SALES – ESSENTIAL REQUISITES - PRICE
CIVIL LAW; SPECIAL CONTRACTS; LEASE; NON-PAYMENT OF RENTALS GIVES RIGHT TO
G.R. No. 122544 January 28, 1999
REGINA P. DIZON, AMPARO D. BARTOLOME, FIDELINA D. BLAZA, ESTER ABAD DIZON and
JOSEPH ANTHONY DIZON, RAYMUND A. DIZON, GERARD A. DIZON, and JOSE A. DIZON, JR.,
petitioners,
vs.
COURT OF APPEALS and OVERLAND EXPRESS LINES, INC., respondents.
G.R. No. 124741 January 28, 1999
REGINA P. DIZON, AMPARO D. BARTOLOME, FIDELINA D. BALZA, ESTER ABAD DIZON and
JOSEPH ANTHONY DIZON, RAYMUND A. DIZON, GERARD A. DIZON, and Jose A. DIZON, JR.,
petitioners,
vs.
COURT OF APPEALS, HON. MAXIMIANO C. ASUNCION, and OVERLAND EXPRESS LINES, INC.,
respondents.
SYNOPSIS
In 1974, Overland Express Lines, Inc. entered into a Contract of Lease with Option to Buy
with herein petitioners involving a land in Quezon City. The term of the lease was for one (1)
year, during which period, the lessee was granted an option to purchase the lot for P3,000.00
per square meter. Thereafter, the lease shall be on a per month basis with a monthly rental of
P3,000.00. Later, for failure to pay the increased rental of P8,000.00 per month effective June
1976, herein petitioners filed an action for ejectment to which the Corporation was ordered to
vacate the leased premises. The Corporation, however, questioned the jurisdiction of the City
Court over the ejectment case. Subsequently, the Corporation filed its own action for specific
performance and fixing the period for obligation. It sought to compel the execution of a deed
of sale pursuant to the option to purchase, and the receipt of the partial payment it made and
to fix the period to pay the balance thereof.
Petitioners have established a right to evict private respondent from the subject
premises for non-payment of rentals. In this regard, the then City Court had exclusive
jurisdiction over the ejectment suit. The filing by the Corporation of a suit with the RTC for
specific performance did not divest the City Court of its jurisidiction over the ejectment case
The decision of the City Court was affirmed by the Intermediate Appellate Court and the
Supreme Court. Having failed to exercise the option to purchase within the stipulated one-
year period, private respondent Corporation cannot now enforce its option. An implied new
lease on a monthly basis does not ipso facto carry with it an implied revival of the option to
purchase the leased premises. The right to exercise the option to purchase expired with the
termination of the original contract of lease for one year. The private respondent delivered a
check of P300,000.00 to Alice Dizon who allegedly acted as agent of petitioners pursuant to
the supposed authority given by petitioner as payee thereof does not amount to a perfected
contract of sale pursuant to the contract of lease with option to buy. There was no valid
consent by the petitioners on the supposed sale entered into by Alice Dizon, as petitioners
alleged agent, and private respondent.
SYLLABUS
1.
EVICT, REGARDLESS OF THE ACTION FOR SPECIFIC PERFORMANCE TO ENFORCE OPTION
TO PURCHASE WHICH WAS ALSO INSTITUTED. Petitioners have established a right to
evict private respondent from the subject premises for non-payment of rentals. Since
the rent was paid on a monthly basis, the period of lease is considered to be from month
to month in accordance with Article 1687 of the New Civil Code. Where the rentals are
paid monthly, the lease, even if verbal may be deemed to be on a monthly basis, expiring
at the end of every month pursuant to Article 1687, in relation to Article 1673 of the Civil
Code. In such case, a demand to vacate is not even necessary for judicial action after the
expiration of every month. When private respondent failed to pay the increased rental,
the petitioners had a cause of action to institute an ejectment suit against the former
with the then City Court. In this regard, the City Court (now MTC) had exclusive
jurisdiction over the ejectment suit. The filing by private respondent of a suit with the
Regional Trial Court for specific performance to enforce the option to purchase did not
divest the then City Court of its jurisdiction to take cognizance over the ejectment case.
Of note is the fact that the decision of the City Court was affirmed by both the
Intermediate Appellate Court and this Court.
2. ID.; ID.; ID.; FAILURE TO EXERCISE OPTION TO PURCHASE WITHIN THE STIPULATED
PERIOD; EFFECT; CASE AT BAR. Having failed to exercise the option to purchase within
the stipulated one year period, private respondent cannot enforce its option to purchase
anymore. Moreover, even assuming arguendo that the right to exercise the option still
subsists at the time private respondent tendered the amount, the suit for specific
performance to enforce the option to purchase was filed more than ten (10) years after
accrual of the cause of action as provided under Article 1144 of the New Civil Code. In
this case, there was a contract of lease for one (1) year with option to purchase. The
contract of lease expired without the private respondent, as lessee, purchasing the
property but remained in possession thereof. Hence, there was an implicit renewal of
the contract of lease on a monthly basis. The other terms of the original contract of
lease which are revived in the implied new lease under Article 1670 of the New Civil
Code are only those terms which are germane to the lessees right of continued
enjoyment of the property leased. Therefore, an implied new lease does not ipso facto
carry with it any implied revival of private respondents option to purchase (as lessee
thereof) the leased premises. The provision entitling the lessee the option to purchase
the leased premises is not deemed incorporated in the impliedly renewed contract
because it is alien to the possession of the lessee. Private respondents right to exercise
the option to purchase expired with the termination of the original contract of lease for
one year.
3. ID.; ID.; CONTRACT OF SALE; WHEN PERFECTED. Under Article 1475 of the New Civil Code,
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. Thus, the elements of a contract of sale are consent,
object, and price in money or its equivalent. It bears stressing that the absence of any of
these essential elements negates the existence of a perfected contract of sale. Sale is a
consensual contract and he who alleges it must show its existence by competent proof.
4. ID.; ID.; CONTRACT OF AGENCY; NOT APPRECIATED. There was no valid consent by the
petitioners (as co-owners of the leased premises) on the supposed sale entered into by
Dizon, as petitioners alleged agent, and private respondent. The basis for agency is
representation and a person dealing with an agent is put upon inquiry and must discover
upon his peril the authority of the agent. As provided in Article 1868 of the New Civil
Code, there was no showing that petitioners consented to the act of Dizon nor
authorized her to act on their behalf with regard to her transaction with private
respondent. The most prudent thing private respondent should have done was to
ascertain the extent of the authority of Dizon. Being negligent in this regard, private
respondent cannot seek relief on the basis of a supposed agency.
MARTINEZ, J.:
Two consolidated petitions were filed before us seeking to set aside and annul the decisions
and resolutions of respondent Court of Appeals. What seemed to be a simple ejectment suit
was juxtaposed with procedural intricacies which finally found its way to this Court.
G.R. No. 122544:
On May 23, 1974, private respondent Overland Express Lines, Inc. (lessee) entered into a
Contract of Lease with Option to Buy with petitioners 1 (lessors) involving a 1,755.80 square
meter parcel of land situated at corner MacArthur Highway and South "H" Street, Diliman,
Quezon City. The term of the lease was for one (1) year commencing from May 16, 1974 up to
May 15, 1975. During this period, private respondent was granted an option to purchase for
the amount of P3,000.00 per square meter. Thereafter, the lease shall be on a per month basis
with a monthly rental of P3,000.00.
For failure of private respondent to pay the increased rental of P8,000.00 per month effective
June 1976, petitioners filed an action for ejectment (Civil Case No. VIII-29155) on November
10, 1976 before the then City Court (now Metropolitan Trial Court) of Quezon City, Branch VIII.
On November 22, 1982, the City Court rendered judgment 2 ordering private respondent to
vacate the leased premises and to pay the sum of P624,000.00 representing rentals in arrears
and/or as damages in the form of reasonable compensation for the use and occupation of the
premises during the period of illegal detainer from June 1976 to November 1982 at the
monthly rental of P8,000.00, less payments made, plus 12% interest per annum from
November 18, 1976, the date of filing of the complaint, until fully paid, the sum of P8,000.00 a
month starting December 1982, until private respondent fully vacates the premises, and to pay
P20,000.00 as and by way of attorney's fees.
Private respondent filed a certiorari petition praying for the issuance of a restraining order
enjoining the enforcement of said judgment and dismissal of the case for lack of jurisdiction of
the City Court.
3 perfected contract of sale, and that for failure of petitioners to deny receipt thereof, private
On September 26, 1984, the then Intermidiate Appellate Court (now Court of Appeals)
rendered a decision 4 stating that:
. . ., the alleged question of whether petitioner was granted an extension of the option to
buy the property; whether such option, if any, extended the lease or whether petitioner
actually paid the alleged P300,000.00 to Fidela Dizon, as representative of private
respondents in consideration of the option and, whether petitioner thereafter offered to pay
the balance of the supposed purchase price, are all merely incidental and do not remove the
unlawful detainer case from the jurisdiction or respondent court. In consonance with the
ruling in the case of Teodoro, Jr. vs. Mirasol (supra), the above matters may be raised and
decided in the unlawful detainer suit as, to rule otherwise, would be a violation of the
principle prohibiting multiplicity of suits. (Original Records, pp. 38-39).
The motion for reconsideration was denied. On review, this Court dismissed the petition in a
resolution dated June 19, 1985 and likewise denied private respondent's subsequent motion
for reconsideration in a resolution dated September 9, 1985. 5
On October 7, 1985, private respondent filed before the Regional Trial Court (RTC) of Quezon
City (Civil Case No. Q-45541) an action for Specific Performance and Fixing of Period for
Obligation with prayer for the issuance of a restraining order pending hearing on the prayer for
a writ of preliminary injunction. It sought to compel the execution of a deed of sale pursuant
to the option to purchase and the receipt of the partial payment, and to fix the period to pay
the balance. In an Order dated October 25, 1985, the trial court denied the issuance of a writ
of preliminary injunction on the ground that the decision of the then City Court for the
ejectment of the private respondent, having been affirmed by the then Intermediate Appellate
Court and the Supreme Court, has become final and executory.
Unable to secure an injunction, private respondent also filed before the RTC of Quezon City,
Branch 102 (Civil Case No. Q-46487) on November 15, 1985 a complaint for Annulment of and
Relief from Judgment with injunction and damages. In its decision 6 dated May 12, 1986, the
trial court dismissed the complaint for annulment on the ground of res judicata, and the writ
of preliminary injunction previously issued was dissolved. It also ordered private respondent to
pay P3,000.00 as attorney's fees. As a consequence of private respondent's motion for
reconsideration, the preliminary injunction was reinstated, thereby restraining the execution
of the City Court's judgment on the ejectment case.
The two cases were the after consolidated before the RTC of Quezon City, Branch 77. On April
28, 1989, a decision 7 was rendered dismissing private respondent's complaint in Civil Case No.
Q-45541 (specific performance case) and denying its motion for reconsideration in Civil Case
No. 46487 (annulment of the ejectment case). The motion for reconsideration of said decision
was likewise denied.
On appeal, 8 respondent Court of Appeals rendered a decision 9 upholding the jurisdiction of
the City Court of Quezon City in the ejectment case. It also concluded that there was a
perfected contract of sale between the parties on the leased premises and that pursuant to
the option to buy agreement, private respondent had acquired the rights of a vendee in a
contract of sale. It opined that the payment by private respondent of P300,000.00 on June 20,
1975 as partial payment for the leased property, which petitioners accepted (through Alice A.
Dizon) and for which an official receipt was issued, was the operative act that gave rise to a
respondent can therefore assume that Alice A. Dizon, acting as agent of petitioners, was
authorized by them to receive the money in their behalf. The Court of Appeals went further by
stating that in fact, what was entered into was a "conditional contract of sale" wherein
ownership over the leased property shall not pass to the private respondent until it has fully
paid the purchase price. Since private respondent did not consign to the court the balance of
the purchase price and continued to occupy the subject premises, it had the obligation to pay
the amount of P1,700.00 in monthly rentals until full payment of the purchase price. The
dispositive portion of said decision reads:
WHEREFORE, the appealed decision in Case No. 46387 is AFFIRMED. The appealed decision
in Case No. 45541 is, on the other hand, ANNULLED and SET ASIDE. The defendants-
appellees are ordered to execute the deed of absolute sale of the property in question, free
from any lien or encumbrance whatsoever, in favor of the plaintiff-appellant, and to deliver
to the latter the said deed of sale, as well as the owner's duplicate of the certificate of title
to said property upon payment of the balance of the purchase price by the plaintiff-
appellant. The plaintiff-appellant is ordered to pay P1,700.00 per month from June 1976,
plus 6% interest per annum, until payment of the balance of the purchase price, as
previously agreed upon by the parties.
SO ORDERED.
Upon denial of the motion for partil reconsideration (Civil Case No. Q-45541) by respondent
Court of Appeals, 10 petitioners elevated the case via petition for certiorari questioning the
authority of Alice A. Dizon as agent of petitioners in receiving private respondent's partial
payment amounting to P300,000.00 pursuant to the Contract of Lease with Option to Buy.
Petitioner also assail the propriety of private respondent's exercise of the option when it
tendered the said amount on June 20, 1975 which purportedly resulted in a perfected contract
of sale.
G.R. No. 124741:
Petitioners filed with respondent Court of Appeals a motion to remand the records of Civil
Case No. 38-29155 (ejectment case) to the Metropolitan Trial Court (MTC), then City Court of
Quezon City, Branch 38, for execution of the judgment 11 dated November 22, 1982 which was
granted in a resolution dated June 29, 1992. Private respondent filed a motion to reconsider
said resolution which was denied.
Aggrieved, private respondent filed a petition for certiorari, prohibition with preliminary
injunction and/or restraining order with this Court (G.R. Nos. 106750-51) which was dismissed
in a resolution dated September 16, 1992 on the ground that the same was a refiled case
previously dismissed for lack of merit. On November 26, 1992, entry of judgment was issued
by this Court.
On July 14, 1993, petitioners filed an urgent ex-parte motion for execution of the decision in
Civil Case No. 38-29155 with the MTC of Quezon City, Branch 38. On September 13, 1993, the
trial court ordered the issuance of a third alias writ of execution. In denying private
respondent's motion for reconsideration, it ordered the immediate implementation of the
third writ of execution without delay.
On December 22, 1993, private respondent filed with the Regional Trial Court (RTC) of Quezon
City, Branch 104 a petition for certiorari and prohibition with preliminary injunction/restraining
order (SP. PROC. No. 93-18722) challenging the enforceability and validity of the MTC
judgment as well as the order for its execution.
On January 11, 1994, RTC of Quezon City, Branch 104 issued an
order12 granting the issuance of a writ of preliminary injunction upon private respondent's'
posting of an injunction bond of P50,000.00.
Assailing the aforequoted order after denial of their motion for partial reconsideration,
petitioners filed a petition 13 for certiorari and prohibition with a prayer for a temporary
restraining order and/or preliminary injunction with the Court of Appeals. In its decision, 14 the
Court of Appeals dismissed the petition and ruled that:
The avowed purpose of this petition is to enjoin the public respondent from restraining the
ejectment of the private respondent. To grant the petition would be to allow the ejectment
of the private respondent. We cannot do that now in view of the decision of this Court in
CA-G.R. CV Nos. 25153-54. Petitioners' alleged right to eject private respondent has been
demonstrated to be without basis in the said civil case. The petitioners have been shown,
after all, to have no right to eject private respondents.
WHEREFORE, the petition is DENIED due course and is accordingly DISMISSED.
SO ORDERED. 15
16
Petitioners' motion for reconsideration was denied in a resolution by the Court of Appeals
stating that:
This court in its decision in CA-G.R. CV Nos. 25153-54 declared that the plaintiff-appellant
(private respondent herein) acquired the rights of a vendee in a contract of sale, in effect,
recognizing the right of the private respondent to possess the subject premises. Considering
said decision, we should not allow ejectment; to do so would disturb the status quo of the
parties since the petitioners are not in possession of the subject property. It would be unfair
and unjust to deprive the private respondent of its possession of the subject property after
its rights have been established in a subsequent ruling.
WHEREFORE, the motion for reconsideration is DENIED for lack of merit.
SO ORDERED. 17
Hence, this instant petition.
We find both petitions impressed with merit.
First. Petitioners have established a right to evict private respondent from the subject premises
for non-payment of rentals. The term of the Contract of Lease with Option to Buy was for a
period of one (1) year (May 16, 1974 to May 15, 1975) during which the private respondent
was given an option to purchase said property at P3,000.00 square meter. After the expiration
thereof, the lease was for P3,000.00 per month.
Admittedly, no definite period beyond the one-year term of lease was agreed upon by
petitioners and private respondent. However, since the rent was paid on a monthly basis, the
period of lease is considered to be from month to month in accordance with Article 1687 of
the New Civil Code.18 Where the rentals are paid monthly, the lease, even if verbal may be
deemed to be on a monthly basis, expiring at the end of every month pursuant to Article 1687,
in relation to Article 1673 of the Civil Code. 19 In such case, a demand to vacate is not even
necessary for judicial action after the expiration of every month. 20
When private respondent failed to pay the increased rental of P8,000.00 per month in June
1976, the petitioners had a cause of action to institute an ejectment suit against the former
with the then City Court. In this regard, the City Court (now MTC) had exclusive jurisdiction
over the ejectment suit. The filing by private respondent of a suit with the Regional Trial Court
for specific performance to enforce the option to purchase did not divest the then City Court
of its jurisdiction to take cognizance over the ejectment case. Of note is the fact that the
decision of the City Court was affirmed by both the Intermediate Appellate Court and this
Court.
Second. Having failed to exercise the option within the stipulated one-year period, private
respondent cannot enforce its option to purchase anymore. Moreover, even assuming
arguendo that the right to exercise the option still subsists at the time private respondent
tendered the amount on June 20, 1975, the suit for specific performance to enforce the option
to purchase was filed only on October 7, 1985 or more than ten (10) years after accrual of the
cause of action as provided under Article 1144 of the New Civil Code. 21
In this case, there was a contract of lease for one (1) year with option to purchase. The
contract of lease expired without the private respondent, as lessee, purchasing the property
but remained in possession thereof. Hence, there was an implicit renewal of the contract of
lease on a monthly basis. The other terms of the original contract of lease which are revived in
the implied new lease under Article 1670 of the New Civil Code 22 are only those terms which
are germane to the lessee's right of continued enjoyment of the property leased. 23 Therefore,
an implied new lease does not ipso facto carry with it any implied revival of private
respondent's option to purchase (as lessee thereof) the leased premises. The provision
entitling the lessee the option to purchase the leased premises is not deemed incorporated in
the impliedly renewed contract because it is alien to the possession of the lessee. Private
respondent's right to exercise the option to purchase expired with the termination of the
original contract of lease for one year. The rationale of this Court is that:
This is a reasonable construction of the provision, which is based on the presumption that
when the lessor allows the lessee to continue enjoying possession of the property for fifteen
days after the expiration of the contract he is willing that such enjoyment shall be for the
entire period corresponding to the rent which is customarily paid — in this case up to the
end of the month because the rent was paid monthly. Necessarily, if the presumed will of
the parties refers to the enjoyment of possession the presumption covers the other terms of
the contract related to such possession, such as the amount of rental, the date when it must
be paid, the care of the property, the responsibility for repairs, etc. But no such presumption
may be indulged in with respect to special agreements which by nature are foreign to the
right of occupancy or enjoyment inherent in a contract of lease. 24
Third. There was no perfected contract of sale between petitioners and private respondent.
Private respondent argued that it delivered the check of P300,000.00 to Alice A. Dizon who
acted as agent of petitioners pursuant to the supposed authority given by petitioner Fidela
Dizon, the payee thereof. Private respondent further contended that petitioners' filing of the
ejectment case against it based on the contract of lease with option to buy holds petitioners in
estoppel to question the authority of petitioner Fidela Dizon. It insisted that the payment of
P300,000.00 as partial payment of the purchase price constituted a valid exercise of the option
to buy.
Under Article 1475 of the New Civil Code, "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." Thus, the elements of a contract of sale
are consent, object, and price in money or its equivalent. It bears stressing that the absence of
any of these essential elements negates the existence of a perfected contract of sale. Sale is a
consensual contract and he who alleges it must show its existence by competent proof. 25
In an attempt to resurrect the lapsed option, private respondent gave P300,000.00 to
petitioners (thru Alice A. Dizon) on the erroneous presumption that the said amount tendered
would constitute a perfected contract of sale pursuant to the contract of lease with option to
buy. There was no valid consent by the petitioners (as co-owners of the leased premises) on
the supposed sale entered into by Alice A. Dizon, as petitioners' alleged agent, and private
respondent. The basis for agency is representation and a person dealing with an agent is put
upon inquiry and must discover upon his peril the authority of the agent. 26 As provided in
Article 1868 of the New Civil Code, 27 there was no showing that petitioners consented to the
act of Alice A. Dizon nor authorized her to act on their behalf with regard to her transaction
with private respondent. The most prudent thing private respondent should have done was to
ascertain the extent of the authority of Alice A. Dizon. Being negligent in this regard, private
respondent cannot seek relief on the basis of a supposed agency.
In Bacaltos Coal Mines vs. Court of Appeals, 28 we explained the rule in dealing with an agent:
Every person dealing with an agent is put upon inquiry and must discover upon his peril the
authority of the agent. If he does not make such inquiry, he is chargeable with knowledge of
the agent's authority, and his ignorance of that authority will not be any excuse. Persons
dealing with an assumed agency, whether the assumed agency be a general or special one,
are bound at their peril, if they would hold the principal, to ascertain not only the fact of the
agency but also the nature and extent of the authority, and in case either is controverted,
the burden of proof is upon them to establish it.
For the long years that private respondent was able to thwart the execution of the ejectment
suit rendered in favor of petitioners, we now write finis to this controversy and shun further
delay so as to ensure that this case would really attain finality.
WHEREFORE, in view of the foregoing, both petitions are GRANTED. The decision dated March
29, 1994 and the resolution dated October 19, 1995 in CA-G.R. CV No. 25153-54, as well as the
decision dated December 11, 1995 and the resolution dated April 23, 1997 in CA-G.R. SP No.
33113 of the Court of Appeals are hereby REVERSED and SET ASIDE.
Let the records of this case be remanded to the trial court for immediate execution of the
judgment dated November 22, 1982 in Civil Case No. VIII-29155 of the then City Court (now
Metropolitan Trial Court) of Quezon City, Branch VIII as affirmed in the decision dated
September 26, 1984 of the then Intermediate Appellate Court (now Court of Appeals) and in
the resolution dated June 19, 1985 of this Court.
However, petitioners are ordered to REFUND to private respondent the amount of
P300,000.00 which they received through Alice A. Dizon on June 20, 1975.1âwphi1.nêt
SO ORDERED.
SALES – DISTINGUISHED FROM OTHER CONTRACTS – CONTRACT TO SELL
G.R. No. L-25885 January 31, 1972
LUZON BROKERAGE CO., INC., plaintiff-appellee,
vs.
MARITIME BUILDING CO., INC., and MYERS BUILDING CO., INC., defendants, MARITIME
BUILDING CO., INC., defendant-appellant.
REYES, J.B.L., J.:p
Direct appeal (prior to the effectivity of Republic Act 5440) by Maritime Building Co., Inc. from
a decision of the Court of First Instance of Manila (in its Civil Case No. 47319), the dispositive
part of which provides as follows:
FOR ALL THE FOREGOING CONSIDERATIONS, judgment is hereby rendered declaring that the
Myers Building Co., Inc. is entitled to receive the rentals which the plaintiff has been paying,
including those already deposited in Court, thereby relieving the plaintiff of any obligation to
pay the same to any other party, and ordering the Maritime Building Co., Inc. to pay the
commission fees paid by the Myers Building Co., Inc. to the Clerk of this Court, plus the sum
of P3,000.00 as and for attorney's fees.
On the cross-claim by the Myers Building Co., Inc., the Maritima Building Co., Inc. is hereby
ordered to pay the Myers Building Co., Inc. the sum of P10,000.00 damages, plus the sum of
P30,000.00, representing rentals wrongfully collected by it from the plaintiff corresponding
to the months of March, April and May, 1961 and the costs hereof.
The antecedents of the litigation are summarized in the appealed judgment thus:
This is an action for interpleading.
It appears that on April 30, 1949, in the City of Manila, the defendant Myers Building Co.,
Inc., owner of three parcels of land in the City of Manila, together with the improvements
thereon, entered into a contract entitled "Deed of Conditional Sale" in favor of Bary Building
Co., Inc., later known as Maritime Building Co., Inc., whereby the former sold the same to
the latter for P1,000,000.00, Philippine currency. P50,000.00 of this price was paid upon the
execution of the said contract and the parties agreed that the balance of P950,000.00 was to
be paid in monthly installments at the rate of P10,000.00 with interest of 5% per annum
until the same was fully paid.
In Par. (O), they agreed that in case of failure on the part of the vendee to pay any of the
installments due and payable, the contract shall be annulled at the option of the vendor and
all payments already made by vendee shall be forfeited and the vendor shall have right to
re-enter the property and take possession thereof.
Later, the monthly installment of P10,000.00 above-stipulated with 5% interest per annum
was amended or decreased to P5,000.00 per month and the interest was raised to 5-1/2%
per annum. The monthly installments under the contract was regularly paid by the Bary
Building Co., Inc. and/or the Maritime Co., Inc. until the end of February, 1961. It failed to
pay the monthly installment corresponding to the month of March 1961, for which the Vice-
President, George Schedler, of the Maritime Building Co., Inc., wrote a letter to the President
of Myers, Mr. C. Parsons, requesting for a moratorium on the monthly payment of the
installments until the end of the year 1961, for the reason that the said company was
encountering difficulties in connection with the operation of the warehouse business.
However, Mr. C. Parsons, in behalf of the Myers Estate, answered that the monthly
payments due were not payable to the Myers Estate but to the Myers Building Co., Inc., and
that the Board of Directors of the Myers Co., Inc. refused to grant the request for
moratorium for suspension of payments under any condition.
Notwithstanding the denial of this request for moratorium by the Myers Board of Directors
the Maritime Building Co., Inc. failed to pay the monthly installments corresponding to the
months of March, April and May, 1961. Whereupon, on May 16, 1961, the Myers Building
Co., Inc. made a demand upon the Maritime Building Co., Inc., for the payment of the
installments that had become due and payable, which letter, however, was returned
unclaimed.
Then, on June 5, 1961, the Myers Building Co., Inc. wrote the Maritime Building Co., Inc.
another letter advising it of the cancellation of the Deed of Conditional Sale entered into
between them and demanding the return of the possession of the properties and holding
the Maritime Building Co., Inc. liable for use and occupation of the said properties at
P10,000.00 monthly.
In the meantime, the Myers Building Co., Inc. demanded upon the Luzon Brokerage Co., Inc.
to whom the Maritime Building Co., Inc. leased the properties, the payment of monthly
rentals of P10,000.00 and the surrender of the same to it. As a consequence, the Luzon
Brokerage Co., Inc. found itself in a payment to the wrong party, filed this action for
interpleader against the Maritime Building Co., Inc.
After the filing of this action, the Myers Building Co., Inc. in its answer filed a cross-claim
against the Maritime Building Co., Inc. praying for the confirmation of its right to cancel the
said contract. In the meantime, the contract between the Maritime Building Co., Inc. and
the Luzon Brokerage Co., Inc. was extended by mutual agreement for a period of four (4)
more years, from April, 1964 to March 31, 1968.
The Maritime Building Co., Inc. now contends (1) that the Myers Building Co., Inc. cannot
cancel the contract entered into by them for the conditional sale of the properties in
question extrajudicially and (2) that it had not failed to pay the monthly installments due
under the contract and, therefore, is not guilty of having violated the same.
It should be further elucidated that the suspension by the appellant Maritime Building Co., Inc.
(hereinafter called Maritime) of the payment of installments due from it to appellee Myers
Building Co., Inc. (hereinafter designated as Myers Corporation) arose from an award of
backwages made by the Court of Industrial Relations in favor of members of Luzon Labor
Union who served the Fil-American forces in Bataan in early 1942 at the instance of the
employer Luzon Brokerage Co. and for which F. H. Myers, former majority stockholder of the
Luzon Brokerage Co., had allegedly promised to indemnify E. M. Schedler (who controlled
Maritime) when the latter purchased Myers' stock in the Brokerage Company. Schedler
contended that he was being sued for the backpay award of some P325,000, when it was a
liability of Myers, or of the latter's estate upon his death. In his letter to Myers Corporation
(Exhibit "11", Maritime) dated 7 April 1961 (two months and ten days before the initial
complaint in the case at bar), Schedler claimed the following:
 At all times when the F. H. Myers Estate was open in the Philippine Islands and open in San
Francisco, the Myers Estate or heirs assumed the defense of the Labor Union claims and led
us to believe that they would indemnify us therefrom.
Recently, however, for the first time, and after both the Philippine and San Francisco F. H.
Myers Estates were closed, we have been notified that the F. H. Myers indemnity on the
Labor Union case will not be honored, and in fact Mrs. Schedler and I have been sued in the
Philippines by my successor in interest, Mr. Wentholt, and have been put to considerable
expense.
You are advised that my wife and I, as the owners of the Maritime Building Company, intend
to withhold any further payments to Myers Building Company or Estate, in order that we can
preserve those funds and assets to set off against the potential liability to which I am now
exposed by the failure of the Myers heirs to honor the indemnity agreement pertaining to
the Labor claims.
The trial court found the position of Schedler indefensible, and that Maritime, by its failure to
pay, committed a breach of the sale contract; that Myers Company, from and after the breach,
became entitled to terminate the contract, to forfeit the installments paid, as well as to
repossess, and collect the rentals of, the building from its lessee, Luzon Brokerage Co., in view
of the terms of the conditional contract of sale stipulating that:
(d) It is hereby agreed, covenanted and stipulated by and between the parties hereto that
the Vendor will execute and deliver to the Vendee a definite or absolute deed of sale upon
the full payment by the vendee of the unpaid balance of the purchase price hereinabove
stipulated; that should the Vendee fail to pay any of the monthly installments, when due, or
otherwise fail to comply with any of the terms and conditions herein stipulated, then this
Deed of Conditional Sale shall automatically and without any further formality, become null
and void, and all sums so paid by the Vendee by reason thereof, shall be considered as
rentals and the Vendor shall then and there be free to enter into the premises, take
possession thereof or sell the properties to any other party.
xxx xxx xxx
(o) In case the Vendee fails to make payment or payments, or any part thereof, as herein
provided, or fails to perform any of the covenants or agreements hereof, this contract shall,
at the option of the Vendor, be annulled and, in such event, all payments made by the
Vendee to the Vendor by virtue of this contract shall be forfeited and retained by the Vendor
in full satisfaction of the liquidated damages by said Vendor sustained; and the said Vendor
shall have the right to forthwith re-enter, and take possession of, the premises subject-
matter of this contract.
"The remedy of forfeiture stated in the next-preceding paragraph shall not
be exclusive of any other remedy, but the Vendor shall have every other
remedy granted it by virtue of this contract, by law, and by equity."
From the judgment of the court below, the dispositive portion whereof has been transcribed
at the start of this opinion, Myers duly appealed to this Court.
The main issue posed by appellant is that there has been no breach of contract by Maritime;
and assuming that there was one, that the appellee Myers was not entitled to rescind or
resolve the contract without recoursing to judicial process.
It is difficult to understand how appellant Maritime can seriously contend that its failure or
refusal to pay the P5,000 monthly installments corresponding to the months of March, April
and May, 1961 did not constitute a breach of contract with Myers, when said agreement
(transcribed in the Record on Appeal, pages 59-71) expressly stipulated that the balance of the
purchase price (P950,000) —
shall be paid at the rate of Ten Thousand Pesos (P10,000) monthly on or before the 10th day
of each month with interest at 5% per annum, this amount to be first applied on the
interest, and the balance paid to the principal thereof; and the failure to pay any installment
or interest when due shall ipso facto cause the whole unpaid balance of the principal and
interest to be and become immediately due and payable. (Contract, paragraph b; Record on
Appeal, page 63)
Contrary to appellant Maritime's averments, the default was not made in good faith. The text
of the letter to Myers (Exhibit "11", Maritime), heretofore quoted, leaves no doubt that the
non-payment of the installments was the result of a deliberate course of action on the part of
appellant, designed to coerce the appellee Myers Corporation into answering for an alleged
promise of the late F. H. MYERS to indemnify E. W. Schedler, the controlling stock-holder of
appellant, for any payments to be made to the members of the Luzon Labor Union. This is
apparent also from appellant's letter to his counsel (Exhibit "12", Maritime):
... I do not wish to deposit pesos representing the months of March, April and May, since the
Myers refusal to honor the indemnity concerning the labor claims has caused me to
disburse (sic) roughly $10,000.00 to date in fees, cost and travel expenses. However, if the
Myers people will deposit in trust with Mr. C. Parsons 25,000 pesos to cover my costs to
date, I will then deposit with Mr. Parsons, in trust, 15,000 pesos for March, April and May
and will also post a monthly deposit of 5,000 pesos until the dispute is settled. The dispute
won't be settled in my mind, unless and until:
a) The Myers people indemnify me fully the labor cases;
b) The labor cases are terminated favorably to Luzon Brokerage and no liability exists;
c) The Myers people pay any judgment entered on the labor cases thereby releasing me; or
d) It is finally determined either in San Francisco or in the Philippines by a court that the
Myers heirs must honor the indemnity which Mr. F. H. Myers promised when I purchased
Luzon Brokerage Company.
Yet appellant Maritime (assuming that it had validly acquired the claims of its president and
controlling stockholder, E. M. Schedler) could not ignore the fact that whatever obligation F. H.
Myers or his estate had assumed in favor of Schedler with respect to the Luzon Brokerage
labor case was not, and could not have been, an obligation of appellee corporation (Myers
Building Company). No proof exists that the board of directors of the Myers Corporation had
agreed to assume responsibility for the debts (if any) that the late Myers or his heirs had
incurred in favor of Schedler. Not only this, but it is apparent from the letters quoted
heretofore that Schedler had allowed the estate proceedings of the late F. M. Myers to close
without providing for any contingent liability in Schedler's favor; so that by offsetting the
alleged debt of Myers to him, against the balance of the price due under the "Deed of
Conditional Sale", appellant Maritime was in fact attempting to burden the Myers Building
Company with an uncollectible debt, since enforcement thereof against the estate of F. H.
Myers was already barred.
Under the circumstances, the action of Maritime in suspending payments to Myers
Corporation was a breach of contract tainted with fraud or malice (dolo), as distinguished from
mere negligence (culpa), "dolo" being succinctly defined as a "conscious and intentional design
to evade the normal fulfillment of existing obligations" (Capistrano, Civil Code of the
Philippines, Vol. 3, page 38), and therefore incompatible with good faith (Castan, Derecho Civil,
7th Ed., Vol. 3, page 129; Diaz Pairo, Teoria de Obligaciones, Vol. 1, page 116).
Maritime having acted in bad faith, it was not entitled to ask the court to give it further time to
make payment and thereby erase the default or breach that it had deliberately incurred. Thus
the lower court committed no error in refusing to extend the periods for payment. To do
otherwise would be to sanction a deliberate and reiterated infringement of the contractual
obligations incurred by Maritime, an attitude repugnant to the stability and obligatory force of
contracts.
From another point of view, it is irrelevant whether appellant Maritime's infringement of its
contract was casual or serious, for as pointed out by this Court in Manuel vs. Rodriguez, 109
Phil. 1, at page 10 —
The contention of plaintiff-appellant that Payatas Subdivision Inc. had no right to cancel the
contract as there was only a "casual breach" is likewise untenable. In contracts to sell, where
ownership is retained by the seller and is not to pass until the full payment of the price, such
payment, as we said, is a positive suspensive condition, the 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, in accordance with Article 1117 of the Old Civil Code. To
argue that there was only a casual breach is to proceed from the assumption that the
contract is one of absolute sale, where non-payment is a resolutory condition, which is not
the case.
But it is argued for Maritime that even if it had really violated the Contract of Conditional Sale
with Myers, the latter could not extrajudicially rescind or resolve the contract, but must first
recourse to the courts. While recognizing that paragraph (d) of the deed of conditional sale
expressly provides inter alia —
that should the Vendee fail to pay any of the monthly installments when due, or otherwise
fail to comply with any of the terms and conditions herein stipulated, then this Deed of
Conditional Sale shall automatically and without any further formality, become null and
void, and all sums so paid by the Vendee by reason thereof shall be considered as rentals..
(Emphasis supplied)
herein appellant Maritime avers that paragraph (e) of the deed contemplates that a suit
should be brought in court for a judicial declaration of rescission. The paragraph relied upon by
Maritime is couched in the following, terms:
(e) It is also hereby agreed, covenanted and stipulated by and between the parties hereto
that should the Vendor rescind this Deed of Conditional Sale, for any of the reasons
stipulated in the preceding paragraph, the Vendee by these presents obligates itself to
peacefully deliver the properties subject of this contract to the Vendor, and in the event that
the Vendee refuses to peacefully deliver the possession of the properties subject of this
contract to the Vendor in case of rescission, and a suit should be brought in court by the
Vendor to seek judicial declaration of rescission and take possession of the properties
subject of this contract, the Vendee hereby obligates itself to pay all the expenses to be
incurred by reason of such suit and in addition obligates itself to pay the sum of P10,000.00,
in concept of damages, penalty and attorney's fees.
Correlation of this paragraph (e) with the preceding paragraph (d) of the Deed of Conditional
Sale (quoted in page 5 of this opinion) reveals no incompatibility between the two; and the
suit to "be brought in Court by the Vendor to seek judicial declaration of rescission" is provided
for by paragraph(e) only in the eventuality that, notwithstanding the automatic annulment of
the deed under paragraph (d), the Vendee "refuses to peacefully deliver the possession of the
properties subject of this contract". The step contemplated is logical since the Vendor can not,
by himself, dispossess the Vendee manu militari, if the latter should refuse to vacate despite
the violation of the contract, since no party can take the law in his own hands. But the bringing
of such an action in no way contradicts or restricts the automatic termination of the contract
in case the Vendee (i.e., appellant Maritime) should not comply with the agreement.
Anyway, this Court has repeatedly held that —
Well settled is, however, the rule that a judicial action for the rescission of a contract is not
necessary where the contract provides that it may be revoked and cancelled for violation of
any of its terms and conditions" (Lopez vs. Commissioner of Customs, L-28235, 30 January
1971, 37 SCRA 327, 334,, and cases cited therein).1 (Emphasis supplied.)
Resort to judicial action for rescission is obviously not contemplated.... The validity of the
stipulation can not be seriously disputed. It is in the nature of a facultative resolutory
condition which in many cases has been upheld by this Court. (Ponce Enrile vs. Court of
Appeals, L-27549, 30 Sept. 1969; 29 SCRA 504).
The obvious remedy of the party opposing the rescission for any reason being to file the
corresponding action to question the rescission and enforce the agreement, as indicated in our
decision in University of the Philippines vs. Walfrido de los Angeles,
L-28602, 29 September 1970, 35 SCRA 107.
Of course, it must be understood that the act of a party in treating a contract as cancelled or
resolved on account of infractions by the other contracting party must be made known to
the other and is always provisional, being ever subject to scrutiny and review by the proper
court. If the other party denies that rescission is justified, it is free to resort to judicial action
in its own behalf, and bring the matter to court. Then, should the court, after due hearing,
decide that the resolution of the contract was not warranted, the responsible party will be
sentenced to damages; in the contrary case, the resolution will be affirmed, and the
consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its own risk.
 For it is only the final judgment of the corresponding court that will conclusively and finally
settle whether the action taken was or was not correct in law. But the law definitely does
not require that the contracting party who believes itself injured must first file suit and wait
for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party
injured by the other's breach will have to passively sit and watch its damages accumulate
during the pendency of the suit until the final judgment of rescission is rendered when the
law itself requires that he should exercise due diligence to minimize its own damages (Civil
Code, Article 2203).
Maritime likewise invokes Article 1592 of the Civil Code of the Philippines as entitling it to pay
despite its default:
ART. 1592. 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.
Assuming arguendo that Article 1592 is applicable, the cross-claim filed by Myers against
Maritime in the court below constituted a judicial demand for rescission that satisfies the
requirements of said article.
But even if it were not so, appellant overlooks that its contract with appellee Myers is not the
ordinary sale envisaged by Article 1592, transferring ownership simultaneously with the
delivery of the real property sold, but one in which the vendor retained ownership of the
immovable object of the sale, merely undertaking to convey it provided the buyer strictly
complied with the terms of the contract (see paragraph [d], ante, page 5). In suing to recover
possession of the building from Maritime, appellee Myers is not after the resolution or setting
aside of the contract and the restoration of the parties to the status quo ante, as contemplated
by Article 1592, but precisely enforcing the provisions of the agreement that it is no longer
obligated to part with the ownership or possession of the property because Maritime failed to
comply with the specified condition precedent, which is to pay the installments as they fell
due.
The distinction between contracts of sale and contract to sell with reserved title has been
recognized by this Court in repeated decisions 2 upholding the power of promisors under
contracts to sell in case of failure of the other party to complete payment, to extrajudicially
terminate the operation of the contract, refuse conveyance and retain the sums or
installments already received, where such rights are expressly provided for, as in the case at
bar.
attorneys' fees awarded by the trial court, it is undeniable that appellant Maritime has come
out of the entire transaction still at a profit to itself.
There remains the procedural objection raised by appellant Maritime to this interpleader
action filed by the Luzon Brokerage Co., the lessee of the building conditionally sold by Myers
to Maritime. It should be recalled that when Maritime defaulted in its payments to Myers, and
the latter notified the former that it was cancelling the contract of conditional sale, Myers also
notified Luzon Brokerage, Maritime's lessee of the building, of the cancellation of the sale, and
demanded that Luzon should pay to Myers the rentals of the building beginning from June,
1961, under penalty of ejectment (Record on Appeal, pages 14-15). In doubt as to who was
entitled to the rentals, Luzon filed this action for interpleader against Myers and Maritime, and
deposited the rentals in court as they fell due. The appellant Maritime moved to dismiss on
the ground that (a) Luzon could not entertain doubts as to whom the rentals should be paid
since Luzon had leased the building from Maritime since 1949, renewing the contract from
time to time, and Myers had no right to cancel the lease; and (b) that Luzon was not a
disinterested party, since it tended to favor appellee Myers. The court below overruled
Maritime's objections and We see no plausible reason to overturn the order. While Myers was
not a party to the lease, its cancellation of the conditional sale of the premises to Maritime,
Luzon's lessor, could not but raise reasonable doubts as to the continuation of the lease, for
the termination of the lessor's right of possession of the premises necessarily ended its right
to the rentals falling due thereafter. The preceding portion of our opinion is conclusive that
Luzon's doubts were grounded under the law and the jurisprudence of this Court.
No adequate proof exists that Luzon was favoring any one of the contending parties. It was
interested in being protected against prejudice deriving from the result of the controversy,
regardless of who should win. For the purpose it was simpler for Luzon to compel the
disputants to litigate between themselves, rather than chance being sued by Myers, and later
being compelled to proceed against Maritime to recoup its losses. In any event, Maritime
ultimately confirmed the act of Luzon in suing for interpleader, by agreeing to renew Luzon's
lease in 1963 during the pendency of the present action, and authorizing Luzon to continue
depositing the rentals in court "until otherwise directed by a court of competent jurisdiction"
(Exhibit "18-Maritime"). The procedural objection has thus become moot.
PREMISES CONSIDERED, the appealed decision should be, and hereby is, affirmed, and
appellant Maritime Building Co., as well as appellee Luzon Brokerage Co., are further ordered
to surrender the premises to the appellee Myers Building Co. Costs against appellant.

Maritime's appeal that it would be iniquituous that it should be compelled to forfeit the
P973,000 already paid to Myers, as a result of its failure to make good a balance of only
P319,300.65, payable at P5,000 monthly, becomes unimpressive when it is considered that
while obligated to pay the price of one million pesos at P5,000 monthly, plus interest,
Maritime, on the other hand, had leased the building to Luzon Brokerage, Inc. since 1949; and
Luzon paid P13,000 a month rent, from September, 1951 to August 1956, and thereafter until
1961, at P10,000 a month, thus paying a total of around one and a half million pesos in rentals
to Maritime. Even adding to Maritime's losses of P973,000 the P10,000 damages and P3,000
SALES – DISTINGUISHED FROM OTHER CONTRACTS – CONTRACT TO SELL
G.R. No. L-59266 February 29, 1988
SILVESTRE DIGNOS and ISABEL LUMUNGSOD, petitioners,
vs.
HON. COURT OF APPEALS and ATILANO G. JABIL, respondents.
BIDIN, J.:
This is a petition for review on certiorari seeking the reversal of the: (1) Decision * of the 9th
Division, Court of Appeals dated July 31,1981, affirming with modification the Decision, dated
August 25, 1972 of the Court of First Instance ** of Cebu in civil Case No. 23-L entitled Atilano
G. Jabil vs. Silvestre T. Dignos and Isabela Lumungsod de Dignos and Panfilo Jabalde, as
Attorney-in-Fact of Luciano Cabigas and Jovita L. de Cabigas; and (2) its Resolution dated
December 16, 1981, denying defendant-appellant's (Petitioner's) motion for reconsideration,
for lack of merit.
The undisputed facts as found by the Court of Appeals are as follows:
The Dignos spouses were owners of a parcel of land, known as Lot No. 3453, of the cadastral
survey of Opon, Lapu-Lapu City. On June 7, 1965, appellants (petitioners) Dignos spouses
sold the said parcel of land to plaintiff-appellant (respondent Atilano J. Jabil) for the sum of
P28,000.00, payable in two installments, with an assumption of indebtedness with the First
Insular Bank of Cebu in the sum of P12,000.00, which was paid and acknowledged by the
vendors in the deed of sale (Exh. C) executed in favor of plaintiff-appellant, and the next
installment in the sum of P4,000.00 to be paid on or before September 15, 1965.
On November 25, 1965, the Dignos spouses sold the same land in favor of defendants
spouses, Luciano Cabigas and Jovita L. De Cabigas, who were then U.S. citizens, for the price
of P35,000.00. A deed of absolute sale (Exh. J, also marked Exh. 3) was executed by the
Dignos spouses in favor of the Cabigas spouses, and which was registered in the Office of
the Register of Deeds pursuant to the provisions of Act No. 3344.
As the Dignos spouses refused to accept from plaintiff-appellant the balance of the purchase
price of the land, and as plaintiff- appellant discovered the second sale made by defendants-
appellants to the Cabigas spouses, plaintiff-appellant brought the present suit. (Rollo, pp.
27-28)
After due trial, the Court of first Instance of Cebu rendered its Decision on August 25,1972, the
decretal portion of which reads:
WHEREFORE, the Court hereby declares the deed of sale executed on November 25, 1965
by defendant Isabela L. de Dignos in favor of defendant Luciano Cabigas, a citizen of the
United States of America, null and void ab initio, and the deed of sale executed by
defendants Silvestre T. Dignos and Isabela Lumungsod de Dignos not rescinded.
Consequently, the plaintiff Atilano G. Jabil is hereby ordered to pay the sum, of Sixteen
Thousand Pesos (P16,000.00) to the defendants-spouses upon the execution of the Deed of
absolute Sale of Lot No. 3453, Opon Cadastre and when the decision of this case becomes
final and executory.
The plaintiff Atilano G. Jabil is ordered to reimburse the defendants Luciano Cabigas and
Jovita L. de Cabigas, through their attorney-in-fact, Panfilo Jabalde, reasonable amount
corresponding to the expenses or costs of the hollow block fence, so far constructed.
It is further ordered that defendants-spouses Silvestre T. Dignos and Isabela Lumungsod de
Dignos should return to defendants-spouses Luciano Cabigas and Jovita L. de Cabigas the
sum of P35,000.00, as equity demands that nobody shall enrich himself at the expense of
another.
The writ of preliminary injunction issued on September 23, 1966, automatically becomes
permanent in virtue of this decision.
With costs against the defendants.
From the foregoing, the plaintiff (respondent herein) and defendants-spouss (petitioners
herein) appealed to the Court of Appeals, which appeal was docketed therein as CA-G.R. No.
54393-R, "Atilano G. Jabil v. Silvestre T. Dignos, et al."
On July 31, 1981, the Court of Appeals affirmed the decision of the lower court except as to
the portion ordering Jabil to pay for the expenses incurred by the Cabigas spouses for the
building of a fence upon the land in question. The disposive portion of said decision of the
Court of Appeals reads:
IN VIEW OF THE FOREGOING CONSIDERATIONS, except as to the modification of the
judgment as pertains to plaintiff-appellant above indicated, the judgment appealed from is
hereby AFFIRMED in all other respects.
With costs against defendants-appellants.
SO ORDERED.
Judgment MODIFIED.
A motion for reconsideration of said decision was filed by the defendants- appellants
(petitioners) Dignos spouses, but on December 16, 1981, a resolution was issued by the Court
of Appeals denying the motion for lack of merit.
Hence, this petition.
In the resolution of February 10, 1982, the Second Division of this Court denied the petition for
lack of merit. A motion for reconsideration of said resolution was filed on March 16, 1982. In
the resolution dated April 26,1982, respondents were required to comment thereon, which
comment was filed on May 11, 1982 and a reply thereto was filed on July 26, 1982 in
compliance with the resolution of June 16,1 982. On August 9,1982, acting on the motion for
reconsideration and on all subsequent pleadings filed, this Court resolved to reconsider its
resolution of February 10, 1982 and to give due course to the instant petition. On September
6, 1982, respondents filed a rejoinder to reply of petitioners which was noted on the
resolution of September 20, 1982.
Petitioners raised the following assignment of errors:
I
THE COURT OF APPEALS COMMITTED A GRAVE ERROR OF LAW IN GROSSLY, INCORRECTLY
INTERPRETING THE TERMS OF THE CONTRACT, EXHIBIT C, HOLDING IT AS AN ABSOLUTE SALE,
EFFECTIVE TO TRANSFER OWNERSHIP OVER THE PROPERTY IN QUESTION TO THE
RESPONDENT AND NOT MERELY A CONTRACT TO SELL OR PROMISE TO SELL; THE COURT ALSO
ERRED IN MISAPPLYING ARTICLE 1371 AS WARRANTING READING OF THE AGREEMENT,
EXHIBIT C, AS ONE OF ABSOLUTE SALE, DESPITE THE CLARITY OF THE TERMS THEREOF
SHOWING IT IS A CONTRACT OF PROMISE TO SELL.
II
THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN INCORRECTLY APPLYING AND OR
IN MISAPPLYING ARTICLE 1592 OF THE NEW CIVIL CODE AS WARRANTING THE ERRONEOUS
CONCLUSION THAT THE NOTICE OF RESCISSION, EXHIBIT G, IS INEFFECTIVE SINCE IT HAS NOT
BEEN JUDICIALLY DEMANDED NOR IS IT A NOTARIAL ACT.
III
THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN REJECTING THE APPLICABILITY OF
ARTICLES 2208,2217 and 2219 OF THE NEW CIVIL CODE AND ESTABLISHED JURISPRUDENCE AS
TO WARRANT THE AWARD OF DAMAGES AND ATTORNEY'S FEES TO PETITIONERS.
IV
PLAINTIFF'S COMPLAINT FOR SPECIFIC PERFORMANCE SHOULD HAVE BEEN DISMISSED, HE
HAVING COME TO COURT WITH UNCLEAN HANDS.
V
BY AND LARGE, THE COURT OF APPEALS COMMITTED AN ERROR IN AFFIRMING WITH
MODIFICATION THE DECISION OF THE TRIAL COURT DUE TO GRAVE MISINTERPRETATION,
MISAPPLICATION AND MISAPPREHENSION OF THE TERMS OF THE QUESTIONED CONTRACT
AND THE LAW APPLICABLE THERETO.
The foregoing assignment of errors may be synthesized into two main issues, to wit:
I. Whether or not subject contract is a deed of absolute sale or a contract Lot sell.
II. Whether or not there was a valid rescission thereof.
There is no merit in this petition.
It is significant to note that this petition was denied by the Second Division of this Court in its
Resolution dated February 1 0, 1 982 for lack of merit, but on motion for reconsideration and
on the basis of all subsequent pleadings filed, the petition was given due course.
I.
The contract in question (Exhibit C) is a Deed of Sale, with the following conditions:
1. That Atilano G..Jabilis to pay the amount of Twelve Thousand Pesos P12,000.00) Phil.
Philippine Currency as advance payment;
2. That Atilano G. Jabil is to assume the balance of Twelve Thousand Pesos (P12,000.00)
Loan from the First Insular Bank of Cebu;
3. That Atilano G. Jabil is to pay the said spouses the balance of Four. Thousand Pesos
(P4,000.00) on or before September 15,1965;
4. That the said spouses agrees to defend the said Atilano G. Jabil from other claims on the
said property;
5. That the spouses agrees to sign a final deed of absolute sale in favor of Atilano G. Jabil
over the above-mentioned property upon the payment of the balance of Four Thousand
Pesos. (Original Record, pp. 10-11)
In their motion for reconsideration, petitioners reiterated their contention that the Deed of
Sale (Exhibit "C") is a mere contract to sell and not an absolute sale; that the same is subject to
two (2) positive suspensive conditions, namely: the payment of the balance of P4,000.00 on or
before September 15,1965 and the immediate assumption of the mortgage of P12,000.00 with
the First Insular Bank of Cebu. It is further contended that in said contract, title or ownership
over the property was expressly reserved in the vendor, the Dignos spouses until the
suspensive condition of full and punctual payment of the balance of the purchase price shall
have been met. So that there is no actual sale until full payment is made (Rollo, pp. 51-52).
In bolstering their contention that Exhibit "C" is merely a contract to sell, petitioners aver that
there is absolutely nothing in Exhibit "C" that indicates that the vendors thereby sell, convey or
transfer their ownership to the alleged vendee. Petitioners insist that Exhibit "C" (or 6) is a
private instrument and the absence of a formal deed of conveyance is a very strong indication
that the parties did not intend "transfer of ownership and title but only a transfer after full
payment" (Rollo, p. 52). Moreover, petitioners anchored their contention on the very terms
and conditions of the contract, more particularly paragraph four which reads, "that said
spouses has agreed to sell the herein mentioned property to Atilano G. Jabil ..." and condition
number five which reads, "that the spouses agrees to sign a final deed of absolute sale over
the mentioned property upon the payment of the balance of four thousand pesos."
Such contention is untenable.
By and large, the issues in this case have already been settled by this Court in analogous cases.
Thus, it has been held that a deed of sale is absolute in nature although denominated as a
"Deed of Conditional Sale" where nowhere in the contract in question is a proviso or
stipulation to the effect that title to the property sold is reserved in the vendor until full
payment of the purchase price, nor is there a stipulation giving the vendor the right to
unilaterally rescind the contract the moment the vendee fails to pay within a fixed period
Taguba v. Vda. de Leon, 132 SCRA 722; Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc.,
86 SCRA 305).
A careful examination of the contract shows that there is no such stipulation reserving the title
of the property on the vendors nor does it give them the right to unilaterally rescind the
contract upon non-payment of the balance thereof within a fixed period.
On the contrary, all the elements of a valid contract of sale under Article 1458 of the Civil
Code, are present, such as: (1) consent or meeting of the minds; (2) determinate subject
matter; and (3) price certain in money or its equivalent. In addition, Article 1477 of the same equity and justice mandate as in the aforecited case that Jabil be given an additional period
Code provides that "The ownership of the thing sold shall be transferred to the vendee upon within which to complete payment of the purchase price.
actual or constructive delivery thereof." As applied in the case of Froilan v. Pan Oriental
Shipping Co., et al. (12 SCRA 276), this Court held that in the absence of stipulation to the WHEREFORE, the petition filed is hereby Dismissed for lack of merit and the assailed decision
contrary, the ownership of the thing sold passes to the vendee upon actual or constructive of the Court of Appeals is Affirmed in toto.
delivery thereof.
SO ORDERED.
While it may be conceded that there was no constructive delivery of the land sold in the case
at bar, as subject Deed of Sale is a private instrument, it is beyond question that there was
actual delivery thereof. As found by the trial court, the Dignos spouses delivered the
possession of the land in question to Jabil as early as March 27,1965 so that the latter
constructed thereon Sally's Beach Resort also known as Jabil's Beach Resort in March, 1965;
Mactan White Beach Resort on January 15,1966 and Bevirlyn's Beach Resort on September 1,
1965. Such facts were admitted by petitioner spouses (Decision, Civil Case No. 23-L; Record on
Appeal, p. 108).

Moreover, the Court of Appeals in its resolution dated December 16,1981 found that the acts
of petitioners, contemporaneous with the contract, clearly show that an absolute deed of sale
was intended by the parties and not a contract to sell.

Be that as it may, it is evident that when petitioners sold said land to the Cabigas spouses, they
were no longer owners of the same and the sale is null and void.

II.

Petitioners claim that when they sold the land to the Cabigas spouses, the contract of sale was
already rescinded.

Applying the rationale of the case of Taguba v. Vda. de Leon (supra) which is on all fours with
the case at bar, the contract of sale being absolute in nature is governed by Article 1592 of the
Civil Code. It is undisputed that petitioners never notified private respondents Jabil by notarial
act that they were rescinding the contract, and neither did they file a suit in court to rescind
the sale. The most that they were able to show is a letter of Cipriano Amistad who, claiming to
be an emissary of Jabil, informed the Dignos spouses not to go to the house of Jabil because
the latter had no money and further advised petitioners to sell the land in litigation to another
party (Record on Appeal, p. 23). As correctly found by the Court of Appeals, there is no
showing that Amistad was properly authorized by Jabil to make such extra-judicial rescission
for the latter who, on the contrary, vigorously denied having sent Amistad to tell petitioners
that he was already waiving his rights to the land in question. Under Article 1358 of the Civil
Code, it is required that acts and contracts which have for their object the extinguishment of
real rights over immovable property must appear in a public document.

Petitioners laid considerable emphasis on the fact that private respondent Jabil had no money
on the stipulated date of payment on September 15,1965 and was able to raise the necessary
amount only by mid-October 1965.

It has been ruled, however, that "where time is not of the essence of the agreement, a slight
delay on the part of one party in the performance of his obligation is not a sufficient ground
for the rescission of the agreement" (Taguba v. Vda. de Leon, supra). Considering that private
respondent has only a balance of P4,000.00 and was delayed in payment only for one month,
SALES – DISTINGUISHED FROM OTHER CONTRACTS – CONTRACT FOR A PIECE OF WORK
G.R. No. L-8506 August 31, 1956
CELESTINO CO & COMPANY, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE, 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.
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.

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?
SALES – DISTINGUISHED FROM OTHER CONTRACTS – CONTRACT FOR A PIECE OF WORK
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.
ESGUERRA, J.:
Petition for review on certiorari of the decision of the Court of Tax Appeals in CTA Case No.
681, dated November 29, 1966, assessing a compensating tax of P174,441.62 on the
Engineering Equipment and Supply Company.
As found by the Court of Tax Appeals, and as established by the evidence on record, the facts
of this case are as follows:
Engineering Equipment and Supply Co. (Engineering for short), a domestic corporation, is an
engineering and machinery firm. As operator of an integrated engineering shop, it is engaged,
among others, in the design and installation of central type air conditioning system, pumping
plants and steel fabrications. (Vol. I pp. 12-16 T.S.N. August 23, 1960)
On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now Commissioner, of Internal
Revenue denouncing Engineering for tax evasion by misdeclaring its imported articles and
failing to pay the correct percentage taxes due thereon in connivance with its foreign suppliers
(Exh. "2" p. 1 BIR record Vol. I). Engineering was likewise denounced to the Central Bank (CB)
for alleged fraud in obtaining its dollar allocations. Acting on these denunciations, a raid and
search was conducted by a joint team of Central Bank, (CB), National Bureau of Investigation
(NBI) and Bureau of Internal Revenue (BIR) agents on September 27, 1956, on which occasion
voluminous records of the firm were seized and confiscated. (pp. 173-177 T.S.N.)
On September 30, 1957, revenue examiners Quesada and Catudan reported and
recommended to the then Collector, now Commissioner, of Internal Revenue (hereinafter
referred to as Commissioner) that Engineering be assessed for P480,912.01 as deficiency
advance sales tax on the theory that it misdeclared its importation of air conditioning units
and parts and accessories thereof which are subject to tax under Section 185(m) 1 of the Tax
Code, instead of Section 186 of the same Code. (Exh. "3" pp. 59-63 BIR rec. Vol. I) This
assessment was revised on January 23, 1959, in line with the observation of the Chief, BIR Law
Division, and was raised to P916,362.56 representing deficiency advance sales tax and
manufacturers sales tax, inclusive of the 25% and 50% surcharges. (pp. 72-80 BIR rec. Vol. I)
On March 3, 1959. the Commissioner assessed against, and demanded upon, Engineering
payment of the increased amount and suggested that P10,000 be paid as compromise in
extrajudicial settlement of Engineering's penal liability for violation of the Tax Code. The firm,
however, contested the tax assessment and requested that it be furnished with the details and
particulars of the Commissioner's assessment. (Exh. "B" and "15", pp. 86-88 BIR rec. Vol. I) The
Commissioner replied that the assessment was in accordance with law and the facts of the
case.
On July 30, 1959, Engineering appealed the case to the Court of Tax Appeals and during the
pendency of the case the investigating revenue examiners reduced Engineering's deficiency tax
liabilities from P916,362.65 to P740,587.86 (Exhs. "R" and "9" pp. 162-170, BIR rec.), based on
findings after conferences had with Engineering's Accountant and Auditor.
On November 29, 1966, the Court of Tax Appeals rendered its decision, the dispositive portion
of which reads as follows:
For ALL THE FOREGOING CONSIDERATIONS, the decision of respondent appealed from is
hereby modified, and petitioner, as a contractor, is declared exempt from the deficiency
manufacturers sales tax covering the period from June 1, 1948. to September 2, 1956.
However, petitioner is ordered to pay respondent, or his duly authorized collection agent,
the sum of P174,141.62 as compensating tax and 25% surcharge for the period from 1953 to
September 1956. With costs against petitioner.
The Commissioner, not satisfied with the decision of the Court of Tax Appeals, appealed to this
Court on January 18, 1967, (G.R. No. L-27044). On the other hand, Engineering, on January 4,
1967, filed with the Court of Tax Appeals a motion for reconsideration of the decision
abovementioned. This was denied on April 6, 1967, prompting Engineering to file also with this
Court its appeal, docketed as G.R. No. L-27452.
Since the two cases, G.R. No. L-27044 and G.R. No. L-27452, involve the same parties and
issues, We have decided to consolidate and jointly decide them.
Engineering in its Petition claims that the Court of Tax Appeals committed the following errors:
1. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
liable to the 30% compensating tax on its importations of equipment and ordinary articles
used in the central type air conditioning systems it designed, fabricated, constructed and
installed in the buildings and premises of its customers, rather than to the compensating tax
of only 7%;
2. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
guilty of fraud in effecting the said importations on the basis of incomplete quotations from
the contents of alleged photostat copies of documents seized illegally from Engineering
Equipment and Supply Company which should not have been admitted in evidence;
3. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
liable to the 25% surcharge prescribed in Section 190 of the Tax Code;
4. That the Court of Tax Appeals erred in holding the assessment as not having prescribed;
5. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
liable for the sum of P174,141.62 as 30% compensating tax and 25% surcharge instead of
completely absolving it from the deficiency assessment of the Commissioner.
The Commissioner on the other hand claims that the Court of Tax Appeals erred:
1. In holding that the respondent company is a contractor and not a manufacturer.
2. In holding respondent company liable to the 3% contractor's tax imposed by Section 191
of the Tax Code instead of the 30% sales tax prescribed in Section 185(m) in relation to
Section 194(x) both of the same Code;
3. In holding that the respondent company is subject only to the 30% compensating tax
under Section 190 of the Tax Code and not to the 30% advance sales tax imposed by section
183 (b), in relation to section 185(m) both of the same Code, on its importations of parts
and accessories of air conditioning units;
4. In not holding the company liable to the 50% fraud surcharge under Section 183 of the
Tax Code on its importations of parts and accessories of air conditioning units,
notwithstanding the finding of said court that the respondent company fraudulently
misdeclared the said importations;
5. In holding the respondent company liable for P174,141.62 as compensating tax and 25%
surcharge instead of P740,587.86 as deficiency advance sales tax, deficiency manufacturers
tax and 25% and 50% surcharge for the period from June 1, 1948 to December 31, 1956.
The main issue revolves on the question of whether or not Engineering is a manufacturer of air
conditioning units under Section 185(m), supra, in relation to Sections 183(b) and 194 of the
Code, or a contractor under Section 191 of the same Code.
The Commissioner contends that Engineering is a manufacturer and seller of air conditioning
units and parts or accessories thereof and, therefore, it is subject to the 30% advance sales tax
prescribed by Section 185(m) of the Tax Code, in relation to Section 194 of the same, which
defines a manufacturer as follows:
Section 194. — Words and Phrases Defined. — In applying the provisions of this Title, words
and phrases shall be taken in the sense and extension indicated below:
xxx xxx xxx
(x) "Manufacturer" includes every person who by physical or chemical process alters the
exterior texture or form or inner substance of any raw material or manufactured or partially
manufactured products in such manner as to prepare it for a special use or uses to which it
could not have been put in its original condition, or who by any such process alters the
quality of any such material or manufactured or partially manufactured product so as to
reduce it to marketable shape, or prepare it for any of the uses of industry, or who by any
such process combines any such raw material or manufactured or partially manufactured
products with other materials or products of the same or of different kinds and in such
manner that the finished product of such process of manufacture can be put to special use
or uses to which such raw material or manufactured or partially manufactured products in
their original condition could not have been put, and who in addition alters such raw
material or manufactured or partially manufactured products, or combines the same to
produce such finished products for the purpose of their sale or distribution to others and
not for his own use or consumption.
In answer to the above contention, Engineering claims that it is not a manufacturer and setter
of air-conditioning units and spare parts or accessories thereof subject to tax under Section
185(m) of the Tax Code, but a contractor engaged in the design, supply and installation of the
central type of air-conditioning system subject to the 3% tax imposed by Section 191 of the
same Code, which is essentially a tax on the sale of services or labor of a contractor rather
than on the sale of articles subject to the tax referred to in Sections 184, 185 and 186 of the
Code.
The arguments of both the Engineering and the Commissioner call for a clarification of the
term contractor as well as the distinction between a contract of sale and contract for
furnishing services, labor and materials. The distinction between a contract of sale and one for
work, labor and materials is tested by the inquiry whether the thing transferred is one not in
existence and which never would have existed but for the order of the party desiring to
acquire it, or a thing which would have existed and has been the subject of sale to some other
persons even if the order had not been given. 2 If the article ordered by the purchaser is exactly
such as the plaintiff makes and keeps on hand for sale to anyone, and no change or
modification of it is made at defendant's request, it is a contract of sale, even though it may be
entirely made after, and in consequence of, the defendants order for it. 3
Our New Civil Code, likewise distinguishes a contract of sale from a contract for a piece of work
thus:
Art. 1467. A contract for the delivery at a certain price of an article which the vendor in the
ordinary course of his business manufactures or procures for the general market, whether
the same is on hand at the time or not, is a contract of sale, but if the goods are to be
manufactured specially for the customer and upon his special order and not for the general
market, it is a contract for a piece of work.
The word "contractor" has come to be used with special reference to a person who, in the
pursuit of the independent business, undertakes to do a specific job or piece of work for other
persons, using his own means and methods without submitting himself to control as to the
petty details. (Arañas, 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 finding4 We adopt —
Engineering, in a nutshell, fabricates, assembles, supplies and installs in the buildings of its
various customers the central type air conditioning system; prepares the plans and
specifications therefor which are distinct and different from each other; the air conditioning
units and spare parts or accessories thereof used by petitioner are not the window type of
air conditioner which are manufactured, assembled and produced locally for sale to the
general market; and the imported air conditioning units and spare parts or accessories
thereof are supplied and installed by petitioner upon previous orders of its customers
conformably with their needs and requirements.
The facts and circumstances aforequoted support the theory that Engineering is a contractor
rather than a manufacturer.
The Commissioner in his Brief argues that "it is more in accord with reason and sound business
management to say that anyone who desires to have air conditioning units installed in his
premises and who is in a position and willing to pay the price can order the same from the
company (Engineering) and, therefore, Engineering could have mass produced and stockpiled
air conditioning units for sale to the public or to any customer with enough 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 1905 of the Code. This compensating tax is not a tax on the importation of goods but a
tax on the use of imported goods not subject to sales tax. Engineering, therefore, should be
held liable to the payment of 30% compensating tax in accordance with Section 190 of the Tax
Code in relation to Section 185(m) of the same, but without the 50% mark up provided in
Section 183(b).
II
We take up next the issue of fraud. The Commissioner charged Engineering with
misdeclaration of the imported air conditioning units and parts or accessories thereof so as to
make them subject to a lower rate of percentage tax (7%) under Section 186 of the Tax Code,
when they are allegedly subject to a higher rate of tax (30%) under its Section 185(m). This
charge of fraud was denied by Engineering but the Court of Tax Appeals in its decision found
adversely and said"
... We are amply convinced from the evidence presented by respondent that petitioner
deliberately and purposely misdeclared its importations. This evidence consists of letters
written by petitioner to its foreign suppliers, instructing them on how to invoice and
describe the air conditioning units ordered by petitioner. ... (p. 218 CTA rec.)
Despite the above findings, however, the Court of Tax Appeals absolved Engineering from
paying the 50% surcharge prescribe by Section 183(a) of the Tax Code by reasoning out as
follows:
The imposition of the 50% surcharge prescribed by Section 183(a) of the Tax Code is based
on willful neglect to file the monthly return within 20 days after the end of each month or in
case a false or fraudulent return is willfully made, it can readily be seen, that petitioner
cannot legally be held subject to the 50% surcharge imposed by Section 183(a) of the Tax
Code. Neither can petitioner be held subject to the 50% surcharge under Section 190 of the
Tax Code dealing on compensating tax because the provisions thereof do not include the
50% surcharge. Where a particular provision of the Tax Code does not impose the 50%
surcharge as fraud penalty we cannot enforce a non-existing provision of law
notwithstanding the assessment of respondent to the contrary. Instances of the exclusion in
the Tax Code of the 50% surcharge are those dealing on tax on banks, taxes on receipts of
insurance companies, and franchise tax. However, if the Tax Code imposes the 50%
surcharge as fraud penalty, it expressly so provides as in the cases of income tax, estate and
inheritance taxes, gift taxes, mining tax, amusement tax and the monthly percentage taxes.
Accordingly, we hold that petitioner is not subject to the 50% surcharge despite the
existence of fraud in the absence of legal basis to support the importation thereof. (p. 228
CTA rec.)
We have gone over the exhibits submitted by the Commissioner evidencing fraud committed
by Engineering and We reproduce some of them hereunder for clarity.
As early as March 18, 1953, Engineering in a letter of even date wrote to Trane Co. (Exh. "3-K"
pp. 152-155, BIR rec.) viz:
 Your invoices should be made in the name of Madrigal & Co., Inc., Manila, Philippines, c/o
Engineering Equipment & Supply Co., Manila, Philippines — forwarding all correspondence
and shipping papers concerning this order to us only and not to the customer.
When invoicing, your invoices should be exactly as detailed in the customer's Letter Order
dated March 14th, 1953 attached. This is in accordance with the Philippine import licenses
granted to Madrigal & Co., Inc. and such details must only be shown on all papers and
shipping documents for this shipment. No mention of words air conditioning equipment
should be made on any shipping documents as well as on the cases. Please give this matter
your careful attention, otherwise great difficulties will be encountered with the Philippine
Bureau of Customs when clearing the shipment on its arrival in Manila. All invoices and
cases should be marked "THIS EQUIPMENT FOR RIZAL CEMENT CO."
The same instruction was made to Acme Industries, Inc., San Francisco, California in a letter
dated March 19, 1953 (Exh. "3-J-1" pp. 150-151, BIR rec.)
On April 6, 1953, Engineering wrote to Owens-Corning Fiberglass Corp., New York, U.S.A. (Exh.
"3-1" pp. 147-149, BIR rec.) also enjoining the latter from mentioning or referring to the term
'air conditioning' and to describe the goods on order as Fiberglass pipe and pipe fitting
insulation instead. Likewise on April 30, 1953, Engineering threatened to discontinue the
forwarding service of Universal Transcontinental Corporation when it wrote Trane Co. (Exh. "3-
H" p. 146, BIR rec.):
It will be noted that the Universal Transcontinental Corporation is not following through on
the instructions which have been covered by the above correspondence, and which
indicates the necessity of discontinuing the use of the term "Air conditioning Machinery or
Air Coolers". Our instructions concerning this general situation have been sent to you in
ample time to have avoided this error in terminology, and we will ask that on receipt of this
letter that you again write to Universal Transcontinental Corp. and inform them that, if in the
future, they are unable to cooperate with us on this requirement, we will thereafter be
unable to utilize their forwarding service. Please inform them that we will not tolerate
another failure to follow our requirements.
And on July 17, 1953 (Exh- "3-g" p. 145, BIR rec.) Engineering wrote Trane Co. another letter,
viz:
In the past, we have always paid the air conditioning tax on climate changers and that mark
is recognized in the Philippines, as air conditioning equipment. This matter of avoiding any
tie-in on air conditioning is very important to us, and we are asking that from hereon that
whoever takes care of the processing of our orders be carefully instructed so as to avoid
again using the term "Climate changers" or in any way referring to the equipment as "air
conditioning."
And in response to the aforequoted letter, Trane Co. wrote on July 30, 1953, suggesting a
solution, viz:
We feel that we can probably solve all the problems by following the procedure outlined in
your letter of March 25, 1953 wherein you stated that in all future jobs you would enclose
photostatic copies of your import license so that we might make up two sets of invoices: one
set describing equipment ordered simply according to the way that they are listed on the
import license and another according to our ordinary regular methods of order write-up. We
would then include the set made up according to the import license in the shipping boxes
themselves and use those items as our actual shipping documents and invoices, and we will
send the other regular invoice to you, by separate correspondence. (Exh- No. "3-F-1", p. 144
BIR rec.)
Another interesting letter of Engineering is one dated August 27, 1955 (Exh. "3-C" p. 141 BIR
rec.)
In the process of clearing the shipment from the piers, one of the Customs inspectors
requested to see the packing list. Upon presenting the packing list, it was discovered that
the same was prepared on a copy of your letterhead which indicated that the Trane Co.
manufactured air conditioning, heating and heat transfer equipment. Accordingly, the
inspectors insisted that this equipment was being imported for air conditioning purposes. To
date, we have not been able to clear the shipment and it is possible that we will be required
to pay heavy taxes on equipment.
The purpose of this letter is to request that in the future, no documents of any kind should be
sent with the order that indicate in any way that the equipment could possibly be used for
air conditioning.
It is realized that this a broad request and fairly difficult to accomplish and administer, but
we believe with proper caution it can be executed. Your cooperation and close supervision
concerning these matters will be appreciated. (Emphasis supplied)
The aforequoted communications are strongly indicative of the fraudulent intent of
Engineering to misdeclare its importation of air conditioning units and spare parts or
accessories thereof to evade payment of the 30% tax. And since the commission of fraud is
altogether too glaring, We cannot agree with the Court of Tax Appeals in absolving Engineering
from the 50% fraud surcharge, otherwise We will be giving premium to a plainly intolerable act
of tax evasion. As aptly stated by then Solicitor General, now Justice, Antonio P. Barredo: 'this
circumstance will not free it from the 50% surcharge because in any case whether it is subject
to advance sales tax or compensating tax, it is required by law to truly declare its importation
in the import entries and internal revenue declarations before the importations maybe
released from customs custody. The said entries are the very documents where the nature,
quantity and value of the imported goods declared and where the customs duties, internal
revenue taxes, and other fees or charges incident to the importation are computed. These
entries, therefore, serve the same purpose as the returns required by Section 183(a) of the
Code.'
Anent the 25% delinquency surcharge, We fully agree to the ruling made by the Court of Tax
Appeals and hold Engineering liable for the same. As held by the lower court:
At first blush it would seem that the contention of petitioner that it is not subject to the
delinquency, surcharge of 25% is sound, valid and tenable. However, a serious study and
critical analysis of the historical provisions of Section 190 of the Tax Code dealing on
compensating tax in relation to Section 183(a) of the same Code, will show that the
contention of petitioner is without merit. The original text of Section 190 of Commonwealth
Act 466, otherwise known as the National Internal Revenue Code, as amended by
Commonwealth Act No. 503, effective on October 1, 1939, does not provide for the filing of
 a compensation tax return and payment of the 25 % surcharge for late payment thereof.
Under the original text of Section 190 of the Tax Code as amended by Commonwealth Act
No. 503, the contention of the petitioner that it is not subject to the 25% surcharge appears
to be legally tenable. However, Section 190 of the Tax Code was subsequently amended by
the Republic Acts Nos. 253, 361, 1511 and 1612 effective October 1, 1946, July 1, 1948, June
9, 1949, June 16, 1956 and August 24, 1956 respectively, which invariably provides among
others, the following:

... If any article withdrawn from the customhouse or the post office without payment of
the compensating tax is subsequently used by the importer for other purposes,
corresponding entry should be made in the books of accounts if any are kept or a written
notice thereof sent to the Collector of Internal Revenue and payment of the
corresponding compensating tax made within 30 days from the date of such entry or
notice and if tax is not paid within such period the amount of the tax shall be increased by
25% the increment to be a part of the tax.

Since the imported air conditioning units-and spare parts or accessories thereof are subject to
the compensating tax of 30% as the same were used in the construction business of
Engineering, it is incumbent upon the latter to comply with the aforequoted requirement of
Section 190 of the Code, by posting in its books of accounts or notifying the Collector of
Internal Revenue that the imported articles were used for other purposes within 30 days. ...
Consequently; as the 30% compensating tax was not paid by petitioner within the time
prescribed by Section 190 of the Tax Code as amended, it is therefore subject to the 25%
surcharge for delinquency in the payment of the said tax. (pp. 224-226 CTA rec.)

III

Lastly the question of prescription of the tax assessment has been put in issue. Engineering
contends that it was not guilty of tax fraud in effecting the importations and, therefore,
Section 332(a) prescribing ten years is inapplicable, claiming that the pertinent prescriptive
period is five years from the date the questioned importations were made. A review of the
record however reveals that Engineering did file a tax return or declaration with the Bureau of
Customs before it paid the advance sales tax of 7%. And the declaration filed reveals that it did
in fact misdeclare its importations. Section 332 of the Tax Code which provides:

Section 332. — Exceptions as to period of limitation of assessment and collection of taxes.

—

(a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax may
be begun without assessment at any time within ten years after the discovery of the falsity,
fraud or omission.

is applicable, considering the preponderance of evidence of fraud with the intent to evade the
higher rate of percentage tax due from Engineering. The, tax assessment was made within the
period prescribed by law and prescription had not set in against the Government.

WHEREFORE, the decision appealed from is affirmed with the modification that Engineering is
hereby also made liable to pay the 50% fraud surcharge.

SO ORDERED.
SALES – DISTINGUISHED FROM OTHER CONTRACTS – AGENCY TO BUY OR SELL
G.R. No. L-11491 August 23, 1918
ANDRES QUIROGA, plaintiff-appellant,
vs.
PARSONS HARDWARE CO., defendant-appellee.
AVANCEÑA, 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. For the foregoing reasons, we are of opinion that the contract by and between the plaintiff and
The word agency, also used in articles 2 and 3, only expresses that the defendant was the only the defendant was one of purchase and sale, and that the obligations the breach of which is
one that could sell the plaintiff's beds in the Visayan Islands. With regard to the remaining alleged as a cause of action are not imposed upon the defendant, either by agreement or by
clauses, the least that can be said is that they are not incompatible with the contract of law.
purchase and sale.
The judgment appealed from is affirmed, with costs against the appellant. So ordered.
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.
SALES – DISTINGUISHED FROM OTHER CONTRACTS – AGENCY TO BUY OR SELL
G.R. No. L-47538 June 20, 1941
GONZALO PUYAT & SONS, INC., petitioner,
vs.
ARCO AMUSEMENT COMPANY (formerly known as Teatro Arco), 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.
SALES – DISTINGUISHED FROM OTHER CONTRACTS – AGENCY TO BUY OR SELL
G.R. No. L-20871 April 30, 1971
KER & CO., LTD., petitioner,
vs.
JOSE B. LINGAD, as Acting Commissioner of Internal Revenue, respondent.
FERNANDO, J.:
Petitioner Ker & Co., Ltd. would have us reverse a decision of the Court of Tax Appeals, holding
it liable as a commercial broker under Section 194 (t) of the National Internal Revenue Code.
Its plea, notwithstanding the vigorous effort of its counsel, is not sufficiently persuasive. An
obstacle, well-nigh insuperable stands in the way. The decision under review conforms to and
is in accordance with the controlling doctrine announced in the recent case of Commissioner
of Internal Revenue v. Constantino.1 The decisive test, as therein set forth, is the retention of
the ownership of the goods delivered to the possession of the dealer, like herein petitioner, for
resale to customers, the price and terms remaining subject to the control of the firm
consigning such goods. The facts, as found by respondent Court, to which we defer,
unmistakably indicate that such a situation does exist. The juridical consequences must
inevitably follow. We affirm.
It was shown that petitioner was assessed by the then Commissioner of Internal Revenue
Melecio R. Domingo the sum of P20,272.33 as the commercial broker's percentage tax,
surcharge, and compromise penalty for the period from July 1, 1949 to December 31, 1953.
There was a request on the part of petitioner for the cancellation of such assessment, which
request was turned down. As a result, it filed a petition for review with the Court of Tax
Appeals. In its answer, the then Commissioner Domingo maintained his stand that petitioner
should be taxed in such amount as a commercial broker. In the decision now under review,
promulgated on October 19, 1962, the Court of Tax Appeals held petitioner taxable except as
to the compromise penalty of P500.00, the amount due from it being fixed at P19,772.33.
Such liability arose from a contract of petitioner with the United States Rubber International,
the former being referred to as the Distributor and the latter specifically designated as the
Company. The contract was to apply to transactions between the former and petitioner, as
Distributor, from July 1, 1948 to continue in force until terminated by either party giving to the
other sixty days' notice.2 The shipments would cover products "for consumption in Cebu,
Bohol, Leyte, Samar, Jolo, Negros Oriental, and Mindanao except [the] province of Davao",
petitioner, as Distributor, being precluded from disposing such products elsewhere than in the
above places unless written consent would first be obtained from the Company. 3 Petitioner, as
Distributor, is required to exert every effort to have the shipment of the products in the
maximum quantity and to promote in every way the sale thereof. 4 The prices, discounts, terms
of payment, terms of delivery and other conditions of sale were subject to change in the
discretion of the Company.5
Then came this crucial stipulation: "The Company shall from time to time consign to the
Distributor and the Distributor will receive, accept and/or hold upon consignment the
products specified under the terms of this agreement in such quantities as in the judgment of
the Company may be necessary for the successful solicitation and maintenance of business in
the territory, and the Distributor agrees that responsibility for the final sole of all goods
delivered shall rest with him. All goods on consignment shall remain the property of the
Company until sold by the Distributor to the purchaser or purchasers, but all sales made by the
Distributor shall be in his name, in which the sale price of all goods sold less the discount given
to the Distributor by the Company in accordance with the provision of paragraph 13 of this
agreement, whether or not such sale price shall have been collected by the Distributor from
the purchaser or purchasers, shall immediately be paid and remitted by the Distributor to the
Company. It is further agreed that this agreement does not constitute Distributor the agent or
legal representative 4 of the Company for any purpose whatsoever. Distributor is not granted
any right or authority to assume or to create any obligation or responsibility, express or
implied, in behalf of or in the name of the Company, or to bind the Company in any manner or
thing whatsoever."6
All specifications for the goods ordered were subject to acceptance by the Company with
petitioner, as Distributor, required to accept such goods shipped as well as to clear the same
through customs and to arrange for delivery in its warehouse in Cebu City. Moreover, orders
are to be filled in whole or in part from the stocks carried by the Company's neighboring
branches, subsidiaries or other sources of Company's brands. 7 Shipments were to be invoiced
at prices to be agreed upon, with the customs duties being paid by petitioner, as Distributor,
for account of the Company.8 Moreover, all resale prices, lists, discounts and general terms and
conditions of local resale were to be subject to the approval of the Company and to change
from time to time in its discretion. 9 The dealer, as Distributor, is allowed a discount of ten
percent on the net amount of sales of merchandise made under such agreement. 10 On a date
to be determined by the Company, the petitioner, as Distributor, was required to report to it
data showing in detail all sales during the month immediately preceding, specifying therein
the quantities, sizes and types together with such information as may be required for
accounting purposes, with the Company rendering an invoice on sales as described to be
dated as of the date of inventory and sales report. As Distributor, petitioner had to make
payment on such invoice or invoices on due date with the Company being privileged at its
option to terminate and cancel the agreement forthwith upon the failure to comply with this
obligation. 11 The Company, at its own expense, was to keep the consigned stock fully insured
against loss or damage by fire or as a result of fire, the policy of such insurance to be payable
to it in the event of loss. Petitioner, as Distributor, assumed full responsibility with reference to
the stock and its safety at all times; and upon request of the Company at any time, it was to
render inventory of the existing stock which could be subject to change. 12 There was
furthermore this equally tell-tale covenant: "Upon the termination or any cancellation of this
agreement all goods held on consignment shall be held by the Distributor for the account of
the Company, without expense to the Company, until such time as provision can be made by
the Company for disposition." 13
The issue with the Court of Tax Appeals, as with us now, is whether the relationship thus
created is one of vendor and vendee or of broker and principal. Not that there would have
been the slightest doubt were it not for the categorical denial in the contract that petitioner
was not constituted as "the agent or legal representative of the Company for any purpose
whatsoever." It would be, however, to impart to such an express disclaimer a meaning it
should not possess to ignore what is manifestly the role assigned to petitioner considering the
instrument as a whole. That would be to lose sight altogether of what has been agreed upon.
The Court of Tax Appeals was not misled in the language of the decision now on appeal: "That
the petitioner Ker & Co., Ltd. is, by contractual stipulation, an agent of U.S. Rubber
International is borne out by the facts that petitioner can dispose of the products of the
Company only to certain persons or entities and within stipulated limits, unless excepted by
the contract or by the Rubber Company (Par. 2); that it merely receives, accepts and/or holds
upon consignment the products, which remain properties of the latter company (Par. 8); that
every effort shall be made by petitioner to promote in every way the sale of the products (Par.
3); that sales made by petitioner are subject to approval by the company (Par. 12); that on
dates determined by the rubber company, petitioner shall render a detailed report showing
sales during the month (Par. 14); that the rubber company shall invoice the sales as of the
dates of inventory and sales report (Par. 14); that the rubber company agrees to keep the
consigned goods fully insured under insurance policies payable to it in case of loss (Par. 15);
that upon request of the rubber company at any time, petitioner shall render an inventory of
the existing stock which may be checked by an authorized representative of the former (Par.
15); and that upon termination or cancellation of the Agreement, all goods held on
consignment shall be held by petitioner for the account of the rubber company until their
disposition is provided for by the latter (Par. 19). All these circumstances are irreconcilably
antagonistic to the idea of an independent merchant." 14 Hence its conclusion: "However, upon
analysis of the contract, as a whole, together with the actual conduct of the parties in respect
thereto, we have arrived at the conclusion that the relationship between them is one of
brokerage or agency." 15 We find ourselves in agreement, notwithstanding the able brief filed
on behalf of petitioner by its counsel. As noted at the outset, we cannot heed petitioner's plea
for reversal.
1. According to the National Internal Revenue Code, a commercial broker "includes all persons,
other than importers, manufacturers, producers, or bona fide employees, who, for
compensation or profit, sell or bring about sales or purchases of merchandise for other
persons or bring proposed buyers and sellers together, or negotiate freights or other business
for owners of vessels or other means of transportation, or for the shippers, or consignors or
consignees of freight carried by vessels or other means of transportation. The term includes
commission merchants." 16 The controlling decision as to the test to be followed as to who falls
within the above definition of a commercial broker is that of Commissioner of Internal
Revenue v. Constantino. 17 In the language of Justice J. B. L. Reyes, who penned the opinion:
"Since the company retained ownership of the goods, even as it delivered possession unto the
dealer for resale to customers, the price and terms of which were subject to the company's
control, the relationship between the company and the dealer is one of agency, ... ." 18 An
excerpt from Salisbury v. Brooks 19 cited in support of such a view follows: " 'The difficulty in
distinguishing between contracts of sale and the creation of an agency to sell has led to the
establishment of rules by the application of which this difficulty may be solved. The decisions
say the transfer of title or agreement to transfer it for a price paid or promised is the essence
of sale. If such transfer puts the transferee in the attitude or position of an owner and makes
him liable to the transferor as a debtor for the agreed price, and not merely as an agent who
must account for the proceeds of a resale, the transaction is a sale; while the essence of an
agency to sell is the delivery to an agent, not as his property, but as the property of the
principal, who remains the owner and has the right to control sales, fix the price, and terms,
demand and receive the proceeds less the agent's commission upon sales made.' " 20 The
opinion relied on the work of Mechem on Sales as well as Mechem on Agency. Williston and
Tiedman both of whom wrote treatises on Sales, were likewise referred to.
Equally relevant is this portion of the Salisbury opinion: "It is difficult to understand or
appreciate the necessity or presence of these mutual requirements and obligations on any
theory other than that of a contract of agency. Salisbury was to furnish the mill and put the
timber owned by him into a marketable condition in the form of lumber; Brooks was to furnish
the funds necessary for that purpose, sell the manufactured product, and account therefor to
Salisbury upon the specific terms of the agreement, less the compensation fixed by the parties
in lieu of interest on the money advanced and for services as agent. These requirements and
stipulations are in tent with any other conception of the contract. If it constitutes an
agreement to sell, they are meaningless. But they cannot be ignored. They were placed there
for some purpose, doubtless as the result of definite antecedent negotiations therefore,
consummated by the final written expression of the agreement." 21 Hence the Constantino
opinion could categorically affirm that the mere disclaimer in a contract that an entity like
petitioner is not "the agent or legal representative for any purpose whatsoever" does not
suffice to yield the conclusion that it is an independent merchant if the control over the goods
for resale of the goods consigned is pervasive in character. The Court of Tax Appeals decision
now under review pays fealty to such an applicable doctrine.
2. No merit therefore attaches to the first error imputed by petitioner to the Court of Tax
Appeals. Neither did such Court fail to appreciate in its true significance the act and conduct
pursued in the implementation of the contract by both the United States Rubber International
and petitioner, as was contended in the second assignment of error. Petitioner ought to have
been aware that there was no need for such an inquiry. The terms of the contract, as noted,
speak quite clearly. There is lacking that degree of ambiguity sufficient to give rise to serious
doubt as to what was contemplated by the parties. A reading thereof discloses that the
relationship arising therefrom was not one of seller and purchaser. If it were thus intended,
then it would not have included covenants which in their totality would negate the concept of
a firm acquiring as vendee goods from another. Instead, the stipulations were so worded as to
lead to no other conclusion than that the control by the United States Rubber International
over the goods in question is, in the language of the Constantino opinion, "pervasive". The
insistence on a relationship opposed to that apparent from the language employed might even
yield the impression that such a mode of construction was resorted to in order that the
applicability of a taxing statute might be rendered nugatory. Certainly, such a result is to be
avoided.
Nor is it to be lost sight of that on a matter left to the discretion of the Court of Tax Appeals
which has developed an expertise in view of its function being limited solely to the
interpretation of revenue laws, this Court is not prepared to substitute its own judgment
unless a grave abuse of discretion is manifest. It would be to frustrate the objective for which
administrative tribunals are created if the judiciary, absent such a showing, is to ignore their
appraisal on a matter that forms the staple of their specialized competence. While it is to be
admitted that counsel for petitioner did scrutinize with care the decision under review with a
view to exposing what was considered its flaws, it cannot be said that there was such a failure
to apply what the law commands as to call for its reversal. Instead, what cannot be denied is
that the Court of Tax Appeals reached a result to which the Court in the recent Constantino
decision gave the imprimatur of its approval.
WHEREFORE, the Court of Tax Appeals decision of October 19, 1962 is affirmed. With costs
against petitioner.
SALES – DISTINGUISHED FROM OTHER CONTRACTS – DACION EN PAGO
G.R. No. 173856 November 20, 2008
DAO HENG BANK, INC., now BANCO DE ORO UNIVERSAL BANK, petitioner
vs.
SPS. LILIA and REYNALDO LAIGO, respondent.
DECISION
CARPIO MORALES, J.:
The Spouses Lilia and Reynaldo Laigo (respondents) obtained loans from Dao Heng Bank, Inc.
(Dao Heng) in the total amount of P11 Million, to secure the payment of which they forged on
October 28, 1996, November 18, 1996 and April 18, 1997 three Real Estate Mortgages
covering two parcels of land registered in the name of respondent "Lilia D. Laigo, . . . married
to Reynaldo Laigo," one containing 569 square meters and the other containing 537 square
meters.
The mortgages were duly registered in the Registry of Deeds of Quezon City.
The loans were payable within 12 months from the execution of the promissory notes covering
the loans. As of 2000, respondents failed to settle their outstanding obligation, drawing them
to verbally offer to cede to Dao Heng one of the two mortgaged lots by way of dacion en pago.
To appraise the value of the mortgaged lands, Dao Heng in fact commissioned an appraiser
whose fees were shouldered by it and respondents.
There appears to have been no further action taken by the parties after the appraisal of the
properties.
Dao Heng was later to demand the settlement of respondents' obligation by letter of August
18, 20001 wherein it indicated that they had an outstanding obligation of P10,385,109.92
inclusive of interests and other charges. Respondents failed to heed the demand, however.
Dao Heng thereupon filed in September 2000 an application to foreclose the real estate
mortgages executed by respondents. The properties subject of the mortgage were sold for
P10,776,242 at a public auction conducted on December 20, 2000 to Banco de Oro Universal
Bank (hereafter petitioner) which was the highest bidder.
It appears that respondents negotiated for the redemption of the mortgages for by a June 29,
2001 letter2 to them, petitioner, to which Dao Heng had been merged, through its Vice
President on Property Management & Credit Services Department, advised respondent Lilia
Laigo as follows:
This is to formally advise you of the bank's response to your proposal pertaining to the
redemption of the two (2) foreclosed lots located in Fairview, Quezon City as has been relayed
to you last June 13, 2001 as follows:
1. Redemption price shall be P11.5MM plus 12% interest based on diminishing
balance payable in staggered payments up to January 2, 2002 as follows:
a. P3MM - immediately upon receipt of this approval
b. Balance payable in staggered payments (plus interest) up to January 2,
2002
2. Release Values for Partial Redemption:
a. TCT No. 92257 (along Commonwealth) P7.500 MM*
b. TCT No. N-146289 (along Regalado) P4.000 MM*
* excluding 12% interest
3. Other Conditions:
a. Payments shall be covered by post dated checks
b. TCT No. 92257 shall be the first property to be released upon payment of
the first P7.5MM plus interest
c. Arrangement to be covered by an Agreement
If you are agreeable to the foregoing terms and conditions, please affix your signature showing
your conformity thereto at the space provided below. (Emphasis and underscoring in the
original; italics supplied)
Nothing was heard from respondents, hence, petitioner by its Manager, Property Management
& Credit Services Department, advised her by letter of December 26, 2001 3 that in view of
their failure to conform to the conditions set by it for the redemption of the properties, it
would proceed to consolidate the titles immediately after the expiration of the redemption
period on January 2, 2002.
Six days before the expiration of the redemption period or on December 27, 2001,
respondents filed a complaint before the Regional Trial Court (RTC) of Quezon City, for
Annulment, Injunction with Prayer for Temporary Restraining Order (TRO), praying for the
annulment of the foreclosure of the properties subject of the real estate mortgages and for
them to be allowed "to deliver by way of ‘dacion en pago' one of the mortgaged properties as
full payment of [their] mortgaged obligation" and to, in the meantime, issue a TRO directing
the defendant-herein petitioner to desist from consolidating ownership over their properties.
By respondents' claim, Dao Heng verbally agreed to enter into a dacion en pago.
In its Opposition to respondents' Application for a TRO, 4 petitioner claimed that there was no
meeting of the minds between the parties on the settlement of respondents' loan via dacion
en pago.
A hearing on the application for a TRO was conducted by Branch 215 of the RTC of Quezon City
following which it denied the same.
Petitioner thereupon filed a Motion to Dismiss the complaint on the ground that the claim on
which respondents' action is founded is unenforceable under the Statute of Frauds and the
complaint states no cause of action. Respondents opposed the motion, contending that their
delivery of the titles to the mortgaged properties constituted partial performance of their
obligation under the dacion en pago to take it out from the coverage of the Statute of Frauds.
The trial court granted petitioner's Motion to Dismiss in this wise:
[P]laintiffs' claim must be based on a document or writing evidencing the alleged dacion en
pago, otherwise, the same cannot be enforced in an action in court. The Court is not
persuaded by plaintiffs' contention that their case is an exception to the operation of the
 rule on statute of frauds because of their partial performance of the obligation in the dacion
en pago consisting of the delivery of the titles of the properties to the defendants. As
correctly pointed out by the defendants, the titles were not delivered to them pursuant to
the dacion en pago but by reason of the execution of the mortgage loan agreement . If
indeed a dacion en pago agreement was entered into between the parties, it is
inconceivable that a written document would not be drafted considering the magnitude of
the amount involved.5 (Emphasis and underscoring supplied)
Respondents assailed the dismissal of their complaint via Petition for Review before this Court
which referred it to the Court of Appeals for disposition.
Reversing the trial court's dismissal of the complaint, the appellate court, by Decision of
January 26, 2006,6 reinstated respondents' complaint.7
In ordering the reinstatement of respondents' complaint, the appellate court held that the
complaint states a cause of action, respondents having alleged that there was partial
performance of the agreement to settle their obligation via dacion en pago when they agreed
to have the properties appraised to thus place their agreement within the exceptions provided
under Article 14038 of the Civil Code on Statute of Frauds. Thus the appellate court
ratiocinated:
Particularly, in seeking exception to the application of the Statute of Frauds, petitioners[-
herein respondents] averred partial performance of the supposed verbal dacion en pago. In
paragraph 5 of their complaint, they stated: "As part of the agreement, defendant Dao Heng
Bank had the mortgaged property appraised to determine which of the two shall be
delivered as full payment of the mortgage obligation; Also as part of the deal, plaintiffs for
their part paid P5,000.00 for the appraisal expense. As reported by the appraiser
commissioned by Defendant Dao Heng, the appraised value of the mortgaged properties
were as follows: x x x" Having done so, petitioners are at least entitled to a reasonable
opportunity to prove their case in the course of a full trial, to which the respondents may
equally present their evidence in refutation of the formers' case. (Underscoring supplied)
Petitioner's Motion for Reconsideration having been denied by the appellate court by
Resolution of July 19, 2006, the present petition was filed faulting the appellate court in ruling:
I.
. . . THAT THE COMPLAINT ALLEGED A SUFFICIENT CAUSE OF ACTION DESPITE THE
ALLEGATIONS, AS WELL AS ADMISSIONS FROM THE RESPONDENTS, THAT THERE WAS
NO PERFECTED DACION EN PAGO CONTRACT;
II.
. . . THAT THE ALLEGED DACION EN PAGO IS NOT UNENFORCEABLE UNDER THE
STATUTE OF FRAUDS, DESPITE THE ABSENCE OF A WRITTEN & BINDING CONTRACT;
III.
. . . THAT THE COMPLAINT SUFFICIENTLY STATED A CAUSE OF ACTION. 9
Generally, the presence of a cause of action is determined from the facts alleged in the
complaint.
In their complaint, respondents alleged:
xxxx
4. Sometime in the middle of the year 2000, defendant Dao Heng Bank as the
creditor bank agreed to the full settlement of plaintiffs' mortgage obligation of P9
Million through the assignment of one of the two (2) mortgaged properties;
[5] As part of the agreement, defendant Dao Heng Bank had the mortgaged
properties appraised to determine which of the two (2) mortgaged properties shall
be delivered as full payment of the mortgage obligation; Also as part of the deal,
plaintiffs for their part paid P5,000.00 for the appraisal expense; As reported by the
appraiser commissioned by defendant Dao Heng, the appraised value of the
mortgaged properties were as follows:
(a) Property No. 1 - T.C.T. No. 92257: P12,518,000.00
L2A Blk 12 Don Mariano Marcos Ave., Fairview, QC
(b) Property No. 2 - T.C.T. No. 146289: P8,055,000.00 L36 Blk 87 Regalado
Ave. Cor. Ipil St., Neopolitan, QC
[6] Sometime in December, year 2000, the protest of plaintiffs notwithstanding and
in blatant breach of the agreed "Dacion en pago" as the mode of full payment of
plaintiffs' mortgage obligation, defendant Dao Heng Bank proceeded to foreclose the
mortgaged properties above-described and sold said properties which were
aggregately valued at more than P20 Million for only P10,776,242.00, an
unconscionably very low price; (Underscoring supplied)
Even if a complaint states a cause of action, however, a motion to dismiss for insufficiency of
cause of action may be granted if the evidence discloses facts sufficient to defeat the claim and
enables the court to go beyond the disclosures in the complaint. In such instances, the court
can dismiss a complaint on this ground, even without a hearing, by taking into account the
discussions in said motion to dismiss and the disposition thereto.10
In its Opposition to respondents' application for the issuance of a TRO, 11 petitioner, responding
to respondents' allegation that it agreed to the settlement of their obligation via the
assignment of one of the two mortgaged properties, alleged that there was no meeting of the
minds thereon:
4. Plaintiffs' claim that defendant Dao Heng Bank[s] foreclosure sale of the mortgaged
properties was improper because there was an agreement to dacion one of the two (2)
mortgaged properties as full settlement of the loan obligation and that defendant Dao Heng
Bank and Banco de Oro were already negotiating and colluding for the latter's acquisition of
the mortgaged [properties] for the unsconscionably low price of P10,776.242.00 are clearly
WITHOUT BASIS. Quite to the contrary, there was no meeting of the minds between
defendant Dao Heng Bank and the plaintiffs to dacion any of the mortgaged properties as
full settlement of the loan. Although there was a PROPOSAL and NEGOTIATIONS to settle the
 loan by way of dacion, nothing came out of said proposal, much less did the negotiations Finally, that respondents did not deny proposing to redeem the mortgages, 17 as reflected in
mature into the execution of a dacion en pago instrument. Defendant Dao Heng Bank found petitioner's June 29, 2001 letter to them, dooms their claim of the existence of a perfected
the offer to settle by way of dacion not acceptable and thus, it opted to foreclose on the dacion en pago.
mortgage.
WHEREFORE, the Court of Appeals Decision of January 26, 2006 is REVERSED and SET ASIDE.
The law clearly provides that "the debtor of a thing cannot compel the creditor to The Resolution of July 2, 2002 of the Regional Trial Court of Quezon City, Branch 215 dismissing
receive a different one, although the latter may be of the same value, or more respondents' complaint is REINSTATED.
valuable than that which is due" (Article 1244, New Civil Code). "The oblige is entitled
to demand fulfillment of the obligation or performance as stipulated" (Palmares v. SO ORDERED.
Court of Appeals, 288 SCRA 422 at p. 444 [1998]). "The power to decide whether or
not to foreclose on the mortgage is the sole prerogative of the mortgagee" (Rural
Bank of San Mateo, Inc. vs. Intermediate Appellate Court, 146 SCRA 205, at 213
[1986]) Defendant Dao Heng Bank merely opted to exercise such prerogative. 12
(Emphasis in the original; capitalization and underscoring supplied)

Dacion en pago as a mode of extinguishing an existing obligation partakes of the nature of sale
whereby property is alienated to the creditor in satisfaction of a debt in money. 13 It is an
objective novation of the obligation, hence, common consent of the parties is required in
order to extinguish the obligation.

. . . In dacion en pago, as a special mode of payment, the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an outstanding debt. 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 debtor's debt. As
such the 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 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."14 (Emphasis, italics and underscoring supplied; citation omitted)

Being likened to that of a contract of sale, dacion en pago is governed by the law on sales.15
The partial execution of a contract of sale takes the transaction out of the provisions of the
Statute of Frauds so long as the essential requisites of consent of the contracting parties,
object and cause of the obligation concur and are clearly established to be present.16

Respondents claim that petitioner's commissioning of an appraiser to appraise the value of the
mortgaged properties, his services for which they and petitioner paid, and their delivery to
petitioner of the titles to the properties constitute partial performance of their agreement to
take the case out of the provisions on the Statute of Frauds.

There is no concrete showing, however, that after the appraisal of the properties, petitioner
approved respondents' proposal to settle their obligation via dacion en pago. The delivery to
petitioner of the titles to the properties is a usual condition sine qua non to the execution of
the mortgage, both for security and registration purposes. For if the title to a property is not
delivered to the mortgagee, what will prevent the mortgagor from again encumbering it also
by mortgage or even by sale to a third party.
SALES – DISTINGUISHED FROM OTHER CONTRACTS – LEASE the chattel mortgage was foreclosed for default in the payment of said second note. At the
foreclosure sale the truck was bought in by the plaintiff for P1,00.
G.R. No. 17551 May 31, 1922
The defendant's defense rests wholly upon the theory that the plaintiff retained the
THE BACHRACH MOTOR CO., INC., plaintiff-appellee, possession of the truck illegally between the dates of October 6 and October 15, 1919, and
vs. that he, the defendant, therefore was under no obligation to pay the note due on the last
TEOFILO MENDOZA, defendant-appellant. named date. It appearing that the plaintiff's retention of the possession of the truck was
authorized by law, the defendant's position is, of course, untenable.
OSTRAND, J.: The judgment appealed from is therefore affirmed with costs against the appellant. So
ordered.
This action was brought to recover the sum of P6,328.90 the balance alleged to be due on the
purchase price of an auto-truck sold by the plaintiff to the defendant on August 5, 1919. The
defendant in his answer alleges as a special defense that the plaintiff, in the beginning of the
month of October of the same year, illegally deprived him of the possession of the truck and
sets up a counterclaim for the sum of P14,350 by way of damages. The trial court rendered a
judgment in favor of the plaintiff for the sum of P5,032 with the costs and with interest at the
rate of 8 per cent per annum on the sum of P5,950 form October 15, 1919, to December 15 of
the same year, and on the sum of P4,963 from the latter date until paid. From this judgment
the defendant appealed.

As a matter of law, there is no merit whatever in the appeal. It appears from the evidence that
the defendant paid P2,000 in cash for the truck and executed a series of promissory notes for
the balance of the purchase price, said balance amounting to P6,300. The notes were for P350
each, the first note becoming due on September 15, 1919, and the others falling due
successively in their serial order on the 15th of each succeeding month. the notes were
secured by a chattel mortgage upon the struck and the mortgage contained clauses to the
effect that default in payment of any of the notes would render all of them immediately due
and payable, and that any payment made by the defendant to the plaintiff might be applied by
the latter towards the payment of any debt for the moment due the plaintiff from the
defendant, whether included in the mortgage or not.

On October 5 of the same year, the defendant brought the struck of plaintiff's repair shop for
some minor repairs. The repairs were completed the following day, but the plaintiff refused to
return the struck to the defendant until the amount then unpaid on the note which fell due on
September 15 were paid. The defendant in his brief argues vigorously that an amount equal to
the amount of the note had at that time in reality been paid, but that plaintiff had applied part
of it to the repair account of the truck and had not credited it to the note. An analysis of the
evidence as a whole shows, however, that the defendant is basing his argument on an evident
error in the transcript of the testimony and that in realty only P50 had been paid on the
September note prior to October 6. In any event, the point is unimportant; the defendant
admits that on the 6th of October there was some money due the plaintiff and whether this
money was due upon the note in question or for repairs to the truck seems immaterial; the
plaintiff would, in either case, have the right of the retention of the truck until the amount due
was paid or tendered him. (Articles 1600 and 1866, Civil Code.)lävvphì1·né+

The truck remained in the possession of the plaintiff until October 15 when the defendant
completed the payment of the note payable on September 15, but as the second note of the
series then also had become due the plaintiff continued to retain the truck and on October 25
SALES – DISTINGUISHED FROM OTHER CONTRACTS – LEASE
G.R. No. L-43263 October 31, 1935
MANILA TRADING & SUPPLY CO., plaintiff-appellant,
vs.
E.M. REYES, defendant-appellee.
MALCOLM, J.:
The only question presented is the validity of Act No. 4122, known as the Installment Sales
Law, reading as follows:
AN ACT TO AMEND THE CIVIL CODE BY INSERTING BETWEEN SECTlONS FOURTEEN
HUNDRED AND FIFTY-FOUR AND FOURTEEN HUNDRED AND FIFTY-FIVE THEREOF A NEW
SECTION, TO BE KNOWN AS SECTION FOURTEEN HUNDRED AND FIFTY-FOUR-A.
Be it enacted by the Senate and House of Representatives of the Philippines in Legislature
assembled and by the authority of the same:
SECTION 1. The Civil Code is hereby amended by inserting between sections fourteen
hundred and fifty-four and fourteen hundred and fifty-five thereof a new section, to be
known as section fourteen hundred and fifty-four-A, which shall read as follows:
"SEC. 1454-A. In a contract for the sale of personal property payable in installments, failure
to pay two or more installments shall confer upon the vendor the right to cancel the sale or
foreclose the mortgage if one has been given the property, without reimbursement to the
purchaser of the installments already paid, if there be an agreement to this effect.
"However, if the vendor has chosen to foreclose the mortgage he shall have no further
action against the purchaser for the recovery of any unpaid balance owing by the same, and
any agreement to the contrary shall be null and void.
"The same rule shall apply to leases of personal property with option to purchase, when the
lessor has chosen to deprive the lessee of the enjoyment of such personal property."
SEC 2. This Act shall take effect on its approval.
Approved, December 9, 1933.
There is no dispute as to the facts. They may be summarize as follows: On December 13, 1933
— that is, subsequent to the enactment of Act No, 4122 — E.M. Reyes executed in favor of the
Manila Trading & Supply Co., a chattel mortgage on an automobile as security for the payment
of the sum of P400, which Reyes agreed to pay in ten equal monthly installments. As found by
the trial judge, Reyes failed to pay some of the installments due on his obligation. Thereupon
the Manila Trading & Supply Co., proceeded to foreclose its chattel mortgage. The mortgaged
property was sold at public auction by the sheriff of the City of Manila for the sum of P200,
After applying this sum, with interest, costs, and liquidated damages to Reyes' indebtedness,
the latter owed the company a balance of P275.47, with interest thereon at the rate of 12
percent per annum from February 19, 1934.
When Reyes failed to pay the deficiency on the debt, the company instituted an action in the
Court of First Instance of Manila for the recovery thereof. To plaintiff's complaint defendant
filed an answer in which he pleaded as a defense that plaintiff, having chosen to foreclose its
chattel mortgage, had no further action against defendant for the recovery of the unpaid
balance owed by him to plaintiff, as provided by Act No. 4122. After trial the lower court
sustained defendant's defense and rendered a judgment absolving him from the complaint,
with costs.
From this judgment, the plaintiff has taken an appeal and here contends that the lower court
erred in not declaring Act No. 4122 of the Philippine Legislature unconstitutional for the
following reasons: (1) in that it embraces more than one subject, (2) in that it unduly restrains
the liberty of a person to contract with respect to his property rights, (3) in that it is class
legislation, and (4) in that it denies vendors and lessors of personal property the equal
protection of the laws.
1. Title of the Law. — Act No. 4122 is entitled, "An Act to amend the Civil Code by inserting
between sections fourteen hundred and fifty-four and fourteen, hundred and fifty-five thereof
a new section, to be known as section fourteen hundred and fifty-four-A." It is argued that the
Act amends the Civil Code and the Chattel Mortgage Law, Act No. 1508. As a consequence, it is
alleged, that one of the subjects covered by the Act, the amendment of the Chattel Mortgage
Law, is not expressed in the title thereof, in violation of section 3 of the Organic Act, the Act of
Congress of August 29, 1916 which provides that no bill which may be enacted into law shall
embrace more than one subject, and that subject shall be expressed in the title of the bill."
We think that this is taking altogether too narrow and technical a view of the matter.
Legislation should not be embarrassed by overly strict construction. The constitutional
provision, while designed to remedy an evil, was not designed to require great particularity in
stating the object of the law in its title. In reality, while Act No. 4122 deals with three subjects,
sales of personal property on the installment plan, chattel mortgages, and leases of personal
property with option to repurchase, all three are comprehended within the subject of
installment payments. (Macondray & Co. vs. R. de Santos [1935], 61 Phil., 370.)
It would be well, however, to scrutinize this point a little more closely. The portion of the Civil
Code which is amended is Book IV, Title IV having to do with contract of purchase and sale and
Chapter I having to do with the nature and form of this contract. The Chattel Mortgage Law, in
section 3, defines a chattel mortgage as conditional sale of personal property as security for
the payment a debt or the performance of some other obligation specified therein. The close
analogy between chattel mortgages as covered by Act No. 1508 and conditional sales as
covered by the Civil Code gave this court considerable difficulty, but eventually it was
determined that a chattel mortgage, under Act No. 1508 is not of the Same effect as a contract
of purchase and sale with right of repurchase under the Civil Code. (Manila Trading & Supply
Co. vs. Tamaraw Plantation Co. [1925], 47 Phil., 513, reconciling Meyers vs. Thein [1910], 15
Phil., 303; Bachrach vs. Mantel [1913] 25 Phil., 410, and Bachrach Motor Co. vs. Summers
[1921], 42 Phil., 3.) Likewise the close relationship between chattel mortgages and conditional
sales in other jurisdictions is evidenced by the fact that a well-known text writer saw fit to
choose this as the title for his work. (Jones, Chattel Mortgages and Conditional Sales, 1933 ed.)
It could be added, if necessary, that the general rule is adopted in this jurisdiction to the effect
that a title which declares a statute to be an act to amend a specific code is sufficient and the
precise nature of the amendatory act need not be further stated. (People vs. Buenviaje [1925],
47 Phil., 536.) On the supposition, therefore, which seems reasonable, that the purpose had in
mind by the Legislature in enacting Act No. 4122 was to provide legislation concerning sales of
personal property on the installment plan, this subject was sufficiently expressed by indicating
that the law had to do with an amendment of the Civil Code in the portion thereof given up to
contract of purchase and sale.lawphil.net
2. Liberty of contract, class legislation, and equal protection of the laws. — The question of the
validity of an act is solely one of constitutional power. Questions of expediency, of motive, or
of results are irrelevant. Nevertheless it is not improper to inquire as to the occasion for the
enactment of a law. The legislative purpose thus disclosed can then serve as a fit background
for constitutional inquiry.
Judge Moran in first instance had the following to say relative to the reasons for the enactment
of Act No. 4122:
Act No. 4122 aims to correct a social and economic evil, the inordinate love for luxury of
those who, without sufficient means, purchase personal effects, and the ruinous practice of
some commercial houses of purchasing back the goods sold for a nominal price besides
keeping a part of the price already paid and collecting the balance, with stipulated interest,
costs, and attorney's fees. For instance, a company sells a truck for P6,500. The purchaser
makes down payment of P500, the balance to be paid in twenty-four equal installments of
P250 each. Pursuant to the practice before the enactment of Act No. 4122, if the purchaser
fails to pay the first two installments, the company takes possession of the truck and has it
sold to at public auction at which sale it purchases the truck for a nominal price, at most
P500, without prejudice to its right to collect the balance of P5,500, plus interest, costs and
attorney's fees. As a consequence, the vendor does not only recover the goods sold, used
hardly two months perhaps with only slight wear and tear, but also collects the entire
stipulated purchase price, which probably swelled up fifty per cent including interest, costs,
and attorney's fees. This practice is worse than usurious in many instances. And although, of
course, the purchaser must suffer the consequences of his imprudence and lack of foresight,
the chastisement must not be to the extent of ruining the vendor in a manner which shocks
the conscience. The object of the law is highly commendable. As to whether or not the
means employed to do away with the evil above-mentioned are arbitrary will be presently
set out.
In a case which readied this court, Mr. Justice Goddard, interpreting Act No. 4122, made the
following observations:
Undoubtedly the principal object of the above amendment was to remedy the abuses
committed in connection with the foreclosure of chattel mortgages. This amendment
prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a
low price and then bringing suit against the mortgagor for a deficiency judgment. The
almost invariable result of this procedure was that the mortgagor found himself minus the
property and still owing practically the full amount of his original indebtedness. Under this
amendment the vendor of personal property, the purchase price of which is payable in
installments, has the right to cancel the sale or foreclose the mortgage if one has been given
on the property. Whichever right the vendor elects he need not return to the purchaser the
amount of the installments already paid, "if there be an agreement to that effect".
Furthermore, if the vendor avails himself of the right to foreclose the mortgage this
amendment prohibits him from bringing an action against the purchaser for the unpaid
balance.
In other words, under this amendment, in all proceedings for the foreclosure of
chattel mortgages, executed on chattels which have been sold on the installment
plan, the mortgagee is limited to the property included in the mortgage." (Bachrach
Motor Co. vs. Millan [1935], 61 Phil., 409.)
Public policy having thus had in view the objects just outlined, we should next examine the law
to determine if notwithstanding that policy, it violates any of the constitutional principles
dealing with the three general subjects here to be considered.
In an effort to enlighten us, our attention has been directed to certain authorities, principally
one coming from the State of Washington and another from the State of Oregon. For reasons
which will soon appear, we do not think that either decision is controlling.
In 1897, an Act was passed in the State of Washington which provided "that in all proceedings
for the foreclosure of mortgages hereafter executed, or on judgments rendered upon the debt
thereby secured, the mortgagee or assignee shall be limited to the property included in the
mortgage." It was held by a divided court of three to two that the statute since limiting the
right to enforce a debt secured by mortgage to the property mortgaged, whether realty or
chattels, was an undue restraint upon the liberty of a citizen to contract with respect to his
property rights. But as is readily apparent, the Washington law and the Philippine law are
radically different in phraseology and in effect (Dennis vs. Moses [1898], 40 L.R.A., 302.)
In Oregon, in a decision of a later date, an Act abolishing deficiency judgments upon the
foreclosure of mortgages to secure the unpaid balance of the purchase price of real property
was unanimously sustained by Supreme Court of that State. The importance of the subject
matter in that jurisdiction was revealed by the fact tat four separate opinions were prepared
by the justices participating, in one of which Mr. Justice Johns, shortly thereafter to become a
member of this court, concurred. However, it is but fair to state that one of the reasons
prompting the court to uphold the law was the financial depression which had prevailed in the
State. While in the Philippines the court can take judicial notice of the stringency of finances
that presses upon the people, we have no reason to believe that this was the reason that
motivated the enactment of Act No. 4122. (Wright vs. Wimberly [1919], 184 Pac., 740.)
While we are on the subject of the authorities, we may state that we have examined all of
those obtainable, including some of recent date, but have not been enlightened very much
because as just indicated, they concerned different states of facts and different laws. We gain
the most help from the case of Bronson vs. Kinzie ([1843], 1 How., 311), decided by the
Supreme Court of the United States. It had under consideration a law passed in the State of
Illinois, which provided that the equitable estate of the mortgagor should not be extinguished
for twelve months after sale on decree, and which prevented any sale of the mortgaged
properly unless two-thirds of the amount at which the property had been valued by appraisers
should be bid therefor.
The court, by Mr. Chief Justice Taney, declared: "Mortgages made since the passage of these
laws must undoubtedly be governed by them; for every State has the power to describe the
legal and equitable obligations of a contract to be made and executed within its jurisdiction. It
may exempt any property it thinks proper from sale, for the payment of a debt; and may
impose such conditions and restrictions upon the creditor as its judgment and policy may
dictate. And all future contracts would be subject to such provisions; and they would be
obligatory upon the parties in the courts of the United States, as well as in those of the State.

As we understand it, parties have no vested right in particular remedies or modes of

procedure, and the Legislature may change existing remedies or modes of procedure without
impairing the obligation of contracts, provided an efficacious remedy remains enforcement.
But changes in the remedies available for the enforcement of a mortgage may not, even when
publicly policy is invoked as an excuse, be pressed so far as to cut down the security of a
mortgage without moderation or reason or in a spirit of oppression. (Brotherhood of American
Yeoman vs. Manz [1922], 206 Pac., 403; Oshkosh Waterworks Co. vs. Oshkosh [1903], 187 U.S.,
437; W.B. Worthen Co. vs. Kavanaugh [1935], 79 U.S. Supreme Court Advance Opinions, 638.)

In the Philippines, the Chattel Mortgage Law did not expressly provide for a deficiency
judgment upon the foreclosure of a mortgage. Indeed, it required decisions of this court to
authorize such a procedure. (Bank of the Philippine Islands vs. Olutanga Lumber Co. [1924], 47
Phil., 20: Manila Trading & Supply Co. vs. Tamaraw Plantation Co., supra.) But the practice
became universal enough to acquire the force of direct legislative enactment regarding
procedure. To a certain extent the Legislature has now disauthorized this practice, but bas left
a sufficient remedy remaining.

Three remedies are available to the vendor who has sold personal property on the installment
plan. (1) He may elect to exact the fulfillment of the obligation. (Bachrach Motor Co. vs. Millan,
supra.) (2) If the vendee shall have failed to pay two or more installments, the vendor may
cancel the sale. (3) If the vendee shall have failed to pay two or more installments, the vendor
may foreclose the mortgage, if one has been given on the property. The basis of the first
option is the Civil Code. The basis of the last two options is Act No. 4112, amendatory of the
Civil Code. And the proviso to the right to foreclose is, that if the vendor has chosen this
remedy, he shall have no further action against the purchaser for the recovery of any unpaid
balance owing by the same. In other words, as we see it, the Act does no no more than qualify
the remedy.

Most constitutional issues are determined by the court's approach to them. The proper
approach in cases of this character should be to resolve all presumptions in favor of the
validity of an act in the absence of a clear conflict between it and the constitution. All doubts
should be resolved in its favor.

The controlling purpose of Act No. 4122 is revealed to be to close the door to abuses
committed in connection with the foreclosure of chattel mortgages when sales were payable in
installments. That public policy, obvious from the statute, was defined and established by
legislative authority. It is for the courts to perpetuate it.

We are of the opinion that the Legislature may change judicial methods and remedies for the
enforcement of contracts, as it has done by the enactment of Act No. 4122, without unduly
interfering with the obligation of the contracts, without sanctioning class legislation, and
without a denial of the equal protection of the laws. We rule that Act No. 4122 is valid and
enforceable. As a consequence, the errors assigned by the appellant are overruled, and the
judgment affirmed, the costs of this instance to be taxed against the losing party.