude that time was of the essence for petitioner as would make the
eleven-day delay a fundamental breach of the contract.
6. ID.; OBLIGATIONS AND CONTRACTS; RESCISSION UNDER ARTICLE 1191 OF THE CIVIL CODE; WHEN PROPER;
DELAY IN PAYMENT FOR TWENTY DAYS NOT CONSIDERED A SUBSTANTIAL BREACH OF CONTRACT; CASE AT
BAR. The right to rescind pursuant to Article 1191 is not absolute. Rescission will not be permitted for slight or casual
breach of the contract. Here, petitioners claim that the breach is so substantial as to justify rescission . . . I am not convinced
that the circumstances may be characterized as so substantial and fundamental as to defeat the object of the parties in
making the agreement. None of the alleged defects in the Letter ofCredit would serve to defeat the object of the parties. It is
to be stressed that the purpose of the opening of a Letter of Credit is to effect payment. The above-mentioned factors could
not have prevented such payment. It is also significant to note that petitioners sent a telegram to private respondents on May
23, 1983 cancelling the contract. This was before they had even received on May 26, 1983 the notice from the bank about
the opening of the Letter of Credit. How could they have made a judgment on the materiality of the provisions of the
Letter of Credit for purposes of rescinding the contract even before setting eyes on said document? To be sure, in the
contract, the private respondents were supposed to open the Letter of Credit on May 15, 1983 but, it was not until May 26,
1983 or eleven (11) days later that they did so. Is the eleven-day delay a substantial breach of the contract as could justify
the rescission of the contract? In Song Fo and Co. v. Hawaiian-Philippine Co., it was held that a delay in payment for twenty
(20) days was not a violation of an essential condition of the contract which would warrant rescission for non-performance.
In the instant case, the contract is bereft of any suggestion that time was of the essence. On the contrary, it is noted that
petitioners allowed private respondents' men to dig and remove the scrap iron located in petitioners' premises between May
17, 1983 until May 30, 1983 or beyond the May 15, 1983 deadline for the opening of the Letter of Credit. Hence, in the
absence of any indication that the time was of the essence, the eleven-day delay must be deemed a casual breach which
cannot justify a rescission.

DECISION

DAVIDE, JR., J p:
By this petition for review under Rule 45 of the Rules of Court, petitioners urge this Court to set aside the decision of public
respondent Court of Appeals in C.A.-G.R. CV No. 08807, 1 promulgated on 16 March 1988, which affirmed with
modification, in respect to the moral damages, the decision of the Regional Trial Court (RTC) of Iloilo in Civil Case No.
15128, an action for specific performance and damages, filed by the herein private respondent against the petitioners. The
dispositive portion of the trial court's decision reads as follows:
"IN VIEW OF THE ABOVE FINDINGS, judgment is hereby rendered in favor of plaintiff and against the
defendants ordering the latter to pay jointly and severally plaintiff, to wit:
1) The sum of Thirty-Four Thousand Five Hundred Eighty Three and 16/100 (P34,583.16), as actual
damages;
2) The sum of One Hundred Thousand (P100,000.00) Pesos, as moral damages;
3) The sum of Ten Thousand (P10,000.00) Pesos, as exemplary damages;
4) The sum of TWENTY Five Thousand (P25,000.00) Pesos, as attorney's fees; and
5) The sum of Five Thousand (P5,000.00) Pesos as actual litis expenses." 2
The public respondent reduced the amount of moral damages to P25,000.00.
The antecedent facts, summarized by the public respondent, are as follows:
"On May 1, 1983, herein plaintiff-appellee and defendants-appellants entered into a sale involving scrap
iron located at the stockyard of defendant-appellant corporation at Cawitan, Sta. Catalina, Negros
Oriental, subject to the condition that plaintiff-appellee will open a letter of credit in the
amount of P250,000.00 in favorof defendant-appellant corporation on or before May 15, 1983. This is
evidenced by a contract entitled `Purchase and Sale of Scrap Iron' duly signed by both parties. llcd
On May 17, 1983, plaintiff-appellee through his man (sic), started to dig and gather and (sic) scrap iron
at the defendant-appellant's (sic) premises, proceeding with such endeavor until May 30 when
defendants-appellants allegedly directed plaintiff-appellee's men to desist from pursuing the work in
view of an alleged case filed against plaintiff-appellee by a certain Alberto Pursuelo. This, however, is
denied by defendants-appellants who allege that on May 23, 1983, they sent a telegram to plaintiffappellee cancelling the contract of sale because of failure of the latter to comply with the conditions
thereof.
On May 24, 1983, plaintiff-appellee informed defendants-appellants by telegram that the letter of credit
was opened May 12, 1983 at the Bank of the Philippine Islands main office in Ayala, but then (sic) the
transmittal was delayed.
On May 26, 1983, defendants-appellants received a letter advice from the Dumaguete City
Branch of the Bank of the Philippine Islands dated May 26, 1983, the content of which is quited (sic) as
follows:
'Please be advised that we have received today cable advise from our Head Office
which reads as follows:
'Open today our irrevocable Domestic Letter of Credit No. 01456-d fot (sic)
P250,000.00 favor ANG TAY c/o Visayan Sawmill Co., Inc. Dumaguete City, Negros Oriental
Account of ARMACO-MARSTEEL ALLOY CORPORATION 2nd Floor Alpap 1 Bldg., 140 Alfaro
stp (sic) Salcedo Village, Makati, Metro Manila Shipments of about 500 MT of assorted steel
scrap marine/heavy equipment expiring on July 24, 1983 without recourse at sight draft drawn
on Armaco Marsteel Alloy Corporation accompanied by the following documents:
Certificate of Acceptance by Armaco-Marsteel Alloy Corporation shipment from Dumaguete
City to buyer's warehouse partial shipment allowed/transhipment (sic) not allowed'.

For your information'.


On July 19, 1983, plaintiff-appellee sent a series of telegrams stating that the case filed against him by
Pursuelo had been dismissed and demanding that defendants-appellants comply with the deed of sale,
otherwise a case will be filed against them.
In reply to those telegrams, defendants-appellants' lawyer, on July 20, 1983 informed plaintiff-appellee's
lawyer that defendant-appellant corporation is unwilling to continue with the sale due to plaintiffappellee's failure to comply with essential pre-conditions of the contract.
On July 29, 1983, plaintiff-appellee filed the complaint below with a petition for preliminary attachment.
The writ of attachment was returned unserved because the defendant-appellant corporation was no
longer in operation and also because the scrap iron as well as other pieces of machinery can no longer
be found on the premises of the corporation." 3
In his complaint, private respondent prayed for judgment ordering the petitioner corporation to comply with the contract by
delivering to him the scrap iron subject thereof; he further sought an award of actual, moral and exemplary damages,
attorney's fees and the costs of the suit. 4

In their Answer with Counterclaim, 5 petitioners insisted that the cancellation of the contract was justified because of private
respondent's non-compliance with essential pre-conditions, among which is the opening of an irrevocable and unconditional
letter of credit not later than 15 May 1983. prcd
During the pre-trial of the case on 30 April 1984, the parties defined the issues to be resolved; these issues were
subsequently embodied in the pre-trial order, to wit:
"1. Was the contract entitled Purchase and Sale of Scrap Iron, dated May 1, 1983 executed by the
parties cancelled and terminated before the Complaint was filed by anyone of the parties; if so, what are
the grounds and reasons relied upon by the cancelling parties; and were the reasons or grounds for
cancelling valid and justified?
2. Are the parties entitled to damages they respectively claim under the pleadings?" 6
On 29 November 1985, the trial court rendered its judgment, the dispositive portion of which was quoted earlier.
Petitioners appealed from said decision to the Court of Appeals which docketed the same as C.A.-G.R. CV No. 08807. In
their Brief, petitioners, by way of assigned errors, alleged that the trial court erred:
"1. In finding that there was delivery of the scrap iron subject of the sale;
2. In not finding that plaintiff had not complied with the conditions in the contract of sale;
3. In finding that defendants-appellants were not justified in cancelling the sale;
4. In awarding damages to the plaintiff as against the defendants-appellants;
5. In not awarding damages to defendants-appellants." 7
Public respondent disposed of these assigned errors in this wise:
"On the first error assigned, defendants-appellants argue that there was no delivery because the
purchase document states that the seller agreed to sell and the buyer agreed to buy 'an undetermined
quantity of scrap iron and junk which the seller will identify and designate.' Thus, it is contended, since
no identification and designation was made, there could be no delivery. In addition, defendantsappellants maintain that their obligation to deliver cannot be completed until they furnish the cargo
trucks to haul the weighed materials to the wharf.
The arguments are untenable. Article 1497 of the Civil Code states:

'The thing sold shall be understood as delivered when it is placed in the control and
possession of the vendee.'
In the case at bar, control and possession over the subject matter of the contract was given to plaintiffappellee, the buyer, when the defendants-appellants as the sellers allowed the buyer and his men to
enter the corporation's premises and to dig-up the scrap iron. The pieces of scrap iron then (sic) placed
at the disposal of the buyer. Delivery was therefore complete. The identification and designation by the
seller does not complete delivery.
On the second and third assignments of error, defendants-appellants argue that under Articles 1593
and 1597 of the Civil Code, automatic rescission may take place by a mere notice to the buyer if the
latter committed a breach of the contract of sale. cdrep
Even if one were to grant that there was a breach of the contract by the buyer, automatic rescission
cannot take place because, as already (sic) stated, delivery had already been made. And, in cases
where there has already been delivery, the intervention of the court is necessary to annul the contract.
As the lower court aptly stated:
'Respecting these allegations of the contending parties, while it is true that Article
1593 of the New Civil Code provides that with respect to movable property, the
rescission of the sale shall of right take place in the interest of the vendor, if the vendee fails to
tender the price at the time or period fixed or agreed, however, automatic rescission is not
allowed if the object sold has been delivered to the buyer (Guevarra vs. Pascual, 13 Phil. 311;
Escueta vs. Pando, 76 Phil 256), the action being one to rescind judicially and where (sic)
Article 1191, supra, thereby applies. There being already an implied delivery of the items,
subject matter of the contract between the parties in this case, the defendant having
surrendered the premises where the scraps (sic) were found for plaintiff's men to dig and
gather, as in fact they had dug and gathered, this Court finds the mere notice of resolution by
the defendants untenable and not conclusive on the rights of the plaintiff (Ocejo Perez vs. Int.
Bank, 37 Phi. 631). Likewise, as early as in the case of Song Fo vs. Hawaiian Philippine
Company, it has been ruled that rescission cannot be sanctioned for a slight or casual
breach (47 Phil. 821).'
In the case of Angeles vs. Calasanz (135 (1935) SCRA 323), the Supreme Court ruled:
'Article 1191 is explicit. In reciprocal obligations, either party has the right to rescind
the contract upon failure of the other to perform the obligation assumed thereunder.
Of course, it must be understood that the right of a party in treating a contract as
cancelled or resolved on account of infractions by the other contracting party must be made
known to the other and is always provisional, being ever subject to scrutiny and review by the
proper court.'
Thus, rescission in cases falling under Article 1191 of the Civil Code is always subject to review by the
courts and cannot be considered final.
In the case at bar, the trial court ruled that rescission is improper because the breach was very slight
and the delay in opening the letter of credit was only 11 days.
'Where time is not of the essence of the agreement, a slight delay by one party in the
performance of his obligation is not a sufficient ground for rescission of the agreement. Equity
and justice mandates (sic) that the vendor be given additional (sic) period to complete
payment of the purchase price.' (Taguda vs. Vda. de Leon, 132 SCRA (1984), 722).'
There is no need to discuss the fourth and fifth assigned errors since these are merely corollary to the
first three assigned errors." 8

Their motion to reconsider the said decision having been denied by public respondent in its Resolution of 4 May
1988, 9 petitioners filed this petition reiterating the abovementioned assignment of errors.
There is merit in the instant petition.
Both the trial court and the public respondent erred in the appreciation of the nature of the transaction between the petitioner
corporation and the private respondent. To this Court's mind, what obtains in the case at bar is a mere contract to sell or
promise to sell, and not a contract of sale.
The trial court assumed that the transaction is a contract of sale and, influenced by its view that there was an
"implied delivery" of the object of the agreement, concluded that Article 1593 of the Civil Code was inapplicable;
citing Guevarra vs. Pascual 10 and Escueta vs. Pando, 11 it ruled that rescission under Article 1191 of the Civil Code could
only be done judicially. The trial court further classified the breach committed by the private respondent as slight or casual,
foreclosing, thereby, petitioners' right to rescind the agreement. cdphil
Article 1593 of the Civil Code provides:
"ARTICLE 1593. With respect to movable property, the rescission of the sale shall of right take place in
the interest of the vendor, if the vendee, upon the expirationof the period fixed for the delivery of the
thing, should not have appeared to receive it, or, having appeared, he should not have tendered the
price at the same time, unless a longer period has been stipulated for its payment."
Article 1191 provides:
"ARTICLE 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment,
if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period."
xxx xxx xxx
Sustaining the trial court on the issue of delivery, public respondent cites Article 1497 of the Civil Code which provides:
"ARTICLE 1497. The thing sold shall be understood as delivered, when it is placed in the control and
possession of the vendee."
In the agreement in question, entitled PURCHASE AND SALE OF SCRAP IRON, 12 the seller bound and promised itself to
sell the scrap iron upon the fulfillment by the private respondent of his obligation to make or indorse an irrevocable and
unconditional letter of credit in payment of the purchase price. Its principal stipulation reads, to wit:
xxx xxx xxx
"Witnesseth:
That the SELLER agrees to sell, and the BUYER agrees to buy, an undetermined quantity of scrap iron
and junk which the SELLER will identify and designate now at Cawitan, Sta. Catalina, Negros Oriental,
at the price of FIFTY CENTAVOS (P0.50) per kilo on the following terms and conditions:
1. Weighing shall be done in the premises of the SELLER at Cawitan, Sta. Catalina, Neg.
Oriental.
2. To cover payment of the purchase price, BUYER will open, make or indorse an irrevocable
and unconditional letter of credit not later than May 15, 1983 at the Consolidated Bank and
Trust Company, Dumaguete City, Branch, in favor of the SELLER in the sum of TWO
HUNDRED AND FIFTY THOUSAND PESOS (P250,000.00), Philippine Currency.

3. The SELLER will furnish the BUYER free of charge at least three (3) cargo trucks with
drivers, to haul the weighed materials from Cawitan to the TSMC wharf at Sta. Catalina for
loading on BUYER's barge. All expenses for labor, loading and unloading shall be for the
account of the BUYER.
4. SELLER shall be entitled to a deduction of three percent (3%) per ton as rust allowance."
(Emphasis supplied).
The petitioner corporation's obligation to sell is unequivocally subject to a positive suspensive condition, i.e., the private
respondent's opening, making or indorsing ofan irrevocable and unconditional letter of credit. The former agreed to deliver
the scrap iron only upon payment of the purchase price by means of an irrevocable and unconditional letter of credit.
Otherwise stated, the contract is not one of sale where the buyer acquired ownership over the property subject to the
resolutory condition that the purchase price would be paid after delivery. Thus, there was to be no actual sale until the
opening, making or indorsing of the irrevocable and unconditional letter of credit. Since what obtains in the case at bar is a
mere promise to sell, the failure of the private respondent to comply with the positive suspensive condition cannot even be
considered a breach casual or serious but simply an event that prevented the obligation of petitioner corporation to
convey

title

from

acquiring

binding

force.

In

Luzon

Brokerage

Co.,

Inc. vs.

Maritime

Building

Co.,

Inc., 13 this Court stated: LexLib

" . . . The upshot of all these stipulations is that in seeking the ouster of Maritime for failure to pay the
price as agreed upon, Myers was not rescinding (or more properly, resolving) the contract, but
precisely enforcing it according to its express terms. In its suit Myers was not seeking restitution to
it of the ownership of the thing sold (since it was never disposed of), such restoration being the logical
consequence of the fulfillment of a resolutory condition, express or implied (article 1190); neither was it
seeking a declaration that its obligation to sell was extinguished. What it sought was a judicial
declaration that because the suspensive condition (full and punctual payment) had not been fulfilled, its
obligation to sell to Maritime never arose or never became effective and, therefore, it (Myers) was
entitled to repossess the property object of the contract, possession being a mere incident to its
right of ownership. It is elementary that, as stated by Castan,
'b) Si la condicion suspensiva llega a faltar, la obligacion se tiene por no existente, y
el acreedor pierde todo derecho, incluso el de utilizar las medidas conservativas.' (3 Cast n,
Derecho Civil, 7a Ed., p. 107). (Also Puig Pea, Der. Civ., T. IV (1), p. 113)'."
In the instant case, not only did the private respondent fail to open, make or indorse an irrevocable and unconditional
letter of credit on or before 15 May 1983 despite his earlier representation in his 24 May 1983 telegram that he had opened
one on 12 May 1983, the letter of advice received by the petitioner corporation on 26 May 1983 from the Bank of the
Philippine Islands Dumaguete City branch explicitly makes reference to the opening on that date of a letter of credit in
favor of petitioner Ang Tay c/o Visayan Sawmill Co. Inc., drawn without recourse on ARMACO-MARSTEEL ALLOY
CORPORATION and set to expire on 24 July 1983, which is indisputably not in accordance with the stipulation in the
contract signed by the parties on at least three (3) counts: (1) it was not opened, made or indorsed by the private
respondent, but by a corporation which is not a party to the contract; (2) it was not opened with the bank agreed upon; and
(3) it is not irrevocable and unconditional, for it is without recourse, it is set to expire on a specific date and it stipulates
certain conditions with respect to shipment. In all probability, private respondent may have sold the subject scrap iron to
ARMACO-MARSTEEL ALLOY CORPORATION, or otherwise assigned to it the contract with the petitioners. Private
respondent's complaint fails to disclose the sudden entry into the picture of this corporation.
Consequently, the obligation of the petitioner corporation to sell did not arise; it therefore cannot be compelled by specific
performance to comply with its prestation. In short, Article 1191 of the Civil Code does not apply; on the contrary, pursuant
to Article 1597 of the Civil Code, the petitioner corporation may totally rescind, as it did in this case, the contract. Said Article
provides:

"ARTICLE 1597. Where the goods have not been delivered to the buyer, and the buyer has repudiated
the contract of sale, or has manifested his inability to perform his obligations, thereunder, or has
committed a breach thereof, the seller may totally rescind the contract of sale by giving notice of his
election so to do to the buyer."
The trial court ruled, however, and the public respondent was in agreement, that there had been an implied delivery in this
case of the subject scrap iron because on 17 May 1983, private respondent's men started digging up and gathering scrap
iron within the petitioner's premises. The entry of these men was upon the private respondent's request. Paragraph 6 of the
Complaint reads:
"6. That on May 17, 1983 Plaintiff with the consent of defendant Ang Tay sent his men to the
stockyard of Visayan Sawmill Co., Inc. at Cawitan, Sta. Catalina, Negros Oriental to dig and gather the
scrap iron and stock the same for weighing." 14
This permission or consent can, by no stretch of the imagination, be construed as delivery of the scrap iron in the sense that,
as held by the public respondent, citing Article 1497 of the Civil Code, petitioners placed the private respondent in control
and possession thereof. In the first place, said Article 1497 falls under the Chapter 15Obligations of the Vendor, which is
found in Title VI (Sales), Book IV of the Civil Code. As such, therefore, the obligation imposed therein is premised on an
existing obligation to deliver the subject of the contract. In the instant case, in view of the private respondent's failure to
comply with the positive suspensive condition earlier discussed, such an obligation had not yet arisen. In the second place, it
was a mere accommodation to expedite the weighing and hauling of the iron in the event that the sale would materialize.
The private respondent was not thereby placed in possession of and control over the scrap iron. Thirdly, We cannot even
assume the conversion of the initial contract or promise to sell into a contract of sale by the petitioner corporation's alleged
implied delivery of the scrap iron because its action and conduct in the premises do not support this conclusion. Indeed,
petitioners demanded the fulfillment of the suspensive condition and eventually cancelled the contract.
All told, Civil Case No. 15128 filed before the trial court was nothing more than the private respondent's preemptive action to
beat the petitioners to the draw.
One last point. This Court notes the palpably excessive and unconscionable moral and exemplary damages awarded by the
trial court to the private respondent despite a clear absence of any legal and factual basis therefor. In contracts, such as in
the instant case, moral damages may be recovered if defendants acted fraudulently and in bad faith, 1 6 while exemplary
damages may only be awarded if defendants acted in a wanton, fraudulent, reckless, oppressive or malevolent
manner. 17 In the instant case, the refusal of the petitioners to deliver the scrap iron was founded on the non-fulfillment by
the private respondent of a suspensive condition. It cannot, therefore, be said that the herein petitioners had acted
fraudulently and in bad faith or in a wanton, reckless, oppressive or malevolent manner. What this Court stated in Inhelder
Corp. vs. Court of Appeals 18 needs to be stressed anew: LLjur
"At this juncture, it may not be amiss to remind Trial Courts to guard against the award of exhorbitant
(sic) damages that are way out of proportion to the environmental circumstances of a case and which,
time and again, this Court has reduced or eliminated. Judicial discretion granted to the Courts in the
assessment ofdamages must always be exercised with balanced restraint and measured objectivity."
For, indeed, moral damages are emphatically not intended to enrich a complainant at the expense of the defendant. They
are awarded only to enable the injured party to obtain means, diversion or amusements that will serve to obviate the moral
suffering he has undergone, by reason of the defendant's culpable action. Its award is aimed at the restoration, within the
limits of the possible, of the spiritual status quo ante, and it must be proportional to the suffering inflicted. 19
WHEREFORE, the instant petition is GRANTED. The decision of public respondent Court of Appeals in C.A.-G.R. CV No.
08807 is REVERSED and Civil Case No. 15128 ofthe Regional Trial Court of Iloilo is ordered DISMISSED.
Costs against the private respondent.
SO ORDERED.
Narvasa, C .J ., Cruz, Feliciano, Padilla, Bidin and Bellosillo, JJ ., concur.
Gutierrez, Jr., J ., On terminal leave.

Melo and Quiason, JJ ., No part.


||| (Visayan Sawmill Co., Inc. v. Court of Appeals, G.R. No. 83851, [March 3, 1993])

[G.R. No. 61623. December 26, 1984.]


PEOPLE'S HOMESITE & HOUSING CORPORATION, petitioner-appellant, vs. COURT OF APPEALS,
RIZALINO L. MENDOZA and ADELAIDA R. MENDOZA,respondents-appellees.

Manuel M. Lazaro, Pilipinas Arenas Laborte and Antonio M. Brillantes for petitioner PHHC.
Tolentino, Cruz, Reyes, Lava and Manuel for private respondents.

SYLLABUS
CIVIL LAW; OBLIGATIONS AND CONTRACTS, NON-PERFECTION OF CONTRACT OF SALE; CONDITIONAL OR
CONTINGENT AWARD PROPERLY WITHDRAWN; CASE AT BAR. There was no perfected sale of Lot 4. It was
conditionally or contingently awarded to the Mendozas subject to the approval by the city council of the proposed
consolidation subdivision plan and the approval of the award by the valuation committee and higher authorities. The city
council did not approve the subdivision plan. The Mendozas were advised in 1961 of the disapproval. In 1964, when the plan
with the area of Lot 4 reduced to 2,608.7 square meters was approved, the Mendozas should have manifested in writing
their acceptance of the award for the purchase of Lot 4 just to show that they were still interested in its purchase although
the

area

was

reduced

and

to

obviate

any

doubt

on

the

matter.

They

did

not

do

so.

The People's Homesite and Housing corporation (PHHC) board of directors acted within its rights in withdrawing the
tentative award. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the
object of the contract and upon the price. From that moment, the parties may reciprocally demand performance, subject to
the law governing the form of contracts." (Art. 1475, Civil Code). "In conditional obligations. the acquisition of rights, as well
as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the
condition." (Art. 1181, Civil Code). Under the facts of the case, there was no meeting of minds on the purchase of Lot 4 with
an area of 2,608.7 square meters at P21 a square meter.

DECISION

AQUINO, J p:

The question in this case is whether the People's Homesite & Housing Corporation bound itself to sell to the Mendoza
spouses Lot 4 (Road) Pcs-4564 of the revised consolidation subdivision plan with an area of 2,608.7 (2,503.7) square
meters located at Diliman, Quezon City.
The PHHC board of directors on February 18, 1960 passed Resolution No. 513 wherein it stated "that subject to the
approval of the Quezon City Council of the above-mentioned Consolidation Subdivision Plan, Lot 4, containing 4,182.2
square meters be, as it is hereby awarded to Spouses Rizalino Mendoza and Adelaida Mendoza, at a price of twenty-one
pesos (P21.00) per square meter" and "that this award shall be subject to the approval of the OEC (PHHC) Valuation
Committee and higher authorities".
The city council disapproved the proposed consolidation subdivision plan on August 20, 1961 (Exh. 2). The said spouses
were advised by registered mail of the disapproval of the plan (Exh. 2-PHHC). Another subdivision plan was prepared and
submitted to the city council for approval. The revised plan, which included Lot 4, with a reduced area of 2,608.7, was
approved by the city council on February 25, 1964 (Exh. H).
On April 26, 1965 the PHHC board of directors passed a resolution recalling all awards of lots to persons who failed to pay
the deposit or down payment for the lots awarded to them (Exh. 5). The Mendozas never paid the price of the lot nor made
the 20% initial deposit. LexLib
On October 18, 1965 the PHHC board of directors passed Resolution No. 218, withdrawing the tentative award of Lot 4 to
the Mendoza spouses under Resolution No. 513 and reawarding said lot jointly and in equal shares to Miguela Sto.
Domingo, Enrique Esteban, Virgilio Pinzon, Leonardo Redublo and Jose Fernandez, subject to existing PHHC rules and
regulations. The prices would be the same as those of the adjoining lots. The awardees were required to deposit an amount
equivalent to 20%of the total selling price (Exh. F).
The five awardees made the initial deposit. The corresponding deeds of sale were executed in their favor. The
subdivision of Lot 4 into five lots was approved by the city council and the Bureau of Lands.
On March 16, 1966 the Mendoza spouses asked for reconsideration of the withdrawal of the previous award to them of Lot 4
and for the cancellation of the re-awardof said lot to Sto. Domingo and four others. Before the request could be acted upon,
the spouses filed the instant action for specific performance and damages.
The trial court sustained the withdrawal of the award. The Mendozas appealed. The Appellate Court reversed that decision
and declared void the re-award of Lot 4 and the deeds of sale and directed the PHHC to sell to the Mendozas Lot 4 with an
area of 2,603.7 square meters at P21 a square meter and pay to them P4,000 as attorney's fees and litigation expenses.
The PHHC appealed to this Court.
The issue is whether there was a perfected sale of Lot 4, with the reduced area, to the Mendozas which they can enforce
against the PHHC by an action for specific performance.
We hold that there was no perfected sale of Lot 4. It was conditionally or contingently awarded to the Mendozas subject to
the approval by the city council of the proposed consolidation subdivision plan and the approval of the award by the
valuation committee and higher authorities.
The city council did not approve the subdivision plan. The Mendozas were advised in 1961 of the disapproval. In 1964, when
the plan with the area of Lot 4 reduced to 2,608.7 square meters was approved, the Mendozas should have manifested in
writing their acceptance of the award for the purchase of Lot 4 just to show that they were still interested in its purchase
although the area was reduced and to obviate any doubt on the matter, They did not do so. The PHHC board of directors
acted within its rights in withdrawing the tentative award.
"The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the
object of the contract and upon the price. From that moment, the parties may reciprocally demand
performance, subject to the law governing the form of contracts." (Art. 1475, Civil Code).
"Son, sin embargo, excepcion a esta regla los casos en que por virtud de la voluntad de las partes o de
la ley, se celebra la venta bajo una condicion suspensiva, y en los cuales no se perfecciona la venta
hasta el cumplimiento de la condicion" (4 Castan Tobeas, Derecho Civil Espaol 8th ed. p. 81).

"In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those
already acquired, shall depend upon the happening of the event which constitutes the condition". (Art.
1181, Civil Code). "Se llama suspensiva la condicion de la que depende la perfeccion, o sea el principio
del contrato". (9 Giorgi, Teoria de las Obligaciones, p. 57).
Under the facts of this case, we cannot say there was a meeting of minds on the purchase of Lot 4 with an area of 2,608.7
square meters at P21 a square meter. cdll
The case of Lapinig vs. Court of Appeals, 115 SCRA 213 is not in point because the awardee in that case applied for the
purchase of the lot, paid the 10% deposit and a conditional contract to sell was executed in his favor. The PHHC could not
re-award that lot to another person.
WHEREFORE, the decision of the Appellate Court is reversed and set aside and the judgment of the trial court is affirmed.
No costs.
SO ORDERED.
Makasiar, Concepcion, Jr., Abad Santos, Escolin and Cuevas, JJ ., concur.
||| (People's Homesite & Housing Corp. v. Court of Appeals, G.R. No. 61623, [December 26, 1984], 218 PHIL 742-746)

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


ROMULO A. CORONEL, ALARICO A. CORONEL, ANNETTE A. CORONEL, ANNABELLE C.
GONZALES (for herself and on behalf of Floraida C. Tupper, as attorney-in-fact), CIELITO
A. CORONEL, FLORAIDA A. ALMONTE, and CATALINA BALAIS MABANAG, petitioners, vs.
THE COURT OF APPEALS, CONCEPCION D. ALCARAZ and RAMONA PATRICIA ALCARAZ,
assisted by GLORIA F. NOEL as attorney-in-fact, respondents.

Leven S. Puno for petitioners.


Perpetuo G. Paner for private respondents.

SYLLABUS
1. CIVIL LAW; SALES; ESSENTIAL ELEMENTS THEREOF. Sale, by its very nature, is a consensual contract because it
is perfected by mere consent. The essential elements of a contract of sale are the following: a) consent or meeting of the

minds, that is, consent to transfer ownership in exchange for the price; b) determinate subject matter; and c) price certain in
money or its equivalent. DCScaT
2. ID.; ID.; CONTRACT TO SELL DISTINGUISHED FROM CONDITIONAL CONTRACT OF SALE. Under this definition,
a Contract to Sell may not be considered as a Contract of Sale because the first essential element is lacking. In a contract to
sell, the prospective seller explicitly reserves the transfer of title to the prospective buyer, meaning, the prospective seller
does not as yet agree or consent to transfer ownership of the property subject of the contract to sell until the
happening of an event, which for present purposes we shall take as the full payment of the purchase price. What the seller
agrees or obliges himself to do is to fulfill his promise to sell the subject property when the entire amount of the purchase
price is delivered to him. . . . In a contract to sell, upon the fulfillment of the suspensive condition which is the full
payment of the purchase price, ownership will not automatically transfer to the buyer although the property may have been
previously delivered to him. The prospective seller still has to convey title to the prospective buyer by entering into a
contract of absolute sale. A contract to sell as defined hereinabove, may not even be considered as a conditional
contract of sale where the seller may likewise reserve title to the property subject of the sale until the fulfillment of a
suspensive condition, because in a conditional contract of sale, the first element of consent is present, although it is
conditioned upon the happening of a contingent event which may or may not occur. If the suspensive condition is not
fulfilled, the perfection of the contract of sale is completely abated (cf. Homesite and Housing Corp. vs. Courtof Appeals,
133 SCRA 777 [1984]). However, if the suspensive condition is fulfilled, the contract of sale is thereby perfected, such that if
there had already been previous delivery of the property subject of the sale to the buyer, ownership thereto automatically
transfers to the buyer by operation of law without any further act having to be performed by the seller.
3. ID.; ID.; ID.; SALE OF SUBJECT PROPERTY TO A THIRD PERSON; EFFECTS THEREOF. It is essential to
distinguish between a contract to sell and a conditional contract of sale specially in cases where the subject property is sold
by the owner not to the party the seller contracted with, but to a third person, as in the case at bench. In a contract to sell,
there being no previous sale of the property, a third person buying such property despite the fulfillment of the suspensive
condition such as the full payment of the purchase price, for instance, cannot be deemed a buyer in bad faith and the
prospective buyer cannot seek the relief of reconveyance of the property. There is no double sale in such case. Title to the
property will transfer to the buyer after registration because there is no defect in the owner-seller's title per se, but the
latter, of course, may be sued for damages by the intending buyer. In a conditional contract of sale, however, upon the
fulfillment of the suspensive condition, the sale becomes absolute and this will definitely affect the seller's title thereto. In
fact, if there had been previous delivery of the subject property, the seller's ownership or title to the property is automatically
transferred to the buyer such that, the seller will no longer have any title to transfer to any third person. Applying Article
1544 of the Civil Code, such second buyer of the property who may have had actual or constructive knowledge of such
defect, cannot be a registrant in good faith. Such second buyer cannot defeat the first buyer's title. In case a title is issued to
the second buyer, the first buyer may seek reconveyance of the property subject of the sale.
4. ID.; ID.; CONTRACT OF SALE; INTERPRETATION OF WORDS USED THEREIN SHOULD BE GIVEN ORDINARY
MEANING; CASE AT BENCH. It is a canon in the interpretation of contracts that the words used therein should be given
their natural and ordinary meaning unless a technical meaning was intended (Tan vs. Court ofAppeals, 212 SCRA 586
[1992]). Thus, . . . When the "Receipt of Down Payment" is considered in its entirety, it becomes more manifest that there
was a clear intent on the part of petitioners to transfer title to the buyer, but since the transfer certificate of title was still in the
name of petitioner's father, they could not fully effect such transfer although the buyer was then willing and able to
immediately pay the purchase price. Therefore, petitioners-sellers undertook upon receipt of the down payment from private
respondent Ramona P. Alcaraz, to cause the issuance of a new certificate of title in their names from that of their father, after
which, they promised to present said title, now in their names, to the latter and to execute the deed of absolute sale
whereupon, the latter shall, in turn, pay the entire balance ofthe purchase price. The agreement could not have been a
contract to sell because the sellers herein made no express reservation of ownership or title to the subject parcel of land.
Furthermore, the circumstance which prevented the parties from entering into an absolute contract of sale pertained to the
sellers themselves (the certificate of title was not in their names) and not the full payment of the purchase price. Under the
established facts and circumstances of the case, the Court may safely presume that, had the certificate of title been in the
names of petitioners-sellers at that time, there would have been no reason why an absolute contract of sale could not have
been executed and consummated right there and then.

5. ID.; ID.; ID.; WHEN RECIPROCAL OBLIGATIONS OF SELLER AND BUYER AROSE IN CASE AT BENCH. On
January 19, 1985, as evidenced by the document denominated as "Receipt of Down Payment" (Exh. "A", Exh. "1"), the
parties entered into a contract of sale subject only to the suspensive condition that the sellers shall effect the
issuance of new certificate of title from that of their father's name to their names. . . . On February 6, 1985, this condition
was fulfilled (Exh. "D"; Exh. "4"). We therefore, hold that, in accordance with Article 1187 . . . the rights and obligations of the
parties with respect to the perfected contract of sale became mutually due and demandable as of the time of fulfillment or
occurrence of the suspensive condition on February 6, 1985. As of that point in time, reciprocal obligations of both seller and
buyer arose, that is, . . . petitioners, as sellers, were obliged to present the transfer certificate of title already in their names
to private respondent Ramona P. Alcaraz, the buyer, and to immediately execute the deed of absolute sale, while the buyer
on her part, was obliged to forthwith pay the balance of the purchase price amounting to P1,190,000.00.
6. ID.; WILLS AND SUCCESSION; RIGHTS THERETO TRANSMITTED FROM MOMENT OF DECEDENT'S DEATH;
CASE AT BENCH. Petitioners also argue there could be no perfected contract on January 19, 1985 because they were
then not yet the absolute owners of the inherited property. We cannot sustain this argument. Article 774of the Civil Code
defines succession as a mode of transferring ownership as follows: Art. 774. Succession is a mode of acquisition by
virtue of which the property, rights and obligations to the extent and value of the inheritance of a person are transmitted
through his death to another or others by his will or by operation of law. Petitioners-sellers in the case at bar being the sons
and daughters of the decedent Constancio P. Coronel are compulsory heirs who were called to succession by
operation of law. Thus, at the point their father drew his last breath, petitioners stepped into his shoes insofar as the subject
property is concerned, such that any rights or obligations pertaining thereto became binding and enforceable upon them. It
is expressly provided that rights to the succession are transmitted from the moment of death of the decedent (Article 777,
Civil Code; Cuison vs. Villanueva, 90 Phil. 850 [1952]).
7. ID.;

SALES;

CONTRACT OF SALE;

ESTOPPEL;

PETITIONERS

PRECLUDED

FROM

DENYING

OWNERSHIP OF SUBJECT PROPERTY AT TIME OF SALE; CASE AT BENCH. Aside from this, petitioners are
precluded from raising their supposed lack of capacity to enter into an agreement at that time and they cannot be allowed to
now take a posture contrary to that which they took when they entered into the agreement with private respondent Ramona
P. Alcaraz. . . . Having represented themselves as the true owners of the subject property at the time of sale, petitioners
cannot claim now that they were not yet the absolute owners thereof at that time.
8. ID.; ID.; ID.; RESCISSION; PHYSICAL ABSENCE OF BUYER NOT A GROUND THEREFOR IN CASE AT BENCH.
Petitioners also contend that although there was in fact a perfected contract of sale between them and Ramona P. Alcaraz,
the latter breached her reciprocal obligation when she rendered impossible the consummation thereof by going to the United
States of America, without leaving her address, telephone number, and Special Power of Attorney (Paragraphs 14 and 15,
Answer with Compulsory Counterclaim to the Amended Complaint, p. 2; Rollo, p. 43), for which reason, so petitioners
conclude, they were correct in unilaterally rescinding the contract of sale. We do not agree with petitioners that there was a
valid rescission of the contract of sale in the instant case. We note that these supposed grounds for petitioners' rescission,
are mere allegations found only in their responsive pleadings, which by express provision of the rules, are deemed
controverted even if no reply is filed by the plaintiffs (Sec. 11, Rule 6, Revised Rules of Court). The records are absolutely
bereft of any supporting evidence to substantiate petitioners' allegations. We had stressed time and again that allegations
must be proven by sufficient evidence (Ng Cho Cio vs. Ng Diong, 110 Phil. 882 [1961]; Recaro vs. Embisan, 2 SCRA 598
[1961]). Mere allegation is not an evidence (Lagasca vs. De Vera, 79 Phil. 376 [1947]). Even assuming arguendo that
Ramona P. Alcaraz was in the United States ofAmerica on February 6, 1985, we cannot justify petitioners-sellers'
act of unilaterally and extrajudicially rescinding the contract of sale, there being no express stipulation authorizing the sellers
to extrajudicially rescind the contract of sale. (cf Dignos vs. CA, 158 SCRA 375 [1988]; Taguba vs. Vda. de Leon, 132 SCRA
722 [1984]). Moreover, petitioners are estopped from raising the alleged absence of Ramona P. Alcaraz because although
the evidence on record shows that the sale was in the name of Ramona P. Alcaraz as the buyer, the sellers had been
dealing with Concepcion D. Alcaraz, Ramona's mother, who had acted for and in behalf of her daughter, if not also in her
own behalf. Indeed, the down payment was made by Concepcion D. Alcaraz with her own personal check (Exh. "B"; Exh.
"2") for and in behalf ofRamona P. Alcaraz. There is no evidence showing that petitioners ever questioned Concepcion's
authority to represent Ramona P. Alcaraz when they accepted her personal check. Neither did they raise any objection as
regards payment being effected by a third person. Accordingly, as far as petitioners are concerned, the physical
absence of Ramona P. Alcaraz is not a ground to rescind the contract of sale.

9. ID.; ID.; ID.; ID.; ID.; BUYER NOT CONSIDERED IN DEFAULT IN CASE AT BENCH. Corollarily, Ramona P. Alcaraz
cannot even be deemed to be in default, insofar as her obligation to pay the full purchase price is concerned. Petitioners
who are precluded from setting up the defense of the physical absence of Ramona P. Alcaraz as above-explained offered no
proof whatsoever to show that they actually presented the new transfer certificate of title in their names and signified their
willingness and readiness to execute the deed of absolute sale in accordance with their agreement. Ramona's
corresponding obligation to pay the balance of the purchase price in the amount of P1,190,000.00 (as buyer) never became
due and demandable and, therefore, she cannot be deemed to have been in default. Article 1169 of the Civil Code defines
when a party in a contract involving reciprocal obligations may be considered in default, . . . There is thus neither factual nor
legal basis to rescind the contract of sale between petitioners and respondents.
10. ID.; ID.; DOUBLE SALE; WHEN SECOND BUYER IS ENTITLED TO TITLE OR OWNERSHIP OF PROPERTY. With
the foregoing conclusions, the sale to the other petitioner, Catalina B. Mabanag, gave rise to a case of double sale where
Article 1544 of the Civil Code will apply. . . . The record of the case shows that the Deed ofAbsolute Sale dated April 25,
1985 as proof of the second contract of sale was registered with the Registry of Deeds of Quezon City giving rise to the
issuance of a new certificate of title in the name of Catalina B. Mabanag on June 5, 1985. Thus, the second
paragraph of Article 1544 shall apply. The above-cited provision on double sale presumes title or ownership to pass to the
first buyer, the exceptions being: (a) when the second buyer, in good faith, registers the sale ahead of the first buyer, and (b)
should there be no inscription by either of the two buyers, when the second buyer, in good faith, acquires possession of the
property ahead of the first buyer. Unless, the second buyer satisfies these requirements, title or ownership will not transfer to
him to the prejudice of the first buyer.
11. ID.; ID.; ID.; ID.; CASE AT BENCH. Petitioners point out that the notice of lis pendens in the case at bar was
annotated on the title of the subject property only on February 22, 1985, whereas, the second sale between petitioners
Coronels and petitioner. Mabanag was supposedly perfected prior thereto or on February 18, 1985. The idea conveyed is
that at the time petitioner Mabanag, the second buyer, bought the property under a clean title, she was unaware of any
adverse claim or previous sale, for which reason she is a buyer in good faith. We are not persuaded by such argument. In a
case of double sale, what finds relevance and materiality is not whether or not the second buyer was a buyer in good faith
but whether or not said second buyer registers such second sale in good faith, that is, without knowledge of any defect in the
title of the property sold. As clearly borne out by the evidence in this case, petitioner Mabanag could not have in good faith,
registered the sale entered into on February 18, 1985 because as early as February 22, 1985, a notice of lis pendens had
been annotated on the transfer certificate of title in the names of petitioners, whereas petitioner Mabanag registered the said
sale sometime in April, 1985. At the time of registration, therefore, petitioner Mabanag knew that the same property had
already been previously sold to private respondents, or, at least, she was charged with knowledge that a previous buyer is
claiming title to the same property. Petitioner Mabanag cannot close her eyes to the defect in petitioners' title to the property
at the time of the registration of the property. CAScIH
MELO, J p:
The petition before us has its roots in a complaint for specific performance to compel herein petitioners (except the last
named, Catalina Balais Mabanag) to consummate the sale of a parcel of land with its improvements located along Roosevelt
Avenue in Quezon City entered into by the parties sometime in January 1985 for the price of P1,240,000.00
The undisputed facts of the case were summarized by respondent court in this wise:
On January 19, 1985, defendants-appellants Romulo Coronel, et al. (hereinafter referred to as
Coronels) executed a document entitled "Receipt of Down Payment" (Exh. "A") in favor of plaintiff
Ramona Patricia Alcaraz (hereinafter referred to as Ramona) which is reproduced hereunder:
RECEIPT OF DOWN PAYMENT
P1,240,000.00 Total amount
50,000.00 Down payment

P1,190,000.00 Balance
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty Thousand
Pesos

purchase

price of our

inherited

house

and

lot,

covered

by

TCT

No. 119627 of the

Registry of Deeds of Quezon City, in the total amount of P1,240,000.00.


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

15 days within which to submit their corresponding comment or reply thereto, after which, the case would be deemed
submitted for resolution.
On April 14, 1988, the case was submitted for resolution before Judge Reynaldo Roura, who was then temporarily detailed
to preside over Branch 82 of the RTC ofQuezon City. On March 1, 1989, judgment was handed down by Judge Roura from
his regular bench at Macabebe, Pampanga for the Quezon City branch, disposing as follows:
WHEREFORE, judgment for specific performance is hereby rendered ordering defendant to execute in
favor of plaintiffs a deed of absolute sale covering that parcel ofland embraced in and covered by
Transfer Certificate of Title No. 327403 (now TCT No. 331582) of the Registry of Deeds for Quezon City,
together with all the improvements existing thereon free from all liens and encumbrances, and once
accomplished, to immediately deliver the said document of sale to plaintiffs and upon receipt thereof,
the plaintiffs are ordered to pay defendants the whole balance of the purchase price amounting to
P1,190,000.00 in cash. Transfer Certificate of Title No. 331582 of the Registry of Deeds for Quezon City
in the name of intervenor is hereby canceled and declared to be without force and effect. Defendants
and intervenor and all other persons claiming under them are hereby ordered to vacate the subject
property and deliver possession thereof to plaintiffs. Plaintiffs' claim for damages and attorney's fees, as
well as the counterclaims of defendants and intervenors are hereby dismissed.
No pronouncement as to costs.
So Ordered.
Macabebe, Pampanga for Quezon City, March 1, 1989.
(Rollo, p. 106)
A motion for reconsideration was filed by petitioners before the new presiding judge of the Quezon City RTC but the same
was denied by Judge Estrella T. Estrada, thusly:

The prayer contained in the instant motion, i.e., to annul the decision and to render anew decision by
the undersigned Presiding Judge should be denied for the following reasons: (1) The instant case
became submitted for decision as of April 14, 1988 when the parties terminated the presentation of their
respective documentary evidence and when the Presiding Judge at that time was Judge Reynaldo
Roura. The fact that they were allowed to file memoranda at some future date did not change the fact
that the hearing of the case was terminated before Judge Roura and therefore the same should be
submitted to him for decision; (2) When the defendants and intervenor did not object to the
authority of Judge Reynaldo Roura to decide the case prior to the rendition of the decision, when they
met for the first time before the undersigned Presiding Judge at the hearing of a pending incident in Civil
Case No. Q-46145 on November 11, 1988, they were deemed to have acquiesced thereto and they are
now estopped from questioning said authority of Judge Roura after they received the decision in
question which happens to be adverse to them; (3) While it is true that Judge Reynaldo Roura was
merely a Judge-on-detail at this Branch of the Court, he was in all respects the Presiding Judge with full
authority to act on any pending incident submitted before this Court during his incumbency. When he
returned to his Official Station at Macabebe, Pampanga, he did not lose his authority to decide or
resolve such cases submitted to him for decision or resolution because he continued as Judge of the
Regional Trial Court and isof co-equal rank with the undersigned Presiding Judge. The standing rule
and supported by jurisprudence is that a Judge to whom a case is submitted for decision has the
authority to decide the case notwithstanding his transfer to another branch or region of the
same court (Sec. 9, Rule 135, Rule of Court).
Coming now to the twin prayer for reconsideration of the Decision dated March 1, 1989 rendered in the
instant case, resolution of which now pertains to the undersigned Presiding Judge, after a meticulous
examination of the documentary evidence presented by the parties, she is convinced that the
Decision of March 1, 1989 is supported by evidence and, therefore, should not be disturbed.

IN VIEW OF THE FOREGOING, the "Motion for Reconsideration and/or to Annul Decision and Render
Anew Decision by the Incumbent Presiding Judge" dated March 20, 1989 is hereby DENIED.
SO ORDERED.
Quezon City, Philippines, July 12, 1989.
(Rollo, pp. 108-109)
Petitioners thereupon interposed an appeal, but on December 16, 1991, the Court of Appeals (Buena, Gonzaga-Reyes,
Abad Santos (P), JJ.) rendered its decision fully agreeing with the trial court.
Hence, the instant petition which was filed on March 5, 1992. The last pleading, private respondents' Reply Memorandum,
was filed on September 15, 1993. The case was, however, re-raffled to undersigned ponente only on August 28, 1996, due
to the voluntary inhibition of the Justice to whom the case was last assigned.
While we deem it necessary to introduce certain refinements in the disquisition of respondent court in the affirmance of the
trial court's decision, we definitely find the instant petition bereft of merit.
The heart of the controversy which is the ultimate key in the resolution of the other issues in the case at bar is the precise
determination of the legal significance of the document entitled "Receipt of Down Payment" which was offered in evidence
by both parties. There is no dispute as to the fact that said document embodied the binding contract between Ramona
Patricia Alcaraz on the one hand, and the heirs of Constancio P. Coronel on the other, pertaining to a particular house and
lot covered by TCT No. 119627, as defined in Article 1305 of the Civil Code of the Philippines which reads as follows:
Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service.
While, it is the position of private respondents that the "Receipt of Down Payment" embodied a perfected contract of sale,
which perforce, they seek to enforce by means of an action for specific performance, petitioners on their part insist that what
the document signified was a mere executory contract to sell, subject to certain suspensive conditions, and because of the
absence of Ramona P. Alcaraz, who left for the United States of America, said contract could not possibly ripen into a
contract of absolute sale.
Plainly, such variance in the contending parties' contentions is brought about by the way each interprets the terms and/or
conditions set forth in said private instrument. Withal, based on whatever relevant and admissible evidence may be available
on record, this Court, as were the courts below, is now called upon to adjudge what the real intent of the parties was at the
time the said document was executed.
The Civil Code defines a contract of sale, thus:
Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or
its equivalent.
Sale, by its very nature, is a consensual contract because it is perfected by mere consent. The essential elements of a
contract of sale are the following:
a) Consent or meeting of the minds, that is, consent to transfer ownership in exchange for the price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.
Under this definition, a Contract to Sell may not be considered as a Contract of Sale because the first essential element is
lacking. In a contract to sell, the prospective seller explicitly reserves the transfer of title to the prospective buyer, meaning,
the prospective seller does not as yet agree or consent to transfer ownership of the property subject of the contract to sell
until the happening of an event, which for present purposes we shall take as the full payment of the purchase price. What
the seller agrees or obliges himself to do is to fulfill his promise to sell the subject property when the entire amount of the
purchase price is delivered to him. In other words the full payment of the purchase price partakes of a suspensive condition,
the non-fulfillment of which prevents the obligation to sell from arising and thus, ownership is retained by the prospective

seller without further remedies by the prospective buyer. In Roque vs. Lapuz (96 SCRA 741 [1980]), this Court had occasion
to rule:
Hence, We hold that the contract between the petitioner and the respondent was a contract to sell
where the ownership or title is retained by the seller and is not to pass until the full payment of the price,
such payment being a positive suspensive condition and failure of which is not a breach, casual or
serious, but simply an event that prevented the obligation of the vendor to convey title from acquiring
binding force.
Stated positively, upon the fulfillment of the suspensive condition which is the full payment of the purchase price, the
prospective seller's obligation to sell the subject property by entering into a contract of sale with the prospective buyer
becomes demandable as provided in Article 1479 of the Civil Code which states:
Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon
the promissor if the promise is supported by a consideration distinct from the price.
A contract to sell may thus be defined as a bilateral contract whereby the prospective seller, while expressly reserving the
ownership of the subject property despite delivery thereof to the prospective buyer, binds himself to sell the said property
exclusively to the prospective buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase price.
A contract to sell as defined hereinabove, may not even be considered as a conditional contract of sale where the seller may
likewise reserve title to the property subject of the sale until the fulfillment of a suspensive condition, because in a
conditional contract of sale, the first element of consent is present, although it is conditioned upon the happening of a
contingent event which may or may not occur. If the suspensive condition is not fulfilled, the perfection of the contract of sale
is completely abated (cf. Homesite and Housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984]). However, if the
suspensive condition is fulfilled, the contract of sale is thereby perfected, such that if there had already been previous
delivery of the property subject of the sale to the buyer, ownership thereto automatically transfers to the buyer by
operation of law without any further act having to be performed by the seller.
In a contract to sell, upon the fulfillment of the suspensive condition which is the full payment of the purchase price,
ownership will not automatically transfer to the buyer although the property may have been previously delivered to him. The
prospective seller still has to convey title to the prospective buyer by entering into a contract of absolute sale.
It is essential to distinguish between a contract to sell and a conditional contract of sale specially in cases where the subject
property is sold by the owner not to the party the seller contracted with, but to a third person, as in the case at bench. In a
contract to sell, there being no previous sale of the property, a third person buying such property despite the fulfillment of the
suspensive condition such as the full payment of the purchase price, for instance, cannot be deemed a buyer in bad faith
and the prospective buyer cannot seek the relief of reconveyance of the property. There is no double sale in such case. Title
to the property will transfer to the buyer after registration because there is no defect in the owner-seller's title per se, but the
latter, of course, may be sued for damages by the intending buyer.

In a conditional contract of sale, however, upon the fulfillment of the suspensive condition, the sale becomes absolute and
this will definitely affect the seller's title thereto. In fact, if there had been previous delivery of the subject property, the seller's
ownership or title to the property is automatically transferred to the buyer such that, the seller will no longer have any title to
transfer to any third person. Applying Article 1544 of the Civil Code, such second buyer of the property who may have had
actual or constructive knowledge of such defect in the seller's title, or at least was charged with the obligation to discover
such defect, cannot be a registrant in good faith. Such second buyer cannot defeat the first buyer's title. In case a title is
issued to the second buyer, the first buyer may seek reconveyance of the property subjectof the sale.
With the above postulates as guidelines, we now proceed to the task of deciphering the real nature of the contract entered
into by petitioners and private respondents.

It is a canon in the interpretation of contracts that the words used therein should be given their natural and ordinary meaning
unless a technical meaning was intended (Tan vs. Court of Appeals, 212 SCRA 586 [1992]). Thus, when petitioners
declared in the said "Receipt of Down Payment" that they
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty Thousand
Pesos purchase price of our inherited house and lot, covered by TCT No. 1199627 of the
Registry of Deeds of Quezon City, in the total amount of P1,240,000.00.
without any reservation of title until full payment of the entire purchase price, the natural and ordinary idea conveyed is
that they sold their property.
When the "Receipt of Down Payment" is considered in its entirety, it becomes more manifest that there was a clear intent on
the part of petitioners to transfer title to the buyer, but since the transfer certificate of title was still in the name of petitioner's
father, they could not fully effect such transfer although the buyer was then willing and able to immediately pay the purchase
price. Therefore, petitioners-sellers undertook upon receipt of the down payment from private respondent Ramona P.
Alcaraz, to cause the issuance of a new certificate of title in their names from that of their father, after which, they promised
to present said title, now in their names, to the latter and to execute the deed of absolute sale whereupon, the latter shall, in
turn, pay the entire balance of the purchase price.
The agreement could not have been a contract to sell because the sellers herein made no express reservation of ownership
or title to the subject parcel of land. Furthermore, the circumstance which prevented the parties from entering into an
absolute contract of sale pertained to the sellers themselves (the certificate of title was not in their names) and not the full
payment of the purchase price. Under the established facts and circumstances of the case, the Court may safely presume
that, had the certificate of title been in the names of petitioners-sellers at that time, there would have been no reason why an
absolute contract of sale could not have been executed and consummated right there and then.
Moreover, unlike in a contract to sell, petitioners in the case at bar did not merely promise to sell the property to private
respondent upon the fulfillment of the suspensive condition. On the contrary, having already agreed to sell the subject
property, they undertook to have the certificate of title changed to their names and immediately thereafter, to execute the
written deed of absolute sale.
Thus, the parties did not merely enter into a contract to sell where the sellers, after compliance by the buyer with certain
terms and conditions, promised to sell the property to the latter. What may be perceived from the respective
undertakings of the parties to the contract is that petitioners had already agreed to sell the house and lot they inherited from
their father, completely willing to transfer full ownership of the subject house and lot to the buyer if the documents were then
in order. It just so happened, however, that the transfer certificate of title was then still in the name of their father. It was more
expedient to first effect the change in the certificate of title so as to bear their names. That is why they undertook to cause
the issuance of a new transfer of the certificate of title in their names upon receipt ofthe down payment in the
amount of P50,000.00. As soon as the new certificate of title is issued in their names, petitioners were committed to
immediately execute the deed of absolute sale. Only then will the obligation of the buyer to pay the remainder of the
purchase price arise.
There is no doubt that unlike in a contract to sell which is most commonly entered into so as to protect the seller against a
buyer who intends to buy the property in installment by withholding ownership over the property until the buyer effects full
payment therefor, in the contract entered into in the case at bar, the sellers were the ones who were unable to enter into a
contract of absolute sale by reason of the fact that the certificate of title to the property was still in the name of their father. It
was the sellers in this case who, as it were, had the impediment which prevented, so to speak, the execution of a
contract of absolute sale.
What is clearly established by the plain language of the subject document is that when the said "Receipt of Down Payment"
was prepared and signed by petitioners Romulo A. Coronel, et al., the parties had agreed to a conditional contract of sale,
consummation of which is subject only to the successful transfer of the certificate oftitle from the name of petitioners' father,
Constancio P. Coronel to their names.
The Court significantly notes that this suspensive condition was, in fact, fulfilled on February 6, 1985 (Exh. "D"; Exh. "4").
Thus, on said date, the conditional contract ofsale between petitioners and private respondent Ramona P. Alcaraz became

obligatory, the only act required for the consummation thereof being the delivery of the property by means of the
execution of the deed of absolute sale in a public instrument, which petitioners unequivocally committed themselves to do as
evidenced by the "Receipt of Down Payment."
Article 1475, in correlation with Article 1181, both of the Civil Code, plainly applies to the case at bench. Thus,
Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance, subject to the provisions of the
law governing the form of contracts.
Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or
loss of those already acquired, shall depend upon the happening ofthe event which constitutes the
condition.
Since the condition contemplated by the parties which is the issuance of a certificate of title in petitioners' names was
fulfilled on February 6, 1985, the respective obligations of the parties under the contract of sale became mutually
demandable, that is, petitioners, as sellers, were obliged to present the transfer certificate of title already in their names to
private respondent Ramona P. Alcaraz, the buyer, and to immediately execute the deed of absolute sale, while the buyer on
her part, was obliged to forthwith pay the balance of the purchase price amounting to P1,190,000.00.
It is also significant to note that in the first paragraph in page 9 of their petition, petitioners conclusively admitted that:
3. The petitioners-sellers Coronel bound themselves "to effect the transfer in our names from our
deceased father Constancio P. Coronel, the transfer certificate oftitle immediately upon receipt of the
downpayment above-stated." The sale was still subject to this suspensive condition. (Emphasis
supplied.)
(Rollo, p. 16)
Petitioners themselves recognized that they entered into a contract of sale subject to a suspensive condition. Only,
they contend, continuing in the same paragraph, that:
. . . Had petitioners-sellers not complied with this condition of first transferring the title to the property
under their names, there could be no perfected contract ofsale. (Emphasis supplied.)
(Ibid.)
not aware that they have set their own trap for themselves, for Article 1186 of the Civil Code expressly provides that:
Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.
Besides, it should be stressed and emphasized that what is more controlling these mere hypothetical arguments is
the fact that the condition herein referred to was actually and indisputably fulfilled on February 6, 1985, when a new title was
issued in the names of petitioners as evidenced by TCT No. 327403 (Exh. "D"; Exh. "4").
The inevitable conclusion is that on January 19, 1985, as evidenced by the document denominated as "Receipt of Down
Payment" (Exh. "A"; Exh. "1"), the parties entered into a contract of sale subject only to the suspensive condition that the
sellers shall effect the issuance of new certificate of title from that of their father's name to their names and that, on February
6, 1985, this condition was fulfilled (Exh. "D"; Exh "4").
We, therefore, hold that, in accordance with Article 1187 which pertinently provides
Art. 1187. The effects of conditional obligation to give, once the condition has been fulfilled, shall
retroact to the day of the constitution of the obligation . . .
In obligations to do or not to do, the courts shall determine, in each case, the retroactive effect of the
condition that has been complied with.
the rights and obligations of the parties with respect to the perfected contract of sale became mutually due and
demandable as of the time of fulfillment or occurrence of the suspensive condition on February 6, 1985. As of that point
in time, reciprocal obligations of both seller and buyer arose.

Petitioners also argue there could be no perfected contract on January 19, 1985 because they were then not yet the
absolute owners of the inherited property.
We cannot sustain this argument.
Article 774 of the Civil Code defines Succession as a mode of transferring ownership as follows:
Art. 774. Succession is a mode of acquisition by virtue of which the property, rights and obligations to
the extent and value of the inheritance of a person are transmitted through his death to another or
others by his will or by operation of law.
Petitioners-sellers in the case at bar being the sons and daughters of the decedent Constancio P. Coronel are compulsory
heirs who were called to succession by operation of law. Thus, at the point their father drew his last breath, petitioners
stepped into his shoes insofar as the subject property is concerned, such that any rights or obligations pertaining thereto
became binding and enforceable upon them. It is expressly provided that rights to the succession are transmitted from the
moment of death of the decedent (Article 777, Civil Code; Cuison vs. Villanueva, 90 Phil. 850 [1952]).
Be it also noted that petitioners' claim that succession may not be declared unless the creditors have been paid is rendered
moot by the fact that they were able to effect the transfer of the title to the property from the decedent's name to their names
on February 6, 1985.
Aside from this, petitioners are precluded from raising their supposed lack of capacity to enter into an agreement at that time
and they cannot be allowed to now take a posture contrary to that which they took when they entered into the agreement
with private respondent Ramona P. Alcaraz. The Civil Code expressly states that:
Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person relying thereon.
Having represented themselves as the true owners of the subject property at the time of sale, petitioners cannot claim
now that they were not yet the absolute owners thereof at that time.
Petitioners also contend that although there was in fact a perfected contract of sale between them and Ramona P. Alcaraz,
the latter breached her reciprocal obligation when she rendered impossible the consummation thereof by going to the United
States of America, without leaving her address, telephone number, and Special Powerof Attorney (Paragraphs 14 and 15,
Answer with Compulsory Counterclaim to the Amended Complaint, p. 2; Rollo, p. 43), for which reason, so petitioners
conclude, they were correct in unilaterally rescinding the contract of sale.
We do not agree with petitioners that there was a valid rescission of the contract of sale in the instant case. We note that
these supposed grounds for petitioners' rescission, are mere allegations found only in their responsive pleadings, which by
express provision of the rules, are deemed controverted even if no reply is filed by the plaintiffs (Sec. 11, Rule 6, Revised
Rules of Court). The records are absolutely bereft of any supporting evidence to substantiate petitioners' allegations. We
have stressed time and again that allegations must be proven by sufficient evidence (Ng Cho Cio vs. Ng Diong, 110 Phil.
882 [1961]; Recaro vs. Embisan, 2 SCRA 598 [1961]). Mere allegation is not an evidence (Lagasca vs. De Vera, 79 Phil.
376 [1947]).
Even assuming arguendo that Ramona P. Alcaraz was in the United States of America on February 6, 1985, we cannot
justify petitioners-sellers' act of unilaterally and extrajudicially rescinding the contract of sale, there being no express
stipulation authorizing the sellers to extrajudicially rescind the contract of sale. (cf Dignos vs. CA,158 SCRA 375
[1988]; Taguba vs. Vda. de Leon, 132 SCRA 722 [1984]).
Moreover, petitioners are estopped from raising the alleged absence of Ramona P. Alcaraz because although the evidence
on record shows that the sale was in the name of Ramona P. Alcaraz as the buyer, the sellers had been dealing with
Concepcion D. Alcaraz, Ramona's mother, who had acted for and in behalf of her daughter, if not also in her own behalf.
Indeed, the down payment was made by Concepcion D. Alcaraz with her own personal check (Exh. "B"; Exh. "2") for and in
behalf ofRamona P. Alcaraz. There is no evidence showing that petitioners ever questioned Concepcion's authority to
represent Ramona P. Alcaraz when they accepted her personal check. Neither did they raise any objection as regards

payment being effected by a third person. Accordingly, as far as petitioners are concerned, the physical absence of Ramona
P. Alcaraz is not a ground to rescind the contract of sale.
Corollarily, Ramona P. Alcaraz cannot even be deemed to be in default, insofar as her obligation to pay the full purchase
price is concerned. Petitioners who are precluded from setting up the defense of the physical absence of Ramona P. Alcaraz
as above-explained offered no proof whatsoever to show that they actually presented the new transfer certificate of title in
their names and signified their willingness and readiness to execute the deed of absolute sale in accordance with their
agreement. Ramona's corresponding obligation to pay the balance of the purchase price in the amount of P1,190,000.00 (as
buyer) never became due and demandable and, therefore, she cannot be deemed to have been in default.
Article 1169 of the Civil Code defines when a party in a contract involving reciprocal obligations may be considered in
default, to wit:
Art. 1169. Those obliged to deliver or to do something, incur in delay from the time the obligee judicially
or extrajudicially demands from them the fulfillment oftheir obligation.
xxx xxx xxx
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfill
his obligation, delay by the other begins. (Emphasis supplied.)
There is thus neither factual nor legal basis to rescind the contract of sale between petitioners and respondents.
With the foregoing conclusions, the sale to the other petitioner, Catalina B. Mabanag, gave rise to a case of double sale
where Article 1544 of the Civil Code will apply, to wit:
Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be
transferred to the person who may have first taken possession thereof in good faith, if it should be
movable property.
Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith
first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good faith was first in
the possession; and, in the absence thereof to the person who presents the oldest title, provided there
is good faith.
The record of the case shows that the Deed of Absolute Sale dated April 25, 1985 as proof of the second contract of sale
was registered with the Registry of Deeds ofQuezon City giving rise to the issuance of a new certificate of title in the
name of Catalina B. Mabanag on June 5, 1985. Thus, the second paragraph of Article 1544 shall apply.
The above-cited provision on double sale presumes title or ownership to pass to the first buyer, the exceptions being: (a)
when the second buyer, in good faith, registers the sale ahead of the first buyer, and (b) should there be no inscription by
either of the two buyers, when the second buyer, in good faith, acquires possessionof the property ahead of the first buyer.
Unless, the second buyer satisfies these requirements, title or ownership will not transfer to him to the prejudice of the first
buyer.
In his commentaries on the Civil Code, an accepted authority on the subject, now a distinguished member of the Court,
Justice Jose C. Vitug, explains:
The governing principle is prius tempore, potior jure (first in time, stronger in right). Knowledge by the
first buyer of the second sale cannot defeat the first buyer's rights except when the second buyer first
registers in good faith the second sale (Olivares vs. Gonzales, 159 SCRA 33). Conversely, knowledge
gained by the second buyer of the first sale defeats his rights even if he is first to register, since
knowledge taints his registration with bad faith (see also Astorga vs. Court of Appeals, G.R. No. 58530,
26 December 1984). In Cruz vs. Cabana (G.R. No. 56232, 22 June 1984, 129 SCRA 656), it was held
that it is essential, to merit the protection of Art. 1544, second paragraph, that the second realty buyer

must act in good faith in registering his deed of sale (citing Carbonell vs. Court of Appeals, 69 SCRA
99, Crisostomo vs. CA, G.R. No. 95843, 02 September 1992).
(J. Vitug, Compendium of Civil Law and Jurisprudence, 1993 Edition, p. 604).
Petitioners point out that the notice of lis pendens in the case at bar was annotated on the title of the subject property only
on February 22, 1985, whereas, the second sale between petitioners Coronels and petitioner Mabanag was supposedly
perfected prior thereto or on February 18, 1985. The idea conveyed is that at the time petitioner Mabanag, the second buyer,
bought the property under a clean title, she was unaware of any adverse claim or previous sale, for which reason she is a
buyer in good faith.
We are not persuaded by such argument.
In a case of double sale, what finds relevance and materiality is not whether or not the second buyer was a buyer in good
faith but whether or not said second buyer registers such second sale in good faith, that is, without knowledge of any defect
in the title of the property sold.
As clearly borne out by the evidence in this case, petitioner Mabanag could not have in good faith, registered the sale
entered into on February 18, 1985 because as early as February 22, 1985, a notice of lis pendens had been annotated on
the transfer certificate of title in the names of petitioners, whereas petitioner Mabanag registered the said sale sometime in
April, 1985. At the time of registration, therefore, petitioner Mabanag knew that the same property had already been
previously sold to private respondents, or, at least, she was charged with knowledge that a previous buyer is claiming title to
the same property. Petitioner Mabanag cannot close her eyes to the defect in petitioners' title to the property at the
time of the registration of the property.
This Court had occasions to rule that:
If a vendee in a double sale registers the sale after he has acquired knowledge that there was a
previous sale of the same property to a third party or that another person claims said property in a
previous sale, the registration will constitute a registration in bad faith and will not confer upon him any
right.

(Salvoro vs.

Tanega, 87

SCRA

349

[1978];

citing Palarca vs.

Director of Land, 43

Phil. 146; Cagaoan vs. Cagaoan, 43 Phil. 554; Fernandez vs. Mercader, 43 Phil. 581.)
Thus, the sale of the subject parcel of land between petitioners and Ramona P. Alcaraz, perfected on February 6, 1985, prior
to that between petitioners and Catalina B. Mabanag on February 18, 1985, was correctly upheld by both the courts below.
Although there may be ample indications that there was in fact an agency between Ramona as principal and Concepcion,
her mother, as agent insofar as the subject contract of sale is concerned, the issue of whether or not Concepcion was also
acting in her own behalf as a co-buyer is not squarely raised in the instant petition, nor in such assumption disputed between
mother and daughter. Thus, We will not touch this issue and no longer disturb the lower courts' ruling on this point.
WHEREFORE, premises considered, the instant petition is hereby DISMISSED and the appealed judgment AFFIRMED.
[G.R. No. 153820. October 16, 2009.]
DELFIN TAN, petitioner, vs. ERLINDA C. BENOLIRAO, ANDREW C. BENOLIRAO, ROMANO
C. BENOLIRAO,

DION

C. BENOLIRAO,

SPS.

REYNALDO

TANINGCO

and

NORMA

D. BENOLIRAO, EVELYN T. MONREAL, and ANN KARINA TANINGCO, respondents.

BRION, J p:
Is an annotation made pursuant to Section 4, Rule 74 of the Rules of Court (Rules) on a certificate of title covering real
property considered an encumbrance on the property? We resolve this question in the petition for review on certiorari 1 filed
by Delfin Tan (Tan) to assail the decision of the Court of Appeals (CA) in CA-G.R. CV No. 52033 2 and the decision of the
Regional Trial Court (RTC) 3 that commonly declared the forfeiture of his P200,000.00 down payment as proper, pursuant to
the terms of his contract with the respondents.

THE ANTECEDENTS
The facts are not disputed. Spouses Lamberto and Erlinda Benolirao and the Spouses Reynaldo and Norma Taningco were
the co-owners of a 689-square meter parcel of land (property) located in Tagaytay City and covered by Transfer Certificate of
Title (TCT) No. 26423. On October 6, 1992, the co-owners executed a Deed of Conditional Sale over the property in favor
of Tan for the price of P1,378,000.00. The deed stated:
a) An initial down-payment of TWO HUNDRED (P200,000.00) THOUSAND PESOS, Philippine
Currency, upon signing of this contract; then the remaining balance of ONE MILLION ONE
HUNDRED SEVENTY EIGHT THOUSAND (P1,178,000.00) PESOS, shall be payable within a
period of one hundred fifty (150) days from date hereof without interest;
b) That for any reason, BUYER fails to pay the remaining balance within above mentioned period, the
BUYER shall have a grace period of sixty (60) days within which to make the payment,
provided that there shall be an interest of 15% per annum on the balance amount due from the
SELLERS;
c) That should in case (sic) the BUYER fails to comply with the terms and conditions within the above
stated grace period, then the SELLERS shall have the right to forfeit the down payment, and to
rescind this conditional sale without need of judicial action; SCEDAI
d) That in case, BUYER have complied with the terms and conditions of this contract, then the
SELLERS shall execute and deliver to the BUYER the appropriate Deed of Absolute Sale;
Pursuant to the Deed of Conditional Sale, Tan issued and delivered to the co-owners/vendors Metrobank Check No. 904407
for P200,000.00 as down payment for the property, for which the vendors issued a corresponding receipt.
On November 6, 1992, Lamberto Benolirao died intestate. Erlinda Benolirao (his widow and one of the vendors of the
property) and her children, as heirs of the deceased, executed an extrajudicial settlement of Lamberto's estate on January
20, 1993. On the basis of the extrajudicial settlement, a new certificate of title over the property, TCT No. 27335, was issued
on March 26, 1993 in the names of the Spouses Reynaldo and Norma Taningco and Erlinda Benolirao and her children.
Pursuant to Section 4, Rule 74 of the Rules, the following annotation was made on TCT No. 27335:
. . . any liability to credirots (sic), excluded heirs and other persons having right to the property, for a
period of two (2) years, with respect only to the share of Erlinda, Andrew, Romano and Dion, all
surnamed Benolirao
As stated in the Deed of Conditional Sale, Tan had until March 15, 1993 to pay the balance of the purchase price. By
agreement of the parties, this period was extended by two months, so Tan had until May 15, 1993 to pay the
balance. Tan failed to pay and asked for another extension, which the vendors again granted. Notwithstanding this second
extension, Tan still failed to pay the remaining balance due on May 21, 1993. The vendors thus wrote him a letter demanding
payment of the balance of the purchase price within five (5) days from notice; otherwise, they would declare the rescission of
the conditional sale and the forfeiture of his down payment based on the terms of the contract.
Tan refused to comply with the vendors' demand and instead wrote them a letter (dated May 28, 1993) claiming that the
annotation on the title, made pursuant to Section 4, Rule 74 of the Rules, constituted an encumbrance on the property that
would prevent the vendors from delivering a clean title to him. Thus, he alleged that he could no longer be required to pay
the balance of the purchase price and demanded the return of his down payment.
When the vendors refused to refund the down payment, Tan, through counsel, sent another demand letter to the vendors on
June 18, 1993. The vendors still refused to heed Tan's demand, prompting Tan to file on June 19, 1993 a complaint with the
RTC of Pasay City for specific performance against the vendors, including AndrewBenolirao, Romano Benolirao,
Dion Benolirao as heirs of Lamberto Benolirao, together with Evelyn Monreal and Ann Karina Taningco (collectively,
the respondents). In his complaint, Tan alleged that there was a novation of the Deed of Conditional Sale done without his
consent since the annotation on the title created an encumbrance over the property. Tan prayed for the refund of the down
payment and the rescission of the contract.

On August 9, 1993, Tan amended his Complaint, contending that if the respondents insist on forfeiting the down payment,
he would be willing to pay the balance of the purchase price provided there is reformation of the Deed of Conditional Sale. In
the meantime, Tan caused the annotation on the title of a notice of lis pendens.
On August 21, 1993, the respondents executed a Deed of Absolute Sale over the property in favor of Hector de Guzman (de
Guzman) for the price of P689,000.00. IDTSEH
Thereafter, the respondents moved for the cancellation of the notice of lis pendens on the ground that it was inappropriate
since the case that Tan filed was a personal action which did not involve either title to, or possession of, real property. The
RTC issued an order dated October 22, 1993 granting the respondents' motion to cancel the lis pendens annotation on the
title.
Meanwhile, based on the Deed of Absolute Sale in his favor, de Guzman registered the property and TCT No. 28104 was
issued in his name. Tan then filed a motion to carry over the lis pendens annotation to TCT No. 28104 registered in de
Guzman's name, but the RTC denied the motion.
On September 8, 1995, after due proceedings, the RTC rendered judgment ruling that the respondents' forfeiture of Tan's
down payment was proper in accordance with the terms and conditions of the contract between the parties. 4 The RTC
ordered Tan to pay the respondents the amount of P30,000.00, plus P1,000.00 per court appearance, as attorney's fees,
and to pay the cost of suit.
On appeal, the CA dismissed the petition and affirmed the ruling of the trial court in toto. Hence, the present petition.
THE ISSUES
Tan argues that the CA erred in affirming the RTC's ruling to cancel the lis pendens annotation on TCT No. 27335. Due to
the unauthorized novation of the agreement,Tan presented before the trial court two alternative remedies in his complaint
either the rescission of the contract and the return of the down payment, or the reformation of the contract to adjust the
payment period, so that Tan will pay the remaining balance of the purchase price only after the lapse of the required twoyear encumbrance on the title. Tan posits that the CA erroneously disregarded the alternative remedy of reformation of
contract when it affirmed the removal of the lis pendens annotation on the title.
Tan further contends that the CA erred when it recognized the validity of the forfeiture of the down payment in favor of the
vendors. While admitting that the Deed of Conditional Sale contained a forfeiture clause, he insists that this clause applies
only if the failure to pay the balance of the purchase price was through his own fault or negligence. In the present
case, Tan claims that he was justified in refusing to pay the balance price since the vendors would not have been able to
comply with their obligation to deliver a "clean" title covering the property.
Lastly, Tan maintains that the CA erred in ordering him to pay the respondents P30,000.00, plus P1,000.00 per court
appearance as attorney's fees, since he filed the foregoing action in good faith, believing that he is in the right.
The respondents, on the other hand, assert that the petition should be dismissed for raising pure questions of fact, in
contravention of the provisions of Rule 45 of the Rules which provides that only questions of law can be raised in petitions
for review on certiorari.
THE COURT'S RULING
The petition is granted.
No new issues can be raised in the Memorandum
At the onset, we note that Tan raised the following additional assignment of errors in his Memorandum: (a) the CA erred in
holding that the petitioner could seek reformation of the Deed of Conditional Sale only if he paid the balance of the purchase
price and if the vendors refused to execute the deed of absolute sale; and (b) the CA erred in holding that the petitioner was
estopped from asking for the reformation of the contract or for specific performance. aIcDCH
The Court's September 27, 2004 Resolution expressly stated that "No new issues may be raised by a party in his/its
Memorandum". Explaining the reason for this rule, we said that:

The raising of additional issues in a memorandum before the Supreme Court is irregular, because said
memorandum is supposed to be in support merely of the position taken by the party concerned in his
petition, and the raising of new issues amounts to the filing of a petition beyond the reglementary period.
The purpose of this rule is to provide all parties to a case a fair opportunity to be heard. No new points
of law, theories, issues or arguments may be raised by a party in the Memorandum for the reason that
to permit these would be offensive to the basic rules of fair play, justice and due process. 5

Tan contravened the Court's explicit instructions by raising these additional errors. Hence, we disregard them and focus
instead on the issues previously raised in the petition and properly included in the Memorandum.
Petition raises a question of law
Contrary to the respondents' claim, the issue raised in the present petition defined in the opening paragraph of this
Decision is a pure question of law. Hence, the petition and the issue it presents are properly cognizable by this Court.
Lis pendens annotation not proper in personal actions
Section 14, Rule 13 of the Rules enumerates the instances when a notice of lis pendens can be validly annotated on the title
to real property:
Sec. 14. Notice of lis pendens.
In an action affecting the title or the right of possession of real property, the plaintiff and
the defendant, when affirmative relief is claimed in his answer, may record in the office of the
registry of deeds of the province in which the property is situated a notice of the pendency of
the action. Said notice shall contain the names of the parties and the object of the action or
defense, and a description of the property in that province affected thereby. Only from the time
of filing such notice for record shall a purchaser, or encumbrancer of the property affected
thereby, be deemed to have constructive notice of the pendency of the action, and only of its
pendency against the parties designated by their real names.
The notice of lis pendens hereinabove mentioned may be cancelled only upon order of the
court, after proper showing that the notice is for the purpose of molesting the adverse party, or
that it is not necessary to protect the rights of the party who caused it to be recorded.
The litigation subject of the notice of lis pendens must directly involve a specific property which is necessarily affected by the
judgment. 6
Tan's complaint prayed for either the rescission or the reformation of the Deed of Conditional Sale. While the Deed does
have real property for its object, we find thatTan's complaint is an in personam action, as Tan asked the court to compel the
respondents to do something either to rescind the contract and return the down payment, or to reform the contract by
extending the period given to pay the remaining balance of the purchase price. Either way, Tan wants to enforce his personal
rights against the respondents, not against the property subject of the Deed. As we explained in Domagas v.
Jensen: 7 HCaIDS
The settled rule is that the aim and object of an action determine its character. Whether a proceeding
is in rem, or in personam, or quasi in rem for that matter, is determined by its nature and purpose, and
by these only. A proceeding in personam is a proceeding to enforce personal rights and obligations
brought against the person and is based on the jurisdiction of the person, although it may involve his
right to, or the exercise of ownership of, specific property, or seek to compel him to control or dispose of
it in accordance with the mandate of the court. The purpose of a proceeding in personam is to impose,
through the judgment of a court, some responsibility or liability directly upon the person of the
defendant. Of this character are suits to compel a defendant to specifically perform some act or actions
to fasten a pecuniary liability on him.

Furthermore, as will be explained in detail below, the contract between the parties was merely a contract to sell where the
vendors retained title and ownership to the property until Tan had fully paid the purchase price. Since Tan had no claim of
ownership or title to the property yet, he obviously had no right to ask for the annotation of a lis pendens notice on the title of
the property.
Contract is a mere contract to sell
A contract is what the law defines it to be, taking into consideration its essential elements, and not what the contracting
parties call it. 8 Article 1485 of the Civil Code defines a contract of sale as follows:
Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the
ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or
its equivalent.
A contract of sale may be absolute or conditional.
The very essence of a contract of sale is the transfer of ownership in exchange for a price paid or promised. 9
In contrast, a contract to sell is defined as a bilateral contract whereby the prospective seller, while expressly reserving
the ownership of the property despite delivery thereof to the prospective buyer, binds himself to sell the property
exclusively to the prospective buyer upon fulfillment of the condition agreed, i.e., full payment of the purchase price. 10 A
contract to sell may not even be considered as a conditional contract of sale where the seller may likewise reserve title to
the property subject of the sale until the fulfillment of a suspensive condition, because in a conditional contract of sale,
the first element of consent is present,although it is conditioned upon the happening of a contingent event which may or
may not occur. 11
In the present case, the true nature of the contract is revealed by paragraph D thereof, which states:
xxx xxx xxx
d) That in case, BUYER has complied with the terms and conditions of this contract, then the SELLERS
shall execute and deliver to the BUYER the appropriate Deed of Absolute Sale; CDHAcI
xxx xxx xxx
Jurisprudence has established that where the seller promises to execute a deed of absolute sale upon the completion by the
buyer of the payment of the price, the contract is only a contract to sell. 12 Thus, while the contract is denominated as a
Deed of Conditional Sale, the presence of the above-quoted provision identifies the contract as being a mere contract to sell.
A Section 4, Rule 74 annotation is an encumbrance on the property
While Tan admits that he refused to pay the balance of the purchase price, he claims that he had valid reason to do so
the sudden appearance of an annotation on the title pursuant to Section 4, Rule 74 of the Rules, which Tan considered an
encumbrance on the property.
We find Tan's argument meritorious.
The annotation placed on TCT No. 27335, the new title issued to reflect the extrajudicial partition of Lamberto Benolirao's
estate among his heirs, states:
. . . any liability to credirots (sic), excluded heirs and other persons having right to the property, for a
period of two (2) years, with respect only to the share of Erlinda, Andrew, Romano and Dion, all
surnamed Benolirao [Emphasis supplied.]
This annotation was placed on the title pursuant to Section 4, Rule 74 of the Rules, which reads:
Sec. 4. Liability of distributees and estate. If it shall appear at any time within two (2) years after the
settlement and distribution of an estate in accordance with the provisions of either of the first two
sections of this rule, that an heir or other person has been unduly deprived of his lawful participation in
the estate, such heir or such other person may compel the settlement of the estate in the courts in the
manner hereinafter provided for the purpose of satisfying such lawful participation. And if within the

same time of two (2) years, it shall appear that there are debts outstanding against the estate
which have not been paid, or that an heir or other person has been unduly deprived of his lawful
participation payable in money, the court having jurisdiction of the estate may, by order for that
purpose, after hearing, settle the amount of such debts or lawful participation and order how
much and in what manner each distributee shall contribute in the payment thereof, and may
issue execution, if circumstances require, against the bond provided in the preceding section or
against the real estate belonging to the deceased, or both. Such bond and such real estate shall
remain charged with a liability to creditors, heirs, or other persons for the full period of two (2) years
after such distribution, notwithstanding any transfers of real estate that may have been made.
[Emphasis supplied.]
Senator Vicente Francisco discusses this provision in his book The Revised Rules of Court in the Philippines, 13 where he
states:
The provision of Section 4, Rule 74 prescribes the procedure to be followed if within two years after an
extrajudicial partition or summary distribution is made, an heir or other person appears to have been
deprived of his lawful participation in the estate, or some outstanding debts which have not been paid
are discovered. When the lawful participation of the heir is not payable in money, because, for
instance, he is entitled to a part of the real property that has been partitioned, there can be no
other procedure than to cancel the partition so made and make a new division, unless, of
course, the heir agrees to be paid the value of his participation with interest. But in case the lawful
participation of the heir consists in his share in personal property of money left by the decedent, or in
case unpaid debts are discovered within the said period of two years, the procedure is not to cancel the
partition, nor to appoint an administrator to re-assemble the assets, as was allowed under the old Code,
but the court, after hearing, shall fix the amount of such debts or lawful participation in proportion to or
to the extent of the assets they have respectively received and, if circumstances require, it may issue
execution against the real estate belonging to the decedent, or both. The present procedure is more
expedient and less expensive in that it dispenses with the appointment of an administrator and does not
disturb the possession enjoyed by the distributees. 14[Emphasis supplied.] IDAaCc
An annotation is placed on new certificates of title issued pursuant to the distribution and partition of a decedent's real
properties to warn third persons on the possible interests of excluded heirs or unpaid creditors in these properties. The
annotation, therefore, creates a legal encumbrance or lien on the real property in favor of the excluded heirs or
creditors. Where a buyer purchases the real property despite the annotation, he must be ready for the possibility
that the title could be subject to the rights of excluded parties. The cancellation of the sale would be the logical
consequence where: (a) the annotation clearly appears on the title, warning all would-be buyers; (b) the sale unlawfully
interferes with the rights of heirs; and (c) the rightful heirs bring an action to question the transfer within the two-year period
provided by law.

As we held in Vda. de Francisco v. Carreon: 15


And Section 4, Rule 74 . . . expressly authorizes the court to give to every heir his lawful participation in
the real estate "notwithstanding any transfers of such real estate" and to "issue execution" thereon. All
this implies that, when within the amendatory period the realty has been alienated, the court in redividing it among the heirs has the authority to direct cancellation of such alienation in the same
estate proceedings, whenever it becomes necessary to do so. To require the institution of a
separate action for such annulment would run counter to the letter of the above rule and the spirit of
these summary settlements. [Emphasis supplied.]
Similarly, in Sps. Domingo v. Roces, 16 we said:
The foregoing rule clearly covers transfers of real property to any person, as long as the deprived heir or
creditor vindicates his rights within two years from the date of the settlement and distribution of estate.

Contrary to petitioners' contention, the effects of this provision are not limited to the heirs or
original

distributees

of

the

estate

properties,

but

shall

affect any transferee

of

the

properties. [Emphasis supplied.]


Indeed, in David v. Malay, 17 although the title of the property had already been registered in the name of the third party
buyers, we cancelled the sale and ordered the reconveyance of the property to the estate of the deceased for proper
disposal among his rightful heirs.
By the time Tan's obligation to pay the balance of the purchase price arose on May 21, 1993 (on account of the extensions
granted by the respondents), a new certificate of title covering the property had already been issued on March 26, 1993,
which contained the encumbrance on the property; the encumbrance would remain so attached until the expiration of the
two-year period. Clearly, at this time, the vendors could no longer compel Tan to pay the balance of the purchase since
considering they themselves could not fulfill their obligation to transfer a clean title over the property to Tan.
Contract to sell is not rescinded but terminated
What then happens to the contract?
We have held in numerous cases 18 that the remedy of rescission under Article 1191 cannot apply to mere contracts to sell.
We explained the reason for this in Santosv. Court of Appeals, 19 where we said: STaHIC
[I]n a contract to sell, title remains with the vendor and does not pass on to the vendee until the
purchase price is paid in full. Thus, in a contract to sell, the payment of the purchase price is a positive
suspensive condition. Failure to pay the price agreed upon is not a mere breach, casual or
serious, but a situation that prevents the obligation of the vendor to convey title from acquiring
an obligatory force. This is entirely different from the situation in a contract of sale, where nonpayment of the price is a negative resolutory condition. The effects in law are not identical. In a contract
of sale, the vendor has lost ownership of the thing sold and cannot recover it, unless the contract of sale
is rescinded and set aside. In a contract to sell, however, the vendor remains the owner for as long
as the vendee has not complied fully with the condition of paying the purchase price. If the
vendor should eject the vendee for failure to meet the condition precedent, he isenforcing the contract
and not rescinding it. . . . Article 1592 speaks of non-payment of the purchase price as a resolutory
condition. It does not apply to a contract to sell. As to Article 1191, it is subordinated to the provisions of
Article 1592 when applied to sales of immovable property. Neither provision is applicable [to a contract
to sell]. [Emphasis supplied.]
We, therefore, hold that the contract to sell was terminated when the vendors could no longer legally compel Tan to pay the
balance of the purchase price as a result of the legal encumbrance which attached to the title of the property. Since Tan's
refusal to pay was due to the supervening event of a legal encumbrance on the property and not through his own fault or
negligence, we find and so hold that the forfeiture of Tan's down payment was clearly unwarranted.
Award of Attorney's fees
As evident from our previous discussion, Tan had a valid reason for refusing to pay the balance of the purchase price for the
property. Consequently, there is no basis for the award of attorney's fees in favor of the respondents.
On the other hand, we award attorney's fees in favor of Tan, since he was compelled to litigate due to the respondents'
refusal to return his down payment despite the fact that they could no longer comply with their obligation under the contract
to sell, i.e., to convey a clean title. Given the facts of this case, we find the award of P50,000.00 as attorney's fees proper.
Monetary award is subject to legal interest
Undoubtedly, Tan made a clear and unequivocal demand on the vendors to return his down payment as early as May 28,
1993. Pursuant to our definitive ruling inEastern Shipping Lines, Inc. v. Court of Appeals, 20 we hold that the vendors should
return the P200,000.00 down payment to Tan, subject to the legal interest of 6% per annum computed from May 28, 1993,
the date of the first demand letter.

Furthermore, after a judgment has become final and executory, the rate of legal interest, whether the obligation was in the
form of a loan or forbearance of money or otherwise, shall be 12% per annum from such finality until its satisfaction.
Accordingly, the principal obligation of P200,000.00 shall bear 6% interest from the date of first demand or from May 28,
1993. From the date the liability for the principal obligation and attorney's fees has become final and executory, an annual
interest of 12% shall be imposed on these obligations until their final satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit. aDcHIC
WHEREFORE, premises considered, we hereby GRANT the petition and, accordingly, ANNUL and SET ASIDE the May 30,
2002 decision of the Court of Appeals in CA-G.R. CV No. 52033. Another judgment is rendered declaring the Deed of
Conditional Sale terminated and ordering the respondents to return the P200,000.00 down payment to petitioner Delfin Tan,
subject to legal interest of 6% per annum, computed from May 28, 1993. The respondents are also ordered to pay, jointly
and severally, petitioner Delfin Tan the amount of P50,000.00 as and by way of attorney's fees. Once this decision becomes
final and executory, respondents are ordered to pay interest at 12% per annum on the principal obligation as well as the
attorney's fees, until full payment of these amounts. Costs against the respondents.
SO ORDERED.
Quisumbing, * Carpio Morales, Nachura ** and Abad, JJ., concur.
||| (Tan v. Benolirao, G.R. No. 153820, [October 16, 2009], 619 PHIL 35-55)