Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 103577 October 7, 1996
ROMULO A. CORONEL, ALARICO A. CORONEL, ANNETTE A. CORONEL, ANNABELLE C. GONZALES (for
herself and on behalf of Florida 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.

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 Down payment

P1,190,000.00 Balance
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty
Thousand Pesos purchase price of our inherited house and lot, covered by TCT No. 119627
of the Registry of Deeds of Quezon City, in the total amount of P1,240,000.00.
We bind ourselves to effect the transfer in our names from our deceased father, Constancio
P. Coronel, the transfer certificate of title immediately upon receipt of the down payment
above-stated.
On our presentation of the TCT already in or name, We will immediately execute the deed of
absolute sale of said property and Miss Ramona Patricia Alcaraz shall immediately pay the
balance of the P1,190,000.00.
Clearly, the conditions appurtenant to the sale are the following:
1. Ramona will make a down payment of Fifty Thousand (P50,000.00) Pesos upon execution
of the document aforestated;

2. The Coronels will cause the transfer in their names of the title of the property registered in
the name of their deceased father upon receipt of the Fifty Thousand (P50,000.00) Pesos
down payment;
3. Upon the transfer in their names of the subject property, the Coronels will execute the
deed of absolute sale in favor of Ramona and the latter will pay the former the whole balance
of One Million One Hundred Ninety Thousand (P1,190,000.00) Pesos.
On the same date (January 15, 1985), plaintiff-appellee Concepcion D. Alcaraz (hereinafter
referred to as Concepcion), mother of Ramona, paid the down payment of Fifty Thousand
(P50,000.00) Pesos (Exh. "B", Exh. "2").
On February 6, 1985, the property originally registered in the name of the Coronels' father
was transferred in their names under TCT
No. 327043 (Exh. "D"; Exh. "4")
On February 18, 1985, the Coronels sold the property covered by TCT No. 327043 to
intervenor-appellant Catalina B. Mabanag (hereinafter referred to as Catalina) for One Million
Five Hundred Eighty Thousand (P1,580,000.00) Pesos after the latter has paid Three
Hundred Thousand (P300,000.00) Pesos (Exhs. "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 of documentary exhibits. Thus, plaintiffs therein (now private respondents)
proffered their documentary evidence accordingly marked as Exhibits "A" through "J", inclusive of their
corresponding submarkings. Adopting these same exhibits as their own, then defendants (now petitioners)
accordingly offered and marked them as Exhibits "1" through "10", likewise inclusive of their corresponding
submarkings. Upon motion of the parties, the trial court gave them thirty (30) days within which to simultaneously
submit their respective memoranda, and an additional 15 days within which to submit their corresponding comment
or reply thereof, after which, the case would be deemed submitted for resolution.
On April 14, 1988, the case was submitted for resolution before Judge Reynaldo Roura, who was then temporarily
detailed to preside over Branch 82 of the RTC of Quezon City. On March 1, 1989, judgment was handed down by
Judge Roura from his regular bench at Macabebe, Pampanga for the Quezon City branch, disposing as follows:
WHEREFORE, judgment for specific performance is hereby rendered ordering defendant to
execute in favor of plaintiffs a deed of absolute sale covering that parcel of land embraced in
and covered by Transfer Certificate of Title No. 327403 (now TCT No. 331582) of the
Registry of Deeds for Quezon City, together with all the improvements existing thereon free

from all liens and encumbrances, and once accomplished, to immediately deliver the said
document of sale to plaintiffs and upon receipt thereof, the 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 petitioner 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 is of co-equal rank with the undersigned Presiding Judge. The standing rule
and supported by jurisprudence is that a Judge to whom a case is submitted for decision has
the authority to decide the case notwithstanding his transfer to another branch or region of
the same court (Sec. 9, Rule 135, Rule of Court).
Coming now to the twin prayer for reconsideration of the Decision dated March 1, 1989
rendered in the instant case, resolution of which now pertains to the undersigned Presiding
Judge, after a meticulous examination of the documentary evidence presented by the
parties, she is convinced that the Decision of March 1, 1989 is supported by evidence and,
therefore, should not be disturbed.
IN VIEW OF THE FOREGOING, the "Motion for Reconsideration and/or to Annul Decision
and Render Anew Decision by the Incumbent Presiding Judge" dated March 20, 1989 is
hereby DENIED.
SO ORDERED.
Quezon City, Philippines, July 12, 1989.

(Rollo, pp. 108-109)

Petitioners thereupon interposed an appeal, but on December 16, 1991, the Court of Appeals (Buena, GonzagaReyes, 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 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 explicity 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 is 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 used 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 subject of the sale.

With the above postulates as guidelines, we now proceed to the task of deciphering the real nature of the contract
entered into by petitioners and private respondents.
It is a canon in the interpretation of contracts that the words used therein should be given their natural and ordinary
meaning unless a technical meaning was intended (Tan vs. Court of Appeals, 212 SCRA 586 [1992]). Thus, when
petitioners declared in the said "Receipt of Down Payment" that they
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty
Thousand Pesos purchase price of our inherited house and lot, covered by TCT No.
1199627 of the Registry of Deeds of Quezon City, in the total amount of P1,240,000.00.
without any reservation of title until full payment of the entire purchase price, the natural and ordinary
idea conveyed is that they sold their property.
When the "Receipt of Down Payment" is considered in its entirety, it becomes more manifest that there was a clear
intent on the part of petitioners to transfer title to the buyer, but since the transfer certificate of title was still in the
name of 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 properly 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 happened, however, that the transfer certificate of title was then still in the
name of their father. It was more expedient to first effect the change in the certificate of title so as to bear their
names. That is why they undertook to cause the issuance of a new transfer of the certificate of title in their names
upon receipt of the down payment in the amount of P50,000.00. As soon as the new certificate of title is issued in
their names, petitioners were committed to immediately execute the deed of absolute sale. Only then will the
obligation of the buyer to pay the remainder of the purchase price arise.
There is no doubt that unlike in a contract to sell which is most commonly entered into so as to protect the seller
against a buyer who intends to buy the property in installment by withholding ownership over the property until the
buyer effects full payment therefor, in the contract entered into in the case at bar, the sellers were the one who were
unable to enter into a contract of absolute sale by reason of the fact that the certificate of title to the property was
still in the name of their father. It was the sellers in this case who, as it were, had the impediment which prevented,
so to speak, the execution of an contract of absolute sale.
What is clearly established by the plain language of the subject document is that when the said "Receipt of Down
Payment" was prepared and signed by petitioners Romeo A. Coronel, et al., the parties had agreed to a conditional
contract of sale, consummation of which is subject only to the successful transfer of the certificate of title from the
name of petitioners' father, Constancio P. Coronel, to their names.

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

condition that the sellers shall effect the issuance of new certificate 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 obligation to do or not to do, the courts shall determine, in each case, the retroactive effect
of the condition that has been complied with.
the rights and obligations of the parties with respect to the perfected contract of sale became
mutually due and demandable as of the time of fulfillment or occurrence of the suspensive condition
on February 6, 1985. As of that point in time, reciprocal obligations of both seller and buyer arose.
Petitioners also argue there could been no perfected contract on January 19, 1985 because they were then not yet
the absolute owners of the inherited property.
We cannot sustain this argument.
Article 774 of the Civil Code defines Succession as a mode of transferring ownership as follows:
Art. 774. Succession is a mode of acquisition by virtue of which the property, rights and
obligations to be 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 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 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 petitioner-sellers' act of unilaterally and extradicially rescinding the contract of sale, there being no
express stipulation authorizing the sellers to extarjudicially 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 of Ramona 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 of their 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 if be immovable property, the ownership shall belong to the person acquiring it who in
good faith first recorded it in Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good faith
was first in the possession; and, in the absence thereof to the person who presents the
oldest title, provided there is good faith.

The record of the case shows that the Deed of Absolute Sale dated April 25, 1985 as proof of the second contract of
sale was registered with the Registry of Deeds of Quezon City giving rise to the issuance of a new certificate of title
in the name of Catalina B. Mabanag on June 5, 1985. Thus, the second paragraph of Article 1544 shall apply.
The above-cited provision on double sale presumes title or ownership to pass to the 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.
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 has 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).
Petitioner point out that the notice of lis pendens in the case at bar was annoted 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 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 that 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 pervious sale, the registration will constitute a registration in bad faith and will
not confer upon him any right. (Salvoro vs. Tanega, 87 SCRA 349 [1978]; citing Palarca vs.
Director of Land, 43 Phil. 146; Cagaoan vs. Cagaoan, 43 Phil. 554; Fernandez vs. Mercader,
43 Phil. 581.)
Thus, the sale of the subject parcel of land between petitioners and Ramona P. Alcaraz, perfected on February 6,
1985, prior to that between petitioners and Catalina B. Mabanag on February 18, 1985, was correctly upheld by
both the courts below.

Although there may be ample indications that there was in fact an agency between Ramona as principal and
Concepcion, her mother, as agent insofar as the subject contract of sale is concerned, the issue of whether or not
Concepcion was also acting in her own behalf as a co-buyer is not squarely raised in the instant petition, nor in such
assumption disputed between mother and daughter. Thus, We will not touch this issue and no longer disturb the
lower courts' ruling on this point.
WHEREFORE, premises considered, the instant petition is hereby DISMISSED and the appealed judgment
AFFIRMED.
SO ORDERED.
Narvasa, C.J., Davide, Jr. and Francisco, JJ., concur.
Panganiban, J., took no part.
The Lawphil Project - Arellano Law Foundation

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 77770 December 15, 1988
ATTY. JOSE S. GOMEZ, DELFINA GOMEZ ESTRADA, ENRIQUITA GOMEZ OXCIANO, BENITA GOMEZ
GARLITOS, REYNALDO GOMEZ ESPEJO, ARMANDO GOMEZ, ERLINDA GOMEZ GUICO, EUGENIA GOMEZ
CALICDAN, AZUCENA GOMEZ ORENCIA, TEODORO S. GOMEZ, JR., and ALEJO S. GOMEZ (now deceased)
represented by his wife, LETICIA Y. GOMEZ, and children, namely, MARGIE GOMEZ GOB, JACINTO Y.
GOMEZ, ALEJO Y. GOMEZ, JR., and MARY ANN Y. GOMEZ, petitioners,
vs.
HON. COURT OF APPEALS, HON. PEDRO G. ADUCAYEN Judge Regional Trial Court, San Carlos City
(Pangasinan) Branch LVI, HON. CHIEF, LAND REGISTRATION COMMISSION, Quezon City, Metro Manila, and
SILVERIO G. PEREZ, Chief, Division of Original Registration, Land Registration Commission, Quezon City,
Metro Manila, respondents.

PADILLA, J.:
The present case originated with the filing by petitioners on 30 August 1968 in the Court of First Instance (now
Regional Trial Court) of San Carlos City, Pangasinan, of an application for registration of several lots situated in
Bayambang, Pangasinan.
The lots applied for were Lots Nos. 1, 2, 3, 4, 5, 6, 7, 8, 9, 1 0, 11 and 12 of Plan Psu-54792 Amd.-2. The lots were
among those involved in the case of Government of the Philippine Islands vs. Abran, 1 wherein this Court declared
Consolacion M. Gomez owner of certain lots in Sitio Poponto Bayambang, Pangasinan. Petitioners are the heirs of
Teodoro Y. Gomez (father of Consolacion) who, together with Consolacion's son, Luis Lopez, inherited from her parcels of
land when Consolacion Gomez died intestate. Petitioners alleged that after the death of Teodoro Y. Gomez, they became
the absolute owners of the subject lots by virtue of a Quitclaim executed in their favor by Luis Lopez. The lots (formerly
portions of Lots 15,16, 34 and 41 covered by Plan Ipd-92) were subdivided into twelve lotsLots Nos. 1, 2, 3, 4, 5, 6, 7, 8,
9, 10, 11 and 12. The subdivision plan was duly approved by the Bureau of Lands on 30 November 1963. Petitioners
agreed to allocate the lots among themselves.

After notice and publication, and there being no opposition to the application, the trial court issued an order of
general default. On 5 August 1981, the court rendered its decision adjudicating the subject lots in petitioners' favor.

On 6 October 1981, the trial court issued an order 3 expressly stating that the decision of 5 August 1981 had become
final and directed the Chief of the General Land Registration Office to issue the corresponding decrees of registration over
the lots adjudicated in the decision of 5 August 1981.
On 11 July 1984, respondent Silverio G. Perez, Chief of the Division of Original Registration, Land Registration
Commission (now known as the National Land Titles and Deeds Registration Administration), submitted a report to
the court a quo stating that Lots 15, 16, 34 and 41 of Ipd-92 were already covered by homestead patents issued in
1928 and 1929 and registered under the Land Registration Act. He recommended that the decision of 5 August
1981, and the order of 6 October 1981 be set aside. Petitioners opposed the report, pointing out that no opposition
was raised by the Bureau of Lands during the registration proceedings and that the decision of 5 August 1981
should be implemented because it had long become final and executory.
After hearing, the lower court rendered a second decision on 25 March 1985 setting aside the decision dated 5
August 1981 and the order dated 6 October 1981 for the issuance of decrees. 4 Petitioners moved for reconsideration
but the motion was denied by respondent judge on 6 August 1985 for lack of merit. 5
Petitioners filed a petition for certiorari and mandamus with this Court which in turn referred the petition to the Court
of Appeals. 6
On 17 September 1986, the appellate court rendered judgment, 7 dismissing the petition and stating, among others,
thus
In resum, prior to the issuance of the decree of registration, the respondent Judge has still
the power and control over the decision he rendered. The finality of an adjudication of land in
a registration or cadastral case takes place only after the expiration of the one-year period
after entry of the final decree of registration (Afalla vs. Rosauro, 60 Phil. 622; Valmonte vs.
Nable, 85 Phil. 256; Capio vs. Capio, 94 Phil. 113). When the respondent Judge amended
his decision after the report of the respondent officials of the Land Registration office had
shown that homestead patents had already been issued on some of the lots, respondents
cannot be faulted because land already granted by homestead patent can no longer be the
subject of another registration (Manalo vs. Lukban, et al., 48 Phil. 973).
WHEREFORE, in view of the foregoing, We resolve to DISMISS the petition for lack of merit.
SO ORDERED.
Petitioners' motion for reconsideration was denied by the appellate court in its Resolution dated 10 March 1987. 8
Hence, this recourse.
Several issues are raised by petitioners in this petition. The more important issues before the Court are: (a) whether
or not respondent Judge had jurisdiction to issue the decision of 25 March 1985 which set aside the lower court's
earlier decision of 5 August 1981 and the order of 6 October 1981; (b) whether or not the respondents Acting Land
Registration Commissioner and Engr. Silverio Perez, Chief, Division of Original Registration, Land Registration
Commission, have no alternative but to issue the decrees of registration pursuant to the decision of 5 August 1981
and the order for issuance of decrees, dated 6 October 1981, their duty to do so being purely ministerial; (c) whether
or not "the law of the case" is the decision in Government of the Philippine Islands v. Abran, supra, which held that
the lands adjudicated to Consolacion Gomez were not public lands, and therefore they could not have been
acquired by holders of homestead titles as against petitioners herein.
It is not disputed that the decision dated 5 August 1981 had become final and executory. Petitioners vigorously
maintain that said decision having become final, it may no longer be reopened, reviewed, much less, set aside.
They anchor this claim on section 30 of P.D. No. 1529 (Property Registration Decree) which provides that, after
judgment has become final and executory, the court shall forthwith issue an order to the Commissioner of Land
Registration for the issuance of the decree of registration and certificate of title. Petitioners contend that section 30
should be read in relation to section 32 of P.D. 1529 in that, once the judgment becomes final and executory under

section 30, the decree of registration must issue as a matter of course. This being the law, petitioners assert, when
respondent Judge set aside in his decision, dated 25 March 1985, the decision of 5 August 1981 and the order of 6
October 1981, he clearly acted without jurisdiction.
Petitioners' contention is not correct. Unlike ordinary civil actions, the adjudication of land in a cadastral or land
registration proceeding does not become final, in the sense of incontrovertibility until after the expiration of one (1)
year after the entry of the final decree of registration. 9 This Court, in several decisions, has held that as long as a final
decree has not been entered by the Land Registration Commission (now NLTDRA) and the period of one (1) year has not
elapsed from date of entry of such decree, the title is not finally adjudicated and the decision in the registration proceeding
continues to be under the control and sound discretion of the court rendering it. 10
Petitioners contend that the report of respondent Silverio Perez should have been submitted to the court a quo
before its decision became final. But were we to sustain this argument, we would be pressuring respondent land
registration officials to submit a report or study even if haphazardly prepared just to beat the reglementary deadline
for the finality of the court decision. As said by this Court in De los Reyes vs. de Villa: 11
Examining section 40, we find that the decrees of registration must be stated in convenient
form for transcription upon the certificate of title and must contain an accurate technical
description of the land. This requires technical men. Moreover, it frequently occurs that only
portions of a parcel of land included in an application are ordered registered and that the
limits of such portions can only be roughly indicated in the decision of the court. In such
cases amendments of the plans and sometimes additional surveys become necessary
before the final decree can be entered. That can hardly be done by the court itself; the law
very wisely charges the Chief Surveyor of the General Land Registration Office with such
duties (Administrative Code, section 177).
Thus, the duty of respondent land registration officials to render reports is not limited to the period before the court's
decision becomes final, but may extend even after its finality but not beyond the lapse of one (1) year from the entry
of the decree.
Petitioners insist that the duty of the respondent land registration officials to issue the decree is purely ministerial. It
is ministerial in the sense that they act under the orders of the court and the decree must be in conformity with the
decision of the court and with the data found in the record, and they have no discretion in the matter. However, if
they are in doubt upon any point in relation to the preparation and issuance of the decree, it is their duty to refer the
matter to the court. They act, in this respect, as officials of the court and not as administrative officials, and their act
is the act of the court. 12 They are specifically called upon to "extend assistance to courts in ordinary and cadastral land
registration proceedings ." 13
The foregoing observations resolve the first two (2) issues raised by petitioners.
Petitioners next contend that "the law of the case" is found in Government of the Philippine Islands vs. Abran, et al.,
supra, where it was decided by this Court that the lands of Consolacion M. Gomez, from whom petitioners derive
their ownership over the lots in question, were not public lands. A reading of the pertinent and dispositive portions of
the aforesaid decision will show, however, that the lots earlier covered by homestead patents were not included
among the lands adjudicated to Consolacion M. Gomez. The decision states:
With respect to the portions of land covered by homestead certificates of title, we are of
opinion that such certificates are sufficient to prevent the title to such portion from going to
appellants aforesaid, for they carry with them preponderating evidence that the respective
homesteaders held adverse possession of such portions, dating back to 1919 or 1920,
accordingly to the evidence, and the said appellants failed to object to that possession in
time. (Emphasis supplied)
Wherefore modifying the judgment appealed from, it is hereby ordered that the lots
respectively claimed by Agustin V. Gomez, Consolacion M. Gomez, and Julian Macaraeg, be
registered in their name, with the exclusion of the portions covered by the homestead
certificates ... . (Emphasis supplied.) 14

The report of respondent land registration officials states that the holders of the homestead patents registered the
lots in question in the years 1928 and 1929. The decision in Government of the Philippine Islands vs. Abran was
promulgated on 31 December 1931. Hence, the subject lots are specifically excluded from those adjudicated by the
aforesaid decision to Consolacion M. Gomez.
It is a settled rule that a homestead patent, once registered under the Land Registration Act, becomes indefeasible
and incontrovertible as a Torrens title, and may no longer be the subject of an investigation for determination or
judgment in cadastral proceeding. 15
The aforecited case of Government vs. Abran, therefore, is not "the law of the case", for the lots in question were
not private lands of Consolacion M. Gomez when homestead patents were issued over them in 1928-1929. There is
sufficient proof to show that Lots 15, 16, 34 and 41 of Ipd-92 were already titled lands way back in 1928 and 1929
as shown by Annexes "A", "B", "C", and "D" of respondents' Memorandum. 16
Lastly, petitioners claim that if the decision of 5 August 1981 of the lower court is sustained, the homestead title
holders may still vindicate their rights by filing a separate civil action for cancellation of titles and for reconveyance in
a court of ordinary civil jurisdiction. Conversely, the same recourse may be resorted to by petitioners. "(T)he true
owner may bring an action to have the ownership or title to land judicially settled, and if the allegations of the plaintiff
that he is the true owner of the parcel of land granted as free patent and described in the Torrens title and that the
defendant and his predecessor-in-interest were never in possession of the parcel of land and knew that the plaintiff
and his predecessor-in-interest have been in possession thereof be established, then the court in the exercise of its
equity jurisdiction, without ordering the cancellation of the Torrens title issued upon the patent, may direct the
defendant, the registered owner, to reconvey the parcel of land to the plaintiff who has been found to be the true
owner thereof." 17
WHEREFORE, the petition is DENIED. The appealed decision of the Court of Appeals is AFFIRMED. Costs against
the petitioners-appellants.
SO ORDERED.
Melencio-Herrera (Chairperson), Paras and Regalado, JJ., concur.
Sarmiento, J., is on leave.

Footnotes
1 56 Phil. 397.
2 Penned by Judge Felicidad Carandang Villalon, Branch X, CFI of Pangasinan, Third
Judicial District, San Carlos City, Rollo, pp. 102-108.
3 Rollo, p. l09.
4 Penned by Judge Pedro G. Aducayen, Branch LVI, RTC, First Judicial Region, San Carlos
City, Pangasinan.
5 Rollo, p. 130-136.
6 G.R. No. 71872, Rollo, pp. 31-46.
7 CA-G.R. Sp. No. 07621, Decision penned by Justice Esteban M. Lising with the
concurrence of Justices F.C. Bartolome and Felipe B. Kalalo, Rollo, pp. 149-159.
8 Rollo, pp. 180-181.

9 Section 32, P.D. 1529.

10 Capio vs. Capio, 94 Phil. 113; Valmonte vs. Nable, 85 Phil. 256; Afalla and Pinanoc vs.
Rosauro, 60 Phil. 622; Roman Catholic Bishop of Cebu vs. Phil. Railway Co., 49 Phil. 540;
De los Reyes vs. De Villa, 48 Phil. 227; Pamintuan vs. San Agustin, 43 Phil. 558; Director of
Lands vs. Busuego, 12 SCRA 678.
11 48 Phil. 227.
12 De los Reyes vs. De Villa, supra.
13 Section 6, (2) (6), P.D. No. 1529.
14 56 Phil. 397, 401.
15 El Hogar Filipino vs. Olviga, 60 Phil. 17; Aquino vs. Director of Lands, 39 Phil. 850;
Manalo vs. Lukban and Liwanag, 48 Phil. 973; Pajomayo, et al. vs. Manipon, et al., 39 SCRA
676; Iglesia ni Cristo vs. Hon. Judge CFI of Nueva Ecija, Br. I, 123 SCRA 516.
16 Rollo, pp. 325-329.
17 Iglesia ni Cristo vs. Hon. Judge, CFI of Nueva Ecija, Br. I, 123 SCRA 516, citing Vital vs.
Anore, et al., 90 Phil. 858-859.
The Lawphil Project - Arellano Law Foundation

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 107207 November 23, 1995

VIRGILIO R. ROMERO, petitioner,
vs.
HON. COURT OF APPEALS and ENRIQUETA CHUA VDA. DE ONGSIONG, respondents.

VITUG, J.:
The parties pose this question: May the vendor demand the rescission of a contract for the sale of a parcel of land
for a cause traceable to his own failure to have the squatters on the subject property evicted within the contractuallystipulated period?
Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of production, manufacture and
exportation of perlite filter aids, permalite insulation and processed perlite ore. In 1988, petitioner and his foreign
partners decided to put up a central warehouse in Metro Manila on a land area of approximately 2,000 square
meters. The project was made known to several freelance real estate brokers.

A day or so after the announcement, Alfonso Flores and his wife, accompanied by a broker, offered a parcel of land
measuring 1,952 square meters. Located in Barangay San Dionisio, Paraaque, Metro Manila, the lot was covered
by TCT No. 361402 in the name of private respondent Enriqueta Chua vda. de Ongsiong. Petitioner visited the
property and, except for the presence of squatters in the area, he found the place suitable for a central warehouse.
Later, the Flores spouses called on petitioner with a proposal that should he advance the amount of P50,000.00
which could be used in taking up an ejectment case against the squatters, private respondent would agree to sell
the property for only P800.00 per square meter. Petitioner expressed his concurrence. On 09 June 1988, a contract,
denominated "Deed of Conditional Sale," was executed between petitioner and private respondent. The simplydrawn contract read:
DEED OF CONDITIONAL SALE
KNOW ALL MEN BY THESE PRESENTS:
This Contract, made and executed in the Municipality of Makati, Philippines this 9th day of
June, 1988 by and between:
ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow, Filipino and
residing at 105 Simoun St., Quezon City, Metro Manila, hereinafter referred to
as the VENDOR;
-andVIRGILIO R. ROMERO, married to Severina L. Lat, of Legal age, Filipino,
and residing at 110 San Miguel St., Plainview Subd., Mandaluyong Metro
Manila, hereinafter referred to as the VENDEE:
W I T N E S S E T H : That
WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total area of ONE
THOUSAND NINE HUNDRED FIFTY TWO (1,952) SQUARE METERS, more or less,
located in Barrio San Dionisio, Municipality of Paraaque, Province of Rizal, covered by TCT
No. 361402 issued by the Registry of Deeds of Pasig and more particularly described as
follows:
xxx xxx xxx
WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land and the VENDOR has
accepted the offer, subject to the terms and conditions hereinafter stipulated:
NOW, THEREFORE, for and in consideration of the sum of ONE MILLION FIVE HUNDRED
SIXTY ONE THOUSAND SIX HUNDRED PESOS (P1,561,600.00) ONLY, Philippine
Currency, payable by VENDEE to in to (sic) manner set forth, the VENDOR agrees to sell to
the VENDEE, their heirs, successors, administrators, executors, assign, all her rights, titles
and interest in and to the property mentioned in the FIRST WHEREAS CLAUSE, subject to
the following terms and conditions:
1. That the sum of FIFTY THOUSAND PESOS (P50,000.00) ONLY Philippine
Currency, is to be paid upon signing and execution of this instrument.
2. The balance of the purchase price in the amount of ONE MILLION FIVE
HUNDRED ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00)
ONLY shall be paid 45 days after the removal of all squatters from the above
described property.

3. Upon full payment of the overall purchase price as aforesaid, VENDOR

without necessity of demand shall immediately sign, execute, acknowledged
(sic) and deliver the corresponding deed of absolute sale in favor of the
VENDEE free from all liens and encumbrances and all Real Estate taxes are
all paid and updated.
It is hereby agreed, covenanted and stipulated by and between the parties hereto that if after
60 days from the date of the signing of this contract the VENDOR shall not be able to
remove the squatters from the property being purchased, the downpayment made by the
buyer shall be returned/reimbursed by the VENDOR to the VENDEE.
That in the event that the VENDEE shall not be able to pay the VENDOR the balance of the
purchase price of ONE MILLION FIVE HUNDRED ELEVEN THOUSAND SIX HUNDRED
PESOS (P1,511,600.00) ONLY after 45 days from written notification to the VENDEE of the
removal of the squatters from the property being purchased, the FIFTY THOUSAND PESOS
(P50,000.00) previously paid as downpayment shall be forfeited in favor of the VENDOR.
Expenses for the registration such as registration fees, documentary stamp, transfer fee,
assurances and such other fees and expenses as may be necessary to transfer the title to
the name of the VENDEE shall be for the account of the VENDEE while capital gains tax
shall be paid by the VENDOR.
IN WITNESS WHEREOF, the parties hereunto signed those (sic) presents in the City of
Makati MM, Philippines on this 9th day of June, 1988.
(Sgd.) (Sgd.)
VIRGILIO R. ROMERO ENRIQUETA CHUA VDA.
DE ONGSIONG
Vendee Vendor
SIGNED IN THE PRESENCE OF:
(Sgd.) (Sgd.)
Rowena C. Ongsiong Jack M. Cruz 1
Alfonso Flores, in behalf of private respondent, forthwith received and acknowledged a check for
P50,000.00 2 from petitioner. 3
Pursuant to the agreement, private respondent filed a complaint for ejectment (Civil Case No. 7579) against Melchor
Musa and 29 other squatter families with the Metropolitan Trial Court of Paraaque. A few months later, or on 21
February 1989, judgment was rendered ordering the defendants to vacate the premises. The decision was handed
down beyond the 60-day period (expiring 09 August 1988) stipulated in the contract. The writ of execution of the
judgment was issued, still later, on 30 March 1989.
In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00 she received from petitioner
since, she said, she could not "get rid of the squatters" on the lot. Atty. Sergio A.F. Apostol, counsel for petitioner, in
his reply of 17 April 1989, refused the tender and stated:.
Our client believes that with the exercise of reasonable diligence considering the favorable
decision rendered by the Court and the writ of execution issued pursuant thereto, it is now
possible to eject the squatters from the premises of the subject property, for which reason,
he proposes that he shall take it upon himself to eject the squatters, provided, that expenses

which shall be incurred by reason thereof shall be chargeable to the purchase price of the
land. 4
Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"), through its Regional Director for Luzon,
Farley O. Viloria, asked the Metropolitan Trial Court of Paraaque for a grace period of 45 days from 21 April 1989
within which to relocate and transfer the squatter families. Acting favorably on the request, the court suspended the
enforcement of the writ of execution accordingly.
On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-day grace period and his
client's willingness to "underwrite the expenses for the execution of the judgment and ejectment of the occupants." 5
In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent, advised Atty. Apostol that the
Deed of Conditional Sale had been rendered null and void by virtue of his client's failure to evict the squatters from
the premises within the agreed 60-day period. He added that private respondent had "decided to retain the
property." 6
On 23 June 1989, Atty. Apostol wrote back to explain:
The contract of sale between the parties was perfected from the very moment that there was
a meeting of the minds of the parties upon the subject lot and the price in the amount of
P1,561,600.00. Moreover, the contract had already been partially fulfilled and executed upon
receipt of the downpayment of your client. Ms. Ongsiong is precluded from rejecting its
binding effects relying upon her inability to eject the squatters from the premises of subject
property during the agreed period. Suffice it to state that, the provision of the Deed of
Conditional Sale do not grant her the option or prerogative to rescind the contract and to
retain the property should she fail to comply with the obligation she has assumed under the
contract. In fact, a perusal of the terms and conditions of the contract clearly shows that the
right to rescind the contract and to demand the return/reimbursement of the downpayment is
granted to our client for his protection.
Instead, however, of availing himself of the power to rescind the contract and demand the
return, reimbursement of the downpayment, our client had opted to take it upon himself to
eject the squatters from the premises. Precisely, we refer you to our letters addressed to
your client dated April 17, 1989 and June 8, 1989.
Moreover, it is basic under the law on contracts that the power to rescind is given to the
injured party. Undoubtedly, under the circumstances, our client is the injured party.
Furthermore, your client has not complied with her obligation under their contract in good
faith. It is undeniable that Ms. Ongsiong deliberately refused to exert efforts to eject the
squatters from the premises of the subject property and her decision to retain the property
was brought about by the sudden increase in the value of realties in the surrounding areas.
Please consider this letter as a tender of payment to your client and a demand to execute
the absolute Deed of Sale. 7
A few days later (or on 27 June 1989), private respondent, prompted by petitioner's continued refusal to accept the
return of the P50,000.00 advance payment, filed with the Regional Trial Court of Makati, Branch 133, Civil Case No.
89-4394 for rescission of the deed of "conditional" sale, plus damages, and for the consignation of P50,000.00 cash.
Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of execution in Civil Case No. 7579
on motion of private respondent but the squatters apparently still stayed on.
Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court of Makati 8 rendered decision holding that
private respondent had no right to rescind the contract since it was she who "violated her obligation to eject the squatters
from the subject property" and that petitioner, being the injured party, was the party who could, under Article 1191 of the
Civil Code, rescind the agreement. The court ruled that the provisions in the contract relating to (a) the

return/reimbursement of the P50,000.00 if the vendor were to fail in her obligation to free the property from squatters
within the stipulated period or (b), upon the other hand, the sum's forfeiture by the vendor if the vendee were to fail in
paying the agreed purchase price, amounted to "penalty clauses". The court added:

This Court is not convinced of the ground relied upon by the plaintiff in seeking the
rescission, namely: (1) he (sic) is afraid of the squatters; and (2) she has spent so much to
eject them from the premises (p. 6, tsn, ses. Jan. 3, 1990). Militating against her profession
of good faith is plaintiffs conduct which is not in accord with the rules of fair play and justice.
Notably, she caused the issuance of an alias writ of execution on August 25, 1989 (Exh. 6) in
the ejectment suit which was almost two months after she filed the complaint before this
Court on June 27, 1989. If she were really afraid of the squatters, then she should not have
pursued the issuance of an alias writ of execution. Besides, she did not even report to the
police the alleged phone threats from the squatters. To the mind of the Court, the so-called
squatter factor is simply factuitous (sic). 9
The lower court, accordingly, dismissed the complaint and ordered, instead, private respondent to
eject or cause the ejectment of the squatters from the property and to execute the absolute deed of
conveyance upon payment of the full purchase price by petitioner.
Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate court rendered its decision. 10 It
opined that the contract entered into by the parties was subject to a resolutory condition, i.e., the ejectment of the
squatters from the land, the non-occurrence of which resulted in the failure of the object of the contract; that private
respondent substantially complied with her obligation to evict the squatters; that it was petitioner who was not ready to pay
the purchase price and fulfill his part of the contract, and that the provision requiring a mandatory return/reimbursement of
the P50,000.00 in case private respondent would fail to eject the squatters within the 60-day period was not a penal
clause. Thus, it concluded.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and a new one
entered declaring the contract of conditional sale dated June 9, 1988 cancelled and ordering
the defendant-appellee to accept the return of the downpayment in the amount of
P50,000.00 which was deposited in the court below. No pronouncement as to costs. 11
Failing to obtain a reconsideration, petitioner filed this petition for review on certiorari raising issues that, in fine,
center on the nature of the contract adverted to and the P50,000.00 remittance made by petitioner.
A perfected contract of sale may either be absolute or conditional 12 depending on whether the agreement is devoid of,
or subject to, any condition imposed on the passing of title of the thing to be conveyed or on the obligation of a party
thereto. When ownership is retained until the fulfillment of a positive condition the breach of the condition will simply
prevent the duty to convey title from acquiring an obligatory force. If the condition is imposed on an obligation of a party
which is not complied with, the other party may either refuse to proceed or waive said condition (Art. 1545, Civil Code).
Where, of course, the condition is imposed upon the perfection of the contract itself, the failure of such condition would
prevent the juridical relation itself from coming into existence. 13
In determining the real character of the contract, the title given to it by the parties is not as much significant as its
substance. For example, a deed of sale, although denominated as a deed of conditional sale, may be treated as
absolute in nature, if title to the property sold is not reserved in the vendor or if the vendor is not granted the right to
unilaterally rescind the contract predicated
on the fulfillment or non-fulfillment, as the case may be, of the prescribed condition. 14
The term "condition" in the context of a perfected contract of sale pertains, in reality, to the compliance by one party
of an undertaking the fulfillment of which would beckon, in turn, the demandability of the reciprocal prestation of the
other party. The reciprocal obligations referred to would normally be, in the case of vendee, the payment of the
agreed purchase price and, in the case of the vendor, the fulfillment of certain express warranties (which, in the case
at bench is the timely eviction of the squatters on the property).
It would be futile to challenge the agreement here in question as not being a duly perfected contract. A sale is at
once perfected when a person (the seller) obligates himself, for a price certain, to deliver and to transfer ownership
of a specified thing or right to another (the buyer) over which the latter agrees. 15

The object of the sale, in the case before us, was specifically identified to be a 1,952-square meter lot in San
Dionisio, Paraaque, Rizal, covered by Transfer Certificate of Title No. 361402 of the Registry of Deeds for Pasig
and therein technically described. The purchase price was fixed at P1,561,600.00, of which P50,000.00 was to be
paid upon the execution of the document of sale and the balance of P1,511,600.00 payable "45 days after the
removal of all squatters from the above described property."
From the moment the contract is perfected, 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. Under the agreement, private respondent is obligated to evict the squatters on the property.
The ejectment of the squatters is a condition the operative act of which sets into motion the period of compliance by
petitioner of his own obligation, i.e., to pay the balance of the purchase price. Private respondent's failure "to remove
the squatters from the property" within the stipulated period gives petitioner the right to either refuse to proceed with
the agreement or waive that condition in consonance with Article 1545 of the Civil Code. 16 This option clearly belongs
to petitioner and not to private respondent.
We share the opinion of the appellate court that the undertaking required of private respondent does not constitute a
"potestative condition dependent solely on his will" that might, otherwise, be void in accordance with Article 1182 of
the Civil Code 17 but a "mixed" condition "dependent not on the will of the vendor alone but also of third persons like the
squatters and government agencies and personnel concerned." 18 We must hasten to add, however, that where the socalled "potestative condition" is imposed not on the birth of the obligation but on its fulfillment, only the obligation is
avoided, leaving unaffected the obligation itself. 19
In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows the obligee to choose
between proceeding with the agreement or waiving the performance of the condition. It is this provision which is the
pertinent rule in the case at bench. Here, evidently, petitioner has waived the performance of the condition imposed
on private respondent to free the property from squatters. 20
In any case, private respondent's action for rescission is not warranted. She is not the injured party. 21 The right of
resolution of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other
party that violates the reciprocity between them. 22 It is private respondent who has failed in her obligation under the
contract. Petitioner did not breach the agreement. He has agreed, in fact, to shoulder the expenses of the execution of the
judgment in the ejectment case and to make arrangements with the sheriff to effect such execution. In his letter of 23 June
1989, counsel for petitioner has tendered payment and demanded forthwith the execution of the deed of absolute sale.
Parenthetically, this offer to pay, having been made prior to the demand for rescission, assuming for the sake of argument
that such a demand is proper under Article 1592 23 of the Civil Code, would likewise suffice to defeat private respondent's
prerogative to rescind thereunder.
There is no need to still belabor the question of whether the P50,000.00 advance payment is reimbursable to
petitioner or forfeitable by private respondent, since, on the basis of our foregoing conclusions, the matter has
ceased to be an issue. Suffice it to say that petitioner having opted to proceed with the sale, neither may petitioner
demand its reimbursement from private respondent nor may private respondent subject it to forfeiture.
WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED AND SET ASIDE, and
another is entered ordering petitioner to pay private respondent the balance of the purchase price and the latter to
execute the deed of absolute sale in favor of petitioner. No costs.
SO ORDERED.
Feliciano, Romero, Melo and Panganiban, JJ., concur.
Footnotes
1 Records, pp. 60-61.
2 Exh. 9.
3 Exh. 2.

4 Records, p. 116.
5 Exh. 8-B.
6 Exh. D.
7 Records, pp. 74-75.
8 Presided by Judge Buenaventura J. Guerrero.
9 Records, p. 205.
10 Penned by Associate Justice Fermin A. Martin, Jr. and concurred in by Associate Justices
Emeterio C. Cui and Cezar D. Francisco.
11 Rollo, p. 46.
12 Art. 1458, second paragraph, Civil Code of the Philippines.
13 See Ang Yu Asuncion, et al., vs. Court of Appeals, 238 SCRA 602.
14 Ibid., Vol. V, p. 3 citing Dignos v. Court of Appeals, No. L-59266, February 29, 1988, 158
SCRA 375.
15 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.
16 Art. 1545. Where the obligation of either party to a contract of sale is subject to any
condition which is not performed, such party may refuse to proceed with the contract or he
may waive performance of the condition. If the other party has promised that the condition
should happen or be performed, such first mentioned party may also treat the
nonperformance of the condition as a breach of warranty.
Where the ownership in the thing has not passed, the buyer may treat the fulfillment by the
seller of his obligation to deliver the same as described and as warranted expressly or by
implication in the contract of sale as a condition of the obligation of the buyer to perform his
promise to accept and pay for the thing.
17 Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor,
the conditional obligation shall be void. If it depends upon chance or upon the will of a third
person, the obligation shall take effect in conformity with the provisions of this Code.
18 Decision, p. 17.
19 See Osmea vs. Rama, 14 Phil. 99.
20 See: Intestate Estate of the Late Ricardo P. Presbitero, Sr. v. Court of Appeals, 217 SCRA
372.
21 In Boysaw v. Interphil. Promotions, Inc. (148 SCRA 635, 643), the Court has said: "The
power to rescind is given to the injured party. 'Where the plaintiff is the party who did not
perform the undertaking which he was bound by the terms of the agreement to perform, he is

not entitled to insist upon the performance of the contract by the defendant, or recover
damages by reason of his own breach.'"
22 Deiparine, Jr. v. Court of Appeals, 221 SCRA 503, 513 citing Universal Food Corporation
v. Court of Appeals, 33 SCRA 1.
23 See Ocampo v. Court of Appeals, supra. Art. 1592 states: "In the sale of immovable
property, even though it may have been stipulated that upon failure to pay the price at the
time agreed upon the rescission of the contract shall of right take place, the vendee may pay,
even after the expiration of the period, as long as no demand for rescission of the contract
has been made upon him either judicially or by a notarial act. After the demand, the court
may not grant him a new term."
The Lawphil Project - Arellano Law Foundation

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 108346

July 11, 2001

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners,

vs.
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.
PANGANIBAN, J.:
A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by the contract,
entitled the injured party to rescind the obligation. Rescission abrogates the contract from its inception and requires
a mutual restitution of benefits received.
The Case
Before us is a Petition for Review on Certiorari1 questioning the Decision2 of the Court of Appeals (CA) in CA-GR CV
No. 32991 dated October 9, 1992, as well as its Resolution3 dated December 29, 1992 denying petitioner's motion
for reconsideration.4
The dispositive portion of the assailed Decision reads:
"WHEREFORES the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and the
Decision dated November 14, 1990 dismissing the [C]omplaint is RESINSTATED. The bonds posted
by plaintiffs-appellees and defendants-appellants are hereby RELEASED." 5
The Facts
The factual antecedents of the case, as found by the CA, are as follows:

"x x x. David Raymundo [herein private respondent] is the absolute and registered owner of a parcel
of land, together with the house and other improvements thereon, located at 1918 Kamias St.,
Dasmarias Village, Makati and covered by TCT No. 142177. Defendant George Raymundo [herein
private petitioners] is David's father who negotiated with plaintiffs Avelina and Mariano Velarde
[herein petitioners] for the sale of said property, which was, however, under lease (Exh. '6', p. 232,
Record of Civil Case No. 15952).
"On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A'; Exh. '1', pp. 11-12,
Record) was executed by defendant David Raymundo, as vendor, in favor of plaintiff Avelina
Velarde, as vendee, with the following terms and conditions:
'x x x

xxx

xxx

'That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS
(P800,000.00), Philippine currency, receipt of which in full is hereby acknowledged by the
VENDOR from the VENDEE, to his entire and complete satisfaction, by these presents the
VENDOR hereby SELLS, CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely and
voluntarily, with full warranty of a legal and valid title as provided by law, unto the VENDEE,
her heirs, successors and assigns, the parcel of land mentioned and described above,
together with the house and other improvements thereon.
'That the aforesaid parcel of land, together with the house and other improvements thereon,
were mortgaged by the VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati,
Metro Manila to secure the payment of a loan of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, as evidenced by a Real Estate
Mortgage signed and executed by the VENDOR in favor of the said Bank of the Philippine
Islands, on _____ and which Real Estate Mortgage was ratified before Notary Public for
Makati, _____, as Doc. No. ______, Page No. _____, Book No. ___, Series of 1986 of his
Notarial Register.
'That as part of the consideration of this sale, the VENDEE hereby assumes to pay the
mortgage obligations on the property herein sold in the amount of ONE MILLION EIGHT
HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in favor of Bank of
Philippine Islands, in the name of the VENDOR, and further agrees to strictly and faithfully
comply with all the terms and conditions appearing in the Real Estate Mortgage signed and
executed by the VENDOR in favor of BPI, including interests and other charges for late
payment levied by the Bank, as if the same were originally signed and executed by the
VENDEE.
'It is further agreed and understood by the parties herein that the capital gains tax and
documentary stamps on the sale shall be for the account of the VENDOR; whereas, the
registration fees and transfer tax thereon shall be the account of the VENDEE.' (Exh. 'A', pp.
11-12, Record).'
"On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the consent of
her husband, Mariano, executed an Undertaking (Exh. 'C', pp. 13-14, Record).'
'x x x

xxx

xxx

'Whereas, as per deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo
the sum of EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, and
assume the mortgage obligations on the property with the Bank of the Philippine Islands in
the amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),
Philippine currency, in accordance with the terms and conditions of the Deed of Real Estate
Mortgage dated _____, signed and executed by Mr. David A. Raymundo with the said Bank,
acknowledged before Notary Public for Makati, _____, as Doc. No. _____, Page No. _____,
Book No. _____, Series of 1986 of his Notarial Register.

'WHEREAS, while my application for the assumption of the mortgage obligations on the
property is not yet approved by the mortgagee Bank, I have agreed to pay the mortgage
obligations on the property with the Bank in the name of Mr. David A. Raymundo, in
accordance with the terms and conditions of the said Deed of Real Estate Mortgage,
including all interests and other charges for late payment.
'WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for
purposes of attesting and confirming our private understanding concerning the said
mortgage obligations to be assumed.
'NOW, THEREFORE, for and in consideration of the foregoing premises, and the assumption
of the mortgage obligations of ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, with the bank of the Philippine Islands, I, Mrs, Avelina
D, Velarde with the consent of my husband, Mariano Z. Velardo, do hereby bind and obligate
myself, my heirs, successors and assigns, to strictly and faithfully comply with the following
terms and conditions:
'1. That until such time as my assumption of the mortgage obligations on the property
purchased is approved by the mortgagee bank, the Bank of the Philippine Islands, I shall
continue to pay the said loan in accordance with the terms and conditions of the Deed of
Real Estate Mortgage in the name of Mr. David A. Raymundo, the original Mortgagor.
'2. That, in the event I violate any of the terms and conditions of the said Deed of Real Estate
Mortgage, I hereby agree that my downpayment of P800,000.00, plus all payments made
with the Bank of the Philippine Islands on the mortgage loan, shall be forfeited in favor of Mr.
David A. Raymundo, as and by way of liquidated damages, without necessity of notice or
any judicial declaration to that effect, and Mr. David A. Raymundo shall resume total and
complete ownership and possession of the property sold by way of Deed of Sale with
Assumption of Mortgage, and the same shall be deemed automatically cancelled and be of
no further force or effect, in the same manner as it (the) same had never been executed or
entered into.
'3. That I am executing the Undertaking for purposes of binding myself, my heirs, successors
and assigns, to strictly and faithfully comply with the terms and conditions of the mortgage
obligations with the Bank of the Philippine Islands, and the covenants, stipulations and
provisions of this Undertaking.
'That, David A. Raymundo, the vendor of the property mentioned and identified above, [does]
hereby confirm and agree to the undertakings of the Vendee pertinent to the assumption of
the mortgage obligations by the Vendee with the Bank of the Philippine Islands. (Exh. 'C', pp.
13-14, Record).'
"This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.
"It appears that the negotiated terms for the payment of the balance of P1.8 million was from the
proceeds of a loan that plaintiffs were to secure from a bank with defendant's help. Defendants had
a standing approved credit line with the Bank of the Philippine Islands (BPI). The parties agreed to
avail of this, subject to BPI's approval of an application for assumption of mortgage by plaintiffs.
Pending BPI's approval o[f] the application, plaintiffs were to continue paying the monthly interests of
the loan secured by a real estate mortgage.
"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by the
aforementioned mortgage for three (3) months as follows: September 19, 1986 at P27,225.00;
October 20, 1986 at P23,000.00; and November 19, 1986 at P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15,
17and 18, Record).

"On December 15, 1986, plaintiffs were advised that the Application for Assumption of Mortgage with
BPI, was not approved (Exh. 'J', p. 133, Record). This prompted plaintiffs not to make any further
payment.
"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their nonpayment to the mortgage bank constitute[d] non-performance of their obligation (Exh. '3', p. 220,
Record).
"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:
'This is to advise you, therefore, that our client is willing to pay the balance in cash not later
than January 21, 1987 provided: (a) you deliver actual possession of the property to her not
later than January 15, 1987 for her immediate occupancy; (b) you cause the re- lease of title
and mortgage from the Bank of P.I. and make the title available and free from any liens and
encumbrances; and (c) you execute an absolute deed of sale in her favor free from any liens
or encumbrances not later than January 21, 1987.' (Exhs. 'k', '4', p. 223, Record).
"On January 8, 1987 defendants sent plaintiffs a notarial notice of cancellation/rescission of the
intended sale of the subject property allegedly due to the latter's failure to comply with the terms and
conditions of the Deed of Sale with Assumption of Mortgage and the Undertaking (Exh. '5', pp. 225226, Record)."6
Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents for specific
performance, nullity of cancellation, writ of possession and damages. This was docketed as Civil Case No. 15952 at
the Regional Trial Court of Makati, Branch 149. The case was tried and heard by then Judge Consuelo YnaresSantiago (now an associate justice of this Court), who dismissed the Complaint in a Decision dated November 14,
1990.7 Thereafter, petitioners filed a Motion for Reconsideration. 8
Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge Salvador S. A. Abad
Santos was assigned to the sala she vacated. In an Order dated May 15, 1991, 9 Judge Abad Santos granted
petitioner's Motion for Reconsideration and directed the parties to proceed with the sale. He instructed petitioners to
pay the balance of P1.8 million to private respondents who, in turn, were ordered to execute a deed of absolute sale
and to surrender possession of the disputed property to petitioners.
Private respondents appealed to the CA.
Ruling of the Court of Appeal
The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiago's earlier Decision
dismissing petitioners' Complaint. Upholding the validity of the rescission made by private respondents, the CA
explained its ruling in this wise:
"In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part of the consideration
of this sale, the VENDEE (Velarde)' would assume to pay the mortgage obligation on the subject
property in the amount of P 1.8 million in favor of BPI in the name of the Vendor (Raymundo). Since
the price to be paid by the Vendee Velarde includes the downpayment of P800,000.00 and the
balance of Pl.8 million, and the balance of Pl.8 million cannot be paid in cash, Vendee Velarde, as
part of the consideration of the sale, had to assume the mortgage obligation on the subject property.
In other words, the assumption of the mortgage obligation is part of the obligation of Velarde, as
vendee, under the contract. Velarde further agreed 'to strictly and faithfully comply with all the terms
and conditions appearing in the Real Estate Mortgage signed and executed by the VENDOR in favor
of BPI x x x as if the same were originally signed and executed by the Vendee. (p. 2, thereof, p. 12,
Record). This was reiterated by Velarde in the document entitled 'Undertaking' wherein the latter
agreed to continue paying said loan in accordance with the terms and conditions of the Deed of Real
Estate Mortgage in the name of Raymundo. Moreover, it was stipulated that in the event of violation
by Velarde of any terms and conditions of said deed of real estate mortgage, the downpayment of
P800,000.00 plus all payments made with BPI or the mortgage loan would be forfeited and the

[D]eed of [S]ale with [A]ssumption of [M]ortgage would thereby be Cancelled automatically and of no
force and effect (pars. 2 & 3, thereof, pp 13-14, Record).
"From these 2 documents, it is therefore clear that part of the consideration of the sale was the
assumption by Velarde of the mortgage obligation of Raymundo in the amount of Pl.8 million. This
would mean that Velarde had to make payments to BPI under the [D]eed of [R]eal [E]state
[M]ortgage the name of Raymundo. The application with BPI for the approval of the assumption of
mortgage would mean that, in case of approval, payment of the mortgage obligation will now be in
the name of Velarde. And in the event said application is disapproved, Velarde had to pay in full. This
is alleged and admitted in Paragraph 5 of the Complaint. Mariano Velarde likewise admitted this fact
during the hearing on September 15, 1997 (p. 47, t.s.n., September 15, 1987; see also pp. 16-26,
t.s.n., October 8, 1989). This being the case, the non-payment of the mortgage obligation would
result in a violation of the contract. And, upon Velarde's failure to pay the agreed price, the[n]
Raymundo may choose either of two (2) actions - (1) demand fulfillment of the contract, or (2)
demand its rescission (Article 1191, Civil Code).
"The disapproval by BPI of the application for assumption of mortgage cannot be used as an excuse
for Velarde's non-payment of the balance of the purchase price. As borne out by the evidence,
Velarde had to pay in full in case of BPI's disapproval of the application for assumption of mortgage.
What Velarde should have done was to pay the balance of P1.8 million. Instead, Velarde sent
Raymundo a letter dated January 7, 1987 (Exh. 'K', '4') which was strongly given weight by the lower
court in reversing the decision rendered by then Judge Ynares-Santiago. In said letter, Velarde
registered their willingness to pay the balance in cash but enumerated 3 new conditions which, to
the mind of this Court, would constitute a new undertaking or new agreement which is subject to the
consent or approval of Raymundo. These 3 conditions were not among those previously agreed
upon by Velarde and Raymundo. These are mere offers or, at most, an attempt to novate. But then
again, there can be no novation because there was no agreement of all the parties to the new
contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).
"It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale with
Assumption of Mortgage would be deemed 'automatically cancelled and of no further force and
effect, as if the same had never been executed or entered into.' While it is true that even if the
contract expressly provided for automatic rescission upon failure to pay the price, the vendee may
still pay, he may do so only for as long as no demand for rescission of the contract has been made
upon him either judicially or by a notarial act (Article 1592, Civil Code). In the case at bar, Raymundo
sent Velarde notarial notice dated January 8, 1987 of cancellation/rescission of the contract due to
the latter's failure to comply with their obligation. The rescission was justified in view of Velarde's
failure to pay the price (balance) which is substantial and fundamental as to defeat the object of the
parties in making the agreement. As adverted to above, the agreement of the parties involved a
reciprocal obligation wherein the obligation of one is a resolutory condition of the obligation of the
other, the non-fulfillment of which entitles the other party to rescind the contract (Songcuan vs. IAC,
191 SCRA 28). Thus, the non-payment of the mortgage obligation by appellees Velarde would
create a right to demand payment or to rescind the contract, or to criminal prosecution (Edca
Publishing & Distribution Corporation vs. Santos, 184 SCRA 614). Upon appellee's failure, therefore,
to pay the balance, the contract was properly rescinded (Ruiz vs. IAC, 184 SCRA 720).
Consequently, appellees Velarde having violated the contract, they have lost their right to its
enforcement and hence, cannot avail of the action for specific performance (Voysaw vs. Interphil
Promotions, Inc., 148 SCRA 635)."10
Hence, this appeal. 11
The Issues
Petitioners, in their Memorandum,12 interpose the following assignment of errors:
"I.

The Court of Appeals erred in holding that the non-payment of the mortgage obligation resulted in a
breach of the contract.
"II
The Court of Appeals erred in holding that the rescission (resolution) of the contract by private
respondents was justified.
"III
The Court of Appeals erred in holding that petitioners' January 7, 1987 letter gave three 'new
conditions' constituting mere offers or an attempt to novate necessitating a new agreement between
the parties."
The Court's Ruling
The Petition is partially meritorious.
First Issue:
Breach of Contract
Petitioner aver that their nonpayment of private respondents' mortgage obligation did not constitute a breach of
contract, considering that their request to assume the obligation had been disapproved by the mortgagee bank.
Accordingly, payment of the monthly amortizations ceased to be their obligation and, instead, it devolved upon
private respondents again.
However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay the balance of the
purchase price. As admitted by both parties, their agreement mandated that petitioners should pay the purchase
price balance of P1.8 million to private respondents in case the request to assume the mortgage would be
disapproved. Thus, on December 15, 1986, when petitioners received notice of the bank's disapproval of their
application to assume respondents' mortgage, they should have paid the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering to make such payment only upon the
fulfillment of certain conditions not originally agreed upon in the contract of sale. Such conditional offer to pay cannot
take the place of actual payment as would discharge the obligation of a buyer under a contract of sale.
In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate things, and the
buyer to pay therefor a price certain in money or its equivalent. 13
Private respondents had already performed their obligation through the execution of the Deed of Sale, which
effectively transferred ownership of the property to petitioner through constructive delivery. Prior physical delivery or
possession is not legally required, and the execution of the Deed of Sale is deemed equivalent to delivery.14
Petitioners, on the other hand, did not perform their correlative obligation of paying the contract price in the manner
agreed upon. Worse, they wanted private respondents to perform obligations beyond those stipulated in the contract
before fulfilling their own obligation to pay the full purchase price.
Second Issue
Validity of the Rescission
Petitioners likewise claim that the rescission of the contract by private respondents was not justified, inasmuch as
the former had signified their willingness to pay the balance of the purchase price only a little over a month from the
time they were notified of the disapproval of their application for assumption of mortgage. Petitioners also aver that
the breach of the contract was not substantial as would warrant a rescission. They cite several cases 15 in which this

Court declared that rescission of a contract would not be permitted for a slight or casual breach. Finally, they argue
that they have substantially performed their obligation in good faith, considering that they have already made the
initial payment of P800,000 and three (3) monthly mortgage payments.
As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of the mortgage
obligations, as their nonperformance of their reciprocal obligation to pay the purchase price under the contract of
sale. Private respondents' right to rescind the contract finds basis in Article 1191 of the Civil Code, which explicitly
provides as follows:
"Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission even after he has chosen
fulfillment, if the latter should become impossible."
The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of
faith by the other party who violates the reciprocity between them. 16 The breach contemplated in the said provision is
the obligor's failure to comply with an existing obligation.17 When the obligor cannot comply with what is incumbent
upon it, the obligee may seek rescission and, in the absence of any just cause for the court to determine the period
of compliance, the court shall decree the rescission.18
In the present case, private respondents validly exercised their right to rescind the contract, because of the failure of
petitioners to comply with their obligation to pay the balance of the purchase price. Indubitably, the latter violated the
very essence of reciprocity in the contract of sale, a violation that consequently gave rise to private respondent's
right to rescind the same in accordance with law.
True, petitioners expressed their willingness to pay the balance of the purchase price one month after it became
due; however, this was not equivalent to actual payment as would constitute a faithful compliance of their reciprocal
obligation. Moreover, the offer to pay was conditioned on the performance by private respondents of additional
burdens that had not been agreed upon in the original contract. Thus, it cannot be said that the breach committed by
petitioners was merely slight or casual as would preclude the exercise of the right to rescind.
Misplaced is petitioners' reliance on the cases19 they cited, because the factual circumstances in those cases are not
analogous to those in the present one. In Song Fo there was, on the part of the buyer, only a delay of twenty (20)
days to pay for the goods delivered. Moreover, the buyer's offer to pay was unconditional and was accepted by the
seller.
In Zepeda, the breach involved a mere one-week delay in paying the balance of 1,000 which was actually paid.
In Tan, the alleged breach was private respondent's delay of only a few days, which was for the purpose of clearing
the title to the property; there was no reference whatsoever to the nonpayment of the contract price.
In the instant case, the breach committed did not merely consist of a slight delay in payment or an irregularity; such
breach would not normally defeat the intention of the parties to the contract. Here, petitioners not only failed to pay
the P1.8 million balance, but they also imposed upon private respondents new obligations as preconditions to the
performance of their own obligation. In effect, the qualified offer to pay was a repudiation of an existing obligation,
which was legally due and demandable under the contract of sale. Hence, private respondents were left with the
legal option of seeking rescission to protect their own interest.
Mutual Restitution
Required in Rescission
As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a
violation of the terms and conditions of the mortgage contract. Therefore, the automatic rescission and forfeiture of

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

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

1wphi1.nt

Melo, Vitug, and Sandoval-Gutierrez, JJ., concur.

Footnotes:
1

Rollo, pp. 37-53.

Rollo, pp. 68-78. Penned by Justice Regina G. Ordoez-Benitez and concurred in by Justices
Gloria C. Paras (Division chairman) and Eduardo G. Montenegro (member).
2

Rollo, p. 81.

Rollo, pp. 21-33.

CA Decision, p. 11; Rollo, p. 20.

Rollo, pp. 68-73.

Records, pp. 280-284.

Records, pp. 285-293.

10

Records, pp. 339-341.

Rollo, pp. 75-78.

To eradicate its backlog of old cases, the Court m Februry 27, 2001 resolved to redistribute longpending cases to justices who had no backlog, and who were thus tasked to prioritize them.
Consequently, this case was raffled and assigned to the undersigned ponente for study and report.
11

12

Rollo, p. 227.

13

Coronel v. CA, 263 SCRA 15, October 7, 1996.

14

Power Commercial and Industrial Corp. v. CA, 274 SCRA 597, June 20, 1997.

Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil. 821, September 16, 1925; Tan v. Court of
Appeals, 175 SCRA 656, July 28, 1989; and Zepeda v. Court of Appeals, 216 SCRA 293, December
9, 1992.
15

Uy v. Court of Appeals, 314 SCRA 69, September 9, 1999; Romeo v. Court of Appeals, 250 SCRA
223, November 23, 1995.
16

17

Cheng v. Genato, 300 SCRA 722, December 29, 1998.

18

Central Philippine University v. Court of Appeals, 246 SCRA 511, July 17, 1995.

19

See footnote 15.

Co v. Court of Appeals, 312 SCRA 528, August 17,1999. Vitug, Compendium of Civil Law and
Jurisprudence, 1993 revised ed., p. 556.
20

21

0campo v. Court of Appeals, 233 SCRA 551, June 30, 1994.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 118114 December 7, 1995

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

PADILLA, J.:
This is a petition for review on certiorari of the decision 1 of the Court of Appeals, 2nd Division, in CA-G.R. No. 36177,
which affirmed the decision 2 of the Regional Trial Court of Himamaylan, Negros Occidental holding that private
respondent Edy de los Reyes had acquired ownership of Lot No. 1130 of the Cadastral Survey of Hinigaran, Negros
Occidental based on a document entitled "Declaration of Heirship and Waiver of Rights", and ordering the dispossession
of petitioner as leasehold tenant of the land for failure to pay rentals.
The facts of the case are as follows:
The title to Lot No. 1130 of the Cadastral Survey of Hinigaran, Negros Occidental was evidenced by OCT No. R12179. The lot has an area of 13,720 sq. meters. The title was issued and is registered in the name of spouses
Santiago Vasquez and Lorenza Oruma. After both spouses died, their only son Felixberto inherited the lot. In 1975,
Felixberto executed a duly notarized document entitled "Declaration of Heirship and Deed of Absolute Sale" in favor
of Cosme Pido.
The evidence before the court a quo established that since 1960, petitioner Teodoro Acap had been the tenant of a
portion of the said land, covering an area of nine thousand five hundred (9,500) meters. When ownership was
transferred in 1975 by Felixberto to Cosme Pido, Acap continued to be the registered tenant thereof and religiously
paid his leasehold rentals to Pido and thereafter, upon Pido's death, to his widow Laurenciana.
The controversy began when Pido died intestate and on 27 November 1981, his surviving heirs executed a
notarized document denominated as "Declaration of Heirship and Waiver of Rights of Lot No. 1130 Hinigaran
Cadastre," wherein they declared; to quote its pertinent portions, that:
. . . Cosme Pido died in the Municipality of Hinigaran, Negros Occidental, he died intestate
and without any known debts and obligations which the said parcel of land is (sic) held liable.
That Cosme Pido was survived by his/her legitimate heirs, namely: LAURENCIANA PIDO,
wife, ELY, ERVIN, ELMER, and ELECHOR all surnamed PIDO; children;
That invoking the provision of Section 1, Rule 74 of the Rules of Court, the above-mentioned
heirs do hereby declare unto [sic] ourselves the only heirs of the late Cosme Pido and that
we hereby adjudicate unto ourselves the above-mentioned parcel of land in equal shares.
Now, therefore, We LAURENCIANA 3, ELY, ELMER, ERVIN and ELECHOR all surnamed PIDO,
do hereby waive, quitclaim all our rights, interests and participation over the said parcel of land in
favor of EDY DE LOS REYES, of legal age, (f)ilipino, married to VIRGINIA DE LOS REYES, and
resident of Hinigaran, Negros Occidental, Philippines. . . . 4 (Emphasis supplied)
The document was signed by all of Pido's heirs. Private respondent Edy de los Reyes did not sign said document.
It will be noted that at the time of Cosme Pido's death, title to the property continued to be registered in the name of
the Vasquez spouses. Upon obtaining the Declaration of Heirship with Waiver of Rights in his favor, private
respondent Edy de los Reyes filed the same with the Registry of Deeds as part of a notice of an adverse claim
against the original certificate of title.
Thereafter, private respondent sought for petitioner (Acap) to personally inform him that he (Edy) had become the
new owner of the land and that the lease rentals thereon should be paid to him. Private respondent further alleged
that he and petitioner entered into an oral lease agreement wherein petitioner agreed to pay ten (10) cavans of
palay per annum as lease rental. In 1982, petitioner allegedly complied with said obligation. In 1983, however,
petitioner refused to pay any further lease rentals on the land, prompting private respondent to seek the assistance
of the then Ministry of Agrarian Reform (MAR) in Hinigaran, Negros Occidental. The MAR invited petitioner to a
conference scheduled on 13 October 1983. Petitioner did not attend the conference but sent his wife instead to the
conference. During the meeting, an officer of the Ministry informed Acap's wife about private respondent's ownership
of the said land but she stated that she and her husband (Teodoro) did not recognize private respondent's claim of
ownership over the land.

On 28 April 1988, after the lapse of four (4) years, private respondent filed a complaint for recovery of possession
and damages against petitioner, alleging in the main that as his leasehold tenant, petitioner refused and failed to
pay the agreed annual rental of ten (10) cavans of palay despite repeated demands.
During the trial before the court a quo, petitioner reiterated his refusal to recognize private respondent's ownership
over the subject land. He averred that he continues to recognize Cosme Pido as the owner of the said land, and
having been a registered tenant therein since 1960, he never reneged on his rental obligations. When Pido died, he
continued to pay rentals to Pido's widow. When the latter left for abroad, she instructed him to stay in the
landholding and to pay the accumulated rentals upon her demand or return from abroad.
Petitioner further claimed before the trial court that he had no knowledge about any transfer or sale of the lot to
private respondent in 1981 and even the following year after Laurenciana's departure for abroad. He denied having
entered into a verbal lease tenancy contract with private respondent and that assuming that the said lot was indeed
sold to private respondent without his knowledge, R.A. 3844, as amended, grants him the right to redeem the same
at a reasonable price. Petitioner also bewailed private respondent's ejectment action as a violation of his right to
security of tenure under P.D. 27.
On 20 August 1991, the lower court rendered a decision in favor of private respondent, the dispositive part of which
reads:
WHEREFORE, premises considered, the Court renders judgment in favor of the plaintiff, Edy
de los Reyes, and against the defendant, Teodoro Acap, ordering the following, to wit:
1. Declaring forfeiture of defendant's preferred right to issuance of a Certificate of Land
Transfer under Presidential Decree No. 27 and his farmholdings;
2. Ordering the defendant Teodoro Acap to deliver possession of said farm to plaintiff, and;
3. Ordering the defendant to pay P5,000.00 as attorney's fees, the sum of P1,000.00 as
expenses of litigation and the amount of P10,000.00 as actual damages. 5
In arriving at the above-mentioned judgment, the trial court stated that the evidence had established that the subject
land was "sold" by the heirs of Cosme Pido to private respondent. This is clear from the following disquisitions
contained in the trial court's six (6) page decision:
There is no doubt that defendant is a registered tenant of Cosme Pido. However, when the
latter died their tenancy relations changed since ownership of said land was passed on to his
heirs who, by executing a Deed of Sale, which defendant admitted in his affidavit, likewise
passed on their ownership of Lot 1130 to herein plaintiff (private respondent). As owner
hereof, plaintiff has the right to demand payment of rental and the tenant is obligated to pay
rentals due from the time demand is made. . . . 6
xxx xxx xxx

Certainly, the sale of the Pido family of Lot 1130 to herein plaintiff does not of itself extinguish
the relationship. There was only a change of the personality of the lessor in the person of
herein plaintiff Edy de los Reyes who being the purchaser or transferee, assumes the rights
and obligations of the former landowner to the tenant Teodoro Acap, herein defendant. 7
Aggrieved, petitioner appealed to the Court of Appeals, imputing error to the lower court when it ruled that private
respondent acquired ownership of Lot No. 1130 and that he, as tenant, should pay rentals to private respondent and
that failing to pay the same from 1983 to 1987, his right to a certificate of land transfer under P.D. 27 was deemed
forfeited.
The Court of Appeals brushed aside petitioner's argument that the Declaration of Heirship and Waiver of Rights
(Exhibit "D"), the document relied upon by private respondent to prove his ownership to the lot, was excluded by the
lower court in its order dated 27 August 1990. The order indeed noted that the document was not identified by

Cosme Pido's heirs and was not registered with the Registry of Deeds of Negros Occidental. According to
respondent court, however, since the Declaration of Heirship and Waiver of Rights appears to have been duly
notarized, no further proof of its due execution was necessary. Like the trial court, respondent court was also
convinced that the said document stands as prima facie proof of appellee's (private respondent's) ownership of the
land in dispute.
With respect to its non-registration, respondent court noted that petitioner had actual knowledge of the subject sale
of the land in dispute to private respondent because as early as 1983, he (petitioner) already knew of private
respondent's claim over the said land but which he thereafter denied, and that in 1982, he (petitioner) actually paid
rent to private respondent. Otherwise stated, respondent court considered this fact of rental payment in 1982 as
estoppel on petitioner's part to thereafter refute private respondent's claim of ownership over the said land. Under
these circumstances, respondent court ruled that indeed there was deliberate refusal by petitioner to pay rent for a
continued period of five years that merited forfeiture of his otherwise preferred right to the issuance of a certificate of
land transfer.
In the present petition, petitioner impugns the decision of the Court of Appeals as not in accord with the law and
evidence when it rules that private respondent acquired ownership of Lot No. 1130 through the aforementioned
Declaration of Heirship and Waiver of Rights.
Hence, the issues to be resolved presently are the following:
1. WHETHER OR NOT THE SUBJECT DECLARATION OF HEIRSHIP AND WAIVER OF
RIGHTS IS A RECOGNIZED MODE OF ACQUIRING OWNERSHIP BY PRIVATE
RESPONDENT OVER THE LOT IN QUESTION.
2. WHETHER OR NOT THE SAID DOCUMENT CAN BE CONSIDERED A DEED OF SALE
IN FAVOR OF PRIVATE RESPONDENT OF THE LOT IN QUESTION.
Petitioner argues that the Regional Trial Court, in its order dated 7 August 1990, explicitly excluded the document
marked as Exhibit "D" (Declaration of Heirship, etc.) as private respondent's evidence because it was not registered
with the Registry of Deeds and was not identified by anyone of the heirs of Cosme Pido. The Court of Appeals,
however, held the same to be admissible, it being a notarized document, hence, a prima facie proof of private
respondents' ownership of the lot to which it refers.
Petitioner points out that the Declaration of Heirship and Waiver of Rights is not one of the recognized modes of
acquiring ownership under Article 712 of the Civil Code. Neither can the same be considered a deed of sale so as to
transfer ownership of the land to private respondent because no consideration is stated in the contract (assuming it
is a contract or deed of sale).
Private respondent defends the decision of respondent Court of Appeals as in accord with the evidence and the law.
He posits that while it may indeed be true that the trial court excluded his Exhibit "D" which is the Declaration of
Heirship and Waiver of Rights as part of his evidence, the trial court declared him nonetheless owner of the subject
lot based on other evidence adduced during the trial, namely, the notice of adverse claim (Exhibit "E") duly
registered by him with the Registry of Deeds, which contains the questioned Declaration of Heirship and Waiver of
Rights as an integral part thereof.
We find the petition impressed with merit.
In the first place, an asserted right or claim to ownership or a real right over a thing arising from a juridical act,
however justified, is not per se sufficient to give rise to ownership over the res. That right or title must be completed
by fulfilling certain conditions imposed by law. Hence, ownership and real rights are acquired only pursuant to a
legal mode or process. While title is the juridical justification, mode is the actual process of acquisition or transfer of
ownership over a thing in question. 8
Under Article 712 of the Civil Code, the modes of acquiring ownership are generally classified into two (2) classes,
namely, the original mode (i.e., through occupation, acquisitive prescription, law or intellectual creation) and the

derivative mode (i.e., through succession mortis causa or tradition as a result of certain contracts, such as sale,
barter, donation, assignment or mutuum).
In the case at bench, the trial court was obviously confused as to the nature and effect of the Declaration of Heirship
and Waiver of Rights, equating the same with a contract (deed) of sale. They are not the same.
In a Contract of Sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other party to pay a price certain in money or its equivalent. 9
Upon the other hand, a declaration of heirship and waiver of rights operates as a public instrument when filed with
the Registry of Deeds whereby the intestate heirs adjudicate and divide the estate left by the decedent among
themselves as they see fit. It is in effect an extrajudicial settlement between the heirs under Rule 74 of the Rules of
Court. 10
Hence, there is a marked difference between a sale of hereditary rights and a waiver of hereditary rights. The first
presumes the existence of a contract or deed of sale between the parties. 11 The second is, technically speaking, a
mode of extinction of ownership where there is an abdication or intentional relinquishment of a known right with
knowledge of its existence and intention to relinquish it, in favor of other persons who are co-heirs in the succession. 12
Private respondent, being then a stranger to the succession of Cosme Pido, cannot conclusively claim ownership over the
subject lot on the sole basis of the waiver document which neither recites the elements of either a sale, 13 or a donation, 14
or any other derivative mode of acquiring ownership.
Quite surprisingly, both the trial court and public respondent Court of Appeals concluded that a "sale" transpired
between Cosme Pido's heirs and private respondent and that petitioner acquired actual knowledge of said sale
when he was summoned by the Ministry of Agrarian Reform to discuss private respondent's claim over the lot in
question. This conclusion has no basis both in fact and in law.
On record, Exhibit "D", which is the "Declaration of Heirship and Waiver of Rights" was excluded by the trial court in
its order dated 27 August 1990 because the document was neither registered with the Registry of Deeds nor
identified by the heirs of Cosme Pido. There is no showing that private respondent had the same document attached
to or made part of the record. What the trial court admitted was Annex "E", a notice of adverse claim filed with the
Registry of Deeds which contained the Declaration of Heirship with Waiver of rights and was annotated at the back
of the Original Certificate of Title to the land in question.
A notice of adverse claim, by its nature, does not however prove private respondent's ownership over the tenanted
lot. "A notice of adverse claim is nothing but a notice of a claim adverse to the registered owner, the validity of which
is yet to be established in court at some future date, and is no better than a notice of lis pendens which is a notice of
a case already pending in court." 15
It is to be noted that while the existence of said adverse claim was duly proven, there is no evidence whatsoever
that a deed of sale was executed between Cosme Pido's heirs and private respondent transferring the rights of
Pido's heirs to the land in favor of private respondent. Private respondent's right or interest therefore in the tenanted
lot remains an adverse claim which cannot by itself be sufficient to cancel the OCT to the land and title the same in
private respondent's name.
Consequently, while the transaction between Pido's heirs and private respondent may be binding on
both parties, the right of petitioner as a registered tenant to the land cannot be perfunctorily forfeited
on a mere allegation of private respondent's ownership without the corresponding proof thereof.
Petitioner had been a registered tenant in the subject land since 1960 and religiously paid lease rentals thereon. In
his mind, he continued to be the registered tenant of Cosme Pido and his family (after Pido's death), even if in 1982,
private respondent allegedly informed petitioner that he had become the new owner of the land.
Under the circumstances, petitioner may have, in good faith, assumed such statement of private respondent to be
true and may have in fact delivered 10 cavans of palay as annual rental for 1982 to private respondent. But in 1983,
it is clear that petitioner had misgivings over private respondent's claim of ownership over the said land because in
the October 1983 MAR conference, his wife Laurenciana categorically denied all of private respondent's allegations.
In fact, petitioner even secured a certificate from the MAR dated 9 May 1988 to the effect that he continued to be the

registered tenant of Cosme Pido and not of private respondent. The reason is that private respondent never
registered the Declaration of Heirship with Waiver of Rights with the Registry of Deeds or with the MAR. Instead, he
(private respondent) sought to do indirectly what could not be done directly, i.e., file a notice of adverse claim on the
said lot to establish ownership thereover.
It stands to reason, therefore, to hold that there was no unjustified or deliberate refusal by petitioner to pay the lease
rentals or amortizations to the landowner/agricultural lessor which, in this case, private respondent failed to
establish in his favor by clear and convincing evidence. 16
Consequently, the sanction of forfeiture of his preferred right to be issued a Certificate of Land Transfer under P.D.
27 and to the possession of his farmholdings should not be applied against petitioners, since private respondent has
not established a cause of action for recovery of possession against petitioner.
WHEREFORE, premises considered, the Court hereby GRANTS the petition and the decision of the Court of
Appeals dated 1 May 1994 which affirmed the decision of the RTC of Himamaylan, Negros Occidental dated 20
August 1991 is hereby SET ASIDE. The private respondent's complaint for recovery of possession and damages
against petitioner Acap is hereby DISMISSED for failure to properly state a cause of action, without prejudice to
private respondent taking the proper legal steps to establish the legal mode by which he claims to have acquired
ownership of the land in question.
SO ORDERED.
Davide, Jr., Bellosillo, Kapunan and Hermosisima, Jr., JJ., concur.
Footnotes
1 Penned by Purisima, J., Chairman, with Isnani, J. and Ibay-Somera, J. concurring.
2 Penned by Executive Judge Jose Aguirre, Jr.
3 The RTC decision used the name Luzviminda. The CA used the name Laudenciana.
4 Annex A, Petition; Rollo, p. 14.
5 Annex "D", Petition Rollo, p. 29.
6 Ibid., p. 27.
7 Ibid., p. 28.
8 Reyes, An Outline of Philippine Civil Law, Vol. II p. 20.
9 Article 1458, Civil Code.
10 Paulmitos v. CA, G.R. No. 61584, Nov. 25, 1992, 215 SCRA 867, 868; Uberas v. CFI of
Negros, G.R. No. 4248, October 30, 1978, 86 SCRA 145, 147; Abrasia v. Carian, G.R. No.
9510, October 31, 1957.
11 See Aguirre v. Atienza, G.R. No. L-10665, Aug. 30, 1958; Mari v. Bonilla, G.R. No. 852,
March 19, 1949; Robles v. CA, 647494 83 SCRA 181, 182, May 15, 1978.
12 See Borromeo Herrera v. Borromeo, G.R. No. L-41171, July 23, 1987, 152 SCRA 171.
13 See note 10 - supra.
14 Osorio v. Osorio and Ynchausti Steamship Co. No. 16544, March 20, 1921.

15 Somes v. Government of the Philippines, No. 42754, October 30, 1935.62 Phil. 432.
16 See Laureto v. CA, G.R. No. 95838, August 7, 1992, 212 SCRA 397. Cuno v. CA, G.R. L62985, April 2, 1984, 128 SCRA 567.
The Lawphil Project - Arellano Law Foundation

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 126444 December 4, 1998

ALFONSO QUIJADA, CRESENTE QUIJADA, REYNELDA QUIJADA, DEMETRIO QUIJADA, ELIUTERIA
QUIJADA, EULALIO QUIJADA, and WARLITO QUIJADA, petitioners,
vs.
COURT OF APPEALS, REGALADO MONDEJAR, RODULFO GOLORAN, ALBERTO ASIS, SEGUNDINO RAS,
ERNESTO GOLORAN, CELSO ABISO, FERNANDO BAUTISTA, ANTONIO MACASERO, and NESTOR
MAGUINSAY, respondents.

MARTINEZ, J.:
Petitioners, as heirs of the late Trinidad Quijada, filed a complaint against private respondents for quieting of title,
recovery of possession and ownership of parcels of land with claim for attorney's fees and damages. The suit was
premised on the following facts found by the court of Appeals which is materially the same as that found by the trial
court:
Plaintiffs-appellees (petitioners) are the children of the late Trinidad Corvera Vda, de Quijada.
Trinidad was one of the heirs of the late Pedro Corvera and inherited from the latter the two-hectare
parcel of land subject of the case, situated in the barrio of San Agustin, Talacogon, Agusan del Sur.
On April 5, 1956, Trinidad Quijada together with her sisters Leonila Corvera Vda. de Sequea and
Paz Corvera Cabiltes and brother Epapiadito Corvera executed a conditional deed of donation (Exh.
C) of the two-hectare parcel of land subject of the case in favor of the Municipality of Talacogon, the
condition being that the parcel of land shall be used solely and exclusively as part of the campus of
the proposed provincial high school in Talacogon. Apparently, Trinidad remained in possession of the
parcel of land despite the donation. On July 29, 1962, Trinidad sold one (1) hectare of the subject
parcel of land to defendant-appellant Regalado Mondejar (Exh. 1). Subsequently, Trinidad verbally
sold the remaining one (1) hectare to defendant-appellant (respondent) Regalado Mondejar without
the benefit of a written deed of sale and evidenced solely by receipts of payment. In 1980, the heirs
of Trinidad, who at that time was already dead, filed a complaint for forcible entry (Exh. E) against
defendant-appellant (respondent) Regalado Mondejar, which complaint was, however, dismissed for
failure to prosecute (Exh. F). In 1987, the proposed provincial high school having failed to
materialize, the Sangguniang Bayan of the municipality of Talacogon enacted a resolution reverting

the two (2) hectares of land donated back to the donors (Exh. D). In the meantime, defendantappellant (respondent) Regalado Mondejar sold portions of the land to defendants-appellants
(respondents) Fernando Bautista (Exh. 5), Rodolfo Goloran (Exh. 6), Efren Guden (Exh. 7) and
Ernesto Goloran (Exh. 8).
On July 5, 1988, plaintiffs-appellees (petitioners) filed this action against defendants-appellants
(respondents). In the complaint, plaintiffs-appellees (petitioners) alleged that their deceased mother
never sold, conveyed, transferred or disposed of the property in question to any person or entity
much less to Regalado Mondejar save the donation made to the Municipality of Talacogon in 1956;
that at the time of the alleged sale to Regalado Mondejar by Trinidad Quijada, the land still belongs
to the Municipality of Talacogon, hence, the supposed sale is null and void.
Defendants-appellants (respondents), on the other hand, in their answer claimed that the land in
dispute was sold to Regalado Mondejar, the one (1) hectare on July 29, 1962, and the remaining
one (1) hectare on installment basis until fully paid. As affirmative and/or special defense,
defendants-appellants (respondents) alleged that plaintiffs action is barred by laches or has
prescribed.
The court a quo rendered judgment in favor of plaintiffs-appellees (petitioners): firstly because
"Trinidad Quijada had no legal title or right to sell the land to defendant Mondejar in 1962, 1966,
1967 and 1968, the same not being hers to dispose of because ownership belongs to the
Municipality of Talacogon (Decision, p. 4; Rollo, p. 39) and, secondly, that the deed of sale executed
by Trinidad Quijada in favor of Mondejar did not carry with it the conformity and acquiescence of her
children, more so that she was already 63 years old at the time, and a widow (Decision, p. 6; Rollo,
p. 41)." 1
The dispositive portion of the trial court's decision reads:
WHEREFORE, viewed from the above perceptions, the scale of justice having tilted in favor of the
plaintiffs, judgment is, as it is hereby rendered:
1) ordering the Defendants to return and vacate the two (2) hectares
of land to Plaintiffs as described in Tax Declaration No. 1209 in the
name of Trinidad Quijada;
2) ordering any person acting in Defendants' behalf to vacate and
restore the peaceful possession of the land in question to Plaintiffs;
3) ordering the cancellation of the Deed of Sale executed by the late
Trinidad Quijada in favor of Defendant Regalado Mondejar as well as
the Deeds of Sale/Relinquishments executed by Mondejar in favor of
the other Defendants;
4) ordering Defendants to remove their improvements constructed on
the questioned lot;
5) ordering the Defendants to pay Plaintiffs, jointly and severally, the
amount of P10,000.00 representing attorney's fees;
6) ordering Defendants to pays the amount of P8,000.00 as
expenses of litigation; and

7) ordering Defendants to pay the sum of P30,000.00 representing

moral damages.
SO ORDERED. 2
On appeal, the Court of Appeals reversed and set aside the judgment a quo 3 ruling that the sale made by Trinidad
Quijada to respondent Mondejar was valid as the former retained an inchoate interest on the lots by virtue of the
automatic reversion clause in the deed of donation. 4 Thereafter, petitioners filed a motion for reconsideration. When the
CA denied their motion, 5 petitioners instituted a petition for review to this Court arguing principally that the sale of the
subject property made by Trinidad Quijada to respondent Mondejar is void, considering that at that time, ownership was
already transferred to the Municipality of Talacogon. On the contrary, private respondents contend that the sale was valid,
that they are buyers in good faith, and that petitioners' case is barred by laches. 6
We affirm the decision of the respondent court.
The donation made on April 5, 1956 by Trinidad Quijada and her brother and sisters 7 was subject to the condition that
the donated property shall be "used solely and exclusively as a part of the campus of the proposed Provincial High School
in Talacogon." 8 The donation further provides that should "the proposed Provincial High School be discontinued or if the
same shall be opened but for some reason or another, the same may in the future be closed" the donated property shall
automatically revert to the donor. 9 Such condition, not being contrary to law, morals, good customs, public order or public
policy was validly imposed in the donation. 10
When the Municipality's acceptance of the donation was made known to the donor, the former became the new
owner of the donated property donation being a mode of acquiring and transmitting ownership 11
notwithstanding the condition imposed by the donee. The donation is perfected once the acceptance by the donee is
made known to the donor. 12 According, ownership is immediately transferred to the latter and that ownership will only
revert to the donor if the resolutory condition is not fulfilled.
In this case, that resolutory condition is the construction of the school. It has been ruled that when a person donates
land to another on the condition that the latter would build upon the land a school, the condition imposed is not a
condition precedent or a suspensive condition but a resolutory one. 13 Thus, at the time of the sales made in 1962
towards 1968, the alleged seller (Trinidad) could not have sold the lots since she had earlier transferred ownership thereof
by virtue of the deed of donation. So long as the resolutory condition subsists and is capable of fulfillment, the donation
remains effective and the donee continues to be the owner subject only to the rights of the donor or his successors-ininterest under the deed of donation. Since no period was imposed by the donor on when must the donee comply with the
condition, the latter remains the owner so long as he has tried to comply with the condition within a reasonable period.
Such period, however, became irrelevant herein when the donee-Municipality manifested through a resolution that it
cannot comply with the condition of building a school and the same was made known to the donor. Only then when the
non-fulfillment of the resolutory condition was brought to the donor's knowledge that ownership of the donated property
reverted to the donor as provided in the automatic reversion clause of the deed of donation.
The donor may have an inchoate interest in the donated property during the time that ownership of the land has not
reverted to her. Such inchoate interest may be the subject of contracts including a contract of sale. In this case,
however, what the donor sold was the land itself which she no longer owns. It would have been different if the
donor-seller sold her interests over the property under the deed of donation which is subject to the possibility of
reversion of ownership arising from the non-fulfillment of the resolutory condition.
As to laches, petitioners' action is not yet barred thereby. Laches presupposes failure or neglect for an unreasonable
and unexplained length of time, to do that which, by exercising due diligence, could or should have been done
earlier; 14 "it is negligence or omission to assert a right within a reasonable time, thus, giving rise to a presumption that the
party entitled to assert it either has abandoned or declined to assert it." 15 Its essential elements of:

a) Conduct on the part of the defendant, or of one under whom he

claims, giving rise to the situation complained of;
b) Delay in asserting complainant's right after he had knowledge of
the defendant's conduct and after he has an opportunity to sue;
c) Lack of knowledge or notice on the part of the defendant that the
complainant would assert the right on which he bases his suit; and,
d) Injury or prejudice to the defendant in the event relief is accorded
to the complainant. 16
are absent in this case. Petioners' cause of action to quiet title commenced only when the property reverted
to the donor and/or his successors-in-interest in 1987. Certainly, when the suit was initiated the following
year, it cannot be said that petioners had slept on their rights for a long time. The 1960's sales made by
Trinidad Quijada cannot be the reckoning point as to when petitioners' cause of action arose. They had no
interest over the property at that time except under the deed of donation to which private respondents were
not privy. Moreover, petitioners had previously filed an ejectment suit against private respondents only that it
did not prosper on a technicality.
Be that at it may, there is one thing which militates against the claim of petitioners. Sale, being a consensual
contract, is perfected by mere consent, which is manifested the moment there is a meeting of the minds 17 as to the
offer and acceptance thereof on three (3) elements: subject matter, price and terms of payment of the price. 18 Ownership
by the seller on the thing sold at the time of the perfection of the contract of sale is not an element for its perfection. What
the law requires is that the seller has the right to transfer ownership at the time the thing sold is delivered. 19 Perfection per
se does not transfer ownership which occurs upon the actual or constructive delivery of the thing sold. 20 A perfected
contract of sale cannot be challenged on the ground of non-ownership on the part of the seller at the time of its perfection;
hence, the sale is still valid.
The consummation, however, of the perfected contract is another matter. It occurs upon the constructive or actual
delivery of the subject matter to the buyer when the seller or her successors-in-interest subsequently acquires
ownership thereof. Such circumstance happened in this case when petitioners who are Trinidad Quijada's heirs
and successors-in-interest became the owners of the subject property upon the reversion of the ownership of the
land to them. Consequently, ownership is transferred to respondent Mondejar and those who claim their right from
him. Article 1434 of the New Civil Code supports the ruling that the seller's "title passes by operation of law to the
buyer." 21 This rule applies not only when the subject matter of the contract of sale is goods, 22 but also to other kinds of
property, including real property. 23
There is also no merit in petitioners' contention that since the lots were owned by the municipality at the time of the
sale, they were outside the commerce of men under Article 1409 (4) of the NCC; 24 thus, the contract involving the
same is inexistent and void from the beginning. However, nowhere in Article 1409 (4) is it provided that the properties of a
municipality, whether it be those for public use or its patrimonial property 25 are outside the commerce of men. Besides,
the lots in this case were conditionally owned by the municipality. To rule that the donated properties are outside the
commerce of men would render nugatory the unchallenged reasonableness and justness of the condition which the donor
has the right to impose as owner thereof. Moreover, the objects referred to as outsides the commerce of man are those
which cannot be appropriated, such as the open seas and the heavenly bodies.
With respect to the trial court's award of attorney's fees, litigation expenses and moral damages, there is neither
factual nor legal basis thereof. Attorney's fees and expenses of litigation cannot, following the general rule in Article
2208 of the New Civil Code, be recovered in this case, there being no stipulation to that effect and the case does not
fall under any of the
exceptions. 26 It cannot be said that private respondents had compelled petitioners to litigate with third persons. Neither

can it be ruled that the former acted in "gross and evident bad faith" in refusing to satisfy the latter's claims considering
that private respondents were under an honest belief that they have a legal right over the property by virtue of the deed of
sale. Moral damages cannot likewise be justified as none of the circumstances enumerated under Articles 2219. 27 and
2220 28 of the New Civil Code concur in this case

WHEREFORE, by virtue of the foregoing, the assailed decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
Melo, Puno and Mendoza, JJ., concur.
Footnotes
1 Decision of Court of Appeals in CA-G.R. CV No. 44016 promulgated on May 31, 1996. pp. 2-5;
Rollo, pp. 41-44.
2 Regional Trial Court (Bayugan, Agusan del Sur) Decision dated July 16, 1993 penned by Judge
Zenaida Placer, p. 6; Annex "A" of Petition; Rollo, p. 21.
3 The decretal portion of the CA's decision states: "WHEREFORE, premises considered, the
decision appealed from is hereby REVERSE and SET ASIDE, and judgment rendered declaring the
defendants-appellants as the rightful and lawful owners and possessors of the subject land. There is
no pronouncement as to costs."
4 CA Decision, pp. 6-7; Rollo, pp. 45-16.
5 CA Resolution promulgated August 26, 1996; Rollo, p. 55.
6 Comment of Private Respondents, pp. 7-8: Rollo, pp. 67-68.
7 Her sisters were Leonila Corvera Vda. de Sequea and Paz Corvera Cabiltes and the brother was
Epapiadito Corvera.
8 RTC Decision, p. 1; Rollo, p. 16.
9 CA Decision. pp. 5-6; Rollo, pp. 44-45.
10 City of Angeles v. CA, 261 SCRA 90.
11 Art. 712, New Civil Code provides: "Ownership is acquired by occupation and by intellectual
creation.
"Ownership and other real rights over property are acquired and transmitted by law, by donation, by
testate and instate succession, and in consequence of certain contracts, by tradition.
"They may also be acquired by means of prescription." (Emphasis supplied).
12 Art. 734, New Civil Code (NCC) reads: "The donation is perfected from the moment the donor
knows of the acceptance by the donee."
13 Central Philippine University v. CA, 246 SCRA 511.

14 Reyes v. CA, 264 SCRA 35; Republic v. Sandiganbayan, 255 SCRA 438; PAL Employees
Savings & Loan Association, Inc. v. NLRC, 260 SCRA 758.
15 Catholic Bishop of Balanga v. CA, 264 SCRA 181; Chavez v. Bonto-Perez, 242 SCRA 73; Rivera
v. CA, 244 SCRA 218; Cormero v. CA, 317 Phil. 348.
16 Santiago v. CA, 278 SCRA 98 (1997); Catholic Bishop of Balanga v. CA, 264 SCRA 181; Claveria
v. Quinco, 207 SCRA 66 (1992); Perez v. Ong Cho, 116 SCRA 732 (1982); Yusingco v. Ong Hing
Lian, 42 SCRA 589 (1971); LE Lotho, Inc. v. Ice and cold Storage Industries, Inc., 3 SCRA 744; Go
Chi Gun, et. al. v. Co Cho, et. al., 96 Phil. 622.
17 Art. 1475, New Civil Code (NCC). "The contact 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 Leabres v. CA, 146 SCRA 158 (1986); See also Navarro v. Sugar Producer's Corporation, 1.
SCRA 1180.
19 Art. 1459, NCC "The thing must be licit and the vendor must have a right to transfer the
ownership thereof at the time it is delivered."
20 Art. 712, NCC. ". . . . Ownership and other real rights over property are acquired and transmitted .
. . in consequence of certain contracts, by tradition."
21 Art. 1431, NCC provides: "When a person who is not the owner of a thing sells or alienates and
delivers it, and later the seller or grantor acquires title thereto, such title passes by operation of law
to the buyer or grantee".
22 Art. 1505 of the NCC provides: "Subject to the provisions of this Title, where goods are sold by a
person who is not the owner thereof, and who does not sell them under authority or with the consent
of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of
the goods is by his conduct precluded from denying the seller's authority to sell.
xxx xxx xxx (Emphasis supplied)
Other exceptions to the foregoing includes: (a) when the contrary is provided in recording laws, (b)
sales made under statutory power of sale or pursuant to a valid order from a court of competent
jurisdiction, and (c) sales made in a merchant's store in accordance with the Code of commerce and
special laws.
23 See Articles 1434, NCC, supra.; Estoque v. Pajimula, 133 Phil. 55; 24 SCRA 59 (1968); Bucton v.
Gabar, 55 SCRA 499.
24 Art. 1409 (4), NCC: "The following contracts are inexistent and void from the beginning:
xxx xxx xxx
(4) Those whose object is outside the commerce of men;
xxx xxx xxx

25 Art. 423, NCC: "The properties of provinces, cities and municipalities, is divided into properties for
public use and patrimonial properties."
Art. 424 provides: "Property for public use, in the provinces, cities and municipalities, consist of the
provincial roads, city streets, municipal streets, the squares, fountains, public waters, promenades,
and public works for public service paid for by said provinces, cities, or municipalities.
"All other property possessed by any of them is patrimonial and shall be governed by this Code,
without prejudice to the provisions of special laws."
26 In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs,
cannot be recovered except:
xxx xxx xxx
(2) when the defendant's act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest.
xxx xxx xxx
(5) where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's
plainly valid, just and demandable claim.
xxx xxx xxx
27 Moral damages may be recovered in the following and analogous cases:
(1) a criminal offense resulting in physical injuries;
(2) quasi-delicts causing physical injuries;
(3) seduction, abduction, rape or other lascivious acts;
(4) adultery or concubinage;
(5) illegal or arbitrary detention or arrests;
(6) illegal search;
(7) libel, slander or any other form or defamation;
(8) malicious prosecution;
(9) acts mentioned in Article 309;
(10) acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34 and
35.
The parents of the female seduced, abducted, raped or abused referred to in no. 3 of this
Article, may also recover moral damages.

The spouse, ascendants, descendants and brothers and sisters may bring the action mentioned in
no. 9 of this Article, in the order named.
29 Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court
should find that, under the circumstances, such damages are justly due. The same rule applies to
breaches of contracts where the defendant acted fraudulently or in bad faith.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-40502 November 29, 1976
VIRGINIA GARCIA FULE, and HONORABLE SEVERO A. MALVAR, Presiding Judge, Court of First Instance of
Laguna, Branch Vl, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, * PRECIOSA B. GARCIA and AGUSTINA B. GARCIA, respondents.
G.R. No. L-42670 November 29, 1976
VIRGINIA GARCIA FULE, petitioner,
vs.
HONORABLE ERNANI C. PAO, Presiding Judge of Court of First Instance of Rizal, Quezon City, Branch
XVIII, and PRECIOSA B. GARCIA, respondents.
Francisco Carreon for petitioners.
Augusto G. Gatmaytan for private respondents.

MARTIN, J.:
These two interrelated cases bring to Us the question of what the word "resides" in Section 1, Rule 73 of the
Revised Rules Of Court, referring to the situs of the settlement of the estate of deceased persons, means.
Additionally, the rule in the appointment of a special administrator is sought to be reviewed.
On May 2, 1973, Virginia G. Fule filed with the Court of First Instance of Laguna, at Calamba, presided over
by Judge Severo A. Malvar, a petition for letters of administration, docketed as Sp. Proc. No. 27-C, alleging,
inter alia, "that on April 26, 1973, Amado G. Garcia, a property owner of Calamba, Laguna, died intestate in
the City of Manila, leaving real estate and personal properties in Calamba, Laguna, and in other places,
within the jurisdiction of the Honorable Court." At the same time, she moved
ex parte for her appointment as special administratrix over the estate. On even date, May 2, 1973, Judge
Malvar granted the motion.
A motion for reconsideration was filed by Preciosa B. Garcia on May 8, 1973, contending that the order
appointing Virginia G. Fule as special administratrix was issued without jurisdiction, since no notice of the
petition for letters of administration has been served upon all persons interested in the estate; there has

been no delay or cause for delay in the proceedings for the appointment of a regular administrator as the
surviving spouse of Amado G. Garcia, she should be preferred in the appointment of a special
administratrix; and, Virginia G. Fule is a debtor of the estate of Amado G. Garcia. Preciosa B. Garcia,
therefore, prayed that she be appointed special administratrix of the estate, in lieu of Virginia G. Fule, and
as regular administratrix after due hearing.
While this reconsideration motion was pending resolution before the Court, Preciosa B. Garcia filed on May
29, 1973 a motion to remove Virginia G. Fule as special administratrix alleging, besides the jurisdictional
ground raised in the motion for reconsideration of May 8, 1973 that her appointment was obtained through
erroneous, misleading and/or incomplete misrepresentations; that Virginia G. Fule has adverse interest
against the estate; and that she has shown herself unsuitable as administratrix and as officer of the court.
In the meantime, the notice of hearing of the petition for letters of administration filed by Virginia G. Fule
with the Court of First Instance of Calamba, Laguna, was published on May 17, 24, and 31, 1973, in the
Bayanihan, a weekly publication of general circulation in Southern Luzon.
On June 6, 1973, Preciosa B. Garcia received a "Supplemental Petition for the Appointment of Regular
Administrator ' filed by Virginia G. Fule. This supplemental petition modified the original petition in four
aspects: (1) the allegation that during the lifetime of the deceased Amado G. Garcia, he was elected as
Constitutional Delegate for the First District of Laguna and his last place of residence was at Calamba,
Laguna; (2) the deletion of the names of Preciosa B. Garcia and Agustina Garcia as legal heirs of Amado G.
Garcia; (3) the allegation that Carolina Carpio, who was simply listed as heir in the original petition, is the
surviving spouse of Amado G. Garcia and that she has expressly renounced her preferential right to the
administration of the estate in favor of Virginia G. Fule; and (4) that Virginia G. Fule be appointed as the
regular administratrix. The admission of this supplemental petition was opposed by Preciosa B. Garcia for
the reason, among others, that it attempts to confer jurisdiction on the Court of First Instance of Laguna, of
which the court was not possessed at the beginning because the original petition was deficient.
On July 19, 1973, Preciosa B. Garcia filed an opposition to the original and supplemental petitions for letters
of administration, raising the issues of jurisdiction, venue, lack of interest of Virginia G. Fule in the estate of
Amado G. Garcia, and disqualification of Virginia G Fule as special administratrix.
An omnibus motion was filed by Virginia G. Fule on August 20, 1973, praying for authority to take
possession of properties of the decedent allegedly in the hands of third persons as well as to secure cash
advances from the Calamba Sugar Planters Cooperative Marketing Association, Inc. Preciosa B. Garcia
opposed the motion, calling attention to the limitation made by Judge Malvar on the power of the special
administratrix, viz., "to making an inventory of the personal and real properties making up the state of the
deceased."
However, by July 2, 1973, Judge Malvar and already issued an order, received by Preciosa B. Garcia only on
July 31, 1973, denying the motion of Preciosa B. Garcia to reconsider the order of May 2, 1973, appointing
Virginia G. Fule as special administratrix, and admitting the supplementation petition of May 18,1973.
On August 31, 1973, Preciosa B. Garcia moved to dismiss the petition, because (1) jurisdiction over the
petition or over the parties in interest has not been acquired by the court; (2) venue was improperly laid;
and (3) Virginia G. Fule is not a party in interest as she is not entitled to inherit from the deceased Amado G.
Garcia.
On September 28, 1973, Preciosa B. Garcia filed a supplemental motion to substitute Virginia G. Fule as
special administratrix, reasoning that the said Virginia G. Fule admitted before before the court that she is a
full-blooded sister of Pablo G. Alcalde, an illegitimate son of Andrea Alcalde, with whom the deceased
Amado G. Garcia has no relation.
Three motions were filed by Preciosa B. Garcia on November 14, 1973, one, to enjoin the special
administratrix from taking possession of properties in the hands of third persons which have not been
determined as belonging to Amado G. Garcia; another, to remove the special administratrix for acting
outside her authority and against the interest of the estate; and still another, filed in behalf of the minor
Agustina B. Garcia, to dismiss the petition for want of cause of action, jurisdiction, and improper venue.

On November 28, 1973, Judge Malvar resolved the pending omnibus motion of Virgina G. Fule and the
motion to dismiss filed by Preciosa B. Garcia. Resolving the motion to dismiss, Judge Malvar ruled that the
powers of the special administratrix are those provided for in Section 2, Rule 80 of the Rules of Court, 1
subject only to the previous qualification made by the court that the administration of the properties subject of
the marketing agreement with the Canlubang Sugar Planters Cooperative Marketing Association should remain
with the latter; and that the special administratrix had already been authorized in a previous order of August 20,
1973 to take custody and possession of all papers and certificates of title and personal effects of the decedent
with the Canlubang Sugar Planters Cooperative Marketing Association, Inc. Ramon Mercado, of the Canlubang
Sugar Planters Cooperative Marketing Association, Inc., was ordered to deliver to Preciosa B. Garcia all
certificates of title in her name without any qualifying words like "married to Amado Garcia" does not appear.
Regarding the motion to dismiss, Judge Malvar ruled that the issue of jurisdiction had already been resolved in
the order of July 2, 1973, denying Preciosa B. Garcia's motion to reconsider the appointment of Virginia G. Fule
and admitting the supplemental petition, the failure of Virginia G. Fule to allege in her original petition for letters
of administration in the place of residence of the decedent at the time of his death was cured. Judge Malvar
further held that Preciosa B. Garcia had submitted to the jurisdiction of the court and had waived her objections
thereto by praying to be appointed as special and regular administratrix of the estate.
An omnibus motion was filed by Preciosa B. Garcia on December 27, 1973 to clarify or reconsider the
foregoing order of Judge Malvar, in view of previous court order limiting the authority of the special
administratrix to the making of an inventory. Preciosa B. Garcia also asked for the resolution of her motion
to dismiss the petitions for lack of cause of action, and also that filed in behalf of Agustina B. Garcia.
Resolution of her motions to substitute and remove the special administratrix was likewise prayed for.
On December 19, 1973, Judge Malvar issued two separate orders, the first, denying Preciosa B. Garcia's
motions to substitute and remove the special administratrix, and the second, holding that the power
allowed the special administratrix enables her to conduct and submit an inventory of the assets of the
estate.
On January 7, 1974, Preciosa B. Garcia moved for reconsideration of the foregoing orders of November 28,
1973 and December 19, 1973, insofar as they sustained or failed to rule on the issues raised by her: (a) legal
standing (cause of action) of Virginia G. Fule; (b) venue; (c) jurisdiction; (d) appointment, qualification and
removal of special administratrix; and (e) delivery to the special administratrix of checks and papers and
effects in the office of the Calamba Sugar Planters Cooperative Marketing Association, Inc.
On March 27, 1973, Judge Malvar issued the first questioned order denying Preciosa B. Garcia's motion for
reconsideration of January 7, 1974. On July 19, 1974, Judge Malvar issued the other three questioned
orders: one, directing Ramon Mercado, of the Calamba Sugar Planters Cooperative Marketing Association,
Inc., to furnish Virginia G. Fule, as special administratrix, copy of the statement of accounts and final
liquidation of sugar pool, as well as to deliver to her the corresponding amount due the estate; another,
directing Preciosa B. Garcia to deliver to Virginia G. Fule two motor vehicles presumably belonging to the
estate; and another, directing Ramon Mercado to deliver to the court all certificates of title in his possession
in the name of Preciosa B. Garcia, whether qualified with the word "single" or "married to Amado Garcia."
During the hearing of the various incidents of this case (Sp. Proc. 27-C) before Judge Malvar, 2 Virginia G.
Fule presented the death certificate of Amado G. Garcia showing that his residence at the time of his death was
Quezon City. On her part, Preciosa B. Garcia presented the residence certificate of the decedent for 1973 showing
that three months before his death his residence was in Quezon City. Virginia G. Fule also testified that Amado G.
Garcia was residing in Calamba, Laguna at the time of his death, and that he was a delegate to the 1971
Constitutional Convention for the first district of Laguna.
On July 26, 1974, Preciosa B. Garcia and Agustina B. Garcia commenced a special action for certiorari
and/or prohibition and preliminary injunction before the Court of Appeals, docketed as CA-G.R. No. 03221SP. primarily to annul the proceedings before Judge Malvar in Sp. Proc. No. 27-C of the Court of First
Instance of Laguna, or, in the alternative, to vacate the questioned four orders of that court, viz., one dated
March 27, 1974, denying their motion for reconsideration of the order denying their motion to dismiss the
criminal and supplemental petitions on the issue, among others, of jurisdiction, and the three others, all
dated July 19, 1974, directing the delivery of certain properties to the special administratrix, Virginia G. Fule,
and to the court.

On January 30, 1975, the Court of Appeals rendered judgment annulling the proceedings before Judge
Severo A. Malvar in Sp. Proc. 27-C of the Court of First Instance of Calamba, Laguna, for lack of jurisdiction.
Denied of their motion for reconsideration on March 31, 1975, Virginia G. Fule forthwith elevated the matter
to Us on appeal by certiorari. The case was docketed as G.R. No. L-40502.
However, even before Virginia G. Fule could receive the decision of the Court of Appeals, Preciosa B. Garcia
had already filed on February 1, 1975 a petition for letters of administration before the Court of First
Instance of Rizal, Quezon City Branch, docketed as Sp. Proc. No. Q-19738, over the same intestate estate of
Amado G. Garcia. On February 10, 1975, Preciosa B. Garcia urgently moved for her appointment as special
administratrix of the estate. Judge Vicente G. Ericta granted the motion and appointed Preciosa B. Garcia
as special administratrix upon a bond of P30,000.00. Preciosa B. Garcia qualified and assumed the office.
For the first time, on February 14, 1975, Preciosa B. Garcia informed Judge Ericta of the pendency of Sp.
Proc. No. 27-C before Judge Malvar of the Court of First Instance of Laguna, and the annulment of the
proceedings therein by the Court of Appeals on January 30, 1975. She manifested, however, her willingness
to withdraw Sp. Proc. Q-19738 should the decision of the Court of Appeals annulling the proceedings before
the Court of First Instance of Laguna in Sp. Proc. No. 27-C have not yet become final, it being the subject of
a motion for reconsideration.
On March 10, 1973, Judge Ericta ordered the suspension of the proceedings before his court until Preciosa
B. Garcia inform the court of the final outcome of the case pending before the Court of Appeals. This
notwithstanding, Preciosa B. Garcia filed on December 11, 1975, an "Urgent Petition for Authority to Pay
Estate Obligations."
On December 13, 1975, Virginia G. Fule filed a "Special Appearance to Question Venue and Jurisdiction"
reiterating the grounds stated in the previous special appearance of March 3, 1975, and calling attention
that the decision of the Court of Appeals and its resolution denying the motion for reconsideration had been
appealed to this Court; that the parties had already filed their respective briefs; and that the case is still
pending before the Court.
On December 17, 1975, Judge Ernani Cruz Pano, who succeeded Judge Ericta, issued an order granting
Preciosa B. Garcia's "Urgent Petition for Authority to Pay Estate Obligations" in that the payments were for
the benefit of the estate and that there hangs a cloud of doubt on the validity of the proceedings in Sp. Proc.
No. 27-C of the Court of First Instance of Laguna.
A compliance of this Order was filed by Preciosa B. Garcia on January 12,1976.
On February 4,1974, VIRGINIA G. FULE instituted G.R. No. L-42670, a petition for certiorari with temporary
restraining order, to annul the proceedings in Sp. Proc. No. Q-19738 and to restrain Judge Ernani Cruz Pao
from further acting in the case. A restraining order was issued on February 9, 1976.
We dismiss the appeal in G.R. No. L-40502 and the petition for certiorari in G.R. No. L-42670 for the reasons
and considerations hereinafter stated.
1. Section 1, Rule 73 of the Revised Rules of Court provides: "If the decedent is an inhabitant of the
Philippines at the time of his death, whether a citizen or an alien, his will shall be proved, or letters of
administration granted, and his estate settled, in the Court of First Instance in the province in which he
resides at the time of his death, and if he is an inhabitant of a foreign country, the Court of First Instance of
any province in which he had estate. The court first taking cognizance of the settlement of the estate of a
decedent, shall exercise jurisdiction to the exclusion of all other courts. The jurisdiction assumed by a
court, so far as it depends on the place of residence of the decedent, or of the location of his estate, shall
not be contested in a suit or proceeding, except in an appeal from that court, in the original case, or when
the want of jurisdiction appears on the record." With particular regard to letters of administration, Section 2,
Rule 79 of the Revised Rules of Court demands that the petition therefor should affirmatively show the
existence of jurisdiction to make the appointment sought, and should allege all the necessary facts, such as
death, the name and last residence of the decedent, the existence, and situs if need be, of assets, intestacy,

where this is relied upon, and the right of the person who seeks administration, as next of kin, creditor, or
otherwise, to be appointed. The fact of death of the intestate and his last residence within the country are
foundation facts upon which all subsequent proceedings in the administration of the estate rest, and that if
the intestate was not an inhabitant of the state at the time of his death, and left no assets in the state, no
jurisdiction is conferred on the court to grant letters of administration. 3
The aforequoted Section 1, Rule 73 (formerly Rule 75, Section 1), specifically the clause "so far as it
depends on the place of residence of the decedent, or of the location of the estate," is in reality a matter of
venue, as the caption of the Rule indicates: "Settlement of Estate of Deceased Persons. Venue and
Processes. 4 It could not have been intended to define the jurisdiction over the subject matter, because such
legal provision is contained in a law of procedure dealing merely with procedural matters. Procedure is one
thing; jurisdiction over the subject matter is another. The power or authority of the court over the subject matter
"existed and was fixed before procedure in a given cause began." That power or authority is not altered or
changed by procedure, which simply directs the manner in which the power or authority shall be fully and justly
exercised. There are cases though that if the power is not exercised conformably with the provisions of the
procedural law, purely, the court attempting to exercise it loses the power to exercise it legally. However, this
does not amount to a loss of jurisdiction over the subject matter. Rather, it means that the court may thereby lose
jurisdiction over the person or that the judgment may thereby be rendered defective for lack of something
essential to sustain it. The appearance of this provision in the procedural law at once raises a strong
presumption that it has nothing to do with the jurisdiction of the court over the subject matter. In plain words, it is
just a matter of method, of convenience to the parties. 5
The Judiciary Act of 1948, as amended, confers upon Courts of First Instance jurisdiction over all probate
cases independently of the place of residence of the deceased. Because of the existence of numerous
Courts of First Instance in the country, the Rules of Court, however, purposedly fixes the venue or the place
where each case shall be brought. A fortiori, the place of residence of the deceased in settlement of estates,
probate of will, and issuance of letters of administration does not constitute an element of jurisdiction over
the subject matter. It is merely constitutive of venue. And it is upon this reason that the Revised Rules of
Court properly considers the province where the estate of a deceased person shall be settled as "venue." 6
2. But, the far-ranging question is this: What does the term "resides" mean? Does it refer to the actual
residence or domicile of the decedent at the time of his death? We lay down the doctrinal rule that the term
"resides" connotes ex vi termini "actual residence" as distinguished from "legal residence or domicile."
This term "resides," like, the terms "residing" and "residence," is elastic and should be interpreted in the
light of the object or purpose of the statute or rule in which it is employed. 7 In the application of venue
statutes and rules Section 1, Rule 73 of the Revised Rules of Court is of such nature residence rather than
domicile is the significant factor. Even where the statute uses the word "domicile" still it is construed as meaning
residence and not domicile in the technical sense. Some cases make a distinction between the terms "residence"
and "domicile" but as generally used in statutes fixing venue, the terms are synonymous, and convey the same
meaning as the term "inhabitant." 8 In other words, "resides" should be viewed or understood in its popular
sense, meaning, the personal, actual or physical habitation of a person, actual residence or place of abode. It
signifies physical presence in a place and actual stay thereat. In this popular sense, the term means merely
residence, that is, personal residence, not legal residence or domicile. 9 Residence simply requires bodily
presence as an inhabitant in a given place, while domicile requires bodily presence in that place and also an
intention to make it one's domicile. 10 No particular length of time of residence is required though; however, the
residence must be more than temporary. 11
3. Divergent claims are maintained by Virginia G. Fule and Preciosa B. Garcia on the residence of the
deceased Amado G. Garcia at the time of his death. In her original petition for letters of administration
before the Court of First Instance of Calamba, Laguna, Virginia G. Fule measely stated "(t)hat on April
26,1973, Amado G. Garcia, a property owner of Calamba, Laguna, died intestate in the City of Manila,
leaving real estate and personal properties in Calamba, Laguna, and in other places within the jurisdiction
of this Honorable Court." Preciosa B. Garcia assailed the petition for failure to satisfy the jurisdictional
requirement and improper laying of venue. For her, the quoted statement avers no domicile or residence of
the deceased Amado G. Garcia. To say that as "property owner of Calamba, Laguna," he also resides in
Calamba, Laguna, is, according to her, non sequitur. On the contrary, Preciosa B. Garcia claims that, as
appearing in his death certificate presented by Virginia G. Fule herself before the Calamba court and in
other papers, the last residence of Amado G. Garcia was at 11 Carmel Avenue, Carmel Subdivision, Quezon

City. Parenthetically, in her amended petition, Virginia G. Fule categorically alleged that Amado G. Garcia's
"last place of residence was at Calamba, Laguna."
On this issue, We rule that the last place of residence of the deceased Amado G. Garcia was at 11 Carmel
Avenue, Carmel Subdivision, Quezon City, and not at Calamba, Laguna. A death certificate is admissible to
prove the residence of the decedent at the time of his death. 12 As it is, the death certificate of Amado G.
Garcia, which was presented in evidence by Virginia G. Fule herself and also by Preciosa B. Garcia, shows that
his last place of residence was at 11 Carmel Avenue, Carmel Subdivision, Quezon City. Aside from this, the
deceased's residence certificate for 1973 obtained three months before his death; the Marketing Agreement and
Power of Attorney dated November 12, 1971 turning over the administration of his two parcels of sugar land to
the Calamba Sugar Planters Cooperative Marketing Association, Inc.; the Deed of Donation dated January 8,
1973, transferring part of his interest in certain parcels of land in Calamba, Laguna to Agustina B. Garcia; and
certificates of titles covering parcels of land in Calamba, Laguna, show in bold documents that Amado G.
Garcia's last place of residence was at Quezon City. Withal, the conclusion becomes imperative that the venue for
Virginia C. Fule's petition for letters of administration was improperly laid in the Court of First Instance of
Calamba, Laguna. Nevertheless, the long-settled rule is that objection to improper venue is subject to waiver.
Section 4, Rule 4 of the Revised Rules of Court states: "When improper venue is not objected to in a motion to
dismiss, it is deemed waived." In the case before Us the Court of Appeals had reason to hold that in asking to
substitute Virginia G. Fule as special administratrix, Preciosa B. Garcia did not necessarily waive her objection to
the jurisdiction or venue assumed by the Court of First Instance of Calamba, Laguna, but availed of a mere
practical resort to alternative remedy to assert her rights as surviving spouse, while insisting on the enforcement
of the Rule fixing the proper venue of the proceedings at the last residence of the decedent.
4. Preciosa B. Garcia's challenge to Virginia G. Fule's appointment as special administratrix is another issue
of perplexity. Preciosa B. Garcia claims preference to the appointment as surviving spouse. Section 1 of
Rule 80 provides that "(w)hen there is delay in granting letters testamentary or of administration by any
cause including an appeal from the allowance or disallowance of a will, the court may appoint a special
administrator to take possession and charge of the estate of the deceased until the questions causing the
delay are decided and executors or administrators appointed. 13 Formerly, the appointment of a special
administrator was only proper when the allowance or disallowance of a will is under appeal. The new Rules,
however, broadened the basis for appointment and such appointment is now allowed when there is delay in
granting letters testamentary or administration by any cause e.g., parties cannot agree among themselves. 14
Nevertheless, the discretion to appoint a special administrator or not lies in the probate court. 15 That, however, is
no authority for the judge to become partial, or to make his personal likes and dislikes prevail over, or his
passions to rule, his judgment. Exercise of that discretion must be based on reason, equity, justice and legal
principle. There is no reason why the same fundamental and legal principles governing the choice of a regular
administrator should not be taken into account in the appointment of a special administrator. 16 Nothing is wrong
for the judge to consider the order of preference in the appointment of a regular administrator in appointing a
special administrator. After all, the consideration that overrides all others in this respect is the beneficial interest
of the appointee in the estate of the decedent. 17 Under the law, the widow would have the right of succession
over a portion of the exclusive property of the decedent, besides her share in the conjugal partnership. For such
reason, she would have as such, if not more, interest in administering the entire estate correctly than any other
next of kin. The good or bad administration of a property may affect rather the fruits than the naked ownership of
a property. 18
Virginia G. Fule, however, disputes the status of Preciosa B. Garcia as the widow of the late Amado G.
Garcia. With equal force, Preciosa B. Garcia maintains that Virginia G. Fule has no relation whatsoever with
Amado G. Garcia, or that, she is a mere illegitimate sister of the latter, incapable of any successional rights.
19
On this point, We rule that Preciosa B. Garcia is prima facie entitled to the appointment of special
administratrix. It needs be emphasized that in the issuance of such appointment, which is but temporary and
subsists only until a regular administrator is appointed, 20 the appointing court does not determine who are
entitled to share in the estate of the decedent but who is entitled to the administration. The issue of heirship is
one to be determined in the decree of distribution, and the findings of the court on the relationship of the parties
in the administration as to be the basis of distribution. 21 The preference of Preciosa B. Garcia is with sufficient
reason. In a Donation Inter Vivos executed by the deceased Amado G. Garcia on January 8, 1973 in favor of
Agustina B. Garcia, he indicated therein that he is married to Preciosa B. Garcia. 22 In his certificate of candidacy
for the office of Delegate to the Constitutional Convention for the First District of Laguna filed on September 1,
1970, he wrote therein the name of Preciosa B. Banaticla as his spouse. 23 Faced with these documents and the
presumption that a man and a woman deporting themselves as husband and wife have entered into a lawful
contract of marriage, Preciosa B. Garcia can be reasonably believed to be the surviving spouse of the late Amado
G. Garcia. Semper praesumitur pro matrimonio. 24

5. Under these circumstances and the doctrine laid down in Cuenco vs. Court of Appeals, 25 this Court under
its supervisory authority over all inferior courts may properly decree that venue in the instant case was properly
assumed by and transferred to Quezon City and that it is in the interest of justice and avoidance of needless
delay that the Quezon City court's exercise of jurisdiction over the settlement of the estate of the deceased
Amado G. Garcia and the appointment of special administratrix over the latter's estate be approved and
authorized and the Court of First Instance of Laguna be disauthorized from continuing with the case and instead
be required to transfer all the records thereof to the Court of First Instance of Quezon City for the continuation of
the proceedings.
6. Accordingly, the Order of Judge Ernani Cruz Pano of December 17, 1975, granting the "Urgent Petition for
Authority to Pay Estate Obligations" filed by Preciosa B. Garcia in Sp. Proc. No. Q-19738, subject matter of
G.R. No. L-42670, and ordering the Canlubang Sugar Estate to deliver to her as special administratrix the
sum of P48,874.70 for payment of the sum of estate obligations is hereby upheld.
IN VIEW OF THE FOREGOING, the petitions of petitioner Virginia Garcia Fule in G.R. No. L-40502 and in G.R.
No. L42670 are hereby denied, with costs against petitioner.
SO ORDERED.
Teehankee (Chairman), Makasiar, Aquino and Concepcion, Jr., JJ., concur.
Muoz Palma, J., took no part.

Footnotes

* Court of Appeals, Special First Division, composed of JJ. Reyes, L.B., Gaviola, Jr.
and De Castro.
1 Sec. 2. Powers and duties of special administrator. Such special administrator
shall take possession and charge of the goods, chattels, rights, credits, and estate of
the deceased and preserve the same for the executor or administrator afterwards
appointed, and for that purpose may commence and maintain suits as administrator.
He may sell only such perishable and other property as the court orders sold. A
special administrator shall not be liable to pay any debts of the deceased unless so
ordered by the court.
2 July 2, 1973, July 26, 1973, August 9, 1973, July 17, 1974, July 25, 1974, at 270-391,
Rollo of No. L-40502.
3 Diez v. Serra, 51 Phil. 286 (1927).
4 See Malig v. Bush, L-22761, May 31, 1969, 28 SCRA 453-454.
5 Manila Railroad Co. v. Attorney-General, 20 Phil. 530-32 (1911).
6 In re Kaw Singco. Sy Oa v. Co Ho, 74 Phil. 241-242 (1943); Rodriguez v. Borja, L21993, June 21, 1966, 17 SCRA 442.
7 McGrath v. Stevenson, 77 P 2d 608; In re Jones, 19 A 2d 280.
8 See 92 C.J.S. 813-14; See also Cuenco v. Court of Appeals, L-24742, October
26,1973, 53 SCRA 377.
9 See 77 C.J.S. 286.

10 Kemp v. Kemp, 16 NYS 2d 34.

11 See 92 C.J.S. 816.
12 See Rules of Court, Francisco, Vol. V-B, 1970 Ed., at 32; Manzanero v. Bongon, 67
Phil. 602 (1939).
13 A special administrator is a representative of decedent, appointed by the probate
court to care for and preserve his estate until an executor or general administrator is
appointed. (Jones v. Minnesota Transfer R. Co., 121 NW 606, cited in Jacinto, Special
Proceedings, 1965 ed., at 106.
14 See Proceedings of the Institute on the Revised Rules of Court, UP Law Center,
1963, at 99.
15 J.M. Tuason & Co., Inc. v. De Guzman, 99 Phil. 281 (1956); Hon. Alcasid v. Samson,
102 Phil. 736 (1957).
16 Ozaeta v. Pecson, 93 Phil. 419-20 (1953).
17 Roxas v. Pecson, 92 Phil. 410 (1948).
18 Idem, at 411.
19 Article 992 of the Civil Code provides: An illegitimate child has no right to inherit
ab intestato from the legitimate children and relatives of his father or mother; nor shall
such children or relatives inherit in the same manner from the illegitimate child.
20 Fernandez v. Maravilla, L-18799, March 31, 1964, 10 SCRA 597.
21 Ngo The Hua v. Chung Kiat Hua, L-17091, September 30, 1963, 9 SCRA 113.
22 Vide, Rollo of No. L-40502, at 219, Annex "SS" to Petition for certiorari and/or
Prohibition and Preliminary Injunction by Preciosa B. Garcia in CA-G.R. No. 03221-SP.
23 Vide, Rollo of No. L-40502, at 268; Annex 5 to Answer filed by Virginia G. Fule to
petition of Preciosa B. Garcia in C.A.-G.R. No. 03221-SP.
24 See Perido vs. Perido, L-28248, March 12, 1975, Makalintal, C.J. ponente, First
Division, 63 SCRA 97.
25 53 SCRA 381.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 143513

November 14, 2001

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and FIRESTONE CERAMICS, INC., respondents.
x---------------------------------------------------------x

G.R. No. 143590

November 14, 2001

NATIONAL DEVELOPMENT CORPORATION, petitioner,

vs.
FIRESTONE CERAMICS, INC., respondents.
BELLOSILLO, J.:
A litigation is not simply a contest of litigants before the bar of public opinion; more than that, it is a pursuit of justice
through legal and equitable means. To prevent the search for justice from evolving into a competition for public
approval, society invests the judiciary with complete independence thereby insulating it from demands expressed
through any medium, the press not excluded. Thus, if the court would merely reflect, and worse, succumb to the
great pressures of the day, the end result, it is feared, would be a travesty of justice.
In the early sixties, petitioner National Development Corporation (NDC), a government owned and controlled
corporation created under CA 182 as amended by CA 311 and PD No. 668, had in its disposal a ten (10)-hectare
property located along Pureza St., Sta. Mesa, Manila. The estate was popularly known as the NDC compound and
covered by Transfer Certificates of Title Nos. 92885, 110301 and 145470.
Sometime in May 1965 private respondent Firestone Ceramics Inc. (FIRESTONE) manifested its desire to lease a
portion of the property for its ceramic manufacturing business. On 24 August 1965 NDC and FIRESTONE entered
into a contract of lease denominated as Contract No. C-30-65 covering a portion of the property measured at
2.90118 hectares for use as a manufacturing plant for a term of ten (10) years, renewable for another ten (10) years
under the same terms and conditions.1 In consequence of the agreement, FIRESTONE constructed on the leased
premises several warehouses and other improvements needed for the fabrication of ceramic products.
Three and a half (3-1/2) years later, or on 8 January 1969, FIRESTONE entered into a second contract of lease with
NDC over the latter's four (4)-unit pre-fabricated reparation steel warehouse stored in Daliao, Davao. FIRESTONE
agreed to ship the warehouse to Manila for eventual assembly within the NDC compound. The second contract,
denominated as Contract No. C-26-68, was for similar use as a ceramic manufacturing plant and was agreed
expressly to be "co-extensive with the lease of LESSEE with LESSOR on the 2.60 hectare-lot." 2
On 31 July 1974 the parties signed a similar contract concerning a six (6)-unit pre-fabricated steel warehouse which,
as agreed upon by the parties, would expire on 2 December 1978.3 Prior to the expiration of the aforementioned
contract, FIRESTONE wrote NDC requesting for an extension of their lease agreement. Consequently on 29
November 1978 the Board of Directors of NDC adopted Resolution No. 11-78-117 extending the term of the lease,
subject to several conditions among which was that in the event NDC "with the approval of higher authorities, decide
to dispose and sell these properties including the lot, priority should be given to the LESSEE"4 (underscoring
supplied). On 22 December 1978, in pursuance of the resolution, the parties entered into a new agreement for a
ten-year lease of the property, renewable for another ten (10) years, expressly granting FIRESTONE the first option
to purchase the leased premises in the event that it decided "to dispose and sell these properties including the
lot . . . . "5
The contracts of lease conspicuously contain an identically worded provision requiring FIRESTONE to construct
buildings and other improvements within the leased premises worth several hundred thousands of pesos. 6
The parties' lessor-lessee relationship went smoothly until early 1988 when FIRESTONE, cognizant of the
impending expiration of their lease agreement with NDC, informed the latter through several letters and telephone
calls that it was renewing its lease over the property. While its letter of 17 March 1988 was answered by Antonio A.
Henson, General Manager of NDC, who promised immediate action on the matter, the rest of its communications
remained unacknowledged.7 FIRESTONE's predicament worsened when rumors of NDC's supposed plans to
dispose of the subject property in favor of petitioner Polytechnic University of the Philippines (PUP) came to its
knowledge. Forthwith, FIRESTONE served notice on NDC conveying its desire to purchase the property in the
exercise of its contractual right of first refusal.
Apprehensive that its interest in the property would be disregarded, FIRESTONE instituted an action for specific
performance to compel NDC to sell the leased property in its favor. FIRESTONE averred that it was pre-empting the

impending sale of the NDC compound to petitioner PUP in violation of its leasehold rights over the 2.60-hectare 8
property and the warehouses thereon which would expire in 1999. FIRESTONE likewise prayed for the issuance of
a writ of preliminary injunction to enjoin NDC from disposing of the property pending the settlement of the
controversy.9
In support of its complaint, FIRESTONE adduced in evidence a letter of Antonio A. Henson dated 15 July 1988
addressed to Mr. Jake C. Lagonera, Director and Special Assistant to Executive Secretary Catalino Macaraeg,
reviewing a proposed memorandum order submitted to then President Corazon C. Aquino transferring the whole
NDC compound, including the leased property, in favor of petitioner PUP. Attached to the letter was a draft of the
proposed memorandum order as well as a summary of existing leases on the subject property. The survey listed
FIRESTONE as lessee of a portion of the property, placed at 29,00010 square meters, whose contract with NDC was
set to expire on 31 December 198911 renewable for another ten (10) years at the option of the lessee. The report
expressly recognized FIRESTONE's right of first refusal to purchase the leased property "should the lessor decide
to sell the same."12
Meanwhile, on 21 February 1989 PUP moved to intervene and asserted its interest in the subject property, arguing
that a "purchaser pendente lite of property which is subject of a litigation is entitled to intervene in the
proceedings."13 PUP referred to Memorandum Order No. 214 issued by then President Aquino ordering the transfer
of the whole NDC compound to the National Government, which in turn would convey the aforementioned property
in favor of PUP at acquisition cost. The issuance was supposedly made in recognition of PUP's status as the "Poor
Man's University" as well as its serious need to extend its campus in order to accommodate the growing student
population. The order of conveyance of the 10.31-hectare property would automatically result in the cancellation of
NDC's total obligation in favor of the National Government in the amount of P57,193,201.64.
Convinced that PUP was a necessary party to the controversy that ought to be joined as party defendant in order to
avoid multiplicity of suits, the trial court granted PUP's motion to intervene. FIRESTONE moved for reconsideration
but was denied. On certiorari, the Court of Appeals affirmed the order of the trial court. FIRESTONE came to us on
review but in a Resolution dated 11 July 1990 we upheld PUP's inclusion as party-defendant in the present
controversy.
Following the denial of its petition, FIRESTONE amended its complaint to include PUP and Executive Secretary
Catalino Macaraeg, Jr., as party-defendants, and sought the annulment of Memorandum Order No. 214.
FIRESTONE alleged that although Memorandum Order No. 214 was issued "subject to such liens/leases existing
[on the subject property]," PUP disregarded and violated its existing lease by increasing the rental rate at
P200,000.00 a month while demanding that it vacated the premises immediately.14 FIRESTONE prayed that in the
event Memorandum Order No. 214 was not declared unconstitutional, the property should be sold in its favor at the
price for which it was sold to PUP - P554.74 per square meter or for a total purchase price of P14,423,240.00.15
Petitioner PUP, in its answer to the amended complaint, argued in essence that the lease contract covering the
property had expired long before the institution of the complaint, and that further, the right of first refusal invoked by
FIRESTONE applied solely to the six-unit pre-fabricated warehouse and not the lot upon which it stood.
After trial on the merits, judgment was rendered declaring the contracts of lease executed between FIRESTONE
and NDC covering the 2.60-hectare property and the warehouses constructed thereon valid and existing until 2
June 1999. PUP was ordered and directed to sell to FIRESTONE the "2.6 hectare leased premises or as may be
determined by actual verification and survey of the actual size of the leased properties where plaintiff's fire brick
factory is located" at P1,500.00 per square meter considering that, as admitted by FIRESTONE, such was the
prevailing market price thereof.
The trial court ruled that the contracts of lease executed between FIRESTONE and NDC were interrelated and
inseparable because "each of them forms part of the integral system of plaintiff's brick manufacturing plant x x x if
one of the leased premises will be taken apart or otherwise detached from the two others, the purpose of the lease
as well as plaintiff's business operations would be rendered useless and inoperative." 16 It thus decreed that
FIRESTONE could exercise its option to purchase the property until 2 June 1999 inasmuch as the 22 December
1978 contract embodied a covenant to renew the lease for another ten (10) years at the option of the lessee as well
as an agreement giving the lessee the right of first refusal.

The trial court also sustained the constitutionality of Memorandum Order No. 214 which was not per se hostile to
FIRESTONE's property rights, but deplored as prejudicial thereto the "very manner with which defendants NDC and
PUP interpreted and applied the same, ignoring in the process that plaintiff has existing contracts of lease
protectable by express provisions in the Memorandum No. 214 itself." 17 It further explained that the questioned
memorandum was issued "subject to such liens/leases existing thereon" 18 and petitioner PUP was under express
instructions "to enter, occupy and take possession of the transferred property subject to such leases or liens and
encumbrances that may be existing thereon"19 (italics supplied).
Petitioners PUP, NDC and the Executive Secretary separately filed their Notice of Appeal, but a few days thereafter,
or on 3 September 1996, perhaps realizing the groundlessness and the futility of it all, the Executive Secretary
withdrew his appeal.20
Subsequently, the Court of Appeals affirmed the decision of the trial court ordering the sale of the property in favor of
FIRESTONE but deleted the award of attorney's fees in the amount of Three Hundred Thousand Pesos
(P300,000.00). Accordingly, FIRESTONE was given a grace period of six (6) months from finality of the court's
judgment within which to purchase the property in questioned in the exercise of its right of first refusal. The Court of
Appeals observed that as there was a sale of the subject property, NDC could not excuse itself from its obligation
TO OFFER THE PROPERTY FOR SALE FIRST TO FIRESTONE BEFORE IT COULD TO OTHER PARTIES. The
Court of Appeals held: "NDC cannot look to Memorandum Order No. 214 to excuse or shield it from its contractual
obligations to FIRESTONE. There is nothing therein that allows NDC to disavow or repudiate the solemn
engagement that it freely and voluntarily undertook, or agreed to undertake." 21
PUP moved for reconsideration asserting that in ordering the sale of the property in favor of FIRESTONE the courts
a quo unfairly created a contract to sell between the parties. It argued that the "court cannot substitute or decree its
mind or consent for that of the parties in determining whether or not a contract (has been) perfected between PUP
and NDC."22 PUP further contended that since "a real property located in Sta. Mesa can readily command a sum of
P10,000.00 per square (meter)," the lower court gravely erred in ordering the sale of the property at only P1,500.00
per square meter. PUP also advanced the theory that the enactment of Memorandum Order No. 214 amounted to a
withdrawal of the option to purchase the property granted to FIRESTONE. NDC, for its part, vigorously contended
that the contracts of lease executed between the parties had expired without being renewed by FIRESTONE;
consequently, FIRESTONE was no longer entitled to any preferential right in the sale or disposition of the leased
property.
We do not see it the way PUP and NDC did. It is elementary that a party to a contract cannot unilaterally withdraw a
right of first refusal that stands upon valuable consideration. That principle was clearly upheld by the Court of
Appeals when it denied on 6 June 2000 the twin motions for reconsideration filed by PUP and NDC on the ground
that the appellants failed to advance new arguments substantial enough to warrant a reversal of the Decision sought
to be reconsidered.23 On 28 June 2000 PUP filed an urgent motion for an additional period of fifteen (15) days from
29 June 2000 or until 14 July 2000 within which to file a Petition for Review on Certiorari of the Decision of the Court
of Appeals.
On the last day of the extended period PUP filed its Petition for Review on Certiorari assailing the Decision of the
Court of Appeals of 6 December 1999 as well as the Resolution of 6 June 2000 denying reconsideration thereof.
PUP raised two issues: (a) whether the courts a quo erred when they "conjectured" that the transfer of the leased
property from NDC to PUP amounted to a sale; and, (b) whether FIRESTONE can rightfully invoke its right of first
refusal. Petitioner posited that if we were to place our imprimatur on the decisions of the courts a quo, "public
welfare or specifically the constitutional priority accorded to education" would greatly be prejudiced. 24
Paradoxically, our paramount interest in education does not license us, or any party for that matter, to destroy the
sanctity of binding obligations. Education may be prioritized for legislative or budgetary purposes, but we doubt if
such importance can be used to confiscate private property such as FIRESTONE's right of first refusal.
On 17 July 2000 we denied PUP's motion for extension of fifteen (15) days within which to appeal inasmuch as the
aforesaid pleading lacked an affidavit of service of copies thereof on the Court of Appeals and the adverse party, as
well as written explanation for not filing and serving the pleading personally.25
Accordingly, on 26 July 2000 we issued a Resolution dismissing PUP's Petition for Review for having been filed out
of time. PUP moved for reconsideration imploring a resolution or decision on the merits of its petition. Strangely,

about the same time, several articles came out in the newspapers assailing the denial of the petition. The daily
papers reported that we unreasonably dismissed PUP's petition on technical grounds, affirming in the process the
decision of the trial court to sell the disputed property to the prejudice of the government in the amount of
P1,000,000,000.00.26 Counsel for petitioner PUP, alleged that the trial court and the Court of Appeals "have decided
a question of substance in a way definitely not in accord with law or jurisprudence." 27
At the outset, let it be noted that the amount of P1,000,000,000.00 as reported in the papers was way too
exaggerated, if not fantastic. We stress that NDC itself sold the whole 10.31-hectare property to PUP at only
P57,193,201.64 which represents NDC's obligation to the national government that was, in exchange, written off.
The price offered per square meter of the property was pegged at P554.74. FIRESTONE's leased premises would
therefore be worth only P14,423,240.00. From any angle, this amount is certainly far below the ballyhooed price of
P1,000,000,000.00.
On 4 October 2000 we granted PUP's Motion for Reconsideration to give it a chance to ventilate its right, if any it still
had in the leased premises, thereby paving the way for a reinstatement of its Petition for Review.28 In its appeal,
PUP took to task the courts a quo for supposedly "substituting or decreeing its mind or consent for that of the parties
(referring to NDC and PUP) in determining whether or not a contract of sale was perfected." PUP also argued that
inasmuch as "it is the parties alone whose minds must meet in reference to the subject matter and cause," it
concluded that it was error for the lower courts to have decreed the existence of a sale of the NDC compound thus
allowing FIRESTONE to exercise its right of first refusal.
On the other hand, NDC separately filed its own Petition for Review and advanced arguments which, in fine,
centered on whether or not the transaction between petitioners NDC and PUP amounted to a sale considering that
"ownership of the property remained with the government."29 Petitioner NDC introduced the novel proposition that if
the parties involved are both government entities the transaction cannot be legally called a sale.
In due course both petitions were consolidated. 30
We believe that the courts a quo did not hypothesize, much less conjure, the sale of the disputed property by NDC
in favor of petitioner PUP. Aside from the fact that the intention of NDC and PUP to enter into a contract of sale was
clearly expressed in the Memorandum Order No. 214,31 a close perusal of the circumstances of this case
strengthens the theory that the conveyance of the property from NDC to PUP was one of absolute sale, for a
valuable consideration, and not a mere paper transfer as argued by petitioners.
A contract of sale, as defined in the Civil Code, is a contract where one of the parties obligates himself to transfer
the ownership of and to deliver a determinate thing to the other or others who shall pay therefore a sum certain in
money or its equivalent.32 It is therefore a general requisite for the existence of a valid and enforceable contract of
sale that it be mutually obligatory, i.e., there should be a concurrence of the promise of the vendor to sell a
determinate thing and the promise of the vendee to receive and pay for the property so delivered and transferred.
The Civil Code provision is, in effect, a "catch-all" provision which effectively brings within its grasp a whole gamut of
transfers whereby ownership of a thing is ceded for a consideration.
Contrary to what petitioners PUP and NDC propose, there is not just one party involved in the questioned
transaction. Petitioners NDC and PUP have their respective charters and therefore each possesses a separate and
distinct individual personality.33 The inherent weakness of NDC's proposition that there was no sale as it was only
the government which was involved in the transaction thus reveals itself. Tersely put, it is not necessary to write an
extended dissertation on government owned and controlled corporations and their legal personalities. Beyond cavil,
a government owned and controlled corporation has a personality of its own, distinct and separate from that of the
government.34 The intervention in the transaction of the Office of the President through the Executive Secretary did
not change the independent existence of these entities. The involvement of the Office of the President was limited to
brokering the consequent relationship between NDC and PUP. But the withdrawal of the appeal by the Executive
Secretary is considered significant as he knew, after a review of the records, that the transaction was subject to
existing liens and encumbrances, particularly the priority to purchase the leased premises in favor of FIRESTONE.
True that there may be instances when a particular deed does not disclose the real intentions of the parties, but their
action may nevertheless indicate that a binding obligation has been undertaken. Since the conduct of the parties to
a contract may be sufficient to establish the existence of an agreement and the terms thereof, it becomes necessary
for the courts to examine the contemporaneous behavior of the parties in establishing the existence of their contract.

The preponderance of evidence shows that NDC sold to PUP the whole NDC compound, including the leased
premises, without the knowledge much less consent of private respondent FIRESTONE which had a valid and
existing right of first refusal.
All three (3) essential elements of a valid sale, without which there can be no sale, were attendant in the
"disposition" and "transfer" of the property from NDC to PUP - consent of the parties, determinate subject matter,
and consideration therefor.
Consent to the sale is obvious from the prefatory clauses of Memorandum Order No. 214 which explicitly states the
acquiescence of the parties to the sale of the property WHEREAS, PUP has expressed its willingness to acquire said NDC properties and NDC has
expressed its willingness to sell the properties to PUP (underscoring supplied).35
Furthermore, the cancellation of NDC's liabilities in favor of the National Government in the amount of
P57,193,201.64 constituted the "consideration" for the sale. As correctly observed by the Court of AppealsThe defendants-appellants' interpretation that there was a mere transfer, and not a sale, apart from
being specious sophistry and a mere play of words, is too strained and hairsplitting. For it is
axiomatic that every sale imposes upon the vendor the obligation to transfer ownership as an
essential element of the contract. Transfer of title or an agreement to transfer title for a price paid, or
promised to be paid, is the very essence of sale (Kerr & Co. v. Lingad, 38 SCRA 524; Schmid &
Oberly, Inc., v. RJL Martinez Fishing Corp., 166 SCRA 493). At whatever legal angle we view it,
therefore, the inescapable fact remains that all the requisites of a valid sale were attendant in the
transaction between co-defendants-appellants NDC and PUP concerning the realities subject of the
present suit.36
What is more, the conduct of petitioner PUP immediately after the transaction is in itself an admission that there was
a sale of the NDC compound in its favor. Thus, after the issuance of Memorandum Order No. 214 petitioner PUP
asserted its ownership over the property by posting notices within the compound advising residents and occupants
to vacate the premises.37 In its Motion for Intervention petitioner PUP also admitted that its interest as a "purchaser
pendente lite" would be better protected if it was joined as party-defendant in the controversy thereby confessing
that it indeed purchased the property.
In light of the foregoing disquisition, we now proceed to determine whether FIRESTONE should be allowed to
exercise its right of first refusal over the property. Such right was expressly stated by NDC and FIRESTONE in par.
XV of their third contract denominated as A-10-78 executed on 22 December 1978 which, as found by the courts a
quo, was interrelated to and inseparable from their first contract denominated as C-30-65 executed on 24 August
1965 and their second contract denominated as C-26-68 executed on 8 January 1969. Thus Should the LESSOR desire to sell the leased premises during the term of this Agreement, or any extension thereof,
the LESSOR shall first give to the LESSEE, which shall have the right of first option to purchase the leased
premises subject to mutual agreement of both parties.38
In the instant case, the right of first refusal is an integral and indivisible part of the contract of lease and is
inseparable from the whole contract. The consideration for the right is built into the reciprocal obligations of the
parties. Thus, it is not correct for petitioners to insist that there was no consideration paid by FIRESTONE to entitle it
to the exercise of the right, inasmuch as the stipulation is part and parcel of the contract of lease making the
consideration for the lease the same as that for the option.
It is a settled principle in civil law that when a lease contract contains a right of first refusal, the lessor is under a
legal duty to the lessee not to sell to anybody at any price until after he has made an offer to sell to the latter at a
certain price and the lessee has failed to accept it. 39 The lessee has a right that the lessor's first offer shall be in his
favor.
The option in this case was incorporated in the contracts of lease by NDC for the benefit of FIRESTONE which, in
view of the total amount of its investments in the property, wanted to be assured that it would be given the first

opportunity to buy the property at a price for which it would be offered. Consistent with their agreement, it was then
implicit for NDC to have first offered the leased premises of 2.60 hectares to FIRESTONE prior to the sale in favor of
PUP. Only if FIRESTONE failed to exercise its right of first priority could NDC lawfully sell the property to petitioner
PUP.
It now becomes apropos to ask whether the courts a quo were correct in fixing the proper consideration of the sale
at P1,500.00 per square meter. In contracts of sale, the basis of the right of first refusal must be the current offer of
the seller to sell or the offer to purchase of the prospective buyer. Only after the lessee-grantee fails to exercise its
right under the same terms and within the period contemplated can the owner validly offer to sell the property to a
third person, again, under the same terms as offered to the grantee.40 It appearing that the whole NDC compound
was sold to PUP for P554.74 per square meter, it would have been more proper for the courts below to have
ordered the sale of the property also at the same price. However, since FIRESTONE never raised this as an issue,
while on the other hand it admitted that the value of the property stood at P1,500.00 per square meter, then we see
no compelling reason to modify the holdings of the courts a quo that the leased premises be sold at that price.
Our attention is invited by petitioners to Ang Yu Asuncion v. CA41 in concluding that if our holding in Ang Yu would be
applied to the facts of this case then FIRESTONE's "option, if still subsisting, is not enforceable," the option being
merely a preparatory contract which cannot be enforced.
The contention has no merit. At the heels of Ang Yu came Equatorial Realty Development, Inc., v. Mayfair Theater,
Inc.,42 where after much deliberation we declared, and so we hold, that a right of first refusal is neither "amorphous
nor merely preparatory" and can be enforced and executed according to its terms. Thus, in Equatorial we ordered
the rescission of the sale which was made in violation of the lessee's right of first refusal and further ordered the
sale of the leased property in favor of Mayfair Theater, as grantee of the right. Emphatically, we held that "(a right of
first priority) should be enforced according to the law on contracts instead of the panoramic and indefinite rule on
human relations." We then concluded that the execution of the right of first refusal consists in directing the grantor to
comply with his obligation according to the terms at which he should have offered the property in favor of the
grantee and at that price when the offer should have been made.
One final word. Petitioner PUP should be cautioned against bidding for public sympathy by bewailing the dismissal
of its petition before the press. Such advocacy is not likely to elicit the compassion of this Court or of any court for
that matter. An entreaty for a favorable disposition of a case not made directly through pleadings and oral arguments
before the courts do not persuade us, for as judges, we are ruled only by our forsworn duty to give justice where
justice is due.
WHEREFORE, the petitions in G.R. No. 143513 and G.R. No. 143590 are DENIED. Inasmuch as the first contract
of lease fixed the area of the leased premises at 2.90118 hectares while the second contract placed it at 2.60
hectares, let a ground survey of the leased premises be immediately conducted by a duly licensed, registered
surveyor at the expense of private respondent FIRESTONE CERAMICS, INC., within two (2) months from finality of
the judgment in this case. Thereafter, private respondent FIRESTONE CERAMICS, INC., shall have six (6) months
from receipt of the approved survey within which to exercise its right to purchase the leased property at P1,500.00
per square meter, and petitioner Polytechnic University of the Philippines is ordered to reconvey the property to
FIRESTONE CERAMICS, INC., in the exercise of its right of first refusal upon payment of the purchase price
thereof.
SO ORDERED.
Mendoza, Buena, and De Leon, Jr., JJ., concur.
Quisumbing, J., no part due to prior close relations.

Footnotes
1

Original Records, pp. 12-19.

In the first contract of lease, the area of the property leased was stated as 2.90118 hectares; in the
second contract it is 2.60 hectares.
2

Contract No. C-14-73.

See Note 1 at p. 46.

Contract No. A-10-78, ibid., pp. 45-50.

Par. IX of C-30-65 and par. I, subpar. (c), of A-10-78 require FIRESTONE to make several
improvements with the leased premises in the amount of not less than Three Hundred Thousand
Pesos (P300,000.00).
6

In his letter dated 8 April 1988, Mr. Henson wrote, "We thank you for your letter of March 17, 1988
regarding the NDC property, a portion of which is currently under lease by your company," see Note
1 at p. 40.
7

In their lease contract denominated as C-30-65 the area is referred to as 2.90118 hectares.

In his Order dated 19 August 1988 Judge Cesar D. Francisco, RTC-Br. 117, Pasay City, issued a
temporary restraining order against NDC, id., pp. 34-35. On 12 September 1988, the trial court, after
conducting several hearings, issued a writ of preliminary injunction restraining NDC from selling the
leased property, see Note 1 at pp. 176-178.
9

10

Interchangeably referred to as 2.90118 or 2.6 hectares.

Contract No. A-10-78 dated 22 December 1978 fixed the period of lease for ten (10) years effective
2 December 1978 until 2 June 1989, i.e., following the expiration of the stipulated 180-day
construction period, the ten (10)-year period renewable for another ten (10) years or until 2 June
1999.
11

12

See Note 1 at pp. 49-53.

13

Ibid, pp. 186-190.

14

Id., pp. 233-243.

Per Memorandum Order No. 214, the 10.31 hectare property was sold by NDC for P57,193,201.64
or at P 554.74 per square meter; Rollo in G.R. No. 143513, pp. 51-52; Rollo in G.R. No. 143590, pp.
99-100.
15

Decision penned by Judge Leonardo M. Rivera, RTC-Br. 117, Pasay City, Rollo in G.R. No.
143513, pp. 101- 132.
16

17

Ibid.

18

Id.

19

Id.

20

See CA Decision in CA-G.R. CV No. 54295, promulgated 6 December 1999, Rollo, p. 32.

Decision penned by Associate Justice Renato C. Dacudao, concurred in by Associate Justices Ma.
Alicia Austria-Martinez and Salvador J. Valdez, Jr., Seventh Division, Court of Appeals, CA Rollo, pp.
137-151.
21

22

See Note 16 at pp. 153-171.

23

Resolution dated 6 June 2000 in CA-G.R. CV No. 54295, Rollo in G.R. No. 143513, p. 219.

24

Rollo in G. R. No. 143513, p. 26.

25

Id., p. 5.

"PUP in last-ditch try to save Sta. Mesa lot," Manila Bulletin, 30 September 2000, p. 12; "Gov't
stands to lose P1B from sale of PUP land," Philippine Daily Inquirer, 26 September 2000, p. B14.
26

27

Rollo in G.R. No. 143513, pp. 11-12.

28

Ibid, p. 256.

29

Rollo in G.R. No. 143590, pp. 10-23.

30

See Note 16 at p. 338.

The third "whereas as" clause of Memorandum Order No. 214 expressly provides, "WHEREAS the
PUP has expressed its willingness to acquire said NDC properties and NDC has expressed its
willingness to sell the properties to PUP," see Note 15.
31

32

Art. 1458.

NDC was created under CA 182 (1936), as amended by CA 311 (1938) and PD No. 668 (1975),
while PUP was constituted in 1978 by virtue of PD No. 668.
33

Rayo v. CFI, No. 552783, 19 December 1981, 110 SCRA 456; National Shipyard & Steel
Corporation v. CIR, No. 17874, 31 August 1963, 8 SCRA 781; Social Security System v. CA, 205
PHIL 609 (1983).
34

35

See Note 15 at p. 51, Rollo in G.R. No. 143513; p. 99, Rollo in G.R. No. 143590.

36

See Note 21 at p. 163.

37

See Note 1 at pp. 259-260.

38

See Note 5 at p. 49.

Paraaque Kings Enterprises, Inc. v. CA, 335 PHIL. 1184, (1997); Guzman, Bocaling & Co., v.
Bonnevie, G.R. No. 86150, 2 March 1992, 206 SCRA 668.
39

40

Ibid.

41

G.R. No. 109125, 2 December 1994, 238 SCRA 602.

42

G.R. No. 106063, 21 November 1996, 264 SCRA 483.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-11827

July 31, 1961

FERNANDO A. GAITE, plaintiff-appellee,

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

To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor of Gaite a surety
bond, and pursuant to the promise, Fonacier delivered to Gaite a surety bond dated December 8, 1954 with himself
(Fonacier) as principal and the Larap Mines and Smelting Co. and its stockholders George Krakower, Segundina
Vivas, Pacifico Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified, however,
that when this bond was presented to him by Fonacier together with the "Revocation of Power of Attorney and
Contract", Exhibit "A", on December 8, 1954, he refused to sign said Exhibit "A" unless another bond under written
by a bonding company was put up by defendants to secure the payment of the P65,000.00 balance of their price of
the iron ore in the stockpiles in the mining claims. Hence, a second bond, also dated December 8, 1954 (Exhibit
"B"),was executed by the same parties to the first bond Exhibit "A-1", with the Far Eastern Surety and Insurance Co.
as additional surety, but it provided that the liability of the surety company would attach only when there had been
an actual sale of iron ore by the Larap Mines & Smelting Co. for an amount of not less then P65,000.00, and that,
furthermore, the liability of said surety company would automatically expire on December 8, 1955. Both bonds were
attached to the "Revocation of Power of Attorney and Contract", Exhibit "A", and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he gave to Gaite and the two executed and signed
the "Revocation of Power of Attorney and Contract", Exhibit "A", Fonacier entered into a "Contract of Mining
Operation", ceding, transferring, and conveying unto the Larap Mines and Smelting Co., Inc. the right to develop,
exploit, and explore the mining claims in question, together with the improvements therein and the use of the name
"Larap Iron Mines" and its good will, in consideration of certain royalties. Fonacier likewise transferred, in the same
document, the complete title to the approximately 24,000 tons of iron ore which he acquired from Gaite, to the Larap
& Smelting Co., in consideration for the signing by the company and its stockholders of the surety bonds delivered
by Fonacier to Gaite (Record on Appeal, pp. 82-94).
Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far Eastern Surety and Insurance
Company, no sale of the approximately 24,000 tons of iron ore had been made by the Larap Mines & Smelting Co.,
Inc., nor had the P65,000.00 balance of the price of said ore been paid to Gaite by Fonacier and his sureties
payment of said amount, on the theory that they had lost right to make use of the period given them when their
bond, Exhibit "B" automatically expired (Exhibits "C" to "C-24"). And when Fonacier and his sureties failed to pay as
demanded by Gaite, the latter filed the present complaint against them in the Court of First Instance of Manila (Civil
Case No. 29310) for the payment of the P65,000.00 balance of the price of the ore, consequential damages, and
attorney's fees.
All the defendants except Francisco Dante set up the uniform defense that the obligation sued upon by Gaite was
subject to a condition that the amount of P65,000.00 would be payable out of the first letter of credit covering the
first shipment of iron ore and/or the first amount derived from the local sale of the iron ore by the Larap Mines &
Smelting Co., Inc.; that up to the time of the filing of the complaint, no sale of the iron ore had been made, hence the
condition had not yet been fulfilled; and that consequently, the obligation was not yet due and demandable.
Defendant Fonacier also contended that only 7,573 tons of the estimated 24,000 tons of iron ore sold to him by
Gaite was actually delivered, and counterclaimed for more than P200,000.00 damages.
At the trial of the case, the parties agreed to limit the presentation of evidence to two issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000.00 become due and
demandable when the defendants failed to renew the surety bond underwritten by the Far Eastern Surety and
Insurance Co., Inc. (Exhibit "B"), which expired on December 8, 1955; and
(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant Fonacier were actually in
existence in the mining claims when these parties executed the "Revocation of Power of Attorney and Contract",
Exhibit "A."

On the first question, the lower court held that the obligation of the defendants to pay plaintiff the P65,000.00
balance of the price of the approximately 24,000 tons of iron ore was one with a term: i.e., that it would be paid upon
the sale of sufficient iron ore by defendants, such sale to be effected within one year or before December 8, 1955;
that the giving of security was a condition precedent to Gait's giving of credit to defendants; and that as the latter
failed to put up a good and sufficient security in lieu of the Far Eastern Surety bond (Exhibit "B") which expired on
December 8, 1955, the obligation became due and demandable under Article 1198 of the New Civil Code.
As to the second question, the lower court found that plaintiff Gaite did have approximately 24,000 tons of iron ore at
the mining claims in question at the time of the execution of the contract Exhibit "A."
Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to pay him, jointly and severally,
P65,000.00 with interest at 6% per annum from December 9, 1955 until payment, plus costs. From this judgment,
defendants jointly appealed to this Court.
During the pendency of this appeal, several incidental motions were presented for resolution: a motion to declare
the appellants Larap Mines & Smelting Co., Inc. and George Krakower in contempt, filed by appellant Fonacier, and
two motions to dismiss the appeal as having become academic and a motion for new trial and/or to take judicial
notice of certain documents, filed by appellee Gaite. The motion for contempt is unmeritorious because the main
allegation therein that the appellants Larap Mines & Smelting Co., Inc. and Krakower had sold the iron ore here in
question, which allegedly is "property in litigation", has not been substantiated; and even if true, does not make
these appellants guilty of contempt, because what is under litigation in this appeal is appellee Gaite's right to the
payment of the balance of the price of the ore, and not the iron ore itself. As for the several motions presented by
appellee Gaite, it is unnecessary to resolve these motions in view of the results that we have reached in this case,
which we shall hereafter discuss.
The main issues presented by appellants in this appeal are:
(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay appellee Gaite the
P65,000.00 (balance of the price of the iron ore in question)is one with a period or term and not one with a
suspensive condition, and that the term expired on December 8, 1955; and
(2) that the lower court erred in not holding that there were only 10,954.5 tons in the stockpiles of iron ore sold by
appellee Gaite to appellant Fonacier.
The first issue involves an interpretation of the following provision in the contract Exhibit "A":
7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F. Fonacier all his rights and
interests over the 24,000 tons of iron ore, more or less, above-referred to together with all his rights and
interests to operate the mine in consideration of the sum of SEVENTY-FIVE THOUSAND PESOS
(P75,000.00) which the latter binds to pay as follows:
a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing of this agreement.
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will be paid from and out of the first letter
of credit covering the first shipment of iron ore made by the Larap Mines & Smelting Co., Inc., its assigns,
administrators, or successors in interest.
We find the court below to be legally correct in holding that the shipment or local sale of the iron ore is not a
condition precedent (or suspensive) to the payment of the balance of P65,000.00, but was only a suspensive period
or term. What characterizes a conditional obligation is the fact that its efficacy or obligatory force (as distinguished
from its demandability) is subordinated to the happening of a future and uncertain event; so that if the suspensive

condition does not take place, the parties would stand as if the conditional obligation had never existed. That the
parties to the contract Exhibit "A" did not intend any such state of things to prevail is supported by several
circumstances:
1) The words of the contract express no contingency in the buyer's obligation to pay: "The balance of Sixty-Five
Thousand Pesos (P65,000.00) will be paid out of the first letter of credit covering the first shipment of iron ores . . ."
etc. There is no uncertainty that the payment will have to be made sooner or later; what is undetermined is merely
the exact date at which it will be made. By the very terms of the contract, therefore, the existence of the obligation to
pay is recognized; only its maturity or demandability is deferred.
2) A contract of sale is normally commutative and onerous: not only does each one of the parties assume a
correlative obligation (the seller to deliver and transfer ownership of the thing sold and the buyer to pay the
price),but each party anticipates performance by the other from the very start. While in a sale the obligation of one
party can be lawfully subordinated to an uncertain event, so that the other understands that he assumes the risk of
receiving nothing for what he gives (as in the case of a sale of hopes or expectations, emptio spei), it is not in the
usual course of business to do so; hence, the contingent character of the obligation must clearly appear. Nothing is
found in the record to evidence that Gaite desired or assumed to run the risk of losing his right over the ore without
getting paid for it, or that Fonacier understood that Gaite assumed any such risk. This is proved by the fact that
Gaite insisted on a bond a to guarantee payment of the P65,000.00, an not only upon a bond by Fonacier, the Larap
Mines & Smelting Co., and the company's stockholders, but also on one by a surety company; and the fact that
appellants did put up such bonds indicates that they admitted the definite existence of their obligation to pay the
balance of P65,000.00.
3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or shipment of the ore as a condition
precedent, would be tantamount to leaving the payment at the discretion of the debtor, for the sale or shipment
could not be made unless the appellants took steps to sell the ore. Appellants would thus be able to postpone
payment indefinitely. The desireability of avoiding such a construction of the contract Exhibit "A" needs no stressing.
4) Assuming that there could be doubt whether by the wording of the contract the parties indented a suspensive
condition or a suspensive period (dies ad quem) for the payment of the P65,000.00, the rules of interpretation would
incline the scales in favor of "the greater reciprocity of interests", since sale is essentially onerous. The Civil Code of
the Philippines, Article 1378, paragraph 1, in fine, provides:
If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.
and there can be no question that greater reciprocity obtains if the buyer' obligation is deemed to be actually
existing, with only its maturity (due date) postponed or deferred, that if such obligation were viewed as non-existent
or not binding until the ore was sold.
The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on credit, and not an
aleatory contract where the transferor, Gaite, would assume the risk of not being paid at all; and that the previous
sale or shipment of the ore was not a suspensive condition for the payment of the balance of the agreed price, but
was intended merely to fix the future date of the payment.
This issue settled, the next point of inquiry is whether appellants, Fonacier and his sureties, still have the right to
insist that Gaite should wait for the sale or shipment of the ore before receiving payment; or, in other words, whether
or not they are entitled to take full advantage of the period granted them for making the payment.
We agree with the court below that the appellant have forfeited the right court below that the appellants have
forfeited the right to compel Gaite to wait for the sale of the ore before receiving payment of the balance of
P65,000.00, because of their failure to renew the bond of the Far Eastern Surety Company or else replace it with an

equivalent guarantee. The expiration of the bonding company's undertaking on December 8, 1955 substantially
reduced the security of the vendor's rights as creditor for the unpaid P65,000.00, a security that Gaite considered
essential and upon which he had insisted when he executed the deed of sale of the ore to Fonacier (Exhibit "A").
The case squarely comes under paragraphs 2 and 3 of Article 1198 of the Civil Code of the Philippines:
"ART. 1198. The debtor shall lose every right to make use of the period:
(1) . . .
(2) When he does not furnish to the creditor the guaranties or securities which he has promised.
(3) When by his own acts he has impaired said guaranties or securities after their establishment, and when
through fortuitous event they disappear, unless he immediately gives new ones equally satisfactory.
Appellants' failure to renew or extend the surety company's bond upon its expiration plainly impaired the securities
given to the creditor (appellee Gaite), unless immediately renewed or replaced.
There is no merit in appellants' argument that Gaite's acceptance of the surety company's bond with full knowledge
that on its face it would automatically expire within one year was a waiver of its renewal after the expiration date. No
such waiver could have been intended, for Gaite stood to lose and had nothing to gain barely; and if there was any,
it could be rationally explained only if the appellants had agreed to sell the ore and pay Gaite before the surety
company's bond expired on December 8, 1955. But in the latter case the defendants-appellants' obligation to pay
became absolute after one year from the transfer of the ore to Fonacier by virtue of the deed Exhibit "A.".
All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in demanding payment and
instituting this action one year from and after the contract (Exhibit "A") was executed, either because the appellant
debtors had impaired the securities originally given and thereby forfeited any further time within which to pay; or
because the term of payment was originally of no more than one year, and the balance of P65,000.00 became due
and payable thereafter.
Coming now to the second issue in this appeal, which is whether there were really 24,000 tons of iron ore in the
stockpiles sold by appellee Gaite to appellant Fonacier, and whether, if there had been a short-delivery as claimed
by appellants, they are entitled to the payment of damages, we must, at the outset, stress two things: first, that this
is a case of a sale of a specific mass of fungible goods for a single price or a lump sum, the quantity of "24,000 tons
of iron ore, more or less," stated in the contract Exhibit "A," being a mere estimate by the parties of the total tonnage
weight of the mass; and second, that the evidence shows that neither of the parties had actually measured of
weighed the mass, so that they both tried to arrive at the total quantity by making an estimate of the volume thereof
in cubic meters and then multiplying it by the estimated weight per ton of each cubic meter.
The sale between the parties is a sale of a specific mass or iron ore because no provision was made in their
contract for the measuring or weighing of the ore sold in order to complete or perfect the sale, nor was the price of
P75,000,00 agreed upon by the parties based upon any such measurement.(see Art. 1480, second par., New Civil
Code). The subject matter of the sale is, therefore, a determinate object, the mass, and not the actual number of
units or tons contained therein, so that all that was required of the seller Gaite was to deliver in good faith to his
buyer all of the ore found in the mass, notwithstanding that the quantity delivered is less than the amount estimated
by them (Mobile Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171 So. 872, applying art. 2459 of
the Louisiana Civil Code). There is no charge in this case that Gaite did not deliver to appellants all the ore found in
the stockpiles in the mining claims in questions; Gaite had, therefore, complied with his promise to deliver, and
appellants in turn are bound to pay the lump price.

But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not a definite mass, but
approximately 24,000 tons of ore, so that any substantial difference in this quantity delivered would entitle the
buyers to recover damages for the short-delivery, was there really a short-delivery in this case?
We think not. As already stated, neither of the parties had actually measured or weighed the whole mass of ore
cubic meter by cubic meter, or ton by ton. Both parties predicate their respective claims only upon an estimated
number of cubic meters of ore multiplied by the average tonnage factor per cubic meter.
Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles of ore that he sold to
Fonacier, while appellants contend that by actual measurement, their witness Cirpriano Manlagit found the total
volume of ore in the stockpiles to be only 6.609 cubic meters. As to the average weight in tons per cubic meter, the
parties are again in disagreement, with appellants claiming the correct tonnage factor to be 2.18 tons to a cubic
meter, while appellee Gaite claims that the correct tonnage factor is about 3.7.
In the face of the conflict of evidence, we take as the most reliable estimate of the tonnage factor of iron ore in this
case to be that made by Leopoldo F. Abad, chief of the Mines and Metallurgical Division of the Bureau of Mines, a
government pensionado to the States and a mining engineering graduate of the Universities of Nevada and
California, with almost 22 years of experience in the Bureau of Mines. This witness placed the tonnage factor of
every cubic meter of iron ore at between 3 metric tons as minimum to 5 metric tons as maximum. This estimate, in
turn, closely corresponds to the average tonnage factor of 3.3 adopted in his corrected report (Exhibits "FF" and FF1") by engineer Nemesio Gamatero, who was sent by the Bureau of Mines to the mining claims involved at the
request of appellant Krakower, precisely to make an official estimate of the amount of iron ore in Gaite's stockpiles
after the dispute arose.
Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made by appellant's witness
Cipriano Manlagit is correct, if we multiply it by the average tonnage factor of 3.3 tons to a cubic meter, the product
is 21,809.7 tons, which is not very far from the estimate of 24,000 tons made by appellee Gaite, considering that
actual weighing of each unit of the mass was practically impossible, so that a reasonable percentage of error should
be allowed anyone making an estimate of the exact quantity in tons found in the mass. It must not be forgotten that
the contract Exhibit "A" expressly stated the amount to be 24,000 tons, more or less. (ch. Pine River Logging &
Improvement Co. vs U.S., 279, 46 L. Ed. 1164).
There was, consequently, no short-delivery in this case as would entitle appellants to the payment of damages, nor
could Gaite have been guilty of any fraud in making any misrepresentation to appellants as to the total quantity of
ore in the stockpiles of the mining claims in question, as charged by appellants, since Gaite's estimate appears to
be substantially correct.
WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same, with costs against
appellants.
Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De Leon and Natividad, JJ., concur.

Republic of the Philippines

SUPREME COURT
Baguio City
THIRD DIVISION

G.R. No. 115349 April 18, 1997

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA UNIVERSITY,
respondents.

PANGANIBAN, J.:
In conducting researches and studies of social organizations and cultural values thru its Institute of Philippine
Culture, is the Ateneo de Manila University performing the work of an independent contractor and thus taxable
within the purview of then Section 205 of the National Internal Revenue Code levying a three percent contractor's
tax? This question is answer by the Court in the negative as it resolves this petition assailing the Decision 1 of the
Respondent Court of Appeals 2 in CA-G.R. SP No. 31790 promulgated on April 27, 1994 affirming that of the Court of Tax
Appeals. 3
The Antecedent Facts
The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being largely undisputed
by the parties.
Private respondent is a non-stock, non-profit educational institution with auxiliary units and branches
all over the Philippines. One such auxiliary unit is the Institute of Philippine Culture (IPC), which has
no legal personality separate and distinct from that of private respondent. The IPC is a Philippine
unit engaged in social science studies of Philippine society and culture. Occasionally, it accepts
sponsorships for its research activities from international organizations, private foundations and
government agencies.
On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a
demand letter dated June 3, 1983, assessing private respondent the sum of P174,043.97 for alleged
deficiency contractor's tax, and an assessment dated June 27, 1983 in the sum of P1,141,837 for
alleged deficiency income tax, both for the fiscal year ended March 31, 1978. Denying said tax
liabilities, private respondent sent petitioner a letter-protest and subsequently filed with the latter a
memorandum contesting the validity of the assessments.
On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency
income tax but modifying the assessment for deficiency contractor's tax by increasing the amount
due to P193,475.55. Unsatisfied, private respondent requested for a reconsideration or
reinvestigation of the modified assessment. At the same time, it filed in the respondent court a
petition for review of the said letter-decision of the petitioner. While the petition was pending before
the respondent court, petitioner issued a final decision dated August 3, 1988 reducing the
assessment for deficiency contractor's tax from P193,475.55 to P46,516.41, exclusive of surcharge
and interest.
On July 12, 1993, the respondent court rendered the questioned decision which dispositively reads:

WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE. The

deficiency contractor's tax assessment in the amount of P46,516.41 exclusive of
surcharge and interest for the fiscal year ended March 31, 1978 is hereby
CANCELED. No pronouncement as to cost.
SO ORDERED.
Not in accord with said decision, petitioner has come to this Court via the present petition for review raising
the following issues:
1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW
OF INDEPENDENT CONTRACTOR PURSUANT TO SECTION 205 OF THE TAX
CODE; and
2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3%
CONTRACTOR'S TAX UNDER SECTION 205 OF THE TAX CODE.
The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide:
Sec. 205. Contractor, proprietors or operators of dockyards, and others. A contractor's tax of three
per centum of the gross receipts is hereby imposed on the following:
xxx xxx xxx
(16) Business agents and other independent contractors except persons,
associations and corporations under contract for embroidery and apparel for export,
as well as their agents and contractors and except gross receipts of or from a
pioneer industry registered with the Board of Investments under Republic Act No.
5186:
xxx xxx xxx
The term "independent contractors" include persons (juridical or natural) not
enumerated above (but not including individuals subject to the occupation tax under
Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all
kinds of services for a fee regardless of whether or not the performance of the
service calls for the exercise or use of the physical or mental faculties of such
contractors or their employees.
xxx xxx xxx
Petitioner contends that the respondent court erred in holding that private respondent is not an
"independent contractor" within the purview of Section 205 of the Tax Code. To petitioner, the term
"independent contractor", as defined by the Code, encompasses all kinds of services rendered for a
fee and that the only exceptions are the following:
a. Persons, association and corporations under contract for embroidery and apparel for export and
gross receipts of or from pioneer industry registered with the Board of Investment under R.A. No.
5186;

b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182 [b]
of the Tax Code); and
c. Regional or area headquarters established in the Philippines by multinational corporations,
including their alien executives, and which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communication and coordinating centers for their affiliates,
subsidiaries or branches in the Asia Pacific Region (Section 205 of the Tax Code).
Petitioner thus submits that since private respondent falls under the definition of an "independent
contractor" and is not among the aforementioned exceptions, private respondent is therefore subject
to the 3% contractor's tax imposed under the same Code. 4
The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed the assailed
decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA through this petition for
review.
The Issues
Petitioner submits before us the following issues:
1) Whether or not private respondent falls under the purview of independent contractor pursuant to
Section 205 of the Tax Code.
2) Whether or not private respondent is subject to 3% contractor's tax under Section 205 of the Tax
Code. 5
In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary unit or branch
the Institute of Philippine Culture performing the work of an independent contractor and, thus, subject to the three
percent contractor's tax levied by then Section 205 of the National Internal Revenue Code?
The Court's Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue Code germane to the case before us read:
Sec. 205. Contractors, proprietors or operators of dockyards, and others. A contractor's tax of
three per centum of the gross receipts is hereby imposed on the following:
xxx xxx xxx
(16) Business agents and other independent contractors, except persons, associations and
corporations under contract for embroidery and apparel for export, as well as their agents and
contractors, and except gross receipts of or from a pioneer industry registered with the Board of
Investments under the provisions of Republic Act No. 5186;
xxx xxx xxx

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

Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner Commissioner of
Internal Revenue contends that "the tax is due on its activity of conducting researches for a fee. The tax is due on
the gross receipts made in favor of IPC pursuant to the contracts the latter entered to conduct researches for the
benefit primarily of its clients. The tax is imposed on the exercise of a taxable activity. . . . [T]he sale of services of
private respondent is made under a contract and the various contracts entered into between private respondent and
its clients are almost of the same terms, showing, among others, the compensation and terms of payment." 11
(Emphasis supplied.)
In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show that Ateneo's
IPC in fact contracted to sell its research services for a fee. Clearly then, as found by the Court of Appeals and the
Court of Tax Appeals, petitioner's theory is inapplicable to the established factual milieu obtaining in the instant case.
In the first place, the petitioner has presented no evidence to prove its bare contention that, indeed, contracts for
sale of services were ever entered into by the private respondent. As appropriately pointed out by the latter:
An examination of the Commissioner's Written Formal Offer of Evidence in the Court of Tax Appeals
shows that only the following documentary evidence was presented:
Exhibit 1 BIR letter of authority no. 331844
2 Examiner's Field Audit Report
3 Adjustments to Sales/Receipts
4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr.
None of the foregoing evidence even comes close to purport to be contracts between private
respondent and third parties. 12
Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received by the Ateneo de
Manila University are technically not a fee. They may however fall as gifts or donations which are tax-exempt" as
shown by private respondent's compliance with the requirement of Section 123 of the National Internal Revenue
Code providing for the exemption of such gifts to an educational institution. 13
Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:
To our mind, private respondent hardly fits into the definition of an "independent contractor".
For one, the established facts show that IPC, as a unit of the private respondent, is not engaged in
business. Undisputedly, private respondent is mandated by law to undertake research activities to
maintain its university status. In fact, the research activities being carried out by the IPC is focused
not on business or profit but on social sciences studies of Philippine society and culture. Since it can
only finance a limited number of IPC's research projects, private respondent occasionally accepts
sponsorship for unfunded IPC research projects from international organizations, private foundations
and governmental agencies. However, such sponsorships are subject to private respondent's terms
and conditions, among which are, that the research is confined to topics consistent with the private
respondent's academic agenda; that no proprietary or commercial purpose research is done; and
that private respondent retains not only the absolute right to publish but also the ownership of the
results of the research conducted by the IPC. Quite clearly, the aforementioned terms and conditions
belie the allegation that private respondent is a contractor or is engaged in business.

For another, it bears stressing that private respondent is a non-stock, non-profit educational
corporation. The fact that it accepted sponsorship for IPC's unfunded projects is merely incidental.
For, the main function of the IPC is to undertake research projects under the academic agenda of
the private respondent. Moreover the records do not show that in accepting sponsorship of research
work, IPC realized profits from such work. On the contrary, the evidence shows that for about 30
years, IPC had continuously operated at a loss, which means that sponsored funds are less than
actual expenses for its research projects. That IPC has been operating at a loss loudly bespeaks of
the fact that education and not profit is the motive for undertaking the research projects.
Then, too, granting arguendo that IPC made profits from the sponsored research projects, the fact
still remains that there is no proof that part of such earnings or profits was ever distributed as
dividends to any stockholder, as in fact none was so distributed because they accrued to the benefit
of the private respondent which is a non-profit educational institution. 14
Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not given in the concept of
a fee or price in exchange for the performance of a service or delivery of an object. Rather, the amounts are in the
nature of an endowment or donation given by IPC's benefactors solely for the purpose of sponsoring or funding the
research with no strings attached. As found by the two courts below, such sponsorships are subject to IPC's terms
and conditions. No proprietary or commercial research is done, and IPC retains the ownership of the results of the
research, including the absolute right to publish the same. The copyrights over the results of the research are owned
by
Ateneo and, consequently, no portion thereof may be reproduced without its permission. 15 The amounts given to IPC,
therefore, may not be deemed, it bears stressing as fees or gross receipts that can be subjected to the three percent
contractor's tax.
It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot be deemed
either as a contract of sale or a contract of a piece of work. "By the contract of sale, one of the contracting parties
obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a
price certain in money or its equivalent." 16 By its very nature, a contract of sale requires a transfer of ownership. Thus,
Article 1458 of the Civil Code "expressly makes the obligation to transfer ownership as an essential element of the
contract of sale, following modern codes, such as the German and the Swiss. Even in the absence of this express
requirement, however, most writers, including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have
considered such transfer of ownership as the primary purpose of sale. Perez and Alguer follow the same view, stating that
the delivery of the thing does not mean a mere physical transfer, but is a means of transmitting ownership. Transfer of title
or an agreement to transfer it for a price paid or promised to be paid is the essence of sale." 17 In the case of a contract for
a piece of work, "the contractor binds himself to execute a piece of work for the employer, in consideration of a certain
price or compensation. . . . If the contractor agrees to produce the work from materials furnished by him, he shall deliver
the thing produced to the employer and transfer dominion over the thing, . . ." 18 Ineludably, whether the contract be one of
sale or one for a piece of work, a transfer of ownership is involved and a party necessarily walks away with an object. 19 In
the case at bench, it is clear from the evidence on record that there was no sale either of objects or services because, as
adverted to earlier, there was no transfer of ownership over the research data obtained or the results of research projects
undertaken by the Institute of Philippine Culture.
Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in pursuance of
maintaining Ateneo's university status and not in the course of an independent business of selling such research
with profit in mind. This is clear from a reading of the regulations governing universities:
31. In addition to the legal requisites an institution must meet, among others, the following
requirements before an application for university status shall be considered:
xxx xxx xxx

(e) The institution must undertake research and operate with a competent qualified staff at least
three graduate departments in accordance with the rules and standards for graduate education. One
of the departments shall be science and technology. The competence of the staff shall be judged by
their effective teaching, scholarly publications and research activities published in its school journal
as well as their leadership activities in the profession.
(f) The institution must show evidence of adequate and stable financial resources and support, a
reasonable portion of which should be devoted to institutional development and research. (emphasis
supplied)
xxx xxx xxx
32. University status may be withdrawn, after due notice and hearing, for failure to maintain
satisfactorily the standards and requirements therefor. 20
Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the Ateneo is patently
erroneous because the former is not an independent juridical entity that is separate and distinct form the latter.
Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals Generally
Conclusive
In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically created for the
purpose of reviewing tax cases. Through its expertise, it is undeniably competent to determine the issue of whether"
21
Ateneo de Manila University may be deemed a subject of the three percent contractor's tax "through the evidence
presented before it." Consequently, "as a matter of principle, this Court will not set aside the conclusion reached by . . . the
Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to the study and consideration of
tax problems and has necessarily developed an expertise on the subject unless there has been an abuse or improvident
exercise of authority . . ." 22 This point becomes more evident in the case before us where the findings and conclusions of
both the Court of Tax Appeals and the Court of Appeals appear untainted by any abuse of authority, much less grave
abuse of discretion. Thus, we find the decision of the latter affirming that of the former free from any palpable error.
Public Service, Not Profit, is the Motive
The records show that the Institute of Philippine Culture conducted its research activities at a huge deficit of
P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972 to 1985. 23 In fact, it was
Ateneo de Manila University itself that had funded the research projects of the institute, and it was only when Ateneo
could no longer produce the needed funds that the institute sought funding from outside. The testimony of Ateneo's
Director for Accounting Services, Ms. Leonor Wijangco, provides significant insight on the academic and nonprofit nature
of the institute's research activities done in furtherance of the university's purposes, as follows:
Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of Philippine
Culture) that as far as grants from sponsored research it is possible that the grant sometimes is less
than the actual cost. Will you please tell us in this case when the actual cost is a lot less than the
grant who shoulders the additional cost?
A The University.
Q Now, why is this done by the University?
A Because of our faculty development program as a university, because a university has to have its
own research institute. 24

So, why is it that Ateneo continues to operate and conduct researches through its Institute of Philippine Culture
when it undisputedly loses not an insignificant amount in the process? The plain and simple answer is that private
respondent is not a contractor selling its services for a fee but an academic institution conducting these researches
pursuant to its commitments to education and, ultimately, to public service. For the institute to have tenaciously
continued operating for so long despite its accumulation of significant losses, we can only agree with both the Court
of Tax Appeals and the Court of Appeals that "education and not profit is [IPC's] motive for undertaking the research
projects." 25
WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of Appeals is
hereby AFFIRMED in full.
SO ORDERED.
Narvasa, C.J., Davide, Jr., Melo and Francisco JJ., concur.
Footnotes
1 Rollo, pp. 37-42.
2 Penned by J. Cancio C. Garcia and concurred in by JJ. Pedro A. Ramirez, Chairman, and Hector
L. Hofilea.
3 In CTA Case No. 4280, penned by Associate Judge Ramon O. de Veyra and concurred in by
Presiding Judge Ernesto D. Acosta and Associate Judge Manuel K. Gruba; rollo, pp. 43-55.
4 CA Decision, pp. 1-4; rollo, pp. 37-40.
5 Petition, p. 8; rollo, p 13.
6 Petitioner's Reply, pp. 1-2; rollo, pp. 79-80.
7 Petition, pp. 11-12; rollo, pp. 16-17.
8 Marinduque Iron Mines Agents, Inc. vs. Municipal Council of the Municipality of Hinabangan,
Samar, 11 SCRA 416, 420, June 30 1964, citing 82 C.J.S. 956, 30 Am. Jur. 153, and McQuillin on
Municipal Corp., Vol. 16, p. 267. See also Benjamin B. Aban, Law of Basic Taxation in the
Philippines, p. 93, First Edition, (1994).
9 Commissioner of Internal Revenue vs. Fireman's Fund Ins. Co., 148 SCRA 315, 324, March 9,
1987; citing Manila Railroad Co. vs. Collector of Customs, 52 Phil. 950, (1929).
10 Rollo, pp. 49-50.
11 Petition, pp. 20-22; rollo, pp. 25-27.
12 Comment, p. 10; rollo, p. 71.
13 Rollo, p. 54
14 Ibid., p, 41.

15 Comment, pp. 6-7; rollo, pp. 67-68.

16 Paragraph 1, Article 1458, Civil Code of the Philippines.
17 Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines,
Volume V, pp. 1-2, (1992); citing 3 Castan 12-13, Kerr & Co. vs. Lingad, 38 SCRA 524, April 30,
1971, and Schmid & Oberly vs. RJL Martinez Fishing Corp., 166 SCRA 493, October 18, 1988.
18 Articles 1713 and 1714 of the Civil Code of the Philippines.
19 Villanueva, Cesar L., Philippine Law on Sales, pp. 7-9. (1995); citing Celestino Co. vs. Collector
of Internal Revenue, 99 Phil. 841 (1956).
20 The Manual for Private Schools (adopted pursuant to the provisions of Act No. 2706, as amended
by Act No. 3075 and Commonwealth Act No. 180), cited in private respondent's comment, pp. 4-5;
rollo, pp. 65-66.
21 Philippine Refining Company vs. Court of Appeals, Court of Tax Appeals and Commissioner of
Internal Revenue, 256 SCRA 667, 675-676, May 8, 1996; citing Commissioner of Internal Revenue
vs. Wander Philippines, Inc., et al., 160 SCRA 573, April 15, 1988.
22 Commissioner of Internal Revenue vs. Wander Philippines, Inc., et al., supra; citing Reyes vs.
Commissioner of Internal Revenue, 24 SCRA 198, July 29, 1968.
23 Comment, p. 7; rollo, p. 68.
24 Ibid., p. 8; citing TSN, pp. 12-13, August 25, 1989.
25 Court of Tax Appeals Decision, p. 10, and Court of Appeals Decision, p. 5 (quoted above); Rollo,
pp. 52 and 41.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-6584

October 16, 1911

INCHAUSTI AND CO., plaintiff-appellant,

vs.
ELLIS CROMWELL, Collector of Internal Revenue, defendant-appellee.
Haussermann, Cohn & Fisher, for appellant.
Acting Attorney-General Harvey, for appellee.

MORELAND, J.:

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

XII. That of the 29th day of April, 1910, the defendant, acting in his official capacity as Collector of Internal
Revenue of the Philippine Islands, made demand in writing upon the plaintiff firm for the payment within the
period of five (5) days of the sum of P1,370.68 as a tax of one third of one per cent on the sums of money
mentioned in Paragraph IX hereof, and which the said defendant claimed to be entitled to receive, under the
provisions of the said section 139 of Act No. 1189, upon the said sums of money so collected from
purchasers of hemp under the denomination of "prensaje."
XIII. That on the 4th day of May, 1910, the plaintiff firm paid to the defendant under protest the said sum of
P1,370.69, and on the same date appealed to the defendant as Collector of Internal Revenue, against the
ruling by which the plaintiff firm was required to make said payment, but defendant overruled said protest
and adversely decided said appeal, and refused and still refuses to return to plaintiff the said sum of
P1,370.68 or any part thereof.
1awphil.net

XIV. Upon the facts above set forth t is contended by the plaintiff that the tax of P1,370.68 assessed by the
defendant upon the aggregate sum of said charges made against said purchasers of hemp by the plaintiff
during the period in question, under the denomination of "prensaje" as aforesaid, namely, P411,204.35, is
illegal upon the ground that the said charge does not constitute a part of the selling price of the hemp, but is
a charge made for the service of baling the hemp, and that the plaintiff firm is therefore entitled to recover of
the defendant the said sum of P1,370.68 paid to him under protest, together with all interest thereon at the
legal rate since payment, and the costs of this action.
Upon the facts above stated it is the contention of the defendant that the said charge made under the
denomination of "prensaje" is in truth and in fact a part of the gross value of the hemp sold and of its actual
selling price, and that therefore the tax imposed by section 139 of Act No. 1189 lawfully accrued on said
sums, that the collection thereof was lawfully and properly made and that therefore the plaintiff is not entitled
to recover back said sum or any part thereof; and that the defendant should have judgment against plaintiff
for his costs.
Under these facts we are of the opinion that the judgment of the court below was right. It is one of the stipulations in
the statement of facts that it is customary to sell hemp in bales, and that the price quoted in the market for hemp per
picul is the price for the hemp baled. The fact is that among large dealers like the plaintiff in this case it is practically
impossible to handle hemp without its being baled, and it is admitted by the statement of facts, as well as
demonstrated by the documentary proof introduced in the case, that if the plaintiff sold a quality of hemp it would be
the under standing, without words, that such hemp would be delivered in bales, and that the purchase price would
include the cost and expense of baling. In other words, it is the fact as stipulated, as well as it would be the fact of
necessity, that in all dealings in hemp in the general market the selling price consists of the value of the hemp loose
plus the cost and expense of putting it into marketable form. In the sales made by the plaintiff, which are the basis of
the controversy here, there were n services performed by him for his vendee. There was agreement that services
should be performed. Indeed, at the time of such sales it was not known by the vendee whether the hemp was then
actually baled or not. All that he knew and all that concerned him was that the hemp should be delivered to him
baled. He did not ask the plaintiff to perform services for him, nor did the plaintiff agree to do so. The contract was
single and consisted solely in the sale and purchase of hemp. The purchaser contracted for nothing else and the
vendor agreed to deliver nothing else.
The word "price" signifies the sum stipulated as the equivalent of the thing sold and also every incident taken into
consideration for the fixing of the price, put to the debit of the vendee and agreed to by him. It is quite possible that
the plaintiff, in this case in connection with the hemp which he sold, had himself already paid the additional expense
of baling as a part of the purchase price which he paid and that he himself had received the hemp baled from his
vendor. It is quite possible also that such vendor of the plaintiff may have received the same hemp from his vendor
in baled form, that he paid the additions cost of baling as a part of the purchase price which he paid. In such case
the plaintiff performed no service whatever for his vendee, nor did the plaintiff's vendor perform any service for him.

The distinction between a contract of sale and one for work, labor, and materials is tested by the inquiry whether the
thing transferred is one no in existence and which never would have existed but for the order of the party desiring to
acquire it, or a thing which would have existed and been the subject of sale to some other person, even if the order
had not been given. (Groves vs. Buck, 3 Maule & S., 178; Towers vs. Osborne, 1 Strange, 506; Benjamin on Sales,
90.) It is clear that in the case at bar the hemp was in existence in baled form before the agreements of sale were
made, or, at least, would have been in existence even if none of the individual sales here in question had been
consummated. It would have been baled, nevertheless, for sale to someone else, since, according to the agreed
statement of facts, it is customary to sell hemp in bales. When a person stipulates for the future sale of articles
which he is habitually making, and which at the time are not made or finished, it is essentially a contract of sale and
not a contract for labor. It is otherwise when the article is made pursuant to agreement. (Lamb vs. Crafts, 12 Met.,
353; Smith vs. N.Y.C. Ry. Co., 4 Keyes, 180; Benjamin on Sales, 98.) Where labor is employed on the materials of
the seller he can not maintain an action for work and labor. (Atkinson vs. Bell, 8 Barn. & C., 277; Lee vs. Griffin, 30
L.J.N. S.Q.B., 252; Prescott vs. Locke, 51 N.H., 94.) If the article ordered by the purchaser is exactly such as the
plaintiff makes and keeps on hand for sale to anyone, and no change or modification of it is made at the defendant's
request, it is a contract of sale, even though it may be entirely made after, and in consequence of, the defendant's
order for it. (Garbutt s. Watson, 5 Barn. & Ald., 613; Gardner vs. Joy, 9 Met., 177; Lamb vs. Crafts, 12 Met., 353;
Waterman vs. Meigs, 4 Cush., 497., Clark vs. Nichols, 107 Mass., 547; May vs. Ward, 134 Mass., 127; Abbott vs.
Gilchrist, 38 Me., 260; Crocket vs. Scribner, 64 Me., 105; Pitkin vs. Noyes, 48 N. H., 294; Prescott vs. Locke, 51 N.
H., 94; Ellison vs. Brigham, 38 Vt., 64.) It has been held in Massachusetts that a contract to make is a contract of
sale if the article ordered is already substantially in existence at the time of the order and merely requires some
alteration, modification, or adoption to the buyer's wishes or purposes. (Mixer vs. Howarth, 21 Pick., 205.) It is also
held in that state that a contract for the sale of an article which the vendor in the ordinary course of his business
manufactures or procures for the general market, whether the same is on hand at the time or not, is a contract for
the sale of goods to which the statute of frauds applies. But if the goods are to be manufactured especially for the
purchaser and upon his special order, and not for the general market, the case is not within the statute. (Goddard
vs. Binney, 115 Mass., 450.)
It is clear to our minds that in the case at bar the baling was performed for the general market and was not
something done by plaintiff which was a result of any peculiar wording of the particular contract between him and his
vendee. It is undoubted that the plaintiff prepared his hemp for the general market. This would be necessary. One
whose exposes goods for sale in the market must have them in marketable form. The hemp in question would not
have been in that condition if it had not been baled. the baling, therefore, was nothing peculiar to the contract
between the plaintiff and his vendee. It was precisely the same contract that was made by every other seller of
hemp, engaged as was the plaintiff, and resulted simply in the transfer of title to goods already prepared for the
general market. The method of bookkeeping and form of the account rendered is not controlling as to the nature of
the contract made. It is conceded in the case tat a separate entry and charge would have been made for the baling
even if the plaintiff had not been the one who baled the hemp but, instead, had received it already baled from his
vendor. This indicates of necessity tat the mere fact of entering a separate item for the baling of the hemp is formal
rather than essential and in no sense indicates in this case the real transaction between the parties. It is
undisputable that, if the plaintiff had brought the hemp in question already baled, and that was the hemp the sale
which formed the subject of this controversy, then the plaintiff would have performed no service for his vendee and
could not, therefore, lawfully charge for the rendition of such service. It is, nevertheless, admitted that in spite of that
fact he would still have made the double entry in his invoice of sale to such vendee. This demonstrates the nature of
the transaction and discloses, as we have already said, that the entry of a separate charge for baling does not
accurately describe the transaction between the parties.
Section 139 [Act No. 1189] of the Internal Revenue Law provides that:
There shall be paid by each merchant and manufacturer a tax at the rate of one-third of one per centum on
the gross value in money of all goods, wares and merchandise sold, bartered or exchanged in the Philippine

Islands, and that this tax shall be assessed on the actual selling price at which every such merchant or
manufacturer disposes of his commodities.
The operation of baling undoubtedly augments the value of the goods. We agree that there can be no question that,
if the value of the hemp were not augmented to the amount of P1.75 per bale by said operation, the purchaser
would not pay that sum. If one buys a bale of hemp at a stipulated price of P20, well knowing that there is an
agreement on his part, express or implied, to pay an additional amount of P1.75 for that bale, he considers the bale
of hemp worth P21. 75. It is agreed, as we have before stated, that hemp is sold in bales. Therefore, baling is
performed before the sale. The purchaser of hemp owes to the seller nothing whatever by reason of their contract
except the value of the hemp delivered. That value, that sum which the purchaser pays to the vendee, is the true
selling price of the hemp, and every item which enters into such price is a part of such selling price. By force of the
custom prevailing among hemp dealers in the Philippine Islands, a purchaser of hemp in the market, unless he
expressly stipulates that it shall be delivered to him in loose form, obligates himself to purchase and pay for baled
hemp. Wheher or not such agreement is express or implied, whether it is actual or tacit, it has the same force. After
such an agreement has once been made by the purchaser, he has no right to insists thereafter that the seller shall
furnish him with unbaled hemp. It is undoubted that the vendees, in the sales referred to in the case at bar, would
have no right, after having made their contracts, to insists on the delivery of loose hemp with the purpose in view
themselves to perform the baling and thus save 75 centavos per bale. It is unquestioned that the seller, the plaintiff,
would have stood upon his original contract of sale, that is, the obligation to deliver baled hemp, and would have
forced his vendees to accept baled hemp, he himself retaining among his own profits those which accrued from the
proceed of baling.
We are of the opinion that the judgment appealed from must be affirmed, without special finding as to costs, and it is
so ordered.
Torres, Mapa, Johnson and Carson, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-8506

August 31, 1956

CELESTINO CO & COMPANY, petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
Office of the Solicitor General Ambrosio Padilla, Fisrt Assistant Solicitor General Guillermo E. Torres and Solicitor
Federico V. Sian for respondent.
BENGZON, J.:
Appeal from a decision of the Court of Tax Appeals.
Celestino Co & Company is a duly registered general copartnership doing business under the trade name of
"Oriental Sash Factory". From 1946 to 1951 it paid percentage taxes of 7 per cent on the gross receipts of its sash,
door and window factory, in accordance with section one hundred eighty-six of the National Revenue Code imposing

taxes on sale of manufactured articles. However in 1952 it began to claim liability only to the contractor's 3 per cent
tax (instead of 7 per cent) under section 191 of the same Code; and having failed to convince the Bureau of Internal
Revenue, it brought the matter to the Court of Tax Appeals, where it also failed. Said the Court:
To support his contention that his client is an ordinary contractor . . . counsel presented . . . duplicate
copies of letters, sketches of doors and windows and price quotations supposedly sent by the
manager of the Oriental Sash Factory to four customers who allegedly made special orders to doors
and window from the said factory. The conclusion that counsel would like us to deduce from these
few exhibits is that the Oriental Sash Factory does not manufacture ready-made doors, sash and
windows for the public but only upon special order of its select customers. . . . I cannot believe that
petitioner company would take, as in fact it has taken, all the trouble and expense of registering a
special trade name for its sash business and then orders company stationery carrying the bold print
"Oriental Sash Factory (Celestino Co & Company, Prop.) 926 Raon St. Quiapo, Manila, Tel. No.
33076, Manufacturers of all kinds of doors, windows, sashes, furniture, etc. used season-dried and
kiln-dried lumber, of the best quality workmanships" solely for the purpose of supplying the needs for
doors, windows and sash of its special and limited customers. One ill note that petitioner has chosen
for its tradename and has offered itself to the public as a "Factory", which means it is out to do
business, in its chosen lines on a big scale. As a general rule, sash factories receive orders for doors
and windows of special design only in particular cases but the bulk of their sales is derived from a
ready-made doors and windows of standard sizes for the average home. Moreover, as shown from
the investigation of petitioner's book of accounts, during the period from January 1, 1952 to
September 30, 1952, it sold sash, doors and windows worth P188,754.69. I find it difficult to believe
that this amount which runs to six figures was derived by petitioner entirely from its few customers
who made special orders for these items.
Even if we were to believe petitioner's claim that it does not manufacture ready-made sash, doors
and windows for the public and that it makes these articles only special order of its customers, that
does not make it a contractor within the purview of section 191 of the national Internal Revenue
Code. there are no less than fifty occupations enumerated in the aforesaid section of the national
Internal Revenue Code subject to percentage tax and after reading carefully each and every one of
them, we cannot find under which the business of manufacturing sash, doors and windows upon
special order of customers fall under the category of "road, building, navigation, artesian well, water
workers and other construction work contractors" are those who alter or repair buildings, structures,
streets, highways, sewers, street railways railroads logging roads, electric lines or power lines, and
includes any other work for the construction, altering or repairing for which machinery driven by
mechanical power is used. (Payton vs. City of Anadardo 64 P. 2d 878, 880, 179 Okl. 68).
Having thus eliminated the feasibility off taxing petitioner as a contractor under 191 of the national
Internal Revenue Code, this leaves us to decide the remaining issue whether or not petitioner could
be taxed with lesser strain and more accuracy as seller of its manufactured articles under section
186 of the same code, as the respondent Collector of Internal Revenue has in fact been doing the
Oriental Sash Factory was established in 1946.
The percentage tax imposed in section 191 of our Tax Code is generally a tax on the sales of
services, in contradiction with the tax imposed in section 186 of the same Code which is a tax on the
original sales of articles by the manufacturer, producer or importer. (Formilleza's Commentaries and
Jurisprudence on the National Internal Revenue Code, Vol. II, p. 744). The fact that the articles sold
are manufactured by the seller does not exchange the contract from the purview of section 186 of
the National Internal Revenue Code as a sale of articles.
There was a strong dissent; but upon careful consideration of the whole matter are inclines to accept the above
statement of the facts and the law. The important thing to remember is that Celestino Co & Company habitually
makes sash, windows and doors, as it has represented in its stationery and advertisements to the public. That it
"manufactures" the same is practically admitted by appellant itself. The fact that windows and doors are made by it
only when customers place their orders, does not alter the nature of the establishment, for it is obvious that it only
accepted such orders as called for the employment of such material-moulding, frames, panels-as it ordinarily
manufactured or was in a position habitually to manufacture.

Perhaps the following paragraph represents in brief the appellant's position in this Court:
Since the petitioner, by clear proof of facts not disputed by the respondent, manufacturers sash,
windows and doors only for special customers and upon their special orders and in accordance with
the desired specifications of the persons ordering the same and not for the general market: since the
doors ordered by Don Toribio Teodoro & Sons, Inc., for instance, are not in existence and which
never would have existed but for the order of the party desiring it; and since petitioner's contractual
relation with his customers is that of a contract for a piece of work or since petitioner is engaged in
the sale of services, it follows that the petitioner should be taxed under section 191 of the Tax Code
and NOT under section 185 of the same Code." (Appellant's brief, p. 11-12).
But the argument rests on a false foundation. Any builder or homeowner, with sufficient money, may order windows
or doors of the kind manufactured by this appellant. Therefore it is not true that it serves special customers only or
confines its services to them alone. And anyone who sees, and likes, the doors ordered by Don Toribio Teodoro &
Sons Inc. may purchase from appellant doors of the same kind, provided he pays the price. Surely, the appellant will
not refuse, for it can easily duplicate or even mass-produce the same doors-it is mechanically equipped to do so.
That the doors and windows must meet desired specifications is neither here nor there. If these specifications do not
happen to be of the kind habitually manufactured by appellant special forms for sash, mouldings of panels it
would not accept the order and no sale is made. If they do, the transaction would be no different from a
purchasers of manufactured goods held is stock for sale; they are bought because they meet the specifications
desired by the purchaser.
Nobody will say that when a sawmill cuts lumber in accordance with the peculiar specifications of a customer-sizes
not previously held in stock for sale to the public-it thereby becomes an employee or servant of the customer,1 not
the seller of lumber. The same consideration applies to this sash manufacturer.
The Oriental Sash Factory does nothing more than sell the goods that it mass-produces or habitually makes; sash,
panels, mouldings, frames, cutting them to such sizes and combining them in such forms as its customers may
desire.
On the other hand, petitioner's idea of being a contractor doing construction jobs is untenable. Nobody would regard
the doing of two window panels a construction work in common parlance. 2
Appellant invokes Article 1467 of the New Civil Code to bolster its contention that in filing orders for windows and
doors according to specifications, it did not sell, but merely contracted for particular pieces of work or "merely sold
its services".
Said article reads as follows:
A contract for the delivery at a certain price of an article which the vendor in the ordinary course of
his business manufactures or procures for the general market, whether the same is on hand at the
time or not, is a contract of sale, but if the goods are to be manufactured specially for the customer
and upon his special order, and not for the general market, it is contract for a piece of work.
It is at once apparent that the Oriental Sash Factory did not merely sell its services to Don Toribio Teodoro & Co. (To
take one instance) because it also sold the materials. The truth of the matter is that it sold materials ordinarily
manufactured by it sash, panels, mouldings to Teodoro & Co., although in such form or combination as suited
the fancy of the purchaser. Such new form does not divest the Oriental Sash Factory of its character as
manufacturer. Neither does it take the transaction out of the category of sales under Article 1467 above quoted,
because although the Factory does not, in the ordinary course of its business, manufacture and keep on stock
doors of the kind sold to Teodoro, it could stock and/or probably had in stock the sash, mouldings and panels it used
therefor (some of them at least).
In our opinion when this Factory accepts a job that requires the use of extraordinary or additional equipment, or
involves services not generally performed by it-it thereby contracts for a piece of work filing special orders within

the meaning of Article 1467. The orders herein exhibited were not shown to be special. They were merely orders for
work nothing is shown to call them special requiring extraordinary service of the factory.
The thought occurs to us that if, as alleged-all the work of appellant is only to fill orders previously made, such
orders should not be called special work, but regular work. Would a factory do business performing only special,
extraordinary or peculiar merchandise?
Anyway, supposing for the moment that the transactions were not sales, they were neither lease of services nor
contract jobs by a contractor. But as the doors and windows had been admittedly "manufactured" by the Oriental
Sash Factory, such transactions could be, and should be taxed as "transfers" thereof under section 186 of the
National Revenue Code.
The appealed decision is consequently affirmed. So ordered.
Paras, C. J., Padilla, Montemayor, Bautista Angelo, Concepcion, Reyes, J. B. L., and Felix, JJ., concur.

Footnotes
1

With all the consequences in Article 1729 New Civil Code and Act No. 3959 (bond of contractor).

With all the consequences in Article 1729 New Civil Code and Act No. 3959 (bond of contractor).
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. L-27044 June 30, 1975

THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND THE COURT OF TAX APPEALS, respondents.
G.R. No. L-27452 June 30, 1975
ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS, respondent.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete, Solicitor
Lolita O. Gal-lang, and Special Attorney Gemaliel H. Montalino for Commissioner of Internal Revenue, etc.
Melquides C. Gutierrez, Jose U. Ong, Juan G. Collas, Jr., Luis Ma. Guerrero and J.R. Balonkita for
Engineering and Supply Company.

ESGUERRA, J.:

Petition for review on certiorari of the decision of the Court of Tax Appeals in CTA Case No. 681, dated
November 29, 1966, assessing a compensating tax of P174,441.62 on the Engineering Equipment and
Supply Company.
As found by the Court of Tax Appeals, and as established by the evidence on record, the facts of this case
are as follows:
Engineering Equipment and Supply Co. (Engineering for short), a domestic corporation, is an engineering
and machinery firm. As operator of an integrated engineering shop, it is engaged, among others, in the
design and installation of central type air conditioning system, pumping plants and steel fabrications. (Vol. I
pp. 12-16 T.S.N. August 23, 1960)
On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now Commissioner, of Internal Revenue
denouncing Engineering for tax evasion by misdeclaring its imported articles and failing to pay the correct
percentage taxes due thereon in connivance with its foreign suppliers (Exh. "2" p. 1 BIR record Vol. I).
Engineering was likewise denounced to the Central Bank (CB) for alleged fraud in obtaining its dollar
allocations. Acting on these denunciations, a raid and search was conducted by a joint team of Central
Bank, (CB), National Bureau of Investigation (NBI) and Bureau of Internal Revenue (BIR) agents on
September 27, 1956, on which occasion voluminous records of the firm were seized and confiscated. (pp.
173-177 T.S.N.)
On September 30, 1957, revenue examiners Quesada and Catudan reported and recommended to the then
Collector, now Commissioner, of Internal Revenue (hereinafter referred to as Commissioner) that
Engineering be assessed for P480,912.01 as deficiency advance sales tax on the theory that it misdeclared
its importation of air conditioning units and parts and accessories thereof which are subject to tax under
Section 185(m) 1 of the Tax Code, instead of Section 186 of the same Code. (Exh. "3" pp. 59-63 BIR rec. Vol. I)
This assessment was revised on January 23, 1959, in line with the observation of the Chief, BIR Law Division, and
was raised to P916,362.56 representing deficiency advance sales tax and manufacturers sales tax, inclusive of
the 25% and 50% surcharges. (pp. 72-80 BIR rec. Vol. I)
On March 3, 1959. the Commissioner assessed against, and demanded upon, Engineering payment of the
increased amount and suggested that P10,000 be paid as compromise in extrajudicial settlement of
Engineering's penal liability for violation of the Tax Code. The firm, however, contested the tax assessment
and requested that it be furnished with the details and particulars of the Commissioner's assessment. (Exh.
"B" and "15", pp. 86-88 BIR rec. Vol. I) The Commissioner replied that the assessment was in accordance
with law and the facts of the case.
On July 30, 1959, Engineering appealed the case to the Court of Tax Appeals and during the pendency of
the case the investigating revenue examiners reduced Engineering's deficiency tax liabilities from
P916,362.65 to P740,587.86 (Exhs. "R" and "9" pp. 162-170, BIR rec.), based on findings after conferences
had with Engineering's Accountant and Auditor.
On November 29, 1966, the Court of Tax Appeals rendered its decision, the dispositive portion of which
reads as follows:
For ALL THE FOREGOING CONSIDERATIONS, the decision of respondent appealed from is
hereby modified, and petitioner, as a contractor, is declared exempt from the deficiency
manufacturers sales tax covering the period from June 1, 1948. to September 2, 1956.
However, petitioner is ordered to pay respondent, or his duly authorized collection agent, the
sum of P174,141.62 as compensating tax and 25% surcharge for the period from 1953 to
September 1956. With costs against petitioner.

The Commissioner, not satisfied with the decision of the Court of Tax Appeals, appealed to this Court on
January 18, 1967, (G.R. No. L-27044). On the other hand, Engineering, on January 4, 1967, filed with the
Court of Tax Appeals a motion for reconsideration of the decision abovementioned. This was denied on
April 6, 1967, prompting Engineering to file also with this Court its appeal, docketed as G.R. No. L-27452.
Since the two cases, G.R. No. L-27044 and G.R. No. L-27452, involve the same parties and issues, We have
decided to consolidate and jointly decide them.
Engineering in its Petition claims that the Court of Tax Appeals committed the following errors:
1. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
liable to the 30% compensating tax on its importations of equipment and ordinary articles
used in the central type air conditioning systems it designed, fabricated, constructed and
installed in the buildings and premises of its customers, rather than to the compensating tax
of only 7%;
2. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
guilty of fraud in effecting the said importations on the basis of incomplete quotations from
the contents of alleged photostat copies of documents seized illegally from Engineering
Equipment and Supply Company which should not have been admitted in evidence;
3. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
liable to the 25% surcharge prescribed in Section 190 of the Tax Code;
4. That the Court of Tax Appeals erred in holding the assessment as not having prescribed;
5. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
liable for the sum of P174,141.62 as 30% compensating tax and 25% surcharge instead of
completely absolving it from the deficiency assessment of the Commissioner.
The Commissioner on the other hand claims that the Court of Tax Appeals erred:
1. In holding that the respondent company is a contractor and not a manufacturer.
2. In holding respondent company liable to the 3% contractor's tax imposed by Section 191 of
the Tax Code instead of the 30% sales tax prescribed in Section 185(m) in relation to Section
194(x) both of the same Code;
3. In holding that the respondent company is subject only to the 30% compensating tax under
Section 190 of the Tax Code and not to the 30% advance sales tax imposed by section 183
(b), in relation to section 185(m) both of the same Code, on its importations of parts and
accessories of air conditioning units;
4. In not holding the company liable to the 50% fraud surcharge under Section 183 of the Tax
Code on its importations of parts and accessories of air conditioning units, notwithstanding
the finding of said court that the respondent company fraudulently misdeclared the said
importations;
5. In holding the respondent company liable for P174,141.62 as compensating tax and 25%
surcharge instead of P740,587.86 as deficiency advance sales tax, deficiency manufacturers
tax and 25% and 50% surcharge for the period from June 1, 1948 to December 31, 1956.

The main issue revolves on the question of whether or not Engineering is a manufacturer of air conditioning
units under Section 185(m), supra, in relation to Sections 183(b) and 194 of the Code, or a contractor under
Section 191 of the same Code.
The Commissioner contends that Engineering is a manufacturer and seller of air conditioning units and
parts or accessories thereof and, therefore, it is subject to the 30% advance sales tax prescribed by Section
185(m) of the Tax Code, in relation to Section 194 of the same, which defines a manufacturer as follows:
Section 194. Words and Phrases Defined. In applying the provisions of this Title, words
and phrases shall be taken in the sense and extension indicated below:
xxx xxx xxx
(x) "Manufacturer" includes every person who by physical or chemical process alters the
exterior texture or form or inner substance of any raw material or manufactured or partially
manufactured products in such manner as to prepare it for a special use or uses to which it
could not have been put in its original condition, or who by any such process alters the
quality of any such material or manufactured or partially manufactured product so as to
reduce it to marketable shape, or prepare it for any of the uses of industry, or who by any
such process combines any such raw material or manufactured or partially manufactured
products with other materials or products of the same or of different kinds and in such
manner that the finished product of such process of manufacture can be put to special use or
uses to which such raw material or manufactured or partially manufactured products in their
original condition could not have been put, and who in addition alters such raw material or
manufactured or partially manufactured products, or combines the same to produce such
finished products for the purpose of their sale or distribution to others and not for his own
use or consumption.
In answer to the above contention, Engineering claims that it is not a manufacturer and setter of airconditioning units and spare parts or accessories thereof subject to tax under Section 185(m) of the Tax
Code, but a contractor engaged in the design, supply and installation of the central type of air-conditioning
system subject to the 3% tax imposed by Section 191 of the same Code, which is essentially a tax on the
sale of services or labor of a contractor rather than on the sale of articles subject to the tax referred to in
Sections 184, 185 and 186 of the Code.
The arguments of both the Engineering and the Commissioner call for a clarification of the term contractor
as well as the distinction between a contract of sale and contract for furnishing services, labor and
materials. The distinction between a contract of sale and one for work, labor and materials is tested by the
inquiry whether the thing transferred is one not in existence and which never would have existed but for the
order of the party desiring to acquire it, or a thing which would have existed and has been the subject of
sale to some other persons even if the order had not been given. 2 If the article ordered by the purchaser is
exactly such as the plaintiff makes and keeps on hand for sale to anyone, and no change or modification of it is
made at defendant's request, it is a contract of sale, even though it may be entirely made after, and in
consequence of, the defendants order for it. 3
Our New Civil Code, likewise distinguishes a contract of sale from a contract for a piece of work thus:
Art. 1467. A contract for the delivery at a certain price of an article which the vendor in the
ordinary course of his business manufactures or procures for the general market, whether
the same is on hand at the time or not, is a contract of sale, but if the goods are to be
manufactured specially for the customer and upon his special order and not for the general
market, it is a contract for a piece of work.

The word "contractor" has come to be used with special reference to a person who, in the pursuit of the
independent business, undertakes to do a specific job or piece of work for other persons, using his own
means and methods without submitting himself to control as to the petty details. (Araas, Annotations and
Jurisprudence on the National Internal Revenue Code, p. 318, par. 191 (2), 1970 Ed.) The true test of a
contractor as was held in the cases of Luzon Stevedoring Co., vs. Trinidad, 43, Phil. 803, 807-808, and La
Carlota Sugar Central vs. Trinidad, 43, Phil. 816, 819, would seem to be that he renders service in the course
of an independent occupation, representing the will of his employer only as to the result of his work, and
not as to the means by which it is accomplished.
With the foregoing criteria as guideposts, We shall now examine whether Engineering really did
"manufacture" and sell, as alleged by the Commissioner to hold it liable to the advance sales tax under
Section 185(m), or it only had its services "contracted" for installation purposes to hold it liable under
section 198 of the Tax Code.
I
After going over the three volumes of stenographic notes and the voluminous record of the BIR and the
CTA as well as the exhibits submitted by both parties, We find that Engineering did not manufacture air
conditioning units for sale to the general public, but imported some items (as refrigeration compressors in
complete set, heat exchangers or coils, t.s.n. p. 39) which were used in executing contracts entered into by
it. Engineering, therefore, undertook negotiations and execution of individual contracts for the design,
supply and installation of air conditioning units of the central type (t.s.n. pp. 20-36; Exhs. "F", "G", "H", "I",
"J", "K", "L", and "M"), taking into consideration in the process such factors as the area of the space to be
air conditioned; the number of persons occupying or would be occupying the premises; the purpose for
which the various air conditioning areas are to be used; and the sources of heat gain or cooling load on the
plant such as sun load, lighting, and other electrical appliances which are or may be in the plan. (t.s.n. p. 34,
Vol. I) Engineering also testified during the hearing in the Court of Tax Appeals that relative to the
installation of air conditioning system, Engineering designed and engineered complete each particular plant
and that no two plants were identical but each had to be engineered separately.
As found by the lower court, which finding 4 We adopt
Engineering, in a nutshell, fabricates, assembles, supplies and installs in the buildings of its
various customers the central type air conditioning system; prepares the plans and
specifications therefor which are distinct and different from each other; the air conditioning
units and spare parts or accessories thereof used by petitioner are not the window type of air
conditioner which are manufactured, assembled and produced locally for sale to the general
market; and the imported air conditioning units and spare parts or accessories thereof are
supplied and installed by petitioner upon previous orders of its customers conformably with
their needs and requirements.
The facts and circumstances aforequoted support the theory that Engineering is a contractor rather than a
manufacturer.
The Commissioner in his Brief argues that "it is more in accord with reason and sound business
management to say that anyone who desires to have air conditioning units installed in his premises and
who is in a position and willing to pay the price can order the same from the company (Engineering) and,
therefore, Engineering could have mass produced and stockpiled air conditioning units for sale to the
public or to any customer with enough money to buy the same." This is untenable in the light of the fact
that air conditioning units, packaged, or what we know as self-contained air conditioning units, are distinct
from the central system which Engineering dealt in. To Our mind, the distinction as explained by

Engineering, in its Brief, quoting from books, is not an idle play of words as claimed by the Commissioner,
but a significant fact which We just cannot ignore. As quoted by Engineering Equipment & Supply Co., from
an Engineering handbook by L.C. Morrow, and which We reproduce hereunder for easy reference:
... there is a great variety of equipment in use to do this job (of air conditioning). Some
devices are designed to serve a specific type of space; others to perform a specific function;
and still others as components to be assembled into a tailor-made system to fit a particular
building. Generally, however, they may be grouped into two classifications unitary and
central system.
The unitary equipment classification includes those designs such as room air conditioner,
where all of the functional components are included in one or two packages, and installation
involves only making service connection such as electricity, water and drains. Central-station
systems, often referred to as applied or built-up systems, require the installation of
components at different points in a building and their interconnection.
The room air conditioner is a unitary equipment designed specifically for a room or similar
small space. It is unique among air conditioning equipment in two respects: It is in the
electrical appliance classification, and it is made by a great number of manufacturers.
There is also the testimony of one Carlos Navarro, a licensed Mechanical and Electrical Engineer, who was
once the Chairman of the Board of Examiners for Mechanical Engineers and who was allegedly responsible
for the preparation of the refrigeration and air conditioning code of the City of Manila, who said that "the
central type air conditioning system is an engineering job that requires planning and meticulous layout due
to the fact that usually architects assign definite space and usually the spaces they assign are very small
and of various sizes. Continuing further, he testified:
I don't think I have seen central type of air conditioning machinery room that are exactly alike
because all our buildings here are designed by architects dissimilar to existing buildings,
and usually they don't coordinate and get the advice of air conditioning and refrigerating
engineers so much so that when we come to design, we have to make use of the available
space that they are assigning to us so that we have to design the different component parts
of the air conditioning system in such a way that will be accommodated in the space
assigned and afterwards the system may be considered as a definite portion of the
building. ...
Definitely there is quite a big difference in the operation because the window type air
conditioner is a sort of compromise. In fact it cannot control humidity to the desired level;
rather the manufacturers, by hit and miss, were able to satisfy themselves that the desired
comfort within a room could be made by a definite setting of the machine as it comes from
the factory; whereas the central type system definitely requires an intelligent operator. (t.s.n.
pp. 301-305, Vol. II)
The point, therefore, is this Engineering definitely did not and was not engaged in the manufacture of air
conditioning units but had its services contracted for the installation of a central system. The cases cited by
the Commissioner (Advertising Associates, Inc. vs. Collector of Customs, 97, Phil. 636; Celestino Co & Co.
vs. Collector of Internal Revenue, 99 Phil. 841 and Manila Trading & Supply Co. vs. City of Manila, 56 O.G.
3629), are not in point. Neither are they applicable because the facts in all the cases cited are entirely
different. Take for instance the case of Celestino Co where this Court held the taxpayer to be a
manufacturer rather than a contractor of sash, doors and windows manufactured in its factory. Indeed, from
the very start, Celestino Co intended itself to be a manufacturer of doors, windows, sashes etc. as it did

register a special trade name for its sash business and ordered company stationery carrying the bold print
"ORIENTAL SASH FACTORY (CELESTINO CO AND COMPANY, PROP.) 926 Raon St., Quiapo, Manila, Tel. No.
etc., Manufacturers of All Kinds of Doors, Windows ... ." Likewise, Celestino Co never put up a contractor's
bond as required by Article 1729 of the Civil Code. Also, as a general rule, sash factories receive orders for
doors and windows of special design only in particular cases, but the bulk of their sales is derived from
ready-made doors and windows of standard sizes for the average home, which "sales" were reflected in
their books of accounts totalling P118,754.69 for the period from January, 1952 to September 30, 1952, or for
a period of only nine (9) months. This Court found said sum difficult to have been derived from its few
customers who placed special orders for these items. Applying the abovestated facts to the case at bar, We
found them to he inapposite. Engineering advertised itself as Engineering Equipment and Supply Company,
Machinery Mechanical Supplies, Engineers, Contractors, 174 Marques de Comillas, Manila (Exh. "B" and
"15" BIR rec. p. 186), and not as manufacturers. It likewise paid the contractors tax on all the contracts for
the design and construction of central system as testified to by Mr. Rey Parker, its President and General
Manager. (t.s.n. p. 102, 103) Similarly, Engineering did not have ready-made air conditioning units for sale
but as per testimony of Mr. Parker upon inquiry of Judge Luciano of the CTA
Q Aside from the general components, which go into air conditioning plant
or system of the central type which your company undertakes, and the
procedure followed by you in obtaining and executing contracts which you
have already testified to in previous hearing, would you say that the covering
contracts for these different projects listed ... referred to in the list, Exh. "F" are
identical in every respect? I mean every plan or system covered by these
different contracts are identical in standard in every respect, so that you can
reproduce them?
A No, sir. They are not all standard. On the contrary, none of them are the
same. Each one must be designed and constructed to meet the particular
requirements, whether the application is to be operated. (t.s.n. pp. 101-102)
What We consider as on all fours with the case at bar is the case of S.M. Lawrence Co. vs. McFarland,
Commissioner of Internal Revenue of the State of Tennessee and McCanless, 355 SW 2d, 100, 101, "where
the cause presents the question of whether one engaged in the business of contracting for the
establishment of air conditioning system in buildings, which work requires, in addition to the furnishing of a
cooling unit, the connection of such unit with electrical and plumbing facilities and the installation of ducts
within and through walls, ceilings and floors to convey cool air to various parts of the building, is liable for
sale or use tax as a contractor rather than a retailer of tangible personal property. Appellee took the
Position that appellant was not engaged in the business of selling air conditioning equipment as such but
in the furnishing to its customers of completed air conditioning systems pursuant to contract, was a
contractor engaged in the construction or improvement of real property, and as such was liable for sales or
use tax as the consumer of materials and equipment used in the consummation of contracts, irrespective of
the tax status of its contractors. To transmit the warm or cool air over the buildings, the appellant installed
system of ducts running from the basic units through walls, ceilings and floors to registers. The contract
called for completed air conditioning systems which became permanent part of the buildings and
improvements to the realty." The Court held the appellant a contractor which used the materials and the
equipment upon the value of which the tax herein imposed was levied in the performance of its contracts
with its customers, and that the customers did not purchase the equipment and have the same installed.
Applying the facts of the aforementioned case to the present case, We see that the supply of air
conditioning units to Engineer's various customers, whether the said machineries were in hand or not, was
especially made for each customer and installed in his building upon his special order. The air conditioning
units installed in a central type of air conditioning system would not have existed but for the order of the

party desiring to acquire it and if it existed without the special order of Engineering's customer, the said air
conditioning units were not intended for sale to the general public. Therefore, We have but to affirm the
conclusion of the Court of Tax Appeals that Engineering is a contractor rather than a manufacturer, subject
to the contractors tax prescribed by Section 191 of the Code and not to the advance sales tax imposed by
Section 185(m) in relation to Section 194 of the same Code. Since it has been proved to Our satisfaction that
Engineering imported air conditioning units, parts or accessories thereof for use in its construction
business and these items were never sold, resold, bartered or exchanged, Engineering should be held liable
to pay taxes prescribed under Section 190 5 of the Code. This compensating tax is not a tax on the importation
of goods but a tax on the use of imported goods not subject to sales tax. Engineering, therefore, should be held
liable to the payment of 30% compensating tax in accordance with Section 190 of the Tax Code in relation to
Section 185(m) of the same, but without the 50% mark up provided in Section 183(b).
II
We take up next the issue of fraud. The Commissioner charged Engineering with misdeclaration of the
imported air conditioning units and parts or accessories thereof so as to make them subject to a lower rate
of percentage tax (7%) under Section 186 of the Tax Code, when they are allegedly subject to a higher rate
of tax (30%) under its Section 185(m). This charge of fraud was denied by Engineering but the Court of Tax
Appeals in its decision found adversely and said"
... We are amply convinced from the evidence presented by respondent that petitioner
deliberately and purposely misdeclared its importations. This evidence consists of letters
written by petitioner to its foreign suppliers, instructing them on how to invoice and describe
the air conditioning units ordered by petitioner. ... (p. 218 CTA rec.)
Despite the above findings, however, the Court of Tax Appeals absolved Engineering from paying the 50%
surcharge prescribe by Section 183(a) of the Tax Code by reasoning out as follows:
The imposition of the 50% surcharge prescribed by Section 183(a) of the Tax Code is based
on willful neglect to file the monthly return within 20 days after the end of each month or in
case a false or fraudulent return is willfully made, it can readily be seen, that petitioner
cannot legally be held subject to the 50% surcharge imposed by Section 183(a) of the Tax
Code. Neither can petitioner be held subject to the 50% surcharge under Section 190 of the
Tax Code dealing on compensating tax because the provisions thereof do not include the
50% surcharge. Where a particular provision of the Tax Code does not impose the 50%
surcharge as fraud penalty we cannot enforce a non-existing provision of law
notwithstanding the assessment of respondent to the contrary. Instances of the exclusion in
the Tax Code of the 50% surcharge are those dealing on tax on banks, taxes on receipts of
insurance companies, and franchise tax. However, if the Tax Code imposes the 50%
surcharge as fraud penalty, it expressly so provides as in the cases of income tax, estate and
inheritance taxes, gift taxes, mining tax, amusement tax and the monthly percentage taxes.
Accordingly, we hold that petitioner is not subject to the 50% surcharge despite the existence
of fraud in the absence of legal basis to support the importation thereof. (p. 228 CTA rec.)
We have gone over the exhibits submitted by the Commissioner evidencing fraud committed by
Engineering and We reproduce some of them hereunder for clarity.
As early as March 18, 1953, Engineering in a letter of even date wrote to Trane Co. (Exh. "3-K" pp. 152-155,
BIR rec.) viz:

Your invoices should be made in the name of Madrigal & Co., Inc., Manila, Philippines, c/o
Engineering Equipment & Supply Co., Manila, Philippines forwarding all correspondence
and shipping papers concerning this order to us only and not to the customer.
When invoicing, your invoices should be exactly as detailed in the customer's Letter Order
dated March 14th, 1953 attached. This is in accordance with the Philippine import licenses
granted to Madrigal & Co., Inc. and such details must only be shown on all papers and
shipping documents for this shipment. No mention of words air conditioning equipment
should be made on any shipping documents as well as on the cases. Please give this matter
your careful attention, otherwise great difficulties will be encountered with the Philippine
Bureau of Customs when clearing the shipment on its arrival in Manila. All invoices and
cases should be marked "THIS EQUIPMENT FOR RIZAL CEMENT CO."
The same instruction was made to Acme Industries, Inc., San Francisco, California in a letter dated March
19, 1953 (Exh. "3-J-1" pp. 150-151, BIR rec.)
On April 6, 1953, Engineering wrote to Owens-Corning Fiberglass Corp., New York, U.S.A. (Exh. "3-1" pp.
147-149, BIR rec.) also enjoining the latter from mentioning or referring to the term 'air conditioning' and to
describe the goods on order as Fiberglass pipe and pipe fitting insulation instead. Likewise on April 30,
1953, Engineering threatened to discontinue the forwarding service of Universal Transcontinental
Corporation when it wrote Trane Co. (Exh. "3-H" p. 146, BIR rec.):
It will be noted that the Universal Transcontinental Corporation is not following through on
the instructions which have been covered by the above correspondence, and which indicates
the necessity of discontinuing the use of the term "Air conditioning Machinery or Air
Coolers". Our instructions concerning this general situation have been sent to you in ample
time to have avoided this error in terminology, and we will ask that on receipt of this letter
that you again write to Universal Transcontinental Corp. and inform them that, if in the future,
they are unable to cooperate with us on this requirement, we will thereafter be unable to
utilize their forwarding service. Please inform them that we will not tolerate another failure to
follow our requirements.
And on July 17, 1953 (Exh- "3-g" p. 145, BIR rec.) Engineering wrote Trane Co. another letter, viz:
In the past, we have always paid the air conditioning tax on climate changers and that mark is
recognized in the Philippines, as air conditioning equipment. This matter of avoiding any tiein on air conditioning is very important to us, and we are asking that from hereon that
whoever takes care of the processing of our orders be carefully instructed so as to avoid
again using the term "Climate changers" or in any way referring to the equipment as "air
conditioning."
And in response to the aforequoted letter, Trane Co. wrote on July 30, 1953, suggesting a solution, viz:
We feel that we can probably solve all the problems by following the procedure outlined in
your letter of March 25, 1953 wherein you stated that in all future jobs you would enclose
photostatic copies of your import license so that we might make up two sets of invoices: one
set describing equipment ordered simply according to the way that they are listed on the
import license and another according to our ordinary regular methods of order write-up. We
would then include the set made up according to the import license in the shipping boxes
themselves and use those items as our actual shipping documents and invoices, and we will

send the other regular invoice to you, by separate correspondence. (Exh- No. "3-F-1", p. 144
BIR rec.)
Another interesting letter of Engineering is one dated August 27, 1955 (Exh. "3-C" p. 141 BIR rec.)
In the process of clearing the shipment from the piers, one of the Customs inspectors
requested to see the packing list. Upon presenting the packing list, it was discovered that the
same was prepared on a copy of your letterhead which indicated that the Trane Co.
manufactured air conditioning, heating and heat transfer equipment. Accordingly, the
inspectors insisted that this equipment was being imported for air conditioning purposes. To
date, we have not been able to clear the shipment and it is possible that we will be required
to pay heavy taxes on equipment.
The purpose of this letter is to request that in the future, no documents of any kind should be
sent with the order that indicate in any way that the equipment could possibly be used for air
conditioning.
It is realized that this a broad request and fairly difficult to accomplish and administer, but we
believe with proper caution it can be executed. Your cooperation and close supervision
concerning these matters will be appreciated. (Emphasis supplied)
The aforequoted communications are strongly indicative of the fraudulent intent of Engineering to
misdeclare its importation of air conditioning units and spare parts or accessories thereof to evade
payment of the 30% tax. And since the commission of fraud is altogether too glaring, We cannot agree with
the Court of Tax Appeals in absolving Engineering from the 50% fraud surcharge, otherwise We will be
giving premium to a plainly intolerable act of tax evasion. As aptly stated by then Solicitor General, now
Justice, Antonio P. Barredo: 'this circumstance will not free it from the 50% surcharge because in any case
whether it is subject to advance sales tax or compensating tax, it is required by law to truly declare its
importation in the import entries and internal revenue declarations before the importations maybe released
from customs custody. The said entries are the very documents where the nature, quantity and value of the
imported goods declared and where the customs duties, internal revenue taxes, and other fees or charges
incident to the importation are computed. These entries, therefore, serve the same purpose as the returns
required by Section 183(a) of the Code.'
Anent the 25% delinquency surcharge, We fully agree to the ruling made by the Court of Tax Appeals and
hold Engineering liable for the same. As held by the lower court:
At first blush it would seem that the contention of petitioner that it is not subject to the
delinquency, surcharge of 25% is sound, valid and tenable. However, a serious study and
critical analysis of the historical provisions of Section 190 of the Tax Code dealing on
compensating tax in relation to Section 183(a) of the same Code, will show that the
contention of petitioner is without merit. The original text of Section 190 of Commonwealth
Act 466, otherwise known as the National Internal Revenue Code, as amended by
Commonwealth Act No. 503, effective on October 1, 1939, does not provide for the filing of a
compensation tax return and payment of the 25 % surcharge for late payment thereof. Under
the original text of Section 190 of the Tax Code as amended by Commonwealth Act No. 503,
the contention of the petitioner that it is not subject to the 25% surcharge appears to be
legally tenable. However, Section 190 of the Tax Code was subsequently amended by the
Republic Acts Nos. 253, 361, 1511 and 1612 effective October 1, 1946, July 1, 1948, June 9,
1949, June 16, 1956 and August 24, 1956 respectively, which invariably provides among
others, the following:

... If any article withdrawn from the customhouse or the post office without
payment of the compensating tax is subsequently used by the importer for
other purposes, corresponding entry should be made in the books of accounts
if any are kept or a written notice thereof sent to the Collector of Internal
Revenue and payment of the corresponding compensating tax made within 30
days from the date of such entry or notice and if tax is not paid within such
period the amount of the tax shall be increased by 25% the increment to be a
part of the tax.
Since the imported air conditioning units-and spare parts or accessories thereof are subject to the
compensating tax of 30% as the same were used in the construction business of Engineering, it is
incumbent upon the latter to comply with the aforequoted requirement of Section 190 of the Code, by
posting in its books of accounts or notifying the Collector of Internal Revenue that the imported articles
were used for other purposes within 30 days. ... Consequently; as the 30% compensating tax was not paid
by petitioner within the time prescribed by Section 190 of the Tax Code as amended, it is therefore subject
to the 25% surcharge for delinquency in the payment of the said tax. (pp. 224-226 CTA rec.)
III
Lastly the question of prescription of the tax assessment has been put in issue. Engineering contends that
it was not guilty of tax fraud in effecting the importations and, therefore, Section 332(a) prescribing ten
years is inapplicable, claiming that the pertinent prescriptive period is five years from the date the
questioned importations were made. A review of the record however reveals that Engineering did file a tax
return or declaration with the Bureau of Customs before it paid the advance sales tax of 7%. And the
declaration filed reveals that it did in fact misdeclare its importations. Section 332 of the Tax Code which
provides:
Section 332. Exceptions as to period of limitation of assessment and collection of taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax may
be begun without assessment at any time within ten years after the discovery of the falsity,
fraud or omission.
is applicable, considering the preponderance of evidence of fraud with the intent to evade the higher rate of
percentage tax due from Engineering. The, tax assessment was made within the period prescribed by law
and prescription had not set in against the Government.
WHEREFORE, the decision appealed from is affirmed with the modification that Engineering is hereby also
made liable to pay the 50% fraud surcharge.
SO ORDERED.
Makalintal, C.J., Castro, Makasiar and Martin, 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 sold, 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 material 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
(m) Air conditioning units and parts or accessories thereof. (As amended by R.A. No. 588,
effective from September 22, 1950 until it was amended by R.A. No. 1612 made effective
August 14, 1956.) manufactured articles. ...
2 Groves vs. Buck, 3, Maule & s. 178; Towers v. Osborne, 1 Strange 506, Benjamin on Sales
90; as cited in Araas, Annotation., and Jurisprudence on the NIRC, as amended, 1970 ed. p.
323, 324.
3 Ibid., p. 324, par. 191 (13).
4 Decision, Court of Tax Appeals, CTA Rec. p. 212.
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, except those subject to specific taxes under the Title IV of this Code,
shall pay on the total value thereof at the time they are received by such persons, including
freight, postage, insurance, commission and similar charges, a compensating tax equivalent
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 post office. Provided,
However, That merchants, importers, and manufacturers, who are subject to the tax under
Sections 184, 185, 186 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 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 manufacture 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 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 part of the tax".(As amended by R.A.
253, effective July 1948).
1wph1.t

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. L-11491

August 23, 1918

ANDRES QUIROGA, plaintiff-appellant,

vs.
PARSONS HARDWARE CO., defendant-appellee.
Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant.
Crossfield & O'Brien for appellee.
AVANCEA, J.:
On January 24, 1911, in this city of manila, a contract in the following tenor was entered into by and between the
plaintiff, as party of the first part, and J. Parsons (to whose rights and obligations the present defendant later
subrogated itself), as party of the second part:
CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND J. PARSONS, BOTH
MERCHANTS ESTABLISHED IN MANILA, FOR THE EXCLUSIVE SALE OF "QUIROGA" BEDS IN
THE VISAYAN ISLANDS.
ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his beds in the Visayan Islands to J.
Parsons under the following conditions:
(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for the latter's establishment in Iloilo,
and shall invoice them at the same price he has fixed for sales, in Manila, and, in the invoices, shall make
and allowance of a discount of 25 per cent of the invoiced prices, as commission on the sale; and Mr.
Parsons shall order the beds by the dozen, whether of the same or of different styles.
(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds received, within a period of sixty days from the
date of their shipment.
(C) The expenses for transportation and shipment shall be borne by M. Quiroga, and the freight, insurance,
and cost of unloading from the vessel at the point where the beds are received, shall be paid by Mr.
Parsons.
(D) If, before an invoice falls due, Mr. Quiroga should request its payment, said payment when made shall
be considered as a prompt payment, and as such a deduction of 2 per cent shall be made from the amount
of the invoice.
The same discount shall be made on the amount of any invoice which Mr. Parsons may deem convenient to
pay in cash.
(E) Mr. Quiroga binds himself to give notice at least fifteen days before hand of any alteration in price which
he may plan to make in respect to his beds, and agrees that if on the date when such alteration takes effect
he should have any order pending to be served to Mr. Parsons, such order shall enjoy the advantage of the
alteration if the price thereby be lowered, but shall not be affected by said alteration if the price thereby be
increased, for, in this latter case, Mr. Quiroga assumed the obligation to invoice the beds at the price at
which the order was given.
(F) Mr. Parsons binds himself not to sell any other kind except the "Quiroga" beds.

ART. 2. In compensation for the expenses of advertisement which, for the benefit of both contracting parties,
Mr. Parsons may find himself obliged to make, Mr. Quiroga assumes the obligation to offer and give the
preference to Mr. Parsons in case anyone should apply for the exclusive agency for any island not
comprised with the Visayan group.
ART. 3. Mr. Parsons may sell, or establish branches of his agency for the sale of "Quiroga" beds in all the
towns of the Archipelago where there are no exclusive agents, and shall immediately report such action to
Mr. Quiroga for his approval.
ART. 4. This contract is made for an unlimited period, and may be terminated by either of the contracting
parties on a previous notice of ninety days to the other party.
Of the three causes of action alleged by the plaintiff in his complaint, only two of them constitute the subject matter
of this appeal and both substantially amount to the averment that the defendant violated the following obligations:
not to sell the beds at higher prices than those of the invoices; to have an open establishment in Iloilo; itself to
conduct the agency; to keep the beds on public exhibition, and to pay for the advertisement expenses for the same;
and to order the beds by the dozen and in no other manner. As may be seen, with the exception of the obligation on
the part of the defendant to order the beds by the dozen and in no other manner, none of the obligations imputed to
the defendant in the two causes of action are expressly set forth in the contract. But the plaintiff alleged that the
defendant was his agent for the sale of his beds in Iloilo, and that said obligations are implied in a contract of
commercial agency. The whole question, therefore, reduced itself to a determination as to whether the defendant, by
reason of the contract hereinbefore transcribed, was a purchaser or an agent of the plaintiff for the sale of his beds.
In order to classify a contract, due regard must be given to its essential clauses. In the contract in question, what
was essential, as constituting its cause and subject matter, is that the plaintiff was to furnish the defendant with the
beds which the latter might order, at the price stipulated, and that the defendant was to pay the price in the manner
stipulated. The price agreed upon was the one determined by the plaintiff for the sale of these beds in Manila, with a
discount of from 20 to 25 per cent, according to their class. Payment was to be made at the end of sixty days, or
before, at the plaintiff's request, or in cash, if the defendant so preferred, and in these last two cases an additional
discount was to be allowed for prompt payment. These are precisely the essential features of a contract of purchase
and sale. There was the obligation on the part of the plaintiff to supply the beds, and, on the part of the defendant, to
pay their price. These features exclude the legal conception of an agency or order to sell whereby the mandatory or
agent received the thing to sell it, and does not pay its price, but delivers to the principal the price he obtains from
the sale of the thing to a third person, and if he does not succeed in selling it, he returns it. By virtue of the contract
between the plaintiff and the defendant, the latter, on receiving the beds, was necessarily obliged to pay their price
within the term fixed, without any other consideration and regardless as to whether he had or had not sold the beds.
It would be enough to hold, as we do, that the contract by and between the defendant and the plaintiff is one of
purchase and sale, in order to show that it was not one made on the basis of a commission on sales, as the plaintiff
claims it was, for these contracts are incompatible with each other. But, besides, examining the clauses of this
contract, none of them is found that substantially supports the plaintiff's contention. Not a single one of these
clauses necessarily conveys the idea of an agency. The words commission on sales used in clause (A) of article 1
mean nothing else, as stated in the contract itself, than a mere discount on the invoice price. The word agency, also
used in articles 2 and 3, only expresses that the defendant was the only one that could sell the plaintiff's beds in the
Visayan Islands. With regard to the remaining clauses, the least that can be said is that they are not incompatible
with the contract of purchase and sale.
The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-president of the defendant corporation
and who established and managed the latter's business in Iloilo. It appears that this witness, prior to the time of his
testimony, had serious trouble with the defendant, had maintained a civil suit against it, and had even accused one
of its partners, Guillermo Parsons, of falsification. He testified that it was he who drafted the contract Exhibit A, and,

when questioned as to what was his purpose in contracting with the plaintiff, replied that it was to be an agent for his
beds and to collect a commission on sales. However, according to the defendant's evidence, it was Mariano Lopez
Santos, a director of the corporation, who prepared Exhibit A. But, even supposing that Ernesto Vidal has stated the
truth, his statement as to what was his idea in contracting with the plaintiff is of no importance, inasmuch as the
agreements contained in Exhibit A which he claims to have drafted, constitute, as we have said, a contract of
purchase and sale, and not one of commercial agency. This only means that Ernesto Vidal was mistaken in his
classification of the contract. But it must be understood that a contract is what the law defines it to be, and not what
it is called by the contracting parties.
The plaintiff also endeavored to prove that the defendant had returned beds that it could not sell; that, without
previous notice, it forwarded to the defendant the beds that it wanted; and that the defendant received its
commission for the beds sold by the plaintiff directly to persons in Iloilo. But all this, at the most only shows that, on
the part of both of them, there was mutual tolerance in the performance of the contract in disregard of its terms; and
it gives no right to have the contract considered, not as the parties stipulated it, but as they performed it. Only the
acts of the contracting parties, subsequent to, and in connection with, the execution of the contract, must be
considered for the purpose of interpreting the contract, when such interpretation is necessary, but not when, as in
the instant case, its essential agreements are clearly set forth and plainly show that the contract belongs to a certain
kind and not to another. Furthermore, the return made was of certain brass beds, and was not effected in exchange
for the price paid for them, but was for other beds of another kind; and for the letter Exhibit L-1, requested the
plaintiff's prior consent with respect to said beds, which shows that it was not considered that the defendant had a
right, by virtue of the contract, to make this return. As regards the shipment of beds without previous notice, it is
insinuated in the record that these brass beds were precisely the ones so shipped, and that, for this very reason, the
plaintiff agreed to their return. And with respect to the so-called commissions, we have said that they merely
constituted a discount on the invoice price, and the reason for applying this benefit to the beds sold directly by the
plaintiff to persons in Iloilo was because, as the defendant obligated itself in the contract to incur the expenses of
advertisement of the plaintiff's beds, such sales were to be considered as a result of that advertisement.
In respect to the defendant's obligation to order by the dozen, the only one expressly imposed by the contract, the
effect of its breach would only entitle the plaintiff to disregard the orders which the defendant might place under
other conditions; but if the plaintiff consents to fill them, he waives his right and cannot complain for having acted
thus at his own free will.
For the foregoing reasons, we are of opinion that the contract by and between the plaintiff and the defendant was
one of purchase and sale, and that the obligations the breach of which is alleged as a cause of action are not
imposed upon the defendant, either by agreement or by law.
The judgment appealed from is affirmed, with costs against the appellant. So ordered.
Arellano, C.J., Torres, Johnson, Street and Malcolm, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-47538

June 20, 1941

GONZALO PUYAT & SONS, INC., petitioner,

vs.
ARCO AMUSEMENT COMPANY (formerly known as Teatro Arco), respondent.
Feria & Lao for petitioner.
J. W. Ferrier and Daniel Me. Gomez for respondent.
LAUREL, J.:
This is a petition for the issuance of a writ of certiorari to the Court of Appeals for the purpose of reviewing its
Amusement Company (formerly known as Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat and Sons. Inc.,
defendant-appellee."
It appears that the respondent herein brought an action against the herein petitioner in the Court of First Instance of
Manila to secure a reimbursement of certain amounts allegedly overpaid by it on account of the purchase price of
sound reproducing equipment and machinery ordered by the petitioner from the Starr Piano Company of Richmond,
Indiana, U.S.A. The facts of the case as found by the trial court and confirmed by the appellate court, which are
admitted by the respondent, are as follows:
In the year 1929, the "Teatro Arco", a corporation duly organized under the laws of the Philippine Islands,
with its office in Manila, was engaged in the business of operating cinematographs. In 1930, its name was
changed to Arco Amusement Company. C. S. Salmon was the president, while A. B. Coulette was the
business manager. About the same time, Gonzalo Puyat & Sons, Inc., another corporation doing business in
the Philippine Islands, with office in Manila, in addition to its other business, was acting as exclusive agents
in the Philippines for the Starr Piano Company of Richmond, Indiana, U.S. A. It would seem that this last
company dealt in cinematographer equipment and machinery, and the Arco Amusement Company desiring
to equipt its cinematograph with sound reproducing devices, approached Gonzalo Puyat & Sons, Inc., thru
its then president and acting manager, Gil Puyat, and an employee named Santos. After some negotiations,
it was agreed between the parties, that is to say, Salmon and Coulette on one side, representing the plaintiff,
and Gil Puyat on the other, representing the defendant, that the latter would, on behalf of the plaintiff, order
sound reproducing equipment from the Starr Piano Company and that the plaintiff would pay the defendant,
in addition to the price of the equipment, a 10 per cent commission, plus all expenses, such as, freight,
insurance, banking charges, cables, etc. At the expense of the plaintiff, the defendant sent a cable, Exhibit
"3", to the Starr Piano Company, inquiring about the equipment desired and making the said company to
quote its price without discount. A reply was received by Gonzalo Puyat & Sons, Inc., with the price,
evidently the list price of $1,700 f.o.b. factory Richmond, Indiana. The defendant did not show the plaintiff
the cable of inquiry nor the reply but merely informed the plaintiff of the price of $1,700. Being agreeable to
this price, the plaintiff, by means of Exhibit "1", which is a letter signed by C. S. Salmon dated November 19,
1929, formally authorized the order. The equipment arrived about the end of the year 1929, and upon
delivery of the same to the plaintiff and the presentation of necessary papers, the price of $1.700, plus the
10 per cent commission agreed upon and plus all the expenses and charges, was duly paid by the plaintiff to
the defendant.
Sometime the following year, and after some negotiations between the same parties, plaintiff and
defendants, another order for sound reproducing equipment was placed by the plaintiff with the defendant,
on the same terms as the first order. This agreement or order was confirmed by the plaintiff by its letter
Exhibit "2", without date, that is to say, that the plaintiff would pay for the equipment the amount of $1,600,
which was supposed to be the price quoted by the Starr Piano Company, plus 10 per cent commission, plus
all expenses incurred. The equipment under the second order arrived in due time, and the defendant was
duly paid the price of $1,600 with its 10 per cent commission, and $160, for all expenses and charges. This
amount of $160 does not represent actual out-of-pocket expenses paid by the defendant, but a mere flat

charge and rough estimate made by the defendant equivalent to 10 per cent of the price of $1,600 of the
equipment.
About three years later, in connection with a civil case in Vigan, filed by one Fidel Reyes against the
defendant herein Gonzalo Puyat & Sons, Inc., the officials of the Arco Amusement Company discovered that
the price quoted to them by the defendant with regard to their two orders mentioned was not the net price
but rather the list price, and that the defendants had obtained a discount from the Starr Piano Company.
Moreover, by reading reviews and literature on prices of machinery and cinematograph equipment, said
officials of the plaintiff were convinced that the prices charged them by the defendant were much too high
including the charges for out-of-pocket expense. For these reasons, they sought to obtain a reduction from
the defendant or rather a reimbursement, and failing in this they brought the present action.
The trial court held that the contract between the petitioner and the respondent was one of outright purchase and
sale, and absolved that petitioner from the complaint. The appellate court, however, by a division of four, with one
justice dissenting held that the relation between petitioner and respondent was that of agent and principal, the
petitioner acting as agent of the respondent in the purchase of the equipment in question, and sentenced the
petitioner to pay the respondent alleged overpayments in the total sum of $1,335.52 or P2,671.04, together with
legal interest thereon from the date of the filing of the complaint until said amount is fully paid, as well as to pay the
costs of the suit in both instances. The appellate court further argued that even if the contract between the petitioner
and the respondent was one of purchase and sale, the petitioner was guilty of fraud in concealing the true price and
hence would still be liable to reimburse the respondent for the overpayments made by the latter.
The petitioner now claims that the following errors have been incurred by the appellate court:
I. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, segun hechos, entre la recurrente
y la recurrida existia una relacion implicita de mandataria a mandante en la transaccion de que se trata, en
vez de la de vendedora a compradora como ha declarado el Juzgado de Primera Instncia de Manila,
presidido entonces por el hoy Magistrado Honorable Marcelino Montemayor.
II. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, suponiendo que dicha relacion
fuerra de vendedora a compradora, la recurrente obtuvo, mediante dolo, el consentimiento de la recurrida
en cuanto al precio de $1,700 y $1,600 de las maquinarias y equipos en cuestion, y condenar a la
recurrente ha obtenido de la Starr Piano Company of Richmond, Indiana.
We sustain the theory of the trial court that the contract between the petitioner and the respondent was one of
purchase and sale, and not one of agency, for the reasons now to be stated.
In the first place, the contract is the law between the parties and should include all the things they are supposed to
have been agreed upon. What does not appear on the face of the contract should be regarded merely as "dealer's"
or "trader's talk", which can not bind either party. (Nolbrook v. Conner, 56 So., 576, 11 Am. Rep., 212; Bank v.
Brosscell, 120 III., 161; Bank v. Palmer, 47 III., 92; Hosser v. Copper, 8 Allen, 334; Doles v. Merrill, 173 Mass., 411.)
The letters, Exhibits 1 and 2, by which the respondent accepted the prices of $1,700 and $1,600, respectively, for
the sound reproducing equipment subject of its contract with the petitioner, are clear in their terms and admit no
other interpretation that the respondent in question at the prices indicated which are fixed and determinate. The
respondent admitted in its complaint filed with the Court of First Instance of Manila that the petitioner agreed to sell
to it the first sound reproducing equipment and machinery. The third paragraph of the respondent's cause of action
states:
3. That on or about November 19, 1929, the herein plaintiff (respondent) and defendant (petitioner) entered
into an agreement, under and by virtue of which the herein defendant was to secure from the United States,
and sell and deliver to the herein plaintiff, certain sound reproducing equipment and machinery, for which the

said defendant, under and by virtue of said agreement, was to receive the actual cost price plus ten per cent
(10%), and was also to be reimbursed for all out of pocket expenses in connection with the purchase and
delivery of such equipment, such as costs of telegrams, freight, and similar expenses. (Emphasis ours.)
We agree with the trial judge that "whatever unforseen events might have taken place unfavorable to the defendant
(petitioner), such as change in prices, mistake in their quotation, loss of the goods not covered by insurance or
failure of the Starr Piano Company to properly fill the orders as per specifications, the plaintiff (respondent) might
still legally hold the defendant (petitioner) to the prices fixed of $1,700 and $1,600." This is incompatible with the
pretended relation of agency between the petitioner and the respondent, because in agency, the agent is exempted
from all liability in the discharge of his commission provided he acts in accordance with the instructions received
from his principal (section 254, Code of Commerce), and the principal must indemnify the agent for all damages
which the latter may incur in carrying out the agency without fault or imprudence on his part (article 1729, Civil
Code).
While the latters, Exhibits 1 and 2, state that the petitioner was to receive ten per cent (10%) commission, this does
not necessarily make the petitioner an agent of the respondent, as this provision is only an additional price which
the respondent bound itself to pay, and which stipulation is not incompatible with the contract of purchase and sale.
(See Quiroga vs. Parsons Hardware Co., 38 Phil., 501.)
In the second place, to hold the petitioner an agent of the respondent in the purchase of equipment and machinery
from the Starr Piano Company of Richmond, Indiana, is incompatible with the admitted fact that the petitioner is the
exclusive agent of the same company in the Philippines. It is out of the ordinary for one to be the agent of both the
vendor and the purchaser. The facts and circumstances indicated do not point to anything but plain ordinary
transaction where the respondent enters into a contract of purchase and sale with the petitioner, the latter as
exclusive agent of the Starr Piano Company in the United States.
It follows that the petitioner as vendor is not bound to reimburse the respondent as vendee for any difference
between the cost price and the sales price which represents the profit realized by the vendor out of the transaction.
This is the very essence of commerce without which merchants or middleman would not exist.
The respondents contends that it merely agreed to pay the cost price as distinguished from the list price, plus ten
per cent (10%) commission and all out-of-pocket expenses incurred by the petitioner. The distinction which the
respondents seeks to draw between the cost price and the list price we consider to be spacious. It is to be observed
that the twenty-five per cent (25%) discount granted by the Starr piano Company to the petitioner is available only to
the latter as the former's exclusive agent in the Philippines. The respondent could not have secured this discount
from the Starr Piano Company and neither was the petitioner willing to waive that discount in favor of the
respondent. As a matter of fact, no reason is advanced by the respondent why the petitioner should waive the 25
per cent discount granted it by the Starr Piano Company in exchange for the 10 percent commission offered by the
respondent. Moreover, the petitioner was not duty bound to reveal the private arrangement it had with the Starr
Piano Company relative to such discount to its prospective customers, and the respondent was not even aware of
such an arrangement. The respondent, therefore, could not have offered to pay a 10 per cent commission to the
petitioner provided it was given the benefit of the 25 per cent discount enjoyed by the petitioner. It is well known that
local dealers acting as agents of foreign manufacturers, aside from obtaining a discount from the home office,
sometimes add to the list price when they resell to local purchasers. It was apparently to guard against an
exhorbitant additional price that the respondent sought to limit it to 10 per cent, and the respondent is estopped from
questioning that additional price. If the respondent later on discovers itself at the short end of a bad bargain, it alone
must bear the blame, and it cannot rescind the contract, much less compel a reimbursement of the excess price, on
that ground alone. The respondent could not secure equipment and machinery manufactured by the Starr Piano
Company except from the petitioner alone; it willingly paid the price quoted; it received the equipment and
machinery as represented; and that was the end of the matter as far as the respondent was concerned. The fact
that the petitioner obtained more or less profit than the respondent calculated before entering into the contract or

reducing the price agreed upon between the petitioner and the respondent. Not every concealment is fraud; and
short of fraud, it were better that, within certain limits, business acumen permit of the loosening of the sleeves and of
the sharpening of the intellect of men and women in the business world.
The writ of certiorari should be, as it is hereby, granted. The decision of the appellate court is accordingly reversed
and the petitioner is absolved from the respondent's complaint in G. R. No. 1023, entitled "Arco Amusement
Company (formerly known as Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat & Sons, Inc., defendants-appellee,"
without pronouncement regarding costs. So ordered.
Avancea, C.J., Diaz, Moran and Horrilleno, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 130972

January 23, 2002

PHILIPPINE LAWIN BUS, CO., MASTER TOURS & TRAVEL CORP., MARCIANO TAN, ISIDRO TAN, ESTEBAN
TAN and HENRY TAN, petitioners,
vs.
COURT OF APPEALS and ADVANCE CAPITAL CORPORATION, respondents.
DECISION
PARDO, J.:
The Case
The case is a petition for review via certiorari of the decision of the Court of Appeals,1 reversing that of the trial court2
and sentencing petitioners as follows:
"WHEREFORE, the appealed decision should be, as it is hereby REVERSED and SET ASIDE. In lieu thereof, a
new one is hereby rendered ordering the defendants-appellees to pay, jointly and solidarily, in favor of plaintiffappellant Advance Capital Corporation, the following amounts:
"1. P16,484,994.42, the principal obligation under the two promissory note Nos. 003 and 00037 plus
interest and penalties;
"2. P100,000.00 for loss of goodwill and good reputation;
"3. An amount equivalent to 10% of the collectible amount, plus P50,000, as acceptance fee and
P500 per appearance, as and for attorneys fees: and
"4. P100,000 as litigation expenses.
"Costs shall be taxed against defendant-appellees.
"SO ORDERED."3

The Facts
The facts, as found by the Court of Appeals, are as follows:
"On 7 August 1990 plaintiff Advance Capital Corporation, a licensed lending investor, extended a loan to defendant
Philippine Lawin Bus Company (hereafter referred to as LAWIN), in the amount of P8,000,000.00 payable within a
period of one (1) year, as evidenced by a Credit Agreement (Exhibits "B" to "B-4-B"). The defendant, through
Marciano Tan, its Executive Vice President, executed Promissory Note No. 003, for the amount of P8,000,000.00
(Exhs. "C" to "C-1").
"To guarantee payment of the loan, defendant Lawin executed in favor of plaintiff the following documents: (1) A
Deed of Chattel Mortgage wherein 9 units of buses were constituted as collaterals (Exhibits "F" to "F-7"): (2) A joint
and several UNDERTAKING of defendant Master Tours and Travel Corporation dated 07 August 1990, signed by
Isidro Tan and Marciano Tan (Exhs. "H" to "H-1): and (3) A joint and several UNDERTAKING dated 21 August 1990,
executed and signed by Esteban, Isidro, Marciano and Henry, all surnamed Tan (Exhs. "I" to "I-6").
"Out of the P8,000,000.00 loan, P1,800,000.00 was paid. Thus, on 02 November 1990, defendant Bus Company
was able to avail an additional loan of P2,000,000.00 for one (1) month under Promissory Note 00028 (Exhs. "J"-"J1").
"Defendant LAWIN failed to pay the aforementioned promissory note and the same was renewed on 03 December
1990 to become due on or before 01 February 1991, under Promissory Note 00037 (Exh. "K").
"On 15 May 1991 for failure to pay the two promissory notes, defendant LAWIN was granted a loan re-structuring for
two (2) months to mature on 31 July 1991.
"Despite the restructuring, defendant LAWIN failed to pay. Thus, plaintiff foreclosed the mortgaged buses and as the
sole bidder thereof, the amount of P2,000,000.00 was accepted by the deputy sheriff conducting the sale and
credited to the account of defendant LAWIN.
"Thereafter, on 27 May 1992, identical demand letters were sent to the defendants to pay their obligation (Exhs. "X"
to "CC"). Despite repeated demands, the defendants failed to pay their indebtedness which totaled of
P16,484,992.42 as of 31 July 1992 (Exhs. "DD"-"DD-1").
"Thus, the suit for sum of money, wherein the plaintiff prays that defendants solidarily pay plaintiff as of July 31,
1992 the sum of (a) P16,484,994.12 as principal obligation under the two promissory notes Nos. 003 and 00037,
plus interests and penalties: (b) P300,000.00 for loss of good will and good business reputation: (c) attorneys fees
amounting to P100,000.00 as acceptance fee and a sum equivalent to 10% of the collectible amount, and P500.00
as appearance fee; (d) P200,000.00 as litigation expenses; (e) exemplary damages in an amount to be awarded at
the courts discretion; and (f) the costs.
"On 04 September 1993, a writ of preliminary injunction was issued with respect to movable and immovable
properties of the defendants.
"In answer to the complaint, defendants-appellees assert by way of special and affirmative defense, that there was
already an arrangement as to the full settlement of the loan obligation by way of:
"17.A. Sale of the nine (9) units passenger buses the proceeds of which will be credited against the loan amount as
full payment thereof; or in the alternative.
"17.B. Plaintiff will shoulder and bear the cost of rehabilitating the buses, with the amount thereof to be included in
the total obligation of defendant Lawin and the bus operated, with the earnings thereof to be applied to the loan
obligation of defendant Lawin." (p. 4 Answer; p. 166, rec.)
"Defendants further assert that the foreclosure sale was in violation of the aforequoted arrangement and prayed for
the nullification of the same and the dismissal of the complaint." 4

On 28 June 1995, the trial court rendered a decision dismissing the complaint, as follows:
"WHEREFORE, judgment is rendered as follows:
"1. Dismissing the complaint for lack of merit;
"2. Declaring the foreclosure and auction sale null and void;
"3. Declaring the obligation or indebtedness of defendants EXTINGUISHED;
"4. Declaring the writ of attachment issued in this case null and void and, therefore, is hereby
declared dissolved; and
"5. Ordering the Sheriff of this Branch or whoever is in possession, to return all the personal
properties attached in this case to the owner/s thereof within one (1) week from the finality of this
decision;
"6. Dismissing defendants counterclaim for lack of sufficient merit.
"No pronouncement as to costs.
"SO ORDERED."5
In time, respondent Advance Capital Corporation appealed from the decision to the Court of Appeals. 6
On 30 September 1997, the Court of Appeals promulgated a decision reversing that of the trial court, the dispositive
portion of which is set out in the opening paragraph of this decision.
Hence, this appeal.7
The Issue
The issue raised is whether there was dacion en pago between the parties upon the surrender or transfer of the
mortgaged buses to the respondent.8
The Courts Ruling
We deny the petition, with modification.
The issue raised is factual. In an appeal via certiorari, we may not review the factual findings of the Court of
Appeals.9 When supported by substantial evidence, the findings of fact of the Court of Appeals are conclusive and
binding on the parties and are not reviewable by this Court,10 unless the case falls under any of the recognized
exceptions to the rule.11
Petitioner failed to prove that the case falls within the exceptions.12 The Supreme Court is not a trier of facts.13 It is
not our function to review, examine and evaluate or weigh the probative value of the evidence presented. 14 A
question of fact would arise in such event.15
Nonetheless, we agree with the Court of Appeals that there was no dacion en pago that took place between the
parties.
In dacion en pago, property is alienated to the creditor in satisfaction of a debt in money.16 It is "the delivery and
transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of
the obligation."17 It "extinguishes the obligation to the extent of the value of the thing delivered, either as agreed
upon by the parties or as may be proved, unless the parties by agreement, express or implied, or by their silence,
consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished." 18

Article 1245 of the Civil Code provides that the law on sales shall govern an agreement of dacion en pago. A
contract of sale is perfected at the moment there is a meeting of the minds of the parties thereto upon the thing
which is the object of the contract and upon the price.19 In Filinvest Credit Corporation v. Philippine Acetylene Co.,
Inc., we said:
"x x x. In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts
it as equivalent of payment of an outstanding obligation. The undertaking really partakes in one sense of the nature
of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged
against the debtors debt. As such, the essential elements of a contract of sale, namely, consent, object certain, and
cause or consideration must be present. In its modern concept, what actually takes place in dacion en pago is an
objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an
obligation is considered as the object of the contract of sale, while the debt is considered as the purchase price. In
any case, common consent is an essential prerequisite, be it sale or novation, to have the effect of totally
extinguishing the debt or obligation."20
1wphi1

In this case, there was no meeting of the minds between the parties on whether the loan of the petitioners would be
extinguished by dacion en pago. The petitioners anchor their claim solely on the testimony of Marciano Tan that he
proposed to extinguish petitioners obligation by the surrender of the nine buses to the respondent acceded to as
shown by receipts its representative made.21 However, the receipts executed by respondents representative as
proof of an agreement of the parties that delivery of the buses to private respondent would result in extinguishing
petitioners obligation do not in any way reflect the intention of the parties that ownership thereof by respondent
would be complete and absolute. The receipts show that the two buses were delivered to respondent in order that it
would take custody for the purpose of selling the same. The receipts themselves in fact show that petitioners
deemed respondent as their agent in the sale of the two vehicles whereby the proceeds thereof would be applied in
payment of petitioners indebtedness to respondent. Such an agreement negates transfer of absolute ownership
over the property to respondent, as in a sale. Thus, in Philippine National Bank v. Pineda22 we held that where
machinery and equipment were repossessed to secure the payment of a loan obligation and not for the purpose of
transferring ownership thereof to the creditor in satisfaction of said loan, no dacion en pago was ever
accomplished.
1wphi1

The Fallo
IN VIEW WHEREOF, the Court DENIES the petition and AFFIRMS the decision of the Court of Appeals 23 with
MODIFICATION as follows:
WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE. In lieu thereof, judgment is hereby
rendered ordering defendants-appellees to pay, jointly and severally, plaintiff-appellant Advance Capital Corp. the
following amounts:
(1) P16,484,994.42, the principal obligation under the two promissory notes plus 12% per annum
from the finality of this decision until fully paid;
(2) P50,000.00 as attorneys fees;
(3) Costs of suit.
All other monetary awards are deleted.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Ynares-Santiago, JJ., concur.

Footnotes

In CA-G. R. CV No. 50080, promulgated on September 30, 1997, Petition, Annex "E", Rollo, pp. 7992. Martinez, A. M. J., ponente, Ibay-Somera and Agcaoili, JJ., concurring.
1

Regional Trial Court of Makati, Branch 145, Decision, dated June 28, 1995. Judge Job B. Madayag,
presiding, Rollo, pp. 60-77.
2

Rollo, pp. 79-92, at pp. 91-92.

Rollo, pp. 79-92, at pp. 80-81.

Rollo, pp. 60-77, at pp. 76-77.

Docketed as CA-G. R. CV No. 50080.

Petition filed on November 26, 1997, Rollo, pp. 6-39. On October 21, 1998, we gave due course to
the petition. (Rollo, p. 138).
7

Comment, Rollo, pp. 114-131, at p. 117.

Cristobal v. Court of Appeals, 353 Phil. 320, 326 [1998]; Sarmiento v. Court of Appeals, 353 Phil.
834, 845-846 [1998]; Concepcion v. Court of Appeals, 324 SCRA 85 [2000], citing Congregation of
the Virgin Mary v. Court of Appeals, 353 Phil. 591, 597 [1998] and Sarmiento v. Court of Appeals,
supra; Arriola v. Mahilum, 337 SCRA 464, 469 [2000]; Bolanos v. Court of Appeals, 345 SCRA 125,
130-131 [2000].
9

10

Atillo v. Court of Appeals, 334 Phil. 546, 555 [1997].

11

Cebu Shipyard and Engineering Works, Inc. v. William Lines, Inc., 366 Phil. 439, 452 [1999].

12

Rivera v. Court of Appeals, 348 Phil. 734, 743 [1998].

13

Trade Unions of the Philippines v. Laguesma, 236 SCRA 586 [1994].

14

Trade Unions of the Philippines v. Laguesma, supra, Note 13.

Cheesman v. Intermediate Appellate Court, 193 SCRA 93 [1991]; Ramos v. Pepsi Cola Bottling
Co., 125 Phil. 701 [1967]; Pilar Dev. Corp. v. Intermediate Appellate Court, 146 SCRA 215 [1986];
Arroyo v. Beaterio del Santissimo Rosario de Molo, 132 Phil. 9 [1968]; Bernardo v. Court of Appeals,
216 SCRA 224 [1992].
15

16

Art. 1245, Civil Code.

Tolentino, Civil Code of the Philippines, Vol. IV, 1991 ed., p. 293, citing 2 Castan 525; 8 Manresa
324 and Filinvest Credit Corporation vs. Philippine Acetylene Co., 197 Phil. 394 [1982].
17

Caltex (Philippines), Inc. v. Intermediate Appellate Court, 215 SCRA 580, 589 [1992], quoting
Lopez v. Court of Appeals, 114 SCRA 671, 685 [1982].
18

Fule v. Court of Appeals, 350 Phil. 349, 363 [1998], citing Art. 1475 of the Civil Code, and Romero
v. Court of Appeals, 320 Phil. 269 [1995].
19

20

Supra, at pp. 402-403.

21

TSN, June 18, 1995, pp. 3-4; Court of Appeals Decision, pp. 7-8.

22

197 SCRA 1, 10 [1991].

23

In CA-G. R. CV No. 50080.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 115902 September 27, 1995

FILINVEST CREDIT CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and SPOUSES EDILBERTO and MARCIANA TADIAMAN, respondents.

DAVIDE, JR., J.:

This petition for review on certiorari seeks to set aside the decision of the Court of Appeals in CA-G.R. CV No.
30231 1 affirming in toto the decision of the Regional Trial Court (RTC) of San Fernando (Pampanga), Branch 46, in Civil
Case No. 6599. 2
The antecedent facts are summarized by the Court of Appeals as follows:
Defendants-appellees, spouses Edilberto and Marciana Tadiaman, residents of Cabanatuan City,
purchased a 10-wheeler Izusu cargo truck from Jordan Enterprises, Inc., in Quezon City, in
installments. Said spouses executed a promissory note for P196,680.00 payable in 24 monthly
installments in favor of Jordan Enterprises, Inc., and a Chattel Mortgage over the motor vehicle
purchased to secure the payment of the promissory note. Jordan Enterprises, Inc. assigned its rights
and interests over the said instruments to Filinvest Finance and Leasing Corporation, which in turn
assigned them to plaintiff-appellant Filinvest Credit Corporation.
Subsequently, the spouses Tadiaman defaulted in the payment of the installments due on the
promissory note, and plaintiff-appellant filed an action for replevin and damages against them with
the court below. Upon motion of the plaintiff-appellant, a writ of replevin was issued, and the truck
was seized in the province of Isabela, by persons who represented themselves to be special sheriffs
of the court, but who turned out to be employees of the plaintiff-appellant. The truck was brought by
such persons all the way back to Metro Manila.
Thereafter, defendant spouses filed a counterbond, and the lower court ordered the return of the
truck. This was not immediately implemented because the defendant spouses were met with
delaying tactics of the plaintiff-appellant, and when they finally recovered the truck, they found the
same to be "cannibalized". This was graphically recounted in the report (Exhibit "3") of Deputy
Sheriff Anastacio Dizon, who assisted the spouses in recovering the vehicle, excerpts of which are
as follows:

On February 14, 1983, the undersigned contacted Mr. Villanueva, Branch Manager
of the FILINVEST at Bo. Dolores, San Fernando, Pampanga and he gave the
information that the said Isuzu Cargo Truck, subject of the aforesaid Court Order,
was already delivered to their main garage at Bo. Talon, Las Pias; Metro Manila. Mr.
Villanueva further told the undersigned that in order to effectively enforce the
aforementioned Court Order, the undersigned should discuss the matter with Mr.
Telesforo (Jun) Isidro, Collection in-charge, and Mr. Gaspar Antonio delos Santos,
Vice President for Branch Administration of the FILINVEST main office at Makati,
Metro Manila.
On February 18, 1983, defendant Marciana Tadiaman, Atty. Benites and the
undersigned contacted Messrs. Gaspar Antonio delos Santos and Telesforo (Jun)
Isidro at the main office, FILINVEST at Paseo de Roxas, Makati, Metro Manila and
we discussed the smooth retaking of possession by the defendants of the 10-wheeler
Isuzu Cargo Truck with motor No. E 120-22041, Serial No. SPM 710164864. Messrs.
Delos Santos and Isidro alternatively argued that the Traveler's Insurance Company
is one of the black listed Insurance firm, so much so, it is only the company's lawyer
who can direct the delivery of the above-cited Cargo Truck to us. They told us to wait
for the arrival of their Lawyer at 5:40 p.m., and we agreed that in the meantime that
their lawyer is not around, the said vehicle would not be transferred to any other
place.
Came 5:30 P.M., but the company's lawyer never arrived and we were told to go
back on February 21, 1983. Mr. delos Santos finally told us that the company will not
deliver to us the said Cargo Truck until and after their company lawyer would say so.
On February 19, 1983, Mr. Felicisimo Hogaldo, Atty. Benites, defendant Marciana
Tadiaman, three policemen of Las Pinas, Metro Manila, and the undersigned went
directly to the FILINVEST garage at Bo. Talon, Las Pinas, Metro Manila and there
contracted Mr. Ismael Pascual, Custodian of all repossessed vehicles of the said
company, and Mr. Pedro Gervacio, Security Guard of the company assigned by the
Allied Investigation Bureau at 6th Floor, Ramon Santos Bldg. They told us that the
10-wheeler Cargo Truck subject of the above-cited court order is not one of the
vehicles listed in their in-coming and out-going ledger books and they told us to
examine their books.
Defendant Marciana Tadiaman told Messrs. Pedro Gervacio and Ismael Pascual that
she saw the above-mentioned Cargo-Truck last February 14, 1983 at the end corner
of the garage. And for that purpose she requested us, including Mr. Pascual and the
Security Guard, to inspect the site where the said truck was supposed to have been
placed when she for the first time saw it on February 14, 1983.
Unexpectedly, she saw and pointed to us on the site oil leaks on the ground which
she believed came from the vehicle we were looking for. We also saw skid marks of
tires of a truck starting from the site where the cargo truck was previously placed as
pointed to by defendant Marciana Tadiaman up to around 20 meters before reaching
the gate of the compound. The other skid larks of tires of a truck was also seen on a
portion of a road leading to a compound owned by other person.
Mr. Gervacio and Pascual strongly insisted that they do not know the whereabouts of
the said Cargo Truck. The undersigned requested the Policemen of Las Pinas, Metro

Manila, Atty. Benites and defendant Marciana Tadiaman to see for ourselves the road
leading to a compound owned by another firm, about 1/3 of the Length of which road
is completely blocked by a big and tall building. It was at this portion where the
subject Cargo Truck was placed.
Mr. Ismael Pascual called their main office, FILINVEST, by telephone about the
discovery of the whereabouts of said cargo truck by the undersigned. Defendant
Marciana Tadiaman to
Mr. Pascual that there were missing parts and that other parts of the truck were
completely changed with worn-out spare parts.
Mr. Pascual told the undersigned that he will only affix his signature on the
acknowledgment receipt, below the line "GIVEN BY", if the missing parts and
replaced parts were not mentioned in said receipt.
It was because of the said actuations of the plaintiff-appellant that the defendants-appellee [sic] filed
a counterclaim for damages. . . . 3
After trial, the trial court rendered a decision the dispositive portion of which reads as follows:
WHEREFORE, judgment is hereby rendered on the main action, in favor of plaintiff and against
defendants, ordering the latter, jointly and severally, to pay the plaintiff the following sums:
(a) The sum of P88,333.32 which is the balance of the promissory note as of
September 26, 1982, with interest thereon at 14% per annum from said date.
(b) The sum equivalent to 25% of the amount sued upon, as and for attorney's fees,
that is P88,333.32 plus the stipulated interest; and
(c) The costs of suit.
On the Counterclaim:
Plaintiff not having successfully rebutted the defendants' evidence respecting damages caused to
them by virtue of the illegal seizure of the property, and hiding the truck in some other place not their
garage, feigning knowledge that the same had been recorded in their incoming ledger books, the
"cannibalizing" done while the truck was in the custody of plaintiff's garage, the frustrations which the
defendants had to undergo for two weeks before the truck was finally placed in the hands of Sheriff
Dizon, all point to the liability of plaintiff for its failure intentionally or otherwise "to observe certain
norms that spring from the fountain of good conscience and guide human conduct to the end that
law may approach its supreme ideal, which is the sway and dominance of justice.
WHEREFORE, judgment is rendered in favor of counter-claimants defendants and against plaintiff,
ordering the latter to pay to the defendants the following sums:
(1) Actual damages representing lost spare parts while in the custody of plaintiff in its
garage being hidden from defendants, in the sum of P50,000.00;
(2) P50,000.00 as moral damages;
(3) P20,000.00 as exemplary damages;

(4) P20,000.00 as attorney's fee; and

(5) Proportionate part of the costs adjudged against plaintiff.
SO ORDERED. 4
Petitioner Filinvest Credit Corporation (hereinafter Filinvest) appealed that portion of the judgment on the
counterclaim to the Court of Appeals (CA-G.R. CV No. 30231) and assigned the following errors of the lower court:
I
THE TRIAL COURT ERRED IN AWARDING DAMAGES; ACTUAL, MORAL, EXEMPLARY AND
ATTORNEY'S FEES AND PROPORTIONATE PART OF THE COSTS IN FAVOR OF THE
DEFENDANTS IN THEIR COUNTER-CLAIMS IN THE ABSENCE OF ANY ACTIONABLE LOSS
SUSTAINED BY THEM FOR IT WAS THE DEFENDANTS WHO VIOLATED THEIR PROMISSORY
NOTE AND CHATTEL MORTGAGE WITH THE PLAINTIFF.
II
THE TRIAL COURT ERRED IN HOLDING THAT THE PLAINTIFF OR ANY OF ITS
REPRESENTATIVES HAD NO RIGHT TO TAKE THE MORTGAGED PROPERTY AFTER THE
BREACH OF THE CONDITIONS IN THE PROMISSORY NOTE AND CHATTEL MORTGAGE BY
THE DEFENDANTS. 5
In its decision of 26 May 1994, the Court of Appeals affirmed in toto the decision of the trial court. It found no merit in
the appeal. Thus:
The plaintiff-appellant argues that it had the right to seize the truck from the moment that the
defendants-appellees defaulted in the payment of the monthly installments, and to institute an action
for replevin preliminary to effecting a foreclosure of the property mortgaged extrajudicially. The
plaintiff-appellant misses the point entirely. In the first place, it has not been held liable for filing an
action for replevin in order to recover possession of the truck prior to its foreclosure, but for the
manner in which it carried out the seizure of the vehicle. It is ironic that, in spite of plaintiff-appellant's
apparent recognition of the necessity of legal means for the recovery of the truck, in the end, it
utilized illegal means in the actual seizure of the vehicle by having its employees pose as special
agents of the court in effecting the same. Plaintiff-appellant even went to the extent of asking the
appointment of a special sheriff to enforce the order of seizure, but still had the truck seized by its
own people instead. It is as if the plaintiff-appellant utilized the court only to clothe its employees with
apparent authority to seize the vehicle concerned.
In the second place, plaintiff-appellant was held liable for hiding the truck and making it difficult for
the defendants-appellees to recover the same. Defendants-appell[ees] were able to have the writ of
seizure quashed on the basis of a counterbond. Plaintiff-appellant should have been the first to obey
the order for the return of the seized truck, considering its avowed adherence to law and order. And
yet, it made it difficult for the defendants-appellees to actually recover the vehicle, as reported by the
deputy sheriff above.
In the third place, there is unrebutted evidence that the truck was "cannibalized" while in the custody
of the plaintiff-appellant. The latter argues that such evidence is not credible, because, if the truck
was stripped of vital parts, it could not have been driven by the defendants-appellees all the way
back to Cabanatuan City. Plaintiff-appellant conveniently overlooks the testimony of defendant-

appellee Mrs. Tadiaman that they had to buy the missing parts in order to make the truck run (t.s.n.,
p. 40, October 2, 1986, Exhibits "'9", "10" and "11"). 6
Filinvest now comes to us alleging that the Court of Appeals:
(a) . . . DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW AND THE
APPLICABLE DECISIONS OF THIS HONORABLE COURT WHEN IT REVERSED THE DECISION
OF THE REGIONAL TRIAL COURT OF MANILA, BRANCH 9;
(b) . . . ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION
WHEN IT SUSTAINED THE ERRONEOUS DECISION OF THE HONORABLE REGIONAL TRIAL
COURT BRANCH 46 OF SAN FERNANDO, PAMPANGA;
(c) . . . ACTED WITH GRAVE ABUSE OF DISCRETION AND CONTRARY TO EXISTING LAW AND
JURISPRUDENCE WHEN [IT] SUSTAINED THE SPECULATIVE FINDING OF THE RTC THAT THE
PETITIONER "CANNIBALIZED" THE MORTGAGED VEHICLE;
(d) . . . ERRED GRIEVOUSLY WHEN IT EXONERATED PRIVATE RESPONDENTS FROM PAYING
THE PETITIONER ON THE LATTER'S LEGITIMATE CLAIMS UNDER THE COMPLAINT
PARTICULARLY ON THE UNPAID PROMISSORY NOTE MADE BY THE PRIVATE
RESPONDENTS;
(e) . . . ACTED CONTRARY TO LAW WHEN IT IGNORED THE PLAIN ADMISSIONS IN THE
ANSWER (AT PARAGRAPH 2, & 3, PAGE 1) OF THE DEFENDANTS (PRIVATE RESPONDENTS)
THAT THEY HAVE DULY EXECUTED A PROMISSORY NOTE SECURED BY A DEED OF
CHATTEL MORTGAGE AND THAT THE PRIVATE RESPONDENTS VIOLATED THE TERMS OF
THE PROMISSORY NOTE IN FAILING TO PAY THE INSTALLMENTS DUE THEREON FOR NOV.
15, 1981 AND THE SUBSEQUENT 9 INSTALLMENTS OR UP TO AUGUST 15, 1982;
(f) . . . ERRED IN REFUSING TO APPLY THE TERMS AND CONDITIONS OF THE PROMISSORY
NOTE AND THE DEED OF CHATTEL MORTGAGE SIGNED BY THE PONCES "AS THE LAW
BETWEEN THE PARTIES" TO THE CONTRACT SUBJECT OF THE SUIT IN THE RTC. 7
Additionally, Filinvest maintains that:
(g) THERE IS NO PROOF TO SUSTAIN THE AWARD OF MORAL DAMAGES FOR P50,000.00
ACCORDINGLY THERE IS NO BASIS FOR THE AWARD OF EXEMPLARY DAMAGES. 8
We gave due course to the petition and required the parties to submit their respective memoranda after the filing of
the comment to the petition by the private respondents and of the reply thereto by Filinvest. The parties
subsequently filed their memoranda which merely reiterated the arguments in their respective initiatory pleadings.
The only relevant issue in this petition is whether or not the Court of Appeals committed reversible error in
dismissing Filinvest's appeal from the decision of the trial court on the private respondents' counterclaim and in
affirming in toto the said decision. The first ground raised herein by Filinvest is baseless since the discussions or
arguments in Filinvest's petition and memorandum fail to disclose what the decision of Branch 9 of the RTC of
Manila is all about. So is the fourth ground, for, the unappealed portion of the trial court's decision did in fact order
the private respondents to pay Filinvest the unpaid balance of the promissory note, with interest and attorney's fees.
All the other grounds are deemed waived for not having been raised in the appeal to the Court of Appeals. In any
event, Filinvest's disquisitions on such irrelevant issues are confounded.

As to the sole issue defined above, the Court of Appeals correctly ruled that Filinvest is liable for damages not
because it commenced an action for replevin to recover possession of the truck prior to its foreclosure, but because
of the manner it carried out the seizure of the vehicle. Sections 3 and 4, Rule 60 of the Rules of Court are very clear
and direct as to the procedure for the seizure of property under a writ of replevin, thus:
Sec. 3. Order. Upon the filing of such affidavit and bond with the clerk or judge of the court in
which the action is pending, the judge of such court shall issue an order describing the personal
property alleged to be wrongfully detained, and requiring the sheriff or other proper officer of the
court forthwith to take such property into his custody.
Sec. 4. Duty of the officer. Upon receiving such order the officer must serve a copy thereof on the
defendant together with a copy of the application, affidavit and bond, and must forthwith take the
property, if it be in the possession of the defendant or his agent, and retain it in his custody. . . .
(emphasis supplied)
In the instant case, it was not the sheriff or any other proper officer of the trial court who implemented the writ of
replevin. Because it was aware that no other person can implement the writ, Filinvest asked the trial court to appoint
a special sheriff. Yet, it used its own employees who misrepresented themselves as deputy sheriffs to seize the
truck without having been authorized by the court to do so. Filinvest justified its seizure by citing a statement in
Bachrach Motor Co. vs. Summers, 9 to wit, "the only restriction on the mode by which the mortgagee shall secure
possession of the mortgaged property after breach of condition is that he must act in an orderly manner and without
creating a breach of the peace, subjecting himself to an action for trespass."
This justification is misplace and misleading for Bachrach itself had ruled that if a mortgagee cannot obtain
possession of a mortgaged property for its sale on foreclosure, it must bring a civil action either to recover such
possession as a preliminary step to the sale or to obtain judicial foreclosure. Pertinent portions of Bachrach read as
follows:
Where, however, debtor refuses to yield up the property, the creditor must institute an action, either
to effect a judicial foreclosure directly, to secure possession as a preliminary to the sale
contemplated in the provision above quoted. He cannot lawfully take the property by force against
the will of the debtor. Upon this point the American authorities are even more harmonious that they
are upon the point that the creditor is entitled to possession. As was said may years ago by the
writer of this opinion in a monographic article contributed to an encyclopedic legal treatise, "if
possession cannot be peaceably obtained the mortgagee must bring an action." (Trust Deeds and
Power of Sale Mortgages, 28 Am. & Eng. Encyc. of Law, 2d ed., 783.) In the Article of Chattel
Mortgages, in Corpus Juris, we find the following statement of the law on the same point: "The only
restriction on the mode by which the mortgagee shall secure possession of the mortgaged property
after breach of condition is that he must act in an orderly manner and without creating a breach of
the peace, subjecting himself to an action to trespass. (11 C.J., 560; see also 5 R.C.L., 462.)
The reason why the law does not allow the creditor to possess himself of the mortgaged property
with violence and against the will of the debtor is to be found in the fact that the creditor's right of
possession is conditioned upon the fact of default, and the existence of this fact may naturally be the
subject of controversy. The debtor, for instance, may claim in good faith, and rightly or wrongly, that
the debt is paid, or that for some other reason the alleged default is nonexistent. His possession in
this situation is as fully entitled to protection as that of any other person, and in the language of
article 446 of the Civil Code he must be respected therein. To allow the creditor to seize the property
against the will of the debtor would make the former to a certain extent both judge and executioner in
his own cause a thing which is inadmissible in the absence of unequivocal agreement in the
contract itself or express provision to that effect in the statute.

It will be observed that the law places the responsibility of conducting the sale upon "a public officer;"
and it might be supposed that an officer, such as the sheriff, can seize the property where the
creditor could not. This suggestion is, we think, without force, as it is manifest that the sheriff or other
officer proceeding under the authority of the language already quoted from section 14 of the Chattel
Mortgage Law, becomes pro hac vice the mere agent of the creditor. There is nothing in this
provision which creates a specific duty on the part of the officer to seize the mortgaged property; and
no intention on the part of the law-making body to impose such a duty can be implied. The
conclusion is clear that for the recovery of possession, where the right is disputed, the creditor must
proceed along the usual channels by action in court. Whether the sheriff, upon being indemnified by
the creditor, could safely proceed to take the property from the debtor, is a point upon which we
express no opinion. . . .
But whatever conclusion may be drawn in the premises with respect to the true nature of a chattel
mortgage, the result must in this case be the same; for whether the mortgagee becomes the real
owner of the mortgaged property as some suppose or acquires only certain rights therein, it is
none the less clear that he has after default the right of possession; though it cannot be admitted
that he may take the law into his own hands and wrest the property violently from the possession of
the mortgagor. Neither can he do through the medium of a public officer that which he cannot directly
do himself. The consequence is that in such case the creditor must either resort to a civil action to
recover possession as a preliminary to a sale, or preferably he may bring an action to obtain a
judicial foreclosure in conformity, so far as with the provisions of the Chattel to Mortgage Law. 10
Replevin is, of course, the appropriate action to recover possession preliminary to the extrajudicial foreclosure of a
chattel mortgage. Filinvest did in fact institute such an action and obtained a writ of replevin. And, by filing it,
Filinvest admitted that it cannot acquire possession of the mortgaged vehicle in an orderly or peaceful manner.
Accordingly, it should have left the enforcement of the writ in accordance with Rule 60 of the Rules of Court which it
had voluntarily invoked.
Parenthetically, it must be observed that the trial court erred in holding that the action for replevin was "not in order
as [Filinvest] is not the owner of the property (Sec, 2 par. (a) Rule 60)." 11 It is not only the owner who can institute a
replevin suit. A person "entitled to the possession" of the property also can, as provided in the same paragraph cited by
the trial court, which reads:
Sec. 2. Affidavit and bond. Upon applying for such order the plaintiff must show . . .
(a) That the plaintiff is the owner of the property claimed, particularly describing it, or
is entitled to the possession thereof; . . . (emphasis supplied)
Upon the default by the mortgagor in his obligations, Filinvest, as a mortgagee, had the right to the
possession of the property mortgaged preparatory to its sale in a public auction. 12 However, for employing
subterfuge in seizing the truck by misrepresenting its employees as deputy sheriffs and then hiding and
cannibalizing it, Filinvest committed bad faith in violation of Article 19 of the Civil Code which provides:
Every person must, in the exercise of his rights and in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good faith.
In common usage, good faith is ordinarily used to describe that state of mind denoting honesty of purpose, freedom
from intention to defraud, and, generally speaking, means being faithful to one's duty or obligation. 13 It consists of the
honest intention to abstain from taking an unconscionable and unscrupulous advantage of another. 14
This leaves us to the issue of damages and attorney's fees.

In their answer with counterclaim, the private respondents asked for (a) actual damages of P50,000.00 for the spare
parts found missing after their recovery of the truck and another P50,000.00 for unearned profits due to the failure to
use the truck in their ricemill business; (b) moral damages of P50,000.00 for "the mental anguish, serious anxiety,
physical suffering, wounded feelings, social humiliation, moral shock, sleepless nights and other similar injury" which
they suffered as a "proximate result of the [petitioner's illegal, wrongful and unlawful acts"; (c) nominal damages of
P30,000.00; (d) exemplary damages of P20,000.00; and (e) attorney's fees of P20,000.00 which they incurred "as a
direct result of [petitioner's] illegal and unwarranted actuations and in connection with the defense of this action." 15
As to actual damages, the petitioner admits that per Exhibits "1," "9," and "10" of the private respondents, only the
sum of P33,222.00 and not P50,000.00 was "supposedly spent for the alleged lost spare parts." 16 The
petitioner may thus be held liable only for such amount for actual or compensatory damages.
Anent the moral damages, the trial court ruled that the acts of the petitioner were in total disregard of Articles 19, 20,
and 21 of the Civil Code. 17 It added that the petitioner had not only caused actual damages in lost earnings, but had also
caused the private respondents to suffer indignities at the hands of the petitioner's personnel in hiding the truck in
question, misleading them, and making them work for the release of the truck for about two weeks, thereby justifying the
award of moral damages along with the exemplary and other damages in favor of the private respondents. 18
We agree with this finding of the trial court. The petitioner's acts clearly fall within the contemplation of Articles 19
and 21 of the Civil Code. 19 The acts of fraudulently taking the truck, hiding it from the private respondents, and removing
its spare parts show nothing but a willful intention to cause loss to the private respondents that is punctuated with bad
faith and is obviously contrary to good customs. Thus, the private respondents are entitled to the moral damages they
prayed for, for under Article 2219 of the Civil Code, moral damages may be recovered in cases involving acts referred to
in Article 21 of the same Code.
The private respondents prayed for nominal damages of P30,000.00 which the trial court did not award them.
Having failed to appeal this omission by the trial court, we cannot make anymore such award at this point.
The award of exemplary damages is in order in view of the wanton, fraudulent, and oppressive manner by which the
petitioner sought to enforce its right to the possession of the mortgaged vehicle. Article 2232 of the Civil Code
provides:
In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in
a wanton, fraudulent, reckless, oppressive, or malevolent manner.
Of course, a plaintiff need not prove the actual extent of exemplary damages, for its determination is
addressed to the sound discretion of the court upon proof of the plaintiff's entitlement to moral, temperate, or
actual or compensatory damages. Article 2234 of the Civil Code thus provides in part as follows:
While the amount of the exemplary damages need not be proved, the plaintiff must show that he is
entitled to moral, temperate or compensatory damages before the court may consider the question
of whether or not exemplary damages should be awarded. . . .
The award for attorney's fees must, however, be set aside. There is no question that the petitioner filed in good faith
its complaint for replevin and damages to protect its rights under the promissory note and the chattel mortgage. That
the private respondents had defaulted in its obligation under the promissory note thereby authorizing the petitioner
to seek enforcement of its claim thereunder and proceed against the mortgage of the vehicle was duly recognized
by the trial court by its judgment against the private respondents incorporated in the first part of the dispositive
portion. The private respondents did not appeal therefrom. There would then be no basis for awarding attorney's
fees in favor of the private respondents for whatever physical suffering, mental anguish, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, or any other similar injury they had suffered, even if

proven, were only such as are usually caused to parties haled into court as a defendant and which are not
compensable, for the law could not have meant to impose a penalty on the right to litigate. 20
WHEREFORE, the assailed judgment of the Court of Appeals in CA-G.R. CV No. 30231 as well as that of the
Regional Trial Court of San Fernando, Pampanga, Branch 46 in Civil Case No. 6599 on the counterclaim is
AFFIRMED, subject to the modifications abovestated. As so modified, the petitioner is hereby ordered to pay the
private respondents only the following:
(a) actual damages in the reduced amount of P33,222.00;
(b) moral damages in the amount of P50,000.00; and
(c) exemplary damages in the amount of P20,000.00.
No pronouncement as to costs.
SO ORDERED.
Padilla, Bellosillo and Kapunan, JJ., concur.
Hermosisima, Jr., J., is on leave.
Footnotes
1 Rollo, 44-50. Per Hofilea, H., J., Ramirez, P., and Garcia, C., JJ., concurring.
2 Id., 51-56. Per Judge Nerberte C. Ponce.
3 Rollo, 45-48.
4 Rollo, 55-56.
5 Rollo, 48-49.
6 Rollo, 49-50.
7 Rollo, 13-14.
8 Id., 22.
9 42 Phil. 3 [1921].
10 Supra, at pages 6-7, 9-10. See BPI Credit Corp. vs. Court of Appeals, 204 SCRA 601
[1991].
11 Rollo, 54.
12 See Bachrach Motor Co. vs. Summers, supra note 9; BPI Credit Corp. vs. Court of
Appeals, supra note 10.
13 Black's Law Dictionary 693 (6th ed. 1990).

14 Abando vs. Lozada, 178 SCRA 509 [1989]; Farolan vs. Solmac Marketing Corn., 195
SCRA 168 [1991].
15 Rollo, 76-77.
16 Petition, 24; Id., 33; Memorandum, 19; Id., 121.
17 RTC Decision, 3-4; Rollo, 53-54.
18 Id.; Id.
19 Article 20 does not apply in this case for it refers to acts that are contrary to law, but there
is no allegation, proof, or finding that the petitioner's actions were contrary to any provision of
the law.
20 Espiritu vs. Court of Appeals, 137 SCRA 50 [1985]; PNB vs. Court of Appeals, 159 SCRA
433 [1988]; Ilocos Norte Electric Co. vs. Court of Appeals, 179 SCRA 5 [1989]; Castillo vs.
Court of Appeals, 205 SCRA 529 [1992].