1
G.R. No. 118114 December 7, 1995
TEODORO ACAP, petitioner,
vs.
COURT OF APPEALS and EDY DE LOS REYES, respondents.
PADILLA, J.:
This is a petition for review on certiorari of the decision1 of the
Court of Appeals, 2nd Division, in CA-G.R. No. 36177, which
affirmed the decision2 of the Regional Trial Court of Himamaylan,
Negros Occidental holding that private respondent Edy de los
Reyes had acquired ownership of Lot No. 1130 of the Cadastral
Survey of Hinigaran, Negros Occidental based on a document
entitled "Declaration of Heirship and Waiver of Rights", and
ordering the dispossession of petitioner as leasehold tenant of the
land for failure to pay rentals.
The facts of the case are as follows:
The title to Lot No. 1130 of the Cadastral Survey of Hinigaran,
Negros Occidental was evidenced by OCT No. R-12179. The lot
has an area of 13,720 sq. meters. The title was issued and is
registered in the name of spouses Santiago Vasquez and Lorenza
Oruma. After both spouses died, their only son Felixberto inherited
the lot. In 1975, Felixberto executed a duly notarized document
entitled "Declaration of Heirship and Deed of Absolute Sale" in
favor of Cosme Pido.
The evidence before the court a quo established that since 1960,
petitioner Teodoro Acap had been the tenant of a portion of the
said land, covering an area of nine thousand five hundred (9,500)
meters. When ownership was transferred in 1975 by Felixberto to
Cosme Pido, Acap continued to be the registered tenant thereof
and religiously paid his leasehold rentals to Pido and thereafter,
upon Pido's death, to his widow Laurenciana.
The controversy began when Pido died intestate and on 27
November 1981, his surviving heirs executed a notarized
document denominated as "Declaration of Heirship and Waiver of
Rights of Lot No. 1130 Hinigaran Cadastre," wherein they declared;
to quote its pertinent portions, that:
. . . Cosme Pido died in the Municipality of Hinigaran, Negros
Occidental, he died intestate and without any known debts and
obligations which the said parcel of land is (sic) held liable.
That Cosme Pido was survived by his/her legitimate heirs, namely:
LAURENCIANA PIDO, wife, ELY, ERVIN, ELMER, and ELECHOR
all surnamed PIDO; children;
That invoking the provision of Section 1, Rule 74 of the Rules of
Court, the above-mentioned heirs do hereby declare unto [sic]
ourselves the only heirs of the late Cosme Pido and that we hereby
adjudicate unto ourselves the above-mentioned parcel of land in
equal shares.
Now, therefore, We LAURENCIANA3 , ELY, ELMER, ERVIN and
ELECHOR all surnamed PIDO, do hereby waive, quitclaim all our
rights, interests and participation over the said parcel of land in
favor of EDY DE LOS REYES, of legal age, (f)ilipino, married to
VIRGINIA DE LOS REYES, and resident of Hinigaran, Negros
Occidental, Philippines. . . .4 (Emphasis supplied)
The document was signed by all of Pido's heirs. Private respondent Edy
de los Reyes did not sign said document.
It will be noted that at the time of Cosme Pido's death, title to the property
continued to be registered in the name of the Vasquez spouses. Upon
obtaining the Declaration of Heirship with Waiver of Rights in his favor,
private respondent Edy de los Reyes filed the same with the Registry of
Deeds as part of a notice of an adverse claimagainst the original certificate
of title.
Thereafter, private respondent sought for petitioner (Acap) to personally
inform him that he (Edy) had become the new owner of the land and that
the lease rentals thereon should be paid to him. Private respondent further
alleged that he and petitioner entered into an oral lease agreement
wherein petitioner agreed to pay ten (10) cavans of palay per annum as
lease rental. In 1982, petitioner allegedly complied with said obligation. In
1983, however, petitioner refused to pay any further lease rentals on the
land, prompting private respondent to seek the assistance of the then
Ministry of Agrarian Reform (MAR) in Hinigaran, Negros Occidental. The
MAR invited petitioner to a conference scheduled on 13 October 1983.
Petitioner did not attend the conference but sent his wife instead to the
conference. During the meeting, an officer of the Ministry informed Acap's
wife about private respondent's ownership of the said land but she stated
that she and her husband (Teodoro) did not recognize private
respondent's claim of ownership over the land.
On 28 April 1988, after the lapse of four (4) years, private respondent filed
a complaint for recovery of possession and damages against petitioner,
alleging in the main that as his leasehold tenant, petitioner refused and
failed to pay the agreed annual rental of ten (10) cavans of palay despite
repeated demands.
During the trial before the court a quo, petitioner reiterated his refusal to
recognize private respondent's ownership over the subject land. He
averred that he continues to recognize Cosme Pido as the owner of the
said land, and having been a registered tenant therein since 1960, he
never reneged on his rental obligations. When Pido died, he continued to
pay rentals to Pido's widow. When the latter left for abroad, she instructed
him to stay in the landholding and to pay the accumulated rentals upon her
demand or return from abroad.
Petitioner further claimed before the trial court that he had no knowledge
about any transfer or sale of the lot to private respondent in 1981 and even
the following year after Laurenciana's departure for abroad. He denied
having entered into a verbal lease tenancy contract with private
respondent and that assuming that the said lot was indeed sold to private
respondent without his knowledge, R.A. 3844, as amended, grants him
the right to redeem the same at a reasonable price. Petitioner also
bewailed private respondent's ejectment action as a violation of his right to
security of tenure under P.D. 27.
On 20 August 1991, the lower court rendered a decision in favor of private
respondent, the dispositive part of which reads:
WHEREFORE, premises considered, the Court renders judgment in favor
of the plaintiff, Edy de los Reyes, and against the defendant, Teodoro
Acap, ordering the following, to wit:
1. Declaring forfeiture of defendant's preferred right to issuance of a
Certificate of Land Transfer under Presidential Decree No. 27 and his
farmholdings;
2. Ordering the defendant Teodoro Acap to deliver possession of said
farm to plaintiff, and;
3. Ordering the defendant to pay P5,000.00 as attorney's fees, the sum of
P1,000.00 as expenses of litigation and the amount of P10,000.00 as
actual damages.5

In arriving at the above-mentioned judgment, the trial court stated
that the evidence had established that the subject land was "sold"
by the heirs of Cosme Pido to private respondent. This is clear from
the following disquisitions contained in the trial court's six (6) page
decision:
There is no doubt that defendant is a registered tenant of Cosme
Pido. However, when the latter died their tenancy relations
changed since ownership of said land was passed on to his heirs
who, by executing a Deed of Sale, which defendant admitted in his
affidavit, likewise passed on their ownership of Lot 1130 to herein
plaintiff (private respondent). As owner hereof, plaintiff has the right
to demand payment of rental and the tenant is obligated to pay
rentals due from the time demand is made. . . .6
xxx xxx xxx
Certainly, the sale of the Pido family of Lot 1130 to herein plaintiff
does not of itself extinguish the relationship. There was only a
change of the personality of the lessor in the person of herein
plaintiff Edy de los Reyes who being the purchaser or transferee,
assumes the rights and obligations of the former landowner to the
tenant Teodoro Acap, herein defendant.7
Aggrieved, petitioner appealed to the Court of Appeals, imputing
error to the lower court when it ruled that private respondent
acquired ownership of Lot No. 1130 and that he, as tenant, should
pay rentals to private respondent and that failing to pay the same
from 1983 to 1987, his right to a certificate of land transfer under
P.D. 27 was deemed forfeited.
The Court of Appeals brushed aside petitioner's argument that the
Declaration of Heirship and Waiver of Rights (Exhibit "D"), the
document relied upon by private respondent to prove his ownership
to the lot, was excluded by the lower court in its order dated 27
August 1990. The order indeed noted that the document was not
identified by Cosme Pido's heirs and was not registered with the
Registry of Deeds of Negros Occidental. According to respondent
court, however, since the Declaration of Heirship and Waiver of
Rights appears to have been duly notarized, no further proof of its
due execution was necessary. Like the trial court, respondent court
was also convinced that the said document stands as prima
facie proof of appellee's (private respondent's) ownership of the
land in dispute.
With respect to its non-registration, respondent court noted that
petitioner had actual knowledge of the subject saleof the land in
dispute to private respondent because as early as 1983, he
(petitioner) already knew of private respondent's claim over the
said land but which he thereafter denied, and that in 1982, he
(petitioner) actually paid rent to private respondent. Otherwise
stated, respondent court considered this fact of rental payment in
1982 as estoppel on petitioner's part to thereafter refute private
respondent's claim of ownership over the said land. Under these
circumstances, respondent court ruled that indeed there was
deliberate refusal by petitioner to pay rent for a continued period of
five years that merited forfeiture of his otherwise preferred right to
the issuance of a certificate of land transfer.
In the present petition, petitioner impugns the decision of the Court
of Appeals as not in accord with the law and evidence when it rules
that private respondent acquired ownership of Lot No. 1130
through the aforementioned Declaration of Heirship and Waiver of
Rights.
Hence, the issues to be resolved presently are the following:
2
1. WHETHER OR NOT THE SUBJECT DECLARATION OF HEIRSHIP
AND WAIVER OF RIGHTS IS A RECOGNIZED MODE OF ACQUIRING
OWNERSHIP BY PRIVATE RESPONDENT OVER THE LOT IN
QUESTION.
2. WHETHER OR NOT THE SAID DOCUMENT CAN BE CONSIDERED
A DEED OF SALE IN FAVOR OF PRIVATE RESPONDENT OF THE LOT
IN QUESTION.
Petitioner argues that the Regional Trial Court, in its order dated 7 August
1990, explicitly excluded the document marked as Exhibit "D" (Declaration
of Heirship, etc.) as private respondent's evidence because it was not
registered with the Registry of Deeds and was not identified by anyone of
the heirs of Cosme Pido. The Court of Appeals, however, held the same to
be admissible, it being a notarized document, hence, a prima facie proof
of private respondents' ownership of the lot to which it refers.
Petitioner points out that the Declaration of Heirship and Waiver of Rights
is not one of the recognized modes of acquiring ownership under Article
712 of the Civil Code. Neither can the same be considered a deed of sale
so as to transfer ownership of the land to private respondent because no
consideration is stated in the contract (assuming it is a contract or deed of
sale).
Private respondent defends the decision of respondent Court of Appeals
as in accord with the evidence and the law. He posits that while it may
indeed be true that the trial court excluded his Exhibit "D" which is the
Declaration of Heirship and Waiver of Rights as part of his evidence, the
trial court declared him nonetheless owner of the subject lot based on
other evidence adduced during the trial, namely, the notice of adverse
claim (Exhibit "E") duly registered by him with the Registry of Deeds,
which contains the questioned Declaration of Heirship and Waiver of
Rights as an integral part thereof.
We find the petition impressed with merit.
In the first place, an asserted right or claim to ownership or a real right
over a thing arising from a juridical act, however justified, is not per
se sufficient to give rise to ownership over the res. That right or title must
be completed by fulfilling certain conditions imposed by law. Hence,
ownership and real rights are acquired only pursuant to a legal mode or
process. While title is the juridical justification, mode is the actual process
of acquisition or transfer of ownership over a thing in question. 8
Under Article 712 of the Civil Code, the modes of acquiring ownership are
generally classified into two (2) classes, namely, the original mode (i.e.,
through occupation, acquisitive prescription, law or intellectual creation)
and the derivative mode (i.e., through succession mortis causa or tradition
as a result of certain contracts, such as sale, barter, donation, assignment
or mutuum).
In the case at bench, the trial court was obviously confused as to the
nature and effect of the Declaration of Heirship and Waiver of Rights,
equating the same with a contract (deed) of sale. They are not the same.
In a Contract of Sale, one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other
party to pay a price certain in money or its equivalent.9
Upon the other hand, a declaration of heirship and waiver of rights
operates as a public instrument when filed with the Registry of Deeds
whereby the intestate heirs adjudicate and divide the estate left by the
decedent among themselves as they see fit. It is in effect an extrajudicial
settlement between the heirs under Rule 74 of the Rules of Court.10
Hence, there is a marked difference between a sale of hereditary rights
and a waiver of hereditary rights. The first presumes the existence of a
contract or deed of sale between the parties.11 The second is, technically
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speaking, a mode of extinction of ownership where there is an Deeds or with the MAR. Instead, he (private respondent) sought to do
abdication or intentional relinquishment of a known right with indirectly what could not be done directly, i.e., file a notice of adverse
knowledge of its existence and intention to relinquish it, in favor of claim on the said lot to establish ownership thereover.
other persons who are co-heirs in the succession.12 Private
respondent, being then a stranger to the succession of Cosme Pido,
It stands to reason, therefore, to hold that there was no unjustified or
cannot conclusively claim ownership over the subject lot on the
deliberate refusal by petitioner to pay the lease rentals or amortizations to
sole basis of the waiver document which neither recites the
the landowner/agricultural lessor which, in this case, private respondent
elements of either a sale,13 or a donation,14 or any other derivative
failed to establish in his favor by clear and convincing evidence.16
mode of acquiring ownership.

Consequently, the sanction of forfeiture of his preferred right to be issued

Quite surprisingly, both the trial court and public respondent Court
a Certificate of Land Transfer under P.D. 27 and to the possession of his
of Appeals concluded that a "sale" transpired between Cosme
farmholdings should not be applied against petitioners, since private
Pido's heirs and private respondent and that petitioner acquired
respondent has not established a cause of action for recovery of
actual knowledge of said sale when he was summoned by the
possession against petitioner.
Ministry of Agrarian Reform to discuss private respondent's claim
over the lot in question. This conclusion has no basis both in fact
and in law. WHEREFORE, premises considered, the Court hereby GRANTS the
petition and the decision of the Court of Appeals dated 1 May 1994 which
affirmed the decision of the RTC of Himamaylan, Negros Occidental dated
On record, Exhibit "D", which is the "Declaration of Heirship and
20 August 1991 is hereby SET ASIDE. The private respondent's complaint
Waiver of Rights" was excluded by the trial court in its order
for recovery of possession and damages against petitioner Acap is hereby
dated 27 August 1990 because the document was neither
DISMISSED for failure to properly state a cause of action, without
registered with the Registry of Deeds nor identified by the heirs of
prejudice to private respondent taking the proper legal steps to establish
Cosme Pido. There is no showing that private respondent had the
the legal mode by which he claims to have acquired ownership of the land
same document attached to or made part of the record. What the
in question.
trial court admitted was Annex "E", a notice of adverse claim filed
with the Registry of Deeds which contained the Declaration of
Heirship with Waiver of rights and was annotated at the back of the SO ORDERED.
Original Certificate of Title to the land in question.
Davide, Jr., Bellosillo, Kapunan and Hermosisima, Jr., JJ., concur.
A notice of adverse claim, by its nature, does not however prove
private respondent's ownership over the tenanted lot. "A notice of
adverse claim is nothing but a notice of a claim adverse to the
registered owner, the validity of which is yet to be established in
court at some future date, and is no better than a notice of lis
pendens which is a notice of a case already pending in court."15 G.R. No. L-116650 May 23, 1995

It is to be noted that while the existence of said adverse claim was

duly proven, there is no evidence whatsoever that a deed of sale TOYOTA SHAW, INC., petitioner,
was executed between Cosme Pido's heirs and private respondent
transferring the rights of Pido's heirs to the land in favor of private vs.
respondent. Private respondent's right or interest therefore in the
tenanted lot remains an adverse claim which cannot by itself be COURT OF APPEALS and LUNA L. SOSA, respondents.
sufficient to cancel the OCT to the land and title the same in private
respondent's name.

Consequently, while the transaction between Pido's heirs and

private respondent may be binding on both parties, the right of DAVIDE, JR., J.:
petitioner as a registered tenant to the land cannot be perfunctorily
forfeited on a mere allegation of private respondent's ownership
without the corresponding proof thereof. At the heart of the present controversy is the document marked Exhibit "A"
1 for the private respondent, which was signed by a sales representative
Petitioner had been a registered tenant in the subject land since of Toyota Shaw, Inc. named Popong Bernardo. The document reads as
1960 and religiously paid lease rentals thereon. In his mind, he follows:
continued to be the registered tenant of Cosme Pido and his family
(after Pido's death), even if in 1982, private respondent allegedly
informed petitioner that he had become the new owner of the land.
4 June 1989

Under the circumstances, petitioner may have, in good faith,

assumed such statement of private respondent to be true and may
have in fact delivered 10 cavans of palay as annual rental for 1982 AGREEMENTS BETWEEN MR. SOSA
to private respondent. But in 1983, it is clear that petitioner had
& POPONG BERNARDO OF TOYOTA
misgivings over private respondent's claim of ownership over the
said land because in the October 1983 MAR conference, his wife SHAW, INC.
Laurenciana categorically denied all of private respondent's
allegations. In fact, petitioner even secured a certificate from the
MAR dated 9 May 1988 to the effect that he continued to be the
registered tenant of Cosme Pido and not of private respondent. 1. all necessary documents will be submitted to TOYOTA SHAW, INC.
The reason is that private respondent never registered the (POPONG BERNARDO) a week after, upon arrival of Mr. Sosa from the
Declaration of Heirship with Waiver of Rights with the Registry of Province (Marinduque) where the unit will be used on the 19th of June.
 4

downpayment

2. the downpayment of P100,000.00 will be paid by Mr. Sosa on

June 15, 1989.
—

3. the TOYOTA SHAW, INC. LITE ACE yellow, will be pick-up

[sic] and released by TOYOTA SHAW, INC. on the 17th of June at P 53,148.00
10 a.m.

b)
Very truly yours,

insurance
(Sgd.) POPONG BERNARDO.

—
Was this document, executed and signed by the petitioner's sales
representative, a perfected contract of sale, binding upon the
petitioner, breach of which would entitle the private respondent to
P 13,970.00
damages and attorney's fees? The trial court and the Court of
Appeals took the affirmative view. The petitioner disagrees. Hence,
this petition for review on certiorari.
c)

The antecedents as disclosed in the decisions of both the trial court

and the Court of Appeals, as well as in the pleadings of petitioner BLT registration fee
Toyota Shaw, Inc. (hereinafter Toyota) and respondent Luna L.
Sosa (hereinafter Sosa) are as follows. Sometime in June of 1989,
Luna L. Sosa wanted to purchase a Toyota Lite Ace. It was then a
seller's market and Sosa had difficulty finding a dealer with an —
available unit for sale. But upon contacting Toyota Shaw, Inc., he
was told that there was an available unit. So on 14 June 1989,
Sosa and his son, Gilbert, went to the Toyota office at Shaw P 1,067.00
Boulevard, Pasig, Metro Manila. There they met Popong Bernardo,
a sales representative of Toyota.

CHMO fee

Sosa emphasized to Bernardo that he needed the Lite Ace not later
than 17 June 1989 because he, his family, and a balikbayan guest
would use it on 18 June 1989 to go to Marinduque, his home —
province, where he would celebrate his birthday on the 19th of
June. He added that if he does not arrive in his hometown with the
new car, he would become a "laughing stock." Bernardo assured
P 2,715.00
Sosa that a unit would be ready for pick up at 10:00 a.m. on 17
June 1989. Bernardo then signed the aforequoted "Agreements
Between Mr. Sosa & Popong Bernardo of Toyota Shaw, Inc." It was
also agreed upon by the parties that the balance of the purchase service fee
price would be paid by credit financing through B.A. Finance, and
for this Gilbert, on behalf of his father, signed the documents of
Toyota and B.A. Finance pertaining to the application for financing.
—

The next day, 15 June 1989, Sosa and Gilbert went to Toyota to
deliver the downpayment of P100,000.00. They met Bernardo who P 500.00
then accomplished a printed Vehicle Sales Proposal (VSP) No.
928,2 on which Gilbert signed under the subheading CONFORME.
This document shows that the customer's name is "MR. LUNA accessories
SOSA" with home address at No. 2316 Guijo Street, United
Parañaque II; that the model series of the vehicle is a "Lite Ace
1500" described as "4 Dr minibus"; that payment is by "installment,"
to be financed by "B.A.," 3 with the initial cash outlay of —
P100,000.00 broken down as follows:

P 29,000.00
a)

and that the "BALANCE TO BE FINANCED" is "P274,137.00." The
spaces provided for "Delivery Terms" were not filled-up. It also
contains the following pertinent provisions:
CONDITIONS OF SALES
1. This sale is subject to availability of unit.
2. Stated Price is subject to change without prior notice, Price
prevailing and in effect at time of selling will apply. . . .
Rodrigo Quirante, the Sales Supervisor of Bernardo, checked and
approved the VSP.
On 17 June 1989, at around 9:30 a.m., Bernardo called Gilbert to
inform him that the vehicle would not be ready for pick up at 10:00
a.m. as previously agreed upon but at 2:00 p.m. that same day. At
2:00 p.m., Sosa and Gilbert met Bernardo at the latter's office.
According to Sosa, Bernardo informed them that the Lite Ace was
being readied for delivery. After waiting for about an hour, Bernardo
told them that the car could not be delivered because "nasulot ang
unit ng ibang malakas."
Toyota contends, however, that the Lite Ace was not delivered to
Sosa because of the disapproval by B.A. Finance of the credit
financing application of Sosa. It further alleged that a particular unit
had already been reserved and earmarked for Sosa but could not
be released due to the uncertainty of payment of the balance of the
purchase price. Toyota then gave Sosa the option to purchase the
unit by paying the full purchase price in cash but Sosa refused.
After it became clear that the Lite Ace would not be delivered to him,
Sosa asked that his downpayment be refunded. Toyota did so on
the very same day by issuing a Far East Bank check for the full
amount of P100,000.00, 4 the receipt of which was shown by a
check voucher of Toyota,5 which Sosa signed with the reservation,
"without prejudice to our future claims for damages."
Thereafter, Sosa sent two letters to Toyota. In the first letter, dated
27 June 1989 and signed by him, he demanded the refund, within
five days from receipt, of the downpayment of P100,000.00 plus
interest from the time he paid it and the payment of damages with a
warning that in case of Toyota's failure to do so he would be
constrained to take legal action. 6 The second, dated 4 November
1989 and signed by M. O. Caballes, Sosa's counsel, demanded
one million pesos representing interest and damages, again, with a
warning that legal action would be taken if payment was not made
within three days.7 Toyota's counsel answered through a letter
dated 27 November 1989 8 refusing to accede to the demands of
Sosa. But even before this answer was made and received by
Sosa, the latter filed on 20 November 1989 with Branch 38 of the
Regional Trial Court (RTC) of Marinduque a complaint against
Toyota for damages under Articles 19 and 21 of the Civil Code in
the total amount of P1,230,000.00.9 He alleges, inter alia, that:
5
9. As a result of defendant's failure and/or refusal to deliver the vehicle
to plaintiff, plaintiff suffered embarrassment, humiliation, ridicule, mental
anguish and sleepless nights because: (i) he and his family were
constrained to take the public transportation from Manila to Lucena City on
their way to Marinduque; (ii) his balikbayan-guest canceled his scheduled
first visit to Marinduque in order to avoid the inconvenience of taking public
transportation; and (iii) his relatives, friends, neighbors and other
provincemates, continuously irked him about "his Brand-New Toyota Lite
Ace — that never was." Under the circumstances, defendant should be
made liable to the plaintiff for moral damages in the amount of One Million
Pesos (P1,000,000.00). 10
In its answer to the complaint, Toyota alleged that no sale was entered
into between it and Sosa, that Bernardo had no authority to sign Exhibit
"A" for and in its behalf, and that Bernardo signed Exhibit "A" in his
personal capacity. As special and affirmative defenses, it alleged that: the
VSP did not state date of delivery; Sosa had not completed the documents
required by the financing company, and as a matter of policy, the vehicle
could not and would not be released prior to full compliance with financing
requirements, submission of all documents, and execution of the sales
agreement/invoice; the P100,000.00 was returned to and received by
Sosa; the venue was improperly laid; and Sosa did not have a sufficient
cause of action against it. It also interposed compulsory counterclaims.
After trial on the issues agreed upon during the pre-trial session, 11 the
trial court rendered on 18 February 1992 a decision in favor of Sosa. 12 It
ruled that Exhibit "A," the "AGREEMENTS BETWEEN MR. SOSA AND
POPONG BERNARDO," was a valid perfected contract of sale between
Sosa and Toyota which bound Toyota to deliver the vehicle to Sosa, and
further agreed with Sosa that Toyota acted in bad faith in selling to another
the unit already reserved for him.
As to Toyota's contention that Bernardo had no authority to bind it through
Exhibit "A," the trial court held that the extent of Bernardo's authority "was
not made known to plaintiff," for as testified to by Quirante, "they do not
volunteer any information as to the company's sales policy and guidelines
because they are internal matters." 13 Moreover, "[f]rom the beginning of
the transaction up to its consummation when the downpayment was made
by the plaintiff, the defendants had made known to the plaintiff the
impression that Popong Bernardo is an authorized sales executive as it
permitted the latter to do acts within the scope of an apparent authority
holding him out to the public as possessing power to do these acts." 14
Bernardo then "was an agent of the defendant Toyota Shaw, Inc. and
hence bound the defendants." 15
The court further declared that "Luna Sosa proved his social standing in
the community and suffered besmirched reputation, wounded feelings and
sleepless nights for which he ought to be compensated." 16 Accordingly, it
disposed as follows:
WHEREFORE, viewed from the above findings, judgment is hereby
rendered in favor of the plaintiff and against the defendant:
1. ordering the defendant to pay to the plaintiff the sum of P75,000.00
for moral damages;
2. ordering the defendant to pay the plaintiff the sum of P10,000.00 for
exemplary damages;

3. ordering the defendant to pay the sum of P30,000.00
attorney's fees plus P2,000.00 lawyer's transportation fare per trip
in attending to the hearing of this case;
4. ordering the defendant to pay the plaintiff the sum of
P2,000.00 transportation fare per trip of the plaintiff in attending the
hearing of this case; and
5. ordering the defendant to pay the cost of suit.
SO ORDERED.
Dissatisfied with the trial court's judgment, Toyota appealed to the
Court of Appeals. The case was docketed as CA-G.R. CV No.
40043. In its decision promulgated on 29 July 1994,17 the Court of
Appeals affirmed in toto the appealed decision.
Toyota now comes before this Court via this petition and raises the
core issue stated at the beginning of the ponencia and also the
following related issues: (a) whether or not the standard VSP was
the true and documented understanding of the parties which would
have led to the ultimate contract of sale, (b) whether or not Sosa
has any legal and demandable right to the delivery of the vehicle
despite the non-payment of the consideration and the non-approval
of his credit application by B.A. Finance, (c) whether or not Toyota
acted in good faith when it did not release the vehicle to Sosa, and
(d) whether or not Toyota may be held liable for damages.
We find merit in the petition.
Neither logic nor recourse to one's imagination can lead to the
conclusion that Exhibit "A" is a perfected contract of sale.
Article 1458 of the Civil Code defines a contract of sale as follows:
Art. 1458. By the contract of sale one of the contracting parties
obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain in
money or its equivalent.
A contract of sale may be absolute or conditional.
and Article 1475 specifically provides when it is deemed perfected:
Art. 1475. The contract of sale is perfected at the moment there is
a meeting of minds upon the thing which is the object of the
contract and upon the price.
From that moment, the parties may reciprocally demand
performance, subject to the provisions of the law governing the
form of contracts.
6
What is clear from Exhibit "A" is not what the trial court and the Court of
Appeals appear to see. It is not a contract of sale. No obligation on the part
of Toyota to transfer ownership of a determinate thing to Sosa and no
correlative obligation on the part of the latter to pay therefor a price certain
appears therein. The provision on the downpayment of P100,000.00 made
no specific reference to a sale of a vehicle. If it was intended for a contract
of sale, it could only refer to a sale on installment basis, as the VSP
executed the following day confirmed. But nothing was mentioned about
the full purchase price and the manner the installments were to be paid.
This Court had already ruled that a definite agreement on the manner of
payment of the price is an essential element in the formation of a binding
and enforceable contract of sale. 18 This is so because the agreement as
to the manner of payment goes into the price such that a disagreement on
the manner of payment is tantamount to a failure to agree on the price.
Definiteness as to the price is an essential element of a binding agreement
to sell personal property. 19
Moreover, Exhibit "A" shows the absence of a meeting of minds between
Toyota and Sosa. For one thing, Sosa did not even sign it. For another,
Sosa was well aware from its title, written in bold letters, viz.,
AGREEMENTS BETWEEN MR. SOSA & POPONG BERNARDO OF
TOYOTA SHAW, INC.
that he was not dealing with Toyota but with Popong Bernardo and that the
latter did not misrepresent that he had the authority to sell any Toyota
vehicle. He knew that Bernardo was only a sales representative of Toyota
and hence a mere agent of the latter. It was incumbent upon Sosa to act
with ordinary prudence and reasonable diligence to know the extent of
Bernardo's authority as an
agent20 in respect of contracts to sell Toyota's vehicles. A person dealing
with an agent is put upon inquiry and must discover upon his peril the
authority of the agent.21
At the most, Exhibit "A" may be considered as part of the initial phase of
the generation or negotiation stage of a contract of sale. There are three
stages in the contract of sale, namely:
(a) preparation, conception, or generation, which is the period of
negotiation and bargaining, ending at the moment of agreement of the
parties;
(b) perfection or birth of the contract, which is the moment when the
parties come to agree on the terms of the contract; and
(c) consummation or death, which is the fulfillment or performance of
the terms agreed upon in the contract.22
The second phase of the generation or negotiation stage in this case was
the execution of the VSP. It must be emphasized that thereunder, the
downpayment of the purchase price was P53,148.00 while the balance to
be paid on installment should be financed by B.A. Finance Corporation. It
is, of course, to be assumed that B.A. Finance Corp. was acceptable to
Toyota, otherwise it should not have mentioned B.A. Finance in the VSP.

Financing companies are defined in Section 3(a) of R.A. No. 5980,
as amended by P.D. No. 1454 and P.D. No. 1793, as "corporations
or partnerships, except those regulated by the Central Bank of the
Philippines, the Insurance Commission and the Cooperatives
Administration Office, which are primarily organized for the purpose
of extending credit facilities to consumers and to industrial,
commercial, or agricultural enterprises, either by discounting or
factoring commercial papers or accounts receivables, or by buying
and selling contracts, leases, chattel mortgages, or other evidence
of indebtedness, or by leasing of motor vehicles, heavy equipment
and industrial machinery, business and office machines and
equipment, appliances and other movable property." 23
Accordingly, in a sale on installment basis which is financed by a
financing company, three parties are thus involved: the buyer who
executes a note or notes for the unpaid balance of the price of the
thing purchased on installment, the seller who assigns the notes or
discounts them with a financing company, and the financing
company which is subrogated in the place of the seller, as the
creditor of the installment buyer. 24 Since B.A. Finance did not
approve Sosa's application, there was then no meeting of minds on
the sale on installment basis.
We are inclined to believe Toyota's version that B.A. Finance
disapproved Sosa's application for which reason it suggested to
Sosa that he pay the full purchase price. When the latter refused,
Toyota cancelled the VSP and returned to him his P100,000.00.
Sosa's version that the VSP was cancelled because, according to
Bernardo, the vehicle was delivered to another who was "mas
malakas" does not inspire belief and was obviously a delayed
afterthought. It is claimed that Bernardo said, "Pasensiya kayo,
nasulot ang unit ng ibang malakas," while the Sosas had already
been waiting for an hour for the delivery of the vehicle in the
afternoon of 17 June 1989. However, in paragraph 7 of his
complaint, Sosa solemnly states:
On June 17, 1989 at around 9:30 o'clock in the morning,
defendant's sales representative, Mr. Popong Bernardo, called
plaintiff's house and informed the plaintiff's son that the vehicle will
not be ready for pick-up at 10:00 a.m. of June 17, 1989 but at 2:00
p.m. of that day instead. Plaintiff and his son went to defendant's
office on June 17 1989 at 2:00 p.m. in order to pick-up the vehicle
but the defendant for reasons known only to its representatives,
refused and/or failed to release the vehicle to the plaintiff. Plaintiff
demanded for an explanation, but nothing was given; . . .
(Emphasis supplied). 25
The VSP was a mere proposal which was aborted in lieu of
subsequent events. It follows that the VSP created no demandable
right in favor of Sosa for the delivery of the vehicle to him, and its
non-delivery did not cause any legally indemnifiable injury.
The award then of moral and exemplary damages and attorney's
fees and costs of suit is without legal basis. Besides, the only
ground upon which Sosa claimed moral damages is that since it
was known to his friends, townmates, and relatives that he was
buying a Toyota Lite Ace which they expected to see on his
birthday, he suffered humiliation, shame, and sleepless nights
when the van was not delivered. The van became the subject
matter of talks during his celebration that he may not have paid for
it, and this created an impression against his business standing
and reputation. At the bottom of this claim is nothing but misplaced
7
pride and ego. He should not have announced his plan to buy a Toyota
Lite Ace knowing that he might not be able to pay the full purchase price. It
was he who brought embarrassment upon himself by bragging about a
thing which he did not own yet.
Since Sosa is not entitled to moral damages and there being no award for
temperate, liquidated, or compensatory damages, he is likewise not
entitled to exemplary damages. Under Article 2229 of the Civil Code,
exemplary or corrective damages are imposed by way of example or
correction for the public good, in addition to moral, temperate, liquidated,
or compensatory damages.
Also, it is settled that for attorney's fees to be granted, the court must
explicitly state in the body of the decision, and not only in the dispositive
portion thereof, the legal reason for the award of attorney's fees. 26 No
such explicit determination thereon was made in the body of the decision
of the trial court. No reason thus exists for such an award.
WHEREFORE, the instant petition is GRANTED. The challenged decision
of the Court of Appeals in CA-G.R. CV NO. 40043 as well as that of
Branch 38 of the Regional Trial Court of Marinduque in Civil Case No.
89-14 are REVERSED and SET ASIDE and the complaint in Civil Case
No. 89-14 is DISMISSED. The counterclaim therein is likewise
DISMISSED.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 143513 November 14, 2001
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and FIRESTONE CERAMICS, INC., respondents.
x---------------------------------------------------------x
G.R. No. 143590 November 14, 2001
NATIONAL DEVELOPMENT CORPORATION, petitioner,
vs.
FIRESTONE CERAMICS, INC., respondents.
BELLOSILLO, J.:
A litigation is not simply a contest of litigants before the bar of public
opinion; more than that, it is a pursuit of justice through legal and equitable
means. To prevent the search for justice from evolving into a competition
for public approval, society invests the judiciary with complete
independence thereby insulating it from demands expressed through any
medium, the press not excluded. Thus, if the court would merely reflect,
and worse, succumb to the great pressures of the day, the end result, it is
feared, would be a travesty of justice.
In the early sixties, petitioner National Development Corporation (NDC), a
government owned and controlled corporation created under CA 182 as
amended by CA 311 and PD No. 668, had in its disposal a ten

(10)-hectare property located along Pureza St., Sta. Mesa, Manila.
The estate was popularly known as the NDC compound and
covered by Transfer Certificates of Title Nos. 92885, 110301 and
145470.
Sometime in May 1965 private respondent Firestone Ceramics Inc.
(FIRESTONE) manifested its desire to lease a portion of the
property for its ceramic manufacturing business. On 24 August
1965 NDC and FIRESTONE entered into a contract of lease
denominated as Contract No. C-30-65 covering a portion of the
property measured at 2.90118 hectares for use as a manufacturing
plant for a term of ten (10) years, renewable for another ten (10)
years under the same terms and conditions. 1 In consequence of
the agreement, FIRESTONE constructed on the leased premises
several warehouses and other improvements needed for the
fabrication of ceramic products.
Three and a half (3-1/2) years later, or on 8 January 1969,
FIRESTONE entered into a second contract of lease with NDC
over the latter's four (4)-unit pre-fabricated reparation steel
warehouse stored in Daliao, Davao. FIRESTONE agreed to ship
the warehouse to Manila for eventual assembly within the NDC
compound. The second contract, denominated as Contract No.
C-26-68, was for similar use as a ceramic manufacturing plant and
was agreed expressly to be "co-extensive with the lease of
LESSEE with LESSOR on the 2.60 hectare-lot."2
On 31 July 1974 the parties signed a similar contract concerning a
six (6)-unit pre-fabricated steel warehouse which, as agreed upon
by the parties, would expire on 2 December 1978.3 Prior to the
expiration of the aforementioned contract, FIRESTONE wrote NDC
requesting for an extension of their lease agreement. Consequently
on 29 November 1978 the Board of Directors of NDC adopted
Resolution No. 11-78-117 extending the term of the lease, subject
to several conditions among which was that in the event NDC "with
the approval of higher authorities, decide to dispose and sell these
properties including the lot, priority should be given to the
LESSEE"4 (underscoring supplied). On 22 December 1978, in
pursuance of the resolution, the parties entered into a new
agreement for a ten-year lease of the property, renewable for
another ten (10) years, expressly granting FIRESTONE the first
option to purchase the leased premises in the event that it decided
"to dispose and sell these properties including the lot . . . . "5
The contracts of lease conspicuously contain an identically worded
provision requiring FIRESTONE to construct buildings and other
improvements within the leased premises worth several hundred
thousands of pesos.6
The parties' lessor-lessee relationship went smoothly until early
1988 when FIRESTONE, cognizant of the impending expiration of
their lease agreement with NDC, informed the latter through
several letters and telephone calls that it was renewing its lease
over the property. While its letter of 17 March 1988 was answered
by Antonio A. Henson, General Manager of NDC, who promised
immediate action on the matter, the rest of its communications
remained unacknowledged.7 FIRESTONE's predicament worsened
when rumors of NDC's supposed plans to dispose of the subject
property in favor of petitioner Polytechnic University of the
Philippines (PUP) came to its knowledge. Forthwith, FIRESTONE
served notice on NDC conveying its desire to purchase the
property in the exercise of its contractual right of first refusal.
Apprehensive that its interest in the property would be disregarded,
FIRESTONE instituted an action for specific performance to
compel NDC to sell the leased property in its favor. FIRESTONE
averred that it was pre-empting the impending sale of the NDC
compound to petitioner PUP in violation of its leasehold rights over
the 2.60-hectare8property and the warehouses thereon which
would expire in 1999. FIRESTONE likewise prayed for the
8
issuance of a writ of preliminary injunction to enjoin NDC from disposing of
the property pending the settlement of the controversy.9
In support of its complaint, FIRESTONE adduced in evidence a letter of
Antonio A. Henson dated 15 July 1988 addressed to Mr. Jake C. Lagonera,
Director and Special Assistant to Executive Secretary Catalino Macaraeg,
reviewing a proposed memorandum order submitted to then President
Corazon C. Aquino transferring the whole NDC compound, including the
leased property, in favor of petitioner PUP. Attached to the letter was a
draft of the proposed memorandum order as well as a summary of existing
leases on the subject property. The survey listed FIRESTONE as lessee
of a portion of the property, placed at 29,00010 square meters, whose
contract with NDC was set to expire on 31 December 198911 renewable for
another ten (10) years at the option of the lessee. The report expressly
recognized FIRESTONE's right of first refusal to purchase the leased
property "should the lessor decide to sell the same."12
Meanwhile, on 21 February 1989 PUP moved to intervene and asserted
its interest in the subject property, arguing that a "purchaser pendente
lite of property which is subject of a litigation is entitled to intervene in the
proceedings."13 PUP referred to Memorandum Order No. 214 issued by
then President Aquino ordering the transfer of the whole NDC compound
to the National Government, which in turn would convey the
aforementioned property in favor of PUP at acquisition cost. The issuance
was supposedly made in recognition of PUP's status as the "Poor Man's
University" as well as its serious need to extend its campus in order to
accommodate the growing student population. The order of conveyance of
the 10.31-hectare property would automatically result in the cancellation of
NDC's total obligation in favor of the National Government in the amount
of P57,193,201.64.
Convinced that PUP was a necessary party to the controversy that ought
to be joined as party defendant in order to avoid multiplicity of suits, the
trial court granted PUP's motion to intervene. FIRESTONE moved for
reconsideration but was denied. On certiorari, the Court of Appeals
affirmed the order of the trial court. FIRESTONE came to us on review but
in a Resolution dated 11 July 1990 we upheld PUP's inclusion as
party-defendant in the present controversy.
Following the denial of its petition, FIRESTONE amended its complaint to
include PUP and Executive Secretary Catalino Macaraeg, Jr., as
party-defendants, and sought the annulment of Memorandum Order No.
214. FIRESTONE alleged that although Memorandum Order No. 214 was
issued "subject to such liens/leases existing [on the subject property],"
PUP disregarded and violated its existing lease by increasing the rental
rate at P200,000.00 a month while demanding that it vacated the premises
immediately.14 FIRESTONE prayed that in the event Memorandum Order
No. 214 was not declared unconstitutional, the property should be sold in
its favor at the price for which it was sold to PUP - P554.74 per square
meter or for a total purchase price of P14,423,240.00.15
Petitioner PUP, in its answer to the amended complaint, argued in
essence that the lease contract covering the property had expired long
before the institution of the complaint, and that further, the right of first
refusal invoked by FIRESTONE applied solely to the six-unit
pre-fabricated warehouse and not the lot upon which it stood.
After trial on the merits, judgment was rendered declaring the contracts of
lease executed between FIRESTONE and NDC covering the 2.60-hectare
property and the warehouses constructed thereon valid and existing until 2
June 1999. PUP was ordered and directed to sell to FIRESTONE the "2.6
hectare leased premises or as may be determined by actual verification
and survey of the actual size of the leased properties where plaintiff's fire
brick factory is located" at P1,500.00 per square meter considering that,
as admitted by FIRESTONE, such was the prevailing market price thereof.
The trial court ruled that the contracts of lease executed between
FIRESTONE and NDC were interrelated and inseparable because "each
of them forms part of the integral system of plaintiff's brick manufacturing

plant x x x if one of the leased premises will be taken apart or
otherwise detached from the two others, the purpose of the lease
as well as plaintiff's business operations would be rendered
useless and inoperative."16 It thus decreed that FIRESTONE could
exercise its option to purchase the property until 2 June 1999
inasmuch as the 22 December 1978 contract embodied a covenant
to renew the lease for another ten (10) years at the option of the
lessee as well as an agreement giving the lessee the right of first
refusal.
The trial court also sustained the constitutionality of Memorandum
Order No. 214 which was not per se hostile to FIRESTONE's
property rights, but deplored as prejudicial thereto the "very manner
with which defendants NDC and PUP interpreted and applied the
same, ignoring in the process that plaintiff has existing contracts of
lease protectable by express provisions in the Memorandum No.
214 itself."17 It further explained that the questioned memorandum
was issued "subject to such liens/leases existing thereon" 18 and
petitioner PUP was under express instructions "to enter, occupy
and take possession of the transferred property subject to such
leases or liens and encumbrances that may be existing
thereon"19 (italics supplied).
Petitioners PUP, NDC and the Executive Secretary separately filed
their Notice of Appeal, but a few days thereafter, or on 3
September 1996, perhaps realizing the groundlessness and the
futility of it all, the Executive Secretary withdrew his appeal. 20
Subsequently, the Court of Appeals affirmed the decision of the
trial court ordering the sale of the property in favor of FIRESTONE
but deleted the award of attorney's fees in the amount of Three
Hundred Thousand Pesos (P300,000.00). Accordingly,
FIRESTONE was given a grace period of six (6) months from
finality of the court's judgment within which to purchase the
property in questioned in the exercise of its right of first refusal. The
Court of Appeals observed that as there was a sale of the subject
property, NDC could not excuse itself from its obligation TO
OFFER THE PROPERTY FOR SALE FIRST TO FIRESTONE
BEFORE IT COULD TO OTHER PARTIES. The Court of Appeals
held: "NDC cannot look to Memorandum Order No. 214 to excuse
or shield it from its contractual obligations to FIRESTONE. There is
nothing therein that allows NDC to disavow or repudiate the solemn
engagement that it freely and voluntarily undertook, or agreed to
undertake."21
PUP moved for reconsideration asserting that in ordering the sale
of the property in favor of FIRESTONE the courts a quo unfairly
created a contract to sell between the parties. It argued that the
"court cannot substitute or decree its mind or consent for that of the
parties in determining whether or not a contract (has been)
perfected between PUP and NDC."22 PUP further contended that
since "a real property located in Sta. Mesa can readily command a
sum of P10,000.00 per square (meter)," the lower court gravely
erred in ordering the sale of the property at only P1,500.00 per
square meter. PUP also advanced the theory that the enactment
of Memorandum Order No. 214 amounted to a withdrawal of the
option to purchase the property granted to FIRESTONE. NDC, for
its part, vigorously contended that the contracts of lease executed
between the parties had expired without being renewed by
FIRESTONE; consequently, FIRESTONE was no longer entitled to
any preferential right in the sale or disposition of the leased
property.
We do not see it the way PUP and NDC did. It is elementary that a
party to a contract cannot unilaterally withdraw a right of first refusal
that stands upon valuable consideration. That principle was clearly
upheld by the Court of Appeals when it denied on 6 June 2000 the
twin motions for reconsideration filed by PUP and NDC on the
ground that the appellants failed to advance new arguments
substantial enough to warrant a reversal of the Decision sought to
9
be reconsidered.23 On 28 June 2000 PUP filed an urgent motion for an
additional period of fifteen (15) days from 29 June 2000 or until 14 July
2000 within which to file a Petition for Review on Certiorari of
the Decision of the Court of Appeals.
On the last day of the extended period PUP filed its Petition for Review on
Certiorari assailing the Decision of the Court of Appeals of 6 December
1999 as well as the Resolution of 6 June 2000 denying reconsideration
thereof. PUP raised two issues: (a) whether the courts a quo erred when
they "conjectured" that the transfer of the leased property from NDC to
PUP amounted to a sale; and, (b) whether FIRESTONE can rightfully
invoke its right of first refusal. Petitioner posited that if we were to place
our imprimatur on the decisions of the courts a quo, "public welfare or
specifically the constitutional priority accorded to education" would greatly
be prejudiced.24
Paradoxically, our paramount interest in education does not license us, or
any party for that matter, to destroy the sanctity of binding obligations.
Education may be prioritized for legislative or budgetary purposes, but we
doubt if such importance can be used to confiscate private property such
as FIRESTONE's right of first refusal.
On 17 July 2000 we denied PUP's motion for extension of fifteen (15) days
within which to appeal inasmuch as the aforesaid pleading lacked an
affidavit of service of copies thereof on the Court of Appeals and the
adverse party, as well as written explanation for not filing and serving the
pleading personally.25
Accordingly, on 26 July 2000 we issued a Resolution dismissing
PUP's Petition for Review for having been filed out of time. PUP moved for
reconsideration imploring a resolution or decision on the merits of its
petition. Strangely, about the same time, several articles came out in the
newspapers assailing the denial of the petition. The daily papers reported
that we unreasonably dismissed PUP's petition on technical grounds,
affirming in the process the decision of the trial court to sell the disputed
property to the prejudice of the government in the amount
of P1,000,000,000.00.26 Counsel for petitioner PUP, alleged that the trial
court and the Court of Appeals "have decided a question of substance in a
way definitely not in accord with law or jurisprudence."27
At the outset, let it be noted that the amount of P1,000,000,000.00 as
reported in the papers was way too exaggerated, if not fantastic. We
stress that NDC itself sold the whole 10.31-hectare property to PUP at
only P57,193,201.64 which represents NDC's obligation to the national
government that was, in exchange, written off. The price offered per
square meter of the property was pegged at P554.74. FIRESTONE's
leased premises would therefore be worth only P14,423,240.00. From any
angle, this amount is certainly far below the ballyhooed price
of P1,000,000,000.00.
On 4 October 2000 we granted PUP's Motion for Reconsideration to give it
a chance to ventilate its right, if any it still had in the leased premises,
thereby paving the way for a reinstatement of its Petition for Review.28 In
its appeal, PUP took to task the courts a quo for supposedly "substituting
or decreeing its mind or consent for that of the parties (referring to NDC
and PUP) in determining whether or not a contract of sale was perfected."
PUP also argued that inasmuch as "it is the parties alone whose minds
must meet in reference to the subject matter and cause," it concluded that
it was error for the lower courts to have decreed the existence of a sale of
the NDC compound thus allowing FIRESTONE to exercise its right of first
refusal.
On the other hand, NDC separately filed its own Petition for Review and
advanced arguments which, in fine, centered on whether or not the
transaction between petitioners NDC and PUP amounted to a sale
considering that "ownership of the property remained with the
government."29 Petitioner NDC introduced the novel proposition that if the
parties involved are both government entities the transaction cannot be
legally called a sale.

In due course both petitions were consolidated. 30
We believe that the courts a quo did not hypothesize, much less
conjure, the sale of the disputed property by NDC in favor of
petitioner PUP. Aside from the fact that the intention of NDC and
PUP to enter into a contract of sale was clearly expressed in
the Memorandum Order No. 214,31 a close perusal of the
circumstances of this case strengthens the theory that the
conveyance of the property from NDC to PUP was one of absolute
sale, for a valuable consideration, and not a mere paper transfer as
argued by petitioners.
A contract of sale, as defined in the Civil Code, is a contract where
one of the parties obligates himself to transfer the ownership of and
to deliver a determinate thing to the other or others who shall pay
therefore a sum certain in money or its equivalent.32 It is therefore a
general requisite for the existence of a valid and enforceable
contract of sale that it be mutually obligatory, i.e., there should be a
concurrence of the promise of the vendor to sell a determinate
thing and the promise of the vendee to receive and pay for the
property so delivered and transferred. The Civil Code provision is,
in effect, a "catch-all" provision which effectively brings within its
grasp a whole gamut of transfers whereby ownership of a thing is
ceded for a consideration.
Contrary to what petitioners PUP and NDC propose, there is not
just one party involved in the questioned transaction. Petitioners
NDC and PUP have their respective charters and therefore each
possesses a separate and distinct individual personality. 33 The
inherent weakness of NDC's proposition that there was no sale as it
was only the government which was involved in the transaction
thus reveals itself. Tersely put, it is not necessary to write an
extended dissertation on government owned and controlled
corporations and their legal personalities. Beyond cavil, a
government owned and controlled corporation has a personality of
its own, distinct and separate from that of the government.34 The
intervention in the transaction of the Office of the President through
the Executive Secretary did not change the independent existence
of these entities. The involvement of the Office of the President was
limited to brokering the consequent relationship between NDC and
PUP. But the withdrawal of the appeal by the Executive Secretary
is considered significant as he knew, after a review of the records,
that the transaction was subject to existing liens and
encumbrances, particularly the priority to purchase the leased
premises in favor of FIRESTONE.
True that there may be instances when a particular deed does not
disclose the real intentions of the parties, but their action may
nevertheless indicate that a binding obligation has been
undertaken. Since the conduct of the parties to a contract may be
sufficient to establish the existence of an agreement and the terms
thereof, it becomes necessary for the courts to examine the
contemporaneous behavior of the parties in establishing the
existence of their contract.
The preponderance of evidence shows that NDC sold to PUP the
whole NDC compound, including the leased premises, without the
knowledge much less consent of private respondent FIRESTONE
which had a valid and existing right of first refusal.
All three (3) essential elements of a valid sale, without which there
can be no sale, were attendant in the "disposition" and "transfer" of
the property from NDC to PUP - consent of the parties, determinate
subject matter,and consideration therefor.
Consent to the sale is obvious from the prefatory clauses
of Memorandum Order No. 214 which explicitly states the
acquiescence of the parties to the sale of the property -
10
WHEREAS, PUP has expressed its willingness to acquire said NDC
properties and NDC has expressed its willingness to sell the properties to
PUP (underscoring supplied).35
Furthermore, the cancellation of NDC's liabilities in favor of the National
Government in the amount of P57,193,201.64 constituted the
"consideration" for the sale. As correctly observed by the Court of
Appeals-
The defendants-appellants' interpretation that there was a mere transfer,
and not a sale, apart from being specious sophistry and a mere play of
words, is too strained and hairsplitting. For it is axiomatic that every sale
imposes upon the vendor the obligation to transfer ownership as an
essential element of the contract. Transfer of title or an agreement to
transfer title for a price paid, or promised to be paid, is the very essence of
sale (Kerr & Co. v. Lingad, 38 SCRA 524; Schmid & Oberly, Inc., v. RJL
Martinez Fishing Corp., 166 SCRA 493). At whatever legal angle we view
it, therefore, the inescapable fact remains that all the requisites of a valid
sale were attendant in the transaction between co-defendants-appellants
NDC and PUP concerning the realities subject of the present suit. 36
What is more, the conduct of petitioner PUP immediately after the
transaction is in itself an admission that there was a sale of the NDC
compound in its favor. Thus, after the issuance of Memorandum Order No.
214 petitioner PUP asserted its ownership over the property by posting
notices within the compound advising residents and occupants to vacate
the premises.37 In its Motion for Intervention petitioner PUP also admitted
that its interest as a "purchaser pendente lite" would be better protected if
it was joined as party-defendant in the controversy thereby confessing that
it indeed purchased the property.
In light of the foregoing disquisition, we now proceed to determine whether
FIRESTONE should be allowed to exercise its right of first refusal over the
property. Such right was expressly stated by NDC and FIRESTONE in par.
XV of their third contract denominated as A-10-78 executed on 22
December 1978 which, as found by the courts a quo, was interrelated to
and inseparable from their first contract denominated as C-30-65 executed
on 24 August 1965 and their second contract denominated as C-26-68
executed on 8 January 1969. Thus -
Should the LESSOR desire to sell the leased premises during the term of
this Agreement, or any extension thereof, the LESSOR shall first give to
the LESSEE, which shall have the right of first option to purchase the
leased premises subject to mutual agreement of both parties. 38
In the instant case, the right of first refusal is an integral and indivisible part
of the contract of lease and is inseparable from the whole contract. The
consideration for the right is built into the reciprocal obligations of the
parties. Thus, it is not correct for petitioners to insist that there was no
consideration paid by FIRESTONE to entitle it to the exercise of the right,
inasmuch as the stipulation is part and parcel of the contract of lease
making the consideration for the lease the same as that for the option.
It is a settled principle in civil law that when a lease contract contains a
right of first refusal, the lessor is under a legal duty to the lessee not to sell
to anybody at any price until after he has made an offer to sell to the latter
at a certain price and the lessee has failed to accept it.39 The lessee has a
right that the lessor's first offer shall be in his favor.
The option in this case was incorporated in the contracts of lease by NDC
for the benefit of FIRESTONE which, in view of the total amount of its
investments in the property, wanted to be assured that it would be given
the first opportunity to buy the property at a price for which it would be
offered. Consistent with their agreement, it was then implicit for NDC to
have first offered the leased premises of 2.60 hectares to FIRESTONE
prior to the sale in favor of PUP. Only if FIRESTONE failed to exercise its
right of first priority could NDC lawfully sell the property to petitioner PUP.

It now becomes apropos to ask whether the courts a quo were
correct in fixing the proper consideration of the sale at P1,500.00
per square meter. In contracts of sale, the basis of the right of first
refusal must be the current offer of the seller to sell or the offer to
purchase of the prospective buyer. Only after the lessee-grantee
fails to exercise its right under the same terms and within the period
contemplated can the owner validly offer to sell the property to a
third person, again, under the same terms as offered to the
grantee.40 It appearing that the whole NDC compound was sold to
PUP for P554.74 per square meter, it would have been more
proper for the courts below to have ordered the sale of the property
also at the same price. However, since FIRESTONE never raised
this as an issue, while on the other hand it admitted that the value
of the property stood at P1,500.00 per square meter, then we see
no compelling reason to modify the holdings of the courts a
quo that the leased premises be sold at that price.
Our attention is invited by petitioners to Ang Yu Asuncion v. CA41 in
concluding that if our holding in Ang Yu would be applied to the
facts of this case then FIRESTONE's "option, if still subsisting, is
not enforceable," the option being merely a preparatory contract
which cannot be enforced.
The contention has no merit. At the heels of Ang
Yu came Equatorial Realty Development, Inc., v. Mayfair Theater,
Inc.,42 where after much deliberation we declared, and so we hold,
that a right of first refusal is neither "amorphous nor merely
preparatory" and can be enforced and executed according to its
terms. Thus, in Equatorial we ordered the rescission of the sale
which was made in violation of the lessee's right of first refusal and
further ordered the sale of the leased property in favor of Mayfair
Theater, as grantee of the right. Emphatically, we held that "(a right
of first priority) should be enforced according to the law on
contracts instead of the panoramic and indefinite rule on human
relations." We then concluded that the execution of the right of first
refusal consists in directing the grantor to comply with his obligation
according to the terms at which he should have offered the property
in favor of the grantee and at that price when the offer should have
been made.
One final word. Petitioner PUP should be cautioned against bidding
for public sympathy by bewailing the dismissal of its petition before
the press. Such advocacy is not likely to elicit the compassion of
this Court or of any court for that matter. An entreaty for a favorable
disposition of a case not made directly through pleadings and oral
arguments before the courts do not persuade us, for as judges, we
are ruled only by our forsworn duty to give justice where justice is
due.
WHEREFORE, the petitions in G.R. No. 143513 and G.R. No.
143590 are DENIED. Inasmuch as the first contract of lease fixed
the area of the leased premises at 2.90118 hectares while the
second contract placed it at 2.60 hectares, let a ground survey of
the leased premises be immediately conducted by a duly licensed,
registered surveyor at the expense of private respondent
FIRESTONE CERAMICS, INC., within two (2) months from finality
of the judgment in this case. Thereafter, private respondent
FIRESTONE CERAMICS, INC., shall have six (6) months from
receipt of the approved survey within which to exercise its right to
purchase the leased property at P1,500.00 per square meter, and
petitioner Polytechnic University of the Philippines is ordered to
reconvey the property to FIRESTONE CERAMICS, INC., in the
exercise of its right of first refusal upon payment of the purchase
price thereof.
SO ORDERED.
G.R. No. 137290 July 31, 2000
11
SAN MIGUEL PROPERTIES PHILIPPINES, INC., petitioner,
vs.
SPOUSES ALFREDO HUANG and GRACE HUANG, respondents.
DECISION
MENDOZA, J.:
This is a petition for review of the decision,1 dated April 8, 1997, of the
Court of Appeals which reversed the decision of the Regional Trial Court,
Branch 153, Pasig City dismissing the complaint brought by respondents
against petitioner for enforcement of a contract of sale.
The facts are not in dispute.
Petitioner San Miguel Properties Philippines, Inc. is a domestic
corporation engaged in the purchase and sale of real properties. Part of its
inventory are two parcels of land totalling 1, 738 square meters at the
corner of Meralco Avenue and General Capinpin Street, Barrio Oranbo,
Pasig City, which are covered by TCT Nos. PT-82395 and PT-82396 of
the Register of Deeds of Pasig City.
On February 21, 1994, the properties were offered for sale for
₱52,140,000.00 in cash. The offer was made to Atty. Helena M. Dauz who
was acting for respondent spouses as undisclosed principals. In a letter 2
dated March 24, 1994, Atty. Dauz signified her clients’ interest in
purchasing the properties for the amount for which they were offered by
petitioner, under the following terms: the sum of ₱500,000.00 would be
given as earnest money and the balance would be paid in eight equal
monthly installments from May to December, 1994. However, petitioner
refused the counter-offer.
On March 29, 1994, Atty. Dauz wrote another letter3 proposing the
following terms for the purchase of the properties, viz:
This is to express our interest to buy your-above-mentioned property with
an area of 1, 738 sq. meters. For this purpose, we are enclosing herewith
the sum of ₱1,000,000.00 representing earnest-deposit money, subject to
the following conditions.
1. We will be given the exclusive option to purchase the property within the
30 days from date of your acceptance of this offer.
2. During said period, we will negotiate on the terms and conditions of the
purchase; SMPPI will secure the necessary Management and Board
approvals; and we initiate the documentation if there is mutual agreement
between us.
3. In the event that we do not come to an agreement on this transaction,
the said amount of ₱1,000,000.00 shall be refundable to us in full upon
demand. . . .
Isidro A. Sobrecarey, petitioner’s vice-president and operations manager
for corporate real estate, indicated his conformity to the offer by affixing his
signature to the letter and accepted the "earnest-deposit" of ₱1 million.
Upon request of respondent spouses, Sobrecarey ordered the removal of
the "FOR SALE" sign from the properties.
Atty. Dauz and Sobrecarey then commenced negotiations. During their
meeting on April 8, 1994, Sobrecarey informed Atty. Dauz that petitioner
was willing to sell the subject properties on a 90-day term. Atty. Dauz
countered with an offer of six months within which to pay.
On April 14, 1994, the parties again met during which Sobrecarey
informed Atty. Dauz that petitioner had not yet acted on her counter-offer.
This prompted Atty. Dauz to propose a four-month period of amortization.

On April 25, 1994, Atty. Dauz asked for an extension of 45 days
from April 29, 1994 to June 13, 1994 within which to exercise her
option to purchase the property, adding that within that period, "[we]
hope to finalize [our] agreement on the matter."4 Her request was
granted.
On July 7, 1994, petitioner, through its president and chief
executive officer, Federico Gonzales, wrote Atty. Dauz informing
her that because the parties failed to agree on the terms and
conditions of the sale despite the extension granted by petitioner,
the latter was returning the amount of ₱1 million given as
"earnest-deposit."5
On July 20, 1994, respondent spouses, through counsel, wrote
petitioner demanding the execution within five days of a deed of
sale covering the properties. Respondents attempted to return the
"earnest-deposit" but petitioner refused on the ground that
respondents’ option to purchase had already expired.
On August 16, 1994, respondent spouses filed a complaint for
specific performance against petitioner before the Regional Trial
Court, Branch 133, Pasig City where it was docketed as Civil Case
No. 64660.
Within the period for filing a responsive pleading, petitioner filed a
motion to dismiss the complaint alleging that (1) the alleged
"exclusive option" of respondent spouses lacked a consideration
separate and distinct from the purchase price and was thus
unenforceable and (2) the complaint did not allege a cause of
action because there was no "meeting of the minds" between the
parties and, therefore, no perfected contract of sale. The motion
was opposed by respondents.
On December 12, 1994, the trial court granted petitioner’s motion
and dismissed the action. Respondents filed a motion for
reconsideration, but it was denied by the trial court. They then
appealed to the Court of Appeals which, on April 8, 1997, rendered
a decision6 reversing the judgment of the trial court. The appellate
court held that all the requisites of a perfected contract of sale had
been complied with as the offer made on March 29, 1994, in
connection with which the earnest money in the amount of ₱1
million was tendered by respondents, had already been accepted
by petitioner. The court cited Art. 1482 of the Civil Code which
provides that "[w]henever earnest money is given in a contract of
sale, it shall be considered as part of the price and as proof of the
perfection of the contract." The fact the parties had not agreed on
the mode of payment did not affect the contract as such is not an
essential element for its validity. In addition, the court found that
Sobrecarey had authority to act in behalf of petitioner for the sale of
the properties.7
Petitioner moved for reconsideration of the trial court’s decision, but
its motion was denied. Hence, this petition.
Petitioner contends that the Court of Appeals erred in finding that
there was a perfected contract of sale between the parties because
the March 29, 1994 letter of respondents, which petitioner accepted,
merely resulted in an option contract, albeit it was unenforceable
for lack of a distinct consideration. Petitioner argues that the
absence of agreement as to the mode of payment was fatal to the
perfection of the contract of sale. Petitioner also disputes the
appellate court’s ruling that Isidro A. Sobrecarey had authority to
sell the subject real properties.8
Respondents were required to comment within ten (10) days from
notice. However, despite 13 extensions totalling 142 days which
the Court had given to them, respondents failed to file their
comment. They were thus considered to have waived the filing of a
comment.
12
The petition is meritorious.
In holding that there is a perfected contract of sale, the Court of Appeals
relied on the following findings: (1) earnest money was allegedly given by
respondents and accepted by petitioner through its vice-president and
operations manager, Isidro A. Sobrecarey; and (2) the documentary
evidence in the records show that there was a perfected contract of sale.
With regard to the alleged payment and acceptance of earnest money, the
Court holds that respondents did not give the ₱1 million as "earnest
money" as provided by Art. 1482 of the Civil Code. They presented the
amount merely as a deposit of what would eventually become the earnest
money or downpayment should a contract of sale be made by them. The
amount was thus given not as a part of the purchase price and as proof of
the perfection of the contract of sale but only as a guarantee that
respondents would not back out of the sale. Respondents in fact described
the amount as an "earnest-deposit." In Spouses Doromal, Sr. v. Court of
Appeals,9 it was held:
. . . While the ₱5,000 might have indeed been paid to Carlos in October,
1967, there is nothing to show that the same was in the concept of the
earnest money contemplated in Art. 1482 of the Civil Code, invoked by
petitioner, as signifying perfection of the sale. Viewed in the backdrop of
the factual milieu thereof extant in the record, We are more inclined to
believe that the said ₱5,000.00 were paid in the concept of earnest money
as the term was understood under the Old Civil Code, that is, as a
guarantee that the buyer would not back out, considering that it is not clear
that there was already a definite agreement as to the price then and that
petitioners were decided to buy 6/7 only of the property should respondent
Javellana refuse to agree to part with her 1/7 share. 10
In the present case, the ₱1 million "earnest-deposit" could not have been
given as earnest money as contemplated in Art. 1482 because, at the time
when petitioner accepted the terms of respondents’ offer of March 29,
1994, their contract had not yet been perfected. This is evident from the
following conditions attached by respondents to their letter, to wit: (1) that
they be given the exclusive option to purchase the property within 30 days
from acceptance of the offer; (2) that during the option period, the parties
would negotiate the terms and conditions of the purchase; and (3)
petitioner would secure the necessary approvals while respondents would
handle the documentation.
The first condition for an option period of 30 days sufficiently shows that a
sale was never perfected.1âwphi1 As petitioner correctly points out,
acceptance of this condition did not give rise to a perfected sale but merely
to an option or an accepted unilateral promise on the part of respondents
to buy the subject properties within 30 days from the date of acceptance of
the offer. Such option giving respondents the exclusive right to buy the
properties within the period agreed upon is separate and distinct from the
contract of sale which the parties may enter.11 All that respondents had
was just the option to buy the properties which privilege was not, however,
exercised by them because there was a failure to agree on the terms of
payment. No contract of sale may thus be enforced by respondents.
Furthermore, even the option secured by respondents from petitioner was
fatally defective. Under the second paragraph of Art. 1479, an accepted
unilateral promise to buy or sell a determinate thing for a price certain is
binding upon the promisor only if the promise is supported by a distinct
consideration. Consideration in an option contract may be anything of
value, unlike in sale where it must be the price certain in money or its
equivalent. There is no showing here of any consideration for the option.
Lacking any proof of such consideration, the option is unenforceable.
Equally compelling as proof of the absence of a perfected sale is the
second condition that, during the option period, the parties would
negotiate the terms and conditions of the purchase. The stages of a
contract of sale are as follows: (1) negotiation, covering the period from
the time the prospective contracting parties indicate interest in the contract
to the time the contract is perfected; (2) perfection, which takes place upon

the concurrence of the essential elements of the sale which are the
meeting of the minds of the parties as to the object of the contract
and upon the price; and (3) consummation, which begins when the
parties perform their respective undertakings under the contract of
sale, culminating in the extinguishment thereof. 12 In the present
case, the parties never got past the negotiation stage. The alleged
"indubitable evidence"13 of a perfected sale cited by the appellate
court was nothing more than offers and counter-offers which did
not amount to any final arrangement containing the essential
elements of a contract of sale. While the parties already agreed on
the real properties which were the objects of the sale and on the
purchase price, the fact remains that they failed to arrive at
mutually acceptable terms of payment, despite the 45-day
extension given by petitioner.
The appellate court opined that the failure to agree on the terms of
payment was no bar to the perfection of the sale because Art. 1475
only requires agreement by the parties as to the price of the object.
This is error. In Navarro v. Sugar Producers Cooperative Marketing
Association, Inc.,14 we laid down the rule that the manner of
payment of the purchase price is an essential element before a
valid and binding contract of sale can exist. Although the Civil Code
does not expressly state that the minds of the parties must also
meet on the terms or manner of payment of the price, the same is
needed, otherwise there is no sale. As held in Toyota Shaw, Inc. v.
Court of Appeals,15 agreement on the manner of payment goes into
the price such that a disagreement on the manner of payment is
tantamount to a failure to agree on the price. 16 In Velasco v. Court
of Appeals,17 the parties to a proposed sale had already agreed on
the object of sale and on the purchase price. By the buyer’s own
admission, however, the parties still had to agree on how and when
the downpayment and the installments were to be paid. It was held:
. . . Such being the situation, it can not, therefore, be said that a
definite and firm sales agreement between the parties had been
perfected over the lot in question. Indeed, this Court has already
ruled before that a definite agreement on the manner of payment of
the purchase price is an essential element in the formation of a
binding and enforceable contract of sale. The fact, therefore, that
the petitioners delivered to the respondent the sum of P10,000 as
part of the down-payment that they had to pay cannot be
considered as sufficient proof of the perfection of any purchase and
sale agreement between the parties herein under Art. 1482 of the
new Civil Code, as the petitioners themselves admit that some
essential matter - the terms of the payment - still had to be mutually
covenanted.18
Thus, it is not the giving of earnest money, but the proof of the
concurrence of all the essential elements of the contract of sale
which establishes the existence of a perfected sale.
In the absence of a perfected contract of sale, it is immaterial
whether Isidro A. Sobrecarey had the authority to enter into a
contract of sale in behalf of petitioner. This issue, therefore, needs
no further discussion.
WHEREFORE, the decision of the Court of Appeals is REVERSED
and respondents’ complaint is DISMISSED.
SO ORDERED.
G.R. No. 154493 December 6, 2006
REYNALDO VILLANUEVA, petitioner,
vs.
PHILIPPINE NATIONAL BANK (PNB), respondent.
13
DECISION
AUSTRIA-MARTINEZ, J.:
The Petition for Review on Certiorari under Rule 45 before this Court
assails the January 29, 2002 Decision1 and June 27, 2002 Resolution2 of
the Court of Appeals (CA) in CA-G.R. CV No. 520083 which reversed and
set aside the September 14, 1995 Decision4 of the Regional Trial Court,
Branch 22, General Santos City (RTC) in Civil Case No. 4553.
As culled from the records, the facts are as follows:
The Special Assets Management Department (SAMD) of the Philippine
National Bank (PNB) issued an advertisement for the sale thru bidding of
certain PNB properties in Calumpang, General Santos City, including Lot
No. 17, covered by TCT No. T-15042, consisting of 22,780 square meters,
with an advertised floor price of P1,409,000.00, and Lot No. 19, covered
by TCT No. T-15036, consisting of 41,190 square meters, with an
advertised floor price of P2,268,000.00.5 Bidding was subject to the
following conditions: 1) that cash bids be submitted not later than April 27,
1989; 2) that said bids be accompanied by a 10% deposit in manager’s or
cashier’s check; and 3) that all acceptable bids be subject to approval by
PNB authorities.
In a June 28, 1990 letter6 to the Manager, PNB-General Santos Branch,
Reynaldo Villanueva (Villanueva) offered to purchase Lot Nos. 17 and 19
for P3,677,000.00. He also manifested that he was
depositing P400,000.00 to show his good faith but with the understanding
that said amount may be treated as part of the payment of the purchase
price only when his offer is accepted by PNB. At the bottom of said letter
there appears an unsigned marginal note stating that P400,000.00 was
deposited into Villanueva’s account (Savings Account No. 43612) with
PNB-General Santos Branch. 7
PNB-General Santos Branch forwarded the June 28, 1990 letter of
Villanueva to Ramon Guevara (Guevara), Vice President, SAMD.8 On July
6, 1990, Guevara informed Villanueva that only Lot No. 19 is available and
that the asking price therefor is P2,883,300.00.9 Guevara further wrote:
If our quoted price is acceptable to you, please submit a revised offer to
purchase. Sale shall be subject to our Board of Director’s approval and to
other terms and conditions imposed by the Bank on sale of acquired
assets. 10 (Emphasis ours)
Instead of submitting a revised offer, Villanueva merely inserted at the
bottom of Guevara’s letter a July 11, 1990 marginal note, which reads:
C O N F O R M E:
PRICE OF P2,883,300.00 (downpayment of P600,000.00 and the
balance payable in two (2) years at quarterly amortizations.) 11
Villanueva paid P200,000.00 to PNB which issued O.R. No. 16997 to
acknowledge receipt of the "partial payment deposit on offer to
purchase."12 On the dorsal portion of Official Receipt No. 16997,
Villanueva signed a typewritten note, stating:
This is a deposit made to show the sincerity of my purchase offer with the
understanding that it shall be returned without interest if my offer is not
favorably considered or be forfeited if my offer is approved but I fail/refuse
to push through the purchase.13
Also, on July 24, 1990, P380,000.00 was debited from Villanueva’s
Savings Account No. 43612 and credited to SAMD.14

On October 11, 1990, however, Guevara wrote Villanueva that,
upon orders of the PNB Board of Directors to conduct another
appraisal and public bidding of Lot No. 19, SAMD is deferring
negotiations with him over said property and returning his deposit
of P580,000.00.15 Undaunted, Villanueva attempted to deliver
postdated checks covering the balance of the purchase price but
PNB refused the same.
Hence, Villanueva filed with the RTC a Complaint16 for specific
performance and damages against PNB. In its September 14, 1995
Decision, the RTC granted the Complaint, thus:
WHEREFORE, judgment is rendered in favor of the plaintiff and
against the defendant directing it to do the following:
1. To execute a deed of sale in favor of the plaintiff over Lot 19
comprising 41,190 square meters situated at Calumpang, General
Santos City covered by TCT No. T-15036 after payment of the
balance in cash in the amount of P2,303,300.00;
2. To pay the plaintiff P1,000,000.00 as moral
damages; P500,000.00 as attorney’s fees, plus litigation expenses
and costs of the suit.
SO ORDERED.17
The RTC anchored its judgment on the finding that there existed a
perfected contract of sale between PNB and Villanueva. It found:
The following facts are either admitted or undisputed:
xxx
The defendant through Vice-President Guevara negotiated with the
plaintiff in connection with the offer of the plaintiff to buy Lots 17 &
19. The offer of plaintiff to buy, however, was accepted by the
defendant only insofar as Lot 19 is concerned as exemplified by its
letter dated July 6, 1990 where the plaintiff signified his
concurrence after conferring with the defendant’s vice-president.
The conformity of the plaintiff was typewritten by the defendant’s
own people where the plaintiff accepted the price of P2,883,300.00.
The defendant also issued a receipt to the plaintiff on the same day
when the plaintiff paid the amount of P200,000.00 to complete the
downpayment of P600,000.00 (Exhibit "F" & Exhibit "I"). With this
development, the plaintiff was also given the go signal by the
defendant to improve Lot 19 because it was already in effect sold to
him and because of that the defendant fenced the lot and
completed his two houses on the property.18
The RTC also pointed out that Villanueva’s P580,000.00
downpayment was actually in the nature of earnest money
acceptance of which by PNB signified that there was already a
sale.19 The RTC further cited contemporaneous acts of PNB
purportedly indicating that, as early as July 25, 1990, it considered
Lot 19 already sold, as shown by Guevara’s July 25, 1990 letter
(Exh. "H")20 to another interested buyer.
PNB appealed to the CA which reversed and set aside the
September 14, 1995 RTC Decision, thus:
WHEREFORE, the appealed decision is REVERSED and SET
ASIDE and another rendered DISMISSING the complaint.
SO ORDERED.21
14
According to the CA, there was no perfected contract of sale because the
July 6, 1990 letter of Guevara constituted a qualified acceptance of the
June 28, 1990 offer of Villanueva, and to which Villanueva replied on July
11, 1990 with a modified offer. The CA held:
In the case at bench, consent, in respect to the price and manner of its
payment, is lacking. The record shows that appellant, thru Guevara’s July
6, 1990 letter, made a qualified acceptance of appellee’s letter-offer dated
June 28, 1990 by imposing an asking price of P2,883,300.00 in cash for
Lot 19. The letter dated July 6, 1990 constituted a counter-offer (Art. 1319,
Civil Code), to which appellee made a new proposal, i.e., to pay the
amount of P2,883,300.00 in staggered amounts, that is, P600,000.00 as
downpayment and the balance within two years in quarterly amortizations.
A qualified acceptance, or one that involves a new proposal, constitutes a
counter-offer and a rejection of the original offer (Art. 1319, id.).
Consequently, when something is desired which is not exactly what is
proposed in the offer, such acceptance is not sufficient to generate
consent because any modification or variation from the terms of the offer
annuls the offer (Tolentino, Commentaries and Jurisprudence on the Civil
Code of the Philippines, 6th ed., 1996, p. 450, cited in ABS-CBN
Broadcasting Corporation v. Court of Appeals, et al., 301 SCRA 572).
Appellee’s new proposal, which constitutes a counter-offer, was not
accepted by appellant, its board having decided to have Lot 19
reappraised and sold thru public bidding.
Moreover, it was clearly stated in Guevara’s July 6, 1990 letter that "the
sale shall be subject to our Board of Director’s approval and to other terms
and conditions imposed by the Bank on sale of acquired assets." 22
Villanueva’s Motion for Reconsideration23 was denied by the CA in its
Resolution of June 27, 2002.
Petitioner Villanueva now assails before this Court the January 29, 2002
Decision and June 27, 2002 Resolution of the CA. He assigns five issues
which may be condensed into two: first, whether a perfected contract of
sale exists between petitioner and respondent PNB; and second, whether
the conduct and actuation of respondent constitutes bad faith as to entitle
petitioner to moral and exemplary damages and attorney’s fees.
The Court sustains the CA on both issues.
Contracts of sale are perfected by mutual consent whereby the seller
obligates himself, for a price certain, to deliver and transfer ownership of a
specified thing or right to the buyer over which the latter agrees. 24 Mutual
consent being a state of mind, its existence may only be inferred from the
confluence of two acts of the parties: an offer certain as to the object of the
contract and its consideration, and an acceptance of the offer which is
absolute in that it refers to the exact object and consideration embodied in
said offer.25 While it is impossible to expect the acceptance to echo every
nuance of the offer, it is imperative that it assents to those points in the
offer which, under the operative facts of each contract, are not only
material but motivating as well. Anything short of that level of mutuality
produces not a contract but a mere counter-offer awaiting
acceptance.26 More particularly on the matter of the consideration of the
contract, the offer and its acceptance must be unanimous both on the rate
of the payment and on its term. An acceptance of an offer which agrees to
the rate but varies the term is ineffective. 27
To determine whether there was mutual consent between the parties
herein, it is necessary to retrace each offer and acceptance they made.
Respondent began with an invitation to bid issued in April 1989 covering
several of its acquired assets in Calumpang, General Santos City,
including Lot No. 19 for which the floor price was P2,268,000.00. The offer
was subject to the condition that sealed bids, accompanied by a 10%
 15

deposit in manager’s or cashier’s check, be submitted not later negotiations a new substantial matter on which the parties had no prior
than 10 o’clock in the morning of April 27, 1989. discussion and over which they must yet agree. 31 Petitioner’s July 11,
1990 counter-offer, therefore, did not usher the parties beyond the
negotiation stage of contract making towards its perfection. He made a
On June 28, 1990, petitioner made an offer to buy Lot No. 17 and
counter-offer that required acceptance by respondent.
Lot No. 19 for an aggregate price of P3,677,000.00. It is noted that
this offer exactly corresponded to the April 1989 invitation to bid
issued by respondent in that the proposed aggregate purchase As it were, respondent, through its Board of Directors, did not accept this
price for Lot Nos. 17 and 19 matched the advertised floor prices for last counter-offer. As stated in its October 11, 1990 letter to petitioner,
the same properties. However, it cannot be said that the June 28, respondent ordered the reappraisal of the property, in clear repudiation
1990 letter of petitioner was an effective acceptance of the April not only of the proposed price but also the term of payment thereof.
1989 invitation to bid for, by its express terms, said invitation lapsed
on April 27, 1989.28More than that, the April 1989 invitation was
Petitioner insists, however, that the October 11, 1990 repudiation was
subject to the condition that all sealed bids submitted and accepted
belated as respondent had already agreed to his July 11, 1990
be approved by respondent’s higher authorities.
counter-offer when it accepted his "downpayment" or "earnest money"
of P580,000.00.32 He cites Article 1482 of the Civil Code where it says that
Thus, the June 28, 1990 letter of petitioner was an offer to buy acceptance of "downpayment" or "earnest money" presupposes the
independent of the April 1989 invitation to bid. It was a definite offer perfection of a contract.
as it identified with certainty the properties sought to be purchased
and fixed the contract price.
Not so. Acceptance of petitioner’s payments did not amount to an implied
acceptance of his last counter-offer.
However, respondent replied to the June 28, 1990 offer with a July
6, 1990 letter that only Lot No. 19 is available and that the price
To begin with, PNB-General Santos Branch, which accepted
therefor is now P2,883,300.00. As the CA pointed out, this reply
petitioner’s P380,000.00 payment, and PNB-SAMD, which accepted
was certainly not an acceptance of the June 28, 1990 offer but a
his P200,000.00 payment, had no authority to bind respondent to a
mere counter-offer. It deviated from the original offer on three
contract of sale with petitioner.33 Petitioner is well aware of this. To recall,
material points: first, the object of the proposed sale is now only Lot
petitioner sent his June 28, 1990 offer to PNB-General Santos Branch.
No. 19 rather than Lot Nos. 17 and 19; second, the area of the
Said branch did not act on his offer except to endorse it to Guevarra.
property to be sold is still 41,190 sq. m but an 8,797-sq. m portion
Thereafter, petitioner transacted directly with Guevarra. Petitioner then
is now part of a public road; and third, the consideration
cannot pretend that PNB-General Santos Branch had authority to accept
is P2,883,300 for one lot rather than P3,677,000.00 for two lots.
his July 11, 1990 counter-offer by merely accepting his P380,000.00
More important, this July 6, 1990 counter-offer imposed two
payment.
conditions: one, that petitioner submit a revised offer to purchase
based on the quoted price; and two, that the sale of the property be
approved by the Board of Directors and subjected to other terms Neither did SAMD have authority to bind PNB. In its April 1989 invitation to
and conditions imposed by the Bank on the sale of acquired assets. bid, as well as its July 6, 1990 counter-offer, SAMD was always careful to
emphasize that whatever offer is made and entertained will be subject to
the approval of respondent’s higher authorities. This is a reasonable
In reply to the July 6, 1990 counter-offer, petitioner signed his July
disclaimer considering the corporate nature of respondent. 34
11, 1990 conformity to the quoted price of P2,883,300.00 but
inserted the term "downpayment of P600,000.00 and the balance
payable in two years at quarterly amortization." The CA viewed this Moreover, petitioner’s payment of P200,000.00 was with the clear
July 11, 1990 conformity not as an acceptance of the July 6, 1990 understanding that his July 11, 1990 counter-offer was still subject to
counter-offer but a further counter-offer for, while petitioner approval by respondent. This is borne out by respondent’s Exhibits "2-a"
accepted the P2,883,300.00 price for Lot No. 19, he qualified his and "2-b", which petitioner never controverted, where it appears on the
acceptance by proposing a two-year payment term. dorsal portion of O.R. No. 16997 that petitioner acceded that the amount
he paid was a mere "x x x deposit made to show the sincerity of [his]
purchase offer with the understanding that it shall be returned without
Petitioner does not directly impugn such reasoning of the CA. He
interest if [his] offer is not favorably considered x x x."35 This was a clear
merely questions it for taking up the issue of whether his July 11,
acknowledgment on his part that there was yet no perfected contract with
1990 conformity modified the July 6, 1990 counter-offer as this was
respondent and that even with the payments he had advanced, his July 11,
allegedly never raised during the trial nor on appeal.29
1990 counter-offer was still subject to consideration by respondent.

Such argument is not well taken. From beginning to end,

Not only that, in the same Exh. "2-a" as well as in his June 28, 1990 offer,
respondent denied that a contract of sale with petitioner was ever
petitioner referred to his payments as mere "deposits." Even O.R. No.
perfected.30 Its defense was broad enough to encompass every 16997 refers to petitioner’s payment as mere deposit. It is only in the debit
issue relating to the concurrence of the elements of contract,
notice issued by PNB-General Santos Branch where petitioner’s payment
specifically on whether it consented to the object of the sale and its
is referred to as "downpayment". But then, as we said, PNB-General
consideration. There was nothing to prevent the CA from inquiring
Santos Branch has no authority to bind respondent by its interpretation of
into the offers and counter-offers of the parties to determine
the nature of the payment made by petitioner.
whether there was indeed a perfected contract between them.

In sum, the amounts paid by petitioner were not in the nature of

Moreover, there is merit in the ruling of the CA that the July 11,
downpayment or earnest money but were mere deposits or proof of his
1990 marginal note was a further counter-offer which did not lead
interest in the purchase of Lot No. 19. Acceptance of said amounts by
to the perfection of a contract of sale between the parties.
respondent does not presuppose perfection of any contract. 36
Petitioner’s own June 28, 1990 offer quoted the price
of P3,677,000.00 for two lots but was silent on the term of payment.
Respondent’s July 6, 1990 counter-offer quoted the price It must be noted that petitioner has expressly admitted that he had
of P2,833,300.00 and was also silent on the term of payment. Up to withdrawn the entire amount of P580,000.00 deposit from PNB-General
that point, the term or schedule of payment was not on the Santos Branch.37
negotiation table. Thus, when petitioner suddenly introduced a term
of payment in his July 11, 1990 counter-offer, he interjected into the

With the foregoing disquisition, the Court foregoes resolution of the
second issue as it is evident that respondent acted well within its
rights when it rejected the last counter-offer of petitioner.
In fine, petitioner’s petition lacks merit.
WHEREFORE, the petition is DENIED. The Decision dated
January 29, 2002 and Resolution dated June 27, 2002 of the Court
of Appeals are AFFIRMED.
No costs.
G.R. No. 126444 December 4, 1998
ALFONSO QUIJADA, CRESENTE QUIJADA, REYNELDA
QUIJADA, DEMETRIO QUIJADA, ELIUTERIA QUIJADA,
EULALIO QUIJADA, and WARLITO QUIJADA, petitioners,
vs.
COURT OF APPEALS, REGALADO MONDEJAR, RODULFO
GOLORAN, ALBERTO ASIS, SEGUNDINO RAS, ERNESTO
GOLORAN, CELSO ABISO, FERNANDO BAUTISTA, ANTONIO
MACASERO, and NESTOR MAGUINSAY, respondents.
MARTINEZ, J.:
Petitioners, as heirs of the late Trinidad Quijada, filed a complaint
against private respondents for quieting of title, recovery of
possession and ownership of parcels of land with claim for
attorney's fees and damages. The suit was premised on the
following facts found by the court of Appeals which is materially the
same as that found by the trial court:
Plaintiffs-appellees (petitioners) are the children of the late Trinidad
Corvera Vda, de Quijada. Trinidad was one of the heirs of the late
Pedro Corvera and inherited from the latter the two-hectare parcel
of land subject of the case, situated in the barrio of San Agustin,
Talacogon, Agusan del Sur. On April 5, 1956, Trinidad Quijada
together with her sisters Leonila Corvera Vda. de Sequeña and
Paz Corvera Cabiltes and brother Epapiadito Corvera executed a
conditional deed of donation (Exh. C) of the two-hectare parcel of
land subject of the case in favor of the Municipality of Talacogon,
the condition being that the parcel of land shall be used solely and
exclusively as part of the campus of the proposed provincial high
school in Talacogon. Apparently, Trinidad remained in possession
of the parcel of land despite the donation. On July 29, 1962,
Trinidad sold one (1) hectare of the subject parcel of land to
defendant-appellant Regalado Mondejar (Exh. 1). Subsequently,
Trinidad verbally sold the remaining one (1) hectare to
defendant-appellant (respondent) Regalado Mondejar without the
benefit of a written deed of sale and evidenced solely by receipts of
payment. In 1980, the heirs of Trinidad, who at that time was
already dead, filed a complaint for forcible entry (Exh. E) against
defendant-appellant (respondent) Regalado Mondejar, which
complaint was, however, dismissed for failure to prosecute (Exh. F).
In 1987, the proposed provincial high school having failed to
materialize, the Sangguniang Bayan of the municipality of
Talacogon enacted a resolution reverting the two (2) hectares of
land donated back to the donors (Exh. D). In the meantime,
defendant-appellant (respondent) Regalado Mondejar sold portions
of the land to defendants-appellants (respondents) Fernando
Bautista (Exh. 5), Rodolfo Goloran (Exh. 6), Efren Guden (Exh. 7)
and Ernesto Goloran (Exh. 8).
16
On July 5, 1988, plaintiffs-appellees (petitioners) filed this action against
defendants-appellants (respondents). In the complaint, plaintiffs-appellees
(petitioners) alleged that their deceased mother never sold, conveyed,
transferred or disposed of the property in question to any person or entity
much less to Regalado Mondejar save the donation made to the
Municipality of Talacogon in 1956; that at the time of the alleged sale to
Regalado Mondejar by Trinidad Quijada, the land still belongs to the
Municipality of Talacogon, hence, the supposed sale is null and void.
Defendants-appellants (respondents), on the other hand, in their answer
claimed that the land in dispute was sold to Regalado Mondejar, the one
(1) hectare on July 29, 1962, and the remaining one (1) hectare on
installment basis until fully paid. As affirmative and/or special defense,
defendants-appellants (respondents) alleged that plaintiffs action is barred
by laches or has prescribed.
The court a quo rendered judgment in favor of plaintiffs-appellees
(petitioners): firstly because "Trinidad Quijada had no legal title or right to
sell the land to defendant Mondejar in 1962, 1966, 1967 and 1968, the
same not being hers to dispose of because ownership belongs to the
Municipality of Talacogon (Decision, p. 4; Rollo, p. 39) and, secondly, that
the deed of sale executed by Trinidad Quijada in favor of Mondejar did not
carry with it the conformity and acquiescence of her children, more so that
she was already 63 years old at the time, and a widow (Decision, p.
6; Rollo, p. 41)."1
The dispositive portion of the trial court's decision reads:
WHEREFORE, viewed from the above perceptions, the scale of justice
having tilted in favor of the plaintiffs, judgment is, as it is hereby rendered:
1) ordering the Defendants to return and vacate the two (2) hectares of
land to Plaintiffs as described in Tax Declaration No. 1209 in the name of
Trinidad Quijada;
2) ordering any person acting in Defendants' behalf to vacate and restore
the peaceful possession of the land in question to Plaintiffs;
3) ordering the cancellation of the Deed of Sale executed by the late
Trinidad Quijada in favor of Defendant Regalado Mondejar as well as the
Deeds of Sale/Relinquishments executed by Mondejar in favor of the other
Defendants;
4) ordering Defendants to remove their improvements constructed on the
questioned lot;
5) ordering the Defendants to pay Plaintiffs, jointly and severally, the
amount of P10,000.00 representing attorney's fees;
6) ordering Defendants to pays the amount of P8,000.00 as expenses of
litigation; and
7) ordering Defendants to pay the sum of P30,000.00 representing moral
damages.
SO ORDERED.2
On appeal, the Court of Appeals reversed and set aside the judgment a
quo3 ruling that the sale made by Trinidad Quijada to respondent
Mondejar was valid as the former retained an inchoate interest on the
lots by virtue of the automatic reversion clause in the deed of
donation.4 Thereafter, petitioners filed a motion for reconsideration.
When the CA denied their motion,5 petitioners instituted a petition for
review to this Court arguing principally that the sale of the subject
property made by Trinidad Quijada to respondent Mondejar is void,
considering that at that time, ownership was already transferred to
the Municipality of Talacogon. On the contrary, private respondents

contend that the sale was valid, that they are buyers in good
faith, and that petitioners' case is barred by laches. 6
We affirm the decision of the respondent court.
The donation made on April 5, 1956 by Trinidad Quijada and
her brother and sisters7 was subject to the condition that the
donated property shall be "used solely and exclusively as a
part of the campus of the proposed Provincial High School in
Talacogon."8 The donation further provides that should "the
proposed Provincial High School be discontinued or if the
same shall be opened but for some reason or another, the
same may in the future be closed" the donated property shall
automatically revert to the donor.9 Such condition, not being
contrary to law, morals, good customs, public order or public
policy was validly imposed in the donation. 10
When the Municipality's acceptance of the donation was made
known to the donor, the former became the new owner of the
donated property — donation being a mode of acquiring and
transmitting ownership 11 — notwithstanding the condition
imposed by the donee. The donation is perfected once the
acceptance by the donee is made known to the
donor.12 According, ownership is immediately transferred to
the latter and that ownership will only revert to the donor if the
resolutory condition is not fulfilled.
In this case, that resolutory condition is the construction of
the school. It has been ruled that when a person donates land
to another on the condition that the latter would build upon the
land a school, the condition imposed is not a condition
precedent or a suspensive condition but a resolutory
one. 13 Thus, at the time of the sales made in 1962 towards
1968, the alleged seller (Trinidad) could not have sold the lots
since she had earlier transferred ownership thereof by virtue
of the deed of donation. So long as the resolutory condition
subsists and is capable of fulfillment, the donation remains
effective and the donee continues to be the owner subject only
to the rights of the donor or his successors-in-interest under
the deed of donation. Since no period was imposed by the
donor on when must the donee comply with the condition, the
latter remains the owner so long as he has tried to comply
with the condition within a reasonable period. Such period,
however, became irrelevant herein when the
donee-Municipality manifested through a resolution that it
cannot comply with the condition of building a school and the
same was made known to the donor. Only then — when the
non-fulfillment of the resolutory condition was brought to the
donor's knowledge — that ownership of the donated property
reverted to the donor as provided in the automatic reversion
clause of the deed of donation.
The donor may have an inchoate interest in the donated
property during the time that ownership of the land has not
reverted to her. Such inchoate interest may be the subject of
contracts including a contract of sale. In this case, however,
what the donor sold was the land itself which she no longer
owns. It would have been different if the donor-seller sold her
interests over the property under the deed of donation which
is subject to the possibility of reversion of ownership arising
from the non-fulfillment of the resolutory condition.
As to laches, petitioners' action is not yet barred thereby.
Laches presupposes failure or neglect for an unreasonable
and unexplained length of time, to do that which, by exercising
due diligence, could or should have been done earlier; 14 "it is
negligence or omission to assert a right within a reasonable
time, thus, giving rise to a presumption that the party entitled
to assert it either has abandoned or declined to assert it." 15 Its
essential elements of:
17
a) Conduct on the part of the defendant, or of one under whom he
claims, giving rise to the situation complained of;
b) Delay in asserting complainant's right after he had knowledge of
the defendant's conduct and after he has an opportunity to sue;
c) Lack of knowledge or notice on the part of the defendant that the
complainant would assert the right on which he bases his suit; and,
d) Injury or prejudice to the defendant in the event relief is accorded
to the complainant. 16
are absent in this case. Petioners' cause of action to quiet title
commenced only when the property reverted to the donor and/or his
successors-in-interest in 1987. Certainly, when the suit was initiated
the following year, it cannot be said that petioners had slept on their
rights for a long time. The 1960's sales made by Trinidad Quijada
cannot be the reckoning point as to when petitioners' cause of action
arose. They had no interest over the property at that time except
under the deed of donation to which private respondents were not
privy. Moreover, petitioners had previously filed an ejectment suit
against private respondents only that it did not prosper on a
technicality.
Be that at it may, there is one thing which militates against the claim
of petitioners. Sale, being a consensual contract, is perfected by
mere consent, which is manifested the moment there is a meeting of
the minds17 as to the offer and acceptance thereof on three (3)
elements: subject matter, price and terms of payment of the
price. 18 Ownership by the seller on the thing sold at the time of the
perfection of the contract of sale is not an element for its perfection.
What the law requires is that the seller has the right to transfer
ownership at the time the thing sold is delivered. 19 Perfection per
se does not transfer ownership which occurs upon the actual or
constructive delivery of the thing sold. 20 A perfected contract of sale
cannot be challenged on the ground of non-ownership on the part of
the seller at the time of its perfection; hence, the sale is still valid.
The consummation, however, of the perfected contract is another
matter. It occurs upon the constructive or actual delivery of the
subject matter to the buyer when the seller or her
successors-in-interest subsequently acquires ownership thereof.
Such circumstance happened in this case when petitioners — who
are Trinidad Quijada's heirs and successors-in-interest — became
the owners of the subject property upon the reversion of the
ownership of the land to them. Consequently, ownership is
transferred to respondent Mondejar and those who claim their right
from him. Article 1434 of the New Civil Code supports the ruling that
the seller's "title passes by operation of law to the buyer." 21 This rule
applies not only when the subject matter of the contract of sale is
goods,22 but also to other kinds of property, including real
property. 23
There is also no merit in petitioners' contention that since the lots
were owned by the municipality at the time of the sale, they were
outside the commerce of men under Article 1409 (4) of the
NCC;24 thus, the contract involving the same is inexistent and void
from the beginning. However, nowhere in Article 1409 (4) is it
provided that the properties of a municipality, whether it be those for
public use or its patrimonial property 25 are outside the commerce of
men. Besides, the lots in this case were conditionally owned by the
municipality. To rule that the donated properties are outside the
commerce of men would render nugatory the unchallenged
reasonableness and justness of the condition which the donor has
the right to impose as owner thereof. Moreover, the objects referred
to as outsides the commerce of man are those which cannot be
appropriated, such as the open seas and the heavenly bodies.

With respect to the trial court's award of attorney's fees,
litigation expenses and moral damages, there is neither
factual nor legal basis thereof. Attorney's fees and expenses
of litigation cannot, following the general rule in Article 2208 of
the New Civil Code, be recovered in this case, there being no
stipulation to that effect and the case does not fall under any
of the
exceptions. 26 It cannot be said that private respondents had
compelled petitioners to litigate with third persons. Neither
can it be ruled that the former acted in "gross and evident bad
faith" in refusing to satisfy the latter's claims considering that
private respondents were under an honest belief that they
have a legal right over the property by virtue of the deed of
sale. Moral damages cannot likewise be justified as none of
the circumstances enumerated under Articles 2219. 27 and
2220 28 of the New Civil Code concur in this case
WHEREFORE, by virtue of the foregoing, the assailed decision
of the Court of Appeals is AFFIRMED.
SO ORDERED.
G.R. No. 133638 April 15, 2005
PERPETUA VDA. DE APE, Petitioner,
vs.
THE HONORABLE COURT OF APPEALS and GENOROSA
CAWIT VDA. DE LUMAYNO, Respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us is a petition for review on certiorari of the Decision1 of
the Court of Appeals in CA-G.R. CV No. 45886 entitled, "Generosa
Cawit de Lumayno, accompanied by her husband Braulio Lumayno
v. Fortunato Ape, including his wife Perpetua de Ape."
The pertinent facts are as follows:
Cleopas Ape was the registered owner of a parcel of land
particularly known as Lot No. 2319 of the Escalante Cadastre of
Negros Occidental and covered by Original Certificate of Title (OCT)
No. RP 1379 (RP-154 [300]).2Upon Cleopas Ape's death sometime
in 1950, the property passed on to his wife, Maria Ondoy, and their
eleven (11) children, namely: Fortunato, Cornelio, Bernalda,
Bienvenido, Encarnacion, Loreta, Lourdes, Felicidad, Adela,
Dominador, and Angelina, all surnamed Ape.
On 15 March 1973, Generosa Cawit de Lumayno (private
respondent herein), joined by her husband, Braulio, 3instituted a
case for "Specific Performance of a Deed of Sale with Damages"
against Fortunato and his wife Perpetua (petitioner herein) before
the then Court of First Instance of Negros Occidental. It was
alleged in the complaint that on 11 April 1971, private respondent
and Fortunato entered into a contract of sale of land under which
for a consideration of P5,000.00, Fortunato agreed to sell his share
in Lot No. 2319 to private respondent. The agreement was
contained in a receipt prepared by private respondent's son-in-law,
Andres Flores, at her behest. Said receipt was attached to the
complaint as Annex "A" thereof and later marked as Exhibit "G" for
private respondent. The receipt states:
April 11, 1971
TO WHOM IT MAY CONCERN:
18
This date received from Mrs. Generosa Cawit de Lumayno the sum of
THIRTY PESOS ONLY as Advance Payment of my share in Land
Purchased, for FIVE THOUSAND PESOS – LOT #2319.
(Signed)
FORTUNATO APE
P30.00 WITNESS:
(Illegible)4
As private respondent wanted to register the claimed sale transaction, she
supposedly demanded that Fortunato execute the corresponding deed of
sale and to receive the balance of the consideration. However, Fortunato
unjustifiably refused to heed her demands. Private respondent, therefore,
prayed that Fortunato be ordered to execute and deliver to her "a sufficient
and registrable deed of sale involving his one-eleventh (1/11) share or
participation in Lot No. 2319 of the Escalante Cadastre; to pay P5,000.00
in damages; P500.00 reimbursement for litigation expenses as well as
additional P500.00 for every appeal made; P2,000.00 for attorney's fees;
and to pay the costs.5
Fortunato and petitioner denied the material allegations of the complaint
and claimed that Fortunato never sold his share in Lot No. 2319 to private
respondent and that his signature appearing on the purported receipt was
forged. By way of counterclaim, the defendants below maintained having
entered into a contract of lease with respondent involving Fortunato's
portion of Lot No. 2319. This purported lease contract commenced in
1960 and was supposed to last until 1965 with an option for another five (5)
years. The annual lease rental was P100.00 which private respondent
and her husband allegedly paid on installment basis. Fortunato and
petitioner also assailed private respondent and her husband's continued
possession of the rest of Lot No. 2319 alleging that in the event they had
acquired the shares of Fortunato's co-owners by way of sale, he was
invoking his right to redeem the same. Finally, Fortunato and petitioner
prayed that the lease contract between them and respondent be ordered
annulled; and that respondent be ordered to pay them attorney's fees;
moral damages; and exemplary damages.6
In their reply,7 the private respondent and her husband alleged that they
had purchased from Fortunato's co-owners, as evidenced by various
written instruments,8 their respective portions of Lot No. 2319. By virtue
of these sales, they insisted that Fortunato was no longer a co-owner of
Lot No. 2319 thus, his right of redemption no longer existed.
Prior to the resolution of this case at the trial court level, Fortunato died
and was substituted in this action by his children named Salodada, Clarita,
Narciso, Romeo, Rodrigo, Marieta, Fortunato, Jr., and Salvador, all
surnamed Ape.9
During the trial, private respondent testified that she and her husband
acquired the various portions of Lot No. 2319 belonging to Fortunato's
co-owners. Thereafter, her husband caused the annotation of an adverse
claim on the certificate of title of Lot No. 2319.10 The annotation states:
Entry No. 123539 – Adverse claim filed by Braulio Lumayno. – Notice of
adverse claim filed by Braulio Lumayno affecting the lot described in this
title to the extent of 77511.93 square meters, more or less, the aggregate
area of shares sold to him on the basis of (alleged) sales in his
possession. Doc. No. 157, Page No. 33, Book No. XI, Series of 1967 of
Alexander Cawit of Escalante, Neg. Occ. Date of instrument. – June 22,
1967 at 8:30 a.m. (SGD) FEDENCIORRAZ, Actg. Register of Deeds.11
In addition, private respondent claimed that after the acquisition of those
shares, she and her husband had the whole Lot No. 2319 surveyed by a
certain Oscar Mascada who came up with a technical description of said
piece of land.12 Significantly, private respondent alleged that Fortunato
was present when the survey was conducted.13

Also presented as evidence for private respondent were pictures
taken of some parts of Lot No. 2319 purportedly showing the land
belonging to Fortunato being bounded by a row of banana plants
thereby separating it from the rest of Lot No. 2319.14
As regards the circumstances surrounding the sale of Fortunato's
portion of the land, private respondent testified that Fortunato went
to her store at the time when their lease contract was about to
expire. He allegedly demanded the rental payment for his land but
as she was no longer interested in renewing their lease agreement,
they agreed instead to enter into a contract of sale which Fortunato
acceded to provided private respondent bought his portion of Lot
No. 2319 for P5,000.00. Thereafter, she asked her son-in-law
Flores to prepare the aforementioned receipt. Flores read the
document to Fortunato and asked the latter whether he had any
objection thereto. Fortunato then went on to affix his signature on
the receipt.
For her part, petitioner insisted that the entire Lot No. 2319 had not
yet been formally subdivided;15 that on 11 April 1971 she and her
husband went to private respondent's house to collect past rentals
for their land then leased by the former, however, they managed to
collect only thirty pesos;16 that private respondent made her
(petitioner's) husband sign a receipt acknowledging the receipt of
said amount of money;17 and that the contents of said receipt were
never explained to them.18 She also stated in her testimony that her
husband was an illiterate and only learned how to write his name in
order to be employed in a sugar central.19 As for private
respondent's purchase of the shares owned by Fortunato's
co-owners, petitioner maintained that neither she nor her husband
received any notice regarding those sales transactions. 20 The
testimony of petitioner was later on corroborated by her
daughter-in-law, Marietta Ape Dino.21
After due trial, the court a quo rendered a decision22 dismissing
both the complaint and the counterclaim. The trial court likewise
ordered that deeds or documents representing the sales of the
shares previously owned by Fortunato's co-owners be registered
and annotated on the existing certificate of title of Lot No.
2319. According to the trial court, private respondent failed to
prove that she had actually paid the purchase price of P5,000.00 to
Fortunato and petitioner. Applying, therefore, the provision of
Article 1350 of the Civil Code,23 the trial court concluded that
private respondent did not have the right to demand the delivery to
her of the registrable deed of sale over Fortunato's portion of the
Lot No. 2319.
The trial court also rejected Fortunato and petitioner's claim that
they had the right of redemption over the shares previously sold to
private respondent and the latter's husband, reasoning as follows:
Defendants in their counterclaim invoke their right of legal
redemption under Article 1623 of the New Civil Code in view of the
alleged sale of the undivided portions of the lot in question by their
co-heirs and co-owners as claimed by the plaintiffs in their
complaint. They have been informed by the plaintiff about said
sales upon the filing of the complaint in the instant case as far back
as March 14, 1973. Defendant themselves presented as their very
own exhibits copies of the respective deeds of sale or conveyance
by their said co-heirs and co-owners in favor of the plaintiffs or their
predecessors-in-interest way back on January 2, 1992 when they
formally offered their exhibits in the instant case; meaning, they
themselves acquired possession of said documentary exhibits
even before they formally offered them in evidence. Under Art.
1623 of the New Civil Code, defendants have only THIRTY (30)
DAYS counted from their actual knowledge of the exact terms and
conditions of the deeds of sale or conveyance of their co-heirs' and
co-owners' share within which to exercise their right of legal
redemption.24
19
Within the reglementary period, both parties filed their respective notices
of appeal before the trial court with petitioner and her children taking
exception to the finding of the trial court that the period within which they
could invoke their right of redemption had already lapsed.25 For her part,
private respondent raised as errors the trial court's ruling that there was no
contract of sale between herself and Fortunato and the dismissal of their
complaint for specific performance.26
The Court of Appeals, in the decision now assailed before us, reversed
and set aside the trial court's dismissal of the private respondent's
complaint but upheld the portion of the court a quo's decision ordering the
dismissal of petitioner and her children's counterclaim. The dispositive
portion of the appellate court's decision reads:
WHEREFORE, the decision dated March 11, 1994, is hereby REVERSED
and SET ASIDE insofar as the dismissal of plaintiffs-appellants' complaint
is concerned, and another one is entered ordering the defendant-appellant
Fortunato Ape and/or his wife Perpetua de Ape and successors-in-interest
to execute in favor of plaintiff-appellant Generosa Cawit de Lumayno a
Deed of Absolute Sale involving the one-eleventh (1/11) share or
participation of Fortunato Ape in Lot No. 2319, Escalante Cadastre,
containing an area of 12,527.19 square meters, more or less, within (30)
days from finality of this decision, and in case of non-compliance with this
Order, that the Clerk of Court of said court is ordered to execute the deed
on behalf of the vendor. The decision is AFFIRMED insofar as the
dismissal of defendants-appellants' counterclaim is concerned.
Without pronouncement as to costs.27
The Court of Appeals upheld private respondent's position that Exhibit "G"
had all the earmarks of a valid contract of sale, thus:
Exhibit G is the best proof that the P5,000.00 representing the purchase
price of the 1/11th share of Fortunato Ape was not paid by the vendee on
April 11, 1971, and/or up to the present, but that does not affect the
binding force and effect of the document. The vendee having paid the
vendor an advance payment of the agreed purchase price of the property,
what the vendor can exact from the vendee is full payment upon his
execution of the final deed of sale. As is shown, the vendee precisely
instituted this action to compel the vendor Fortunato Ape to execute the
final document, after she was informed that he would execute the same
upon arrival of his daughter "Bala" from Mindanao, but afterwards failed to
live up to his contractual obligation (TSN, pp. 11-13, June 10, 1992).
It is not right for the trial court to expect plaintiff-appellant to pay the
balance of the purchase price before the final deed is executed, or for her
to deposit the equivalent amount in court in the form of
consignation. Consignation comes into fore in the case of a creditor to
whom tender of payment has been made and refuses without just cause
to accept it (Arts. 1256 and 1252, N.C.C.; Querino vs. Pelarca, 29 SCRA
1). As vendee, plaintiff-appellant Generosa Cawit de Lumayno does not
fall within the purview of a debtor.
We, therefore, find and so hold that the trial court should have found that
exhibit G bears all the earmarks of a private deed of sale which is valid,
binding and enforceable between the parties, and that as a consequence
of the failure and refusal on the part of the vendor Fortunato Ape to live up
to his contractual obligation, he and/or his heirs and successors-in-interest
can be compelled to execute in favor of, and to deliver to the vendee,
plaintiff-appellant Generosa Cawit de Lumayno a registerable deed of
absolute sale involving his one-eleventh (1/11th) share or participation in
Lot No. 2319, Escalante Cadastre, containing an area of 12,527.19 square
meters, more or less, within 30 days from finality of this decision, and, in
case of non-compliance within said period, this Court appoints the Clerk of
Court of the trial court to execute on behalf of the vendor the said
document.28
The Court of Appeals, however, affirmed the trial court's ruling on the
issue of petitioner and her children's right of redemption. It ruled that

Fortunato's receipt of the Second Owner's Duplicate of OCT (RP)
1379 (RP-154 ([300]), containing the adverse claim of private
respondent and her husband, constituted a sufficient compliance
with the written notice requirement of Article 1623 of the Civil Code
and the period of redemption under this provision had long lapsed.
Aggrieved by the decision of the appellate court, petitioner is now
before us raising, essentially, the following issues: whether
Fortunato was furnished with a written notice of sale of the shares
of his co-owners as required by Article 1623 of the Civil Code; and
whether the receipt signed by Fortunato proves the existence of a
contract of sale between him and private respondent.
In her memorandum, petitioner claimed that the Court of Appeals
erred in sustaining the court a quo's pronouncement that she could
no longer redeem the portion of Lot No. 2319 already acquired by
private respondent for no written notice of said sales was furnished
them. According to her, the Court of Appeals unduly expanded the
scope of the law by equating Fortunato's receipt of Second Owner's
Duplicate of OCT (RP) 1379 (RP-154 ([300]) with the written notice
requirement of Article 1623. In addition, she argued that Exhibit
"G" could not possibly be a contract of sale of Fortunato's share in
Lot No. 2319 as said document does not contain "(a) definite
agreement on the manner of payment of the price." 29 Even
assuming that Exhibit "G" is, indeed, a contract of sale between
private respondent and Fortunato, the latter did not have the
obligation to deliver to private respondent a registrable deed of sale
in view of private respondent's own failure to pay the full purchase
price of Fortunato's portion of Lot No. 2319. Petitioner is also of
the view that, at most, Exhibit "G" merely contained a unilateral
promise to sell which private respondent could not enforce in the
absence of a consideration distinct from the purchase price of the
land. Further, petitioner reiterated her claim that due to the
illiteracy of her husband, it was incumbent upon private respondent
to show that the contents of Exhibit "G" were fully explained to
him. Finally, petitioner pointed out that the Court of Appeals erred
when it took into consideration the same exhibit despite the fact
that only its photocopy was presented before the court.
On the other hand, private respondent argued that the annotation
on the second owner's certificate over Lot No. 2319 constituted
constructive notice to the whole world of private respondent's claim
over the majority of said parcel of land. Relying on our decision in
the case of Cabrera v. Villanueva,30 private respondent insisted
that when Fortunato received a copy of the second owner's
certificate, he became fully aware of the contracts of sale entered
into between his co-owners on one hand and private respondent
and her deceased husband on the other.
Private respondent also averred that "although (Lot No. 2319) was
not actually partitioned in a survey after the death of Cleopas Ape,
the land was partitioned in a 'hantal-hantal' manner by the
heirs. Each took and possessed specific portion or premises as
his/her share in land, farmed their respective portion or premises,
and improved them, each heir limiting his/her improvement within
the portion or premises which were his/her respective
share."31Thus, when private respondent and her husband
purchased the other parts of Lot No. 2319, it was no longer
undivided as petitioner claims.
The petition is partly meritorious.
Article 1623 of the Civil Code provides:
The right of legal pre-emption or redemption shall not be exercised
except within thirty days from the notice in writing by the
prospective vendor, or by the vendor, as the case may be. The
deed of sale shall not be recorded in the Registry of Property,
20
unless accompanied by an affidavit of the vendor that he has given written
notice thereof to all possible redemptioners.
Despite the plain language of the law, this Court has, over the years, been
tasked to interpret the "written notice requirement" of the above-quoted
provision. In the case Butte v. Manuel Uy & Sons, Inc.,32 we declared
that –
In considering whether or not the offer to redeem was timely, we think that
the notice given by the vendee (buyer) should not be taken into
account. The text of Article 1623 clearly and expressly prescribes that the
thirty days for making the redemption are to be counted from notice in
writing by the vendor. Under the old law (Civ. Code of 1889, Art. 1524), it
was immaterial who gave the notice; so long as the redeeming co-owner
learned of the alienation in favor of the stranger, the redemption period
began to run. It is thus apparent that the Philippine legislature in Article
1623 deliberately selected a particular method of giving notice, and that
method must be deemed exclusive. (39 Am. Jur., 237; Payne vs. State, 12
S.W. 2(d) 528). As ruled in Wampler vs. Lecompte, 150 Atl. 458 (affd. in
75 Law Ed. [U.S.] 275) –
why these provisions were inserted in the statute we are not informed, but
we may assume until the contrary is shown, that a state of facts in respect
thereto existed, which warranted the legislature in so legislating.
The reasons for requiring that the notice should be given by the seller, and
not by the buyer, are easily divined. The seller of an undivided interest is
in the best position to know who are his co-owners that under the law must
be notified of the sale. Also, the notice by the seller removes all doubts as
to fact of the sale, its perfection; and its validity, the notice being a
reaffirmation thereof, so that the party notified need not entertain doubt
that the seller may still contest the alienation. This assurance would not
exist if the notice should be given by the buyer.33
The interpretation was somehow modified in the case of De Conejero, et
al. v. Court of Appeals, et al.34 wherein it was pointed out that Article 1623
"does not prescribe a particular form of notice, nor any distinctive method
for notifying the redemptioner" thus, as long as the redemptioner was
notified in writing of the sale and the particulars thereof, the redemption
period starts to run. This view was reiterated in Etcuban v. The
Honorable Court of Appeals, et al.,35 Cabrera v. Villanueva,36 Garcia, et al.
v. Calaliman, et al.,37 Distrito, et al. v. The Honorable Court of Appeals, et
al.,38 and Mariano, et al. v. Hon. Court of Appeals, et al.39
However, in the case of Salatandol v. Retes,40 wherein the plaintiffs were
not furnished any written notice of sale or a copy thereof by the vendor,
this Court again referred to the principle enunciated in the case of
Butte. As observed by Justice Vicente Mendoza, such reversion is only
sound, thus:
… Art. 1623 of the Civil Code is clear in requiring that the written
notification should come from the vendor or prospective vendor, not from
any other person. There is, therefore, no room for construction. Indeed,
the principal difference between Art. 1524 of the former Civil Code and Art.
1623 of the present one is that the former did not specify who must give
the notice, whereas the present one expressly says the notice must be
given by the vendor. Effect must be given to this change in statutory
language.41
In this case, the records are bereft of any indication that Fortunato was
given any written notice of prospective or consummated sale of the
portions of Lot No. 2319 by the vendors or would-be vendors. The thirty
(30)-day redemption period under the law, therefore, has not commenced
to run.
Despite this, however, we still rule that petitioner could no longer invoke
her right to redeem from private respondent for the exercise of this right
"presupposes the existence of a co-ownership at the time the conveyance

is made by a co-owner and when it is demanded by the other
co-owner or co-owners."42 The regime of co-ownership exists when
ownership of an undivided thing or right belongs to different
persons.43 By the nature of a co-ownership, a co-owner cannot
point to specific portion of the property owned in common as his
own because his share therein remains intangible.44 As legal
redemption is intended to minimize co-ownership,45 once the
property is subdivided and distributed among the co-owners, the
community ceases to exist and there is no more reason to sustain
any right of legal redemption.46
In this case, records reveal that although Lot No. 2319 has not yet
been formally subdivided, still, the particular portions belonging to
the heirs of Cleopas Ape had already been ascertained and they in
fact took possession of their respective parts. This can be
deduced from the testimony of petitioner herself, thus:
Q When the plaintiffs leased the share of your husband,
were there any metes and bounds?
A It was not formally subdivided. We have only a definite
portion. (hantal-hantal)
Q This hantal-hantal of your husband, was it also separate
and distinct from the hantal-hantal or the share of the brothers and
sisters of your husband?
A Well, this property in question is a common property.
Q To the north, whose share was that which is adjacent to
your husband's assumed partition?
A I do not know what [does] this "north" [mean].
COURT
(To Witness)
Q To the place from where the sun rises, whose share was
that?
A The shares of Cornelia, Loreta, Encarnacion and Adela.
Q How could you determine their own shares?
A They were residing in their respective assumed portions.
Q How about determining their respective boundaries?
A It could be determined by stakes and partly a row of
banana plantations planted by my son-in-law.
Q Who is this son-in-law you mentioned?
A Narciso Ape.
ATTY. CAWIT
(Continuing)
Q You said that there were stakes to determine the
hantal-hantal of your husband and the hantal-hantal of the other
heirs, did I get you right?
21
ATTY. TAN
Admitted, Your Honor.
…
ATTY. CAWIT
Q Mrs. Ape, in 1960, Cleopas Ape was already dead, is that
correct?
A Certainly, since he died in 1950.
Q By the manifestation of your counsel that the entire land (13
hectares) of your father-in-law, Cleopas Ape, was leased to Generosa
Lumayno, is this correct?
A No, it is only the assumed portion of my husband [which] was
leased to Generosa Lumayno.
Q For clarification, it was only the share of your husband [which]
was leased to Generosa Cawit Lumayno?
A Yes.47
ATTY. CAWIT
Q My question: is that portion which you said was leased by your
husband to the Lumayno[s] and which was included to the lease by your
mother-in-law to the Lumayno[s], when the Lumayno[s] returned your
husband['s] share, was that the same premises that your husband leased
to the Lumayno[s]?
A The same.
Q In re-possessing this portion of the land corresponding to the
share of your husband, did your husband demand that they should
re-possess the land from the Lumayno[s] or did the Lumayno[s] return
them to your husband voluntarily?
A They just returned to us without paying the rentals.
COURT
Q Was the return the result of your husband's request or just
voluntarily they returned it to your husband?
A No, sir, it was just returned voluntarily, and they abandoned the
area but my husband continued farming.48
Similarly telling of the partition is the stipulation of the parties during the
pre-trial wherein it was admitted that Lot No. 2319 had not been
subdivided nevertheless, "Fortunato Ape had possessed a specific portion
of the land ostensibly corresponding to his share."49
From the foregoing, it is evident that the partition of Lot No. 2319 had
already been effected by the heirs of Cleopas Ape. Although the partition
might have been informal is of no moment for even an oral agreement of
partition is valid and binding upon the parties.50 Likewise, the fact that the
respective shares of Cleopas Ape's heirs are still embraced in one and the
same certificate of title and have not been technically apportioned does
not make said portions less determinable and identifiable from one
another nor does it, in any way, diminish the dominion of their respective
owners.51

Turning now to the second issue of the existence of a contract of
sale, we rule that the records of this case betray the stance of
private respondent that Fortunato Ape entered into such an
agreement with her.
A contract of sale is a consensual contract, thus, it is perfected by
mere consent of the parties. It is born from the moment there is a
meeting of minds upon the thing which is the object of the sale and
upon the price.52 Upon its perfection, the parties may reciprocally
demand performance, that is, the vendee may compel the transfer
of the ownership and to deliver the object of the sale while the
vendor may demand the vendee to pay the thing sold. 53 For there
to be a perfected contract of sale, however, the following elements
must be present: consent, object, and price in money or its
equivalent. In the case of Leonardo v. Court of Appeals, et al.,54
we explained the element of consent, to wit:
The essence of consent is the agreement of the parties on the
terms of the contract, the acceptance by one of the offer made by
the other. It is the concurrence of the minds of the parties on the
object and the cause which constitutes the contract. The area of
agreement must extend to all points that the parties deem material
or there is no consent at all.
To be valid, consent must meet the following requisites: (a) it
should be intelligent, or with an exact notion of the matter to which
it refers; (b) it should be free and (c) it should be
spontaneous. Intelligence in consent is vitiated by error; freedom
by violence, intimidation or undue influence; spontaneity by fraud.55
In this jurisdiction, the general rule is that he who alleges fraud or
mistake in a transaction must substantiate his allegation as the
presumption is that a person takes ordinary care for his concerns
and that private dealings have been entered into fairly and
regularly.56 The exception to this rule is provided for under Article
1332 of the Civil Code which provides that "[w]hen one of the
parties is unable to read, or if the contract is in a language not
understood by him, and mistake or fraud is alleged, the person
enforcing the contract must show that the terms thereof have been
fully explained to the former."
In this case, as private respondent is the one seeking to enforce
the claimed contract of sale, she bears the burden of proving that
the terms of the agreement were fully explained to Fortunato Ape
who was an illiterate. This she failed to do. While she claimed in
her testimony that the contents of the receipt were made clear to
Fortunato, such allegation was debunked by Andres Flores himself
when the latter took the witness stand. According to Flores:
ATTY. TAN
Q Mr. Witness, that receipt is in English, is it not?
A Yes, sir.
Q When you prepared that receipt, were you aware that
Fortunato Ape doesn't know how to read and write English?
A Yes, sir, I know.
Q Mr. Witness, you said you were present at the time of the
signing of that alleged receipt of P30.00, correct?
A Yes, sir.
Q Where, in what place was this receipt signed?
22
A At the store.
Q At the time of the signing of this receipt, were there other
person[s] present aside from you, your mother-in-law and Fortunato Ape?
A In the store, yes, sir.
Q When you signed that document of course you acted as witness
upon request of your mother-in-law?
A No, this portion, I was the one who prepared that document.
Q Without asking of (sic) your mother-in-law, you prepared that
document or it was your mother-in-law who requested you to prepare that
document and acted as witness?
A She requested me to prepare but does not instructed (sic) me to
act as witness. It was our opinion that whenever I prepared the document,
I signed it as a witness.
Q Did it not occur to you to ask other witness to act on the side of
Fortunato Ape who did not know how to read and write English?
A It occurred to me.
Q But you did not bother to request a person who is not related to
your mother-in-law, considering that Fortunato Ape did not know how to
read and write English?
A The one who represented Fortunato Ape doesn't know also how
to read and write English. One a maid.
Q You mentioned that there [was another] person inside the store,
under your previous statement, when the document was signed, there
[was another] person in the store aside from you, your mother-in-law and
Fortunato Ape, is not true?
A That is true, there is one person, but that person doesn't know
how to read also.
…
Q Of course, Mr. Witness, since it occurred to you that there was
need for other witness to sign that document for Fortunato Ape, is it not a
fact that the Municipal Building is very near your house?
A Quite (near).
Q But you could readily proceed to the Municipal Building and
request one who is knowledgeable in English to act as witness?
A I think there is no need for that small receipt. So I don't bother
myself to go.
Q You did not consider that receipt very important because you
said that small receipt?
A Yes, I know.57
As can be gleaned from Flores's testimony, while he was very much aware
of Fortunato's inability to read and write in the English language, he did not
bother to fully explain to the latter the substance of the receipt (Exhibit
"G"). He even dismissed the idea of asking somebody else to assist
Fortunato considering that a measly sum of thirty pesos was

involved. Evidently, it did not occur to Flores that the document he
himself prepared pertains to the transfer altogether of Fortunato's
property to his mother-in-law. It is precisely in situations such as
this when the wisdom of Article 1332 of the Civil Code readily
becomes apparent which is "to protect a party to a contract
disadvantaged by illiteracy, ignorance, mental weakness or some
other handicap."58
In sum, we hold that petitioner is no longer entitled to the right of
redemption under Article 1632 of the Civil Code as Lot No. 2319
had long been partitioned among its co-owners. This Court likewise
annuls the contract of sale between Fortunato and private
respondent on the ground of vitiated consent.
WHEREFORE, premises considered, the decision dated 25 March
1998 of the Court of Appeals is hereby REVERSED and SET
ASIDE and the decision dated 11 March 1994 of the Regional Trial
Court, Branch 58, San Carlos City, Negros Occidental, dismissing
both the complaint and the counterclaim, is hereby
REINSTATED. No costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga,
JJ., concur.
G.R. No. 137552 June 16, 2000
ROBERTO Z. LAFORTEZA, GONZALO Z. LAFORTEZA,
MICHAEL Z. LAFORTEZA, DENNIS Z. LAFORTEZA, and LEA Z.
LAFORTEZA, petitioners,
vs.
ALONZO MACHUCA, respondent.
GONZAGA-REYES, J.:
This Petition for Review on Certiorari seeks the reversal of the
Decision of the Court of Appeals 1 in CA G.R. CV No. 147457
entitled "ALONZO MACHUCA versus ROBERTO Z. LAFORTEZA,
GONZALO Z. LAFORTEZA, LEA ZULUETA-LAFORTEZA,
MICHAEL Z. LAFORTEZA, and DENNIS Z. LAFORTEZA".
The following facts as found by the Court of Appeals are
undisputed:
The property involved consists of a house and lot located at No.
7757 Sherwood Street, Marcelo Green Village, Parañaque, Metro
Manila, covered by Transfer Certificate of Title (TCT) No. (220656)
8941 of the Registered of Deeds of Parañaque (Exhibit "D", Plaintiff,
record, pp. 331-332). The subject property is registered in the
name of the late Francisco Q. Laforteza, although it is conjugal in
nature (Exhibit "8", Defendants, record pp. 331-386).
On August 2, 1988, defendant Lea Zulueta-Laforteza executed a
Special Power of Attorney in favor of defendants Roberto Z.
Laforteza and Gonzalo Z. Laforteza, Jr., appointing both as her
Attorney-in-fact authorizing them jointly to sell the subject property
and sign any document for the settlement of the estate of the late
Francisco Q. Laforteza (Exh. "A", Plaintiff, record, pp. 323-325).
Likewise on the same day, defendant Michael Z. Laforteza
executed a Special Power of Attorney in favor of defendants
Roberto Z. Laforteza and Gonzalo Laforteza, Jr., likewise, granting
the same authority (Exh. "B", record, pp. 326-328) Both agency
instruments contained a provision that in any document or paper to
23
exercise authority granted, the signature of both attorneys- in-fact must be
affixed.
On October 27, 1988, defendant Dennis Z. Laforteza executed a Special
Power of Attorney in favor of defendant Roberto Z. Laforteza for the
purpose of selling the subject property (Exh. "C", Plaintiff, record, pp.
329-330). A year later, on October 30, 1989, Dennis Z. Laforteza executed
another Special Power of Attorney in favor of defendants Roberto Z.
Laforteza and Gonzalo Laforteza, Jr. naming both attorneys-in-fact for the
purpose of selling the subject property and signing any document for the
settlement of the estate of the late Francisco Q. Laforteza. The
subsequent agency instrument (Exh, "2", record, pp. 371-373) contained
similar provisions that both attorneys-in-fact should sign any document or
paper executed in the exercise of their authority.1âwphi1.nêt
In the exercise of the above authority, on January 20, 1989, the heirs of
the late Francisco Q. Laforteza represented by Roberto Z. Laforteza and
Gonzalo Z. Laforteza, Jr. entered into a Memorandum of Agreement
(Contract to Sell) with the plaintiff 2 over the subject property for the sum of
SIX HUNDRED THIRTY THOUSAND PESOS (P630,000.00) payable as
follows:
(a) P30,000.00 as earnest money, to be forfeited in favor of the
defendants if the sale is not effected due to the fault of the plaintiff;
(b) P600,000.00 upon issuance of the new certificate of title in the name of
the late Francisco Q. Laforteza and upon execution of an extra-judicial
settlement of the decedent's estate with sale in favor of the plaintiff (Par. 2,
Exh. "E", record, pp. 335-336).
Significantly, the fourth paragraph of the Memorandum of Agreement
(Contract to Sell) dated January 20, 1989 (Exh. "E", supra.) contained a
provision as follows:
. . . . Upon issuance by the proper Court of the new title, the
BUYER-LESSEE shall be notified in writing and said BUYER-LESSEE
shall have thirty (30) days to produce the balance of P600,000.00 which
shall be paid to the SELLER-LESSORS upon the execution of the
Extrajudicial Settlement with sale.
On January 20, 1989, plaintiff paid the earnest money of THIRTY
THOUSAND PESOS (P30,000.00), plus rentals for the subject property
(Exh. "F", Plaintiff, record, p. 339).
On September 18, 1998 3 , defendant heirs, through their counsel wrote a
letter (Exh. 1, Defendants, record, p. 370) to the plaintiff furnishing the
latter a copy of the reconstituted title to the subject property, advising him
that he had thirty (3) days to produce the balance of SIX HUNDRED
PESOS (sic) (P600,000.00) under the Memorandum of Agreement which
plaintiff received on the same date.
On October 18, 1989, plaintiff sent the defendant heirs a letter requesting
for an extension of the THIRTY (30) DAYS deadline up to November 15,
1989 within which to produce the balance of SIX HUNDRED THOUSAND
PESOS (P600,000.00) (Exh. "G", Plaintiff, record, pp. 341-342).
Defendant Roberto Z. Laforteza, assisted by his counsel Atty. Romeo L.
Gutierrez, signed his conformity to the plaintiff's letter request (Exh. "G-1
and "G-2", Plaintiff, record, p. 342). The extension, however, does not
appear to have been approved by Gonzalo Z. Laforteza, the second
attorney-in-fact as his conformity does not appear to have been secured.
On November 15, 1989, plaintiff informed the defendant heirs, through
defendant Roberto Z. Laforteza, that he already had the balance of SIX
HUNDRED THOUSAND PESOS (P600,000.00) covered by United
Coconut Planters Bank Manager's Check No. 000814 dated November 15,
1989 (TSN, August 25, 1992, p. 11; Exhs. "H", record, pp. 343-344; "M",
records p. 350; and "N", record, p. 351). However, the defendants, refused
to accept the balance (TSN, August 24, 1992, p. 14; Exhs. "M-1", Plaintiff,

record, p. 350; and "N-1", Plaintiff, record, p. 351). Defendant
Roberto Z. Laforteza had told him that the subject property was no
longer for sale (TSN, October 20, 1992, p. 19; Exh. "J", record, p.
347).
On November 20, 1998 4 , defendants informed plaintiff that they
were canceling the Memorandum of Agreement (Contract to Sell)
in view of the plaintiff's failure to comply with his contractual
obligations (Exh. "3").
Thereafter, plaintiff reiterated his request to tender payment of the
balance of SIX HUNDRED THOUSAND PESOS (P600,000.00).
Defendants, however, insisted on the rescission of the
Memorandum of Agreement. Thereafter, plaintiff filed the instant
action for specific performance. The lower court rendered judgment
on July 6, 1994 in favor of the plaintiff, the dispositive portion of
which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff
Alonzo Machuca and against the defendant heirs of the late
Francisco Q. Laforteza, ordering the said defendants.
(a) To accept the balance of P600,000.00 as full payment of the
consideration for the purchase of the house and lot located at No.
7757 Sherwood Street, Marcelo Green Village, Parañaque, Metro
Manila, covered by Transfer Certificate of Title No. (220656) 8941
of the Registry of Deeds of Rizal Parañaque, Branch;
(b) To execute a registrable deed of absolute sale over the subject
property in favor of the plaintiff;
(c) Jointly and severally to pay the plaintiff the sum of P20,000.00
as attorney's fees plus cost of suit.
SO ORDERED. (Rollo, pp. 74-75). 5
Petitioners appealed to the Court of Appeals, which affirmed with
modification the decision of the lower court; the dispositive portion
of the Decision reads:
WHEREFORE, the questioned decision of the lower court is hereby
AFFIRMED with the MODIFICATION that defendant heirs Lea
Zulueta-Laforteza, Michael Z. Laforteza, Dennis Z. Laforteza and
Roberto Z. Laforteza including Gonzalo Z. Laforteza, Jr. are hereby
ordered to pay jointly and severally the sum of FIFTY THOUSAND
PESOS (P50,000.00) as moral damages.
SO ORDERED. 6
Motion for Reconsideration was denied but the Decision was
modified so as to absolve Gonzalo Z. Laforteza, Jr. from liability for
the payment of moral damages. 7 Hence this petition wherein the
petitioners raise the following issues:
I. WHETHER THE TRIAL AND APPELLATE COURTS
CORRECTLY CONSTRUED THE MEMORANDUM OF
AGREEMENT AS IMPOSING RECIPROCAL OBLIGATIONS.
II. WHETHER THE COURTS A QUO CORRECTLY RULED THAT
RESCISSION WILL NOT LIE IN THE INSTANT CASE.
III. WHETHER THE RESPONDENT IS UNDER ESTOPPEL FROM
RAISING THE ALLEGED DEFECT IN THE SPECIAL POWER OF
ATTORNEY DATED 30 OCTOBER 1989 EXECUTED BY DENNIS
LAFORTEZA.
24
IV. SUPPOSING EX GRATIA ARGUMENTI THE MEMORANDUM OF
AGREEMENT IMPOSES RECIPROCAL OBLIGATIONS, WHETHER
THE PETITIONERS MAY BE COMPELLED TO SELL THE SUBJECT
PROPERTY WHEN THE RESPONDENT FAILED TO MAKE A JUDICIAL
CONSIGNATION OF THE PURCHASE PRICE?
V. WHETHER THE PETITIONERS ARE IN BAD FAITH SO TO AS MAKE
THEM LIABLE FOR MORAL DAMAGES? 8
The petitioners contend that the Memorandum of Agreement is merely a
lease agreement with "option to purchase". As it was merely an option, it
only gave the respondent a right to purchase the subject property within a
limited period without imposing upon them any obligation to purchase it.
Since the respondent's tender of payment was made after the lapse of the
option agreement, his tender did not give rise to the perfection of a
contract of sale.
It is further maintained by the petitioners that the Court of Appeals erred in
ruling that rescission of the contract was already out of the question.
Rescission implies that a contract of sale was perfected unlike the
Memorandum of Agreement in question which as previously stated is
allegedly only an option contract.
Petitioner adds that at most, the Memorandum of Agreement (Contract to
Sell) is a mere contract to sell, as indicated in its title. The obligation of the
petitioners to sell the property to the respondent was conditioned upon the
issuance of a new certificate of title and the execution of the extrajudicial
partition with sale and payment of the P600,000.00. This is why
possession of the subject property was not delivered to the respondent as
the owner of the property but only as the lessee thereof. And the failure of
the respondent to pay the purchase price in full prevented the petitioners'
obligation to convey title from acquiring obligatory force.
Petitioners also allege that assuming for the sake of argument that a
contract of sale was indeed perfected, the Court of Appeals still erred in
holding that respondent's failure to pay the purchase price of P600,000.00
was only a "slight or casual breach".
The petitioners also claim that the Court of Appeals erred in ruling that
they were not ready to comply with their obligation to execute the
extrajudicial settlement. The Power of Attorney to execute a Deed of Sale
made by Dennis Z. Laforteza was sufficient and necessarily included the
power to execute an extrajudicial settlement. At any rate, the respondent
is estopped from claiming that the petitioners were not ready to comply
with their obligation for he acknowledged the petitioners' ability to do so
when he requested for an extension of time within which to pay the
purchase price. Had he truly believed that the petitioners were not ready,
he would not have needed to ask for said extension.
Finally, the petitioners allege that the respondent's uncorroborated
testimony that third persons offered a higher price for the property is
hearsay and should not be given any evidentiary weight. Thus, the order
of the lower court awarding moral damages was without any legal basis.
The appeal is bereft of merit.
A perusal of the Memorandum Agreement shows that the transaction
between the petitioners and the respondent was one of sale and lease.
The terms of the agreement read:
1. For and in consideration of the sum of PESOS: SIX HUNDRED THIRTY
THOUSAND (P630,000.00) payable in a manner herein below indicated,
SELLER-LESSOR hereby agree to sell unto BUYER-LESSEE the
property described in the first WHEREAS of this Agreement within six (6)
months from the execution date hereof, or upon issuance by the Court of a
new owner's certificate of title and the execution of extrajudicial partition
with sale of the estate of Francisco Laforteza, whichever is earlier;
 25

2. The above-mentioned sum of PESOS: SIX HUNDRED THIRTY agreement up to the execution of the extrajudicial settlement. It was also
THOUSAND (P630,000.00) shall be paid in the following manner: expressly stipulated that if after the expiration of the six month period, the
lost title was not yet replaced and the extrajudicial partition was not yet
executed, the respondent would no longer be required to pay rentals and
P30,000.00 — as earnest money and as consideration for this
would continue to occupy and use the premises until the subject condition
Agreement, which amount shall be forfeited in favor of
was complied with the petitioners.
SELLER-LESSORS if the sale is not effected because of the fault
or option of BUYER-LESSEE;
The six-month period during which the respondent would be in possession
of the property as lessee, was clearly not a period within which to exercise
P600,000.00 — upon the issuance of the new certificate of title in
an option. An option is a contract granting a privilege to buy or sell within
the name of the late Francisco Laforteza and upon the execution of
an agreed time and at a determined price. An option contract is a separate
an Extrajudicial Settlement of his estate with sale in favor of
and distinct contract from that which the parties may enter into upon the
BUYER-LESSEE free from lien or any encumbrances.
consummation of the option. 13 An option must be supported by
consideration.14 An option contract is governed by the second paragraph
3. Parties reasonably estimate that the issuance of a new title in of Article 1479 of the Civil Code 15 , which reads:
place of the lost one, as well as the execution of extrajudicial
settlement of estate with sale to herein BUYER-LESSEE will be
completed within six (6) months from the execution of this Art. 1479. . . .
Agreement. It is therefore agreed that during the six months period,
BUYER-LESSEE will be leasing the subject property for six months An accepted unilateral promise to buy or to sell a determinate thing for a
period at the monthly rate of PESOS: THREE THOUSAND FIVE price certain is binding upon the promissor if the promise is supported by a
HUNDRED (P3,500.00). Provided however, that if the issuance of consideration distinct from the price.
new title and the execution of Extrajudicial Partition is completed
prior to the expiration of the six months period, BUYER-LESSEE
In the present case, the six-month period merely delayed the
shall only be liable for rentals for the corresponding period
demandability of the contract of sale and did not determine its perfection
commencing from his occupancy of the premises to the execution
for after the expiration of the six-month period, there was an absolute
and completion of the Extrajudicial Settlement of the estate,
obligation on the part of the petitioners and the respondent to comply with
provided further that if after the expiration of six (6) months, the lost
the terms of the sale. The parties made a "reasonable estimate" that the
title is not yet replaced and the extra judicial partition is not
reconstitution the lost title of the house and lot would take approximately
executed, BUYER-LESSEE shall no longer be required to pay
six months and thus presumed that after six months, both parties would be
rentals and shall continue to occupy, and use the premises until
able to comply with what was reciprocally incumbent upon them. The fact
subject condition is complied by SELLER-LESSOR;
that after the expiration of the six-month period, the respondent would
retain possession of the house and lot without need of paying rentals for
4. It is hereby agreed that within reasonable time from the the use therefor, clearly indicated that the parties contemplated that
execution of this Agreement and the payment by BUYER-LESSEE ownership over the property would already be transferred by that time.
of the amount of P30,000.00 as herein above provided,
SELLER-LESSORS shall immediately file the corresponding
The issuance of the new certificate of title in the name of the late
petition for the issuance of a new title in lieu of the lost one in the
Francisco Laforteza and the execution of an extrajudicial settlement of his
proper Courts. Upon issuance by the proper Courts of the new title,
estate was not a condition which determined the perfection of the contract
the BUYER-LESSEE shall have thirty (30) days to produce the
of sale. Petitioners' contention that since the condition was not met, they
balance of P600,000.00 which shall be paid to the
no longer had an obligation to proceed with the sale of the house and lot is
SELLER-LESSORS upon the execution of the Extrajudicial
unconvincing. The petitioners fail to distinguish between a condition
Settlement with sale. 9
imposed upon the perfection of the contract and a condition imposed on
the performance of an obligation. Failure to comply with the first condition
A contract of sale is a consensual contract and is perfected at the results in the failure of a contract, while the failure to comply with the
moment there is a meeting of the minds upon the thing which is the second condition only gives the other party the option either to refuse to
object of the contract and upon the price. 10 From that moment the proceed with the sale or to waive the condition. Thus, Art. 1545 of the Civil
parties may reciprocally demand performance subject to the Code states:
provisions of the law governing the form of contracts. 11 The
elements of a valid contract of sale under Article 1458 of the Civil
Art. 1545. Where the obligation of either party to a contract of sale is
Code are (1) consent or meeting of the minds; (2) determinate
subject to any condition which is not performed, such party may refuse to
subject matter and (3) price certain money or its equivalent. 12
proceed with the contract or he may waive performance of the condition. If
the other party has promised that the condition should happen or be
In the case at bench, there was a perfected agreement between performed, such first mentioned party may also treat the nonperformance
the petitioners and the respondent whereby the petitioners of the condition as a breach of warranty.
obligated themselves to transfer the ownership of and deliver the
house and lot located at 7757 Sherwood St., Marcelo Green Village,
Where the ownership in the things has not passed, the buyer may treat the
Parañaque and the respondent to pay the price amounting to six
fulfillment by the seller of his obligation to deliver the same as described
hundred thousand pesos (P600,000.00). All the elements of a
and as warranted expressly or by implication in the contract of sale as a
contract of sale were thus present. However, the balance of the
condition of the obligation of the buyer to perform his promise to accept
purchase price was to be paid only upon the issuance of the new
and pay for the thing. 16
certificate of title in lieu of the one in the name of the late Francisco
Laforteza and upon the execution of an extrajudicial settlement of
his estate. Prior to the issuance of the "reconstituted" title, the In the case at bar, there was already a perfected contract. The condition
respondent was already placed in possession of the house and lot was imposed only on the performance of the obligations contained therein.
as lessee thereof for six months at a monthly rate of three thousand Considering however that the title was eventually "reconstituted" and that
five hundred pesos (P3,500.00). It was stipulated that should the the petitioners admit their ability to execute the extrajudicial settlement of
issuance of the new title and the execution of the extrajudicial their father's estate, the respondent had a right to demand fulfillment of the
settlement be completed prior to expiration of the six-month period, petitioners' obligation to deliver and transfer ownership of the house and
the respondent would be liable only for the rentals pertaining to the lot.
period commencing from the date of the execution of the

What further militates against petitioners' argument that they did
not enter into a contract or sale is the fact that the respondent paid
thirty thousand pesos (P30,000.00) as earnest money. Earnest
money is something of value to show that the buyer was really in
earnest, and given to the seller to bind the bargain.17 Whenever
earnest money is given in a contract of sale, it is considered as part
of the purchase price and proof of the perfection of the contract. 18
We do not subscribe to the petitioners' view that the Memorandum
Agreement was a contract to sell. There is nothing contained in the
Memorandum Agreement from which it can reasonably be deduced
that the parties intended to enter into a contract to sell, i.e. one
whereby the prospective seller would explicitly reserve the transfer
of title to the prospective buyer, meaning, the prospective seller
does not as yet agree or consent to transfer ownership of the
property subject of the contract to sell until the full payment of the
price, such payment being a positive suspensive condition, the
failure of which is not considered a breach, casual or serious, but
simply an event which prevented the obligation from acquiring any
obligatory force. 19 There is clearly no express reservation of title
made by the petitioners over the property, or any provision which
would impose non-payment of the price as a condition for the
contract's entering into force. Although the memorandum
agreement was also denominated as a "Contract to Sell", we hold
that the parties contemplated a contract of sale. A deed of sale is
absolute in nature although denominated a conditional sale in the
absence of a stipulation reserving title in the petitioners until full
payment of the purchase price. 20 In such cases, ownership of the
thing sold passes to the vendee upon actual or constructive
delivery thereof. 21 The mere fact that the obligation of the
respondent to pay the balance of the purchase price was made
subject to the condition that the petitioners first deliver the
reconstituted title of the house and lot does not make the contract a
contract to sell for such condition is not inconsistent with a contract
of sale. 22
The next issue to be addressed is whether the failure of the
respondent to pay the balance of the purchase price within the
period allowed is fatal to his right to enforce the agreement.
We rule in the negative.
Admittedly, the failure of the respondent to pay the balance of the
purchase price was a breach of the contract and was a ground for
rescission thereof. The extension of thirty (30) days allegedly
granted to the respondent by Roberto Z. Laforteza (assisted by his
counsel Attorney Romeo Gutierrez) was correctly found by the
Court of Appeals to be ineffective inasmuch as the signature of
Gonzalo Z. Laforteza did not appear thereon as required by the
Special Powers of Attorney. 23 However, the evidence reveals that
after the expiration of the six-month period provided for in the
contract, the petitioners were not ready to comply with what was
incumbent upon them, i.e. the delivery of the reconstituted title of
the house and lot. It was only on September 18, 1989 or nearly
eight months after the execution of the Memorandum of Agreement
when the petitioners informed the respondent that they already had
a copy of the reconstituted title and demanded the payment of the
balance of the purchase price. The respondent could not therefore
be considered in delay for in reciprocal obligations, neither party
incurs in delay if the other party does not comply or is not ready to
comply in a proper manner with what was incumbent upon him. 24
Even assuming for the sake of argument that the petitioners were
ready to comply with their obligation, we find that rescission of the
contract will still not prosper. The rescission of a sale of an
immovable property is specifically governed by Article 1592 of the
New Civil Code, which reads:
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
26
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. 25
It is not disputed that the petitioners did not make a judicial or notarial
demand for rescission.1avvphi1 The November 20, 1989 letter of the
petitioners informing the respondent of the automatic rescission of the
agreement did not amount to a demand for rescission, as it was not
notarized. 26 It was also made five days after the respondent's attempt to
make the payment of the purchase price. This offer to pay prior to the
demand for rescission is sufficient to defeat the petitioners' right under
article 1592 of the Civil Code. 27 Besides, the Memorandum Agreement
between the parties did not contain a clause expressly authorizing the
automatic cancellation of the contract without court intervention in the
event that the terms thereof were violated. A seller cannot unilaterally and
extrajudicially rescind a contract or sale where there is no express
stipulation authorizing him to extrajudicially rescind. 28 Neither was there a
judicial demand for the rescission thereof. Thus, when the respondent filed
his complaint for specific performance, the agreement was still in force
inasmuch as the contract was not yet rescinded. At any rate, considering
that the six-month period was merely an approximation of the time if would
take to reconstitute the lost title and was not a condition imposed on the
perfection of the contract and considering further that the delay in payment
was only thirty days which was caused by the respondents justified but
mistaken belief that an extension to pay was granted to him, we agree with
the Court of Appeals that the delay of one month in payment was a mere
casual breach that would not entitle the respondents to rescind the
contract. Rescission of a contract will not be permitted for a slight or
casual breach, but only such substantial and fundamental breach as
would defeat the very object of the parties in making the agreemant. 29
Petitioners' insistence that the respondent should have consignated the
amount is not determinative of whether respondent's action for specific
performance will lie. Petitioners themselves point out that the effect of
cansignation is to extinguish the obligation. It releases the debtor from
responsibility therefor. 30 The failure of the respondent to consignate the
P600,000.00 is not tantamount to a breach of the contract for by the fact of
tendering payment, he was willing and able to comply with his obligation.
The Court of Appeals correctly found the petitioners guilty of bad faith and
awarded moral damages to the respondent. As found by the said Court,
the petitioners refused to comply with, their obligation for the reason that
they were offered a higher price therefor and the respondent was even
offered P100,000.00 by the petitioners' lawyer, Attorney Gutierrez, to
relinquish his rights over the property. The award of moral damages is in
accordance with Article 1191 31 of the Civil Code pursuant to Article 2220
which provides that moral damages may be awarded in case of breach of
contract where the defendant acted in bad faith. The amount awarded
depends on the discretion of the court based on the circumstances of each
case. 32 Under the circumstances, the award given by the Court of
Appeals amounting to P50,000.00 appears to us to be fair and reasonable.
ACCORDINGLY, the decision of the Court of Appeals in CA G.R. CV No.
47457 is AFFIRMED and the instant petition is hereby DENIED.
No pronouncement as to costs.
SO ORDERED.
Melo, Panganiban and Purisima, JJ., concur.
Vitug, J., abroad on official business.
G.R. No. 126083 July 12, 2006
ANTONIO R. CORTES (in his capacity as Administrator of the estate
of Claro S. Cortes), petitioner,
vs.

HON. COURT OF APPEALS and VILLA ESPERANZA
DEVELOPMENT CORPORATION, respondents.
DECISION
YNARES-SANTIAGO, J.:
The instant petition for review seeks the reversal of the June 13,
1996 Decision1 of the Court of Appeals in CA-G.R. CV No. 47856,
setting aside the June 24, 1993 Decision2 of the Regional Trial
Court of Makati, Branch 138, which rescinded the contract of sale
entered into by petitioner Antonio Cortes (Cortes) and private
respondent Villa Esperanza Development Corporation
(Corporation).
The antecedents show that for the purchase price of P3,700,000.00,
the Corporation as buyer, and Cortes as seller, entered into a
contract of sale over the lots covered by Transfer Certificate of Title
(TCT) No. 31113-A, TCT No. 31913-A and TCT No. 32013-A,
located at Baclaran, Parañaque, Metro Manila. On various dates in
1983, the Corporation advanced to Cortes the total sum of
P1,213,000.00. Sometime in September 1983, the parties
executed a deed of absolute sale containing the following terms: 3
1. Upon execution of this instrument, the Vendee shall pay unto the
Vendor sum of TWO MILLION AND TWO HUNDRED THOUSAND
(P2,200,000.00) PESOS, Philippine Currency, less all advances
paid by the Vendee to the Vendor in connection with the sale;
2. The balance of ONE MILLION AND FIVE HUNDRED
THOUSAND [P1,500,000.00] PESOS, Phil. Currency shall be
payable within ONE (1) YEAR from date of execution of this
instrument, payment of which shall be secured by an irrevocable
standby letter of credit to be issued by any reputable local banking
institution acceptable to the Vendor.
xxxx
4. All expense for the registration of this document with the
Register of Deeds concerned, including the transfer tax, shall be
divided equally between the Vendor and the Vendee. Payment of
the capital gains shall be exclusively for the account of the Vendor;
5% commission of Marcosa Sanchez to be deducted upon signing
of sale.4
Said Deed was retained by Cortes for notarization.
On January 14, 1985, the Corporation filed the instant case5 for
specific performance seeking to compel Cortes to deliver the TCTs
and the original copy of the Deed of Absolute Sale. According to
the Corporation, despite its readiness and ability to pay the
purchase price, Cortes refused delivery of the sought documents. It
thus prayed for the award of damages, attorney's fees and litigation
expenses arising from Cortes' refusal to deliver the same
documents.
In his Answer with counterclaim,6 Cortes claimed that the owner's
duplicate copy of the three TCTs were surrendered to the
Corporation and it is the latter which refused to pay in full the
agreed down payment. He added that portion of the subject
property is occupied by his lessee who agreed to vacate the
premises upon payment of disturbance fee. However, due to the
Corporation's failure to pay in full the sum of P2,200,000.00, he in
turn failed to fully pay the disturbance fee of the lessee who now
refused to pay monthly rentals. He thus prayed that the Corporation
be ordered to pay the outstanding balance plus interest and in the
alternative, to cancel the sale and forfeit the P1,213,000.00 partial
down payment, with damages in either case.
27
On June 24, 1993, the trial court rendered a decision rescinding the sale
and directed Cortes to return to the Corporation the amount of
P1,213,000.00, plus interest. It ruled that pursuant to the contract of the
parties, the Corporation should have fully paid the amount of
P2,200,000.00 upon the execution of the contract. It stressed that such is
the law between the parties because the Corporation failed to present
evidence that there was another agreement that modified the terms of
payment as stated in the contract. And, having failed to pay in full the
amount of P2,200,000.00 despite Cortes' delivery of the Deed of Absolute
Sale and the TCTs, rescission of the contract is proper.
In its motion for reconsideration, the Corporation contended that the trial
court failed to consider their agreement that it would pay the balance of the
down payment when Cortes delivers the TCTs. The motion was, however,
denied by the trial court holding that the rescission should stand because
the Corporation did not act on the offer of Cortes' counsel to deliver the
TCTs upon payment of the balance of the down payment. Thus:
The Court finds no merit in the [Corporation's] Motion for Reconsideration.
As stated in the decision sought to be reconsidered, [Cortes'] counsel at
the pre-trial of this case, proposed that if [the Corporation] completes the
down payment agreed upon and make arrangement for the payment of the
balances of the purchase price, [Cortes] would sign the Deed of Sale and
turn over the certificate of title to the [Corporation]. [The Corporation] did
nothing to comply with its undertaking under the agreement between the
parties.
WHEREFORE, in view of the foregoing considerations, the Motion for
Reconsideration is hereby DENIED.
SO ORDERED.7
On appeal, the Court of Appeals reversed the decision of the trial court
and directed Cortes to execute a Deed of Absolute Sale conveying the
properties and to deliver the same to the Corporation together with the
TCTs, simultaneous with the Corporation's payment of the balance of the
purchase price of P2,487,000.00. It found that the parties agreed that the
Corporation will fully pay the balance of the down payment upon Cortes'
delivery of the three TCTs to the Corporation. The records show that no
such delivery was made, hence, the Corporation was not remiss in the
performance of its obligation and therefore justified in not paying the
balance. The decretal portion thereof, provides:
WHEREFORE, premises considered, [the Corporation's] appeal is
GRANTED. The decision appealed from is hereby REVERSED and SET
ASIDE and a new judgment rendered ordering [Cortes] to execute a deed
of absolute sale conveying to [the Corporation] the parcels of land subject
of and described in the deed of absolute sale, Exhibit D. Simultaneously
with the execution of the deed of absolute sale and the delivery of the
corresponding owner's duplicate copies of TCT Nos. 31113-A, 31931-A
and 32013-A of the Registry of Deeds for the Province of Rizal, Metro
Manila, District IV, [the Corporation] shall pay [Cortes] the balance of the
purchase price of P2,487,000.00. As agreed upon in paragraph 4 of the
Deed of Absolute Sale, Exhibit D, under terms and conditions, "All
expenses for the registration of this document (the deed of sale) with the
Register of Deeds concerned, including the transfer tax, shall be divided
equally between [Cortes and the Corporation]. Payment of the capital
gains shall be exclusively for the account of the Vendor; 5% commission
of Marcosa Sanchez to be deducted upon signing of sale." There is no
pronouncement as to costs.
SO ORDERED.8
Cortes filed the instant petition praying that the decision of the trial court
rescinding the sale be reinstated.
There is no doubt that the contract of sale in question gave rise to a
reciprocal obligation of the parties. Reciprocal obligations are those which

arise from the same cause, and which each party is a debtor and a
creditor of the other, such that the obligation of one is dependent
upon the obligation of the other. They are to be performed
simultaneously, so that the performance of one is conditioned upon
the simultaneous fulfillment of the other.9
Article 1191 of the Civil Code, states:
ART. 1191. The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is
incumbent upon him.
xxxx
As to when said failure or delay in performance arise, Article 1169
of the same Code provides that –
ART. 1169
xxxx
In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. From the moment one of the
parties fulfills his obligation, delay by the other begins.
(Emphasis supplied)
The issue therefore is whether there is delay in the performance of
the parties' obligation that would justify the rescission of the
contract of sale. To resolve this issue, we must first determine the
true agreement of the parties.
The settled rule is that the decisive factor in evaluating an
agreement is the intention of the parties, as shown not necessarily
by the terminology used in the contract but by their conduct, words,
actions and deeds prior to, during and immediately after executing
the agreement. As such, therefore, documentary and parol
evidence may be submitted and admitted to prove such intention. 10
In the case at bar, the stipulation in the Deed of Absolute Sale was
that the Corporation shall pay in full the P2,200,000.00 down
payment upon execution of the contract. However, as correctly
noted by the Court of Appeals, the transcript of stenographic notes
reveal Cortes' admission that he agreed that the Corporation's full
payment of the sum of P2,200,000.00 would depend upon his
delivery of the TCTs of the three lots. In fact, his main defense in
the Answer is that, he performed what is incumbent upon him by
delivering to the Corporation the TCTs and the carbon duplicate of
the Deed of Absolute Sale, but the latter refused to pay in full the
down payment.11 Pertinent portion of the transcript, reads:
[Q] Now, why did you deliver these three titles to the plaintiff
despite the fact that it has not been paid in full the agreed down
payment?
A Well, the broker told me that the down payment will be given if I
surrender the titles.
Q Do you mean to say that the plaintiff agreed to pay in full the
down payment of P2,200,000.00 provided you surrender or entrust
to the plaintiff the titles?
A Yes, sir.12
What further confirmed the agreement to deliver the TCTs is the
testimony of Cortes that the title of the lots will be transferred in the
28
name of the Corporation upon full payment of the P2,200,000.00 down
payment. Thus –
ATTY. ANTARAN
Q Of course, you have it transferred in the name of the plaintiff, the title?
A Upon full payment.
xxxx
ATTY. SARTE
Q When you said upon full payment, are you referring to the agreed down
payment of P2,200,000.00?
A Yes, sir.13
By agreeing to transfer title upon full payment of P2,200,000.00, Cortes'
impliedly agreed to deliver the TCTs to the Corporation in order to effect
said transfer. Hence, the phrase "execution of this instrument" 14 as
appearing in the Deed of Absolute Sale, and which event would give rise
to the Corporation's obligation to pay in full the amount of P2,200,000.00,
can not be construed as referring solely to the signing of the deed. The
meaning of "execution" in the instant case is not limited to the signing of a
contract but includes as well the performance or implementation or
accomplishment of the parties' agreement.15 With the transfer of titles as
the corresponding reciprocal obligation of payment, Cortes' obligation is
not only to affix his signature in the Deed, but to set into motion the
process that would facilitate the transfer of title of the lots, i.e., to have the
Deed notarized and to surrender the original copy thereof to the
Corporation together with the TCTs.
Having established the true agreement of the parties, the Court must now
determine whether Cortes delivered the TCTs and the original Deed to the
Corporation. The Court of Appeals found that Cortes never surrendered
said documents to the Corporation. Cortes testified that he delivered the
same to Manny Sanchez, the son of the broker, and that Manny told him
that her mother, Marcosa Sanchez, delivered the same to the Corporation.
Q Do you have any proof to show that you have indeed surrendered these
titles to the plaintiff?
A Yes, sir.
Q I am showing to you a receipt dated October 29, 1983, what relation has
this receipt with that receipt that you have mentioned?
A That is the receipt of the real estate broker when she received the titles.
Q On top of the printed name is Manny Sanchez, there is a signature, do
you know who is that Manny Sanchez?
A That is the son of the broker.
xxxx
Q May we know the full name of the real estate broker?
A Marcosa Sanchez
xxxx

Q Do you know if the broker or Marcosa Sanchez indeed delivered
the titles to the plaintiff?
A That is what [s]he told me. She gave them to the plaintiff.
x x x x.16
ATTY. ANTARAN
Q Are you really sure that the title is in the hands of the plaintiff?
xxxx
Q It is in the hands of the broker but there is no showing that it is in
the hands of the plaintiff?
A Yes, sir.
COURT
Q How do you know that it was delivered to the plaintiff by the son
of the broker?
A The broker told me that she delivered the title to the plaintiff.
ATTY. ANTARAN
Q Did she not show you any receipt that she delivered to [Mr.]
Dragon17 the title without any receipt?
A I have not seen any receipt.
Q So, therefore, you are not sure whether the title has been
delivered to the plaintiff or not. It is only upon the allegation of the
broker?
A Yes, sir.18
However, Marcosa Sanchez's unrebutted testimony is that, she did
not receive the TCTs. She also denied knowledge of delivery
thereof to her son, Manny, thus:
Q The defendant, Antonio Cortes testified during the hearing on
March 11, 1986 that he allegedly gave you the title to the property
in question, is it true?
A I did not receive the title.
Q He likewise said that the title was delivered to your son, do you
know about that?
A I do not know anything about that.19
What further strengthened the findings of the Court of Appeals that
Cortes did not surrender the subject documents was the offer of
Cortes' counsel at the pre-trial to deliver the TCTs and the Deed of
Absolute Sale if the Corporation will pay the balance of the down
payment. Indeed, if the said documents were already in the hands
of the Corporation, there was no need for Cortes' counsel to make
such offer.
Since Cortes did not perform his obligation to have the Deed
notarized and to surrender the same together with the TCTs, the
29
trial court erred in concluding that he performed his part in the contract of
sale and that it is the Corporation alone that was remiss in the
performance of its obligation. Actually, both parties were in delay.
Considering that their obligation was reciprocal, performance thereof must
be simultaneous. The mutual inaction of Cortes and the Corporation
therefore gave rise to a compensation morae or default on the part of both
parties because neither has completed their part in their reciprocal
obligation.20 Cortes is yet to deliver the original copy of the notarized Deed
and the TCTs, while the Corporation is yet to pay in full the agreed down
payment of P2,200,000.00. This mutual delay of the parties cancels out
the effects of default,21 such that it is as if no one is guilty of delay.22
We find no merit in Cortes' contention that the failure of the Corporation to
act on the proposed settlement at the pre-trial must be construed against
the latter. Cortes argued that with his counsel's offer to surrender the
original Deed and the TCTs, the Corporation should have consigned the
balance of the down payment. This argument would have been correct if
Cortes actually surrendered the Deed and the TCTs to the Corporation.
With such delivery, the Corporation would have been placed in default if it
chose not to pay in full the required down payment. Under Article 1169 of
the Civil Code, from the moment one of the parties fulfills his obligation,
delay by the other begins. Since Cortes did not perform his part, the
provision of the contract requiring the Corporation to pay in full the down
payment never acquired obligatory force. Moreover, the Corporation could
not be faulted for not automatically heeding to the offer of Cortes. For one,
its complaint has a prayer for damages which it may not want to waive by
agreeing to the offer of Cortes' counsel. For another, the previous
representation of Cortes that the TCTs were already delivered to the
Corporation when no such delivery was in fact made, is enough reason for
the Corporation to be more cautious in dealing with him.
The Court of Appeals therefore correctly ordered the parties to perform
their respective obligation in the contract of sale, i.e., for Cortes to, among
others, deliver the necessary documents to the Corporation and for the
latter to pay in full, not only the down payment, but the entire purchase
price. And since the Corporation did not question the Court of Appeal's
decision and even prayed for its affirmance, its payment should rightfully
consist not only of the amount of P987,000.00, representing the balance of
the P2,200,000.00 down payment, but the total amount of P2,487,000.00,
the remaining balance in the P3,700,000.00 purchase price.
WHEREFORE, the petition is DENIED and the June 13, 1996 Decision of
the Court of Appeals in CA-G.R. CV No. 47856, is AFFIRMED.
SO ORDERED.
Panganiban, C.J., Austria-Martinez, Callejo, Sr., Chico-Nazario,
J.J., concur.
G.R. No. 108346 July 11, 2001
Spouses MARIANO Z. VELARDE and AVELINA D.
VELARDE, petitioners,
vs.
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE
RAYMUNDO, respondents.
PANGANIBAN, J.:
A substantial breach of a reciprocal obligation, like failure to pay the price
in the manner prescribed by the contract, entitled the injured party to
rescind the obligation. Rescission abrogates the contract from its inception
and requires a mutual restitution of benefits received.
The Case
Before us is a Petition for Review on Certiorari1 questioning the
Decision2 of the Court of Appeals (CA) in CA-GR CV No. 32991 dated
 30

October 9, 1992, as well as its Resolution3 dated December 29,
1992 denying petitioner's motion for reconsideration.4
The dispositive portion of the assailed Decision reads:
"WHEREFORES the Order dated May 15, 1991 is hereby
ANNULLED and SET ASIDE and the Decision dated November 14,
1990 dismissing the [C]omplaint is RESINSTATED. The bonds
posted by plaintiffs-appellees and defendants-appellants are
hereby RELEASED."5
The Facts
The factual antecedents of the case, as found by the CA, are as
follows:
"x x x. David Raymundo [herein private respondent] is the absolute
and registered owner of a parcel of land, together with the house
and other improvements thereon, located at 1918 Kamias St.,
Dasmariñas Village, Makati and covered by TCT No. 142177.
Defendant George Raymundo [herein private petitioners] is David's
father who negotiated with plaintiffs Avelina and Mariano Velarde
[herein petitioners] for the sale of said property, which was,
however, under lease (Exh. '6', p. 232, Record of Civil Case No.
15952).
"On August 8, 1986, a Deed of Sale with Assumption of Mortgage
(Exh. 'A'; Exh. '1', pp. 11-12, Record) was executed by defendant
David Raymundo, as vendor, in favor of plaintiff Avelina Velarde,
as vendee, with the following terms and conditions:
the account of the VENDOR; whereas, the registration fees and transfer
tax thereon shall be the account of the VENDEE.' (Exh. 'A', pp. 11-12,
Record).'
"On the same date, and as part of the above-document, plaintiff Avelina
Velarde, with the consent of her husband, Mariano, executed an
Undertaking (Exh. 'C', pp. 13-14, Record).'
'x x x xxx xxx
'Whereas, as per deed of Sale with Assumption of Mortgage, I paid Mr.
David A. Raymundo the sum of EIGHT HUNDRED THOUSAND PESOS
(P800,000.00), Philippine currency, and assume the mortgage obligations
on the property with the Bank of the Philippine Islands in the amount of
ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),
Philippine currency, in accordance with the terms and conditions of the
Deed of Real Estate Mortgage dated _____, signed and executed by Mr.
David A. Raymundo with the said Bank, acknowledged before Notary
Public for Makati, _____, as Doc. No. _____, Page No. _____, Book No.
_____, Series of 1986 of his Notarial Register.
'WHEREAS, while my application for the assumption of the mortgage
obligations on the property is not yet approved by the mortgagee Bank, I
have agreed to pay the mortgage obligations on the property with the
Bank in the name of Mr. David A. Raymundo, in accordance with the terms
and conditions of the said Deed of Real Estate Mortgage, including all
interests and other charges for late payment.
'WHEREAS, this undertaking is being executed in favor of Mr. David A.
Raymundo, for purposes of attesting and confirming our private
understanding concerning the said mortgage obligations to be assumed.

'x x x xxx xxx

'NOW, THEREFORE, for and in consideration of the foregoing premises,
and the assumption of the mortgage obligations of ONE MILLION EIGHT
'That for and in consideration of the amount of EIGHT HUNDRED HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency,
THOUSAND PESOS (P800,000.00), Philippine currency, receipt of with the bank of the Philippine Islands, I, Mrs, Avelina D, Velarde with the
which in full is hereby acknowledged by the VENDOR from the consent of my husband, Mariano Z. Velardo, do hereby bind and obligate
VENDEE, to his entire and complete satisfaction, by these presents myself, my heirs, successors and assigns, to strictly and faithfully comply
the VENDOR hereby SELLS, CEDES, TRANSFERS, CONVEYS with the following terms and conditions:
AND DELIVERS, freely and voluntarily, with full warranty of a legal
and valid title as provided by law, unto the VENDEE, her heirs,
'1. That until such time as my assumption of the mortgage obligations on
successors and assigns, the parcel of land mentioned and
the property purchased is approved by the mortgagee bank, the Bank of
described above, together with the house and other improvements
the Philippine Islands, I shall continue to pay the said loan in accordance
thereon.
with the terms and conditions of the Deed of Real Estate Mortgage in the
name of Mr. David A. Raymundo, the original Mortgagor.
'That the aforesaid parcel of land, together with the house and
other improvements thereon, were mortgaged by the VENDOR to
'2. That, in the event I violate any of the terms and conditions of the said
the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila to
Deed of Real Estate Mortgage, I hereby agree that my downpayment of
secure the payment of a loan of ONE MILLION EIGHT HUNDRED
P800,000.00, plus all payments made with the Bank of the Philippine
THOUSAND PESOS (P1,800,000.00), Philippine currency, as
Islands on the mortgage loan, shall be forfeited in favor of Mr. David A.
evidenced by a Real Estate Mortgage signed and executed by the
Raymundo, as and by way of liquidated damages, without necessity of
VENDOR in favor of the said Bank of the Philippine Islands, on
notice or any judicial declaration to that effect, and Mr. David A.
_____ and which Real Estate Mortgage was ratified before Notary
Raymundo shall resume total and complete ownership and possession of
Public for Makati, _____, as Doc. No. ______, Page No. _____,
the property sold by way of Deed of Sale with Assumption of Mortgage,
Book No. ___, Series of 1986 of his Notarial Register.
and the same shall be deemed automatically cancelled and be of no
further force or effect, in the same manner as it (the) same had never been
'That as part of the consideration of this sale, the VENDEE hereby executed or entered into.
assumes to pay the mortgage obligations on the property herein
sold in the amount of ONE MILLION EIGHT HUNDRED
'3. That I am executing the Undertaking for purposes of binding myself, my
THOUSAND PESOS (P1,800,000.00), Philippine currency, in favor
heirs, successors and assigns, to strictly and faithfully comply with the
of Bank of Philippine Islands, in the name of the VENDOR, and
terms and conditions of the mortgage obligations with the Bank of the
further agrees to strictly and faithfully comply with all the terms and
Philippine Islands, and the covenants, stipulations and provisions of this
conditions appearing in the Real Estate Mortgage signed and
Undertaking.
executed by the VENDOR in favor of BPI, including interests and
other charges for late payment levied by the Bank, as if the same
were originally signed and executed by the VENDEE. 'That, David A. Raymundo, the vendor of the property mentioned and
identified above, [does] hereby confirm and agree to the undertakings of
the Vendee pertinent to the assumption of the mortgage obligations by the
'It is further agreed and understood by the parties herein that the
capital gains tax and documentary stamps on the sale shall be for

Vendee with the Bank of the Philippine Islands. (Exh. 'C', pp. 13-14,
Record).'
"This undertaking was signed by Avelina and Mariano Velarde and
David Raymundo.
"It appears that the negotiated terms for the payment of the balance
of P1.8 million was from the proceeds of a loan that plaintiffs were
to secure from a bank with defendant's help. Defendants had a
standing approved credit line with the Bank of the Philippine
Islands (BPI). The parties agreed to avail of this, subject to BPI's
approval of an application for assumption of mortgage by plaintiffs.
Pending BPI's approval o[f] the application, plaintiffs were to
continue paying the monthly interests of the loan secured by a real
estate mortgage.
"Pursuant to said agreements, plaintiffs paid BPI the monthly
interest on the loan secured by the aforementioned mortgage for
three (3) months as follows: September 19, 1986 at P27,225.00;
October 20, 1986 at P23,000.00; and November 19, 1986 at
P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15, 17and 18, Record).
"On December 15, 1986, plaintiffs were advised that the
Application for Assumption of Mortgage with BPI, was not approved
(Exh. 'J', p. 133, Record). This prompted plaintiffs not to make any
further payment.
"On January 5, 1987, defendants, thru counsel, wrote plaintiffs
informing the latter that their non-payment to the mortgage bank
constitute[d] non-performance of their obligation (Exh. '3', p. 220,
Record).
"In a Letter dated January 7, 1987, plaintiffs, thru counsel,
responded, as follows:
'This is to advise you, therefore, that our client is willing to pay the
balance in cash not later than January 21, 1987 provided: (a) you
deliver actual possession of the property to her not later than
January 15, 1987 for her immediate occupancy; (b) you cause the
re- lease of title and mortgage from the Bank of P.I. and make the
title available and free from any liens and encumbrances; and (c)
you execute an absolute deed of sale in her favor free from any
liens or encumbrances not later than January 21, 1987.' (Exhs. 'k',
'4', p. 223, Record).
"On January 8, 1987 defendants sent plaintiffs a notarial notice of
cancellation/rescission of the intended saleof the subject property
allegedly due to the latter's failure to comply with the terms and
conditions of the Deed of Sale with Assumption of Mortgage and
the Undertaking (Exh. '5', pp. 225-226, Record)."6
Consequently, petitioners filed on February 9, 1987 a Complaint
against private respondents for specific performance, nullity of
cancellation, writ of possession and damages. This was docketed
as Civil Case No. 15952 at the Regional Trial Court of Makati,
Branch 149. The case was tried and heard by then Judge Consuelo
Ynares-Santiago (now an associate justice of this Court), who
dismissed the Complaint in a Decision dated November 14,
1990.7 Thereafter, petitioners filed a Motion for Reconsideration.8
Meanwhile, then Judge Ynares-Santiago was promoted to the
Court of Appeals and Judge Salvador S. A. Abad Santos was
assigned to the sala she vacated. In an Order dated May 15,
1991,9 Judge Abad Santos granted petitioner's Motion for
Reconsideration and directed the parties to proceed with the sale.
He instructed petitioners to pay the balance of P1.8 million to
private respondents who, in turn, were ordered to execute a deed
31
of absolute sale and to surrender possession of the disputed property to
petitioners.
Private respondents appealed to the CA.
Ruling of the Court of Appeal
The CA set aside the Order of Judge Abad Santos and reinstated then
Judge Ynares-Santiago's earlier Decision dismissing petitioners'
Complaint. Upholding the validity of the rescission made by private
respondents, the CA explained its ruling in this wise:
"In the Deed of Sale with Assumption of Mortgage, it was stipulated that
'as part of the consideration of this sale, the VENDEE (Velarde)' would
assume to pay the mortgage obligation on the subject property in the
amount of P 1.8 million in favor of BPI in the name of the Vendor
(Raymundo). Since the price to be paid by the Vendee Velarde includes
the downpayment of P800,000.00 and the balance of Pl.8 million, and the
balance of Pl.8 million cannot be paid in cash, Vendee Velarde, as part of
the consideration of the sale, had to assume the mortgage obligation on
the subject property. In other words, the assumption of the mortgage
obligation is part of the obligation of Velarde, as vendee, under the
contract. Velarde further agreed 'to strictly and faithfully comply with all the
terms and conditions appearing in the Real Estate Mortgage signed and
executed by the VENDOR in favor of BPI x x x as if the same were
originally signed and executed by the Vendee. (p. 2, thereof, p. 12,
Record). This was reiterated by Velarde in the document entitled
'Undertaking' wherein the latter agreed to continue paying said loan in
accordance with the terms and conditions of the Deed of Real Estate
Mortgage in the name of Raymundo. Moreover, it was stipulated that in
the event of violation by Velarde of any terms and conditions of said deed
of real estate mortgage, the downpayment of P800,000.00 plus all
payments made with BPI or the mortgage loan would be forfeited and the
[D]eed of [S]ale with [A]ssumption of [M]ortgage would thereby be
Cancelled automatically and of no force and effect (pars. 2 & 3, thereof, pp
13-14, Record).
"From these 2 documents, it is therefore clear that part of the
consideration of the sale was the assumption by Velarde of the mortgage
obligation of Raymundo in the amount of Pl.8 million. This would mean
that Velarde had to make payments to BPI under the [D]eed of [R]eal
[E]state [M]ortgage the name of Raymundo. The application with BPI for
the approval of the assumption of mortgage would mean that, in case of
approval, payment of the mortgage obligation will now be in the name of
Velarde. And in the event said application is disapproved, Velarde had to
pay in full. This is alleged and admitted in Paragraph 5 of the Complaint.
Mariano Velarde likewise admitted this fact during the hearing on
September 15, 1997 (p. 47, t.s.n., September 15, 1987; see also pp. 16-26,
t.s.n., October 8, 1989). This being the case, the non-payment of the
mortgage obligation would result in a violation of the contract. And, upon
Velarde's failure to pay the agreed price, the[n] Raymundo may choose
either of two (2) actions - (1) demand fulfillment of the contract, or (2)
demand its rescission (Article 1191, Civil Code).
"The disapproval by BPI of the application for assumption of mortgage
cannot be used as an excuse for Velarde's non-payment of the balance of
the purchase price. As borne out by the evidence, Velarde had to pay in
full in case of BPI's disapproval of the application for assumption of
mortgage. What Velarde should have done was to pay the balance of P1.8
million. Instead, Velarde sent Raymundo a letter dated January 7, 1987
(Exh. 'K', '4') which was strongly given weight by the lower court in
reversing the decision rendered by then Judge Ynares-Santiago. In said
letter, Velarde registered their willingness to pay the balance in cash but
enumerated 3 new conditions which, to the mind of this Court, would
constitute a new undertaking or new agreement which is subject to the
consent or approval of Raymundo. These 3 conditions were not among
those previously agreed upon by Velarde and Raymundo. These are mere
offers or, at most, an attempt to novate. But then again, there can be no
novation because there was no agreement of all the parties to the new
contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).

"It was likewise agreed that in case of violation of the mortgage
obligation, the Deed of Sale with Assumption of Mortgage would be
deemed 'automatically cancelled and of no further force and effect,
as if the same had never been executed or entered into.' While it is
true that even if the contract expressly provided for automatic
rescission upon failure to pay the price, the vendee may still pay,
he may do so only for as long as no demand for rescission of the
contract has been made upon him either judicially or by a notarial
act (Article 1592, Civil Code). In the case at bar, Raymundo sent
Velarde notarial notice dated January 8, 1987 of
cancellation/rescission of the contract due to the latter's failure to
comply with their obligation. The rescission was justified in view of
Velarde's failure to pay the price (balance) which is substantial and
fundamental as to defeat the object of the parties in making the
agreement. As adverted to above, the agreement of the parties
involved a reciprocal obligation wherein the obligation of one is a
resolutory condition of the obligation of the other, the non-fulfillment
of which entitles the other party to rescind the contract (Songcuan
vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage
obligation by appellees Velarde would create a right to demand
payment or to rescind the contract, or to criminal prosecution (Edca
Publishing & Distribution Corporation vs. Santos, 184 SCRA 614).
Upon appellee's failure, therefore, to pay the balance, the contract
was properly rescinded (Ruiz vs. IAC, 184 SCRA 720).
Consequently, appellees Velarde having violated the contract, they
have lost their right to its enforcement and hence, cannot avail of
the action for specific performance (Voysaw vs. Interphil
Promotions, Inc., 148 SCRA 635)."10
Hence, this appeal. 11
The Issues
Petitioners, in their Memorandum,12 interpose the following
assignment of errors:
"I.
The Court of Appeals erred in holding that the non-payment of the
mortgage obligation resulted in a breach of the contract.
"II
The Court of Appeals erred in holding that the rescission
(resolution) of the contract by private respondents was justified.
"III
The Court of Appeals erred in holding that petitioners' January 7,
1987 letter gave three 'new conditions' constituting mere offers or
an attempt to novate necessitating a new agreement between the
parties."
The Court's Ruling
The Petition is partially meritorious.
First Issue:
Breach of Contract
Petitioner aver that their nonpayment of private respondents'
mortgage obligation did not constitute a breach of contract,
considering that their request to assume the obligation had been
disapproved by the mortgagee bank. Accordingly, payment of the
32
monthly amortizations ceased to be their obligation and, instead, it
devolved upon private respondents again.
However, petitioners did not merely stop paying the mortgage obligations;
they also failed to pay the balance of the purchase price. As admitted by
both parties, their agreement mandated that petitioners should pay the
purchase price balance of P1.8 million to private respondents in case the
request to assume the mortgage would be disapproved. Thus, on
December 15, 1986, when petitioners received notice of the bank's
disapproval of their application to assume respondents' mortgage, they
should have paid the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering
to make such payment only upon the fulfillment of certain conditions not
originally agreed upon in the contract of sale. Such conditional offer to pay
cannot take the place of actual payment as would discharge the obligation
of a buyer under a contract of sale.
In a contract of sale, the seller obligates itself to transfer the ownership of
and deliver a determinate things, and the buyer to pay therefor a price
certain in money or its equivalent.13
Private respondents had already performed their obligation through the
execution of the Deed of Sale, which effectively transferred ownership of
the property to petitioner through constructive delivery. Prior physical
delivery or possession is not legally required, and the execution of the
Deed of Sale is deemed equivalent to delivery.14
Petitioners, on the other hand, did not perform their correlative obligation
of paying the contract price in the manner agreed upon. Worse, they
wanted private respondents to perform obligations beyond those
stipulated in the contract before fulfilling their own obligation to pay the full
purchase price.
Second Issue
Validity of the Rescission
Petitioners likewise claim that the rescission of the contract by private
respondents was not justified, inasmuch as the former had signified their
willingness to pay the balance of the purchase price only a little over a
month from the time they were notified of the disapproval of their
application for assumption of mortgage. Petitioners also aver that the
breach of the contract was not substantial as would warrant a rescission.
They cite several cases15 in which this Court declared that rescission of a
contract would not be permitted for a slight or casual breach. Finally, they
argue that they have substantially performed their obligation in good faith,
considering that they have already made the initial payment of P800,000
and three (3) monthly mortgage payments.
As pointed out earlier, the breach committed by petitioners was not so
much their nonpayment of the mortgage obligations, as their
nonperformance of their reciprocal obligation to pay the purchase price
under the contract of sale. Private respondents' right to rescind the
contract finds basis in Article 1191 of the Civil Code, which explicitly
provides as follows:
"Art. 1191. -- The power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent upon
him.
The injured party may choose between fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission even after he has chosen fulfillment, if the latter should become
impossible."

The right of rescission of a party to an obligation under Article 1191
of the Civil Code is predicated on a breach of faith by the other
party who violates the reciprocity between them.16 The breach
contemplated in the said provision is the obligor's failure to comply
with an existing obligation.17 When the obligor cannot comply with
what is incumbent upon it, the obligee may seek rescission and, in
the absence of any just cause for the court to determine the period
of compliance, the court shall decree the rescission. 18
In the present case, private respondents validly exercised their
right to rescind the contract, because of the failure of petitioners to
comply with their obligation to pay the balance of the purchase
price. Indubitably, the latter violated the very essence of reciprocity
in the contract of sale, a violation that consequently gave rise to
private respondent's right to rescind the same in accordance with
law.
True, petitioners expressed their willingness to pay the balance of
the purchase price one month after it became due; however, this
was not equivalent to actual payment as would constitute a faithful
compliance of their reciprocal obligation. Moreover, the offer to pay
was conditioned on the performance by private respondents of
additional burdens that had not been agreed upon in the original
contract. Thus, it cannot be said that the breach committed by
petitioners was merely slight or casual as would preclude the
exercise of the right to rescind.
Misplaced is petitioners' reliance on the cases 19 they cited,
because the factual circumstances in those cases are not
analogous to those in the present one. In Song Fo there was, on
the part of the buyer, only a delay of twenty (20) days to pay for the
goods delivered. Moreover, the buyer's offer to pay was
unconditional and was accepted by the seller.
In Zepeda, the breach involved a mere one-week delay in paying
the balance of 1,000 which was actually paid.
In Tan, the alleged breach was private respondent's delay of only a
few days, which was for the purpose of clearing the title to the
property; there was no reference whatsoever to the nonpayment of
the contract price.
In the instant case, the breach committed did not merely consist of
a slight delay in payment or an irregularity; such breach would not
normally defeat the intention of the parties to the contract. Here,
petitioners not only failed to pay the P1.8 million balance, but they
also imposed upon private respondents new obligations as
preconditions to the performance of their own obligation. In effect,
the qualified offer to pay was a repudiation of an existing obligation,
which was legally due and demandable under the contract of sale.
Hence, private respondents were left with the legal option of
seeking rescission to protect their own interest.
Mutual Restitution
Required in Rescission
As discussed earlier, the breach committed by petitioners was the
nonperformance of a reciprocal obligation, not a violation of the
terms and conditions of the mortgage contract. Therefore, the
automatic rescission and forfeiture of payment clauses stipulated in
the contract does not apply. Instead, Civil Code provisions shall
govern and regulate the resolution of this controversy.
Considering that the rescission of the contract is based on Article
1191 of the Civil Code, mutual restitution is required to bring back
the parties to their original situation prior to the inception of the
contract. Accordingly, the initial payment of P800,000 and the
33
corresponding mortgage payments in the amounts of P27,225, P23,000
and P23,925 (totaling P874,150.00) advanced by petitioners should be
returned by private respondents, lest the latter unjustly enrich themselves
at the expense of the former.
Rescission creates the obligation to return the object of the contract. It can
be carried out only when the one who demands rescission can return
whatever he may be obliged to restore.20 To rescind is to declare a
contract void at its inception and to put an end to it as though it never was.
It is not merely to terminate it and release the parties from further
obligations to each other, but to abrogate it from the beginning and restore
the parties to their relative positions as if no contract has been made.21
Third Issue
Attempt to Novate
In view of the foregoing discussion, the Court finds it no longer necessary
to discuss the third issue raised by petitioners. Suffice it to say that the
three conditions appearing on the January 7, 1987 letter of petitioners to
private respondents were not part of the original contract. By that time, it
was already incumbent upon the former to pay the balance of the sale
price. They had no right to demand preconditions to the fulfillment of their
obligation, which had become due.
WHEREFORE, the assailed Decision is hereby AFFIRMED with
the MODIFICATION that private respondents are ordered to return to
petitioners the amount of P874,150, which the latter paid as a
consequence of the rescinded contract, with legal interest thereon from
January 8, 1987, the date of rescission. No pronouncement as to costs.
SO ORDERED.1âwphi1.nêt
Melo, Vitug, and Sandoval-Gutierrez, JJ., concur.
G.R. No. L-11827 July 31, 1961
FERNANDO A. GAITE, plaintiff-appellee,
vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES &
SMELTING CO., INC., SEGUNDINA VIVAS, FRNACISCO DANTE,
PACIFICO ESCANDOR and FERNANDO TY, defendants-appellants.
Alejo Mabanag for plaintiff-appellee.
Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for
defendants-appellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the Court of First Instance because
the claims involved aggregate more than P200,000.00.
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either
by himself or in a representative capacity, of 11 iron lode mineral claims,
known as the Dawahan Group, situated in the municipality of Jose
Panganiban, province of Camarines Norte.
By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"),
Fonacier constituted and appointed plaintiff-appellee Fernando A. Gaite
as his true and lawful attorney-in-fact to enter into a contract with any

individual or juridical person for the exploration and development of
the mining claims aforementioned on a royalty basis of not less
than P0.50 per ton of ore that might be extracted therefrom. On
March 19, 1954, Gaite in turn executed a general assignment
(Record on Appeal, pp. 17-19) conveying the development and
exploitation of said mining claims into the Larap Iron Mines, a
single proprietorship owned solely by and belonging to him, on the
same royalty basis provided for in Exhibit "3". Thereafter, Gaite
embarked upon the development and exploitation of the mining
claims in question, opening and paving roads within and outside
their boundaries, making other improvements and installing
facilities therein for use in the development of the mines, and in
time extracted therefrom what he claim and estimated to be
approximately 24,000 metric tons of iron ore.
For some reason or another, Isabelo Fonacier decided to revoke
the authority granted by him to Gaite to exploit and develop the
mining claims in question, and Gaite assented thereto subject to
certain conditions. As a result, a document entitled "Revocation of
Power of Attorney and Contract" was executed on December 8,
1954 (Exhibit "A"),wherein Gaite transferred to Fonacier, for the
consideration of P20,000.00, plus 10% of the royalties that
Fonacier would receive from the mining claims, all his rights and
interests on all the roads, improvements, and facilities in or outside
said claims, the right to use the business name "Larap Iron Mines"
and its goodwill, and all the records and documents relative to the
mines. In the same document, Gaite transferred to Fonacier all his
rights and interests over the "24,000 tons of iron ore, more or less"
that the former had already extracted from the mineral claims, in
consideration of the sum of P75,000.00, P10,000.00 of which was
paid upon the signing of the agreement, and
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)
will be paid from and out of the first letter of credit covering the first
shipment of iron ores and of the first amount derived from the local
sale of iron ore made by the Larap Mines & Smelting Co. Inc., its
assigns, administrators, or successors in interests.
To secure the payment of the said balance of P65,000.00, Fonacier
promised to execute in favor of Gaite a surety bond, and pursuant
to the promise, Fonacier delivered to Gaite a surety bond dated
December 8, 1954 with himself (Fonacier) as principal and the
Larap Mines and Smelting Co. and its stockholders George
Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante,
and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified,
however, that when this bond was presented to him by Fonacier
together with the "Revocation of Power of Attorney and Contract",
Exhibit "A", on December 8, 1954, he refused to sign said Exhibit
"A" unless another bond under written by a bonding company was
put up by defendants to secure the payment of the P65,000.00
balance of their price of the iron ore in the stockpiles in the mining
claims. Hence, a second bond, also dated December 8, 1954
(Exhibit "B"),was executed by the same parties to the first bond
Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as
additional surety, but it provided that the liability of the surety
company would attach only when there had been an actual sale of
iron ore by the Larap Mines & Smelting Co. for an amount of not
less then P65,000.00, and that, furthermore, the liability of said
surety company would automatically expire on December 8, 1955.
Both bonds were attached to the "Revocation of Power of Attorney
and Contract", Exhibit "A", and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he
gave to Gaite and the two executed and signed the "Revocation of
Power of Attorney and Contract", Exhibit "A", Fonacier entered into
a "Contract of Mining Operation", ceding, transferring, and
conveying unto the Larap Mines and Smelting Co., Inc. the right to
develop, exploit, and explore the mining claims in question,
together with the improvements therein and the use of the name
"Larap Iron Mines" and its good will, in consideration of certain
34
royalties. Fonacier likewise transferred, in the same document, the
complete title to the approximately 24,000 tons of iron ore which he
acquired from Gaite, to the Larap & Smelting Co., in consideration for the
signing by the company and its stockholders of the surety bonds delivered
by Fonacier to Gaite (Record on Appeal, pp. 82-94).
Up to December 8, 1955, when the bond Exhibit "B" expired with respect
to the Far Eastern Surety and Insurance Company, no sale of the
approximately 24,000 tons of iron ore had been made by the Larap Mines
& Smelting Co., Inc., nor had the P65,000.00 balance of the price of said
ore been paid to Gaite by Fonacier and his sureties payment of said
amount, on the theory that they had lost right to make use of the period
given them when their bond, Exhibit "B" automatically expired (Exhibits "C"
to "C-24"). And when Fonacier and his sureties failed to pay as demanded
by Gaite, the latter filed the present complaint against them in the Court of
First Instance of Manila (Civil Case No. 29310) for the payment of the
P65,000.00 balance of the price of the ore, consequential damages, and
attorney's fees.
All the defendants except Francisco Dante set up the uniform defense that
the obligation sued upon by Gaite was subject to a condition that the
amount of P65,000.00 would be payable out of the first letter of credit
covering the first shipment of iron ore and/or the first amount derived from
the local sale of the iron ore by the Larap Mines & Smelting Co., Inc.; that
up to the time of the filing of the complaint, no sale of the iron ore had been
made, hence the condition had not yet been fulfilled; and that
consequently, the obligation was not yet due and demandable. Defendant
Fonacier also contended that only 7,573 tons of the estimated 24,000 tons
of iron ore sold to him by Gaite was actually delivered, and counterclaimed
for more than P200,000.00 damages.
At the trial of the case, the parties agreed to limit the presentation of
evidence to two issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite
P65,000.00 become due and demandable when the defendants failed to
renew the surety bond underwritten by the Far Eastern Surety and
Insurance Co., Inc. (Exhibit "B"), which expired on December 8, 1955; and
(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to
defendant Fonacier were actually in existence in the mining claims when
these parties executed the "Revocation of Power of Attorney and
Contract", Exhibit "A."
On the first question, the lower court held that the obligation of the
defendants to pay plaintiff the P65,000.00 balance of the price of the
approximately 24,000 tons of iron ore was one with a term: i.e., that it
would be paid upon the sale of sufficient iron ore by defendants, such sale
to be effected within one year or before December 8, 1955; that the giving
of security was a condition precedent to Gait's giving of credit to
defendants; and that as the latter failed to put up a good and sufficient
security in lieu of the Far Eastern Surety bond (Exhibit "B") which expired
on December 8, 1955, the obligation became due and demandable under
Article 1198 of the New Civil Code.
As to the second question, the lower court found that plaintiff Gaite did
have approximately 24,000 tons of iron ore at the mining claims in
question at the time of the execution of the contract Exhibit "A."
Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering
defendants to pay him, jointly and severally, P65,000.00 with interest at
6% per annum from December 9, 1955 until payment, plus costs. From
this judgment, defendants jointly appealed to this Court.
During the pendency of this appeal, several incidental motions were
presented for resolution: a motion to declare the appellants Larap Mines &
Smelting Co., Inc. and George Krakower in contempt, filed by appellant
Fonacier, and two motions to dismiss the appeal as having become

academic and a motion for new trial and/or to take judicial notice of
certain documents, filed by appellee Gaite. The motion for
contempt is unmeritorious because the main allegation therein that
the appellants Larap Mines & Smelting Co., Inc. and Krakower had
sold the iron ore here in question, which allegedly is "property in
litigation", has not been substantiated; and even if true, does not
make these appellants guilty of contempt, because what is under
litigation in this appeal is appellee Gaite's right to the payment of
the balance of the price of the ore, and not the iron ore itself. As for
the several motions presented by appellee Gaite, it is unnecessary
to resolve these motions in view of the results that we have
reached in this case, which we shall hereafter discuss.
The main issues presented by appellants in this appeal are:
(1) that the lower court erred in holding that the obligation of
appellant Fonacier to pay appellee Gaite the P65,000.00 (balance
of the price of the iron ore in question)is one with a period or term
and not one with a suspensive condition, and that the term expired
on December 8, 1955; and
(2) that the lower court erred in not holding that there were only
10,954.5 tons in the stockpiles of iron ore sold by appellee Gaite to
appellant Fonacier.
The first issue involves an interpretation of the following provision
in the contract Exhibit "A":
7. That Fernando Gaite or Larap Iron Mines hereby transfers to
Isabelo F. Fonacier all his rights and interests over the 24,000 tons
of iron ore, more or less, above-referred to together with all his
rights and interests to operate the mine in consideration of the sum
of SEVENTY-FIVE THOUSAND PESOS (P75,000.00) which the
latter binds to pay as follows:
a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the
signing of this agreement.
b. The balance of SIXTY-FIVE THOUSAND PESOS
(P65,000.00)will be paid from and out of the first letter of credit
covering the first shipment of iron ore made by the Larap Mines &
Smelting Co., Inc., its assigns, administrators, or successors in
interest.
We find the court below to be legally correct in holding that the
shipment or local sale of the iron ore is not a condition precedent
(or suspensive) to the payment of the balance of P65,000.00, but
was only a suspensive period or term. What characterizes a
conditional obligation is the fact that its efficacy or obligatory force
(as distinguished from its demandability) is subordinated to the
happening of a future and uncertain event; so that if the suspensive
condition does not take place, the parties would stand as if the
conditional obligation had never existed. That the parties to the
contract Exhibit "A" did not intend any such state of things to prevail
is supported by several circumstances:
1) The words of the contract express no contingency in the buyer's
obligation to pay: "The balance of Sixty-Five Thousand Pesos
(P65,000.00) will be paid out of the first letter of credit covering the
first shipment of iron ores . . ." etc. There is no uncertainty that the
payment will have to be made sooner or later; what is
undetermined is merely the exact date at which it will be made. By
the very terms of the contract, therefore, the existence of the
obligation to pay is recognized; only its maturity or demandability is
deferred.
2) A contract of sale is normally commutative and onerous: not only
does each one of the parties assume a correlative obligation (the
35
seller to deliver and transfer ownership of the thing sold and the buyer to
pay the price),but each party anticipates performance by the other from
the very start. While in a sale the obligation of one party can be lawfully
subordinated to an uncertain event, so that the other understands that he
assumes the risk of receiving nothing for what he gives (as in the case of a
sale of hopes or expectations, emptio spei), it is not in the usual course of
business to do so; hence, the contingent character of the obligation must
clearly appear. Nothing is found in the record to evidence that Gaite
desired or assumed to run the risk of losing his right over the ore without
getting paid for it, or that Fonacier understood that Gaite assumed any
such risk. This is proved by the fact that Gaite insisted on a bond a to
guarantee payment of the P65,000.00, an not only upon a bond by
Fonacier, the Larap Mines & Smelting Co., and the company's
stockholders, but also on one by a surety company; and the fact that
appellants did put up such bonds indicates that they admitted the definite
existence of their obligation to pay the balance of P65,000.00.
3) To subordinate the obligation to pay the remaining P65,000.00 to the
sale or shipment of the ore as a condition precedent, would be tantamount
to leaving the payment at the discretion of the debtor, for the sale or
shipment could not be made unless the appellants took steps to sell the
ore. Appellants would thus be able to postpone payment indefinitely. The
desireability of avoiding such a construction of the contract Exhibit "A"
needs no stressing.
4) Assuming that there could be doubt whether by the wording of the
contract the parties indented a suspensive condition or a suspensive
period (dies ad quem) for the payment of the P65,000.00, the rules of
interpretation would incline the scales in favor of "the greater reciprocity of
interests", since sale is essentially onerous. The Civil Code of the
Philippines, Article 1378, paragraph 1, in fine, provides:
If the contract is onerous, the doubt shall be settled in favor of the greatest
reciprocity of interests.
and there can be no question that greater reciprocity obtains if the buyer'
obligation is deemed to be actually existing, with only its maturity (due
date) postponed or deferred, that if such obligation were viewed as
non-existent or not binding until the ore was sold.
The only rational view that can be taken is that the sale of the ore to
Fonacier was a sale on credit, and not an aleatory contract where the
transferor, Gaite, would assume the risk of not being paid at all; and that
the previous sale or shipment of the ore was not a suspensive condition
for the payment of the balance of the agreed price, but was intended
merely to fix the future date of the payment.
This issue settled, the next point of inquiry is whether appellants, Fonacier
and his sureties, still have the right to insist that Gaite should wait for the
sale or shipment of the ore before receiving payment; or, in other words,
whether or not they are entitled to take full advantage of the period granted
them for making the payment.
We agree with the court below that the appellant have forfeited the right
court below that the appellants have forfeited the right to compel Gaite to
wait for the sale of the ore before receiving payment of the balance of
P65,000.00, because of their failure to renew the bond of the Far Eastern
Surety Company or else replace it with an equivalent guarantee. The
expiration of the bonding company's undertaking on December 8, 1955
substantially reduced the security of the vendor's rights as creditor for the
unpaid P65,000.00, a security that Gaite considered essential and upon
which he had insisted when he executed the deed of sale of the ore to
Fonacier (Exhibit "A"). The case squarely comes under paragraphs 2 and
3 of Article 1198 of the Civil Code of the Philippines:
"ART. 1198. The debtor shall lose every right to make use of the period:
(1) . . .

(2) When he does not furnish to the creditor the guaranties or
securities which he has promised.
(3) When by his own acts he has impaired said guaranties or
securities after their establishment, and when through fortuitous
event they disappear, unless he immediately gives new ones
equally satisfactory.
Appellants' failure to renew or extend the surety company's bond
upon its expiration plainly impaired the securities given to the
creditor (appellee Gaite), unless immediately renewed or replaced.
There is no merit in appellants' argument that Gaite's acceptance of
the surety company's bond with full knowledge that on its face it
would automatically expire within one year was a waiver of its
renewal after the expiration date. No such waiver could have been
intended, for Gaite stood to lose and had nothing to gain barely;
and if there was any, it could be rationally explained only if the
appellants had agreed to sell the ore and pay Gaite before the
surety company's bond expired on December 8, 1955. But in the
latter case the defendants-appellants' obligation to pay became
absolute after one year from the transfer of the ore to Fonacier by
virtue of the deed Exhibit "A.".
All the alternatives, therefore, lead to the same result: that Gaite
acted within his rights in demanding payment and instituting this
action one year from and after the contract (Exhibit "A") was
executed, either because the appellant debtors had impaired the
securities originally given and thereby forfeited any further time
within which to pay; or because the term of payment was originally
of no more than one year, and the balance of P65,000.00 became
due and payable thereafter.
Coming now to the second issue in this appeal, which is whether
there were really 24,000 tons of iron ore in the stockpiles sold by
appellee Gaite to appellant Fonacier, and whether, if there had
been a short-delivery as claimed by appellants, they are entitled to
the payment of damages, we must, at the outset, stress two
things: first, that this is a case of a sale of a specific mass of
fungible goods for a single price or a lump sum, the quantity of
"24,000 tons of iron ore, more or less," stated in the contract Exhibit
"A," being a mere estimate by the parties of the total tonnage
weight of the mass; and second, that the evidence shows that
neither of the parties had actually measured of weighed the mass,
so that they both tried to arrive at the total quantity by making an
estimate of the volume thereof in cubic meters and then multiplying
it by the estimated weight per ton of each cubic meter.
The sale between the parties is a sale of a specific mass or iron ore
because no provision was made in their contract for the measuring
or weighing of the ore sold in order to complete or perfect the sale,
nor was the price of P75,000,00 agreed upon by the parties based
upon any such measurement.(see Art. 1480, second par., New
Civil Code). The subject matter of the sale is, therefore, a
determinate object, the mass, and not the actual number of units or
tons contained therein, so that all that was required of the seller
Gaite was to deliver in good faith to his buyer all of the ore found in
the mass, notwithstanding that the quantity delivered is less than
the amount estimated by them (Mobile Machinery & Supply Co., Inc.
vs. York Oilfield Salvage Co., Inc. 171 So. 872, applying art. 2459
of the Louisiana Civil Code). There is no charge in this case that
Gaite did not deliver to appellants all the ore found in the stockpiles
in the mining claims in questions; Gaite had, therefore, complied
with his promise to deliver, and appellants in turn are bound to pay
the lump price.
But assuming that plaintiff Gaite undertook to sell and appellants
undertook to buy, not a definite mass, but approximately 24,000
tons of ore, so that any substantial difference in this quantity
36
delivered would entitle the buyers to recover damages for the
short-delivery, was there really a short-delivery in this case?
We think not. As already stated, neither of the parties had actually
measured or weighed the whole mass of ore cubic meter by cubic meter,
or ton by ton. Both parties predicate their respective claims only upon an
estimated number of cubic meters of ore multiplied by the average
tonnage factor per cubic meter.
Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in
the stockpiles of ore that he sold to Fonacier, while appellants contend
that by actual measurement, their witness Cirpriano Manlañgit found the
total volume of ore in the stockpiles to be only 6.609 cubic meters. As to
the average weight in tons per cubic meter, the parties are again in
disagreement, with appellants claiming the correct tonnage factor to be
2.18 tons to a cubic meter, while appellee Gaite claims that the correct
tonnage factor is about 3.7.
In the face of the conflict of evidence, we take as the most reliable
estimate of the tonnage factor of iron ore in this case to be that made by
Leopoldo F. Abad, chief of the Mines and Metallurgical Division of the
Bureau of Mines, a government pensionado to the States and a mining
engineering graduate of the Universities of Nevada and California, with
almost 22 years of experience in the Bureau of Mines. This witness placed
the tonnage factor of every cubic meter of iron ore at between 3 metric
tons as minimum to 5 metric tons as maximum. This estimate, in turn,
closely corresponds to the average tonnage factor of 3.3 adopted in his
corrected report (Exhibits "FF" and FF-1") by engineer Nemesio Gamatero,
who was sent by the Bureau of Mines to the mining claims involved at the
request of appellant Krakower, precisely to make an official estimate of the
amount of iron ore in Gaite's stockpiles after the dispute arose.
Even granting, then, that the estimate of 6,609 cubic meters of ore in the
stockpiles made by appellant's witness Cipriano Manlañgit is correct, if we
multiply it by the average tonnage factor of 3.3 tons to a cubic meter, the
product is 21,809.7 tons, which is not very far from the estimate of 24,000
tons made by appellee Gaite, considering that actual weighing of each unit
of the mass was practically impossible, so that a reasonable percentage of
error should be allowed anyone making an estimate of the exact quantity
in tons found in the mass. It must not be forgotten that the contract Exhibit
"A" expressly stated the amount to be 24,000 tons, more or less. (ch. Pine
River Logging & Improvement Co. vs U.S., 279, 46 L. Ed. 1164).
There was, consequently, no short-delivery in this case as would entitle
appellants to the payment of damages, nor could Gaite have been guilty of
any fraud in making any misrepresentation to appellants as to the total
quantity of ore in the stockpiles of the mining claims in question, as
charged by appellants, since Gaite's estimate appears to be substantially
correct.
WHEREFORE, finding no error in the decision appealed from, we hereby
affirm the same, with costs against appellants.
Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon,
De Leon and Natividad, JJ., concur.
G.R. No. 126376 November 20, 2003
SPOUSES BERNARDO BUENAVENTURA and CONSOLACION
JOAQUIN, SPOUSES JUANITO EDRA and NORA JOAQUIN,
SPOUSES RUFINO VALDOZ and EMMA JOAQUIN, and NATIVIDAD
JOAQUIN, petitioners,
vs.
COURT OF APPEALS, SPOUSES LEONARDO JOAQUIN and
FELICIANA LANDRITO, SPOUSES FIDEL JOAQUIN and CONCHITA
BERNARDO, SPOUSES TOMAS JOAQUIN and SOLEDAD ALCORAN,
SPOUSES ARTEMIO JOAQUIN and SOCORRO ANGELES, SPOUSES
ALEXANDER MENDOZA and CLARITA JOAQUIN, SPOUSES
 37

TELESFORO CARREON and FELICITAS JOAQUIN, SPOUSES 6. Deed of Absolute Sale covering Lot 168-C-1 of subdivision plan (LRC)
DANILO VALDOZ and FE JOAQUIN, and SPOUSES GAVINO Psd-256395 executed on 7 October 1988, in favor of Gavino Joaquin, for a
JOAQUIN and LEA ASIS, respondents. consideration of ₱25,000.00 (Exh. "K"), pursuant to which TCT No.
157779 was issued in his name (Exh. "K-1").]
DECISION
In seeking the declaration of nullity of the aforesaid deeds of sale and
CARPIO, J.: certificates of title, plaintiffs, in their complaint, aver:

- XX-
The Case

The deeds of sale, Annexes "C," "D," "E," "F," and "G," [and "K"] are
This is a petition for review on certiorari1 to annul the Decision2
simulated as they are, are NULL AND VOID AB INITIO because –
dated 26 June 1996 of the Court of Appeals in CA-G.R. CV No.
41996. The Court of Appeals affirmed the Decision3 dated 18
February 1993 rendered by Branch 65 of the Regional Trial Court a) Firstly, there was no actual valid consideration for the deeds of sale xxx
of Makati ("trial court") in Civil Case No. 89-5174. The trial court over the properties in litis;
dismissed the case after it found that the parties executed the
Deeds of Sale for valid consideration and that the plaintiffs did not
b) Secondly, assuming that there was consideration in the sums reflected
have a cause of action against the defendants.
in the questioned deeds, the properties are more than three-fold times
more valuable than the measly sums appearing therein;
The Facts
c) Thirdly, the deeds of sale do not reflect and express the true intent of
The Court of Appeals summarized the facts of the case as follows: the parties (vendors and vendees); and

Defendant spouses Leonardo Joaquin and Feliciana Landrito are
the parents of plaintiffs Consolacion, Nora, Emma and Natividad as
well as of defendants Fidel, Tomas, Artemio, Clarita, Felicitas, Fe,
and Gavino, all surnamed JOAQUIN. The married Joaquin children
are joined in this action by their respective spouses.
d) Fourthly, the purported sale of the properties in litis was the result of a
deliberate conspiracy designed to unjustly deprive the rest of the
compulsory heirs (plaintiffs herein) of their legitime.
- XXI -

Sought to be declared null and void ab initio are certain deeds of

Necessarily, and as an inevitable consequence, Transfer Certificates of
sale of real property executed by defendant parents Leonardo
Title Nos. 36113/T-172, S-109772, 155329, 155330, 157203 [and 157779]
Joaquin and Feliciana Landrito in favor of their co-defendant
issued by the Registrar of Deeds over the properties in litis xxx are NULL
children and the corresponding certificates of title issued in their
AND VOID AB INITIO.
names, to wit:

Defendants, on the other hand aver (1) that plaintiffs do not have a cause
1. Deed of Absolute Sale covering Lot 168-C-7 of subdivision plan
of action against them as well as the requisite standing and interest to
(LRC) Psd-256395 executed on 11 July 1978, in favor of defendant
assail their titles over the properties in litis; (2) that the sales were with
Felicitas Joaquin, for a consideration of ₱6,000.00 (Exh. "C"),
sufficient considerations and made by defendants parents voluntarily, in
pursuant to which TCT No. [36113/T-172] was issued in her name
good faith, and with full knowledge of the consequences of their deeds of
(Exh. "C-1");
sale; and (3) that the certificates of title were issued with sufficient factual
and legal basis.4 (Emphasis in the original)
2. Deed of Absolute Sale covering Lot 168-I-3 of subdivision plan
(LRC) Psd-256394 executed on 7 June 1979, in favor of defendant
The Ruling of the Trial Court
Clarita Joaquin, for a consideration of ₱1[2],000.00 (Exh. "D"),
pursuant to which TCT No. S-109772 was issued in her name (Exh.
"D-1"); Before the trial, the trial court ordered the dismissal of the case against
defendant spouses Gavino Joaquin and Lea Asis.5 Instead of filing an
Answer with their co-defendants, Gavino Joaquin and Lea Asis filed a
3 Deed of Absolute Sale covering Lot 168-I-1 of subdivision plan
Motion to Dismiss.6In granting the dismissal to Gavino Joaquin and Lea
(LRC) Psd-256394 executed on 12 May 1988, in favor of defendant
Asis, the trial court noted that "compulsory heirs have the right to a
spouses Fidel Joaquin and Conchita Bernardo, for a consideration
legitime but such right is contingent since said right commences only from
of ₱54,[3]00.00 (Exh. "E"), pursuant to which TCT No. 155329 was
the moment of death of the decedent pursuant to Article 777 of the Civil
issued to them (Exh. "E-1");
Code of the Philippines."7

4. Deed of Absolute Sale covering Lot 168-I-2 of subdivision plan

(LRC) Psd-256394 executed on 12 May 1988, in favor of defendant
spouses Artemio Joaquin and Socorro Angeles, for a consideration
of ₱[54,3]00.00 (Exh. "F"), pursuant to which TCT No. 155330 was
issued to them (Exh. "F-1"); and
5. Absolute Sale of Real Property covering Lot 168-C-4 of
subdivision plan (LRC) Psd-256395 executed on 9 September
1988, in favor of Tomas Joaquin, for a consideration of ₱20,000.00
(Exh. "G"), pursuant to which TCT No. 157203 was issued in her
name (Exh. "G-1").
After trial, the trial court ruled in favor of the defendants and dismissed the
complaint. The trial court stated:
In the first place, the testimony of the defendants, particularly that of the
xxx father will show that the Deeds of Sale were all executed for valuable
consideration. This assertion must prevail over the negative allegation of
plaintiffs.
And then there is the argument that plaintiffs do not have a valid cause of
action against defendants since there can be no legitime to speak of prior
to the death of their parents. The court finds this contention tenable. In
determining the legitime, the value of the property left at the death of the
testator shall be considered (Art. 908 of the New Civil Code). Hence, the

legitime of a compulsory heir is computed as of the time of the
death of the decedent. Plaintiffs therefore cannot claim an
impairment of their legitime while their parents live.
All the foregoing considered, this case is DISMISSED.
In order to preserve whatever is left of the ties that should bind
families together, the counterclaim is likewise DISMISSED.
No costs.
SO ORDERED.8
The Ruling of the Court of Appeals
The Court of Appeals affirmed the decision of the trial
court.1âwphi1 The appellate court ruled:
To the mind of the Court, appellants are skirting the real and
decisive issue in this case, which is, whether xxx they have a cause
of action against appellees.
Upon this point, there is no question that plaintiffs-appellants, like
their defendant brothers and sisters, are compulsory heirs of
defendant spouses, Leonardo Joaquin and Feliciana Landrito, who
are their parents. However, their right to the properties of their
defendant parents, as compulsory heirs, is merely inchoate and
vests only upon the latter’s death. While still alive, defendant
parents are free to dispose of their properties, provided that such
dispositions are not made in fraud of creditors.
Plaintiffs-appellants are definitely not parties to the deeds of sale in
question. Neither do they claim to be creditors of their defendant
parents. Consequently, they cannot be considered as real parties
in interest to assail the validity of said deeds either for gross
inadequacy or lack of consideration or for failure to express the true
intent of the parties. In point is the ruling of the Supreme Court in
Velarde, et al. vs. Paez, et al., 101 SCRA 376, thus:
The plaintiffs are not parties to the alleged deed of sale and are not
principally or subsidiarily bound thereby; hence, they have no legal
capacity to challenge their validity.
Plaintiffs-appellants anchor their action on the supposed
impairment of their legitime by the dispositions made by their
defendant parents in favor of their defendant brothers and sisters.
But, as correctly held by the court a quo, "the legitime of a
compulsory heir is computed as of the time of the death of the
decedent. Plaintiffs therefore cannot claim an impairment of their
legitime while their parents live."
With this posture taken by the Court, consideration of the errors
assigned by plaintiffs-appellants is inconsequential.
WHEREFORE, the decision appealed from is hereby AFFIRMED,
with costs against plaintiffs-appellants.
SO ORDERED.9
Hence, the instant petition.
Issues
Petitioners assign the following as errors of the Court of Appeals:
38
1. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
CONVEYANCE IN QUESTION HAD NO VALID CONSIDERATION.
2. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT EVEN
ASSUMING THAT THERE WAS A CONSIDERATION, THE SAME IS
GROSSLY INADEQUATE.
3. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
DEEDS OF SALE DO NOT EXPRESS THE TRUE INTENT OF THE
PARTIES.
4. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
CONVEYANCE WAS PART AND PARCEL OF A CONSPIRACY AIMED
AT UNJUSTLY DEPRIVING THE REST OF THE CHILDREN OF THE
SPOUSES LEONARDO JOAQUIN AND FELICIANA LANDRITO OF
THEIR INTEREST OVER THE SUBJECT PROPERTIES.
5. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
PETITIONERS HAVE A GOOD, SUFFICIENT AND VALID CAUSE OF
ACTION AGAINST THE PRIVATE RESPONDENTS.10
The Ruling of the Court
We find the petition without merit.
We will discuss petitioners’ legal interest over the properties subject of the
Deeds of Sale before discussing the issues on the purported lack of
consideration and gross inadequacy of the prices of the Deeds of Sale.
Whether Petitioners have a legal interest over the properties subject of the
Deeds of Sale
Petitioners’ Complaint betrays their motive for filing this case. In their
Complaint, petitioners asserted that the "purported sale of the
properties in litis was the result of a deliberate conspiracy designed to
unjustly deprive the rest of the compulsory heirs (plaintiffs herein) of their
legitime." Petitioners’ strategy was to have the Deeds of Sale declared
void so that ownership of the lots would eventually revert to their
respondent parents. If their parents die still owning the lots, petitioners and
their respondent siblings will then co-own their parents’ estate by
hereditary succession.11
It is evident from the records that petitioners are interested in the
properties subject of the Deeds of Sale, but they have failed to show any
legal right to the properties. The trial and appellate courts should have
dismissed the action for this reason alone. An action must be prosecuted
in the name of the real party-in-interest.12
[T]he question as to "real party-in-interest" is whether he is "the party who
would be benefitted or injured by the judgment, or the ‘party entitled to the
avails of the suit.’"
xxx
In actions for the annulment of contracts, such as this action, the real
parties are those who are parties to the agreement or are bound either
principally or subsidiarily or are prejudiced in their rights with respect to
one of the contracting parties and can show the detriment which would
positively result to them from the contract even though they did not
intervene in it (Ibañez v. Hongkong & Shanghai Bank, 22 Phil. 572 [1912])
xxx.
These are parties with "a present substantial interest, as distinguished
from a mere expectancy or future, contingent, subordinate, or
consequential interest…. The phrase ‘present substantial interest’ more
concretely is meant such interest of a party in the subject matter of the

action as will entitle him, under the substantive law, to recover if the
evidence is sufficient, or that he has the legal title to demand and
the defendant will be protected in a payment to or recovery by
him."13
Petitioners do not have any legal interest over the properties
subject of the Deeds of Sale. As the appellate court stated,
petitioners’ right to their parents’ properties is merely inchoate and
vests only upon their parents’ death. While still living, the parents of
petitioners are free to dispose of their properties. In their
overzealousness to safeguard their future legitime, petitioners
forget that theoretically, the sale of the lots to their siblings does not
affect the value of their parents’ estate. While the sale of the lots
reduced the estate, cash of equivalent value replaced the lots
taken from the estate.
Whether the Deeds of Sale are void for lack of consideration
Petitioners assert that their respondent siblings did not actually pay
the prices stated in the Deeds of Sale to their respondent father.
Thus, petitioners ask the court to declare the Deeds of Sale void.
A contract of sale is not a real contract, but a consensual contract.
As a consensual contract, a contract of sale becomes a binding
and valid contract upon the meeting of the minds as to price. If
there is a meeting of the minds of the parties as to the price, the
contract of sale is valid, despite the manner of payment, or even
the breach of that manner of payment. If the real price is not stated
in the contract, then the contract of sale is valid but subject to
reformation. If there is no meeting of the minds of the parties as to
the price, because the price stipulated in the contract is simulated,
then the contract is void.14 Article 1471 of the Civil Code states that
if the price in a contract of sale is simulated, the sale is void.
It is not the act of payment of price that determines the validity of a
contract of sale. Payment of the price has nothing to do with the
perfection of the contract. Payment of the price goes into the
performance of the contract. Failure to pay the consideration is
different from lack of consideration. The former results in a right to
demand the fulfillment or cancellation of the obligation under an
existing valid contract while the latter prevents the existence of a
valid contract.15
Petitioners failed to show that the prices in the Deeds of Sale were
absolutely simulated. To prove simulation, petitioners presented
Emma Joaquin Valdoz’s testimony stating that their father,
respondent Leonardo Joaquin, told her that he would transfer a lot
to her through a deed of sale without need for her payment of the
purchase price.16The trial court did not find the allegation of
absolute simulation of price credible. Petitioners’ failure to prove
absolute simulation of price is magnified by their lack of knowledge
of their respondent siblings’ financial capacity to buy the
questioned lots.17 On the other hand, the Deeds of Sale which
petitioners presented as evidence plainly showed the cost of each
lot sold. Not only did respondents’ minds meet as to the purchase
price, but the real price was also stated in the Deeds of Sale. As of
the filing of the complaint, respondent siblings have also fully paid
the price to their respondent father.18
Whether the Deeds of Sale are void for gross inadequacy of price
Petitioners ask that assuming that there is consideration, the same
is grossly inadequate as to invalidate the Deeds of Sale.
Articles 1355 of the Civil Code states:
39
Art. 1355. Except in cases specified by law, lesion or inadequacy of cause
shall not invalidate a contract, unless there has been fraud, mistake or
undue influence. (Emphasis supplied)
Article 1470 of the Civil Code further provides:
Art. 1470. Gross inadequacy of price does not affect a contract of sale,
except as may indicate a defect in the consent, or that the parties really
intended a donation or some other act or contract. (Emphasis supplied)
Petitioners failed to prove any of the instances mentioned in Articles 1355
and 1470 of the Civil Code which would invalidate, or even affect, the
Deeds of Sale. Indeed, there is no requirement that the price be equal to
the exact value of the subject matter of sale. All the respondents believed
that they received the commutative value of what they gave. As we stated
in Vales v. Villa:19
Courts cannot follow one every step of his life and extricate him from bad
bargains, protect him from unwise investments, relieve him from one-sided
contracts, or annul the effects of foolish acts. Courts cannot constitute
themselves guardians of persons who are not legally incompetent. Courts
operate not because one person has been defeated or overcome by
another, but because he has been defeated or overcome illegally. Men
may do foolish things, make ridiculous contracts, use miserable judgment,
and lose money by them – indeed, all they have in the world; but not for
that alone can the law intervene and restore. There must be, in addition, a
violation of the law, the commission of what the law knows as an
actionable wrong, before the courts are authorized to lay hold of the
situation and remedy it. (Emphasis in the original)
Moreover, the factual findings of the appellate court are conclusive on the
parties and carry greater weight when they coincide with the factual
findings of the trial court. This Court will not weigh the evidence all over
again unless there has been a showing that the findings of the lower court
are totally devoid of support or are clearly erroneous so as to constitute
serious abuse of discretion.20 In the instant case, the trial court found that
the lots were sold for a valid consideration, and that the defendant children
actually paid the purchase price stipulated in their respective Deeds of
Sale. Actual payment of the purchase price by the buyer to the seller is a
factual finding that is now conclusive upon us.
WHEREFORE, we AFFIRM the decision of the Court of Appeals in toto.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban, Ynares-Santiago, and Azcuna,
JJ., concur.
G.R. No. 124242 January 21, 2005
SAN LORENZO DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS, PABLO S. BABASANTA, SPS. MIGUEL LU and
PACITA ZAVALLA LU, respondents.
DECISION
TINGA, J.:
From a coaptation of the records of this case, it appears that respondents
Miguel Lu and Pacita Zavalla, (hereinafter, the Spouses Lu) owned two (2)
parcels of land situated in Sta. Rosa, Laguna covered by TCT No.
T-39022 and TCT No. T-39023 both measuring 15,808 square meters or a
total of 3.1616 hectares.
 40

On 20 August 1986, the Spouses Lu purportedly sold the two court in its Order dated 17 January 19905 admitted the amended
parcels of land to respondent Pablo Babasanta, (hereinafter, complaint.
Babasanta) for the price of fifteen pesos (₱15.00) per square meter.
Babasanta made a downpayment of fifty thousand pesos
On 19 January 1990, herein petitioner San Lorenzo Development
(₱50,000.00) as evidenced by a memorandum receipt issued by
Corporation (SLDC) filed a Motion for Intervention6 before the trial court.
Pacita Lu of the same date. Several other payments totaling two
SLDC alleged that it had legal interest in the subject matter under litigation
hundred thousand pesos (₱200,000.00) were made by Babasanta.
because on 3 May 1989, the two parcels of land involved, namely Lot
1764-A and 1764-B, had been sold to it in a Deed of Absolute Sale with
Sometime in May 1989, Babasanta wrote a letter to Pacita Lu to Mortgage.7 It alleged that it was a buyer in good faith and for value and
demand the execution of a final deed of sale in his favor so that he therefore it had a better right over the property in litigation.
could effect full payment of the purchase price. In the same letter,
Babasanta notified the spouses about having received information
In his Opposition to SLDC’s motion for intervention,8 respondent
that the spouses sold the same property to another without his
Babasanta demurred and argued that the latter had no legal interest in the
knowledge and consent. He demanded that the second sale be
case because the two parcels of land involved herein had already been
cancelled and that a final deed of sale be issued in his favor.
conveyed to him by the Spouses Lu and hence, the vendors were without
legal capacity to transfer or dispose of the two parcels of land to the
In response, Pacita Lu wrote a letter to Babasanta wherein she intervenor.
acknowledged having agreed to sell the property to him at fifteen
pesos (₱15.00) per square meter. She, however, reminded
Meanwhile, the trial court in its Order dated 21 March 1990 allowed SLDC
Babasanta that when the balance of the purchase price became
to intervene. SLDC filed its Complaint-in-Intervention on 19 April
due, he requested for a reduction of the price and when she
1990.9 Respondent Babasanta’s motion for the issuance of a preliminary
refused, Babasanta backed out of the sale. Pacita added that she
injunction was likewise granted by the trial court in its Order dated 11
returned the sum of fifty thousand pesos (₱50,000.00) to
January 199110 conditioned upon his filing of a bond in the amount of fifty
Babasanta through Eugenio Oya.
thousand pesos (₱50,000.00).

On 2 June 1989, respondent Babasanta, as plaintiff, filed before

the Regional Trial Court (RTC), Branch 31, of San Pedro, Laguna,
a Complaint for Specific Performance and Damages1 against his
co-respondents herein, the Spouses Lu. Babasanta alleged that
the lands covered by TCT No. T- 39022 and T-39023 had been
sold to him by the spouses at fifteen pesos (₱15.00) per square
meter. Despite his repeated demands for the execution of a final
deed of sale in his favor, respondents allegedly refused.
In their Answer,2 the Spouses Lu alleged that Pacita Lu obtained
loans from Babasanta and when the total advances of Pacita
reached fifty thousand pesos (₱50,000.00), the latter and
Babasanta, without the knowledge and consent of Miguel Lu, had
verbally agreed to transform the transaction into a contract to sell
the two parcels of land to Babasanta with the fifty thousand pesos
(₱50,000.00) to be considered as the downpayment for the
property and the balance to be paid on or before 31 December
1987. Respondents Lu added that as of November 1987, total
payments made by Babasanta amounted to only two hundred
thousand pesos (₱200,000.00) and the latter allegedly failed to pay
the balance of two hundred sixty thousand pesos (₱260,000.00)
despite repeated demands. Babasanta had purportedly asked
Pacita for a reduction of the price from fifteen pesos (₱15.00) to
twelve pesos (₱12.00) per square meter and when the Spouses Lu
refused to grant Babasanta’s request, the latter rescinded the
contract to sell and declared that the original loan transaction just
be carried out in that the spouses would be indebted to him in the
amount of two hundred thousand pesos (₱200,000.00).
Accordingly, on 6 July 1989, they purchased Interbank Manager’s
Check No. 05020269 in the amount of two hundred thousand
pesos (₱200,000.00) in the name of Babasanta to show that she
was able and willing to pay the balance of her loan obligation.
Babasanta later filed an Amended Complaint dated 17 January
19903 wherein he prayed for the issuance of a writ of preliminary
injunction with temporary restraining order and the inclusion of the
Register of Deeds of Calamba, Laguna as party defendant. He
contended that the issuance of a preliminary injunction was
necessary to restrain the transfer or conveyance by the Spouses
Lu of the subject property to other persons.
The Spouses Lu filed their Opposition4 to the amended complaint
contending that it raised new matters which seriously affect their
substantive rights under the original complaint. However, the trial
SLDC in its Complaint-in-Intervention alleged that on 11 February 1989,
the Spouses Lu executed in its favor an Option to Buy the lots subject of
the complaint. Accordingly, it paid an option money in the amount of three
hundred sixteen thousand one hundred sixty pesos (₱316,160.00) out of
the total consideration for the purchase of the two lots of one million two
hundred sixty-four thousand six hundred forty pesos (₱1,264,640.00).
After the Spouses Lu received a total amount of six hundred thirty-two
thousand three hundred twenty pesos (₱632,320.00) they executed on 3
May 1989 a Deed of Absolute Sale with Mortgage in its favor. SLDC
added that the certificates of title over the property were delivered to it by
the spouses clean and free from any adverse claims and/or notice of lis
pendens. SLDC further alleged that it only learned of the filing of the
complaint sometime in the early part of January 1990 which prompted it to
file the motion to intervene without delay. Claiming that it was a buyer in
good faith, SLDC argued that it had no obligation to look beyond the titles
submitted to it by the Spouses Lu particularly because Babasanta’s claims
were not annotated on the certificates of title at the time the lands were
sold to it.
After a protracted trial, the RTC rendered its Decision on 30 July 1993
upholding the sale of the property to SLDC. It ordered the Spouses Lu to
pay Babasanta the sum of two hundred thousand pesos (₱200,000.00)
with legal interest plus the further sum of fifty thousand pesos (₱50,000.00)
as and for attorney’s fees. On the complaint-in-intervention, the trial court
ordered the Register of Deeds of Laguna, Calamba Branch to cancel the
notice of lis pendens annotated on the original of the TCT No. T-39022
(T-7218) and No. T-39023 (T-7219).
Applying Article 1544 of the Civil Code, the trial court ruled that since both
Babasanta and SLDC did not register the respective sales in their favor,
ownership of the property should pertain to the buyer who first acquired
possession of the property. The trial court equated the execution of a
public instrument in favor of SLDC as sufficient delivery of the property to
the latter. It concluded that symbolic possession could be considered to
have been first transferred to SLDC and consequently ownership of the
property pertained to SLDC who purchased the property in good faith.
Respondent Babasanta appealed the trial court’s decision to the Court of
Appeals alleging in the main that the trial court erred in concluding that
SLDC is a purchaser in good faith and in upholding the validity of the sale
made by the Spouses Lu in favor of SLDC.
Respondent spouses likewise filed an appeal to the Court of Appeals.
They contended that the trial court erred in failing to consider that the

contract to sell between them and Babasanta had been novated
when the latter abandoned the verbal contract of sale and declared
that the original loan transaction just be carried out. The Spouses
Lu argued that since the properties involved were conjugal, the trial
court should have declared the verbal contract to sell between
Pacita Lu and Pablo Babasanta null and void ab initio for lack of
knowledge and consent of Miguel Lu. They further averred that the
trial court erred in not dismissing the complaint filed by Babasanta;
in awarding damages in his favor and in refusing to grant the reliefs
prayed for in their answer.
On 4 October 1995, the Court of Appeals rendered
its Decision11 which set aside the judgment of the trial court. It
declared that the sale between Babasanta and the Spouses Lu
was valid and subsisting and ordered the spouses to execute the
necessary deed of conveyance in favor of Babasanta, and the
latter to pay the balance of the purchase price in the amount of two
hundred sixty thousand pesos (₱260,000.00). The appellate court
ruled that the Absolute Deed of Sale with Mortgage in favor of
SLDC was null and void on the ground that SLDC was a purchaser
in bad faith. The Spouses Lu were further ordered to return all
payments made by SLDC with legal interest and to pay attorney’s
fees to Babasanta.
SLDC and the Spouses Lu filed separate motions
reconsideration with the appellate court.12 However,
a Manifestation dated 20 December 1995,13 the Spouses
informed the appellate court that they are no longer contesting
decision dated 4 October 1995.
In its Resolution dated 11 March 1996,14 the appellate court
considered as withdrawn the motion for reconsideration filed by the
Spouses Lu in view of their manifestation of 20 December 1995.
The appellate court denied SLDC’s motion for reconsideration on
the ground that no new or substantial arguments were raised
therein which would warrant modification or reversal of the court’s
decision dated 4 October 1995.
Hence, this petition.
SLDC assigns the following errors allegedly committed by the
appellate court:
THE COURT OF APPEALS ERRED IN
HOLDING THAT SAN LORENZO WAS NOT A
BUYER IN GOOD FAITH BECAUSE WHEN
THE SELLER PACITA ZAVALLA LU
OBTAINED FROM IT THE CASH ADVANCE
OF ₱200,000.00, SAN LORENZO WAS PUT
ON INQUIRY OF A PRIOR TRANSACTION
ON THE PROPERTY.
THE COURT OF APPEALS ERRED IN
FAILING TO APPRECIATE THE
ESTABLISHED FACT THAT THE ALLEGED
FIRST BUYER, RESPONDENT BABASANTA,
WAS NOT IN POSSESSION OF THE
DISPUTED PROPERTY WHEN SAN
LORENZO BOUGHT AND TOOK
POSSESSION OF THE PROPERTY AND NO
ADVERSE CLAIM, LIEN, ENCUMBRANCE
OR LIS PENDENS WAS ANNOTATED ON
THE TITLES.
THE COURT OF APPEALS ERRED IN
FAILING TO APPRECIATE THE FACT THAT
RESPONDENT BABASANTA HAS
SUBMITTED NO EVIDENCE SHOWING
THAT SAN LORENZO WAS AWARE OF HIS
41
RIGHTS OR INTERESTS IN THE DISPUTED
PROPERTY.
THE COURT OF APPEALS ERRED IN HOLDING
THAT NOTWITHSTANDING ITS FULL
CONCURRENCE ON THE FINDINGS OF FACT OF
THE TRIAL COURT, IT REVERSED AND SET
ASIDE THE DECISION OF THE TRIAL COURT
UPHOLDING THE TITLE OF SAN LORENZO AS A
BUYER AND FIRST POSSESSOR IN GOOD
FAITH. 15
SLDC contended that the appellate court erred in concluding that it had
prior notice of Babasanta’s claim over the property merely on the basis of
its having advanced the amount of two hundred thousand pesos
(₱200,000.00) to Pacita Lu upon the latter’s representation that she
needed the money to pay her obligation to Babasanta. It argued that it had
no reason to suspect that Pacita was not telling the truth that the money
would be used to pay her indebtedness to Babasanta. At any rate, SLDC
averred that the amount of two hundred thousand pesos (₱200,000.00)
which it advanced to Pacita Lu would be deducted from the balance of the
purchase price still due from it and should not be construed as notice of
the prior sale of the land to Babasanta. It added that at no instance did
Pacita Lu inform it that the lands had been previously sold to Babasanta.
for
in
Moreover, SLDC stressed that after the execution of the sale in its favor it
Lu
immediately took possession of the property and asserted its rights as new
the owner as opposed to Babasanta who has never exercised acts of
ownership. Since the titles bore no adverse claim, encumbrance, or lien at
the time it was sold to it, SLDC argued that it had every reason to rely on
the correctness of the certificate of title and it was not obliged to go
beyond the certificate to determine the condition of the property. Invoking
the presumption of good faith, it added that the burden rests on Babasanta
to prove that it was aware of the prior sale to him but the latter failed to do
so. SLDC pointed out that the notice of lis pendens was annotated only on
2 June 1989 long after the sale of the property to it was consummated on
3 May 1989.1awphi1.nét
Meanwhile, in an Urgent Ex-Parte Manifestation dated 27 August 1999,
the Spouses Lu informed the Court that due to financial constraints they
have no more interest to pursue their rights in the instant case and submit
themselves to the decision of the Court of Appeals.16
On the other hand, respondent Babasanta argued that SLDC could not
have acquired ownership of the property because it failed to comply with
the requirement of registration of the sale in good faith. He emphasized
that at the time SLDC registered the sale in its favor on 30 June 1990,
there was already a notice of lis pendens annotated on the titles of the
property made as early as 2 June 1989. Hence, petitioner’s registration of
the sale did not confer upon it any right. Babasanta further asserted that
petitioner’s bad faith in the acquisition of the property is evident from the
fact that it failed to make necessary inquiry regarding the purpose of the
issuance of the two hundred thousand pesos (₱200,000.00) manager’s
check in his favor.
The core issue presented for resolution in the instant petition is who
between SLDC and Babasanta has a better right over the two parcels of
land subject of the instant case in view of the successive transactions
executed by the Spouses Lu.
To prove the perfection of the contract of sale in his favor, Babasanta
presented a document signed by Pacita Lu acknowledging receipt of the
sum of fifty thousand pesos (₱50,000.00) as partial payment for 3.6
hectares of farm lot situated at Barangay Pulong, Sta. Cruz, Sta. Rosa,
Laguna.17 While the receipt signed by Pacita did not mention the price for
which the property was being sold, this deficiency was supplied by Pacita
Lu’s letter dated 29 May 198918 wherein she admitted that she agreed to
sell the 3.6 hectares of land to Babasanta for fifteen pesos (₱15.00) per
square meter.

An analysis of the facts obtaining in this case, as well as the
evidence presented by the parties, irresistibly leads to the
conclusion that the agreement between Babasanta and the
Spouses Lu is a contract to sell and not a contract of sale.
Contracts, in general, are perfected by mere consent, 19 which is
manifested by the meeting of the offer and the acceptance upon
the thing which are to constitute the contract. The offer must be
certain and the acceptance absolute.20 Moreover, contracts shall
be obligatory in whatever form they may have been entered into,
provided all the essential requisites for their validity are present. 21
The receipt signed by Pacita Lu merely states that she accepted
the sum of fifty thousand pesos (₱50,000.00) from Babasanta as
partial payment of 3.6 hectares of farm lot situated in Sta. Rosa,
Laguna. While there is no stipulation that the seller reserves the
ownership of the property until full payment of the price which is a
distinguishing feature of a contract to sell, the subsequent acts of
the parties convince us that the Spouses Lu never intended to
transfer ownership to Babasanta except upon full payment of the
purchase price.
Babasanta’s letter dated 22 May 1989 was quite telling. He stated
therein that despite his repeated requests for the execution of the
final deed of sale in his favor so that he could effect full payment of
the price, Pacita Lu allegedly refused to do so. In effect, Babasanta
himself recognized that ownership of the property would not be
transferred to him until such time as he shall have effected full
payment of the price. Moreover, had the sellers intended to transfer
title, they could have easily executed the document of sale in its
required form simultaneously with their acceptance of the partial
payment, but they did not. Doubtlessly, the receipt signed by Pacita
Lu should legally be considered as a perfected contract to sell.
The distinction between a contract to sell and a contract of sale is
quite germane. In a contract of sale, title passes to the vendee
upon the delivery of the thing sold; whereas in a contract to sell, by
agreement the ownership is reserved in the vendor and is not to
pass until the full payment of the price. 22 In a contract of sale, the
vendor has lost and cannot recover ownership until and unless the
contract is resolved or rescinded; whereas in a contract to sell, title
is retained by the vendor until the full payment of the price, such
payment being a positive suspensive condition and failure of which
is not a breach but an event that prevents the obligation of the
vendor to convey title from becoming effective.23
The perfected contract to sell imposed upon Babasanta the
obligation to pay the balance of the purchase price. There being an
obligation to pay the price, Babasanta should have made the
proper tender of payment and consignation of the price in court as
required by law. Mere sending of a letter by the vendee expressing
the intention to pay without the accompanying payment is not
considered a valid tender of payment.24 Consignation of the
amounts due in court is essential in order to extinguish
Babasanta’s obligation to pay the balance of the purchase price.
Glaringly absent from the records is any indication that Babasanta
even attempted to make the proper consignation of the amounts
due, thus, the obligation on the part of the sellers to convey title
never acquired obligatory force.
On the assumption that the transaction between the parties is a
contract of sale and not a contract to sell, Babasanta’s claim of
ownership should nevertheless fail.
Sale, being a consensual contract, is perfected by mere
consent25 and from that moment, the parties may reciprocally
demand performance.26 The essential elements of a contract of
sale, to wit: (1) consent or meeting of the minds, that is, to transfer
ownership in exchange for the price; (2) object certain which is the
42
subject matter of the contract; (3) cause of the obligation which is
established.27
The perfection of a contract of sale should not, however, be confused with
its consummation. In relation to the acquisition and transfer of ownership,
it should be noted that sale is not a mode, but merely a title. A mode is the
legal means by which dominion or ownership is created, transferred or
destroyed, but title is only the legal basis by which to affect dominion or
ownership.28 Under Article 712 of the Civil Code, "ownership and other
real rights over property are acquired and transmitted by law, by donation,
by testate and intestate succession, and in consequence of certain
contracts, by tradition." Contracts only constitute titles or rights to the
transfer or acquisition of ownership, while delivery or tradition is the mode
of accomplishing the same.29 Therefore, sale by itself does not transfer or
affect ownership; the most that sale does is to create the obligation to
transfer ownership. It is tradition or delivery, as a consequence of sale,
that actually transfers ownership.
Explicitly, the law provides that the ownership of the thing sold is acquired
by the vendee from the moment it is delivered to him in any of the ways
specified in Article 1497 to 1501.30 The word "delivered" should not be
taken restrictively to mean transfer of actual physical possession of the
property. The law recognizes two principal modes of delivery, to wit: (1)
actual delivery; and (2) legal or constructive delivery.
Actual delivery consists in placing the thing sold in the control and
possession of the vendee.31 Legal or constructive delivery, on the other
hand, may be had through any of the following ways: the execution of a
public instrument evidencing the sale;32 symbolical tradition such as the
delivery of the keys of the place where the movable sold is being
kept;33 traditio longa manu or by mere consent or agreement if the
movable sold cannot yet be transferred to the possession of the buyer at
the time of the sale;34 traditio brevi manu if the buyer already had
possession of the object even before the sale;35 and traditio constitutum
possessorium, where the seller remains in possession of the property in a
different capacity.36
Following the above disquisition, respondent Babasanta did not acquire
ownership by the mere execution of the receipt by Pacita Lu
acknowledging receipt of partial payment for the property. For one, the
agreement between Babasanta and the Spouses Lu, though valid, was
not embodied in a public instrument. Hence, no constructive delivery of the
lands could have been effected. For another, Babasanta had not taken
possession of the property at any time after the perfection of the sale in his
favor or exercised acts of dominion over it despite his assertions that he
was the rightful owner of the lands. Simply stated, there was no delivery to
Babasanta, whether actual or constructive, which is essential to transfer
ownership of the property. Thus, even on the assumption that the
perfected contract between the parties was a sale, ownership could not
have passed to Babasanta in the absence of delivery, since in a contract
of sale ownership is transferred to the vendee only upon the delivery of the
thing sold.37
However, it must be stressed that the juridical relationship between the
parties in a double sale is primarily governed by Article 1544 which lays
down the rules of preference between the two purchasers of the same
property. It provides:
Art. 1544. If the same thing should have been sold to different vendees,
the ownership shall be transferred to the person who may have first taken
possession thereof in good faith, if it should be movable property.
Should it be immovable property, the ownership shall belong to the person
acquiring it who in good faith first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person
who in good faith was first in the possession; and, in the absence thereof,
to the person who presents the oldest title, provided there is good faith.

The principle of primus tempore, potior jure (first in time, stronger in
right) gains greater significance in case of double sale of
immovable property. When the thing sold twice is an immovable,
the one who acquires it and first records it in the Registry of
Property, both made in good faith, shall be deemed the
owner.38 Verily, the act of registration must be coupled with good
faith— that is, the registrant must have no knowledge of the defect
or lack of title of his vendor or must not have been aware of facts
which should have put him upon such inquiry and investigation as
might be necessary to acquaint him with the defects in the title of
his vendor.39
Admittedly, SLDC registered the sale with the Registry of Deeds
after it had acquired knowledge of Babasanta’s claim. Babasanta,
however, strongly argues that the registration of the sale by SLDC
was not sufficient to confer upon the latter any title to the property
since the registration was attended by bad faith. Specifically, he
points out that at the time SLDC registered the sale on 30 June
1990, there was already a notice of lis pendens on the file with the
Register of Deeds, the same having been filed one year before on
2 June 1989.
Did the registration of the sale after the annotation of the notice
of lis pendens obliterate the effects of delivery and possession in
good faith which admittedly had occurred prior to SLDC’s
knowledge of the transaction in favor of Babasanta?
We do not hold so.
It must be stressed that as early as 11 February 1989, the Spouses
Lu executed the Option to Buy in favor of SLDC upon receiving
₱316,160.00 as option money from SLDC. After SLDC had paid
more than one half of the agreed purchase price of ₱1,264,640.00,
the Spouses Lu subsequently executed on 3 May 1989 a Deed of
Absolute Salein favor or SLDC. At the time both deeds were
executed, SLDC had no knowledge of the prior transaction of the
Spouses Lu with Babasanta. Simply stated, from the time of
execution of the first deed up to the moment of transfer and
delivery of possession of the lands to SLDC, it had acted in good
faith and the subsequent annotation of lis pendens has no effect at
all on the consummated sale between SLDC and the Spouses Lu.
A purchaser in good faith is one who buys property of
another without notice that some other person has a right to, or
interest in, such property and pays a full and fair price for the same
at the time of such purchase, or before he has notice of the claim or
interest of some other person in the property. 40 Following the
foregoing definition, we rule that SLDC qualifies as a buyer in good
faith since there is no evidence extant in the records that it had
knowledge of the prior transaction in favor of Babasanta. At the
time of the sale of the property to SLDC, the vendors were still the
registered owners of the property and were in fact in possession of
the lands.l^vvphi1.net Time and again, this Court has ruled that a
person dealing with the owner of registered land is not bound to go
beyond the certificate of title as he is charged with notice of
burdens on the property which are noted on the face of the register
or on the certificate of title.41 In assailing knowledge of the
transaction between him and the Spouses Lu, Babasanta
apparently relies on the principle of constructive notice
incorporated in Section 52 of the Property Registration Decree (P.D.
No. 1529) which reads, thus:
Sec. 52. Constructive notice upon registration. – Every conveyance,
mortgage, lease, lien, attachment, order, judgment, instrument or
entry affecting registered land shall, if registered, filed, or entered in
the office of the Register of Deeds for the province or city where the
land to which it relates lies, be constructive notice to all persons
from the time of such registering, filing, or entering.
43
However, the constructive notice operates as such¾by the express
wording of Section 52¾from the time of the registration of the notice of lis
pendens which in this case was effected only on 2 June 1989, at which
time the sale in favor of SLDC had long been consummated insofar as the
obligation of the Spouses Lu to transfer ownership over the property to
SLDC is concerned.
More fundamentally, given the superiority of the right of SLDC to the claim
of Babasanta the annotation of the notice of lis pendens cannot help
Babasanta’s position a bit and it is irrelevant to the good or bad faith
characterization of SLDC as a purchaser. A notice of lis pendens, as the
Court held in Nataño v. Esteban,42 serves as a warning to a prospective
purchaser or incumbrancer that the particular property is in litigation; and
that he should keep his hands off the same, unless he intends to gamble
on the results of the litigation." Precisely, in this case SLDC has intervened
in the pending litigation to protect its rights. Obviously, SLDC’s faith in the
merit of its cause has been vindicated with the Court’s present decision
which is the ultimate denouement on the controversy.
The Court of Appeals has made capital43 of SLDC’s averment in
its Complaint-in-Intervention44 that at the instance of Pacita Lu it issued a
check for ₱200,000.00 payable to Babasanta and the confirmatory
testimony of Pacita Lu herself on cross-examination.45 However, there is
nothing in the said pleading and the testimony which explicitly relates the
amount to the transaction between the Spouses Lu and Babasanta for
what they attest to is that the amount was supposed to pay off the
advances made by Babasanta to Pacita Lu. In any event, the incident took
place after the Spouses Lu had already executed the Deed of Absolute
Sale with Mortgage in favor of SLDC and therefore, as previously
explained, it has no effect on the legal position of SLDC.
Assuming ex gratia argumenti that SLDC’s registration of the sale had
been tainted by the prior notice of lis pendensand assuming further for the
same nonce that this is a case of double sale, still Babasanta’s claim could
not prevail over that of SLDC’s. In Abarquez v. Court of Appeals,46 this
Court had the occasion to rule that if a vendee in a double sale registers
the sale after he has acquired knowledge of a previous sale, the
registration constitutes a registration in bad faith and does not confer upon
him any right. If the registration is done in bad faith, it is as if there is no
registration at all, and the buyer who has taken possession first of the
property in good faith shall be preferred.
In Abarquez, the first sale to the spouses Israel was notarized and
registered only after the second vendee, Abarquez, registered their deed
of sale with the Registry of Deeds, but the Israels were first in possession.
This Court awarded the property to the Israels because registration of the
property by Abarquez lacked the element of good faith. While the facts in
the instant case substantially differ from that in Abarquez, we would not
hesitate to rule in favor of SLDC on the basis of its prior possession of the
property in good faith. Be it noted that delivery of the property to SLDC
was immediately effected after the execution of the deed in its favor, at
which time SLDC had no knowledge at all of the prior transaction by the
Spouses Lu in favor of Babasanta.1a\^/phi1.net
The law speaks not only of one criterion. The first criterion is priority of
entry in the registry of property; there being no priority of such entry, the
second is priority of possession; and, in the absence of the two priorities,
the third priority is of the date of title, with good faith as the common critical
element. Since SLDC acquired possession of the property in good faith in
contrast to Babasanta, who neither registered nor possessed the property
at any time, SLDC’s right is definitely superior to that of Babasanta’s.
At any rate, the above discussion on the rules on double sale would be
purely academic for as earlier stated in this decision, the contract between
Babasanta and the Spouses Lu is not a contract of sale but merely a
contract to sell. In Dichoso v. Roxas,47 we had the occasion to rule that
Article 1544 does not apply to a case where there was a sale to one party
of the land itself while the other contract was a mere promise to sell the
land or at most an actual assignment of the right to repurchase the same
land. Accordingly, there was no double sale of the same land in that case.

WHEREFORE, the instant petition is hereby GRANTED. The
decision of the Court of Appeals appealed from is REVERSED and
SET ASIDE and the decision of the Regional Trial Court, Branch 31,
of San Pedro, Laguna is REINSTATED. No costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and
Chico-Nazario, JJ., concur.
G.R. No. 133879 November 21, 2001
EQUATORIAL REALTY DEVELOPMENT, INC., petitioner,
vs.
MAYFAIR THEATER, INC., respondent.
PANGANIBAN, J.:
General propositions do not decide specific cases. Rather, laws are
interpreted in the context of the peculiar factual situation of each
proceeding. Each case has its own flesh and blood and cannot be
ruled upon on the basis of isolated clinical classroom principles.
While we agree with the general proposition that a contract of sale
is valid until rescinded, it is equally true that ownership of the thing
sold is not acquired by mere agreement, but by tradition or delivery.
The peculiar facts of the present controversy as found by this Court
in an earlier relevant Decision show that delivery was not actually
effected; in fact, it was prevented by a legally effective impediment.
Not having been the owner, petitioner cannot be entitled to the civil
fruits of ownership like rentals of the thing sold. Furthermore,
petitioner's bad faith, as again demonstrated by the specific factual
milieu of said Decision, bars the grant of such benefits. Otherwise,
bad faith would be rewarded instead of punished.
The Case
Filed before this Court is a Petition for Review1 under Rule 45 of
the Rules of Court, challenging the March 11, 1998 Order2 of the
Regional Trial Court of Manila (RTC), Branch 8, in Civil Case No.
97-85141. The dispositive portion of the assailed Order reads as
follows:
"WHEREFORE, the motion to dismiss filed by defendant Mayfair is
hereby GRANTED, and the complaint filed by plaintiff Equatorial is
hereby DISMISSED."3
Also questioned is the May 29, 1998 RTC Order4 denying
petitioner's Motion for Reconsideration.
The Facts
The main factual antecedents of the present Petition are matters of
record, because it arose out of an earlier case decided by this
Court on November 21, 1996, entitled Equatorial Realty
Development, Inc. v. Mayfair Theater, Inc.5(henceforth referred to
as the "mother case"), docketed as G.R No. 106063.
Carmelo & Bauermann, Inc. ("Camelo" ) used to own a parcel of
land, together with two 2-storey buildings constructed thereon,
located at Claro M. Recto Avenue, Manila, and covered by TCT No.
18529 issued in its name by the Register of Deeds of Manila.
On June 1, 1967, Carmelo entered into a Contract of Lease with
Mayfair Theater Inc. ("Mayfair") for a period of 20 years. The lease
covered a portion of the second floor and mezzanine of a
44
two-storey building with about 1,610 square meters of floor area, which
respondent used as a movie house known as Maxim Theater.
Two years later, on March 31, 1969, Mayfair entered into a second
Contract of Lease with Carmelo for the lease of another portion of the
latter's property — namely, a part of the second floor of the two-storey
building, with a floor area of about 1,064 square meters; and two store
spaces on the ground floor and the mezzanine, with a combined floor area
of about 300 square meters. In that space, Mayfair put up another movie
house known as Miramar Theater. The Contract of Lease was likewise for
a period of 20 years.
Both leases contained a provision granting Mayfair a right of first refusal to
purchase the subject properties. However, on July 30, 1978 — within the
20-year-lease term — the subject properties were sold by Carmelo to
Equatorial Realty Development, Inc. ("Equatorial") for the total sum of
P11,300,000, without their first being offered to Mayfair.
As a result of the sale of the subject properties to Equatorial, Mayfair filed
a Complaint before the Regional Trial Court of Manila (Branch 7) for (a)
the annulment of the Deed of Absolute Sale between Carmelo and
Equatorial, (b) specific performance, and (c) damages. After trial on the
merits, the lower court rendered a Decision in favor of Carmelo and
Equatorial. This case, entitled "Mayfair" Theater, Inc. v. Carmelo and
Bauermann, Inc., et al.," was docketed as Civil Case No. 118019.
On appeal (docketed as CA-GR CV No. 32918), the Court of Appeals (CA)
completely reversed and set aside the judgment of the lower court.
The controversy reached this Court via G.R No. 106063. In this mother
case, it denied the Petition for Review in this wise:
"WHEREFORE, the petition for review of the decision of the Court of
Appeals, dated June 23, 1992, in CA-G.R. CV No. 32918, is HEREBY
DENIED. The Deed of Absolute Sale between petitioners Equatorial
Realty Development, Inc. and Carmelo & Bauermann, Inc. is hereby
deemed rescinded; Carmelo & Bauermann is ordered to return to
petitioner Equatorial Realty Development the purchase price. The latter is
directed to execute the deeds and documents necessary to return
ownership to Carmelo & Bauermann of the disputed lots. Carmelo &
Bauermann is ordered to allow Mayfair Theater, Inc. to buy the aforesaid
lots for P11,300,000.00."6
The foregoing Decision of this Court became final and executory on March
17, 1997. On April 25, 1997, Mayfair filed a Motion for Execution, which
the trial court granted.
However, Carmelo could no longer be located. Thus, following the order of
execution of the trial court, Mayfair deposited with the clerk of court a
quo its payment to Carmelo in the sum of P11,300,000 less; P847,000 as
withholding tax. The lower court issued a Deed of Reconveyance in favor
of Carmelo and a Deed of Sale in favor of Mayfair. On the basis of these
documents, the Registry of Deeds of Manila canceled Equatorial's titles
and issued new Certificates of Title7 in the name of Mayfair.
Ruling on Equatorial's Petition for Certiorari and Petition contesting the
foregoing manner of execution, the CA in its Resolution of November 20,
1998, explained that Mayfair had no right to deduct the P847,000 as
withholding tax. Since Carmelo could no longer be located, the appellate
court ordered Mayfair to deposit the said sum with the Office of the Clerk
of Court, Manila, to complete the full amount of P11,300,000 to be turned
over to Equatorial.
Equatorial questioned the legality of the above CA ruling before this Court
in G.R No. 136221 entitled "Equatorial Realty Development, Inc. v. Mayfair
Theater, Inc." In a Decision promulgated on May 12, 2000,8 this Court
directed the trial court to follow strictly the Decision in GR. No. 106063, the
mother case. It explained its ruling in these words:

"We agree that Carmelo and Bauermann is obliged to return the
entire amount of eleven million three hundred thousand pesos
(P11,300,000.00) to Equatorial. On the other hand, Mayfair may
not deduct from the purchase price the amount of eight hundred
forty-seven thousand pesos (P847,000.00) as withholding tax. The
duty to withhold taxes due, if any, is imposed on the seller Carmelo
and Bauermann, Inc."9
Meanwhile, on September 18, 1997 — barely five months after
Mayfair had submitted its Motion for Execution before the RTC of
Manila, Branch 7 — Equatorial filed with the Regional Trial Court of
Manila, Branch 8, an action for the collection of a sum of money
against Mayfair, claiming payment of rentals or reasonable
compensation for the defendant's use of the subject
premises after its lease contracts had expired. This action was the
progenitor of the present case.
In its Complaint, Equatorial alleged among other things that the
Lease Contract covering the premises occupied by Maxim Theater
expired on May 31, 1987, while the Lease Contract covering the
premises occupied by Miramar Theater lapsed on March 31,
1989.10 Representing itself as the owner of the subject premises by
reason of the Contract of Sale on July 30, 1978, it claimed rentals
arising from Mayfair's occupation thereof.
Ruling of the RTC Manila, Branch 8
As earlier stated, the trial court dismissed the Complaint via the
herein assailed Order and denied the Motion for Reconsideration
filed by Equatorial.11
The lower court debunked the claim of petitioner for unpaid back
rentals, holding that the rescission of the Deed of Absolute Sale in
the mother case did not confer on Equatorial any vested or residual
proprietary rights, even in expectancy.
In granting the Motion to Dismiss, the court a quo held that the
critical issue was whether Equatorial was the owner of the subject
property and could thus enjoy the fruits or rentals therefrom. It
declared the rescinded Deed of Absolute Sale as avoid at its
inception as though it did not happen."
The trial court ratiocinated as follows:
"The meaning of rescind in the aforequoted decision is to set aside.
In the case of Ocampo v. Court of Appeals, G.R. No. 97442, June
30, 1994, the Supreme Court held that, 'to rescind is to declare a
contract void in its inception and to put an end as though it never
were. It is not merely to terminate it and release parties from further
obligations to each other but to abrogate it from the beginning and
restore parties to relative positions which they would have occupied
had no contract ever been made.'
"Relative to the foregoing definition, the Deed of Absolute Sale
between Equatorial and Carmelo dated July 31, 1978 is void at its
inception as though it did not happen.
"The argument of Equatorial that this complaint for back rentals as
'reasonable compensation for use of the subject property after
expiration of the lease contracts presumes that the Deed of
Absolute Sale dated July 30, 1978 from whence the fountain of
Equatorial's all rights flows is still valid and existing.
xxx xxx xxx
45
"The subject Deed of Absolute Sale having been rescinded by the
Supreme Court, Equatorial is not the owner and does not have any right to
demand backrentals from the subject property. . .12
The trial court added: "The Supreme Court in the Equatorial case, G.R No.
106063, has categorically stated that the Deed of Absolute Sale dated July
31, 1978 has been rescinded subjecting the present complaint to res
judicata."13
Hence, the present recourse.14
Issues
Petitioner submits, for the consideration of this Court, the following
issues:15
"A
The basis of the dismissal of the Complaint by the Regional Trial Court not
only disregards basic concepts and principles in the law on contracts and
in civil law, especially those on rescission and its corresponding legal
effects, but also ignores the dispositive portion of the Decision of the
Supreme Court in G.R. No. 106063 entitled 'Equatorial Realty
Development, Inc. & Carmelo & Bauermann, Inc. vs. Mayfair Theater, Inc.'
"B.
The Regional Trial Court erred in holding that the Deed of Absolute Sale in
favor of petitioner by Carmelo & Bauermann, Inc., dated July 31, 1978,
over the premises used and occupied by respondent, having been
'deemed rescinded' by the Supreme Court in G.R. No. 106063, is 'void at
its inception as though it did not happen.'
"C.
The Regional Trial Court likewise erred in holding that the aforesaid Deed
of Absolute Sale, dated July 31, 1978, having been 'deemed rescinded' by
the Supreme Court in G.R. No. 106063, petitioner 'is not the owner and
does not have any right to demand backrentals from the subject property,'
and that the rescission of the Deed of Absolute Sale by the Supreme Court
does not confer to petitioner 'any vested right nor any residual proprietary
rights even in expectancy.'
"D.
The issue upon which the Regional Trial Court dismissed the civil case, as
stated in its Order of March 11, 1998, was not raised by respondent in its
Motion to Dismiss.
"E.
The sole ground upon which the Regional Trial Court dismissed Civil Case
No. 97-85141 is not one of the grounds of a Motion to Dismiss under Sec.
1 of Rule 16 of the 1997 Rules of Civil Procedure."
Basically, the issues can be summarized into two: (1) the substantive
issue of whether Equatorial is entitled to back rentals; and (2) the
procedural issue of whether the court a quo's dismissal of Civil Case No.
97-85141 was based on one of the grounds raised by respondent in its
Motion to Dismiss and covered by Rule 16 of the Rules of Court.
This Court's Ruling
The Petition is not meritorious.
 46

First Issue: Hence, respondent's opposition to the transfer of the property by way of
Ownership of Subject Properties sale to Equatorial was a legally sufficient impediment that effectively
prevented the passing of the property into the latter's hands.
We hold that under the peculiar facts and circumstances of the
case at bar, as found by this Court en banc in its Decision This was the same impediment contemplated in Vda. de Sarmiento v.
promulgated in 1996 in the mother case, no right of ownership was Lesaca,30 in which the Court held as follows:
transferred from Carmelo to Equatorial in view of a patent failure to
deliver the property to the buyer.
"The question that now arises is: Is there any stipulation in the sale in
question from which we can infer that the vendor did not intend to deliver
Rental — a Civil outright the possession of the lands to the vendee? We find none. On the
Fruit of Ownership contrary, it can be clearly seen therein that the vendor intended to place
the vendee in actual possession of the lands immediately as can be
inferred from the stipulation that the vendee 'takes actual possession
To better understand the peculiarity of the instant case, let us begin
thereof . . . with full rights to dispose, enjoy and make use thereof in such
with some basic parameters. Rent is a civil fruit 16 that belongs to
manner and form as would be most advantageous to herself.' The
the owner of the property producing it17 by right of
possession referred to in the contract evidently refers to actual possession
accession.18 Consequently and ordinarily, the rentals that fell due
from the time of the perfection of the sale to petitioner until its and not merely symbolical inferable from the mere execution of the
document.
rescission by final judgment should belong to the owner of the
property during that period.
"Has the vendor complied with this express commitment? she did not. As
provided in Article 1462, the thing sold shall be deemed delivered when
By a contract of sale, "one of the contracting parties obligates
the vendee is placed in the control and possession thereof, which situation
himself to transfer ownership of and to deliver a determinate thing
does not here obtain because from the execution of the sale up to the
and the other to pay therefor a price certain in money or its
present the vendee was never able to take possession of the lands due to
equivalent."19
the insistent refusal of Martin Deloso to surrender them claiming
ownership thereof. And although it is postulated in the same article that
Ownership of the thing sold is a real right,20 which the buyer the execution of a public document is equivalent to delivery, this legal
acquires only upon delivery of the thing to him "in any of the ways fiction only holds true when there is no impediment that may prevent the
specified in articles 1497 to 1501, or in any other manner signifying passing of the property from the hands of the vendor into those of the
an agreement that the possession is transferred from the vendor to vendee. x x x."31
the vendee."21 This right is transferred, not merely by contract, but
also by tradition or delivery.22 Non nudis pactis sed traditione
The execution of a public instrument gives rise, therefore, only to a prima
dominia rerum transferantur. And there is said to be delivery if and
facie presumption of delivery. Such presumption is destroyed when the
when the thing sold "is placed in the control and possession of the
instrument itself expresses or implies that delivery was not intended; or
vendee."23 Thus, it has been held that while the execution of a
public instrument of sale is recognized by law as equivalent to the when by other means it is shown that such delivery was not effected,
because a third person was actually in possession of the thing. In the latter
delivery of the thing sold,24 such constructive or symbolic delivery,
case, the sale cannot be considered consummated.
being merely presumptive, is deemed negated by the failure of the
vendee to take actual possession of the land sold.25
However, the point may be raised that under Article 1164 of the Civil Code,
Equatorial as buyer acquired a right to the fruits of the thing sold from the
Delivery has been described as a composite act, a thing in which
time the obligation to deliver the property to petitioner arose.32 That time
both parties must join and the minds of both parties concur. It is an
arose upon the perfection of the Contract of Sale on July 30, 1978, from
act by which one party parts with the title to and the possession of
which moment the laws provide that the parties to a sale may reciprocally
the property, and the other acquires the right to and the possession
demand performance.33 Does this mean that despite the judgment
of the same. In its natural sense, delivery means something in
rescinding the sale, the right to the fruits34 belonged to, and remained
addition to the delivery of property or title; it means transfer of
enforceable by, Equatorial?
possession.26 In the Law on Sales, delivery may be either actual or
constructive, but both forms of delivery contemplate "the absolute
giving up of the control and custody of the property on the part of Article 1385 of the Civil Code answers this question in the negative,
the vendor, and the assumption of the same by the vendee."27 because "[r]escission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price with
its interest; x x x" Not only the land and building sold, but also the rental
Possession Never
payments paid, if any, had to be returned by the buyer.
Acquired by Petitioner

Another point. The Decision in the mother case stated that "Equatorial x x
Let us now apply the foregoing discussion to the present issue.
x has received rents" from Mayfair "during all the years that this
From the peculiar facts of this case, it is clear that petitioner never
controversy has been litigated." The Separate Opinion of Justice Teodoro
took actual control and possession of the property sold, in view of
Padilla in the mother case also said that Equatorial was "deriving rental
respondent's timely objection to the sale and the continued actual
income" from the disputed property. Even herein ponente'sSeparate
possession of the property. The objection took the form of a court
Concurring Opinion in the mother case recognized these rentals. The
action impugning the sale which, as we know, was rescinded by a
question now is: Do all these statements concede actual delivery?
judgment rendered by this Court in the mother case. It has been
held that the execution of a contract of sale as a form of
constructive delivery is a legal fiction. It holds true only when there The answer is "No." The fact that Mayfair paid rentals to Equatorial during
is no impediment that may prevent the passing of the property from the litigation should not be interpreted to mean either actual delivery or
the hands of the vendor into those of the vendee. 28 When there is ipso facto recognition of Equatorial's title.
such impediment, "fiction yields to reality — the delivery has not
been effected."29
The CA Records of the mother case 35 show that Equatorial — as alleged
buyer of the disputed properties and as alleged successor-in-interest of
Carmelo's rights as lessor — submitted two ejectment suits against

Mayfair. Filed in the Metropolitan Trial Court of Manila, the first was
docketed as Civil Case No. 121570 on July 9, 1987; and
the second, as Civil Case No. 131944 on May 28, 1990. Mayfair
eventually won them both. However, to be able to maintain physical
possession of the premises while awaiting the outcome of the
mother case, it had no choice but to pay the rentals.
The rental payments made by Mayfair should not be construed as a
recognition of Equatorial as the new owner. They were made
merely to avoid imminent eviction. It is in this context that one
should understand the aforequoted factual statements in
the ponencia in the mother case, as well as the Separate Opinion
of Mr. Justice Padilla and the Separate Concurring Opinion of the
herein ponente.
At bottom, it may be conceded that, theoretically, a rescissible
contract is valid until rescinded. However, this generalprinciple is
not decisive to the issue of whether Equatorial ever acquired the
right to collect rentals. What is decisive is the civil law rule that
ownership is acquired, not by mere agreement, but by tradition or
delivery. Under the factual environment of this controversy as
found by this Court in the mother case, Equatorial was never put in
actual and effective control or possession of the property because
of Mayfair's timely objection.
As pointed out by Justice Holmes, general propositions do not
decide specific cases. Rather, "laws are interpreted in the context
of the peculiar factual situation of each case. Each case has its
own flesh and blood and cannot be decided on the basis of isolated
clinical classroom principles."36
In short, the sale to Equatorial may have been valid from inception,
but it was judicially rescinded before it could be consummated.
Petitioner never acquired ownership, not because the sale was
void, as erroneously claimed by the trial court, but because the sale
was not consummated by a legally effective delivery of the property
sold.
Benefits Precluded by
Petitioner's Bad Faith
Furthermore, assuming for the sake of argument that there was
valid delivery, petitioner is not entitled to any benefits from the
"rescinded" Deed of Absolute Sale because of its bad faith. This
being the law of the mother case decided in 1996, it may no longer
be changed because it has long become final and executory.
Petitioner's bad faith is set forth in the following pertinent portions of
the mother case:
"First and foremost is that the petitioners acted in bad faith to
render Paragraph 8 'inutile.'
xxx xxx xxx
"Since Equatorial is a buyer in bad faith, this finding renders the
sale to it of the property in question rescissible. We agree with
respondent Appellate Court that the records bear out the fact that
Equatorial was aware of the lease contracts because its lawyers
had, prior to the sale, studied the said contracts. As such,
Equatorial cannot tenably claim to be a purchaser in good faith, and,
therefore, rescission lies.
xxx xxx xxx
"As also earlier emphasized, the contract of sale between
Equatorial and Carmelo is characterized by bad faith, since it was
knowingly entered into in violation of the rights of and to the
prejudice of Mayfair. In fact, as correctly observed by the Court of
47
Appeals, Equatorial admitted that its lawyers had studied the contract of
lease prior to the sale. Equatorial's knowledge of the stipulations therein
should have cautioned it to look further into the agreement to determine if
it involved stipulations that would prejudice its own interests.
xxx xxx xxx
"On the part of Equatorial, it cannot be a buyer in good faith because it
bought the property with notice and full knowledge that Mayfair had a right
to or interest in the property superior to its own. Carmelo and Equatorial
took unconscientious advantage of Mayfair."37 (Italics supplied)
Thus, petitioner was and still is entitled solely to he return of the purchase
price it paid to Carmelo; no more, no less. This Court has firmly ruled in
the mother case that neither of them is entitled to any consideration of
equity, as both "took unconscientious advantage of Mayfair." 38
In the mother case, this Court categorically denied the payment of interest,
a fruit of ownership. By the same token, rentals, another fruit of ownership,
cannot be granted without mocking this Court's en banc Decision, which
has long become final.
Petitioner's claim of reasonable compensation for respondent's use and
occupation of the subject property from the time the lease expired cannot
be countenanced. If it suffered any loss, petitioner must bear it in silence,
since it had wrought that loss upon itself. Otherwise, bad faith would be
rewarded instead of punished.@lawphil.net
We uphold the trial court's disposition, not for the reason it gave, but for (a)
the patent failure to deliver the property and (b) petitioner's bad faith, as
above discussed.
Second Issue:itc-alf
Ground in Motion to Dismiss
Procedurally, petitioner claims that the trial court deviated from the
accepted and usual course of judicial proceedings when it dismissed Civil
Case No. 97-85141 on a ground not raised in respondent's Motion to
Dismiss. Worse, it allegedly based its dismissal on a ground not provided
for in a motion to dismiss as enunciated in the Rules of Court.@lawphil.net
We are not convinced A review of respondent's Motion to Dismiss Civil
Case No. 97-85141 shows that there were two grounds invoked, as
follows:
"(A)
Plaintiff is guilty of forum-shopping.itc-alf
"(B)
Plaintiff's cause of action, if any, is barred by prior judgment."39
The court a quo ruled, inter alia, that the cause of action of petitioner
plaintiff in the case below) had been barred by a prior judgment of this
Court in G.R No. 106063, the mother case.
Although it erred in its interpretation of the said Decision when it argued
that the rescinded Deed of Absolute Sale was avoid," we hold,
nonetheless, that petitioner's cause of action is indeed barred by a prior
judgment of this Court. As already discussed, our Decision in G.R No.
106063 shows that petitioner is not entitled to back rentals, because it
never became the owner of the disputed properties due to a failure of
delivery. And even assuming arguendo that there was a valid delivery,
petitioner's bad faith negates its entitlement to the civil fruits of ownership,
like interest and rentals.

Under the doctrine of res judicata or bar by prior judgment, a matter
that has been adjudicated by a court of competent jurisdiction must
be deemed to have been finally and conclusively settled if it arises
in any subsequent litigation between the same parties and for the
same cause.40 Thus, "[a] final judgment on the merits rendered by a
court of competent jurisdiction is conclusive as to the rights of the
parties and their privies and constitutes an absolute bar to
subsequent actions involving the same claim, demand, or cause of
action."41 Res judicata is based on the ground that the "party to be
affected, or some other with whom he is in privity, has litigated the
same matter in a former action in a court of competent jurisdiction,
and should not be permitted to litigate it again.42
It frees the parties from undergoing all over again the rigors of
unnecessary suits and repetitive trials. At the same time, it prevents
the clogging of court dockets. Equally important, it stabilizes rights
and promotes the rule of law.@lawphil.net
We find no need to repeat the foregoing disquisitions on the first
issue to show satisfaction of the elements of res judicata. Suffice it
to say that, clearly, our ruling in the mother case bars petitioner
from claiming back rentals from respondent. Although the court a
quo erred when it declared "void from inception" the Deed of
Absolute Sale between Carmelo and petitioner, our foregoing
discussion supports the grant of the Motion to Dismiss on the
ground that our prior judgment in G.R No. 106063 has already
resolved the issue of back rentals.
On the basis of the evidence presented during the hearing of
Mayfair's Motion to Dismiss, the trial court found that the issue of
ownership of the subject property has been decided by this Court in
favor of Mayfair. We quote the RTC:
"The Supreme Court in the Equatorial case, G.R. No. 106063 has
categorically stated that the Deed of Absolute Sale dated July 31,
1978 has been rescinded subjecting the present complaint to res
judicata."43(Emphasis in the original)
Hence, the trial court decided the Motion to Dismiss on the basis of
res judicata, even if it erred in interpreting the meaning of
"rescinded" as equivalent to "void" In short, it ruled on the ground
raised; namely, bar by prior judgment. By granting the Motion,
it disposed correctly, even if its legal reason for nullifying the sale
was wrong. The correct reasons are given in this Decision.
WHEREFORE, the Petition is hereby DENIED. Costs against
petitioner.itc-alf
SO ORDERED.
Davide Jr., C.J., Quisumbing, Pardo, Buena, Ynares-Santiago and
Carpio, JJ., concur.
Bellosillo, J., I join the dissent of J. Gutierrez.
Melo, J., concurring opinion.
Puno, J., concur and also join the concurring opinion of J. Melo.
Vitug, J., see dissenting opinion.
Kapunan, J., join the dissenting opinions of Justices Vitug and
Sandoval-Gutierrez.
Mendoza, J., concur in this and Melo, J.'s concurring opinion.
De Leon, Jr., J., join the dissenting opinion of Justice J.C. Vitug.
Concurring Opinion
MELO, J., concurring:
48
While I express my conformity to the ponencia of our distinguished
colleague, Mr. Justice Artemio V. Panganiban, I would just like to make
the following observations:
1. The issue in this case was squarely resolved in our 1996 En
Banc decision in the main case. What petitioner is asking us to do now is
to reverse or modify a judgment which is accurate in every respect,
conformable to law and jurisprudence, and faithful to principles of fairness
and justice.
2. Petitioner's submissions are deceiving. It is trying to collect unjustified
and unbelievably increased rentals by provoking a purely academic
discussion, as far as respondent is concerned, of a non-applicable
provision of the Civil Code on contracts.
3. To grant the petition is to reward bad faith, for petitioner has deprived
respondent of the latter's property rights for twenty-three (23) years and
has forced it to defend its interests in case after case during that lengthy
period. Petitioner now tries to inflict further injury in the fantastic and
groundless amount of P115,947,867.00. To remand this case to the lower
court in order to determine the back rentals allegedly due to petitioner
Equatorial Realty Development Corporation, Inc. is to encourage
continuation of crafty tactics and to allow the further dissipation of scarce
judicial time and resources.
The instant petition arose from a complaint for back rentals, increased
rentals and interests filed by petitioner Equatorial Realty Development, Inc.
(Equatorial) against respondent Mayfair Theater, Inc. (Mayfair). It has to
be adjudicated in the context of three earlier petitions decided by this
Court.
A dispute between the two parties over the ownership of a commercial lot
and building along Claro M. Recto Avenue in Manila has led to 23 years of
protracted litigation, including the filing of 4 petitions with the Court,
namely, G.R. No. L-106063, decided on November 21, 1996 (264 SCRA
483); G.R. No. 103311 decided on March 4, 1992; G.R. No. 136221,
decided on May 12, 2000; and the present petition, G.R. No. 133879.
The case at bar is a classic illustration of how a dubious interpretation of
the dispositive portion of the 1996 decision for petitioner could lead to 5
more years of bitter litigation after the initial 18 years of legal proceedings
over the first case.
Lease contracts over the subject property were executed on June 1, 1967
and March 31, 1969 by original owner Carmelo and Bauermann, Inc.
(Carmelo) in favor of herein respondent Mayfair. The leases expired on
May 31, 1987 and March 31, 1989, respectively. The lease contracts
embodied provisions giving Mayfair a right-of-first-refusal should Carmelo
sell the property.
In an act characterized as bad faith by this Court, the property, in violation
of the right of first refusal, was sold by Carmelo to herein petitioner
Equatorial, on July 31, 1978 for P11,300,000.00. On September 13, 1978,
Mayfair filed the first case for annulment of the contract of sale, specific
performance of the right-of-first-refusal provision, and damages. The
Regional Trial Court (RTC) of Manila decided the case in favor of
Equatorial on February 7, 1991. Counterclaims for compensation arising
from the use of the premises were awarded to Equatorial by the 1991 RTC
decision.
On June 23, 1992, the Court of Appeals reversed the RTC decision, thus
leading to the first petition, G.R. No. 106063, filed against Mayfair by both
Equatorial and Carmelo.
On November 21, 1996, this Court En Banc rendered its decision (264
SCRA 483 [1996]), disposing:

WHEREFORE, the petition for review of the decision of the Court of
Appeals dated June 23, 1992, in CA-G.R. CV No. 32918, is
HEREBY DENIED. The Deed of Absolute Sale between petitioners
Equatorial Realty Development, Inc. and Carmelo & Bauermann,
Inc. is hereby rescinded; petitioner Carmelo & Bauermann is
ordered to return to petitioner Equatorial Realty Development the
purchase price. The latter is directed to execute the deeds and
documents necessary to return ownership to Carmelo &
Bauermann of the disputed lots. Carmelo and Bauermann is
ordered to allow Mayfair Theater, Inc. to buy the aforesaid lots for
P11,300,000.00.
In the Court of Appeals decision (CA-G.R. CV No. 32918, June 23,
1992) in the main case, raised to this Court, Mayfair was ordered to
directly pay P11,300,000.00 to Equatorial whereupon Equatorial
would execute the deeds and documents necessary for the transfer
of ownership to Mayfair and the registration of the property in its
name. The execution of documents and the transfer of the property
were directly between Equatorial and Mayfair. Our decision in 1996
(G.R. No. 106063) affirmed the appellate decision. However, while
the 1978 deed of sale questioned by Mayfair was rescinded, we
ordered Carmelo to first return to Equatorial the purchase price of
the property, whereupon Equatorial would return ownership to
Carmelo, after which Mayfair would buy the lot for P11,300,000.00
from Carmelo.
When the case was remanded to the RTC for execution of the
decision, it was ascertained that Carmelo and Bauermann, Inc. was
no longer in existence. The Sheriff could not enforce the portions of
the judgment calling for acts to be performed by Carmelo. Mayfair,
therefore, deposited the amount of P11,300,000.00 with the RTC
for payment to Equatorial, hoping that the latter would faithfully
comply with this Court's decision. In this regard, it may be
mentioned that buyer Mayfair also paid P847,000.00 in taxes which
the vendors should have paid. The RTC ordered the execution of
deeds of transfer, the cancellation of Equatorial's titles to the
property, and the issuance of new titles in favor of Mayfair.
Accordingly, the property was registered in the name of Mayfair
and titles issued in its favor.
Equatorial, however, saw an opening for further litigation. It
questioned the method employed by the RTC to execute the
Court's judgment, arguing that the directives involving Carmelo's
participation were ignored by the trial court. The litigation over the
alleged incorrectness of the execution eventually led to the second
petition earlier mentioned — G.R. No. 136221.
It may be mentioned at this point that on July 9, 1987, while the
right-of-first-refusal and cancellation case was pending, Equatorial
filed an action for ejectment against Mayfair. Because the issue of
ownership was still pending in the case for rescission of deed of
sale including the enforcement of the right-of-first-refusal provision,
the ejectment case was dismissed. Appeals to the RTC and the
Court of Appeals were denied.
On March 26, 1990, still another ejectment case was filed by
Equatorial. In decisions which reached all the way to this Court in
G.R. No. 103311, the cases for ejectment did not prosper. Mayfair
won the cases on March 4, 1992.
The three cases decided by the Court in these litigations between
Equatorial and Mayfair, all of them in favor of Mayfair, are
antecedents of the present and fourth petition. Equatorial has been
adjudged as having unlawfully and in bad faith acquired property
that should have belonged to Mayfair since 1978. Ownership and
title have been unquestionably transferred to Mayfair.
Seemingly, Equatorial now seeks to profit from its bad faith. While
the case involving the allegedly incorrect execution of the 1996
49
decision on cancellation of the deed of sale in G.R. No. 106063 was being
litigated, Equatorial filed on September 18, 1997 with the RTC of Manila
two complaints for payment of back and increased rentals arising from the
use by Mayfair of the lot, building, and other fixed improvements. From the
time the property was sold by Carmelo to Equatorial, lessee Mayfair had
been paying to Equatorial the rentals fixed in the 1967 and 1969 lease
contracts with the original owner. This was during the pendency of the
complaint for annulment of the contract of sale, specific performance of
the right-of-first-refusal provision, and damages.
As found in our 1998 decision in G.R. No. 106063, the disputed property
should have actually belonged to Mayfair at the time. However, to avoid
the ejectment cases, which Equatorial nonetheless later filed, Mayfair was
forced to pay rentals to Equatorial. It paid the rentals based on the rates
fixed by Carmelo in the lease contracts.
Equatorial, claiming the 1967 and 1969 rentals to be inadequate, claimed
increased amounts as reasonable compensation. Because the amounts
fixed by the lease contract with Carmelo but paid to Equatorial were only
at the rate of P17,966.21 monthly while Equatorial wanted P210,000.00
every month plus legal interests, the suit was for the payment of
P115,947,867.68 as of June 19, 1997.
Citing the 1996 decision in G.R. No. 106063, Mayfair contended that it
owned the property under the decision. It stated that the sale by Carmelo
to Equatorial had been cancelled, and, as owner, Mayfair owed no
increased rentals to Equatorial based on said decision.
The present case on back rentals could not be conclusively decided
because the execution and finality of the issue of ownership were being
contested for 5 years in the petition on the proper execution filed in G.R.
No. 136221. This petition had to wait for the resolution of G.R. No.
136221.
In its decision dated May 12, 2000, in G.R. No. 136221 (First Division, per
Mr. Justice Pardo; Davide, Jr., C.J., Kapunan, and Ynares-Santiago, JJ.,
concurring), this Court reiterated the judgment in G.R. No. 106063. It
emphasized that the 1996 decision awarding the property to Mayfair was
clear. It stated that the decision having attained finality, there was nothing
left for the parties to do but to adhere to the mandates of the decision.
In the dispositive portion, however, the Court ordered the trial court "to
carry out the execution following strictly the terms" of the 1996 decision.
However, as earlier stated, this could not be done because Carmelo had
ceased to exist. There was no longer any Carmelo which could return the
P11,300,000.00 consideration of the 1978 sale to Equatorial as ordered in
the dispositive portion of the 1996 decision. Equatorial could not and
would not also execute the deeds returning the property to Carmelo, as
directed in the decision. Neither could the defunct Carmelo sell the
property to Mayfair at the sale price in 1978 when the right of first refusal
was violated.
Mayfair had to file a motion for partial reconsideration, emphasizing that it
was impossible for a corporation which has gone out of existence to obey
the specific orders of this Court. A resolution was, therefore, rendered on
June 25, 2001 putting an end to the controversy over the proper
implementation of the 1996 judgment.
This June 25, 2001 Resolution in G.R. No. 136221 validated the issuance
of new titles in the name of the adjudicated owner, Mayfair. The Court
ordered the direct release to Equatorial of the P11,300,000.00 deposited
in court for the account of the defunct Carmelo.
In the follow-up Resolution of the First Division in G.R. No. 136221 dated
June 25, 2001, the Court, after describing the case as a Promethean one
involving the execution of a decision which has been long final, and after
calling the efforts to stave off execution as a travesty of justice, instructed
the trial court:

1. To execute the Court's Decision strictly in accordance with the
ruling in G.R. No. 106063 by validating the acts of the sheriff of
Manila and the titles in the name of Mayfair Theater, Inc. issued by
the Register of Deeds of Manila consistent therewith;
2. In case of failure of Carmelo and Bauermann to accept the
amount of P11,300,000.00 deposited by Mayfair Theater, Inc. with
the Clerk of Court, Regional Trial Court, Manila, to authorize the
Clerk of Court to RELEASE the amount of P11,300,000.00
deposited with the court for the account of Carmelo and
Bauermann, Inc. to petitioner;
3. To devolve upon the trial court the determination of other issues
that may remain unresolved among the parties, relating to the
execution of this Court's final decision in G.R. No. 106063.
In light of the Court's judgments in G.R. No. 106063 and G.R. No.
136221, the present petition in G.R. No. 133879 for back rentals
should now be finally resolved, applying the rulings in those earlier
decisions.
Indubitably, the 1978 deed of sale executed by Carmelo in favor of
Equatorial over the disputed property has been set aside by this
Court. Equatorial was declared a buyer in bad faith. The contract
was characterized as a fraudulent sale and the entirety of the
indivisible property sold to Equatorial was the property we ordered
to be conveyed to Mayfair for the same price paid by Equatorial to
Carmelo.
It is also beyond question that the method of execution of the 1996
decision by the RTC, the direct payment by Mayfair to Equatorial,
bypassing and detouring the defunct Carmelo corporation, has
been validated by this Court. There are no longer any procedural
obstacles to the full implementation of the decision.
And finally, the property sold to Equatorial in violation of Mayfair's
right of first refusal is now indisputably possessed by, and owned
and titled in the name of, respondent Mayfair.
Parenthetically, the issue on the payment of back and increased
rentals, plus interests, was actually settled in the 1996 decision in
G.R. No. 106063. It could not be enforced at the time only because
of the controversy unfortunately raised by Equatorial over the
proper execution of the 1996 decision.
It is now time to reiterate the 1996 decision on interests and settle
the dispute between Mayfair and Equatorial once and for all.
Thus, we reiterate that:
On the question of interest payments on the principal amount of
P11,300.000.00, it must be borne in mind that both Carmelo and
Equatorial acted in bad faith. Carmelo knowingly and deliberately
broke a contract entered into with Mayfair. It sold the property to
Equatorial with purpose and intent to withhold any notice or
knowledge of the sale coming to the attention of Mayfair. All the
circumstances point to a calculated and contrived plan of
non-compliance with the agreement of first refusal.
On the part of Equatorial, it cannot be a buyer in good faith
because it bought the property with notice and full knowledge the
Mayfair had a right to or interest in the property superior to its own.
Carmelo and Equatorial took unconscientious advantage of
Mayfair.
Neither may Carmelo and Equatorial avail of consideration based
on equity which might warrant the grant of interests. The vendor
50
received as payment from the vendee what, at the time, was a full and fair
price for the property. It has used the P11,300,000.00 all these years
earning income or interest from the amount. Equatorial, on the other hand,
has received rents and otherwise profited from the use of the property
turned over to it by Carmelo. In fact, during all the years that this
controversy was being litigated. Mayfair paid rentals regularly to the buyer
who had an inferior right to purchase the property. Mayfair is under no
obligation to pay any interests arising from this judgment to either Carmelo
or Equatorial (264 SCRA 483, pp. 511-512).
Worthy quoting too is the concurring opinion in our 1996 decision of Mr.
Justice Teodoro R. Padilla as follows:
The equities of the case support the foregoing legal disposition. During the
intervening years between 1 August 1978 and this date, Equatorial (after
acquiring the C.M. Recto property for the price of P11,300,000.00) had
been leasing the property and deriving rental income therefrom. In fact,
one of the lessees in the property was Mayfair. Carmelo had, in turn, been
using the proceeds of the sale, investment-wise and/or operation wise in
its own business.
It may appear, at first blush, that Mayfair is unduly favored by the solution
submitted by this opinion, because the price of P11,300,000.00 which it
has to pay Carmelo in the exercise of its right of first refusal, has been
subjected to the inroads of inflation so that its purchasing power today is
less than when the same amount was paid by Equatorial to Carmelo. But
then it cannot be overlooked that it was Carmelo's breach of Mayfair's right
of first refusal that prevented Mayfair from paying the price of
P11,300,000.00 to Carmelo at about the same time the amount was paid
by Equatorial to Carmelo. Moreover, it cannot be ignored that Mayfair had
also incurred consequential or "opportunity" losses by reason of its failure
to acquire and use the property under its right of first refusal. In fine, any
loss in purchasing power of the price of P11,300,000.00 is for Carmelo to
incur or absorb on account of its bad faith in breaching Mayfair's
contractual right of first refusal to the subject property. (ibid., pp. 511-512).
It can be seen from the above ruling that the issue of rentals and interests
was fully discussed and passed upon in 1996. Equatorial profited from the
use of the building for all the years when it had no right or, as stated in our
decision, had an inferior right over the property. Mayfair, which had the
superior right, continued to pay rent but it was the rate fixed in the lease
contract with Carmelo. We see no reason for us to now deviate from the
reasoning given in our main decision. The decision has been final and
executory for five (5) years and petitioner has failed to present any valid
and reasonable ground to reconsider, modify or reverse it. Let that which
has been fairly adjudicated remain final.
My second observation relates to the clever but, to my mind, deceptive
argument foisted by Equatorial on the Court.
Equatorial relies on the Civil Code provision on rescissible contracts to
bolster its claim. Its argument is that a rescissible contract remains valid
and binding upon the parties thereto until the same is rescinded in an
appropriate judicial proceeding.
Equatorial conveniently fails to state that the July 31, 1978 Deed of
Absolute Sale was between Equatorial and Carmelo only. Respondent
Mayfair was not a party to the contract. The deed of sale was
surreptitiously entered into between Carmelo and Equatorial behind the
back and in violation of the rights of Mayfair. Why should the innocent and
wronged party now be made to bear the consequences of an unlawful
contract to which it was not privy? Insofar as Equatorial and Carmelo are
concerned, their 1978 contract may have validly transferred ownership
from one to the other. But not as far as Mayfair is concerned.
Mayfair starts its arguments with a discussion of Article 1381 of the Civil
Code that contracts entered into in fraud of creditors are rescissible. There
is merit in Mayfair's contention that the legal effects are not restricted to
the contracting parties only. On the contrary, the rescission is for the

benefit of a third party, a stranger to the contract. Mayfair correctly
states that as far as the injured third party is concerned, the
fraudulent contract, once rescinded, is non-existent or void from its
inception. Hence, from Mayfair's standpoint, the deed of absolute
sale which should not have been executed in the first place by
reason of Mayfair's superior right to purchase the property and
which deed was cancelled for that reason by this Court, is legally
non-existent. There must be a restoration of things to the condition
prior to the celebration of the contract (Respondent relies
on Almeda vs. J. M. & Company, 43072-R, December 16, 1975, as
cited in the Philippine Law Dictionary; IV Arturo M. Tolentino, Civil
Code of the Philippines, 570, 1990 Ed., citing Manresa; IV Edgardo
L. Paras, Civil Code of the Philippines, 717-718, 1994 Ed.).
It is hard not to agree with the explanations of Mayfair, to wit:
4.22. As a consequence of the rescission of the Deed of Absolute
Sale, it was as if Equatorial never bought and became the lessor of
the subject properties. Thus, the court a quo did not err in ruling
that Equatorial is not the owner and does not have any right to
demand back rentals from [the] subject property.
4.23. Tolentino, supra, at 577-578 further explains that the effects
of rescission in an accion pauliana retroact to the date when the
credit or right being enforced was acquired.
"While it is necessary that the credit of the plaintiff in the accion
pauliana must be prior to the fraudulent alienation, the date of the
judgment enforcing it is immaterial. Even if the judgment be
subsequent to the alienation, it is merely declaratory, with
retroactive effect to the date when the credit was constituted. . ."
(emphasis supplied)
4.24. The clear rationale behind this is to prevent conniving parties,
such as Equatorial and Carmelo, from benefiting in any manner
from their unlawful act of entering into a contract in fraud of
innocent parties with superior rights like Mayfair. Thus, to allow
Equatorial to further collect rentals from Mayfair is to allow the
former to profit from its own act of bad faith. Ex dolo malo non oritur
actio. (Respondent's Comment, pp. 338-339, Rollo).
This brings me to my third and final observation in this case. This
Court emphasized in the main case that the contract of sale
between Equatorial and Carmelo was characterized by bad faith.
The Court described the sale as "fraudulent" in its 1996 decision. It
stated that the damages which Mayfair suffered are in terms of
actual injury and lost opportunities, emphasizing that Mayfair
should not be given an empty or vacuous victory. Moreover,
altogether too many suits have been filed in this case. Four
separate petitions have come before us, necessitating full length
decisions in at least 3 of them. The 1996 decision stressed that the
Court has always been against multiplicity of suits.
There was bad faith from the execution of the deed of sale because
Equatorial and Carmelo affirmatively operated with furtive design or
with some motive of self-interest or ill-will or for ulterior purposes
(Air France vs. Carrascoso, 18 SCRA 166 [1966]). There was
breach of a known duty by the two parties to the unlawful contract
arising from motives of interests or ill-will calculated to cause
damage to another (Lopez vs. Pan American World Airways, 123
Phil. 264 [1966]).
The presence of bad faith is clear from the records. Our resolution
of this issue in 1996 (G.R. 106063) is res judicata.
We stated:
51
First and foremost is that the petitioners (referring to Equatorial and
Carmelo) acted in bad faith to render Paragraph 8 "inutile".
xxx xxx xxx
Since Equatorial is a buyer in bad faith, this finding renders the sale to it of
the property in question rescissible. We agree with respondent Appellate
Court that the records bear out the fact that Equatorial was aware of the
lease contracts because its lawyers had, prior to the sale, studied the said
contracts. As such Equatorial cannot tenably claim to be a purchaser in
good faith and, therefore, rescission lies.
xxx xxx xxx
As also earlier emphasized, the contract of sale between Equatorial and
Carmelo is characterized by bad faith, since it was knowingly entered into
in violation of the rights of and to the prejudice of Mayfair. In fact, as
correctly observed by the Court of Appeals, Equatorial admitted that its
lawyers had studied the contract of lease prior to the sale. Equatorial's
knowledge of the stipulations therein should have cautioned it to look
further into the agreement to determine if it involved stipulations that would
prejudice its own interests.
xxx xxx xxx
On the part of Equatorial, it cannot be a buyer in good faith because it
bought the property with notice and full knowledge that Mayfair had a right
to or interest in the property superior to its own. Carmelo and Equatorial
took unconscientious advantage of Mayfair (264 SCRA 506, 507-511).
We ruled that because of bad faith, neither may Carmelo and Equatorial
avail themselves of considerations based on equity which might warrant
the grant of interests and, in this case, unconscionably increased rentals.
Verily, if Mayfair were a natural person it could very well have asked for
moral damages instead of facing a lengthy and expensive suit to pay
rentals many times higher than those stipulated in the contract of lease.
Under the Civil Code, Mayfair is the victim in a breach of contract where
Carmelo and Equatorial acted fraudulently and in bad faith.
Considering the judgments in our 3 earlier decisions, Mayfair is under no
obligation to pay any interests, whether based on law or equity, to
Carmelo or Equatorial. Mayfair is the wronged entity, the one which has
suffered injury since 1978 or for the 23 years it was deprived of the
property.
Equatorial has received rentals and other benefits from the use of the
property during these 23 years, rents and benefits which would have
accrued to Mayfair if its rights had not been violated.
There is no obligation on the part of respondent Mayfair to pay any
increased, additional, back or future rentals or interests of any kind to
petitioner Equatorial under the circumstances of this case.
I, therefore, concur with the majority opinion in denying due course and
dismissing the petition.
Puno and Mendoza, JJ., concur.
Dissenting Opinion
VITUG, J., dissenting:

Civil Law, in its usual sophistication, classifies defective contracts
(unlike the seemingly generic treatment in Common Law), into, first,
the rescissible contracts,1 which are the least infirm; followed
by, second, the voidable contracts;2 then, third, the unenforceable
contracts;3 and, finally, fourth, the worst of all or the void
contracts.4 In terms of their efficaciousness, rescissible contracts
are regarded, among the four, as being the closest to perfectly
executed contracts. A rescissible contract contains all the
requisites of a valid contract and are considered legally binding, but
by reason of injury or damage to either of the contracting parties or
to third persons, such as creditors, it is susceptible to rescission at
the instance of the party who may be prejudiced thereby. A
rescissible contract is valid, binding and effective until it is
rescinded. The proper way by which it can be assailed is by an
action for rescission based on any of the causes expressly
specified by law.5
The remedy of rescission in the case of rescissible contracts under
Article 1381 is not to be confused with the remedy of rescission, or
more properly termed "resolution," of reciprocal obligations under
Article 1191 of the Civil Code. While both remedies presuppose the
existence of a juridical relation that, once rescinded, would require
mutual restitution, it is basically, however, in this aspect alone
when the two concepts coincide.
Resolution under Article 1191 would totally release each of the
obligors from compliance with their respective covenants. It might
be worthwhile to note that in some cases, notably Ocampo vs.
Court of Appeals,6 and Velarde vs. Court of Appeals,7 where the
Court referred to rescission as being likened to contracts which are
deemed "void at inception," the focal issue is the breach of the
obligation involved that would allow resolution pursuant to Article
1191 of the Civil Code. The obvious reason is that when parties are
reciprocally bound, the refusal or failure of one of them to comply
with his part of the bargain should allow the other party to resolve
their juridical relationship rather than to leave the matter in a state
of continuing uncertainty. The result of the resolution, when
decreed, renders the reciprocal obligations inoperative "at
inception."
Upon the other hand, the rescission of a rescissible contract under
Article 1381, taken in conjunction with Article 1385, is a relief which
the law grants for the protection of a contracting party or a third
person from injury and damage that the contract may cause, or to
protect some incompatible and preferent right created by the
contract.8Rescissible contracts are not void ab initio, and the
principle, "quod nullum est nullum producit effectum," in void and
inexistent contracts is inapplicable. Until set aside in an appropriate
action rescissible contracts are respected as being legally valid,
binding and in force. It would be wrong to say that rescissible
contracts produce no legal effects whatsoever and that no
acquisition or loss of rights could meanwhile occur and be
attributed to the terminated contract. The effects of the rescission,
prospective in nature, can come about only upon its proper
declaration as such.
Thus when the Court9 held the contract to be "deemed rescinded"
in G.R. No. 106063, the Court did not mean a "declaration of nullity"
of the questioned contract. The agreement between petitioner and
Carmelo being efficacious until rescinded, validly transferred
ownership over the property to petitioner from the time the deed of
sale was executed in a public instrument on 30 July 1978 up to the
time that the decision in G.R. No. 106063 became final on 17
March 1997. It was only from the latter date that the contract had
ceased to be efficacious. The fact that the subject property was in
the hands of a lessee, or for that matter of any possessor with a
juridical title derived from an owner, would not preclude a
conferment of ownership upon the purchaser nor be an impediment
from the transfer of ownership from the seller to the buyer.
Petitioner, being the owner of the property (and none other) until
52
the judicial rescission of the sale in its favor, was entitled to all incidents of
ownership inclusive of, among its other elements, the right to the fruits of
the property. Rentals or rental value over that disputed property from 30
July 1978 up to 17 March 1997 should then properly pertain to petitioner.
In this respect, the much abused terms of "good faith" or "bad faith " play
no role; ownership, unlike other concepts, is never described as being
either in good faith or in bad faith.
With all due respect, I am thus unable to join in this instance my
colleagues in the majority.
Kapunan and De Leon, Jr., JJ., concur.
Dissenting Opinion
SANDOVAL-GUTIERREZ, J., dissenting:
"Stare decisis et non quieta movere — follow past precedents and do not
disturb what has been settled. Adherence to this principle is imperative if
this Court is to maintain stability in jurisprudence.
I regret that I am unable to agree with the majority opinion.
The principal issue in this case is whether a rescissible contract is void
and ineffective from its inception. This issue is not a novel one. Neither is it
difficult to resolve as it involves the application of elementary principles in
the law on contracts, specifically on rescissible contracts, as distinguished
from void or inexistent contracts.
The facts are simple.
On June 1, 1967, respondent Mayfair Theater, Inc. (Mayfair) leased
portions of the ground, mezzanine and second floors of a two storey
commercial building located along C.M. Recto Avenue Manila. The
building together with the land on which it was constructed was then
owned by Carmelo & Bauermann, Inc. (Carmelo). Respondent used these
premises as "Maxim Theater." The lease was for a period of twenty (20)
years.
On March 31, 1969, Mayfair leased from Carmelo another portion of the
second floor, as well as two (2) store spaces on the ground and
mezzanine floors of the same building. Respondent Mayfair used the
premises as a movie theater known as "Miramar Theater."
Both leases contained the following identical provisions:
"That if the LESSOR should desire to sell the leased premises, the
LESSEE shall be given 30-days exclusive option to purchase the same.
In the event, however, that the leased premises is sold to someone other
than the LESSEE, the LESSOR is bound and obligated, as it hereby binds
and obligates itself, to stipulate in the Deed of Sale thereof that the
purchaser shall recognize this lease and be bound by all the terms and
conditions thereof.
On July 31, 1978, Carmelo entered into a Deed of Absolute Sale whereby
it sold the subject land and two-storey building to petitioner Equatorial
Realty Development, Inc. (Equatorial) for P11,300,000.00. Having
acquired from Carmelo ownership of the subject property, Equatorial
received rents from Mayfair for sometime.
Subsequently, Mayfair, claiming it had been denied its right to purchase
the leased property in accordance with the provisions of its lease contracts
with Carmelo, filed with the Regional Trial Court, Branch 7, Manila, a suit

for specific performance and annulment of sale with prayer to
enforce its "exclusive option to purchase" the property. The dispute
between Mayfair, on the one hand, and Carmelo and Equatorial on
the other, reached this Court in G.R. No. 106063, "Equatorial
Realty Development, Inc. & Carmelo & Bauermann, Inc. vs. Mayfair
Theater, Inc."1 On November 21, 1996, this Court rendered a
Decision, the dispositive portion of which reads:
"WHEREFORE, the petition for review of the decision of the Court
of Appeals, dated June 23, 1992, in CA-G.R. CV No. 32918, is
HEREBY DENIED. The Deed of Absolute Sale between petitioners
Equatorial Realty-Development, Inc. and Carmelo & Bauermann,
Inc. is hereby deemed rescinded; Carmelo & Bauermann is
ordered to return to petitioner Equatorial Realty Development the
purchase price. The latter is directed to execute the deeds and
documents necessary to return ownership to Carmelo &
Bauermann of the disputed lots. Carmelo & Bauermann is ordered
to allow Mayfair Theater, Inc. to buy the aforesaid lots for
P11,300,000.00.
SO ORDERED."
The Decision of this Court in G.R. No. 106063 became final and
executory on March 17, 1997.
On April 25, 1997, Mayfair filed with the trial court a motion for
execution which was granted.
However, Carmelo could no longer be located. Thus, Mayfair
deposited with the trial court its payment to Carmelo in the sum of
P11,300,000.00 less P847,000.00 as withholding tax.
The Clerk of Court of the Manila Regional Trial Court, as sheriff,
executed a deed of re-conveyance in favor of Carmelo and a deed
of sale in favor of Mayfair. On the basis of these documents, the
Registry of Deeds of Manila cancelled Equatorial's titles and issued
new Certificates of Title2 in the name of Mayfair.
In G.R. No. 136221,3 "Equatorial Realty Development, Inc. vs.
Mayfair Theater, Inc.," this Court instructed the trial court to
execute strictly this Court's Decision in G.R. No. 106063.
On September 18, 1997, or after the execution of this Court's
Decision in G.R. No. 106063, Equatorial filed with the Regional
Trial Court of Manila, Branch 8, an action for collection of a sum of
money against Mayfair, docketed as Civil Case No. 97-85141.
Equatorial prayed that the trial court render judgment ordering
Mayfair to pay:
(1) the sum of P11,548,941.76 plus legal interest, representing the
total amount of unpaid monthly rentals/reasonable compensation
from June 1, 1987 (Maxim Theater) and March 31,1989 (Miramar
Theater) to July 31, 1997;
(2) the sums of P849,567.12 and P458,853.44 a month, plus legal
interest, as rental/reasonable compensation for the use and
occupation of the subject property from August 1, 1997 to May 31,
1998 (Maxim Theater) and March 31, 1998 (Miramar Theater);
(3) the sum of P500,000.00 as and for attorney's fees, plus other
expenses of litigation; and
(4) the costs of the suit.4
On October 14, 1997, before filing its answer, Mayfair filed a
"Motion to Dismiss" Civil Case No. 97-85141 on the following
grounds:
53
"(A)
PLAINTIFF IS GUILTY OF FORUM SHOPPING.
(B)
PLAINTIFF'S CAUSE OF ACTION, IF ANY, IS BARRED BY PRIOR
JUDGMENT."5
On March 11, 1998, the court a quo issued an order dismissing Civil Case
No. 97-85141 on the ground that since this Court, in G.R. No. 106063,
rescinded the Deed of Absolute Sale between Carmelo and Equatorial,
the contract is void at its inception.6 Correspondingly, Equatorial is not the
owner of the subject property and, therefore, does not have any right to
demand from Mayfair payment of rentals or reasonable compensation for
its use and occupation of the premises.
Equatorial filed a motion for reconsideration but was denied.
Hence, the present petition.
At this stage, I beg to disagree with the ruling of the majority that (1)
Equatorial did not acquire ownership of the disputed property from
Carmelo because of lack of delivery; and that (2) Equatorial is not entitled
to the payment of rentals because of its bad faith.
Firmly incorporated in our Law on Sales is the principle that ownership is
transferred to the vendee by means of delivery, actual or
constructive.7 There is actual delivery when the thing sold is placed in the
control and possession of the vendee.8 Upon the other hand, there is
constructive delivery when the delivery of the thing sold is represented by
other signs or acts indicative thereof. Article 1498 of the Civil Code is in
point. It provides that "When the sale is made through a public instrument,
the execution thereof shall be equivalent to the delivery of the thing which
is the object of the contract, if from the deed the contrary does not appear
or cannot clearly be inferred."9
Contrary to the majority opinion, the facts and circumstances of the instant
case clearly indicate that there was indeed actual and constructive
delivery of the disputed property from Carmelo to Equatorial.
Let me substantiate my claim.
First, I must take exception to the majority's statement that this Court
found in G.R. No. 10606310 that, "no right of ownership was transferred
from Carmelo to Equatorial in view of a patent failure to deliver the
property to the buyer."11
A perusal of the Decision dated November 21, 1996 would reveal
otherwise.
To say that this Court found no transfer of ownership between Equatorial
and Carmelo is very inaccurate. For one, this Court, in disposing of G.R.
No. 106063, explicitly ordered Equatorial to "execute the deeds and
documents necessary to return ownership to Carmelo & Bauermann of the
disputed lots."12 I suppose this Court would not have made such an order
if it did not recognize the transfer of ownership from Carmelo to Equatorial
under the contract of sale. For why would the Court order Equatorial to
execute the deeds and documents necessary to return ownershipto
Carmelo if, all along, it believed that ownership remained with Carmelo?
Furthermore, is Court explicitly stated in the Decision that Equatorial
received rentals from Mayfair during the pendency of the case. Let me
quote the pertinent portion of the Decision, thus:

". . . Equatorial, on the other hand, has received rents and
otherwise profited from the use of the property turned over to it
by Carmelo. In fact, during all the years that this controversy was
being litigated, Mayfair paid rentals regularly to the buyer
(Equatorial) who had an inferior right to purchase the property.
Mayfair is under no obligation to pay any interests arising from this
judgment to either Carmelo or Equatorial."13
Justice Teodoro R. Padilla, in his Separate Opinion, made the
following similar observations:
"The equities of the case support the foregoing legal disposition.
During the intervening years between 1 August 1978 and this date,
Equatorial (after acquiring the C.M. Recto property for the price of
P11,300,000.00) had been leasing the property and deriving rental
income therefrom. In fact, one of the lessees in the property
was Mayfair. Carmelo had, in turn, been using the proceeds of the
sale, investment-wise and/or operation-wise in its own business."14
Obviously, this Court acknowledged the delivery of the property
from Carmelo to Equatorial. As aptly described by Justice
Panganiban himself, the sale between Carmelo and Equatorial had
not only been "perfected" but also "consummated". 15
That actual possession of the property was turned over by Carmelo
to Equatorial is clear from the fact that the latter received rents from
Mayfair. Significantly, receiving rentals is an exercise of actual
possession. Possession, as defined in the Civil Code, is the holding
of a thing or the enjoyment of a right.16 It may either be by material
occupation or by merely subjecting the thing or right to the action of
our will.17 Possession may therefore be exercised through one's
self or through another.18 It is not necessary that the person in
possession should himself be the occupant of the property, the
occupancy can be held by another in the name of the one who
claims possession. In the case at bench, Equatorial exercised
possession over the disputed property through Mayfair. When
Mayfair paid its monthly rentals to Equatorial, the said lessee
recognized the superior right of Equatorial to the possession of the
property. And even if Mayfair did not recognize Equatorial's
superior right over the disputed property, the fact remains that
Equatorial was then enjoying the fruits of its possession.
At this juncture, it will be of aid to lay down the degrees of
possession. The first degree is the mere holding, or possession
without title whatsoever, and in violation of the right of the owner.
Here, both the possessor and the public know that the possession
is wrongful. An example of this is the possession of a thief or a
usurper of land. The second is possession with juridical title, but
not that of ownership. This is possession peaceably acquired, such
that of a tenant, depositary, or pledge. The third is possession with
a just title, or a title sufficient to transfer ownership, but not from the
true owner. An example is the possession of a vendee of a piece of
land from one who pretends to be the owner but is in fact not the
owner thereof. And the fourth is possession with a just title from the
true owner. This is possession that springs from
ownership.19 Undoubtedly, Mayfair's possession is by virtue of
juridical title under the contract of lease, while that of Equatorial is
by virtue of its right of ownership under the contract of sale.
Second, granting arguendo that there was indeed no actual
delivery, would Mayfair's alleged "timely objection to the sale and
continued actual possession of the property" constitute an
"impediment" that may prevent the passing of the property from
Carmelo to Equatorial?20
I believe the answer is no.
The fact that Mayfair has remained in "actual possession of the
property," after the perfection of the contract of sale between
54
Carmelo and Equatorial up to the finality of this Court's Decision in G.R.
No. 106063 (and even up to the present), could not prevent the
consummation of such contract. As I have previously intimated, Mayfair's
possession is not under a claim of ownership. It cannot in any way clash
with the ownership accruing to Equatorial by virtue of the sale. The
principle has always been that the one who possesses as a mere holder
acknowledges in another a superior right or right of ownership. A tenant
possesses the thing leased as a mere holder, so does the usufructuary of
the thing in usufruct; and the borrower of the thing loaned in commodatum.
None of these holders asserts a claim of ownership in himself over the
thing. Similarly, Mayfair does not claim ownership, but only possession as
a lessee with the prior right to purchase the property.
In G.R. No. 106063, Mayfair's main concern in its action for specific
performance was the recognition of its right of first refusal. Hence, the
most that Mayfair could secure from the institution of its suit was to be
allowed to exercise its right to buy the property upon rescission of the
contract of sale. Not until Mayfair actually exercised what it was allowed to
do by this Court in G.R. No. 106063, specifically to buy the disputed
property for P11,300,000.00, would it have any right of ownership. How
then, at that early stage, could Mayfair's action be an impediment in the
consummation of the contract between Carmelo and Equatorial?
Pertinently, it does not always follow that, because a transaction is
prohibited or illegal, title, as between the parties to the transaction, does
not pass from the seller, donor, or transferor to the vendee, donee or
transferee.21
And third, conformably to the foregoing disquisition, I maintain that
Equatorial has the right to be paid whatever monthly rentals during the
period that the contract of sale was in existence minus the rents already
paid. In Guzman v. Court of Appeals,22 this Court decreed that upon the
purchase of the leased property and proper notice by the vendee, the
lessee must pay the agreed monthly rentals to the new owner since, by
virtue of the sale the vendee steps into the shoes of the original lessor to
whom the lessee bound himself to pay. His belief that the subject property
should have been sold to him does not justify the unilateral withholding of
rental payments due to the new owner of the property.23 It must be
stressed that under Article 1658 of the Civil Code, there are only two
instances wherein the lessee may suspend payment of rent, namely: in
case the lessor fails to make the necessary repairs or to maintain the
lessee in peaceful and adequate enjoyment of the property leased. 24 In
this case, the fact remains that Mayfair occupied the leased property. It
derived benefit from such occupation, thus, it should pay the
corresponding rentals due. Nemo cum alterius detrimento locupletari
potest. No one shall enrich himself at the expense of another. 25
Neither should the presence of bad faith prevent the award of rent to
Equatorial. While Equatorial committed bad faith in entering into the
contract with Camelo, it has been equitably punished when this Court
rendered the contract rescissible. That such bad faith was the very reason
why the contract was declared rescissible is evident from the Decision
itself.26 To utilize it again, this time, to deprive Equatorial of its entitlement
to the rent corresponding to the period during which the contract was
supposed to validly exist, would not only be unjust, it would also disturb
the very nature of a rescissible contract.
Let me elucidate on the matter.
Articles 1380 through 1389 of the Civil Code deal with rescissible
contracts. A rescissible contract is one that is validly entered into, but is
subsequently terminated or rescinded for causes provided for by law.
This is the clear implication of Article 1380 of the same Code which
provides:
"Art. 1380. Contracts validly agreed upon may be rescinded in the cases
established by law."
 55

Rescission has been defined as follows:
"Rescission is a remedy granted by law to the contracting parties
and even to third persons, to secure the reparation of damages
caused to them by a contract, even if this should be valid, by
means of the restoration of things to their condition at the moment
prior to the celebration of said contract. It is a relief for the
protection of one of the contracting parties and third persons from
all injury and damage the contract may cause, or to protect some
incompatible and preferential right created by the contract. It
implies a contract which, even if initially valid, produces a lesion or
pecuniary damage to someone. It sets aside the act or contract for
justifiable reasons of equity."27
Necessarily, therefore, a rescissible contract remains valid and
binding upon the parties thereto until the same is rescinded in an
appropriate judicial proceeding.
On the other hand, a void contract, which is treated in Articles 1409
through 1422 of the Civil Code, is inexistent and produces no legal
effect whatsoever. The contracting parties are not bound thereby
and such contract is not subject to ratification.
In dismissing petitioner Equatorial's complaint in Civil Case No.
97-85141, the trial court was apparently of the impression that a
rescissible contract has the same effect as a void contract, thus:
"However, the words in the dispositive portion of the Supreme
Court "is hereby deemed rescinded" does not allow any other
meaning. The said Deed of Absolute Sale is void at its inception.
Clerk of Court executed the deed of sale of the subject property in favor of
Mayfair.
In the meantime, Mayfair has continued to occupy and use the premises,
the reason why Equatorial filed against it Civil Case No. 97-85141 for sum
of money representing rentals and reasonable compensation.
At this point, I must reiterate that Equatorial purchased the subject
property from Carmelo and became its owner on July 31, 1978. While the
contract of sale was "deemed rescinded" by this Court in G.R. No. 106063,
nevertheless the sale had remained valid and binding between the
contracting parties until March 17, 1997 when the Decision in G.R. No.
106063 became final. Consequently, being the owner, Equatorial has the
right to demand from Mayfair payment of rentals corresponding to the
period from July 31, 1978 up to March 17, 1997.
Records show that the rentals and reasonable compensation which
Equatorial demands from Mayfair are those which accrued from the year
1987 to 1998. As earlier stated, prior thereto, Mayfair had been paying the
rents to Equatorial.
In line with this Court's finding that Equatorial was the owner of the
disputed property from July 31, 1978 to March 17, 1997, it is, therefore,
entitled to the payment of rentals accruing to such period.
Consequently, whether or not Mayfair paid Equatorial the rentals specified
in the lease contracts from June 1, 1987 to March 17, 1997 is for the trial
court to resolve.
One last word. In effect, the majority have enunciated that:

xxx xxx xxx

1. A lessor, in a contract of sale, cannot transfer ownership of his property,
occupied by the lessee, to the buyer because there can be no delivery of
The subject Deed of Absolute Sale having been rescinded by the such property to the latter; and
Supreme Court, Equatorial is not the owner and does not have any
right to demand back rentals from subject property. The law states
2. Not only a possessor, but also an owner, can be in bad faith.
that only an owner can enjoy the fruits of a certain property or jus
utendi which includes the right to receive from subject property
what it produces, . . ." I cannot subscribe to such doctrines.

The trial court erred. In G.R. No. 106063 (involving Mayfair's suit for WHEREFORE, I vote to GRANT the petition.
specific performance), this Court clearly characterized the Deed of
Absolute Sale between Carmelo and petitioner Equatorial as a Bellosillo and Kapunan, JJ., concur.
rescissible contract. We stated therein that:

"Since Equatorial is a buys in bad faith. this finding renders the sale
to it of the property in question rescissible. We agree with
respondent Appellate Court that the records bear out the fact that
Equatorial was aware of the lease contracts because its lawyers
G.R. No. L-6584 October 16, 1911
had, prior to the sale, studied the said contracts. As such,
Equatorial cannot tenably claim to be a purchaser in good faith, and
therefore, rescission lies." INCHAUSTI AND CO., plaintiff-appellant,
vs.
ELLIS CROMWELL, Collector of Internal Revenue, defendant-appellee.
This Court did not declare the Deed of Absolute Sale between
Carmelo and Equatorial void but merely rescissible. Consequently,
the contract was, at inception, valid and naturally, it validly Haussermann, Cohn & Fisher, for appellant.
transferred ownership of the subject property to Equatorial. It bears Acting Attorney-General Harvey, for appellee.
emphasis that Equatorial was not automatically divested of its
ownership. Rather, as clearly directed in the dispositive portion of
our Decision, Carmelo should return the purchase price to
Equatorial which, in turn, must execute such deeds and documents
necessary to enable Carmelo to reacquire its ownership of the MORELAND, J.:
property.
This is an appeal by the plaintiff from a judgment of the Court of First
As mentioned earlier, Mayfair deposited with the Regional Trial Instance of the city of Manila, the Hon. Simplicio del Rosario presiding,
Court, Branch 7, Manila, the purchase price of P10,452,000.00 dismissing the complaint upon the merits after trial, without costs.
(P11,300,000.00 less P847,000.00 as withholding tax). In turn, the

The facts presented to this court are agreed upon by both parties,
consisting, in so far as they are material to a decision of the case,
in the following:
III. That the plaintiff firm for many years past has been and now is
engaged in the business of buying and selling at wholesale hemp,
both for its own account and on commission.
IV. That it is customary to sell hemp in bales which are made by
compressing the loose fiber by means of presses, covering two
sides of the bale with matting, and fastening it by means of strips of
rattan; that the operation of bailing hemp is designated among
merchants by the word "prensaje."
V. That in all sales of hemp by the plaintiff firm, whether for its own
account or on commission for others, the price is quoted to the
buyer at so much per picul, no mention being made of bailing; but
with the tacit understanding, unless otherwise expressly agreed,
that the hemp will be delivered in bales and that, according to the
custom prevailing among hemp merchants and dealers in the
Philippine Islands, a charge, the amount of which depends upon
the then prevailing rate, is to be made against the buyer under the
denomination of "prensaje." That this charge is made in the same
manner in all cases, even when the operation of bailing was
performed by the plaintiff or by its principal long before the contract
of sale was made. Two specimens of the ordinary form of account
used in these operations are hereunto appended, marked Exhibits
A and B, respectively, and made a part hereof.
VI. That the amount of the charge made against hemp buyers by
the plaintiff firm and other sellers of hemp under the denomination
of "prensaje" during the period involved in this litigation was P1.75
per bale; that the average cost of the rattan and matting used on
each bale of hemp is fifteen (15) centavos and that the average
total cost of bailing hemp is one (1) peso per bale.
VII. That insurance companies in the Philippine Islands, in
estimating the insurable value of hemp always add to the quoted
price of same the charge made by the seller under the
denomination of "prensaje."
VII. That the average weight of a bale of hemp is two (2) piculs
(126.5 kilograms).
IX. That between the first day of January, 1905, and the 31st day of
March, 1910, the plaintiff firm, in accordance with the custom
mentioned in paragraph V hereof, collected and received, under
the denomination of "prensaje," from purchasers of hemp sold by
the said firm for its own account, in addition to the price expressly
agreed upon for the said hemp, sums aggregating P380,124.35;
and between the 1st day of October, 1908, and the 1st day of
March, 1910, collected for the account of the owners of hemp sold
by the plaintiff firm in Manila on commission, and under the said
denomination of "prensaje," in addition to the price expressly
agreed upon the said hemp, sums aggregating P31,080.
X. That the plaintiff firm in estimating the amount due it as
commissions on sales of hemp made by it for its principals has
always based the said amount on the total sum collected from the
purchasers of the hemp, including the charge made in each case
under the denomination of "prensaje."
XI. That the plaintiff has always paid to the defendant or to his
predecessor in the office of the Collector of Internal Revenue the
tax collectible under the provisions of section 139 of Act No. 1189
upon the selling price expressly agreed upon for all hemp sold by
the plaintiff firm both for its own account and on commission, but
has not, until compelled to do so as hereinafter stated, paid the
56
said tax upon sums received from the purchaser of such hemp under the
denomination of "prensaje."
XII. That of the 29th day of April, 1910, the defendant, acting in his official
capacity as Collector of Internal Revenue of the Philippine Islands, made
demand in writing upon the plaintiff firm for the payment within the period
of five (5) days of the sum of P1,370.68 as a tax of one third of one per
cent on the sums of money mentioned in Paragraph IX hereof, and which
the said defendant claimed to be entitled to receive, under the provisions
of the said section 139 of Act No. 1189, upon the said sums of money so
collected from purchasers of hemp under the denomination of "prensaje."
XIII. That on the 4th day of May, 1910, the plaintiff firm paid to the
defendant under protest the said sum of P1,370.69, and on the same date
appealed to the defendant as Collector of Internal Revenue, against the
ruling by which the plaintiff firm was required to make said payment, but
defendant overruled said protest and adversely decided said appeal, and
refused and still refuses to return to plaintiff the said sum of P1,370.68 or
any part thereof.1awphil.net
XIV. Upon the facts above set forth t is contended by the plaintiff that the
tax of P1,370.68 assessed by the defendant upon the aggregate sum of
said charges made against said purchasers of hemp by the plaintiff during
the period in question, under the denomination of "prensaje" as aforesaid,
namely, P411,204.35, is illegal upon the ground that the said charge does
not constitute a part of the selling price of the hemp, but is a charge made
for the service of baling the hemp, and that the plaintiff firm is therefore
entitled to recover of the defendant the said sum of P1,370.68 paid to him
under protest, together with all interest thereon at the legal rate since
payment, and the costs of this action.
Upon the facts above stated it is the contention of the defendant that the
said charge made under the denomination of "prensaje" is in truth and in
fact a part of the gross value of the hemp sold and of its actual selling price,
and that therefore the tax imposed by section 139 of Act No. 1189 lawfully
accrued on said sums, that the collection thereof was lawfully and properly
made and that therefore the plaintiff is not entitled to recover back said
sum or any part thereof; and that the defendant should have judgment
against plaintiff for his costs.
Under these facts we are of the opinion that the judgment of the court
below was right. It is one of the stipulations in the statement of facts that it
is customary to sell hemp in bales, and that the price quoted in the market
for hemp per picul is the price for the hemp baled. The fact is that among
large dealers like the plaintiff in this case it is practically impossible to
handle hemp without its being baled, and it is admitted by the statement of
facts, as well as demonstrated by the documentary proof introduced in the
case, that if the plaintiff sold a quality of hemp it would be the under
standing, without words, that such hemp would be delivered in bales, and
that the purchase price would include the cost and expense of baling. In
other words, it is the fact as stipulated, as well as it would be the fact of
necessity, that in all dealings in hemp in the general market the selling
price consists of the value of the hemp loose plus the cost and expense of
putting it into marketable form. In the sales made by the plaintiff, which are
the basis of the controversy here, there were n services performed by him
for his vendee. There was agreement that services should be performed.
Indeed, at the time of such sales it was not known by the vendee whether
the hemp was then actually baled or not. All that he knew and all that
concerned him was that the hemp should be delivered to him baled. He
did not ask the plaintiff to perform services for him, nor did the plaintiff
agree to do so. The contract was single and consisted solely in the sale
and purchase of hemp. The purchaser contracted for nothing else and the
vendor agreed to deliver nothing else.
The word "price" signifies the sum stipulated as the equivalent of the thing
sold and also every incident taken into consideration for the fixing of the
price, put to the debit of the vendee and agreed to by him. It is quite
possible that the plaintiff, in this case in connection with the hemp which
he sold, had himself already paid the additional expense of baling as a
part of the purchase price which he paid and that he himself had received

the hemp baled from his vendor. It is quite possible also that such
vendor of the plaintiff may have received the same hemp from his
vendor in baled form, that he paid the additions cost of baling as a
part of the purchase price which he paid. In such case the plaintiff
performed no service whatever for his vendee, nor did the plaintiff's
vendor perform any service for him.
The distinction between a contract of sale and one for work, labor,
and materials is tested by the inquiry whether the thing transferred
is one no in existence and which never would have existed but for
the order of the party desiring to acquire it, or a thing which would
have existed and been the subject of sale to some other person,
even if the order had not been given. (Groves vs. Buck, 3 Maule &
S., 178; Towers vs. Osborne, 1 Strange, 506; Benjamin on Sales,
90.) It is clear that in the case at bar the hemp was in existence in
baled form before the agreements of sale were made, or, at least,
would have been in existence even if none of the individual sales
here in question had been consummated. It would have been baled,
nevertheless, for sale to someone else, since, according to the
agreed statement of facts, it is customary to sell hemp in bales.
When a person stipulates for the future sale of articles which he is
habitually making, and which at the time are not made or finished, it
is essentially a contract of sale and not a contract for labor. It is
otherwise when the article is made pursuant to agreement.
(Lamb vs. Crafts, 12 Met., 353; Smith vs. N.Y.C. Ry. Co., 4 Keyes,
180; Benjamin on Sales, 98.) Where labor is employed on the
materials of the seller he can not maintain an action for work and
labor. (Atkinson vs. Bell, 8 Barn. & C., 277; Lee vs. Griffin, 30 L.J.N.
S.Q.B., 252; Prescott vs. Locke, 51 N.H., 94.) If the article ordered
by the purchaser is exactly such as the plaintiff makes and keeps
on hand for sale to anyone, and no change or modification of it is
made at the defendant's request, it is a contract of sale, even
though it may be entirely made after, and in consequence of, the
defendant's order for it. (Garbutt s. Watson, 5 Barn. & Ald., 613;
Gardner vs. Joy, 9 Met., 177; Lamb vs. Crafts, 12 Met., 353;
Waterman vs. Meigs, 4 Cush., 497., Clark vs. Nichols, 107 Mass.,
547; May vs. Ward, 134 Mass., 127; Abbott vs.Gilchrist, 38 Me.,
260; Crocket vs. Scribner, 64 Me., 105; Pitkin vs. Noyes, 48 N. H.,
294; Prescott vs. Locke, 51 N. H., 94; Ellison vs. Brigham, 38 Vt.,
64.) It has been held in Massachusetts that a contract to make is a
contract of sale if the article ordered is already substantially in
existence at the time of the order and merely requires some
alteration, modification, or adoption to the buyer's wishes or
purposes. (Mixer vs. Howarth, 21 Pick., 205.) It is also held in that
state that a contract for the sale of an article which the vendor in
the ordinary course of his business manufactures or procures for
the general market, whether the same is on hand at the time or not,
is a contract for the sale of goods to which the statute of frauds
applies. But if the goods are to be manufactured especially for the
purchaser and upon his special order, and not for the general
market, the case is not within the statute. (Goddard vs. Binney, 115
Mass., 450.)
It is clear to our minds that in the case at bar the baling was
performed for the general market and was not something done by
plaintiff which was a result of any peculiar wording of the particular
contract between him and his vendee. It is undoubted that the
plaintiff prepared his hemp for the general market. This would be
necessary. One whose exposes goods for sale in the market must
have them in marketable form. The hemp in question would not
have been in that condition if it had not been baled. the baling,
therefore, was nothing peculiar to the contract between the plaintiff
and his vendee. It was precisely the same contract that was made
by every other seller of hemp, engaged as was the plaintiff, and
resulted simply in the transfer of title to goods already prepared for
the general market. The method of bookkeeping and form of the
account rendered is not controlling as to the nature of the contract
made. It is conceded in the case tat a separate entry and charge
would have been made for the baling even if the plaintiff had not
been the one who baled the hemp but, instead, had received it
already baled from his vendor. This indicates of necessity tat the
57
mere fact of entering a separate item for the baling of the hemp is formal
rather than essential and in no sense indicates in this case the real
transaction between the parties. It is undisputable that, if the plaintiff had
brought the hemp in question already baled, and that was the hemp the
sale which formed the subject of this controversy, then the plaintiff would
have performed no service for his vendee and could not, therefore,
lawfully charge for the rendition of such service. It is, nevertheless,
admitted that in spite of that fact he would still have made the double entry
in his invoice of sale to such vendee. This demonstrates the nature of the
transaction and discloses, as we have already said, that the entry of a
separate charge for baling does not accurately describe the transaction
between the parties.
Section 139 [Act No. 1189] of the Internal Revenue Law provides that:
There shall be paid by each merchant and manufacturer a tax at the rate
of one-third of one per centum on the gross value in money of all goods,
wares and merchandise sold, bartered or exchanged in the Philippine
Islands, and that this tax shall be assessed on the actual selling price at
which every such merchant or manufacturer disposes of his commodities.
The operation of baling undoubtedly augments the value of the goods. We
agree that there can be no question that, if the value of the hemp were not
augmented to the amount of P1.75 per bale by said operation, the
purchaser would not pay that sum. If one buys a bale of hemp at a
stipulated price of P20, well knowing that there is an agreement on his part,
express or implied, to pay an additional amount of P1.75 for that bale, he
considers the bale of hemp worth P21. 75. It is agreed, as we have before
stated, that hemp is sold in bales. Therefore, baling is performed before
the sale. The purchaser of hemp owes to the seller nothing whatever by
reason of their contract except the value of the hemp delivered. That value,
that sum which the purchaser pays to the vendee, is the true selling price
of the hemp, and every item which enters into such price is a part of such
selling price. By force of the custom prevailing among hemp dealers in the
Philippine Islands, a purchaser of hemp in the market, unless he expressly
stipulates that it shall be delivered to him in loose form, obligates himself
to purchase and pay for baled hemp. Wheher or not such agreement is
express or implied, whether it is actual or tacit, it has the same force. After
such an agreement has once been made by the purchaser, he has no right
to insists thereafter that the seller shall furnish him with unbaled hemp. It is
undoubted that the vendees, in the sales referred to in the case at bar,
would have no right, after having made their contracts, to insists on the
delivery of loose hemp with the purpose in view themselves to perform the
baling and thus save 75 centavos per bale. It is unquestioned that the
seller, the plaintiff, would have stood upon his original contract of sale, that
is, the obligation to deliver baled hemp, and would have forced his
vendees to accept baled hemp, he himself retaining among his own profits
those which accrued from the proceed of baling.
We are of the opinion that the judgment appealed from must be affirmed,
without special finding as to costs, and it is so ordered.
Torres, Mapa, Johnson and Carson, JJ., concur.
G.R. No. L-8506 August 31, 1956
CELESTINO CO & COMPANY, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
Office of the Solicitor General Ambrosio Padilla, Fisrt Assistant Solicitor
General Guillermo E. Torres and Solicitor Federico V. Sian for respondent.
BENGZON, J.:

Appeal from a decision of the Court of Tax Appeals.
Celestino Co & Company is a duly registered general copartnership
doing business under the trade name of "Oriental Sash Factory".
From 1946 to 1951 it paid percentage taxes of 7 per cent on the
gross receipts of its sash, door and window factory, in accordance
with section one hundred eighty-six of the National Revenue Code
imposing taxes on sale of manufactured articles. However in 1952
it began to claim liability only to the contractor's 3 per cent tax
(instead of 7 per cent) under section 191 of the same Code; and
having failed to convince the Bureau of Internal Revenue, it brought
the matter to the Court of Tax Appeals, where it also failed. Said
the Court:
To support his contention that his client is an ordinary contractor . . .
counsel presented . . . duplicate copies of letters, sketches of doors
and windows and price quotations supposedly sent by the manager
of the Oriental Sash Factory to four customers who allegedly made
special orders to doors and window from the said factory. The
conclusion that counsel would like us to deduce from these few
exhibits is that the Oriental Sash Factory does not manufacture
ready-made doors, sash and windows for the public but only upon
special order of its select customers. . . . I cannot believe that
petitioner company would take, as in fact it has taken, all the
trouble and expense of registering a special trade name for its sash
business and then orders company stationery carrying the bold
print "Oriental Sash Factory (Celestino Co & Company, Prop.) 926
Raon St. Quiapo, Manila, Tel. No. 33076, Manufacturers of all
kinds of doors, windows, sashes, furniture, etc. used season-dried
and kiln-dried lumber, of the best quality workmanships" solely for
the purpose of supplying the needs for doors, windows and sash of
its special and limited customers. One ill note that petitioner has
chosen for its tradename and has offered itself to the public as a
"Factory", which means it is out to do business, in its chosen lines
on a big scale. As a general rule, sash factories receive orders for
doors and windows of special design only in particular cases but
the bulk of their sales is derived from a ready-made doors and
windows of standard sizes for the average home. Moreover, as
shown from the investigation of petitioner's book of accounts,
during the period from January 1, 1952 to September 30, 1952, it
sold sash, doors and windows worth P188,754.69. I find it difficult
to believe that this amount which runs to six figures was derived by
petitioner entirely from its few customers who made special orders
for these items.
Even if we were to believe petitioner's claim that it does not
manufacture ready-made sash, doors and windows for the public
and that it makes these articles only special order of its customers,
that does not make it a contractor within the purview of section 191
of the national Internal Revenue Code. there are no less than fifty
occupations enumerated in the aforesaid section of the national
Internal Revenue Code subject to percentage tax and after reading
carefully each and every one of them, we cannot find under which
the business of manufacturing sash, doors and windows upon
special order of customers fall under the category of "road, building,
navigation, artesian well, water workers and other construction
work contractors" are those who alter or repair buildings, structures,
streets, highways, sewers, street railways railroads logging roads,
electric lines or power lines, and includes any other work for the
construction, altering or repairing for which machinery driven by
mechanical power is used. (Payton vs. City of Anadardo 64 P. 2d
878, 880, 179 Okl. 68).
Having thus eliminated the feasibility off taxing petitioner as a
contractor under 191 of the national Internal Revenue Code, this
leaves us to decide the remaining issue whether or not petitioner
could be taxed with lesser strain and more accuracy as seller of its
manufactured articles under section 186 of the same code, as the
respondent Collector of Internal Revenue has in fact been doing
the Oriental Sash Factory was established in 1946.
58
The percentage tax imposed in section 191 of our Tax Code is generally a
tax on the sales of services, in contradiction with the tax imposed in
section 186 of the same Code which is a tax on the original sales of
articles by the manufacturer, producer or importer. (Formilleza's
Commentaries and Jurisprudence on the National Internal Revenue Code,
Vol. II, p. 744). The fact that the articles sold are manufactured by the
seller does not exchange the contract from the purview of section 186 of
the National Internal Revenue Code as a sale of articles.
There was a strong dissent; but upon careful consideration of the whole
matter are inclines to accept the above statement of the facts and the law.
The important thing to remember is that Celestino Co &
Company habitually makes sash, windows and doors, as it has
represented in its stationery and advertisements to the public. That it
"manufactures" the same is practically admitted by appellant itself. The
fact that windows and doors are made by it only when customers place
their orders, does not alter the nature of the establishment, for it is obvious
that it only accepted such orders as called for the employment of such
material-moulding, frames, panels-as it ordinarily manufactured or was in
a position habitually to manufacture.
Perhaps the following paragraph represents in brief the appellant's
position in this Court:
Since the petitioner, by clear proof of facts not disputed by the respondent,
manufacturers sash, windows and doors only for special customers and
upon their special orders and in accordance with the desired specifications
of the persons ordering the same and not for the general market: since the
doors ordered by Don Toribio Teodoro & Sons, Inc., for instance, are not
in existence and which never would have existed but for the order of the
party desiring it; and since petitioner's contractual relation with his
customers is that of a contract for a piece of work or since petitioner is
engaged in the sale of services, it follows that the petitioner should be
taxed under section 191 of the Tax Code and NOT under section 185 of
the same Code." (Appellant's brief, p. 11-12).
But the argument rests on a false foundation. Any builder or homeowner,
with sufficient money, may order windows or doors of the kind
manufactured by this appellant. Therefore it is not true that it serves
special customers only or confines its services to them alone. And anyone
who sees, and likes, the doors ordered by Don Toribio Teodoro & Sons Inc.
may purchase from appellant doors of the same kind, provided he pays
the price. Surely, the appellant will not refuse, for it can easily duplicate or
even mass-produce the same doors-it is mechanically equipped to do so.
That the doors and windows must meet desired specifications is neither
here nor there. If these specifications do not happen to be of the kind
habitually manufactured by appellant — special forms for sash, mouldings
of panels — it would not accept the order — and no sale is made. If they
do, the transaction would be no different from a purchasers of
manufactured goods held is stock for sale; they are bought because they
meet the specifications desired by the purchaser.
Nobody will say that when a sawmill cuts lumber in accordance with the
peculiar specifications of a customer-sizes not previously held in stock for
sale to the public-it thereby becomes an employee or servant of the
customer,1 not the seller of lumber. The same consideration applies to this
sash manufacturer.
The Oriental Sash Factory does nothing more than sell the goods that it
mass-produces or habitually makes; sash, panels, mouldings, frames,
cutting them to such sizes and combining them in such forms as its
customers may desire.
On the other hand, petitioner's idea of being a contractor doing
construction jobs is untenable. Nobody would regard the doing of two
window panels a construction work in common parlance. 2

Appellant invokes Article 1467 of the New Civil Code to bolster its
contention that in filing orders for windows and doors according to
specifications, it did not sell, but merely contracted for particular
pieces of work or "merely sold its services".
Said article reads as follows:
A contract for the delivery at a certain price of an article which the
vendor in the ordinary course of his business manufactures or
procures for the general market, whether the same is on hand at
the time or not, is a contract of sale, but if the goods are to be
manufactured specially for the customer and upon his special order,
and not for the general market, it is contract for a piece of work.
It is at once apparent that the Oriental Sash Factory did not merely
sell its services to Don Toribio Teodoro & Co. (To take one
instance) because it also sold the materials. The truth of the matter
is that it sold materials ordinarily manufactured by it — sash, panels,
mouldings — to Teodoro & Co., although in such form or
combination as suited the fancy of the purchaser. Such new form
does not divest the Oriental Sash Factory of its character as
manufacturer. Neither does it take the transaction out of the
category of sales under Article 1467 above quoted, because
although the Factory does not, in the ordinary course of its
business, manufacture and keep on stock doors of the kind sold to
Teodoro, it could stock and/or probably had in stock the sash,
mouldings and panels it used therefor (some of them at least).
In our opinion when this Factory accepts a job that requires the use
of extraordinary or additional equipment, or involves services not
generally performed by it-it thereby contracts for a piece of work —
filing special orders within the meaning of Article 1467. The orders
herein exhibited were not shown to be special. They were merely
orders for work — nothing is shown to call them special requiring
extraordinary service of the factory.
The thought occurs to us that if, as alleged-all the work of appellant
is only to fill orders previously made, such orders should not be
called special work, but regular work. Would a factory do business
performing only special, extraordinary or peculiar merchandise?
Anyway, supposing for the moment that the transactions were not
sales, they were neither lease of services nor contract jobs by a
contractor. But as the doors and windows had been admittedly
"manufactured" by the Oriental Sash Factory, such transactions
could be, and should be taxed as "transfers" thereof under section
186 of the National Revenue Code.
The appealed decision is consequently affirmed. So ordered.
Paras, C. J., Padilla, Montemayor, Bautista Angelo, Concepcion,
Reyes, J. B. L., and Felix, JJ., concur.
Footnotes
G.R. No. 52267 January 24, 1996
ENGINEERING & MACHINERY CORPORATION, petitioner,
vs.
COURT OF APPEALS and PONCIANO L. ALMEDA, respondent.
DECISION
PANGANIBAN, J.:
59
Is a contract for the fabrication and installation of a central air-conditioning
system in a building, one of "sale" or "for a piece of work"? What is the
prescriptive period for filing actions for breach of the terms of such
contract?
These are the legal questions brought before this Court in this Petition for
review on certiorari under Rule 45 of the Rules of Court, to set aside the
Decision1 of the Court of Appeals2 in CA-G.R. No. 58276-R promulgated
on November 28, 1978 (affirming in toto the decision3 dated April 15, 1974
of the then Court of First Instance of Rizal, Branch II 4 , in Civil Case No.
14712, which ordered petitioner to pay private respondent the amount
needed to rectify the faults and deficiencies of the air-conditioning system
installed by petitioner in private respondent's building, plus damages,
attorney's fees and costs).
By a resolution of the First Division of this Court dated November 13, 1995,
this case was transferred to the Third. After deliberating on the various
submissions of the parties, including the petition, record on appeal, private
respondent's comment and briefs for the petitioner and the private
respondent, the Court assigned the writing of this Decision to the
undersigned, who took his oath as a member of the Court on October 10,
1995.
The Facts
Pursuant to the contract dated September 10, 1962 between petitioner
and private respondent, the former undertook to fabricate, furnish and
install the air-conditioning system in the latter's building along Buendia
Avenue, Makati in consideration of P210,000.00. Petitioner was to furnish
the materials, labor, tools and all services required in order to so fabricate
and install said system. The system was completed in 1963 and accepted
by private respondent, who paid in full the contract price.
On September 2, 1965, private respondent sold the building to the
National Investment and Development Corporation (NIDC). The latter took
possession of the building but on account of NIDC's noncompliance with
the terms and conditions of the deed of sale, private respondent was able
to secure judicial rescission thereof. The ownership of the building having
been decreed back to private respondent, he re-acquired possession
sometime in 1971. It was then that he learned from some NIDC,
employees of the defects of the air-conditioning system of the building.
Acting on this information, private respondent commissioned Engineer
David R. Sapico to render a technical evaluation of the system in relation
to the contract with petitioner. In his report, Sapico enumerated the defects
of the system and concluded that it was "not capable of maintaining the
desired room temperature of 76ºF - 2ºF (Exhibit C)"5 .
On the basis of this report, private respondent filed on May 8, 1971 an
action for damages against petitioner with the then Court of First Instance
of Rizal (Civil Case No. 14712). The complaint alleged that the
air-conditioning system installed by petitioner did not comply with the
agreed plans and specifications. Hence, private respondent prayed for the
amount of P210,000.00 representing the rectification cost, P100,000.00 as
damages and P15,000.00 as attorney's fees.
Petitioner moved to dismiss the complaint, alleging that the prescriptive
period of six months had set in pursuant to Articles 1566 and 1567, in
relation to Article 1571 of the Civil Code, regarding the responsibility of a
vendor for any hidden faults or defects in the thing sold.
Private respondent countered that the contract dated September 10, 1962
was not a contract for sale but a contract for a piece of work under Article
1713 of the Civil Code. Thus, in accordance with Article 1144 (1) of the
same Code, the complaint was timely brought within the ten-year
prescriptive period.

In its reply, petitioner argued that Article 1571 of the Civil Code
providing for a six-month prescriptive period is applicable to a
contract for a piece of work by virtue of Article 1714, which provides
that such a contract shall be governed by the pertinent provisions
on warranty of title and against hidden defects and the payment of
price in a contract of sale6 .
The trial court denied the motion to dismiss. In its answer to the
complaint, petitioner reiterated its claim of prescription as an
affirmative defense. It alleged that whatever defects might have
been discovered in the air-conditioning system could have been
caused by a variety of factors, including ordinary wear and tear and
lack of proper and regular maintenance. It pointed out that during
the one-year period that private respondent withheld final payment,
the system was subjected to "very rigid inspection and testing and
corrections or modifications effected" by petitioner. It interposed a
compulsory counterclaim suggesting that the complaint was filed
"to offset the adverse effects" of the judgment in Civil Case No.
71494, Court of First Instance of Manila, involving the same parties,
wherein private respondent was adjudged to pay petitioner the
balance of the unpaid contract price for the air-conditioning system
installed in another building of private respondent, amounting to
P138,482.25.
Thereafter, private respondent filed an ex-parte motion for
preliminary attachment on the strength of petitioner's own
statement to the effect that it had sold its business and was no
longer doing business in Manila. The trial court granted the motion
and, upon private respondent's posting of a bond of F'50,000.00,
ordered the issuance of a writ of attachment.
In due course, the trial court rendered a decision finding that
petitioner failed to install certain parts and accessories called for by
the contract, and deviated from the plans of the system, thus
reducing its operational effectiveness to the extent that 35
window-type units had to be installed in the building to achieve a
fairly desirable room temperature. On the question of prescription,
the trial court ruled that the complaint was filed within the ten-year
court prescriptive period although the contract was one for a piece
of work, because it involved the "installation of an air-conditioning
system which the defendant itself manufactured, fabricated,
designed and installed."
Petitioner appealed to the Court of Appeals, which affirmed the
decision of the trial court. Hence, it instituted the instant petition.
The Submissions of the Parties
In the instant Petition, petitioner raised three issues. First, it
contended that private respondent's acceptance of the work and
his payment of the contract price extinguished any liability with
respect to the defects in the air-conditioning system. Second, it
claimed that the Court of Appeals erred when it held that the
defects in the installation were not apparent at the time of delivery
and acceptance of the work considering that private respondent
was not an expert who could recognize such defects. Third, it
insisted that, assuming arguendo that there were indeed hidden
defects, private respondent's complaint was barred by prescription
under Article 1571 of the Civil Code, which provides for a six-month
prescriptive period.
Private respondent, on the other hand, averred that the issues
raised by petitioner, like the question of whether there was an
acceptance of the work by the owner and whether the hidden
defects in the installation could have been discovered by simple
inspection, involve questions of fact which have been passed upon
by the appellate court.
The Court's Ruling
60
The Supreme Court reviews only errors of law in petitions for review
on certiorari under Rule 45. It is not the function of this Court to
re-examine the findings of fact of the appellate court unless said findings
are not supported by the evidence on record or the judgment is based on a
misapprehension of facts7 of Appeals erred when it held that the defects in
the installation were not apparent at the time of delivery and acceptance of
the work considering that private respondent was not an expert who could
recognize such defects. Third. it insisted that, assuming arguendothat
there were indeed hidden defects, private respondent's complaint was
barred by prescription under Article 1571 of the Civil Code, which provides
for a six-month prescriptive period.
Private respondent, on the other hand, averred that the issues raised by
petitioner, like the question of whether here was an acceptance of the
work by the owner and whether the hidden defects in the installation could
have been discovered by simple inspection, involve questions of fact
which have been passed upon by the appellate court.
The Court has consistently held that the factual findings of the trial court,
as well as the Court of Appeals, are final and conclusive and may not be
reviewed on appeal. Among the exceptional circumstances where a
reassessment of facts found by the lower courts is allowed are when the
conclusion is a finding grounded entirely on speculation, surmises or
conjectures; when the inference made is manifestly absurd, mistaken or
impossible; when there is grave abuse of discretion in the appreciation of
facts; when the judgment is premised on a misapprehension of facts;
when the findings went beyond the issues of the case and the same are
contrary to the admissions of both appellant and appellee. After a careful
study of the case at bench, we find none of the above grounds present to
justify the re-evaluation of the findings of fact made by the courts below.8
We see no valid reason to discard the factual conclusions of the appellate
court. . . . (I)t is not the function of this Court to assess and evaluate all
over again the evidence, testimonial and documentary, adduced by the
parties, particularly where, such as here, the findings of both the trial court
and the appellate court on the matter coincide.9 (Emphasis supplied)
Hence, the first two issues will not be resolved as they raise questions of
fact.
Thus, the only question left to be resolved is that of prescription. In their
submissions, the parties argued lengthily on the nature of the contract
entered into by them, viz., whether it was one of sale or for a piece of
work.
Article 1713 of the Civil Code defines a contract for a piece of work thus:
By the contract for a piece of work the contractor binds himself to execute
a piece of work for the employer, in consideration of a certain price or
compensation. The contractor may either employ only his labor or skill, or
also furnish the material.
A contract for a piece of work, labor and materials may be distinguished
from a contract of sale by the inquiry as to whether the thing transferred is
one not in existence and which would never have existed but for the order,
of the person desiring it10 . In such case, the contract is one for a piece of
work, not a sale. On the other hand, if the thing subject of the contract
would have existed and been the subject of a sale to some other person
even if the order had not been given, then the contract is one of sale11 .
Thus, Mr. Justice Vitug12 explains that -
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 (Art. 1467, Civil Code). The mere fact alone

that certain articles are made upon previous orders of customers
will not argue against the imposition of the sales tax if such articles
are ordinarily manufactured by the taxpayer for sale to the public
(Celestino Co. vs. Collector, 99 Phil. 841).
To Tolentino, the distinction between the two contracts depends on
the intention of the parties. Thus, if the parties intended that at
some future date an object has to be delivered, without considering
the work or labor of the party bound to deliver, the contract is one of
sale. But if one of the parties accepts the undertaking on the basis
of some plan, taking into account the work he will employ
personally or through another, there is a contract for a piece of
work13 .
Clearly, the contract in question is one for a piece of work. It is not
petitioner's line of business to manufacture air-conditioning
systems to be sold "off-the-shelf." Its business and particular field
of expertise is the fabrication and installation of such systems as
ordered by customers and in accordance with the particular plans
and specifications provided by the customers. Naturally, the price
or compensation for the system manufactured and installed will
depend greatly on the particular plans and specifications agreed
upon with the customers.
The obligations of a contractor for a piece of work are set forth in
Articles 1714 and 1715 of the Civil Code, which provide:
Art. 1714. If the contractor agrees to produce the work from
material furnished by him, he shall deliver the thing produced to the
employer and transfer dominion over the thing. This contract shall
be governed by the following articles as well as by the pertinent
provisions on warranty of title and against hidden defects and the
payment of price in a contract of sale.
Art. 1715. The contractor shall execute the work in such a manner
that it has the qualities agreed upon and has no defects which
destroy or lessen its value or fitness for its ordinary or stipulated
use. Should the work be not of such quality, the employer may
require that the contractor remove the defect or execute another
work. If the contractor fails or refuses to comply with this obligation,
the employer may have the defect removed or another work
executed, at the contractor's cost.
The provisions on warranty against hidden defects, referred to in
Art. 1714 above-quoted, are found in Articles 1561 and 1566,
which read as follows:
Art. 1561. The vendor shall be responsible for warranty against the
hidden defects which the thing sold may have, should they render it
unfit for the use for which it is intended, or should they diminish its
fitness for such use to such an extent that, had the vendee been
aware thereof, he would not have acquired it or would have given a
lower price for it; but said vendor shall not be answerable for patent
defects or those which may be visible, or for those which are not
visible if the vendee is an expert who, by reason of his trade or
profession, should have known them.
xxx xxx xxx
Art. 1566. The vendor is responsible to the vendee for any hidden
faults or defects in the thing sold, even though he was not aware
thereof.
This provision shall not apply if the contrary has been stipulated,
and the vendor was not aware of the hidden faults or defects in the
thing sold.
61
The remedy against violations of the warranty against hidden defects is
either to withdraw from the contract (redhibitory action) or to demand a
proportionate reduction of the price (accion quanti manoris), with damages
in either case14 .
In Villostas vs. Court of Appeals15 , we held that, "while it is true that
Article 1571 of the Civil Code provides for a prescriptive period of six
months for a redhibitory action, a cursory reading of the ten preceding
articles to which it refers will reveal that said rule may be applied only in
case of implied warranties"; and where there is an express warranty in the
contract, as in the case at bench, the prescriptive period is the one
specified in the express warranty, and in the absence of such period, "the
general rule on rescission of contract, which is four years (Article 1389,
Civil Code) shall apply"16 .
Consistent with the above discussion, it would appear that this suit is
barred by prescription because the complaint was filed more than four
years after the execution of the contract and the completion of the
air-conditioning system.
However, a close scrutiny of the complaint filed in the trial court reveals
that the original action is not really for enforcement of the warranties
against hidden defects, but one for breach of the contract itself. It alleged17
that the petitioner, "in the installation of the air conditioning system did not
comply with the specifications provided" in the written agreement between
the parties, "and an evaluation of the air-conditioning system as installed
by the defendant showed the following defects and violations of the
specifications of the agreement, to wit:
GROUND FLOOR:
"A. RIGHT WING:
Equipped with Worthington Compressor, Model 2VC4 directly driven by an
Hp Elin electric motor 1750 rmp, 3 phase, 60 cycles, 220 volts, complete
with starter evaporative condenser, circulating water pump, air handling
unit air ducts.
Defects Noted:
1. Deteriorated evaporative condenser panels, coils are full of scales and
heavy corrosion is very evident.
2. Defective gauges of compressors;
3. No belt guard on motor;
4. Main switch has no cover;
5. Desired room temperature not attained;
Aside from the above defects, the following were noted not installed
although provided in the specifications.
1. Face by-pass damper of G.I. sheets No. 16. This damper regulates the
flow of cooled air depending on room condition.
2. No fresh air intake provision were provided which is very necessary for
efficient comfort cooling..
3. No motor to regulate the face and by-pass damper.
4. Liquid level indicator for refrigerant not provided.

5. Suitable heat exchanger is not installed. This is an important
component to increase refrigeration efficiency.
6. Modulating thermostat not provided.
7. Water treatment device for evaporative condenser was not
provided.
8. Liquid receiver not provided by sight glass.
B. LEFT WING:
Worthington Compressor Model 2VC4 is installed complete with 15
Hp electric motor, 3 phase, 220 volts 60 cycles with starter.
Defects Noted:
Same as right wing. except No. 4, All other defects on right wing
are common to the left wing.
SECOND FLOOR: (Common up to EIGHT FLOORS)
Compressors installed are MELCO with 7.5 Hp V-belt driven by
1800 RPM, -220 volts, 60 cycles, 3 phase, Thrige electric motor
with starters.
As stated in the specifications under, Section No. IV, the MELCO
compressors do not satisfy the conditions stated therein due to the
following:
1. MELCO Compressors are not provided with automatic capacity
unloader.
2. Not provided with oil pressure safety control.
3. Particular compressors do not have provision for renewal
sleeves.
Out of the total 15 MELCO compressors installed to serve the 2nd
floor up to 8th floors, only six (6) units are in operation and the rest
were already replaced. Of the remaining six (6) units, several of
them have been replaced with bigger crankshafts.
NINTH FLOOR:
Two (2) Worthington 2VC4 driven by 15 Hp, 3 phase, 220 volts, 60
cycles, 1750 rpm, Higgs motors with starters.
Defects Noted are similar to ground floor.
GENERAL REMARKS:
Under Section III, Design conditions of specification for air
conditioning work, and taking into account "A" & "B" same, the
present systems are not capable of maintaining the desired
temperature of 76 = 2ºF (sic).
The present tenant have installed 35 window type air conditioning
units distributed among the different floor levels. Temperature
measurements conducted on March 29. 1971, revealed that 78ºF
room (sic) is only maintained due to the additional window type
units.
62
The trial court, after evaluating the evidence presented, held that, indeed,
petitioner failed to install items and parts required in the contract and
substituted some other items which were not in accordance with the
specifications18 , thus:
From all of the foregoing, the Court is persuaded to believe the plaintiff
that not only had the defendant failed to install items and parts provided for
in the specifications of the air-conditioning system be installed, like face
and by-pass dampers and modulating thermostat and many others, but
also that there are items, parts and accessories which were used and
installed on the air-conditioning system which were not in full accord with
contract specifications. These omissions to install the equipments, parts
and accessories called for in the specifications of the contract, as well as
the deviations made in putting into the air-conditioning system equipments,
parts and accessories not in full accord with the contract specification
naturally resulted to adversely affect the operational effectiveness of the
air-conditioning system which necessitated the installation of thirty-five
window type of air-conditioning units distributed among the different floor
levels in order to be able to obtain a fairly desirable room temperature for
the tenants and actual occupants of the building. The Court opines and so
holds that the failure of the defendant to follow the contract specifications
and said omissions and deviations having resulted in the operational
ineffectiveness of the system installed makes the defendant liable to the
plaintiff in the amount necessary to rectify to put the air conditioning
system in its proper operational condition to make it serve the purpose for
which the plaintiff entered into the contract with the defendant.
The respondent Court affirmed the trial court's decision thereby making
the latter's findings also its own.
Having concluded that the original complaint is one for damages arising
from breach of a written contract - and not a suit to enforce warranties
against hidden defects - we here - with declare that the governing law is
Article 1715 (supra). However, inasmuch as this provision does not
contain a specific prescriptive period, the general law on prescription,
which is Article 1144 of the Civil Code, will apply. Said provision
states, inter alia, that actions "upon a written contract" prescribe in ten (10)
years. Since the governing contract was executed on September 10, 1962
and the complaint was filed on May 8, 1971, it is clear that the action has
not prescribed.
What about petitioner's contention that "acceptance of the work by the
employer relieves the contractor of liability for any defect in the work"?
This was answered by respondent Court19 as follows:
As the breach of contract which gave rise to the instant case consisted in
appellant's omission to install the equipments (sic), parts and accessories
not in accordance with the plan and specifications provided for in the
contract and the deviations made in putting into the air conditioning
system parts and accessories not in accordance with the contract
specifications, it is evident that the defect in the installation was not
apparent at the time of the delivery and acceptance of the work,
considering further that plaintiff is not an expert to recognize the same.
From the very nature of things, it is impossible to determine by the simple
inspection of air conditioning system installed in an 8-floor building
whether it has been furnished and installed as per agreed specifications.
Verily, the mere fact that the private respondent accepted the work does
not, ipso facto, relieve the petitioner from liability for deviations from and
violations of the written contract, as the law gives him ten (10) years within
which to file an action based on breach thereof.
WHEREFORE, the petition is hereby DENIED and the assailed Decision
is AFFIRMED. No costs.
SO ORDERED.
Narvasa, C.J., Davide Jr., Melo and Francisco, JJ., concur.

Footnotes
G.R. No. 113564 June 20, 2001
INOCENCIA YU DINO and her HUSBAND doing business
under the trade name "CANDY CLAIRE FASHION
GARMENTS", petitioners,
vs.
COURT OF APPEALS and ROMAN SIO, doing business under
the name "UNIVERSAL TOY MASTER
MANUFACTURING", respondents.
PUNO, J.:
Though people say, "better late than never", the law frowns upon
those who assert their rights past the eleventh hour. For failing to
timely institute their action, the petitioners are forever barred from
claiming a sum of money from the respondent.
This is a petition for review on certiorari to annul and set aside the
amended decision of the respondent court dated January 24, 1994
reversing its April 30, 1993 decision and dismissing the
plaintiff-petitioners' Complaint on the ground of prescription.The
following undisputed facts gave rise to the case at bar:
Petitioners spouses Dino, doing business under the trade name
"Candy Claire Fashion Garment" are engaged in the business of
manufacturing and selling shirts.1 Respondent Sio is part owner
and general manager of a manufacturing corporation doing
business under the trade name "Universal Toy Master
Manufacturing."2
Petitioners and respondent Sio entered into a contract whereby the
latter would manufacture for the petitioners 20,000 pieces of vinyl
frogs and 20,000 pieces of vinyl mooseheads at P7.00 per piece in
accordance with the sample approved by the petitioners. These
frogs and mooseheads were to be attached to the shirts petitioners
would manufacture and sell.3
Respondent Sio delivered in several installments the 40,000 pieces
of frogs and mooseheads. The last delivery was made on
September 28, 1988. Petitioner fully paid the agreed
price.4 Subsequently, petitioners returned to respondent 29,772
pieces of frogs and mooseheads for failing to comply with the
approved sample.5 The return was made on different dates: the
initial one on December 12, 1988 consisting of 1,720 pieces,6 the
second on January 11, 1989,7 and the last on January 17, 1989.8
Petitioners then demanded from the respondent a refund of the
purchase price of the returned goods in the amount of P208,404.00.
As respondent Sio refused to pay,9 petitioners filed on July 24,
1989 an action for collection of a sum of money in the Regional
Trial Court of Manila, Branch 38.
The trial court ruled in favor of the petitioners, viz:
"WHEREFORE, judgment is hereby rendered in favor of the
plaintiffs Vicente and Inocencia Dino and against defendant Toy
Master Manufacturing, Inc. ordering the latter to pay the former:
1. The amount of Two Hundred Eight Thousand Four Hundred
Four (P208,404.00) Pesos with legal interest thereon from July 5,
1989, until fully paid; and
63
2. The amount of Twenty Thousand (P20,000.00) Pesos as attorney's fees
and the costs of this suit.
The counterclaim on the other hand is hereby dismissed for lack of
merit."10
Respondent Sio sought recourse in the Court of Appeals. In its April 30,
1993 decision, the appellate court affirmed the trial court decision.
Respondent then filed a Motion for Reconsideration and a Supplemental
Motion for Reconsideration alleging therein that the petitioners' action for
collection of sum of money based on a breach of warranty had already
prescribed. On January 24, 1994, the respondent court reversed its
decision and dismissed petitioners' Complaint for having been filed
beyond the prescriptive period. The amended decision read in part, viz:
"Even if there is failure to raise the affirmative defense of prescription in a
motion to dismiss or in an appropriate pleading (answer, amended or
supplemental answer) and an amendment would no longer be feasible,
still prescription, if apparent on the face of the complaint may be favorably
considered (Spouses Matias B. Aznar, III, et al. vs. Hon. Juanito A. Bernad,
etc., supra, G.R. 81190, May 9, 1988). The rule in Gicano vs. Gegato
(supra) was reiterated in Severo v. Court of Appeals, (G.R. No. 84051,
May 19, 1989).
WHEREFORE the Motion For Reconsideration is granted. The judgment
of this Court is set aside and judgment is hereby rendered REVERSING
the judgment of the trial court and dismissing plaintiff's complaint." 11
Hence, this petition with the following assignment of errors:
I.
The respondent Court of Appeals seriously erred in dismissing the
complaint of the Petitioners on the ground that the action had prescribed.
II.
The respondent Court of Appeals seriously erred in holding that the
defense of prescription would still be considered despite the fact that it
was not raised in the answer, if apparent on the face of the complaint.
We first determine the nature of the action filed in the trial court to resolve
the issue of prescription. Petitioners claim that the Complaint they filed in
the trial court on July 24, 1989 was one for the collection of a sum of
money. Respondent contends that it was an action for breach of warranty
as the sum of money petitioners sought to collect was actually a refund of
the purchase price they paid for the alleged defective goods they bought
from the respondent.
We uphold the respondent's contention.
The following provisions of the New Civil Code are apropos:
"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."
"Art. 1713. By the contract for a piece of work the contractor binds himself
to execute a piece of work for the employer, in consideration of a certain
price or compensation. The contractor may either employ only his labor or
skill, or also furnish the material."

As this Court ruled in Engineering & Machinery Corporation v.
Court of Appeals, et al.,12 "a contract for a piece of work, labor and
materials may be distinguished from a contract of sale by the
inquiry as to whether the thing transferred is one not in existence
and which would never have existed but for the order of the person
desiring it. In such case, the contract is one for a piece of work, not
a sale. On the other hand, if the thing subject of the contract would
have existed and been the subject of a sale to some other person
even if the order had not been given then the contract is one of
sale."13 The contract between the petitioners and respondent
stipulated that respondent would manufacture upon order of the
petitioners 20,000 pieces of vinyl frogs and 20,000 pieces of vinyl
mooseheads according to the samples specified and approved by
the petitioners. Respondent Sio did not ordinarily manufacture
these products, but only upon order of the petitioners and at the
price agreed upon.14 Clearly, the contract executed by and
between the petitioners and the respondent was a contract for a
piece of work. At any rate, whether the agreement between the
parties was one of a contract of sale or a piece of work, the
provisions on warranty of title against hidden defects in a contract
of sale apply to the case at bar, viz:
"Art. 1714. If the contractor agrees to produce the work from
material furnished by him, he shall deliver the thing produced to the
employer and transfer dominion over the thing. This contract shall
be governed by the following articles as well as by the pertinent
provisions on warranty of title and against hidden defects and the
payment of price in a contract of sale."
"Art. 1561. The vendor shall be responsible for warranty against the
hidden defects which the thing sold may have, should they render it
unfit for the use for which it is intended, or should they diminish its
fitness for such use to such an extent that, had the vendee been
aware thereof, he would not have acquired it or would have given a
lower price for it; but said vendor shall not be answerable for patent
defects or those which may be visible, or for those which are not
visible if the vendee is an expert who, by reason of his trade or
profession, should have known them."
Petitioners aver that they discovered the defects in respondent's
products when customers in their (petitioners') shirt business came
back to them complaining that the frog and moosehead figures
attached to the shirts they bought were torn. Petitioners allege that
they did not readily see these hidden defects upon their
acceptance. A hidden defect is one which is unknown or could not
have been known to the vendee.15 Petitioners then returned to the
respondent 29,772 defective pieces of vinyl products and
demanded a refund of their purchase price in the amount of
P208,404.00. Having failed to collect this amount, they filed an
action for collection of a sum of money.
Article 1567 provides for the remedies available to the vendee in
case of hidden defects, viz:
"Art. 1567. In the cases of Articles 1561, 1562, 1564, 1565 and
1566, the vendee may elect between withdrawing from the contract
and demanding a proportionate reduction of the price, with
damages in either case."
By returning the 29,772 pieces of vinyl products to respondent and
asking for a return of their purchase price, petitioners were in effect
"withdrawing from the contract" as provided in Art. 1567. The
prescriptive period for this kind of action is provided in Art. 1571 of
the New Civil Code, viz:
"Art. 1571. Actions arising from the provisions of the preceding ten
articles shall be barred after six months from the delivery of the
thing sold." (Emphasis supplied)
64
There is no dispute that respondent made the last delivery of the vinyl
products to petitioners on September 28, 1988. It is also settled that the
action to recover the purchase price of the goods petitioners returned to
the respondent was filed on July 24, 1989, 16 more than nine months from
the date of last delivery. Petitioners having filed the action three months
after the six-month period for filing actions for breach of warranty against
hidden defects stated in Art. 1571,17 the appellate court dismissed the
action.
Petitioners fault the ruling on the ground that it was too late in the day for
respondent to raise the defense of prescription. The law then applicable to
the case at bar, Rule 9, Sec. 2 of the Rules of Court, provides:
"Defenses and objections not pleaded either in a motion to dismiss or in
the answer are deemed waived; except the failure to state a cause of
action . . . "
Thus, they claim that since the respondent failed to raise the defense of
prescription in a motion to dismiss or in its answer, it is deemed waived
and cannot be raised for the first time on appeal in a motion for
reconsideration of the appellate court's decision.
As a rule, the defense of prescription cannot be raised for the first time on
appeal. Thus, we held in Ramos v. Osorio,18 viz:
"It is settled law in this jurisdiction that the defense of prescription is
waivable, and that if it was not raised as a defense in the trial court, it
cannot be considered on appeal, the general rule being that the appellate
court is not authorized to consider and resolve any question not properly
raised in the lower court (Subido vs. Lacson, 55 O.G. 8281, 8285; Moran,
Comments on the Rules of Court, Vol. I, p. 784, 1947 Edition)."
However, this is not a hard and fast rule. In Gicano v. Gegato,19 we held:
". . .(T)rial courts have authority and discretion to dimiss an action on the
ground of prescription when the parties' pleadings or other facts on record
show it to be indeed time-barred; (Francisco v. Robles, Feb, 15, 1954;
Sison v. McQuaid, 50 O.G. 97; Bambao v. Lednicky, Jan. 28, 1961;
Cordova v. Cordova, Jan. 14, 1958; Convets, Inc. v. NDC, Feb. 28, 1958;
32 SCRA 529; Sinaon v. Sorongan, 136 SCRA 408); and it may do so on
the basis of a motion to dismiss (Sec. 1,f, Rule 16, Rules of Court), or an
answer which sets up such ground as an affirmative defense (Sec. 5, Rule
16), or even if the ground is alleged after judgment on the merits, as in a
motion for reconsideration (Ferrer v. Ericta, 84 SCRA 705); or even if the
defense has not been asserted at all, as where no statement thereof is
found in the pleadings (Garcia v. Mathis, 100 SCRA 250; PNB v. Pacific
Commission House, 27 SCRA 766; Chua Lamco v. Dioso, et al., 97 Phil.
821); or where a defendant has been declared in default (PNB v. Perez,
16 SCRA 270). What is essential only, to repeat, is that the facts
demonstrating the lapse of the prescriptive period be otherwise sufficiently
and satisfactorily apparent on the record; either in the averments of the
plaintiff's complaint, or otherwise established by the evidence." (emphasis
supplied)
In Aldovino, et al. v. Alunan, et al.,20 the Court en banc reiterated
the Garcia v. Mathis doctrine cited in the Gicano case that when the
plaintiff's own complaint shows clearly that the action has prescribed, the
action may be dismissed even if the defense of prescription was not
invoked by the defendant.
It is apparent in the records that respondent made the last delivery of vinyl
products to the petitioners on September 28, 1988. Petitioners admit this
in their Memorandum submitted to the trial court and reiterate it in their
Petition for Review.21 It is also apparent in the Complaint that petitioners
instituted their action on July 24, 1989. The issue for resolution is whether
or not the respondent Court of Appeals could dismiss the petitioners'
action if the defense of prescription was raised for the first time on appeal
but is apparent in the records.

Following the Gicano doctrine that allows dismissal of an action on
the ground of prescription even after judgment on the merits, or
even if the defense was not raised at all so long as the relevant
dates are clear on the record, we rule that the action filed by the
petitioners has prescribed. The dates of delivery and institution of
the action are undisputed. There are no new issues of fact arising
in connection with the question of prescription, thus carving out the
case at bar as an exception from the general rule that prescription if
not impleaded in the answer is deemed waived.22
Even if the defense of prescription was raised for the first time on
appeal in respondent's Supplemental Motion for Reconsideration of
the appellate court's decision, this does not militate against the due
process right of the petitioners. On appeal, there was no new issue
of fact that arose in connection with the question of prescription,
thus it cannot be said that petitioners were not given the
opportunity to present evidence in the trial court to meet a factual
issue. Equally important, petitioners had the opportunity to oppose
the defense of prescription in their Opposition to the Supplemental
Motion for Reconsideration filed in the appellate court and in their
Petition for Review in this Court.
This Court's application of the Osorio and Gicano doctrines to the
case at bar is confirmed and now enshrined in Rule 9, Sec. 1 of the
1997 Rules of Civil Procedure, viz:
"Section 1. Defense and objections not pleaded. - Defenses and
objections not pleaded whether in a motion to dismiss or in the
answer are deemed waived. However, when it appears from the
pleadings that the court has no jurisdiction over the subject matter,
that there is another action pending between the same parties for
the same cause, or that the action is barred by a prior judgment or
by statute of limitations, the court shall dismiss the claim."
(Emphasis supplied)
WHEREFORE, the petition is DENIED and the impugned decision
of the Court of Appeals dated January 24, 1994 is AFFIRMED. No
costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Kapunan, Pardo, and
Ynares-Santiago, JJ., concur.
* This case was transferred to the ponente on March 14, 2001
pursuant to Resolution in A.M. No. 00-9-03-SC. – Re: Creation of
Special Committee on Case Backlog dated February 27, 2001.
G.R. No. 115349 April 18, 1997
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS
and ATENEO DE MANILA UNIVERSITY, respondents.
PANGANIBAN, J.:
In conducting researches and studies of social organizations and
cultural values thru its Institute of Philippine Culture, is the Ateneo
de Manila University performing the work of an independent
contractor and thus taxable within the purview of then Section 205
of the National Internal Revenue Code levying a three percent
contractor's tax? This question is answer by the Court in the
negative as it resolves this petition assailing the Decision 1 of the
Respondent Court of Appeals 2 in CA-G.R. SP No. 31790
65
promulgated on April 27, 1994 affirming that of the Court of Tax Appeals. 3
The Antecedent Facts
The antecedents as found by the Court of Appeals are reproduced
hereinbelow, the same being largely undisputed by the parties.
Private respondent is a non-stock, non-profit educational institution with
auxiliary units and branches all over the Philippines. One such auxiliary
unit is the Institute of Philippine Culture (IPC), which has no legal
personality separate and distinct from that of private respondent. The IPC
is a Philippine unit engaged in social science studies of Philippine society
and culture. Occasionally, it accepts sponsorships for its research
activities from international organizations, private foundations and
government agencies.
On July 8, 1983, private respondent received from petitioner
Commissioner of Internal Revenue a demand letter dated June 3, 1983,
assessing private respondent the sum of P174,043.97 for alleged
deficiency contractor's tax, and an assessment dated June 27, 1983 in the
sum of P1,141,837 for alleged deficiency income tax, both for the fiscal
year ended March 31, 1978. Denying said tax liabilities, private
respondent sent petitioner a letter-protest and subsequently filed with the
latter a memorandum contesting the validity of the assessments.
On March 17, 1988, petitioner rendered a letter-decision canceling the
assessment for deficiency income tax but modifying the assessment for
deficiency contractor's tax by increasing the amount due to P193,475.55.
Unsatisfied, private respondent requested for a reconsideration or
reinvestigation of the modified assessment. At the same time, it filed in the
respondent court a petition for review of the said letter-decision of the
petitioner. While the petition was pending before the respondent court,
petitioner issued a final decision dated August 3, 1988 reducing the
assessment for deficiency contractor's tax from P193,475.55 to
P46,516.41, exclusive of surcharge and interest.
On July 12, 1993, the respondent court rendered the questioned decision
which dispositively reads:
WHEREFORE, in view of the foregoing, respondent's decision is SET
ASIDE. The deficiency contractor's tax assessment in the amount of
P46,516.41 exclusive of surcharge and interest for the fiscal year ended
March 31, 1978 is hereby CANCELED. No pronouncement as to cost.
SO ORDERED.
Not in accord with said decision, petitioner has come to this Court via the
present petition for review raising the following issues:
1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE
PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT TO
SECTION 205 OF THE TAX CODE; and
2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3%
CONTRACTOR'S TAX UNDER SECTION 205 OF THE TAX CODE.
The pertinent portions of Section 205 of the National Internal Revenue
Code, as amended, provide:
Sec. 205. Contractor, proprietors or operators of dockyards, and others. —
A contractor's tax of threeper centum of the gross receipts is hereby
imposed on the following:
xxx xxx xxx

(16) Business agents and other independent contractors except
persons, associations and corporations under contract for
embroidery and apparel for export, as well as their agents and
contractors and except gross receipts of or from a pioneer industry
registered with the Board of Investments under Republic Act No.
5186:
xxx xxx xxx
The term "independent contractors" include persons (juridical or
natural) not enumerated above (but not including individuals
subject to the occupation tax under Section 12 of the Local Tax
Code) whose activity consists essentially of the sale of all kinds of
services for a fee regardless of whether or not the performance of
the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees.
xxx xxx xxx
Petitioner contends that the respondent court erred in holding that
private respondent is not an "independent contractor" within the
purview of Section 205 of the Tax Code. To petitioner, the term
"independent contractor", as defined by the Code, encompasses all
kinds of services rendered for a fee and that the only exceptions
are the following:
a. Persons, association and corporations under contract for
embroidery and apparel for export and gross receipts of or from
pioneer industry registered with the Board of Investment under R.A.
No. 5186;
b. Individuals occupation tax under Section 12 of the Local Tax
Code (under the old Section 182 [b] of the Tax Code); and
c. Regional or area headquarters established in the Philippines by
multinational corporations, including their alien executives, and
which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communication and
coordinating centers for their affiliates, subsidiaries or branches in
the Asia Pacific Region (Section 205 of the Tax Code).
Petitioner thus submits that since private respondent falls under the
definition of an "independent contractor" and is not among the
aforementioned exceptions, private respondent is therefore subject
to the 3% contractor's tax imposed under the same Code. 4
The Court of Appeals disagreed with the Petitioner Commissioner
of Internal Revenue and affirmed the assailed decision of the Court
of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA
through this petition for review.
The Issues
Petitioner submits before us the following issues:
1) Whether or not private respondent falls under the purview of
independent contractor pursuant to Section 205 of the Tax Code.
2) Whether or not private respondent is subject to 3% contractor's
tax under Section 205 of the Tax Code. 5
In fine, these may be reduced to a single issue: Is Ateneo de
Manila University, through its auxiliary unit or branch — the Institute
of Philippine Culture — performing the work of an independent
contractor and, thus, subject to the three percent contractor's tax
levied by then Section 205 of the National Internal Revenue Code?
66
The Court's Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue Code
germane to the case before us read:
Sec. 205. Contractors, proprietors or operators of dockyards, and others.
— A contractor's tax of threeper centum of the gross receipts is hereby
imposed on the following:
xxx xxx xxx
(16) Business agents and other independent contractors, except persons,
associations and corporations under contract for embroidery and apparel
for export, as well as their agents and contractors, and except gross
receipts of or from a pioneer industry registered with the Board of
Investments under the provisions of Republic Act No. 5186;
xxx xxx xxx
The term "independent contractors" include persons (juridical or natural)
not enumerated above (but not including individuals subject to the
occupation tax under Section 12 of the Local Tax Code) whose activity
consists essentially of the sale of all kinds of services for a fee regardless
of whether or not the performance of the service calls for the exercise or
use of the physical or mental faculties of such contractors or their
employees.
The term "independent contractor" shall not include regional or area
headquarters established in the Philippines by multinational corporations,
including their alien executives, and which headquarters do not earn or
derive income from the Philippines and which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries
or branches in the Asia-Pacific Region.
The term "gross receipts" means all amounts received by the prime or
principal contractor as the total contract price, undiminished by amount
paid to the subcontractor, shall be excluded from the taxable gross
receipts of the subcontractor.
Petitioner Commissioner of Internal Revenue contends that Private
Respondent Ateneo de Manila University "falls within the definition" of an
independent contractor and "is not one of those mentioned as excepted";
hence, it is properly a subject of the three percent contractor's tax levied
by the foregoing provision of law. 6 Petitioner states that the "term
'independent contractor' is not specifically defined so as to delimit the
scope thereof, so much so that any person who . . . renders physical and
mental service for a fee, is now indubitably considered an independent
contractor liable to 3% contractor's tax." 7 According to petitioner, Ateneo
has the burden of proof to show its exemption from the coverage of the
law.
We disagree. Petitioner Commissioner of Internal Revenue erred in
applying the principles of tax exemption without first applying the
well-settled doctrine of strict interpretation in the imposition of taxes. It is
obviously both illogical and impractical to determine who are exempted
without first determining who are covered by the aforesaid provision. The
Commissioner should have determined first if private respondent was
covered by Section 205, applying the rule of strict interpretation of laws
imposing taxes and other burdens on the populace, before asking Ateneo
to prove its exemption therefrom. The Court takes this occasion to
reiterate the hornbook doctrine in the interpretation of tax laws that "(a)
statute will not be construed as imposing a tax unless it does so clearly,
expressly, and unambiguously . . . (A) tax cannot be imposed without clear

and express words for that purpose. Accordingly, the general rule
of requiring adherence to the letter in construing statutes applies
with peculiar strictness to tax lawsand the provisions of a taxing act
are not to be extended by implication." 8 Parenthetically, in
answering the question of who is subject to tax statutes, it is basic
that "in case of doubt, such statutes are to be construed most
strongly against the government and in favor of the subjects or
citizens because burdens are not to be imposed nor presumed to
be imposed beyond what statutes expressly and clearly import." 9
To fall under its coverage, Section 205 of the National Internal
Revenue Code requires that the independent contractor be
engaged in the business of selling its services. Hence, to impose
the three percent contractor's tax on Ateneo's Institute of Philippine
Culture, it should be sufficiently proven that the private respondent
is indeed selling its services for a fee in pursuit of an independent
business. And it is only after private respondent has been found
clearly to be subject to the provisions of Sec. 205 that the question
of exemption therefrom would arise. Only after such coverage is
shown does the rule of construction — that tax exemptions are to
be strictly construed against the taxpayer — come into play,
contrary to petitioner's position. This is the main line of reasoning of
the Court of Tax Appeals in its decision, 10 which was affirmed by
the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Service of its Institute of Philippine Culture
After reviewing the records of this case, we find no evidence that
Ateneo's Institute of Philippine Culture ever sold its services for a
fee to anyone or was ever engaged in a business apart from and
independently of the academic purposes of the university.
Stressing that "it is not the Ateneo de Manila University per
se which is being taxed," Petitioner Commissioner of Internal
Revenue contends that "the tax is due on its activity of conducting
researches for a fee. The tax is due on the gross receipts made in
favor of IPC pursuant to the contracts the latter entered to conduct
researches for the benefit primarily of its clients. The tax is imposed
on the exercise of a taxable activity. . . . [T]he sale of services of
private respondent is made under a contract and the various
contracts entered into between private respondent and its clients
are almost of the same terms, showing, among others, the
compensation and terms of payment." 11(Emphasis supplied.)
In theory, the Commissioner of Internal Revenue may be correct.
However, the records do not show that Ateneo's IPC in fact
contracted to sell its research services for a fee. Clearly then, as
found by the Court of Appeals and the Court of Tax Appeals,
petitioner's theory is inapplicable to the established factual milieu
obtaining in the instant case.
In the first place, the petitioner has presented no evidence to prove
its bare contention that, indeed, contracts for sale of services were
ever entered into by the private respondent. As appropriately
pointed out by the latter:
An examination of the Commissioner's Written Formal Offer of
Evidence in the Court of Tax Appeals shows that only the following
documentary evidence was presented:
Exhibit 1 BIR letter of authority no. 331844
2 Examiner's Field Audit Report
3 Adjustments to Sales/Receipts
4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr.
67
None of the foregoing evidence even comes close to purport to be
contracts between private respondent and third parties. 12
Moreover, the Court of Tax Appeals accurately and correctly declared that
the " funds received by the Ateneo de Manila University are technically not
a fee. They may however fall as gifts or donations which are tax-exempt"
as shown by private respondent's compliance with the requirement of
Section 123 of the National Internal Revenue Code providing for the
exemption of such gifts to an educational institution. 13
Respondent Court of Appeals elucidated on the ruling of the Court of Tax
Appeals:
To our mind, private respondent hardly fits into the definition of an
"independent contractor".
For one, the established facts show that IPC, as a unit of the private
respondent, is not engaged in business. Undisputedly, private respondent
is mandated by law to undertake research activities to maintain its
university status. In fact, the research activities being carried out by the
IPC is focused not on business or profit but on social sciences studies of
Philippine society and culture. Since it can only finance a limited number
of IPC's research projects, private respondent occasionally accepts
sponsorship for unfunded IPC research projects from international
organizations, private foundations and governmental agencies. However,
such sponsorships are subject to private respondent's terms and
conditions, among which are, that the research is confined to topics
consistent with the private respondent's academic agenda; that no
proprietary or commercial purpose research is done; and that private
respondent retains not only the absolute right to publish but also the
ownership of the results of the research conducted by the IPC. Quite
clearly, the aforementioned terms and conditions belie the allegation that
private respondent is a contractor or is engaged in business.
For another, it bears stressing that private respondent is a non-stock,
non-profit educational corporation. The fact that it accepted sponsorship
for IPC's unfunded projects is merely incidental. For, the main function of
the IPC is to undertake research projects under the academic agenda of
the private respondent. Moreover the records do not show that in
accepting sponsorship of research work, IPC realized profits from such
work. On the contrary, the evidence shows that for about 30 years, IPC
had continuously operated at a loss, which means that sponsored funds
are less than actual expenses for its research projects. That IPC has been
operating at a loss loudly bespeaks of the fact that education and not profit
is the motive for undertaking the research projects.
Then, too, granting arguendo that IPC made profits from the sponsored
research projects, the fact still remains that there is no proof that part of
such earnings or profits was ever distributed as dividends to any
stockholder, as in fact none was so distributed because they accrued to
the benefit of the private respondent which is a non-profit educational
institution. 14
Therefore, it is clear that the funds received by Ateneo's Institute of
Philippine Culture are not given in the concept of a fee or price in
exchange for the performance of a service or delivery of an object. Rather,
the amounts are in the nature of an endowment or donation given by IPC's
benefactors solely for the purpose of sponsoring or funding the
research with no strings attached. As found by the two courts below, such
sponsorships are subject to IPC's terms and conditions. No proprietary or
commercial research is done, and IPC retains the ownership of the results
of the research, including the absolute right to publish the same. The
copyrights over the results of the research are owned by
Ateneo and, consequently, no portion thereof may be reproduced without
its permission. 15 The amounts given to IPC, therefore, may not be
deemed, it bears stressing as fees or gross receipts that can be subjected
to the three percent contractor's tax.

It is also well to stress that the questioned transactions of Ateneo's
Institute of Philippine Culture cannot be deemed either as a
contract of sale or a contract of a piece of work. "By the contract of
sale, one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to
pay therefor a price certain in money or its equivalent." 16 By its
very nature, a contract of sale requires a transfer of ownership.
Thus, Article 1458 of the Civil Code "expressly makes the
obligation to transfer ownership as an essential element of the
contract of sale, following modern codes, such as the German and
the Swiss. Even in the absence of this express requirement,
however, most writers, including Sanchez Roman, Gayoso,
Valverde, Ruggiero, Colin and Capitant, have considered such
transfer of ownership as the primary purpose of sale. Perez and
Alguer follow the same view, stating that the delivery of the thing
does not mean a mere physical transfer, but is a means of
transmitting ownership. Transfer of title or an agreement to transfer
it for a price paid or promised to be paid is the essence of
sale." 17 In the case of a contract for a piece of work, "the contractor
binds himself to execute a piece of work for the employer, in
consideration of a certain price or compensation. . . . If the
contractor agrees to produce the work from materials furnished by
him, he shall deliver the thing produced to the employer and
transfer dominion over the thing, . . ." 18 Ineludably, whether the
contract be one of sale or one for a piece of work, a transfer of
ownership is involved and a party necessarily walks away with an
object. 19 In the case at bench, it is clear from the evidence on
record that there was no sale either of objects or services because,
as adverted to earlier, there was no transfer of ownership over the
research data obtained or the results of research projects
undertaken by the Institute of Philippine Culture.
Furthermore, it is clear that the research activity of the Institute of
Philippine Culture is done in pursuance of maintaining Ateneo's
university status and not in the course of an independent business
of selling such research with profit in mind. This is clear from a
reading of the regulations governing universities:
31. In addition to the legal requisites an institution must meet,
among others, the following requirements before an application for
university status shall be considered:
xxx xxx xxx
(e) The institution must undertake research and operate with a
competent qualified staff at least three graduate departments in
accordance with the rules and standards for graduate education.
One of the departments shall be science and technology. The
competence of the staff shall be judged by their effective teaching,
scholarly publications and research activities published in its school
journal as well as their leadership activities in the profession.
(f) The institution must show evidence of adequate and stable
financial resources and support, a reasonable portion of which
should be devoted to institutional development and research.
(emphasis supplied)
xxx xxx xxx
32. University status may be withdrawn, after due notice and
hearing, for failure to maintain satisfactorily the standards and
requirements therefor. 20
Petitioner's contention that it is the Institute of Philippine Culture
that is being taxed and not the Ateneo is patently erroneous
because the former is not an independent juridical entity that is
separate and distinct form the latter.
68
Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by
the Court of Appeals Generally Conclusive
In addition, we reiterate that the "Court of Tax Appeals is a highly
specialized body specifically created for the purpose of reviewing tax
cases. Through its expertise, it is undeniably competent to determine the
issue of whether" 21 Ateneo de Manila University may be deemed a
subject of the three percent contractor's tax "through the evidence
presented before it." Consequently, "as a matter of principle, this Court will
not set aside the conclusion reached by . . . the Court of Tax Appeals
which is, by the very nature of its function, dedicated exclusively to the
study and consideration of tax problems and has necessarily developed
an expertise on the subject unless there has been an abuse or
improvident exercise of authority . . ." 22 This point becomes more evident
in the case before us where the findings and conclusions of both the Court
of Tax Appeals and the Court of Appeals appear untainted by any abuse
of authority, much less grave abuse of discretion. Thus, we find the
decision of the latter affirming that of the former free from any palpable
error.
Public Service, Not Profit, is the Motive
The records show that the Institute of Philippine Culture conducted its
research activities at a huge deficit of P1,624,014.00 as shown in its
statements of fund and disbursements for the period 1972 to 1985. 23 In
fact, it was Ateneo de Manila University itself that had funded the research
projects of the institute, and it was only when Ateneo could no longer
produce the needed funds that the institute sought funding from outside.
The testimony of Ateneo's Director for Accounting Services, Ms. Leonor
Wijangco, provides significant insight on the academic and nonprofit
nature of the institute's research activities done in furtherance of the
university's purposes, as follows:
Q Now it was testified to earlier by Miss Thelma Padero (Office Manager
of the Institute of Philippine Culture) that as far as grants from sponsored
research it is possible that the grant sometimes is less than the actual cost.
Will you please tell us in this case when the actual cost is a lot less than
the grant who shoulders the additional cost?
A The University.
Q Now, why is this done by the University?
A Because of our faculty development program as a university, because a
university has to have its own research institute. 24
So, why is it that Ateneo continues to operate and conduct researches
through its Institute of Philippine Culture when it undisputedly loses not an
insignificant amount in the process? The plain and simple answer is that
private respondent is not a contractor selling its services for a fee but an
academic institution conducting these researches pursuant to its
commitments to education and, ultimately, to public service. For the
institute to have tenaciously continued operating for so long despite its
accumulation of significant losses, we can only agree with both the Court
of Tax Appeals and the Court of Appeals that "education and not profit is
[IPC's] motive for undertaking the research
projects." 25
WHEREFORE, premises considered, the petition is DENIED and the
assailed Decision of the Court of Appeals is hereby AFFIRMED in full.
SO ORDERED.
G.R. No. L-11491 August 23, 1918

ANDRES QUIROGA, plaintiff-appellant,
vs.
PARSONS HARDWARE CO., defendant-appellee.
Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant.
Crossfield & O'Brien for appellee.
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
69
apply for the exclusive agency for any island not comprised with the
Visayan group.
ART. 3. Mr. Parsons may sell, or establish branches of his agency for the
sale of "Quiroga" beds in all the towns of the Archipelago where there are
no exclusive agents, and shall immediately report such action to Mr.
Quiroga for his approval.
ART. 4. This contract is made for an unlimited period, and may be
terminated by either of the contracting parties on a previous notice of
ninety days to the other party.
Of the three causes of action alleged by the plaintiff in his complaint, only
two of them constitute the subject matter of this appeal and both
substantially amount to the averment that the defendant violated the
following obligations: not to sell the beds at higher prices than those of the
invoices; to have an open establishment in Iloilo; itself to conduct the
agency; to keep the beds on public exhibition, and to pay for the
advertisement expenses for the same; and to order the beds by the dozen
and in no other manner. As may be seen, with the exception of the
obligation on the part of the defendant to order the beds by the dozen and
in no other manner, none of the obligations imputed to the defendant in the
two causes of action are expressly set forth in the contract. But the plaintiff
alleged that the defendant was his agent for the sale of his beds in Iloilo,
and that said obligations are implied in a contract of commercial agency.
The whole question, therefore, reduced itself to a determination as to
whether the defendant, by reason of the contract hereinbefore transcribed,
was a purchaser or an agent of the plaintiff for the sale of his beds.
In order to classify a contract, due regard must be given to its essential
clauses. In the contract in question, what was essential, as constituting its
cause and subject matter, is that the plaintiff was to furnish the defendant
with the beds which the latter might order, at the price stipulated, and that
the defendant was to pay the price in the manner stipulated. The price
agreed upon was the one determined by the plaintiff for the sale of these
beds in Manila, with a discount of from 20 to 25 per cent, according to their
class. Payment was to be made at the end of sixty days, or before, at the
plaintiff's request, or in cash, if the defendant so preferred, and in these
last two cases an additional discount was to be allowed for prompt
payment. These are precisely the essential features of a contract of
purchase and sale. There was the obligation on the part of the plaintiff to
supply the beds, and, on the part of the defendant, to pay their price.
These features exclude the legal conception of an agency or order to sell
whereby the mandatory or agent received the thing to sell it, and does not
pay its price, but delivers to the principal the price he obtains from the sale
of the thing to a third person, and if he does not succeed in selling it, he
returns it. By virtue of the contract between the plaintiff and the defendant,
the latter, on receiving the beds, was necessarily obliged to pay their price
within the term fixed, without any other consideration and regardless as to
whether he had or had not sold the beds.
It would be enough to hold, as we do, that the contract by and between the
defendant and the plaintiff is one of purchase and sale, in order to show
that it was not one made on the basis of a commission on sales, as the
plaintiff claims it was, for these contracts are incompatible with each other.
But, besides, examining the clauses of this contract, none of them is found
that substantially supports the plaintiff's contention. Not a single one of
these clauses necessarily conveys the idea of an agency. The
words commission on sales used in clause (A) of article 1 mean nothing
else, as stated in the contract itself, than a mere discount on the invoice
price. The word agency, also used in articles 2 and 3, only expresses that
the defendant was the only one that could sell the plaintiff's beds in the
Visayan Islands. With regard to the remaining clauses, the least that can
be said is that they are not incompatible with the contract of purchase and
sale.
The plaintiff calls attention to the testimony of Ernesto Vidal, a former
vice-president of the defendant corporation and who established and
managed the latter's business in Iloilo. It appears that this witness, prior to
the time of his testimony, had serious trouble with the defendant, had

maintained a civil suit against it, and had even accused one of its
partners, Guillermo Parsons, of falsification. He testified that it was
he who drafted the contract Exhibit A, and, when questioned as to
what was his purpose in contracting with the plaintiff, replied that it
was to be an agent for his beds and to collect a commission on
sales. However, according to the defendant's evidence, it was
Mariano Lopez Santos, a director of the corporation, who prepared
Exhibit A. But, even supposing that Ernesto Vidal has stated the
truth, his statement as to what was his idea in contracting with the
plaintiff is of no importance, inasmuch as the agreements
contained in Exhibit A which he claims to have drafted, constitute,
as we have said, a contract of purchase and sale, and not one of
commercial agency. This only means that Ernesto Vidal was
mistaken in his classification of the contract. But it must be
understood that a contract is what the law defines it to be, and not
what it is called by the contracting parties.
The plaintiff also endeavored to prove that the defendant had
returned beds that it could not sell; that, without previous notice, it
forwarded to the defendant the beds that it wanted; and that the
defendant received its commission for the beds sold by the plaintiff
directly to persons in Iloilo. But all this, at the most only shows that,
on the part of both of them, there was mutual tolerance in the
performance of the contract in disregard of its terms; and it gives no
right to have the contract considered, not as the parties stipulated it,
but as they performed it. Only the acts of the contracting parties,
subsequent to, and in connection with, the execution of the contract,
must be considered for the purpose of interpreting the contract,
when such interpretation is necessary, but not when, as in the
instant case, its essential agreements are clearly set forth and
plainly show that the contract belongs to a certain kind and not to
another. Furthermore, the return made was of certain brass beds,
and was not effected in exchange for the price paid for them, but
was for other beds of another kind; and for the letter Exhibit L-1,
requested the plaintiff's prior consent with respect to said beds,
which shows that it was not considered that the defendant had a
right, by virtue of the contract, to make this return. As regards the
shipment of beds without previous notice, it is insinuated in the
record that these brass beds were precisely the ones so shipped,
and that, for this very reason, the plaintiff agreed to their return.
And with respect to the so-called commissions, we have said that
they merely constituted a discount on the invoice price, and the
reason for applying this benefit to the beds sold directly by the
plaintiff to persons in Iloilo was because, as the defendant
obligated itself in the contract to incur the expenses of
advertisement of the plaintiff's beds, such sales were to be
considered as a result of that advertisement.
In respect to the defendant's obligation to order by the dozen, the
only one expressly imposed by the contract, the effect of its breach
would only entitle the plaintiff to disregard the orders which the
defendant might place under other conditions; but if the plaintiff
consents to fill them, he waives his right and cannot complain for
having acted thus at his own free will.
For the foregoing reasons, we are of opinion that the contract by
and between the plaintiff and the defendant was one of purchase
and sale, and that the obligations the breach of which is alleged as
a cause of action are not imposed upon the defendant, either by
agreement or by law.
The judgment appealed from is affirmed, with costs against the
appellant. So ordered.
Arellano, C.J., Torres, Johnson, Street and Malcolm, JJ., concur.
G.R. No. L-47538 June 20, 1941
70
GONZALO PUYAT & SONS, INC., petitioner,
vs.
ARCO AMUSEMENT COMPANY (formerly known as Teatro
Arco), respondent.
Feria & Lao for petitioner.
J. W. Ferrier and Daniel Me. Gomez for respondent.
LAUREL, J.:
This is a petition for the issuance of a writ of certiorari to the Court of
Appeals for the purpose of reviewing its Amusement Company (formerly
known as Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat and Sons.
Inc., defendant-appellee."
It appears that the respondent herein brought an action against the herein
petitioner in the Court of First Instance of Manila to secure a
reimbursement of certain amounts allegedly overpaid by it on account of
the purchase price of sound reproducing equipment and machinery
ordered by the petitioner from the Starr Piano Company of Richmond,
Indiana, U.S.A. The facts of the case as found by the trial court and
confirmed by the appellate court, which are admitted by the respondent,
are as follows:
In the year 1929, the "Teatro Arco", a corporation duly organized under
the laws of the Philippine Islands, with its office in Manila, was engaged in
the business of operating cinematographs. In 1930, its name was changed
to Arco Amusement Company. C. S. Salmon was the president, while A. B.
Coulette was the business manager. About the same time, Gonzalo Puyat
& Sons, Inc., another corporation doing business in the Philippine Islands,
with office in Manila, in addition to its other business, was acting as
exclusive agents in the Philippines for the Starr Piano Company of
Richmond, Indiana, U.S. A. It would seem that this last company dealt in
cinematographer equipment and machinery, and the Arco Amusement
Company desiring to equipt its cinematograph with sound reproducing
devices, approached Gonzalo Puyat & Sons, Inc., thru its then president
and acting manager, Gil Puyat, and an employee named Santos. After
some negotiations, it was agreed between the parties, that is to say,
Salmon and Coulette on one side, representing the plaintiff, and Gil Puyat
on the other, representing the defendant, that the latter would, on behalf of
the plaintiff, order sound reproducing equipment from the Starr Piano
Company and that the plaintiff would pay the defendant, in addition to the
price of the equipment, a 10 per cent commission, plus all expenses, such
as, freight, insurance, banking charges, cables, etc. At the expense of the
plaintiff, the defendant sent a cable, Exhibit "3", to the Starr Piano
Company, inquiring about the equipment desired and making the said
company to quote its price without discount. A reply was received by
Gonzalo Puyat & Sons, Inc., with the price, evidently the list price of
$1,700 f.o.b. factory Richmond, Indiana. The defendant did not show the
plaintiff the cable of inquiry nor the reply but merely informed the plaintiff of
the price of $1,700. Being agreeable to this price, the plaintiff, by means of
Exhibit "1", which is a letter signed by C. S. Salmon dated November 19,
1929, formally authorized the order. The equipment arrived about the end
of the year 1929, and upon delivery of the same to the plaintiff and the
presentation of necessary papers, the price of $1.700, plus the 10 per cent
commission agreed upon and plus all the expenses and charges, was duly
paid by the plaintiff to the defendant.
Sometime the following year, and after some negotiations between the
same parties, plaintiff and defendants, another order for sound
reproducing equipment was placed by the plaintiff with the defendant, on
the same terms as the first order. This agreement or order was confirmed
by the plaintiff by its letter Exhibit "2", without date, that is to say, that the
plaintiff would pay for the equipment the amount of $1,600, which was
supposed to be the price quoted by the Starr Piano Company, plus 10 per
cent commission, plus all expenses incurred. The equipment under the
second order arrived in due time, and the defendant was duly paid the
price of $1,600 with its 10 per cent commission, and $160, for all expenses
and charges. This amount of $160 does not represent actual out-of-pocket
expenses paid by the defendant, but a mere flat charge and rough

estimate made by the defendant equivalent to 10 per cent of the
price of $1,600 of the equipment.
About three years later, in connection with a civil case in Vigan,
filed by one Fidel Reyes against the defendant herein Gonzalo
Puyat & Sons, Inc., the officials of the Arco Amusement Company
discovered that the price quoted to them by the defendant with
regard to their two orders mentioned was not the net price but
rather the list price, and that the defendants had obtained a
discount from the Starr Piano Company. Moreover, by reading
reviews and literature on prices of machinery and cinematograph
equipment, said officials of the plaintiff were convinced that the
prices charged them by the defendant were much too high
including the charges for out-of-pocket expense. For these reasons,
they sought to obtain a reduction from the defendant or rather a
reimbursement, and failing in this they brought the present action.
The trial court held that the contract between the petitioner and the
respondent was one of outright purchase and sale, and absolved
that petitioner from the complaint. The appellate court, however, —
by a division of four, with one justice dissenting — held that the
relation between petitioner and respondent was that of agent and
principal, the petitioner acting as agent of the respondent in the
purchase of the equipment in question, and sentenced the
petitioner to pay the respondent alleged overpayments in the total
sum of $1,335.52 or P2,671.04, together with legal interest thereon
from the date of the filing of the complaint until said amount is fully
paid, as well as to pay the costs of the suit in both instances. The
appellate court further argued that even if the contract between the
petitioner and the respondent was one of purchase and sale, the
petitioner was guilty of fraud in concealing the true price and hence
would still be liable to reimburse the respondent for the
overpayments made by the latter.
The petitioner now claims that the following errors have been
incurred by the appellate court:
I. El Tribunal de Apelaciones incurrio en error de derecho al
declarar que, segun hechos, entre la recurrente y la recurrida
existia una relacion implicita de mandataria a mandante en la
transaccion de que se trata, en vez de la de vendedora a
compradora como ha declarado el Juzgado de Primera Instncia de
Manila, presidido entonces por el hoy Magistrado Honorable
Marcelino Montemayor.
II. El Tribunal de Apelaciones incurrio en error de derecho al
declarar que, suponiendo que dicha relacion fuerra de vendedora a
compradora, la recurrente obtuvo, mediante dolo, el
consentimiento de la recurrida en cuanto al precio de $1,700 y
$1,600 de las maquinarias y equipos en cuestion, y condenar a la
recurrente ha obtenido de la Starr Piano Company of Richmond,
Indiana.
We sustain the theory of the trial court that the contract between
the petitioner and the respondent was one of purchase and sale,
and not one of agency, for the reasons now to be stated.
In the first place, the contract is the law between the parties and
should include all the things they are supposed to have been
agreed upon. What does not appear on the face of the contract
should be regarded merely as "dealer's" or "trader's talk", which
can not bind either party. (Nolbrook v. Conner, 56 So., 576, 11 Am.
Rep., 212; Bank v. Brosscell, 120 III., 161; Bank v. Palmer, 47 III.,
92; Hosser v. Copper, 8 Allen, 334; Doles v. Merrill, 173 Mass.,
411.) The letters, Exhibits 1 and 2, by which the respondent
accepted the prices of $1,700 and $1,600, respectively, for the
sound reproducing equipment subject of its contract with the
petitioner, are clear in their terms and admit no other interpretation
that the respondent in question at the prices indicated which are
71
fixed and determinate. The respondent admitted in its complaint filed with
the Court of First Instance of Manila that the petitioner agreed to sellto 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.
Avanceña, C.J., Diaz, Moran and Horrilleno, JJ., concur.
The Lawphil Project - Arellano Law Foundation---
G.R. No. L-20871 April 30, 1971
KER & CO., LTD., petitioner,
vs.
JOSE B. LINGAD, as Acting Commissioner of Internal
Revenue, respondent.
Ross, Selph and Carrascoso for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B.
Afurong and Special Atty. Balbino Gatdula, Jr. for 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
72
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
73
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.
Concepcion C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro,
Teehankee, Barredo, Villamor and Makasiar, JJ., concur.
Footnotes
G.R. No. 75198 October 18, 1988
SCHMID & OBERLY, INC., petitioner,
vs.
RJL MARTINEZ FISHING CORPORATION, respondent.
Sycip Salazar Hernandez & Gatmaitan Law Office for petitioner.
Siguion Reyna, Montecillo & Ongsiako Law Office for respondent.
CORTES, J.:
Petitioner seeks reversal of the decision and the resolution of the
Court of Appeals, ordering Schmid & Oberly Inc. (hereafter to be
referred to simply as "SCHMID") to refund the purchase price paid
by RJL Martinez Fishing Corporation (hereafter to be referred to
simply as "RJL MARTINEZ") to D. Nagata Co., Ltd. of Japan
(hereafter to be referred to simply as NAGATA CO.") for twelve (12)
defective "Nagata"-brand generators, plus consequential damages,
and attorneys fees.
The facts as found by the Court of Appeals, are as follows:
The findings of facts by the trial court (Decision, pp. 21-28, Record
on Appeal) shows: that the plaintiff RJL Martinez Fishing
Corporation is engaged in deep-sea fishing, and in the course of its
business, needed electrical generators for the operation of its
business; that the defendant sells electrical generators with the
brand of "Nagata", a Japanese product; that the supplier is the
manufacturer, the D. Nagata Co. Ltd., of Japan, that the defendant
Schmid & Oberly Inc. advertised the 12 Nagata generators for sale;
that the plaintiff purchased 12 brand new Nagata generators, as
advertised by herein defendant; that through an irrevocable line of
credit, the D. Nagata Co., Ltd., shipped to the plaintiff 12 electric
generators, and the latter paid the amount of the purchase price;
that the 12 generators were found to be factory defective; that the
plaintiff informed the defendant herein that it shall return the 12
generators as in fact three of the 12 were actually returned to the
defendant; that the plaintiff sued the defendant on the warranty;
asking for rescission of the contract; that the defendant be ordered
to accept the generators and be ordered to pay back the purchase
money; and that the plaintiff asked for damages. (Record on
Appeal, pp. 27-28) [CA Decision, pp. 34; Rollo, pp. 47-48.]
74
On the basis thereof, the Court of Appeals affirmed the decision of the trial
court ordering petitioner to refund to private respondent the purchase price
for the twelve (12) generators and to accept delivery of the same and to
pay s and attorney's fees, with a slight modification as to the amount to be
refunded. In its resolution of the motion for reconsideration, the Court of
Appeals further modified the trial courts decision as to the award of
consequential damages.
Ordinarily, the Court will not disturb the findings of fact of the Court of
Appeals in petitions to review the latter's decisions under Rule 45 of the
Revised Rules of Court, the scope of the Court's inquiry being limited to a
review of the imputed errors of law [Chan v. Court of Appeals, G.R. No.
L-27488, June 30, 1970, 33 SCRA 77; Tiongco v. De la Merced, G.R. No.
L-24426, July 25, 1974, 58 SCRA 89; Corona v. Court of Appeals, G.R. No.
62482, April 28, 1983, 121 SCRA 865; Baniqued v. Court of Appeals, G.R.
No.
L-47531, January 30, 1984, 127 SCRA 596.] However, when, as in this
case, it is the petitioner's position that the appealed judgment is premised
on a misapprehension of
facts, * the Court is compelled to review the Court of Appeal's factual
findings [De la Cruz v. Sosing, 94 Phil. 26 (1953); Castillo v. Court of
Appeals, G.R. No. I,48290, September 29, 1983, 124 SCRA 808.]
Considering the sketchiness of the respondent court's narration of facts,
whether or not the Court of Appeals indeed misapprehended the facts
could not be determined without a thorough review of the records.
Thus, after a careful scrutiny of the records, the Court has found the
appellate court's narration of facts incomplete. It failed to include certain
material facts.
The facts are actually as follows:
RJL MARTINEZ is engaged in the business of deep-sea fishing. As RJL
MARTINEZ needed electric generators for some of its boats and SCHMIID
sold electric generators of different brands, negotiations between them for
the acquisition thereof took place. The parties had two separate
transactions over "Nagata"-brand generators.
The first transaction was the sale of three (3) generators. In this
transaction, it is not disputed that SCHMID was the vendor of the
generators. The company supplied the generators from its stockroom; it
was also SCHMID which invoiced the sale.
The second transaction, which gave rise to the present controversy,
involves twelve (12) "Nagata"-brand generators. 'These are the facts
surrounding this particular transaction:
As RJL MARTINEZ was canvassing for generators, SC gave RJL
MARTINEZ its Quotation dated August 19, 1975 [Exhibit 'A"] for twelve (12)
"Nagata'-brand generators with the following specifications:
"NAGATA" Single phase AC Alternators, 110/220 V, 60 cycles, 1800 rpm,
unity power factor, rectifier type and radio suppressor,, 5KVA (5KW)
$546.75 @
It was stipulated that payment would be made by confirming an
irrevocable letter of credit in favor of NAGATA CO. Furthermore, among
the General Conditions of Sale appearing on the dorsal side of the
Quotation is the following:
Buyer will, upon request, promptly open irrevocable Letter of Credit in
favor of seller, in the amount stated on the face of this memorandum,
specifying shipment from any Foreign port to Manila or any safe Philippine
port, permitting partial shipments and providing that in the event the
shippers are unable to ship within the specified period due to strikes, lack
of shipping space or other circumstances beyond their reasonable control,
Buyer agrees to extend the said Letter of Credit for later shipment. The

Letter of Credit shall otherwise be subject to the conditions stated
in this memorandum of contract. [Emphasis supplied.]
Agreeing with the terms of the Quotation, RJL MARTINEZ opened
a letter of credit in favor of NAGATA CO. Accordingly, on
November 20,1975, SCHMID transmitted to NAGATA CO. an order
[Exhibit "4"] for the twelve (12) generators to be shipped directly to
RJL MARTINEZ. NAGATA CO. thereafter sent RJL MARTINEZ the
bill of lading and its own invoice (Exhibit "B") and, in accordance
with the order, shipped the generators directly to RJL MARTINEZ.
The invoice states that "one (1) case of 'NAGATA' AC Generators"
consisting of twelve sets was—bought by order and for account risk
of Messrs. RJL Martinez Fishing Corporation.
For its efforts, SCHMID received from NAGATA CO. a commission
of $1,752.00 for the sale of the twelve generators to RJL
MARTINEZ. [Exhibits "9", "9-A", "9-B" and "9-C".]
All fifteen (15) generators subject of the two transactions burned
out after continuous use. RJL MARTINEZ informed SCHMID about
this development. In turn, SCHMID brought the matter to the
attention of NAGATA CO. In July 1976, NAGATA CO. sent two
technical representatives who made an ocular inspection and
conducted tests on some of the burned out generators, which by
then had been delivered to the premises of SCHMID.
The tests revealed that the generators were overrated. As indicated
both in the quotation and in the invoice, the capacity of a generator
was supposed to be 5 KVA (kilovolt amperes). However, it turned
out that the actual capacity was only 4 KVA.
SCHMID replaced the three (3) generators subject of the first sale
with generators of a different brand.
As for the twelve (12) generators subject of the second transaction,
the Japanese technicians advised RJL MARTINEZ to ship three (3)
generators to Japan, which the company did. These three (3)
generators were repaired by NAGATA CO. itself and thereafter
returned to RJL MARTINEZ; the remaining nine (9) were neither
repaired nor replaced. NAGATA CO., however, wrote SCHMID
suggesting that the latter check the generators, request for spare
parts for replacement free of charge, and send to NAGATA CO.
SCHMID's warranty claim including the labor cost for repairs
[Exhibit "I".] In its reply letter, SCHMID indicated that it was not
agreeable to these terms [Exhibit "10".]
As not all of the generators were replaced or repaired, RJL
MARTINEZ formally demanded that it be refunded the cost of the
generators and paid damages. SCHMID in its reply maintained that
it was not the seller of the twelve (12) generators and thus refused
to refund the purchase price therefor. Hence, on February 14, 1977,
RJL MARTINEZ brought suit against SCHMID on the theory that
the latter was the vendor of the twelve (12) generators and, as such
vendor, was liable under its warranty against hidden defects.
Both the trial court and the Court of Appeals upheld the contention
of RJL MARTINEZ that SCHMID was the vendor in the second
transaction and was liable under its warranty. Accordingly, the
courts a quo rendered judgment in favor of RJL MARTINEZ. Hence,
the instant recourse to this Court.
In this petition for review, SCHMID seeks reversal on the following
grounds:
(i) Schmid was merely the indentor in the sale [of the twelve (12)
generators] between Nagata Co., the exporter and RJL Martinez,
the importer;
75
(ii) as mere indentor, Schmid is not liable for the seller's implied warranty
against hidden defects, Schmid not having personally assumed any such
warranty.
(iii) in any event, conformably with Article 1563 of the Civil Code, there
was no implied warranty against hidden defects in the sale of these twelve
(12) generators because these were sold under their trade name "Nagata";
and
(iv) Schmid, accordingly, is not liable for the reimbursement claimed by
RJL Martinez nor for the latter's unsubstantiated claim of PI 10.33
operational losses a day nor for exemplary damages, attorney's fees and
costs. [Petition, p. 6.]
1. As may be expected, the basic issue confronting this Court is whether
the second transaction between the parties was a sale or an indent
transaction. SCHMID maintains that it was the latter; RJL MARTINEZ
claims that it was a sale.
At the outset, it must be understood that a contract is what the law defines
it to be, considering its essential elements, and not what it is caged by the
contracting parties [Quiroga v. Parsons Hardware Co., 38 Phil. 501
(1918).]
The Civil Code defines a contract of sale, thus:
ART. 458. By the contract of sale one of the contracting parties obligates
himself to transfer the ownership of and to deliver a determinate thing, and
the other to pay therefor a price certain in money or its equivalent.
It has been said that the essence of the contract of sale is transfer of title
or agreement to transfer it for a price paid or promised [Commissioner of
Internal Revenue v. Constantino, G.R. No. L-25926, February 27, 1970,
31 SCRA 779, 785, citing Salisbury v. Brooks, 94 SE 117,118-19.] "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." [Ibid.]
On the other hand, there is no statutory definition of "indent" in this
jurisdiction. However, the Rules and Regulations to Implement
Presidential Decree No. 1789 (the Omnibus Investments Code) lumps
"indentors" together with "commercial brokers" and "commission
merchants" in this manner:
... A foreign firm which does business through the middlemen acting in
their own names, such as indentors, commercial brokers or commission
merchants, shall not be deemed doing business in the Philippines. But
such indentors, commercial brokers or commission merchants shall be the
ones deemed to be doing business in the Philippines [Part I, Rule I,
Section 1, par. g (1).]
Therefore, an indentor is a middlemen in the same class as commercial
brokers and commission merchants. To get an Idea of what an indentor is,
a look at the definition of those in his class may prove helpful.
A broker is generally defined as one who is engaged, for others, on a
commission, negotiating contracts relative to property with the custody of
which he has no concern; the negotiator between other parties, never
acting in his own name but in the name of those who employed him; he is
strictly a middleman and for some purpose the agent of both parties. (1 9
Cyc 186; Henderson vs. The State, 50 Ind., 234; Black's Law Dictionary.)
A broker is one whose occupation it is to bring parties together to bargain,
or to bargain for them, in matters of trade, commerce or navigation.
Mechem on Agency, sec. 13; Wharton on Agency, sec. 695.) Judge
Storey, in his work on Agency, defines a broker as an agent employed to
make bargains and contracts between other persons, in matters of trade,
commerce or navigation, for compensation commonly called brokerage.

(Storey on Agency, sec. 28.) [Behn Meyer and Co., Ltd. v. Nolting
and Garcia, 35 Phil. 274, 279-80 (1916).]
A commission merchant is one engaged in the purchase or sale for
another of personal property which, for this purpose, is placed in
his possession and at his disposal. He maintains a relation not only
with his principal and the purchasers or vendors, but also with the
property which is subject matter of the transaction. [Pacific
Commercial Co. v. Yatco, 68 Phil. 398, 401 (1939).]
Thus, the chief feature of a commercial broker and a commercial
merchant is that in effecting a sale, they are merely intermediaries
or middle-men, and act in a certain sense as the agent of both
parties to the transaction.
Webster defines an indent as "a purchase order for goods
especially when sent from a foreign country." [Webster's Ninth New
Collegiate Dictionary 612 (1986).] It would appear that there are
three parties to an indent transaction, namely, the buyer, the
indentor, and the supplier who is usually a non-resident
manufacturer residing in the country where the goods are to be
bought [Commissioner of Internal Revenue v. Cadwallader Pacific
Company, G.R. No. L-20343, September 29, 1976, 73 SCRA 59.]
An indentor may therefore be best described as one who, for
compensation, acts as a middleman in bringing about a purchase
and sale of goods between a foreign supplier and a local
purchaser.
Coming now to the case at bar, the admissions of the parties and
the facts appearing on record more than suffice to warrant the
conclusion that SCHMID was not a vendor, but was merely an
indentor, in the second transaction.
In its complaint, RJL MARTINEZ admitted that the generators were
purchased "through indent order" [Record on Appeal, p. 6.] In the
same vein, it admitted in its demand letter previously sent to
SCHMID that twelve (12) of en (15) Nagata-brand generators "were
purchased through your company (SCHMID), by indent order and
three (3) by direct purchase." [Exhibit "D".] The evidence also show
that RJL MARTINEZ paid directly NAGATA CO, for the generators,
and that the latter company itself invoiced the sale [Exhibit "B"], and
shipped the generators directly to the former. The only participation
of SCHMID was to act as an intermediary or middleman between
NAGATA CO. and RJL MARTINEZ, by procuring an order from
RJL MARTINEZ and forwarding the same to NAGATA CO. for
which the company received a commission from NAGATA CO.
[Exhibits "9", "9-A", "9-B" and "9-C".]
The above transaction is significantly different from the first
transaction wherein SCHMID delivered the goods from its own
stock (which it had itself imported from NAGATA CO.), issued its
own invoice, and collected payment directly from the purchaser.
These facts notwithstanding, RJL MARTINEZ insists that SCHMID
was the vendor of the twelve generators on the following grounds:
First, it is contended that the Quotation and the General Conditions
of Sale on the dorsal side thereof do not necessarily lead to the
conclusion that NAGATA CO., and not SCHMID, was the real seller
in the case of the twelve (12) generators in that:
(i) the signing of the quotation, which was under SCHMID's
letter-head, perfected the contract of sale (impliedly, as between
the signatories thereto—i.e., RJL MARTINEZ and SCHMID);
(ii) the qualification that the letter of credit shall be in favor of
NAGATA CO. constituted simply the manner of payment requested
by SCHMID (implying that SCHMID, as seller, merely chose to
76
waive direct payment, stipulating delivery of payment instead to NAGATA
CO. as supplier);
Second, it is asserted that the acts of SCHMID after it was informed of the
defect in the generators were indicative of its awareness that it was the
vendor and acknowledgment of its liability as such vendor. Attention is
called to these facts: When RJL MARTINEZ complained to SCHMID that
the generators were defective, SCHMID immediately asked RJL
MARTINEZ to send the defective generators to its shop to determine what
was wrong. SCHMID likewise informed NAGATA CO. about the complaint
of RJL MARTINEZ. When the Japanese technicians arrived, SCHMID
made available its technicians, its shop and its testing equipment. After the
generators were found to have factory defects, SCHMID facilitated the
shipment of three (3) generators to Japan and, after their repair, back to
the Philippines [Memorandum for the Respondent, p. 8.]
Third, it is argued that the contents of the letter from NAGATA CO. to
SCHMID regarding the repair of the generators indicated that the latter
was "within the purview of a seller." [Ibid.]
Fourth, it is argued that if SCHMID is considered as a mere agent of
NAGATA CO., a foreign corporation not licensed to do business in the
Philippines, then the officers and employees of the former may be
penalized for violation of the old Corporation Law which provided:
Sec. 69 ... Any officer or agent of the corporation or any person transacting
business for any foreign corporation not having the license prescribed
shall be punished by imprisonment for not less than six months nor more
than two years or by a fine 'of not less than two hundred pesos nor more
than one thousand pesos or both such imprisonment and fine, in the
discretion of the Court.
The facts do not bear out these contentions.
The first contention disregards the circumstances surrounding the second
transaction as distinguished from those surrounding the first transaction,
as noted above.
Neither does the solicitous manner by which SCHMID responded to RJL
MARTINEZ's complaint prove that the former was the seller of the
generators. As aptly stated by counsel, no indentor will just fold its hands
when a client complains about the goods it has bought upon the indentor's
mediation. In its desire to promote the product of the seller and to retain
the goodwill of the buyer, a prudent indentor desirous of maintaining his
business would have to act considerably. towards his clients.
Note that in contrast to its act of replacing the three (3) generators subject
of the first transaction, SCHMID did not replace any of the twelve (12)
generators, but merely rendered assistance to both RJL TINES and
NAGATA CO. so that the latter could repair the defective generators.
The proposal of NAGATA CO. rejected by SCHMID that the latter
undertake the repair of the nine (9) other defective generators, with the
former supplying the replacement parts free of charge and subsequently
reimbursing the latter for labor costs [Exhibit "I"], cannot support the
conclusion that SCHMID is vendor of the generators of the second
transaction or was acting "within the purview of a seller."
Finally, the afore-quoted penal provision in the Corporation Law finds no
application to SCHMID and its officers and employees relative to the
transactions in the instant case. What the law seeks to prevent, through
said provision, is the circumvention by foreign corporations of licensing
requirements through the device of employing local representatives. An
indentor, acting in his own name, is not, however, covered by the
above-quoted provision. In fact, the provision of the Rules and
Regulations implementing the Omnibus Investments Code quoted above,
which was copied from the Rules implementing Republic Act No. 5455,
recognizes the distinct role of an indentor, such that when a foreign

corporation does business through such indentor, the foreign
corporation is not deemed doing business in the Philippines.
In view of the above considerations, this Court rules that SCHMID
was merely acting as an indentor in the purchase and sale of the
twelve (12) generators subject of the second transaction. Not being
the vendor, SCHMID cannot be held liable for the implied warranty
for hidden defects under the Civil Code [Art. 1561, et seq.]
2. However, even as SCHMID was merely an indentor, there was
nothing to prevent it from voluntarily warranting that twelve (12)
generators subject of the second transaction are free from any
hidden defects. In other words, SCHMID may be held answerable
for some other contractual obligation, if indeed it had so bound
itself. As stated above, an indentor is to some extent an agent of
both the vendor and the vendee. As such agent, therefore, he may
expressly obligate himself to undertake the obligations of his
principal (See Art. 1897, Civil Code.)
The Court's inquiry, therefore, shifts to a determination of whether
or not SCHMID expressly bound itself to warrant that the twelve (12)
generators are free of any hidden defects.
Again, we consider the facts.
The Quotation (Exhibit A is in writing. It is the repository of the
contract between RJL MARTINEZ and SCHMID. Notably, nowhere
is it stated therein that SCHMID did bind itself to answer for the
defects of the things sold. There being no allegation nor any proof
that the Quotation does not express the true intent and agreement
of the contracting parties, extrinsic parol evidence of warranty will
be to no avail [See Rule 123, Sec. 22.]
The trial court, however, relied on the testimony of Patrocinio
Balagtas, the head of the Electrical Department of RJL MARTINEZ,
to support the finding that SCHMID did warrant the twelve (12)
generators against defects.
Upon careful examination of Balagtas' testimony, what is at once
apparent is that Balagtas failed to disclose the nature or terms and
conditions of the warranty allegedly given by SC Was it a warranty
that the generators would be fit for the fishing business of the buyer?
Was it a warranty that the generators to be delivered would meet
the specifications indicated in the Quotation? Considering the
different kinds of warranties that may be contracted, unless the
nature or terms and conditions of the warranty are known, it would
not be possible to determine whether there has been a breach
thereof.
Moreover, a closer examination of the statements allegedly made
by the representative of SCHMID reveals that they merely
constituted an expression of opinion which cannot by any means
be construed as a warranty [See Art. 1546, Civil Code.]
We quote from Balagtas' testimony:
Atty. CATRAL:
Q Did you not say at the start of your cross examination, Mr.
Balagtas, that the only participation you had in the acquisition of
those twelve (12) units [of] generators was your having issued a
purchase order to your own company for the purchase of the units?
ATTY. AQUINO:
Misleading, your Honor.
77
Atty. CATRAL:
I am asking the witness.
COURT:
He has the right to ask that question because he is on cross. Moreover, if I
remember, he mentioned something like that. Witness may answer.
A Yes, sir. Before I submitted that, we negotiated with Schmid and Oberly
the beat generators they can recommend because we are looking for
generators. The representative of Schmid and Oberly said that Nagata is
very good. That is why I recommended that to the management. [t.s.n.,
October 14, 1977, pp. 23-25.]
At any rate, when asked where SCHMID's warranty was contained,
Balagtas testified initially that it was in the receipts covering the sale. (At
this point, it may be stated that the invoice [Exhibit "B-l"] was issued by
NAGATA CO. and nowhere is it stated therein that SCHMID warranted the
generators against defects.) When confronted with a copy of the invoice
issued by NAGATA CO., he changed his assertion and claimed that what
he meant was that the date of the commencement of the period of
SCHMID's warranty would be based on the date of the invoice. On further
examination, he again changed his mind and asserted that the warranty
was given verbally [TSN, October 14, 1977, pp. 19-22.] But then again, as
stated earlier, the witness failed to disclose the nature or terms and
conditions of the warranty allegedly given by SCHMID.
On the other hand, Hernan Adad SCHMID's General Manager, was
categorical that the company does not warrant goods bought on indent
and that the company warrants only the goods bought directly from it, like
the three generators earlier bought by RJL MARTINEZ itself [TSN,
December 19, 1977, pp. 63-64.] It must be recalled that SCHMID readily
replaced the three generators from its own stock. In the face of these
conflicting testimonies, this Court is of the view that RJL has failed to
prove that SCHMID had given a warranty on the twelve (12) generators
subject of the second transaction. Even assuming that a warranty was
given, there is no way to determine whether there has been a breach
thereof, considering that its nature or terms and conditions have not been
shown.
3. In view of the foregoing, it becomes unnecessary to pass upon the other
issues.
WHEREFORE, finding the Court of Appeals to have committed a
reversible error, the petition is GRANTED and the appealed Decision and
Resolution of the Court of Appeals are REVERSED. The complaint of RJL
Martinez Fishing Corporation is hereby DISMISSED. No costs.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr. and Bidin, JJ., concur.
Feliciano, J., took no part.
G.R. No. 117356 June 19, 2000
VICTORIAS MILLING CO., INC., petitioner,
vs.
COURT OF APPEALS and CONSOLIDATED SUGAR
CORPORATION, respondents.
DECISION

QUISUMBING, J.:
Before us is a petition for review on certiorari under Rule 45 of the
Rules of Court assailing the decision of the Court of Appeals dated
February 24, 1994, in CA-G.R. CV No. 31717, as well as the
respondent court's resolution of September 30, 1994 modifying
said decision. Both decision and resolution amended the judgment
dated February 13, 1991, of the Regional Trial Court of Makati City,
Branch 147, in Civil Case No. 90-118.
The facts of this case as found by both the trial and appellate courts
are as follows:
St. Therese Merchandising (hereafter STM) regularly bought sugar
from petitioner Victorias Milling Co., Inc., (VMC). In the course of
their dealings, petitioner issued several Shipping List/Delivery
Receipts (SLDRs) to STM as proof of purchases. Among these was
SLDR No. 1214M, which gave rise to the instant case. Dated
October 16, 1989, SLDR No. 1214M covers 25,000 bags of sugar.
Each bag contained 50 kilograms and priced at P638.00 per bag as
"per sales order VMC Marketing No. 042 dated October 16, 1989."1
The transaction it covered was a "direct sale."2The SLDR also
contains an additional note which reads: "subject for (sic)
availability of a (sic) stock at NAWACO (warehouse)."3
On October 25, 1989, STM sold to private respondent
Consolidated Sugar Corporation (CSC) its rights in SLDR No.
1214M for P 14,750,000.00. CSC issued one check dated October
25, 1989 and three checks postdated November 13, 1989 in
payment. That same day, CSC wrote petitioner that it had been
authorized by STM to withdraw the sugar covered by SLDR No.
1214M. Enclosed in the letter were a copy of SLDR No. 1214M and
a letter of authority from STM authorizing CSC "to withdraw for and
in our behalf the refined sugar covered by Shipping List/Delivery
Receipt-Refined Sugar (SDR) No. 1214 dated October 16, 1989 in
the total quantity of 25,000 bags."4
On October 27, 1989, STM issued 16 checks in the total amount of
P31,900,000.00 with petitioner as payee. The latter, in turn, issued
Official Receipt No. 33743 dated October 27, 1989 acknowledging
receipt of the said checks in payment of 50,000 bags. Aside from
SLDR No. 1214M, said checks also covered SLDR No. 1213.
Private respondent CSC surrendered SLDR No. 1214M to the
petitioner's NAWACO warehouse and was allowed to withdraw
sugar. However, after 2,000 bags had been released, petitioner
refused to allow further withdrawals of sugar against SLDR No.
1214M. CSC then sent petitioner a letter dated January 23, 1990
informing it that SLDR No. 1214M had been "sold and endorsed" to
it but that it had been refused further withdrawals of sugar from
petitioner's warehouse despite the fact that only 2,000 bags had
been withdrawn.5 CSC thus inquired when it would be allowed to
withdraw the remaining 23,000 bags.
On January 31, 1990, petitioner replied that it could not allow any
further withdrawals of sugar against SLDR No. 1214M because
STM had already dwithdrawn all the sugar covered by the cleared
checks.6
On March 2, 1990, CSC sent petitioner a letter demanding the
release of the balance of 23,000 bags.
Seven days later, petitioner reiterated that all the sugar
corresponding to the amount of STM's cleared checks had been
fully withdrawn and hence, there would be no more deliveries of the
commodity to STM's account. Petitioner also noted that CSC had
represented itself to be STM's agent as it had withdrawn the 2,000
bags against SLDR No. 1214M "for and in behalf" of STM.
78
On April 27, 1990, CSC filed a complaint for specific performance,
docketed as Civil Case No. 90-1118. Defendants were Teresita Ng Sy
(doing business under the name of St. Therese Merchandising) and herein
petitioner. Since the former could not be served with summons, the case
proceeded only against the latter. During the trial, it was discovered that
Teresita Ng Go who testified for CSC was the same Teresita Ng Sy who
could not be reached through summons.7 CSC, however, did not bother
to pursue its case against her, but instead used her as its witness.
CSC's complaint alleged that STM had fully paid petitioner for the sugar
covered by SLDR No. 1214M. Therefore, the latter had no justification for
refusing delivery of the sugar. CSC prayed that petitioner be ordered to
deliver the 23,000 bags covered by SLDR No. 1214M and sought the
award of P1,104,000.00 in unrealized profits, P3,000,000.00 as exemplary
damages, P2,200,000.00 as attorney's fees and litigation expenses.
Petitioner's primary defense a quo was that it was an unpaid seller for the
23,000 bags.8 Since STM had already drawn in full all the sugar
corresponding to the amount of its cleared checks, it could no longer
authorize further delivery of sugar to CSC. Petitioner also contended that it
had no privity of contract with CSC.
Petitioner explained that the SLDRs, which it had issued, were not
documents of title, but mere delivery receipts issued pursuant to a series
of transactions entered into between it and STM. The SLDRs prescribed
delivery of the sugar to the party specified therein and did not authorize
the transfer of said party's rights and interests.
Petitioner also alleged that CSC did not pay for the SLDR and was actually
STM's co-conspirator to defraud it through a misrepresentation that CSC
was an innocent purchaser for value and in good faith. Petitioner then
prayed that CSC be ordered to pay it the following sums: P10,000,000.00
as moral damages; P10,000,000.00 as exemplary damages; and
P1,500,000.00 as attorney's fees. Petitioner also prayed that
cross-defendant STM be ordered to pay it P10,000,000.00 in exemplary
damages, and P1,500,000.00 as attorney's fees.
Since no settlement was reached at pre-trial, the trial court heard the case
on the merits.
As earlier stated, the trial court rendered its judgment favoring private
respondent CSC, as follows:
"WHEREFORE, in view of the foregoing, the Court hereby renders
judgment in favor of the plaintiff and against defendant Victorias Milling
Company:
"1) Ordering defendant Victorias Milling Company to deliver to the plaintiff
23,000 bags of refined sugar due under SLDR No. 1214;
"2) Ordering defendant Victorias Milling Company to pay the amount of
P920,000.00 as unrealized profits, the amount of P800,000.00 as
exemplary damages and the amount of P1,357,000.00, which is 10% of
the acquisition value of the undelivered bags of refined sugar in the
amount of P13,570,000.00, as attorney's fees, plus the costs.
"SO ORDERED."9
It made the following observations:
"[T]he testimony of plaintiff's witness Teresita Ng Go, that she had fully
paid the purchase price of P15,950,000.00 of the 25,000 bags of sugar
bought by her covered by SLDR No. 1214 as well as the purchase price of
P15,950,000.00 for the 25,000 bags of sugar bought by her covered by
SLDR No. 1213 on the same date, October 16, 1989 (date of the two
SLDRs) is duly supported by Exhibits C to C-15 inclusive which are
post-dated checks dated October 27, 1989 issued by St. Therese

Merchandising in favor of Victorias Milling Company at the time it
purchased the 50,000 bags of sugar covered by SLDR No. 1213
and 1214. Said checks appear to have been honored and duly
credited to the account of Victorias Milling Company because on
October 27, 1989 Victorias Milling Company issued official receipt
no. 34734 in favor of St. Therese Merchandising for the amount of
P31,900,000.00 (Exhibits B and B-1). The testimony of Teresita Ng
Go is further supported by Exhibit F, which is a computer printout of
defendant Victorias Milling Company showing the quantity and
value of the purchases made by St. Therese Merchandising, the
SLDR no. issued to cover the purchase, the official reciept no. and
the status of payment. It is clear in Exhibit 'F' that with respect to
the sugar covered by SLDR No. 1214 the same has been fully paid
as indicated by the word 'cleared' appearing under the column of
'status of payment.'
"On the other hand, the claim of defendant Victorias Milling
Company that the purchase price of the 25,000 bags of sugar
purchased by St. Therese Merchandising covered by SLDR No.
1214 has not been fully paid is supported only by the testimony of
Arnulfo Caintic, witness for defendant Victorias Milling Company.
The Court notes that the testimony of Arnulfo Caintic is merely a
sweeping barren assertion that the purchase price has not been
fully paid and is not corroborated by any positive evidence. There is
an insinuation by Arnulfo Caintic in his testimony that the postdated
checks issued by the buyer in payment of the purchased price were
dishonored. However, said witness failed to present in Court any
dishonored check or any replacement check. Said witness likewise
failed to present any bank record showing that the checks issued
by the buyer, Teresita Ng Go, in payment of the purchase price of
the sugar covered by SLDR No. 1214 were dishonored."10
Petitioner appealed the trial court’s decision to the Court of
Appeals.
On appeal, petitioner averred that the dealings between it and STM
were part of a series of transactions involving only one account or
one general contract of sale. Pursuant to this contract, STM or any
of its authorized agents could withdraw bags of sugar only against
cleared checks of STM. SLDR No. 21214M was only one of 22
SLDRs issued to STM and since the latter had already withdrawn
its full quota of sugar under the said SLDR, CSC was already
precluded from seeking delivery of the 23,000 bags of sugar.
Private respondent CSC countered that the sugar purchases
involving SLDR No. 1214M were separate and independent
transactions and that the details of the series of purchases were
contained in a single statement with a consolidated summary of
cleared check payments and sugar stock withdrawals because this
a more convenient system than issuing separate statements for
each purchase.
The appellate court considered the following issues: (a) Whether or
not the transaction between petitioner and STM involving SLDR No.
1214M was a separate, independent, and single transaction; (b)
Whether or not CSC had the capacity to sue on its own on SLDR
No. 1214M; and (c) Whether or not CSC as buyer from STM of the
rights to 25,000 bags of sugar covered by SLDR No. 1214M could
compel petitioner to deliver 23,000 bags allegedly unwithdrawn.
On February 24, 1994, the Court of Appeals rendered its decision
modifying the trial court's judgment, to wit:
"WHEREFORE, the Court hereby MODIFIES the assailed
judgment and orders defendant-appellant to:
"1) Deliver to plaintiff-appellee 12,586 bags of sugar covered by
SLDR No. 1214M;
79
"2) Pay to plaintiff-appellee P792,918.00 which is 10% of the value of the
undelivered bags of refined sugar, as attorneys fees;
"3) Pay the costs of suit.
"SO ORDERED."11
Both parties then seasonably filed separate motions for reconsideration.
In its resolution dated September 30, 1994, the appellate court modified its
decision to read:
"WHEREFORE, the Court hereby modifies the assailed judgment and
orders defendant-appellant to:
"(1) Deliver to plaintiff-appellee 23,000 bags of refined sugar under SLDR
No. 1214M;
"(2) Pay costs of suit.
"SO ORDERED."12
The appellate court explained the rationale for the modification as follows:
"There is merit in plaintiff-appellee's position.
"Exhibit ‘F' We relied upon in fixing the number of bags of sugar which
remained undelivered as 12,586 cannot be made the basis for such a
finding. The rule is explicit that courts should consider the evidence only
for the purpose for which it was offered. (People v. Abalos, et al, 1 CA Rep
783). The rationale for this is to afford the party against whom the
evidence is presented to object thereto if he deems it necessary.
Plaintiff-appellee is, therefore, correct in its argument that Exhibit ‘F' which
was offered to prove that checks in the total amount of P15,950,000.00
had been cleared. (Formal Offer of Evidence for Plaintiff, Records p.
58) cannot be used to prove the proposition that 12,586 bags of sugar
remained undelivered.
"Testimonial evidence (Testimonies of Teresita Ng [TSN, 10 October 1990,
p. 33] and Marianito L. Santos [TSN, 17 October 1990, pp. 16, 18, and
36]) presented by plaintiff-appellee was to the effect that it had withdrawn
only 2,000 bags of sugar from SLDR after which it was not allowed to
withdraw anymore. Documentary evidence (Exhibit I, Id., p. 78, Exhibit K,
Id., p. 80) show that plaintiff-appellee had sent demand letters to
defendant-appellant asking the latter to allow it to withdraw the remaining
23,000 bags of sugar from SLDR 1214M. Defendant-appellant, on the
other hand, alleged that sugar delivery to the STM corresponded only to
the value of cleared checks; and that all sugar corresponded to cleared
checks had been withdrawn. Defendant-appellant did not rebut
plaintiff-appellee's assertions. It did not present evidence to show how
many bags of sugar had been withdrawn against SLDR No. 1214M,
precisely because of its theory that all sales in question were a series of
one single transaction and withdrawal of sugar depended on the clearing
of checks paid therefor.
"After a second look at the evidence, We see no reason to overturn the
findings of the trial court on this point."13
Hence, the instant petition, positing the following errors as grounds for
review:
"1. The Court of Appeals erred in not holding that STM's and private
respondent's specially informing petitioner that respondent was authorized
by buyer STM to withdraw sugar against SLDR No. 1214M "for and in our
(STM) behalf," (emphasis in the original) private respondent's withdrawing
2,000 bags of sugar for STM, and STM's empowering other persons as its

agents to withdraw sugar against the same SLDR No. 1214M,
rendered respondent like the other persons, an agent of STM as
held in Rallos v. Felix Go Chan & Realty Corp., 81 SCRA 252, and
precluded it from subsequently claiming and proving being an
assignee of SLDR No. 1214M and from suing by itself for its
enforcement because it was conclusively presumed to be an agent
(Sec. 2, Rule 131, Rules of Court) and estopped from doing so. (Art.
1431, Civil Code).
"2. The Court of Appeals erred in manifestly and arbitrarily ignoring
and disregarding certain relevant and undisputed facts which, had
they been considered, would have shown that petitioner was not
liable, except for 69 bags of sugar, and which would justify review
of its conclusion of facts by this Honorable Court.
"3. The Court of Appeals misapplied the law on compensation
under Arts. 1279, 1285 and 1626 of the Civil Code when it ruled
that compensation applied only to credits from one SLDR or
contract and not to those from two or more distinct
contracts between the same parties; and erred in denying
petitioner's right to setoff all its credits arising prior to notice of
assignment from other sales or SLDRs against private
respondent's claim as assignee under SLDR No. 1214M, so as to
extinguish or reduce its liability to 69 bags, because the law on
compensation applies precisely to two or more distinct contracts
between the same parties (emphasis in the original).
"4. The Court of Appeals erred in concluding that the settlement or
liquidation of accounts in Exh. ‘F’ between petitioner and STM,
respondent's admission of its balance, and STM's acquiescence
thereto by silence for almost one year did not render Exh. `F' an
account stated and its balance binding.
"5. The Court of Appeals erred in not holding that the conditions of
the assigned SLDR No. 1214, namely, (a) its subject matter being
generic, and (b) the sale of sugar being subject to its availability at
the Nawaco warehouse, made the sale conditional and prevented
STM or private respondent from acquiring title to the sugar; and the
non-availability of sugar freed petitioner from further obligation.
"6. The Court of Appeals erred in not holding that the "clean hands"
doctrine precluded respondent from seeking judicial reliefs (sic)
from petitioner, its only remedy being against its assignor."14
Simply stated, the issues now to be resolved are:
(1)....Whether or not the Court of Appeals erred in not ruling that
CSC was an agent of STM and hence, estopped to sue upon SLDR
No. 1214M as an assignee.
(2)....Whether or not the Court of Appeals erred in applying the law
on compensation to the transaction under SLDR No. 1214M so as
to preclude petitioner from offsetting its credits on the other SLDRs.
(3)....Whether or not the Court of Appeals erred in not ruling that
the sale of sugar under SLDR No. 1214M was a conditional sale or
a contract to sell and hence freed petitioner from further
obligations.
(4)....Whether or not the Court of Appeals committed an error of law
in not applying the "clean hands doctrine" to preclude CSC from
seeking judicial relief.
The issues will be discussed in seriatim.
Anent the first issue, we find from the records that petitioner raised
this issue for the first time on appeal.1avvphi1 It is settled that an
80
issue which was not raised during the trial in the court below could not be
raised for the first time on appeal as to do so would be offensive to the
basic rules of fair play, justice, and due process.15 Nonetheless, the Court
of Appeals opted to address this issue, hence, now a matter for our
consideration.
Petitioner heavily relies upon STM's letter of authority allowing CSC to
withdraw sugar against SLDR No. 1214M to show that the latter was
STM's agent. The pertinent portion of said letter reads:
"This is to authorize Consolidated Sugar Corporation or its representative
to withdraw for and in our behalf (stress supplied) the refined sugar
covered by Shipping List/Delivery Receipt = Refined Sugar (SDR) No.
1214 dated October 16, 1989 in the total quantity of 25, 000 bags." 16
The Civil Code defines a contract of agency as follows:
"Art. 1868. By the contract of agency a person binds himself to render
some service or to do something in representation or on behalf of another,
with the consent or authority of the latter."
It is clear from Article 1868 that the basis of agency is representation.17 On
the part of the principal, there must be an actual intention to appoint 18 or
an intention naturally inferable from his words or actions;19 and on the part
of the agent, there must be an intention to accept the appointment and act
on it,20 and in the absence of such intent, there is generally no agency.21
One factor which most clearly distinguishes agency from other legal
concepts is control; one person - the agent - agrees to act under the
control or direction of another - the principal. Indeed, the very word
"agency" has come to connote control by the principal.22 The control factor,
more than any other, has caused the courts to put contracts between
principal and agent in a separate category.23 The Court of Appeals, in
finding that CSC, was not an agent of STM, opined:
"This Court has ruled that where the relation of agency is dependent upon
the acts of the parties, the law makes no presumption of agency, and it is
always a fact to be proved, with the burden of proof resting upon the
persons alleging the agency, to show not only the fact of its existence, but
also its nature and extent (Antonio vs. Enriquez [CA], 51 O.G. 3536]. Here,
defendant-appellant failed to sufficiently establish the existence of an
agency relation between plaintiff-appellee and STM. The fact alone that it
(STM) had authorized withdrawal of sugar by plaintiff-appellee "for and in
our (STM's) behalf" should not be eyed as pointing to the existence of an
agency relation ...It should be viewed in the context of all the
circumstances obtaining. Although it would seem STM represented
plaintiff-appellee as being its agent by the use of the phrase "for and in our
(STM's) behalf" the matter was cleared when on 23 January 1990,
plaintiff-appellee informed defendant-appellant that SLDFR No. 1214M
had been "sold and endorsed" to it by STM (Exhibit I, Records, p. 78).
Further, plaintiff-appellee has shown that the 25, 000 bags of sugar
covered by the SLDR No. 1214M were sold and transferred by STM to
it ...A conclusion that there was a valid sale and transfer to
plaintiff-appellee may, therefore, be made thus capacitating
plaintiff-appellee to sue in its own name, without need of joining its
imputed principal STM as co-plaintiff."24
In the instant case, it appears plain to us that private respondent CSC was
a buyer of the SLDFR form, and not an agent of STM. Private respondent
CSC was not subject to STM's control. The question of whether a contract
is one of sale or agency depends on the intention of the parties as
gathered from the whole scope and effect of the language employed. 25
That the authorization given to CSC contained the phrase "for and in our
(STM's) behalf" did not establish an agency. Ultimately, what is decisive is
the intention of the parties.26 That no agency was meant to be established
by the CSC and STM is clearly shown by CSC's communication to
petitioner that SLDR No. 1214M had been "sold and endorsed" to it. 27 The
use of the words "sold and endorsed" means that STM and CSC intended
a contract of sale, and not an agency. Hence, on this score, no error was

committed by the respondent appellate court when it held that CSC
was not STM's agent and could independently sue petitioner.
On the second issue, proceeding from the theory that the
transactions entered into between petitioner and STM are but serial
parts of one account, petitioner insists that its debt has been offset
by its claim for STM's unpaid purchases, pursuant to Article 1279 of
the Civil Code.28 However, the trial court found, and the Court of
Appeals concurred, that the purchase of sugar covered by SLDR
No. 1214M was a separate and independent transaction; it was not
a serial part of a single transaction or of one account contrary to
petitioner's insistence. Evidence on record shows, without being
rebutted, that petitioner had been paid for the sugar purchased
under SLDR No. 1214M. Petitioner clearly had the obligation to
deliver said commodity to STM or its assignee. Since said sugar
had been fully paid for, petitioner and CSC, as assignee of STM,
were not mutually creditors and debtors of each other. No
reversible error could thereby be imputed to respondent appellate
court when, it refused to apply Article 1279 of the Civil Code to the
present case.
Regarding the third issue, petitioner contends that the sale of sugar
under SLDR No. 1214M is a conditional sale or a contract to sell,
with title to the sugar still remaining with the vendor. Noteworthy,
SLDR No. 1214M contains the following terms and conditions:
"It is understood and agreed that by payment by buyer/trader of
refined sugar and/or receipt of this document by the buyer/trader
personally or through a representative, title to refined sugar is
transferred to buyer/trader and delivery to him/it is deemed effected
and completed (stress supplied) and buyer/trader assumes full
responsibility therefore…"29
The aforequoted terms and conditions clearly show that petitioner
transferred title to the sugar to the buyer or his assignee upon
payment of the purchase price. Said terms clearly establish a
contract of sale, not a contract to sell. Petitioner is now estopped
from alleging the contrary. The contract is the law between the
contracting parties.30 And where the terms and conditions so
stipulated are not contrary to law, morals, good customs, public
policy or public order, the contract is valid and must be upheld.31
Having transferred title to the sugar in question, petitioner is now
obliged to deliver it to the purchaser or its assignee.
As to the fourth issue, petitioner submits that STM and private
respondent CSC have entered into a conspiracy to defraud it of its
sugar. This conspiracy is allegedly evidenced by: (a) the fact that
STM's selling price to CSC was below its purchasing price; (b)
CSC's refusal to pursue its case against Teresita Ng Go; and (c)
the authority given by the latter to other persons to withdraw sugar
against SLDR No. 1214M after she had sold her rights under said
SLDR to CSC. Petitioner prays that the doctrine of "clean hands"
should be applied to preclude CSC from seeking judicial relief.
However, despite careful scrutiny, we find here the records bare of
convincing evidence whatsoever to support the petitioner's
allegations of fraud. We are now constrained to deem this matter
purely speculative, bereft of concrete proof.
WHEREFORE, the instant petition is DENIED for lack of merit.
Costs against petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr.,
JJ., concur.
G.R. No. L-46658 May 13, 1991
81
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of
the Court of First Instance of Rizal, Branch XXI and TAYABAS
CEMENT COMPANY, INC., respondents.
The Chief Legal Counsel for petitioner.
Ortille Law Office for private respondent.
FERNAN, C.J.:
In this petition for certiorari, petitioner Philippine National Bank (PNB)
seeks to annul and set aside the orders dated March 4, 1977 and May 31,
1977 rendered in Civil Case No. 244221 of the Court of First Instance of
Rizal, Branch XXI, respectively granting private respondent Tayabas
Cement Company, Inc.'s application for a writ of preliminary injunction to
enjoin the foreclosure sale of certain properties in Quezon City and
Negros Occidental and denying petitioner's motion for reconsideration
thereof.
In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo
Spouses), obtained a loan of P580,000.00 from petitioner bank to
purchase 60% of the subscribed capital stock, and thereby acquire the
controlling interest of private respondent Tayabas Cement Company, Inc.
(TCC).2 As security for said loan, the spouses Arroyo executed a real
estate mortgage over a parcel of land covered by Transfer Certificate of
Title No. 55323 of the Register of Deeds of Quezon City known as the La
Vista property.
Thereafter, TCC filed with petitioner bank an application and agreement
for the establishment of an eight (8) year deferred letter of credit (L/C) for
$7,000,000.00 in favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to
cover the importation of a cement plant machinery and equipment.
Upon approval of said application and opening of an L/C by PNB in favor
of Toyo Menka Kaisha, Ltd. for the account of TCC, the Arroyo spouses
executed the following documents to secure this loan accommodation:
Surety Agreement dated August 5, 19643 and Covenant dated August 6,
1964.4
The imported cement plant machinery and equipment arrived from Japan
and were released to TCC under a trust receipt agreement. Subsequently,
Toyo Menka Kaisha, Ltd. made the corresponding drawings against the
L/C as scheduled. TCC, however, failed to remit and/or pay the
corresponding amount covered by the drawings. Thus, on May 19, 1968,
pursuant to the trust receipt agreement, PNB notified TCC of its intention
to repossess, as it later did, the imported machinery and equipment for
failure of TCC to settle its obligations under the L/C.5
In the meantime, the personal accounts of the spouses Arroyo, which
included another loan of P160,000.00 secured by a real estate mortgage
over parcels of agricultural land known as Hacienda Bacon located in
Isabela, Negros Occidental, had likewise become due. The spouses
Arroyo having failed to satisfy their obligations with PNB, the latter decided
to foreclose the real estate mortgages executed by the spouses Arroyo in
its favor.
On July 18, 1975, PNB filed with the City Sheriff of Quezon City a petition
for extra-judicial foreclosure under Act 3138, as amended by Act 4118 and
under Presidential Decree No. 385 of the real estate mortgage over the
properties known as the La Vista property covered by TCT No.
55323.6 PNB likewise filed a similar petition with the City Sheriff of
Bacolod, Negros Occidental with respect to the mortgaged properties
located at Isabela, Negros Occidental and covered by OCT No. RT 1615.

The foreclosure sale of the La Vista property was scheduled on
August 11, 1975. At the auction sale, PNB was the highest bidder
with a bid price of P1,000,001.00. However, when said property
was about to be awarded to PNB, the representative of the
mortgagor-spouses objected and demanded from the PNB the
difference between the bid price of P1,000,001.00 and the
indebtedness of P499,060.25 of the Arroyo spouses on their
personal account. It was the contention of the spouses Arroyo's
representative that the foreclosure proceedings referred only to the
personal account of the mortgagor spouses without reference to
the account of TCC.
To remedy the situation, PNB filed a supplemental petition on
August 13, 1975 requesting the Sheriff's Office to proceed with the
sale of the subject real properties to satisfy not only the amount of
P499,060.25 owed by the spouses Arroyos on their personal
account but also the amount of P35,019,901.49 exclusive of
interest, commission charges and other expenses owed by said
spouses as sureties of TCC.7 Said petition was opposed by the
spouses Arroyo and the other bidder, Jose L. Araneta.
On September 12, 1975, Acting Clerk of Court and Ex-Officio
Sheriff Diana L. Dungca issued a resolution finding that the
questions raised by the parties required the reception and
evaluation of evidence, hence, proper for adjudication by the courts
of law. Since said questions were prejudicial to the holding of the
foreclosure sale, she ruled that her "Office, therefore, cannot
properly proceed with the foreclosure sale unless and until there be
a court ruling on the aforementioned issues."8
Thus, in May, 1976, PNB filed with the Court of First Instance of
Quezon City, Branch V a petition for mandamus9against said Diana
Dungca in her capacity as City Sheriff of Quezon City to compel her
to proceed with the foreclosure sale of the mortgaged properties
covered by TCT No. 55323 in order to satisfy both the personal
obligation of the spouses Arroyo as well as their liabilities as
sureties of TCC.10
On September 6, 1976, the petition was granted and Dungca was
directed to proceed with the foreclosure sale of the mortgaged
properties covered by TCT No. 55323 pursuant to Act No. 3135
and to issue the corresponding Sheriff's Certificate of Sale. 11
Before the decision could attain finality, TCC filed on September 14,
1976 before the Court of First Instance of Rizal, Pasig, Branch XXI
a complaint12 against PNB, Dungca, and the Provincial Sheriff of
Negros Occidental and Ex-Officio Sheriff of Bacolod City
seeking, inter alia, the issuance of a writ of preliminary injunction to
restrain the foreclosure of the mortgages over the La Vista property
and Hacienda Bacon as well as a declaration that its obligation with
PNB had been fully paid by reason of the latter's repossession of
the imported machinery and equipment.13
On October 5, 1976, the CFI, thru respondent Judge Gregorio
Pineda, issued a restraining order14 and on March 4, 1977, granted
a writ of preliminary injunction.15 PNB's motion for reconsideration
was denied, hence this petition.
Petitioner PNB advances four grounds for the setting aside of the
writ of preliminary injunction, namely: a) that it contravenes P.D. No.
385 which prohibits the issuance of a restraining order against a
government financial institution in any action taken by such
institution in compliance with the mandatory foreclosure provided in
Section 1 thereof; b) that the writ countermands a final decision of a
co-equal and coordinate court; c) that the writ seeks to prohibit the
performance of acts beyond the court's territorial jurisdiction; and, d)
private respondent TCC has not shown any clear legal right or
necessity to the relief of preliminary injunction.
82
Private respondent TCC counters with the argument that P.D. No. 385
does not apply to the case at bar, firstly because no foreclosure
proceedings have been instituted against it by PNB and secondly,
because its account under the L/C has been fully satisfied with the
repossession of the imported machinery and equipment by PNB.
The resolution of the instant controversy lies primarily on the question of
whether or not TCC's liability has been extinguished by the repossession
of PNB of the imported cement plant machinery and equipment.
We rule for the petitioner PNB. It must be remembered that PNB took
possession of the imported cement plant machinery and equipment
pursuant to the trust receipt agreement executed by and between PNB
and TCC giving the former the unqualified right to the possession and
disposal of all property shipped under the Letter of Credit until such time
as all the liabilities and obligations under said letter had been
discharged.16 In the case of Vintola vs. Insular Bank of Asia and
America17 wherein the same argument was advanced by the Vintolas as
entrustees of imported seashells under a trust receipt transaction, we said:
Further, the VINTOLAS take the position that their obligation to IBAA has
been extinguished inasmuch as, through no fault of their own, they were
unable to dispose of the seashells, and that they have relinquished
possession thereof to the IBAA, as owner of the goods, by depositing
them with the Court.
The foregoing submission overlooks the nature and mercantile usage of
the transaction involved. A letter of credit-trust receipt arrangement is
endowed with its own distinctive features and characteristics. Under that
set-up, a bank extends a loan covered by the Letter of Credit, with the trust
receipt as a security for the loan. In other words, the transaction involves a
loan feature represented by the letter of credit, and a security feature
which is in the covering trust receipt.
xxx xxx xxx
A trust receipt, therefore, is a security agreement, pursuant to which a
bank acquires a "security interest" in the goods.1âwphi1 It secures an
indebtedness and there can be no such thing as security interest that
secures no obligation. As defined in our laws:
(h) "Security interest" means a property interest in goods, documents or
instruments to secure performance of some obligations of the entrustee or
of some third persons to the entruster and includes title, whether or not
expressed to be absolute, whenever such title is in substance taken or
retained for security only.
xxx xxx xxx
Contrary to the allegation of the VINTOLAS, IBAA did not become the real
owner of the goods. It was merely the holder of a security title for the
advances it had made to the VINTOLAS. The goods the VINTOLAS had
purchased through IBAA financing remain their own property and they
hold it at their own risk. The trust receipt arrangement did not convert the
IBAA into an investor; the latter remained a lender and creditor.
xxx xxx xxx
Since the IBAA is not the factual owner of the goods, the VINTOLAS
cannot justifiably claim that because they have surrendered the goods to
IBAA and subsequently deposited them in the custody of the court, they
are absolutely relieved of their obligation to pay their loan because of their
inability to dispose of the goods. The fact that they were unable to sell the
seashells in question does not affect IBAA's right to recover the advances
it had made under the Letter of Credit.

PNB's possession of the subject machinery and equipment being
precisely as a form of security for the advances given to TCC under
the Letter of Credit, said possession by itself cannot be considered
payment of the loan secured thereby. Payment would legally result
only after PNB had foreclosed on said securities, sold the same
and applied the proceeds thereof to TCC's loan obligation. Mere
possession does not amount to foreclosure for foreclosure denotes
the procedure adopted by the mortgagee to terminate the rights of
the mortgagor on the property and includes the sale itself.18
Neither can said repossession amount to dacion en pago. Dation in
payment takes place when property is alienated to the creditor in
satisfaction of a debt in money and the same is governed by
sales.19 Dation in payment is the delivery and transmission of
ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation.20 As aforesaid, the
repossession of the machinery and equipment in question was
merely to secure the payment of TCC's loan obligation and not for
the purpose of transferring ownership thereof to PNB in satisfaction
of said loan. Thus, no dacion en pago was ever accomplished.
Proceeding from this finding, PNB has the right to foreclose the
mortgages executed by the spouses Arroyo as sureties of TCC. A
surety is considered in law as being the same party as the debtor in
relation to whatever is adjudged touching the obligation of the latter,
and their liabilities are interwoven as to be inseparable. 21 As
sureties, the Arroyo spouses are primarily liable as original
promissors and are bound immediately to pay the creditor the
amount outstanding.22
Under Presidential Decree No. 385 which took effect on January 31,
1974, government financial institutions like herein petitioner PNB
are required to foreclose on the collaterals and/or securities for any
loan, credit or accommodation whenever the arrearages on such
account amount to at least twenty percent (20%) of the total
outstanding obligations, including interests and charges, as
appearing in the books of account of the financial institution
concerned.23 It is further provided therein that "no restraining order,
temporary or permanent injunction shall be issued by the court
against any government financial institution in any action taken by
such institution in compliance with the mandatory foreclosure
provided in Section 1 hereof, whether such restraining order,
temporary or permanent injunction is sought by the borrower(s) or
any third party or parties . . ."24
It is not disputed that the foreclosure proceedings instituted by PNB
against the Arroyo spouses were in compliance with the mandate
of P.D. 385. This being the case, the respondent judge acted in
excess of his jurisdiction in issuing the injunction specifically
proscribed under said decree.
Another reason for striking down the writ of preliminary injunction
complained of is that it interfered with the order of a co-equal and
coordinate court. Since Branch V of the CFI of Rizal had already
acquired jurisdiction over the question of foreclosure of mortgage
over the La Vista property and rendered judgment in relation
thereto, then it retained jurisdiction to the exclusion of all other
coordinate courts over its judgment, including all incidents relative
to the control and conduct of its ministerial officers, namely the
sheriff thereof.25 The foreclosure sale having been ordered by
Branch V of the CFI of Rizal, TCC should not have filed injunction
proceedings with Branch XXI of the same CFI, but instead should
have first sought relief by proper motion and application from the
former court which had exclusive jurisdiction over the foreclosure
proceeding.26
This doctrine of non-interference is premised on the principle that a
judgment of a court of competent jurisdiction may not be opened,
modified or vacated by any court of concurrent jurisdiction. 27
83
Furthermore, we find the issuance of the preliminary injunction directed
against the Provincial Sheriff of Negros Occidental and ex-officio Sheriff of
Bacolod City a jurisdictional faux pas as the Courts of First Instance, now
Regional Trial Courts, can only enforce their writs of injunction within their
respective designated territories.28
WHEREFORE, the instant petition is hereby granted. The assailed orders
are hereby set aside. Costs against private respondent.
Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur.
G.R. No. 149420 October 8, 2003
SONNY LO, petitioner,
vs.
KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent.
DECISION
YNARES-SANTIAGO, J.:
Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation
engaged in the sale of steel scaffoldings, while petitioner Sonny L. Lo,
doing business under the name and style San’s Enterprises, is a building
contractor. On February 22, 1990, petitioner ordered scaffolding
equipments from respondent worth P540,425.80.1 He paid a
downpayment in the amount of P150,000.00. The balance was made
payable in ten monthly installments.
Respondent delivered the scaffoldings to petitioner.2 Petitioner was able
to pay the first two monthly installments.1a\^/phi1.netHis business,
however, encountered financial difficulties and he was unable to settle his
obligation to respondent despite oral and written demands made against
him.3
On October 11, 1990, petitioner and respondent executed a Deed of
Assignment,4 whereby petitioner assigned to respondent his receivables
in the amount of P335,462.14 from Jomero Realty Corporation. Pertinent
portions of the Deed provide:
WHEREAS, the ASSIGNOR is the contractor for the construction of a
residential house located at Greenmeadow Avenue, Quezon City owned
by Jomero Realty Corporation;
WHEREAS, in the construction of the aforementioned residential house,
the ASSIGNOR purchased on account scaffolding equipments from the
ASSIGNEE payable to the latter;
WHEREAS, up to the present the ASSIGNOR has an obligation to the
ASSIGNEE for the purchase of the aforementioned scaffoldings now in
the amount of Three Hundred Thirty Five Thousand Four Hundred Sixty
Two and 14/100 Pesos (P335,462.14);
NOW, THEREFORE, for and in consideration of the sum of Three
Hundred Thirty Five Thousand Four Hundred Sixty Two and 14/100 Pesos
(P335,462.14), Philippine Currency which represents part of the
ASSIGNOR’s collectible from Jomero Realty Corp., said ASSIGNOR
hereby assigns, transfers and sets over unto the ASSIGNEE all
collectibles amounting to the said amount of P335, 462.14;
And the ASSIGNOR does hereby grant the ASSIGNEE, its successors
and assigns, the full power and authority to demand, collect, receive,
compound, compromise and give acquittance for the same or any part
thereof, and in the name and stead of the said ASSIGNOR;

And the ASSIGNOR does hereby agree and stipulate to and with
said ASSIGNEE, its successors and assigns that said debt is justly
owing and due to the ASSIGNOR for Jomero Realty Corporation
and that said ASSIGNOR has not done and will not cause anything
to be done to diminish or discharge said debt, or delay or to prevent
the ASSIGNEE, its successors or assigns, from collecting the
same;
And the ASSIGNOR further agrees and stipulates as aforesaid that
the said ASSIGNOR, his heirs, executors, administrators, or
assigns, shall and will at times hereafter, at the request of said
ASSIGNEE, its successors or assigns, at his cost and
expense, execute and do all such further acts and deeds as shall
be reasonably necessary to effectually enable said ASSIGNEE to
recover whatever collectibles said ASSIGNOR has in accordance
with the true intent and meaning of these presents. xxx5 (Italics
supplied)
However, when respondent tried to collect the said credit from
Jomero Realty Corporation, the latter refused to honor the Deed of
Assignment because it claimed that petitioner was also indebted to
it.6 On November 26, 1990, respondent sent a letter7 to petitioner
demanding payment of his obligation, but petitioner refused to pay
claiming that his obligation had been extinguished when they
executed the Deed of Assignment.
Consequently, on January 10, 1991, respondent filed an action for
recovery of a sum of money against the petitioner before the
Regional Trial Court of Makati, Branch 147, which was docketed as
Civil Case No. 91-074.8
During the trial, petitioner argued that his obligation was
extinguished with the execution of the Deed of Assignment of credit.
Respondent, for its part, presented the testimony of its employee,
Almeda Bañaga, who testified that Jomero Realty refused to honor
the assignment of credit because it claimed that petitioner had an
outstanding indebtedness to it.
On August 25, 1994, the trial court rendered a decision9 dismissing
the complaint on the ground that the assignment of credit
extinguished the obligation. The decretal portion thereof provides:
WHEREFORE, in view of the foregoing, the Court hereby renders
judgment in favor of the defendant and against the plaintiff,
dismissing the complaint and ordering the plaintiff to pay the
defendant attorney’s fees in the amount of
P25,000.00.1a\^/phi1.net
Respondent appealed the decision to the Court of Appeals. On
April 19, 2001, the appellate court rendered a decision, 10 the
dispositive portion of which reads:
WHEREFORE, finding merit in this appeal, the court REVERSES
the appealed Decision and enters judgment ordering
defendant-appellee Sonny Lo to pay the plaintiff-appellant KJS
ECO-FORMWORK SYSTEM PHILIPPINES, INC. Three Hundred
Thirty Five Thousand Four Hundred Sixty-Two and 14/100
(P335,462.14) with legal interest of 6% per annum from January 10,
1991 (filing of the Complaint) until fully paid and attorney’s fees
equivalent to 10% of the amount due and costs of the suit.
SO ORDERED.11
In finding that the Deed of Assignment did not extinguish the
obligation of the petitioner to the respondent, the Court of Appeals
held that (1) petitioner failed to comply with his warranty under the
Deed; (2) the object of the Deed did not exist at the time of the
transaction, rendering it void pursuant to Article 1409 of the Civil
84
Code; and (3) petitioner violated the terms of the Deed of Assignment
when he failed to execute and do all acts and deeds as shall be necessary
to effectually enable the respondent to recover the collectibles.12
Petitioner filed a motion for reconsideration of the said decision, which was
denied by the Court of Appeals.13
In this petition for review, petitioner assigns the following errors:
I
THE HONORABLE COURT OF APPEALS
COMMITTED A GRAVE ERROR IN DECLARING
THE DEED OF ASSIGNMENT (EXH. "4") AS NULL
AND VOID FOR LACK OF OBJECT ON THE BASIS
OF A MERE HEARSAY CLAIM.
II
THE HONORABLE COURT OF APPEALS ERRED
IN HOLDING THAT THE DEED OF ASSIGNMENT
(EXH. "4") DID NOT EXTINGUISH PETITIONER’S
OBLIGATION ON THE WRONG NOTION THAT
PETITIONER FAILED TO COMPLY WITH HIS
WARRANTY THEREUNDER.
III
THE HONORABLE COURT OF APPEALS ERRED
IN REVERSING THE DECISION OF THE TRIAL
COURT AND IN ORDERING PAYMENT OF
INTERESTS AND ATTORNEY’S FEES.14
The petition is without merit.
An assignment of credit is an agreement by virtue of which the owner of a
credit, known as the assignor, by a legal cause, such as sale, dacion en
pago, exchange or donation, and without the consent of the debtor,
transfers his credit and accessory rights to another, known as the
assignee, who acquires the power to enforce it to the same extent as the
assignor could enforce it against the debtor.15
Corollary thereto, in dacion en pago, as a special mode of payment, the
debtor offers another thing to the creditor who accepts it as equivalent of
payment of an outstanding debt.16 In order that there be a valid dation in
payment, the following are the requisites: (1) There must be the
performance of the prestation in lieu of payment (animo solvendi) which
may consist in the delivery of a corporeal thing or a real right or a credit
against the third person; (2) There must be some difference between the
prestation due and that which is given in substitution (aliud pro alio); (3)
There must be an agreement between the creditor and debtor that the
obligation is immediately extinguished by reason of the performance of a
prestation different from that due.17 The undertaking really partakes in one
sense of the nature of sale, that is, the creditor is really buying the thing or
property of the debtor, payment for which is to be charged against the
debtor’s debt. As such, the vendor in good faith shall be responsible, for
the existence and legality of the credit at the time of the sale but not for the
solvency of the debtor, in specified circumstances.18
Hence, it may well be that the assignment of credit, which is in the nature
of a sale of personal property,19 produced the effects of a dation in
payment which may extinguish the obligation.20 However, as in any other
contract of sale, the vendor or assignor is bound by certain warranties.
More specifically, the first paragraph of Article 1628 of the Civil Code
provides:

The vendor in good faith shall be responsible for the existence and
legality of the credit at the time of the sale, unless it should have
been sold as doubtful; but not for the solvency of the debtor, unless
it has been so expressly stipulated or unless the insolvency was
prior to the sale and of common knowledge.
From the above provision, petitioner, as vendor or assignor, is
bound to warrant the existence and legality of the credit at the time
of the sale or assignment. When Jomero claimed that it was no
longer indebted to petitioner since the latter also had an unpaid
obligation to it, it essentially meant that its obligation to petitioner
has been extinguished by compensation.21 In other words,
respondent alleged the non-existence of the credit and asserted its
claim to petitioner’s warranty under the assignment. Therefore, it
behooved on petitioner to make good its warranty and paid the
obligation.
Furthermore, we find that petitioner breached his obligation under
the Deed of Assignment, to wit:
And the ASSIGNOR further agrees and stipulates as aforesaid that
the said ASSIGNOR, his heirs, executors, administrators, or
assigns, shall and will at times hereafter, at the request of said
ASSIGNEE, its successors or assigns, at his cost and
expense, execute and do all such further acts and deeds as shall
be reasonably necessary to effectually enable said ASSIGNEE to
recover whatever collectibles said ASSIGNOR has in accordance
with the true intent and meaning of these presents.22 (underscoring
ours)
Indeed, by warranting the existence of the credit, petitioner should
be deemed to have ensured the performance thereof in case the
same is later found to be inexistent. He should be held liable to pay
to respondent the amount of his indebtedness.
Hence, we affirm the decision of the Court of Appeals ordering
petitioner to pay respondent the sum of P335,462.14 with legal
interest thereon. However, we find that the award by the Court of
Appeals of attorney’s fees is without factual basis. No evidence or
testimony was presented to substantiate this claim. Attorney’s fees,
being in the nature of actual damages, must be duly substantiated
by competent proof.
WHEREFORE, in view of the foregoing, the Decision of the Court
of Appeals dated April 19, 2001 in CA-G.R. CV No. 47713, ordering
petitioner to pay respondent the sum of P335,462.14 with legal
interest of 6% per annum from January 10, 1991 until fully paid is
AFFIRMED with MODIFICATION. Upon finality of this Decision, the
rate of legal interest shall be 12% per annum, inasmuch as the
obligation shall thereafter become equivalent to a forbearance of
credit.23 The award of attorney’s fees is DELETED for lack of
evidentiary basis.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Vitug, Carpio and Azcuna, JJ.,
concur.
G.R. No. 166704 December 20, 2006
AGRIFINA AQUINTEY, petitioner,
vs.
SPOUSES FELICIDAD AND RICO TIBONG, respondents.
85
DECISION
CALLEJO, SR., J.:
Before us is a petition for review under Rule 45 of the Revised Rules on
Civil Procedure of the Decision1 of the Court of Appeals in CA-G.R. CV No.
78075, which affirmed with modification the Decision2 of the Regional Trial
Court (RTC), Branch 61, Baguio City, and the Resolution3 of the appellate
court denying reconsideration thereof.
The Antecedents
On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC of
Baguio City, a complaint for sum of money and damages against the
respondents, spouses Felicidad and Rico Tibong. Agrifina alleged that
Felicidad had secured loans from her on several occasions, at monthly
interest rates of 6% to 7%. Despite demands, the spouses Tibong failed to
pay their outstanding loan, amounting to P773,000.00 exclusive of
interests. The complaint contained the following prayer:
WHEREFORE, premises considered, it is most respectfully prayed of this
Honorable Court, after due notice and hearing, to render judgment
ordering defendants to pay plaintiff the following:
a). SEVEN HUNDRED SEVENTY-THREE THOUSAND PESOS
(P773,000.00) representing the principal obligation of the defendants with
the stipulated interests of six (6%) percent per month from May 11, 1999
to date and or those that are stipulated on the contracts as mentioned from
paragraph two (2) of the complaint.
b). FIFTEEN PERCENT (15%) of the total accumulated obligations as
attorney's fees.
c). Actual expenses representing the filing fee and other charges and
expenses to be incurred during the prosecution of this case.
Further prays for such other relief and remedies just and equitable under
the premises.4
Agrifina appended a copy of the Counter-Affidavit executed by Felicidad in
I.S. No. 93-334, as well as copies of the promissory notes and
acknowledgment receipts executed by Felicidad covering the loaned
amounts.5
In their Answer with Counterclaim,6 spouses Tibong admitted that they
had secured loans from Agrifina. The proceeds of the loan were then
re-lent to other borrowers at higher interest rates. They, likewise, alleged
that they had executed deeds of assignment in favor of Agrifina, and that
their debtors had executed promissory notes in Agrifina's favor. According
to the spouses Tibong, this resulted in a novation of the original obligation
to Agrifina. They insisted that by virtue of these documents, Agrifina
became the new collector of their debtors; and the obligation to pay the
balance of their loans had been extinguished.
The spouses Tibong specifically denied the material averments in
paragraphs 2 and 2.1 of the complaint. While they did not state the total
amount of their loans, they declared that they did not receive anything
from Agrifina without any written receipt.7 They prayed for that the
complaint be dismissed.
In their Pre-Trial Brief, the spouses Tibong maintained that they have
never obtained any loan from Agrifina without the benefit of a written
document.8
 86

On August 17, 2000, the trial court issued a Pre-Trial Order where
the following issues of the case were defined:
Whether or not plaintiff is entitled to her claim of P773,000.00;
Whether or not plaintiff is entitled to stipulated interests in the
promissory notes; and
Whether or not the parties are entitled to their claim for damages. 9
The Case for Petitioner
From August 7, 1990 to October, 1990, Felicidad executed deeds of
assignment of credits (obligations)22 duly notarized by Atty. A-ayo, in
which Felicidad transferred and assigned to Agrifina the total amount
of P546,459.00 due from her debtors.23 In the said deeds, Felicidad
confirmed that her debtors were no longer indebted to her for their
respective loans. For her part, Agrifina conformed to the deeds of
assignment relative to the loans of Virginia Morada and Corazon
Dalisay.24 She was furnished copies of the deeds as well as the
promissory notes.25
The following debtors of Felicidad executed promissory notes where they
obliged themselves to pay directly to Agrifina:

Agrifina and Felicidad were classmates at the University of Debtors Account Date of Instrument
Pangasinan. Felicidad's husband, Rico, also happened to be a Juliet & Tommy Tibong P50,000.00 August 7, 1990
distant relative of Agrifina. Upon Felicidad's prodding, Agrifina Corazon Dalisay 8,000.00 August 7, 1990
agreed to lend money to Felicidad. According to Felicidad, Agrifina
Rita Chomacog 4,480.00 August 8, 1990
would be earning interests higher than those given by the bank for
her money. Felicidad told Agrifina that since she (Felicidad) was Antoinette Manuel 12,000.00 October 19, 1990
engaged in the sale of dry goods at the GP Shopping Arcade, she Rosemarie Bandas 8,000.00 August 8, 1990
would use the money to buy bonnels and thread. 10 Thus, Agrifina Fely Cirilo 63,600.00 September 13, 1990
lent a total sum of P773,000.00 to Felicidad, and each loan
Virginia Morada 62,379.00 August 9, 1990
transaction was covered by either a promissory note or an
acknowledgment receipt.11 Agrifina stated that she had lost the Carmelita Casuga 59,000.00 August 28, 1990
receipts signed by Felicidad for the following Merlinda Gelacio 17,200.00 August 29, 1990
amounts: P100,000.00, P34,000.00 and P2,000.00.12 The Total P284,659.00
particulars of the transactions are as follows:

Amount Date Obtained Interest Per Mo. Due Date Agrifina narrated that Felicidad showed to her the way to the debtors'
houses to enable her to collect from them. One of the debtors, Helen
P 100,000.00 May 11, 1989 6% August 11, 1989
Cabang, did not execute any promissory note but conformed to the Deed
4,000.00 June 8, 1989 - - of Assignment of Credit which Felicidad executed in favor of
50,000.00 June 13, 1989 6% On demandAgrifina.27 Eliza Abance conformed to the deed of assignment for and in
behalf of her sister, Fely Cirilo.28 Edna Papat-iw was not able to affix her
60,000.00 Aug. 16, 1989 7% January 1990
signature on the deed of assignment nor sign the promissory note
205,000.00 Oct. 13, 1989 7% because she was in Taipei, Taiwan.29
January 1990
128,000.00 Oct. 19, 1989 7% January 1990
Following the execution of the deeds of assignment and promissory notes,
2,000.00 Nov. 12, 1989 6% April 28, 1990
Agrifina was able to collect the total amount of P301,000.00 from
10,000.00 June 13, 1990 - - Felicidad's debtors.30 In April 1990, she tried to collect the balance of
80,000.00 Jan. 4, 1990 - - Felicidad's account, but the latter told her to wait until her debtors had
money.31 When Felicidad reneged on her promise, Agrifina filed a
34,000.00 - 6% October 19, 1989
complaint in the Office of the Barangay Captain for the collection
13
100,000.00 July 14, 1989 5% October 1989
of P773,000.00. However, no settlement was arrived at.32

According to Agrifina, Felicidad was able to pay only her loans
amounting to P122,600.00.14
In July 1990, Felicidad gave to Agrifina City Trust Bank Check No.
126804 dated August 25, 1990 in the amount of P50,000.00 as
partial payment.15 However, the check was dishonored for having
been drawn against insufficient funds.16 Agrifina then filed a
criminal case against Felicidad in the Office of the City Prosecutor.
An Information for violation of Batas Pambansa Bilang 22 was filed
against Felicidad, docketed as Criminal Case No. 11181-R. After
trial, the court ordered Felicidad to pay P50,000.00. Felicidad
complied and paid the face value of the check.17
In the meantime, Agrifina learned that Felicidad had re-loaned the
amounts to other borrowers.18 Agrifina sought the assistance of
Atty. Torres G. A-ayo who advised her to require Felicidad to
execute deeds of assignment over Felicidad's debtors. The lawyer
also suggested that Felicidad's debtors execute promissory notes
in Agrifina's favor, to "turn over" their loans from Felicidad. This
arrangement would facilitate collection of Felicidad's account.
Agrifina agreed to the proposal.19 Agrifina, Felicidad, and the
latter's debtors had a conference20 where Atty. A-ayo explained
that Agrifina could apply her collections as payments of Felicidad's
account.21
The Case for Respondents
Felicidad testified that she and her friend Agrifina had been engaged in the
money-lending business.33 Agrifina would lend her money with monthly
interest,34 and she, in turn, would re-lend the money to borrowers at a
higher interest rate. Their business relationship turned sour when Agrifina
started complaining that she (Felicidad) was actually earning more than
Agrifina.35 Before the respective maturity dates of her debtors' loans,
Agrifina asked her to pay her account since Agrifina needed money to buy
a house and lot in Manila. However, she told Agrifina that she could not
pay yet, as her debtors' loan payments were not yet due. 36 Agrifina then
came to her store every afternoon to collect from her, and persuaded her
to go to Atty. Torres G. A-ayo for legal advice.37 The lawyer suggested that
she indorse the accounts of her debtors to Agrifina so that the latter would
be the one to collect from her debtors and she would no longer have any
obligation to Agrifina.38 She then executed deeds of assignment in favor of
Agrifina covering the sums of money due from her debtors. She signed the
deeds prepared by Atty. A-ayo in the presence of Agrifina.39 Some of the
debtors signed the promissory notes which were likewise prepared by the
lawyer. Thereafter, Agrifina personally collected from Felicidad's
debtors.40 Felicidad further narrated that she received P250,000.00 from
one of her debtors, Rey Rivera, and remitted the payment to Agrifina.41

Agrifina testified, on rebuttal, that she did not enter into a re-lending
business with Felicidad. When she asked Felicidad to consolidate
her loans in one document, the latter told her to seek the
assistance of Atty. A-ayo.42 The lawyer suggested that Felicidad
assign her credits in order to help her collect her loans. 43 She
agreed to the deeds of assignment to help Felicidad collect from
the debtors.44
On January 20, 2003, the trial court rendered its Decision45 in favor
of Agrifina. The fallo of the decision reads:
WHEREFORE, judgment is rendered in favor of the plaintiff and
against the defendants ordering the latter to pay the plaintiffs (sic)
the following amounts:
1. P472,000 as actual obligation with the stipulated interest of 6%
per month from May 11, 1999 until the said obligation is fully paid.
However, the amount of P50,000 shall be deducted from the total
accumulated interest for the same was already paid by the
defendant as admitted by the plaintiff in her complaint,
2. P25,000 as attorney's fees,
3. [T]o pay the costs.
SO ORDERED.46
The trial court ruled that Felicidad's obligation had not been
novated by the deeds of assignment and the promissory notes
executed by Felicidad's borrowers. It explained that the documents
did not contain any express agreement to novate and extinguish
Felicidad's obligation. It declared that the deeds and notes were
separate contracts which could stand alone from the original
indebtedness of Felicidad. Considering, however, Agrifina's
admission that she was able to collect from Felicidad's debtors the
total amount of P301,000.00, this should be deducted from the
latter's accountability.47 Hence, the balance, exclusive of interests,
amounted to P472,000.00.
On appeal, the CA affirmed with modification the decision of the
RTC and stated that, based on the promissory notes and
acknowledgment receipts signed by Felicidad, the appellants
secured loans from the appellee in the total principal amount of
only P637,000.00, not P773,000.00 as declared by the trial court.
The CA found that, other than Agrifina's bare testimony that she
had lost the promissory notes and acknowledgment receipts, she
failed to present competent documentary evidence to substantiate
her claim that Felicidad had, likewise, borrowed the amounts
of P100,000.00, P34,000.00, and P2,000.00. Of the P637,000.00
total account, P585,659.00 was covered by the deeds of
assignment and promissory notes; hence, the balance of
Felicidad's account amounted to only P51,341.00. The fallo of the
decision reads:
WHEREFORE, in view of the foregoing, the decision dated January
20, 2003 of the RTC, Baguio City, Branch 61 in Civil Case No.
4370-R is hereby MODIFIED. Defendants-appellants are hereby
ordered to pay the balance of the total indebtedness in the amount
of P51,341.00 plus the stipulated interest of 6% per month from
May 11, 1999 until the finality of this decision.
SO ORDERED.48
The appellate court sustained the trial court's ruling that Felicidad's
obligation to Agrifina had not been novated by the deeds of
assignment and promissory notes executed in the latter's favor.
Although Agrifina was subrogated as a new creditor in lieu of
Felicidad, Felicidad's obligation to Agrifina under the loan
87
transaction remained; there was no intention on their part to novate the
original obligation. Nonetheless, the appellate court held that the legal
effects of the deeds of assignment could not be totally disregarded. The
assignments of credits were onerous, hence, had the effect of
payment, pro tanto, of the outstanding obligation. The fact that Agrifina
never repudiated or rescinded such assignments only shows that she had
accepted and conformed to it. Consequently, she cannot collect both from
Felicidad and her individual debtors without running afoul to the principle
of unjust enrichment. Agrifina's primary recourse then is against
Felicidad's individual debtors on the basis of the deeds of assignment and
promissory notes.
The CA further declared that the deeds of assignment executed by
Felicidad had the effect of payment of her outstanding obligation to
Agrifina in the amount of P585,659.00. It ruled that, since an assignment
of credit is in the nature of a sale, the assignors remained liable for the
warranties as they are responsible for the existence and legality of the
credit at the time of the assignment.
Both parties moved to have the decision reconsidered, 49 but the appellate
court denied both motions on December 21, 2004.50
Agrifina, now petitioner, filed the instant petition, contending that
1. The Honorable Court of Appeals erred in ruling that the deeds of
assignment in favor of petitioner has the effect of payment of the original
obligation even as it ruled out that the original obligation and the assigned
credit are distinct and separate and can stand independently from each
other;
2. The Honorable Court of Appeals erred in passing upon issues raised for
the first time on appeal; and
3. The Honorable Court of Appeals erred in resolving fact not in issue.51
Petitioner avers that the appellate court erred in ruling that respondents'
original obligation amounted to only P637,000.00 (instead of P773,000.00)
simply because she lost the promissory notes/receipts which evidenced
the loans executed by respondent Felicidad Tibong. She insists that the
issue of whether Felicidad owed her less than P773,000.00 was not raised
by respondents during pre-trial and in their appellate brief; the appellate
court was thus proscribed from taking cognizance of the issue.
Petitioner avers that respondents failed to deny, in their verified answer,
that they had secured the P773,000.00 loan; hence, respondents are
deemed to have admitted the allegation in the complaint that the loans
secured by respondent from her amounted to P773,000.00. As gleaned
from the trial court's pre-trial order, the main issue is whether or not she
should be made to pay this amount.
Petitioner further maintains that the CA erred in deducting the total amount
of P585,659.00 covered by the deeds of assignment executed by
Felicidad and the promissory notes executed by the latter's debtors, and
that the balance of respondents' account was only P51,341.00. Moreover,
the appellate court's ruling that there was no novation runs counter to its
holding that the primary recourse was against Felicidad's debtors.
Petitioner avers that of the 11 deeds of assignment and promissory notes,
only two bore her signature.52 She insists that she is not bound by the
deeds which she did not sign. By assigning the obligation to pay petitioner
their loan accounts, Felicidad's debtors merely assumed the latter's
obligation and became co-debtors to petitioner. Respondents were not
released from their obligation under their loan transactions, and she had
the option to demand payment from them or their debtors. Citing the ruling
of this Court in Magdalena Estates, Inc. v. Rodriguez,53 petitioner insists
that the first debtor is not released from responsibility upon reaching an
agreement with the creditor. The payment by a third person of the first
debtor's obligation does not constitute novation, and the creditor can still

enforce the obligation against the original debtor. Petitioner also
cites the ruling of this Court in Guerrero v. Court of Appeals.54
In their Comment on the petition, respondents aver that by virtue of
respondent Felicidad's execution of the deeds of assignment, and
the original debtors' execution of the promissory notes (along with
their conformity to the deeds of assignment with petitioner's
consent), their loan accounts with petitioner amounting
to P585,659.00 had been effectively extinguished. Respondents
point out that this is in accordance with Article 1291, paragraph 2,
of the Civil Code. Thus, the original debtors of respondents had
been substituted as petitioner's new debtors.
Respondents counter that petitioner had been subrogated to their
right to collect the loan accounts of their debtors. In fact, petitioner,
as the new creditor of respondents' former debtors had been able
to collect the latter's loan accounts which amounted
to P301,000.00. The sums received by respondents' debtors were
the same loans which they obliged to pay to petitioner under the
promissory notes executed in petitioner's favor.
Respondents aver that their obligation to petitioner cannot stand or
exist separately from the original debtors' obligation to petitioner as
the new creditor. If allowed to collect from them as well as from
their original debtors, petitioner would be enriching herself at the
expense of respondents. Thus, despite the fact that petitioner had
collected P172,600.00 from respondents and P301,000.00 from
the original debtors, petitioner still sought to collect P773,000.00
from them in the RTC. Under the deeds of assignment executed by
Felicidad and the original debtors' promissory notes, the original
debtors' accounts were assigned to petitioner who would be the
new creditor. In fine, respondents are no longer liable to petitioner
for the balance of their loan account inclusive of interests.
Respondents also insist that petitioner failed to prove that she
(petitioner) was merely authorized to collect the accounts of the
original debtors so as to to facilitate the payment of respondents'
loan obligation.
The Issues
The threshold issues are: (1) whether respondent Felicidad Tibong
borrowed P773,000.00 from petitioner; and (2) whether the
obligation of respondents to pay the balance of their loans,
including interest, was partially extinguished by the execution of the
deeds of assignment in favor of petitioner, relative to the loans of
Edna Papat-iw, Helen Cabang, Antoinette Manuel, and Fely Cirilo
in the total amount of P371,000.00.
The Ruling of the Court
We have carefully reviewed the brief of respondents as appellants
in the CA, and find that, indeed, they had raised the issue of
whether they received P773,000.00 by way of loans from petitioner.
They averred that, as gleaned from the documentary evidence of
petitioner in the RTC, the total amount they borrowed was
only P673,000.00. They asserted that petitioner failed to adduce
concrete evidence that they received P773,000.00 from her.55
We agree, however, with petitioner that the appellate court erred in
reversing the finding of the RTC simply because petitioner failed to
present any document or receipt signed by Felicidad.
Section 10, Rule 8 of the Rules of Civil Procedure requires a
defendant to "specify each material allegation of fact the truth of
which he does not admit and, whenever practicable, x x x set forth
the substance of the matters upon which he relies to support his
denial.56
88
Section 11, Rule 8 of the same Rules provides that allegations of the
complaint not specifically denied are deemed admitted.57
The purpose of requiring the defendant to make a specific denial is to
make him disclose the matters alleged in the complaint which he
succinctly intends to disprove at the trial, together with the matter which he
relied upon to support the denial. The parties are compelled to lay their
cards on the table.58
A denial is not made specific simply because it is so qualified by the
defendant. A general denial does not become specific by the use of the
word "specifically." When matters of whether the defendant alleges having
no knowledge or information sufficient to form a belief are plainly and
necessarily within the defendant's knowledge, an alleged "ignorance or
lack of information" will not be considered as a specific denial. Section 11,
Rule 8 of the Rules also provides that material averments in the complaint
other than those as to the amount of unliquidated damages shall be
deemed admitted when not specifically denied.59 Thus, the answer should
be so definite and certain in its allegations that the pleader's adversary
should not be left in doubt as to what is admitted, what is denied, and what
is covered by denials of knowledge as sufficient to form a belief. 60
In the present case, petitioner alleged the following in her complaint:
2. That defendants are indebted to the plaintiff in the principal amount of
SEVEN HUNDRED SEVENTY-THREE THOUSAND PESOS
(P773,000.00) Philippine Currency with a stipulated interest which are
broken down as follows. The said principal amounts was admitted by the
defendants in their counter-affidavit submitted before the court. Such
affidavit is hereby attached as Annex "A;"61
xxxx
H) The sum of THIRTY FOUR THOUSAND PESOS (P34,000.00) with
interest at six (6%) per cent per month and payable on October 19, 1989,
however[,] the receipt for the meantime cannot be recovered as it was
misplaced by the plaintiff but the letter of defendant FELICIDAD TIBONG
is hereby attached as Annex "H" for the appreciation of the Honorable
court;
I) The sum of ONE HUNDRED THOUSAND PESOS (P100,000.00) with
interest at five (5%) percent per month, obtained on July 14, 1989 and
payable on October 14, 1989. Such receipt was lost but admitted by the
defendants in their counter-affidavit as attached [to] this complaint and
marked as Annex "A" mentioned in paragraph one (1); x x x62
In their Answer, respondents admitted that they had secured loans from
petitioner. While the allegations in paragraph 2 of the complaint were
specifically denied, respondents merely averred that petitioner and
respondent Felicidad entered into an agreement for the lending of money
to interested borrowers at a higher interest rate. Respondents failed to
declare the exact amount of the loans they had secured from petitioner.
They also failed to deny the allegation in paragraph 2 of the complaint that
respondent Felicidad signed and submitted a counter-affidavit in I.S. No.
93-334 where she admitted having secured loans from petitioner in the
amount of P773,000.00. Respondents, likewise, failed to deny the
allegation in paragraph 2(h) of the complaint that respondents had
secured a P34,000.00 loan payable on October 19, 1989, evidenced by a
receipt which petitioner had misplaced. Although respondents specifically
denied in paragraph 2.11 of their Answer the allegations in paragraph 2(I)
of the complaint, they merely alleged that "they have not received sums of
money from the plaintiff without any receipt therefor."
Respondents, likewise, failed to specifically deny another allegation in the
complaint that they had secured a P100,000.00 loan from petitioner on
July 14, 1989; that the loan was payable on October 14, 1989; and
evidenced by a receipt which petitioner claimed to have lost. Neither did
respondents deny the allegation that respondents admitted their loan

of P100,000.00 in the counter-affidavit of respondent Felicidad,
which was appended to the complaint as Annex "A." In fine,
respondents had admitted the existence of their P773,000.00 loan
from petitioner.
We agree with the finding of the CA that petitioner had no right to
collect from respondents the total amount of P301,000.00, which
includes more than P178,980.00 which respondent Felicidad
collected from Tibong, Dalisay, Morada, Chomacog, Cabang,
Casuga, Gelacio, and Manuel. Petitioner cannot again collect the
same amount from respondents; otherwise, she would be enriching
herself at their expense. Neither can petitioner collect from
respondents more than P103,500.00 which she had already
collected from Nimo, Cantas, Rivera, Donguis, Fernandez and
Ramirez.
There is no longer a need for the Court to still resolve the issue of
whether respondents' obligation to pay the balance of their loan
account to petitioner was partially extinguished by the promissory
notes executed by Juliet Tibong, Corazon Dalisay, Rita Chomacog,
Carmelita Casuga, Merlinda Gelacio and Antoinette Manuel
because, as admitted by petitioner, she was able to collect the
amounts under the notes from said debtors and applied them to
respondents' accounts.
Under Article 1231(b) of the New Civil Code, novation is
enumerated as one of the ways by which obligations are
extinguished. Obligations may be modified by changing their object
or principal creditor or by substituting the person of the
debtor.63 The burden to prove the defense that an obligation has
been extinguished by novation falls on the debtor. 64 The nature of
novation was extensively explained in Iloilo Traders Finance, Inc. v.
Heirs of Sps. Oscar Soriano, Jr.,65 as follows:
Novation may either be extinctive or modificatory, much being
dependent on the nature of the change and the intention of the
parties. Extinctive novation is never presumed; there must be an
express intention to novate; in cases where it is implied, the acts of
the parties must clearly demonstrate their intent to dissolve the old
obligation as the moving consideration for the emergence of the
new one. Implied novation necessitates that the incompatibility
between the old and new obligation be total on every point such
that the old obligation is completely superseded by the new one.
The test of incompatibility is whether they can stand together, each
one having an independent existence; if they cannot and are
irreconciliable, the subsequent obligation would also extinguish the
first.
An extinctive novation would thus have the twin effects of, first,
extinguishing an existing obligation and, second, creating a new
one in its stead. This kind of novation presupposes a confluence of
four essential requisites: (1) a previous valid obligation; (2) an
agreement of all parties concerned to a new contract; (3) the
extinguishment of the old obligation; and (4) the birth of a valid new
obligation. Novation is merely modificatory where the change
brought about by any subsequent agreement is merely incidental to
the main obligation (e.g., a change in interest rates or an extension
of time to pay); in this instance, the new agreement will not have
the effect of extinguishing the first but would merely supplement it
or supplant some but not all of its provisions.66 (Citations Omitted)
Novation which consists in substituting a new debtor (delegado) in
the place of the original one (delegante) may be made even without
the knowledge or against the will of the latter but not without the
consent of the creditor. Substitution of the person of the debtor may
be effected by delegacion, meaning, the debtor offers, and the
creditor (delegatario), accepts a third person who consents to the
substitution and assumes the obligation. Thus, the consent of those
three persons is necessary.67 In this kind of novation, it is not
enough to extend the juridical relation to a third person; it is
89
necessary that the old debtor be released from the obligation, and the third
person or new debtor take his place in the relation.68 Without such release,
there is no novation; the third person who has assumed the obligation of
the debtor merely becomes a co-debtor or a surety. If there is no
agreement as to solidarity, the first and the new debtor are considered
obligated jointly.69
In Di Franco v. Steinbaum,70 the appellate court ruled that as to the
consideration necessary to support a contract of novation, the rule is the
same as in other contracts. The consideration need not be pecuniary or
even beneficial to the person promising. It is sufficient if it be a loss of an
inconvenience, such as the relinquishment of a right or the discharge of a
debt, the postponement of a remedy, the discontinuance of a suit, or
forbearance to sue.
In City National Bank of Huron, S.D. v. Fuller,71 the Circuit Court of
Appeals ruled that the theory of novation is that the new debtor
contracts with the old debtor that he will pay the debt, and also to the
same effect with the creditor, while the latter agrees to accept the
new debtor for the old. A novation is not made by showing that the
substituted debtor agreed to pay the debt; it must appear that he agreed
with the creditor to do so. Moreover, the agreement must be based on
the consideration of the creditor's agreement to look to the new
debtor instead of the old. It is not essential that acceptance of the terms
of the novation and release of the debtor be shown by express agreement.
Facts and circumstances surrounding the transaction and the subsequent
conduct of the parties may show acceptance as clearly as an express
agreement, albeit implied.72
We find in this case that the CA correctly found that respondents'
obligation to pay the balance of their account with petitioner was
extinguished, pro tanto, by the deeds of assignment of credit executed by
respondent Felicidad in favor of petitioner.
An assignment of credit is an agreement by virtue of which the owner of a
credit, known as the assignor, by a legal cause, such as sale, dation in
payment, exchange or donation, and without the consent of the debtor,
transfers his credit and accessory rights to another, known as the
assignee, who acquires the power to enforce it to the same extent as the
assignor could enforce it against the debtor.73 It may be in the form of sale,
but at times it may constitute a dation in payment, such as when a debtor,
in order to obtain a release from his debt, assigns to his creditor a credit he
has against a third person.74
In Vda. de Jayme v. Court of Appeals,75 the Court held that dacion en
pago is the delivery and transmission of ownership of a thing by the debtor
to the creditor as an accepted equivalent of the performance of the
obligation. It is a special mode of payment where 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
obligation. As such, the essential elements of a contract of sale, namely,
consent, object certain, and cause or consideration must be present. In its
modern concept, what actually takes place in dacion en pago is an
objective novation of the obligation where the thing offered as an accepted
equivalent of the performance of an obligation is considered as the object
of the contract of sale, while the debt is considered as the purchase price.
In any case, common consent is an essential prerequisite, be it sale or
novation, to have the effect of totally extinguishing the debt or obligation.76
The requisites for dacion en pago are: (1) there must be a performance of
the prestation in lieu of payment (animo solvendi) which may consist in the
delivery of a corporeal thing or a real right or a credit against the third
person; (2) there must be some difference between the prestation due and
that which is given in substitution (aliud pro alio); and (3) there must be an
agreement between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance of a prestation
different from that due.77
 90

All the requisites for a valid dation in payment are present in this
case. As gleaned from the deeds, respondent Felicidad assigned to
petitioner her credits "to make good" the balance of her obligation.
Felicidad testified that she executed the deeds to enable her to
make partial payments of her account, since she could not comply
with petitioner's frenetic demands to pay the account in cash.
Petitioner and respondent Felicidad agreed to relieve the latter of
her obligation to pay the balance of her account, and for petitioner
to collect the same from respondent's debtors.
Admittedly, some of respondents' debtors, like Edna Papat-iw,
were not able to affix their conformity to the deeds. In an
assignment of credit, however, the consent of the debtor is not
essential for its perfection; the knowledge thereof or lack of it
affecting only the efficaciousness or inefficaciousness of any
payment that might have been made. The assignment binds the
debtor upon acquiring knowledge of the assignment but he is
entitled, even then, to raise against the assignee the same
defenses he could set up against the assignor78 necessary in order
that assignment may fully produce legal effects. Thus, the duty to
pay does not depend on the consent of the debtor. The purpose of
the notice is only to inform that debtor from the date of the
assignment. Payment should be made to the assignee and not to
the original creditor.
The transfer of rights takes place upon perfection of the contract,
and ownership of the right, including all appurtenant accessory
rights, is acquired by the assignee79 who steps into the shoes of the
original creditor as subrogee of the latter80 from that amount, the
ownership of the right is acquired by the assignee. The law does
not require any formal notice to bind the debtor to the assignee, all
that the law requires is knowledge of the assignment. Even if the
debtor had not been notified, but came to know of the assignment
by whatever means, the debtor is bound by it. If the document of
assignment is public, it is evidence even against a third person of
the facts which gave rise to its execution and of the date of the
latter. The transfer of the credit must therefore be held valid and
effective from the moment it is made to appear in such instrument,
and third persons must recognize it as such, in view of the
authenticity of the document, which precludes all suspicion of fraud
with respect to the date of the transfer or assignment of the credit. 81
As gleaned from the deeds executed by respondent Felicidad
relative to the accounts of her other debtors, petitioner was
authorized to collect the amounts of P6,000.00 from Cabang,
and P63,600.00 from Cirilo. They obliged themselves to pay
petitioner. Respondent Felicidad, likewise, unequivocably declared
that Cabang and Cirilo no longer had any obligation to her.
Equally significant is the fact that, since 1990, when respondent
Felicidad executed the deeds, petitioner no longer attempted to
collect from respondents the balance of their accounts. It was only
in 1999, or after nine (9) years had elapsed that petitioner
attempted to collect from respondents. In the meantime, petitioner
had collected from respondents' debtors the amount
of P301,000.00.
receives a guaranty or accepts payments from a third person who has
agreed to assume the obligation when there is no agreement that the first
debtor would be released from responsibility. Thus, the creditor can still
enforce the obligation against the original debtor.
In the present case, petitioner and respondent Felicidad agreed that the
amounts due from respondents' debtors were intended to "make good in
part" the account of respondents. Case law is that, an assignment will,
ordinarily, be interpreted or construed in accordance with the rules of
construction governing contracts generally, the primary object being
always to ascertain and carry out the intention of the parties. This intention
is to be derived from a consideration of the whole instrument, all parts of
which should be given effect, and is to be sought in the words and
language employed.83
Indeed, the Court must not go beyond the rational scope of the words
used in construing an assignment, words should be construed according
to their ordinary meaning, unless something in the assignment indicates
that they are being used in a special sense. So, if the words are free from
ambiguity and expressed plainly the purpose of the instrument, there is no
occasion for interpretation; but where necessary, words must be
interpreted in the light of the particular subject matter. 84 And surrounding
circumstances may be considered in order to understand more perfectly
the intention of the parties. Thus, the object to be accomplished through
the assignment, and the relations and conduct of the parties may be
considered in construing the document.
Although it has been said that an ambiguous or uncertain assignment
should be construed most strictly against the assignor, the general rule is
that any ambiguity or uncertainty in the meaning of an assignment will be
resolved against the party who prepared it; hence, if the assignment was
prepared by the assignee, it will be construed most strictly against him or
her.85 One who chooses the words by which a right is given ought to be
held to the strict interpretation of them, rather than the other who only
accepts them.86
Considering all the foregoing, we find that respondents still have a balance
on their account to petitioner in the principal amount of P33,841.00, the
difference between their loan of P773,000.00 less P585,659.00, the
payment of respondents' other debtors amounting to P103,500.00, and
the P50,000.00 payment made by respondents.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The
Decision and Resolution of the Court of Appeals
are AFFIRMED with MODIFICATION in that the balance of the principal
account of the respondents to the petitioner is P33,841.00. No costs.
SO ORDERED.
Austria-Martinez, and Chico-Nazario, JJ., concur.
Panganiban, C.J., retired as of December 7, 2006.
Ynares-Santiago, J., working Chairperson.

While it is true that respondent Felicidad likewise authorized

petitioner in the deeds to collect the debtors' accounts, and for the
A.C. No. 6955 July 27, 2006
latter to pay the same directly, it cannot thereby be considered that
respondent merely authorized petitioner to collect the accounts of
respondents' debtors and for her to apply her collections in partial MAR YUSON, complainant,
payments of their accounts. It bears stressing that petitioner, as vs.
assignee, acquired all the rights and remedies passed by Felicidad, ATTY. JEREMIAS R. VITAN, respondent.
as assignee, at the time of the assignment. 82 Such rights and
remedies include the right to collect her debtors' obligations to her. DECISION

Petitioner cannot find solace in the Court's ruling in Magdalena PANGANIBAN, C.J.:
Estates. In that case, the Court ruled that the mere fact that
novation does not follow as a matter of course when the creditor

Once again this Court exhorts members of the bar to live up to the
strictures of the Lawyers' Oath, the Code of Professional
Responsibility, and the Canons of Professional Ethics. Otherwise,
they shall be sanctioned by this Court.
The Case
Before us is a Letter-Complaint1 for the disbarment of Atty.
Jeremias R. Vitan, filed by Mar Yuson with the Commission on Bar
Discipline (CBD) of the Integrated Bar of the Philippines (IBP).
Respondent was accused of taking advantage of complainant's
generosity and credulity.
On August 5, 2004, IBP-CBD directed Atty. Vitan to submit his
Answer within 15 days from receipt of the Order; 2otherwise, he
would be considered in default and the case heard ex parte.
Because respondent failed to submit his Answer within the given
period, the CBD considered his failure and non-appearance as a
waiver of his right to participate in the proceedings. 3 Thus, the
hearing scheduled for August 11, 2005, pushed through, with the
original copies of the checks he had issued presented by
complainant as evidence. Afterwards, the CBD issued an Order
submitting the case for Resolution. 4 On August 23, 2005,
Commissioner Milagros V. San Juan rendered her Report and
Recommendation.5
Respondent denied having received a copy of the Complaint
against him and alleged that it was only on August 24, 2005, that
he received the Order submitting the case for resolution. Thus, he
filed an Urgent Motion to Revive/Re-open and with Leave to Admit
Attached Answer.6
In its Resolution No. XVII-2005-101 dated October 22, 2005, the
IBP Board of Directors adopted and approved, with modification,
the investigating commissioner's Report and Recommendation.
Upon respondent was imposed the penalty of suspension from the
practice of law for two years, after the board found that he had
taken advantage of complainant through deceit and dishonesty.
The lawyer was further ordered to give back the money he had
received from complainant.
The Facts
Complainant Mar Yuson was a taxi driver with eight children. In
October 2002, he received a sum of money by way of inheritance.
According to him, he and his wife intended to use the money to
purchase a taxi, repair their dilapidated house, and hold a debut
party for their daughter.7
They were able to purchase a secondhand taxi, and Atty. Vitan
helped him with all the legal matters concerning this purchase.
Regrettably, their other plans were put on hold, because the lawyer
borrowed P100,000 from them in December 2002. It was agreed
that the loan would be repaid before the end of the following
year,8 in time for the debut on November 24, 2003.9
To guarantee payment, respondent executed in favor of
complainant several postdated checks to cover the loaned amount.
Those checks, however, turned out to be worthless, because they
had been drawn against the lawyer's closed account in the Bank of
Commerce in Escolta, Manila. The six dishonored checks were
presented during the hearing before the IBP commissioner. 10
Complainant maintained that he had repeatedly tried to recover the
debt, only to be turned away empty-handed each time. He
conceded, though, that respondent had given an undisclosed
amount covered by the checks dated January and February
91
2003.11 The amounts covered by the dishonored checks remained unpaid.
This development prompted complainant to seek the aid of the IBP
National Committee on Legal Aid (NCLA) in obtaining payment. On
November 14, 2003, the IBP-NCLA, through Deputy Director Rosalie J. de
la Cruz, sent him a letter.12 It informed him of the impending administrative
case and advised him to confer with complainant, presumably to settle the
matter. Upon receipt13 of the letter, he again gave assurances that he
would pay the loan in time for the debut.14
When the date passed without any payment, complainant demanded a
collateral to secure the loan. Thus, in his favor, Atty. Vitan executed a
document denominated as a Deed of Absolute Sale, covering the latter's
parcel of land located in Sta. Maria, Bulacan. According to complainant,
their intention was to transfer the title of the property to him temporarily, so
that he could either sell or mortgage15 it. It was further agreed that, if it was
mortgaged, respondent would redeem it as partial or full payment of the
loan.16
Curiously, however, the parties executed a second Deed of Absolute
Sale,17 this time in favor of Atty. Vitan, with complainant as vendor. The
purpose of this particular document was not explained by either party.
On April 12, 2004, complainant was able to mortgage18 the property
for P30,000.19 Contrary to their earlier agreement, respondent did not
redeem it from the mortgagee and, instead, simply sent complainant a
letter20 dated July 7, 2004, promising to pay on or before July 12, 2004. As
this promise was not fulfilled, the mortgagee demanded payment from
complainant and thereby allegedly exposed the latter to shame and
ridicule.21
On July 19, 2004, IBP-NCLA sent another letter22 on behalf of complainant.
Respondent was informed that an administrative case would be filed
against him, unless he settled his obligations by July 30, 2004, the date
given by complainant.
On August 30, 2004, the IBP-NCLA received the reply23 dated July 30,
2004, submitted by Atty. Vitan who explained that he had already settled
his obligation. He maintained that he had in fact executed, in
complainant's favor, a Deed of Absolute Sale over his 203-square-meter
residential property in Sta. Maria, Bulacan. He clarified that "[their]
understanding was that [complainant] ha[d] the option to use, mortgage or
sell [the property] and return to me the excess of the proceeds after
obtaining his money represented by my six (6) dishonored
checks."24Interestingly, respondent attached the Deed of Absolute Sale in
which he was the vendee and complainant the vendor. 25 It appears that
this was the second Deed of Absolute Sale, also referred to in the
Complaint.26
Only after the IBP investigating commissioner had rendered her Report
and Recommendation27 did Atty. Vitan submit his Answer to the
Letter-Complaint. He called the second document a "Counter Deed of
Sale," executed as a "sort of collateral/security for the account of [his]
liaison officer [Evelyn Estur]."28 He admitted having given several
postdated checks amounting to P100,000, supposedly to guarantee the
indebtedness of Estur to complainant. Atty. Vitan argued for the first time
that it was she who had incurred the debts, and that he had acted only as
a "character reference and/or guarantor."29 He maintained that he had
given in to the one-sided transactions, because he was "completely
spellbound by complainant's seeming sincerity and kindness."30 To
corroborate his statements, he attached Estur's Affidavit.31
Report of the Investigating Commissioner
In her Report and Recommendation, Commissioner San Juan
recommended that Atty. Vitan be suspended until his restitution of the
amount he had borrowed. She held that respondent, having taken

advantage of complainant and thus shown dishonesty and
untrustworthiness, did not deserve to retain his membership in the
bar.
On November 24, 2005, the Supreme Court received the IBP
Resolution adopting, with modification, the Report and
Recommendation of the investigating commissioner.
The Court's Ruling
We agree with the findings of the IBP Board of Governors, but
reduce the period of suspension to six months.
Respondent's Administrative Liability
Lawyers are instruments for the administration of justice. They are
expected to maintain not only legal proficiency but also a high
standard of ethics, honesty, integrity and fair dealing. In this way,
the people's faith and confidence in the judicial system is
ensured.32
In the present case, Atty. Vitan undoubtedly owed money to
complainant. In a letter33 to IBP Deputy Director de la Cruz,
respondent admitted having incurred the P100,000 loan. It was
only in his Answer34 that the lawyer suddenly denied that he had
personally incurred this obligation. This time, he pointed to his
employee, Estur, as the true debtor. We find his version of the facts
implausible.
First, the story involving a certain Evelyn Estur was clearly a mere
afterthought, conjured simply to escape his liability. If it were true
that it was she who owed the money, he should have mentioned
this alleged fact in his letter to the IBP NCLA deputy director.
Instead, respondent was completely silent about Estur and merely
asserted that he had already settled his debt with complainant.
Second, the promise of Atty. Vitan to settle his obligations on
particular dates is contained in two handwritten notes signed by
him and worded as follows:
"I undertake to settle the financial obligations of P100,000 – plus
before the end of the year."35
"Mar:
"We will settle on July 12, 2004, on or before said date." 36
The wordings of these promissory notes disclose that he had a
personal obligation to complainant, without any mention of Estur at
all. If it were true that Atty. Vitan had executed those notes for the
account of his liaison officer, he should have used words to that
effect. As a lawyer, he was aware that the preparation of
promissory notes was not a "mere formality;" it had legal
consequences. It is quite far-fetched for a lawyer to assume the
role of guarantor, without saying so in the notes.
A lawyer may be disciplined for evading the payment of a debt
validly incurred.37 In this case, the failure of Atty. Vitan to pay his
debt for over three years despite repeated demands puts in
question his standing as a member of the bar. Worse, he made
several promises to pay his debt promptly, but reneged on all of
them. He even started to hide from complainant according to the
latter .38
Failure to honor just debts, particularly from clients, constitutes
dishonest conduct that does not speak well of a member of the
92
bar.39 It is vital that a lawyer's conduct be kept beyond reproach and above
suspicion at all times. Rule 1.01 of the Code of Professional Responsibility
clearly provides that lawyers must not engage in unlawful, immoral or
deceitful conduct. They must comport themselves in a manner that will
secure and preserve the respect and confidence of the public for the legal
profession.40
Atty. Vitan contends that his obligation was already extinguished, because
he had allegedly sold his Bulacan property to complainant.41 Basically,
respondent is asserting that what had transpired was a dation in payment.
Governed by the law on sales, it is a transaction that takes place when a
piece of property is alienated to the creditor in satisfaction of a debt in
money.42 It involves delivery and transmission of ownership of a thing -- by
the debtor to the creditor -- as an accepted equivalent of the performance
of the obligation.43
Going over the records of this case, we find the contention of Atty. Vitan
undeserving of credence. The records reveal that he did not really intend
to sell and relinquish ownership over his property in Sta. Maria, Bulacan,
notwithstanding the execution of a Deed of Absolute Sale in favor of
complainant. The second Deed of Absolute Sale, which reconveyed the
property to respondent, is proof that he had no such intention. This second
Deed, which he referred to as his "safety net,"44 betrays his intention to
counteract the effects of the first one .
In a manner of speaking, Atty. Vitan was taking back with his right hand
what he had given with his left. The second Deed of Absolute Sale
returned the parties right back where they started, as if there were no sale
in favor of complainant to begin with. In effect, on the basis of the second
Deed of Sale, respondent took back and asserted his ownership over the
property despite having allegedly sold it. Thus, he fails to convince us that
there was a bona fide dation in payment or sale that took place between
the parties; that is, that there was an extinguishment of obligation.
It appears that the true intention of the parties was to use the Bulacan
property to facilitate payment. They only made it appear that the title had
been transferred to complainant to authorize him to sell or mortgage the
property.45Atty. Vitan himself admitted in his letter dated July 30, 2004,
that their intention was to convert the property into cash, so that payment
could be obtained by complainant and the excess returned to
respondent.46 The records, however, do not show that the proceeds
derived were sufficient to discharge the obligation of the lawyer fully; thus,
he is still liable to the extent of the deficiency.
We hasten to add, however, that this administrative case is not the proper
venue for us to determine the extent of the remaining liability. This Court
will not act as a collection agency from faltering debtors, when the amount
of the indebtedness is indefinite and disputed.47
Nevertheless, the records satisfactorily reveal the failure of respondent to
live up to his duties as a lawyer in consonance with the strictures of the
Lawyer's Oath, the Code of Professional Responsibility, and the Canons
of Professional Ethics, thereby degrading not only his person but his
profession as well. So far, we find that his lack of sincerity in fulfilling his
obligations is revealed by his acts of issuing promissory notes and
reneging on them; executing a simulated Deed of Absolute Sale; and
breaking his promise to redeem the property from the mortgagee.
The repeated failure of Atty. Vitan to fulfill his promise puts in question his
integrity and character. Indeed, not only his integrity as an individual but,
more important, his stature as a member of the bar is affected by his acts
of welching on his promises and misleading complainant. Canon 1 and
Rule 1.01 of the Code of Professional Responsibility explicitly state thus:
"CANON 1 — A lawyer shall uphold the constitution, obey the laws of the
land and promote respect for law and legal processes.

"Rule 1.01 — A lawyer shall not engage in unlawful, dishonest,
immoral or deceitful conduct."
Any wrongdoing, whether professional or nonprofessional,
indicating unfitness for the profession justifies disciplinary action.48
There is yet another reason to find Atty. Vitan administratively liable.
In his letter of July 30, 2004, was an admission that the personal
checks he issued in favor of complainant had all been
dishonored.49 Whether those checks were issued for the account of
respondent or of Estur is not important. The fact remains that the
lawyer knowingly issued worthless checks and thus revealed his
disposition to defraud complainant.
The act of a lawyer in issuing a check without sufficient funds to
cover them -- or, worse, drawn against a closed account
--constitutes such willful dishonesty and unethical conduct as to
undermine the public confidence in the law and in lawyers. 50 The
act also manifests a low regard for the Oath taken by the lawyer
upon joining the profession, whose image should be held in high
esteem, not seriously and irreparably tarnished.51
Moreover, the inimical effect of the issuance of worthless checks
has been recognized by this Court in an earlier case, from which
we quote:
"[T]he effect [of issuance of worthless checks] transcends the
private interests of the parties directly involved in the transaction
and touches the interests of the community at large. The mischief it
creates is not only a wrong to the payee or holder, but also an
injury to the public since the circulation of valueless commercial
papers can very well pollute the channels of trade and commerce,
injure the banking system and eventually hurt the welfare of society
and the public interest."52
We have also held that the deliberate failure to pay just debts and
the issuance of worthless checks constitute gross misconduct, 53 for
which a lawyer may be sanctioned with one year's suspension from
the practice of law,54 or a suspension of six months upon partial
payment of the obligation.55
In the instant case, complainant himself admits that respondent
had already paid the amounts covered by the January and
February checks.56 Thus, there has been a partial payment that
justifies a modification of IBP's recommended penalty.
WHEREFORE, Atty. Jeremias R. Vitan is hereby found guilty of
gross misconduct and SUSPENDED from the practice of law for six
(6) months, effective upon his receipt of this Decision, with the
warning that a repetition of the same or any other misconduct will
be dealt with more severely.
Let a copy of this Decision be entered in respondent's record as a
member of the Bar, and notice served on the Integrated Bar of the
Philippines and on the Office of the Court Administrator for
circulation to all courts in the country.
SO ORDERED.
Puno, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Carpio,
Austria-Martinez, Corona, Carpio-Morales, Callejo, Sr., Azcuna,
Tinga, Chico-Nazario, Garcia, Velasco, Jr., J.J., concur.
G.R. No. 82508 September 29, 1989
FILINVEST CREDIT CORPORATION, petitioner,
vs.
93
THE COURT OF APPEALS, JOSE SY BANG and ILUMINADA TAN SY
BANG,*respondents.
Labaquis, Loyola, Angara and Associates for petitioner.
Alfredo 1. Raya for private respondents.
SARMIENTO, J.:
This is a petition for review on certiorari of the decision, 1 dated March 17,
1988, of the Court of Appeals which affirmed with modification the
decision 2 of the Regional Trial Court of Quezon, Branch LIX, Lucena City.
The controversy stemmed from the following facts: The private
respondents, the spouses Jose Sy Bang and Iluminada Tan, were
engaged in the sale of gravel produced from crushed rocks and used for
construction purposes. In order to increase their production, they engaged
the services of Mr. Ruben Mercurio, the proprietor of Gemini Motor Sales
in Lucena City, to look for a rock crusher which they could buy. Mr.
Mercurio referred the private respondents to the Rizal Consolidated
Corporation which then had for sale one such machinery described as:
ONE UNIT LIPPMAN PORTABLE CRUSHING PLANT
(RECONDITIONED) [sic]
JAW CRUSHER-10xl6 DOUBLE ROLL CRUSHER 16x16
3 UNITS PRODUCT CONVEYOR
75 HP ELECTRIC MOTOR
8 PCS. BRAND NEW TIRES CHASSIS NO. 19696 GOOD RUNNING
CONDITION 3
Oscar Sy Bang, a brother of private respondent Jose Sy Bang, went to
inspect the machine at the Rizal Consolidated's plant site. Apparently
satisfied with the machine, the private respondents signified their intent to
purchase the same. They were however confronted with a problem-the
rock crusher carried a cash price tag of P 550,000.00. Bent on acquiring
the machinery, the private respondents applied for financial assistance
from the petitioner, Filinvest Credit Corporation. The petitioner agreed to
extend to the private respondents financial aid on the following conditions:
that the machinery be purchased in the petitioner's name; that it be leased
(with option to purchase upon the termination of the lease period) to the
private respondents; and that the private respondents execute a real
estate mortgage in favor of the petitioner as security for the amount
advanced by the latter. Accordingly, on May 18,1981, a contract of lease
of machinery (with option to purchase) was entered into by the parties
whereby the private respondents agreed to lease from the petitioner the
rock crusher for two years starting from July 5, 1 981 payable as follows:
P10,000.00 - first 3 months
23,000.00 - next 6 months
24,800.00 - next 15 months
The contract likewise stipulated that at the end of the two-year period, the
machine would be owned by the private respondents. Thus, the private
respondents issued in favor of the petitioner a check for P150,550.00, as
initial rental (or guaranty deposit), and twenty-four (24) postdated checks
corresponding to the 24 monthly rentals. In addition, to guarantee their
compliance with the lease contract, the private respondents executed a
real estate mortgage over two parcels of land in favor of the petitioner. The
rock crusher was delivered to the private respondents on June 9, 1981.

Three months from the date of delivery, or on September 7, 1981,
however, the private respondents, claiming that they had only
tested the machine that month, sent a letter-complaint to the
petitioner, alleging that contrary to the 20 to 40 tons per hour
capacity of the machine as stated in the lease contract, the
machine could only process 5 tons of rocks and stones per hour.
They then demanded that the petitioner make good the stipulation
in the lease contract. They followed that up with similar written
complaints to the petitioner, but the latter did not, however, act on
them. Subsequently, the private respondents stopped payment on
the remaining checks they had issued to the petitioner. 5
As a consequence of the non-payment by the private respondents
of the rentals on the rock crusher as they fell due despite the
repeated written demands, the petitioner extrajudicially foreclosed
the real estate mortgage. 6 On April 18, 1983, the private
respondents received a Sheriff s Notice of Auction Sale informing
them that their mortgaged properties were going to be sold at a
public auction on May 25, 1983 at 10:00 o'clock in the morning at
the Office of the Provincial Sheriff in Lucena City to satisfy their
indebtedness to the petitioner. 7 To thwart the impending auction of
their properties, the private respondents filed before the Regional
Trial Court of Quezon, on May 4, 1983, 8 a complaint against the
petitioner, for the rescission of the contract of lease, annullment of
the real estate mortgage, and for injunction and damages, with
prayer for the issuance of a writ of preliminary injunction. 9 On May
23, 1983, three days before the scheduled auction sale, the trial
court issued a temporary restraining order commanding the
Provincial Sheriff of Quezon, and the petitioner, to refrain and
desist from proceeding with the public auction. 10 Two years later,
on September 4, 1985, the trial court rendered a decision in favor
of the private respondents, the dispositive portion of which reads:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby
rendered:
1. making the injunction permanent;
2. rescinding the contract of lease of the machinery and equipment
and ordering the plaintiffs to return to the defendant corporation the
machinery subject of the lease contract, and the defendant
corporation to return to plaintiffs the sum of P470,950.00 it received
from the latter as guaranty deposit and rentals with legal interest
thereon until the amount is fully restituted;
3. annulling the real estate mortgage constituted over the
properties of the plaintiffs covered by Transfer Certificate of Title
Nos. T32480 and T-5779 of the Registry of Deeds of Lucena City;
4. ordering the defendant corporation to pay plaintiffs P30,000.00
as attorney's fees and the costs of the suit.
SO ORDERED. 11
Dissatisfied with the trial court's decision, the petitioner elevated
the case to the respondent Court of Appeals.
On March 17, 1988, the appellate court, finding no error in the
appealed judgment, affirmed the same in toto. 12Hence, this
petition.
Before us, the petitioner reasserts that the private respondents'
cause of action is not against it (the petitioner), but against either
the Rizal Consolidated Corporation, the original owner-seller of the
subject rock crusher, or Gemini Motors Sales which served as a
conduit facilitator of the purchase of the said machine. The
petitioner argues that it is a financing institution engaged in
quasi-banking activities, primarily the lending of money to
94
entrepreneurs such as the private respondents and the general public, but
certainly not the leasing or selling of heavy machineries like the subject
rock crusher. The petitioner denies being the seller of the rock crusher and
only admits having financed its acquisition by the private respondents.
Further, the petitioner absolves itself of any liability arising out of the lease
contract it signed with the private respondents due to the waiver of
warranty made by the latter. The petitioner likewise maintains that the
private respondents being presumed to be knowledgeable about
machineries, should be held responsible for the detection of defects in the
machine they had acquired, and on account of that, they are estopped
from claiming any breach of warranty. Finally, the petitioner interposed the
defense of prescription, invoking Article 1571 of the Civil Code, which
provides:
Art. 1571. Actions arising from the provisions of the preceding ten articles
shall be barred after six months, from the delivery of the thing sold.
We find the petitioner's first contention untenable. While it is accepted that
the petitioner is a financing institution, it is not, however, immune from any
recourse by the private respondents. Notwithstanding the testimony of
private respondent Jose Sy Bang that he did not purchase the rock
crusher from the petitioner, the fact that the rock crusher was purchased
from Rizal Consolidated Corporation in the name and with the funds of the
petitioner proves beyond doubt that the ownership thereof was effectively
transferred to it. It is precisely this ownership which enabled the petitioner
to enter into the "Contract of Lease of Machinery and Equipment" with the
private respondents.
Be that as it may, the real intention of the parties should prevail. The
nomenclature of the agreement cannot change its true essence, i.e., a
sale on installments. It is basic that a contract is what the law defines it
and the parties intend it to be, not what it is called by the parties. 13 It is
apparent here thatthe intent of the parties to the subject contract is for the
so-called rentals to be the installment payments. Upon the completion of
the payments, then the rock crusher, subject matter of the contract, would
become the property of the private respondents. This form of agreement
has been criticized as a lease only in name. Thus in Vda. de Jose v.
Barrueco 14 we stated:
Sellers desirous of making conditional sales of their goods, but who do not
wish openly to make a bargain in that form, for one reason or another,
have frequently resorted to the device of making contracts in the form of
leases either with options to the buyer to purchase for a small
consideration at the end of term, provided the so-called rent has been duly
paid, or with stipulations that if the rent throughout the term is paid, title
shall thereupon vest in the lessee. It is obvious that such transactions are
leases only in name. The so-called rent must necessarily be regarded as
payment of the price in installments since the due payment of the agreed
amount results, by the terms of bargain, in the transfer of title to the
lessee. 15
The importance of the criticism is heightened in the light of Article 1484 of
the new Civil Code which provides for the remedies of an unpaid seller of
movables on installment basis.
Article 1484. In a contract of sale of personal property the price of which is
payable in installments, the vendor may exercise any of the following
remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more
installments;
(3) Foreclose the chattel mortgage or the thing sold, if one has been
constituted, should the vendee's failure to pay cover two or more
installments. In this case, he shall have no further action against the

purchaser to recover any unpaid balance of the price. Any
agreement to the contrary shall be void.
Under the aforequoted provision, the seller of movables in
installments, in case the buyer fails to pay two or more installments
may elect to pursue either of the following remedies: (1) exact
fulfillment by the purchaser of the obligation; (2) cancel the sale; or
(3) foreclose the mortgage on the purchased property if one was
constituted thereon. It is now settled that the said remedies are
alternative and not cumulative and therefore, the exercise of one
bars the exercise of the others.
Indubitably, the device contract of lease with option to buy is at
times resorted to as a means to circumvent Article 1484,
particularly paragraph (3) thereof.Through the set-up, the vendor,
by retaining ownership over the property in the guise of being the
lessor, retains, likewise, the right to repossess the same, without
going through the process of foreclosure, in the event the
vendee-lessee defaults in the payment of the installments. There
arises therefore no need to constitute a chattel mortgage over the
movable sold. More important, the vendor, after repossessing the
property and, in effect, canceling the contract of sale, gets to keep
all the installments-cum-rentals already paid. It is thus for these
reasons that Article 1485 of the new Civil Code provides that:
Article 1485. The preceding article shall be applied to contracts
purporting to be leases of personal property with option to buy,
when the lessor has deprived the lessee of possession or
enjoyment of the thing. (Emphasis ours.)
Unfortunately, even with the foregoing findings, we however fail to
find any reason to hold the petitioner liable for the rock crusher's
failure to produce in accordance with its described capacity.
According to the petitioner, it was the private respondents who
chose, inspected, and tested the subject machinery. It was only
after they had inspected and tested the machine, and found it to
their satisfaction, that the private respondents sought financial aid
from the petitioner. These allegations of the petitioner had never
been rebutted by the private respondents. In fact, they were even
admitted by the private respondents in the contract they signed.
Thus:
LESSEE'S SELECTION, INSPECTION AND VERIFICATION.-The
LESSEE hereby confirms and acknowledges that he has
independently inspected and verified the leased property and has
selected and received the same from the Dealer of his own
choosing in good order and excellent running and operating
condition and on the basis of such verification, etc. the LESSEE
has agreed to enter into this Contract." 16
Moreover, considering that between the parties, it is the private
respondents, by reason of their business, who are presumed to be
more knowledgeable, if not experts, on the machinery subject of
the contract, they should not therefore be heard now to complain of
any alleged deficiency of the said machinery. It is their failure or
neglect to exercise the caution and prudence of an expert, or, at
least, of a prudent man, in the selection, testing, and inspection of
the rock crusher that gave rise to their difficulty and to this conflict.
A well- established principle in law is that between two parties, he,
who by his negligence caused the loss, shall bear the same.
At any rate, even if the private respondents could not be adjudged
as negligent, they still are precluded from imputing any liability on
the petitioner. One of the stipulations in the contract they entered
into with the petitioner is an express waiver of warranties in favor of
the latter. By so signing the agreement, the private respondents
absolved the petitioner from any liability arising from any defect or
deficiency of the machinery they bought. The stipulation on the
machine's production capacity being "typewritten" and that of the
95
waiver being "printed" does not militate against the latter's effectivity. As
such, whether "a capacity of 20 to 40 tons per hour" is a condition or a
description is of no moment. What stands is that the private respondents
had expressly exempted the petitioner from any warranty whatsoever.
Their Contract of Lease Of Machinery And Equipment states:
WARRANTY-LESSEE absolutely releases the lessor from any liability
whatsoever as to any and all matters in relation to warranty in accordance
with the provisions hereinafter stipulated. 17
Taking into account that due to the nature of its business and its mode of
providing financial assistance to clients, the petitioner deals in goods over
which it has no sufficient know-how or expertise, and the selection of a
particular item is left to the client concerned, the latter, therefore,
shoulders the responsibility of protecting himself against product defects.
This is where the waiver of warranties is of paramount importance.
Common sense dictates that a buyer inspects a product before purchasing
it (under the principle of caveat emptor or "buyer beware") and does not
return it for defects discovered later on, particularly if the return of the
product is not covered by or stipulated in a contract or warranty. In the
case at bar, to declare the waiver as non-effective, as the lower courts did,
would impair the obligation of contracts. Certainly, the waiver in question
could not be considered a mere surplusage in the contract between the
parties. Moreover, nowhere is it shown in the records of the case that the
private respondent has argued for its nullity or illegality. In any event, we
find no ambiguity in the language of the waiver or the release of warranty.
There is therefore no room for any interpretation as to its effect or
applicability vis-a- vis the deficient output of the rock crusher. Suffice it to
say that the private respondents have validly excused the petitioner from
any warranty on the rock crusher. Hence, they should bear the loss for any
defect found therein.
WHEREFORE, the Petition is GRANTED; the Decision of the Court of
Appeals dated March 17, 1988 is hereby REVERSED AND SET ASIDE,
and another one rendered DISMISSING the complaint. Costs against the
private respondents.
SO ORDERED.
Melencio-Herrera (Chairperson), Paras and Regalado, ii., concur,
Padilla, J.,took no part
G.R. No. 115966 March 20, 2003
JUANA ALMIRA, RENATO GARCIA, ROGELIO GARCIA, RODOLFO
GARCIA, ROSITA GARCIA, RHODORA GARCIA, ROSALINDA
GARCIA, ROLANDO GARCIA and RAFAEL GARCIA Represented in
this suit by EDGARDO ALVAREZ, petitioners,
vs.
COURT OF APPEALS AND FEDERICO BRIONES, respondents.
AZCUNA, J.:
Before us is a petition for review on certiorari assailing the decision
rendered by the Court of Appeals in C.A. G.R. CV No. 409541 which
reversed the decision of the Regional Trial Court, Branch 32, of San Pedro,
Laguna that rescinded the Kasunduan ng Pagbibilihan2 entered into
between petitioners and private respondent over a portion of a parcel of
land situated in Sta. Rosa, Laguna.
The facts of the case are as follows:
Petitioners are the wife and the children of the late Julio Garcia who
inherited from his mother, Maria Alibudbud, a portion of a 90,655

square-meter property denominated as Lot 1642 of the Sta. Rosa
Estate in Barangay Caingin, Sta. Rosa, Laguna and covered by
TCT No. RT-1076. Lot 1642 was co-owned and registered in the
names of three persons with the following shares: Vicente de
Guzman (½), Enrique Hemedes (1/4), and Francisco Alibudbud,
the father of Maria Alibudbud (¼). Although there was no separate
title in the name of Julio Garcia, there were tax declarations in his
name to the extent of his grandfather’s share covering an area of
21,460 square meters. On July 5, 1984, petitioners, as heirs of
Julio Garcia, and respondent Federico Briones entered into
a Kasunduan ng Pagbibilihan (Kasunduan for brevity) over the
21,460 square-meter portion for the sum of P150,000.00.
Respondent paid P65,000.00 upon execution of the contract while
the balance of P85,000.00 was made payable within six (6) months
from the date of the execution of the instrument. At the time of the
execution of the Kasunduan, petitioners allegedly informed
respondent that TCT No. RT-1076 was in the possession of their
cousin, Conchalina Alibudbud who having bought Vicente de
Guzman’s ½ share, owned the bigger portion of Lot 1642. This
notwithstanding, respondent willingly entered
the Kasunduan provided that the full payment of the purchase price
will be made upon delivery to him of the title.3
The Kasunduan provides:
Na ang UNANG BAHAGI ay siyang magkakamayari (co-owners),
bilang tagapagmana ng yumaong Julio Garcia sa isang lagay na
lupang taniman ng palay, matatagpuan sa nayon ng Caingin, Santa
Rosa, Laguna, may buong lawak na 21,460 metrong parisukat,
humigi‘t kumulang, na lalong makikilala sa mga katangiang
inilalahad sa pahayag ng Buwis Bilang 3472 na ganito ang
natutunguhan: Mga kahanggan: Hilaga-1641-Nazario Lauriles;
Timog-Barique Hemedez; Silangan- Vicente de Guzman; at
Kanluran-Francisco Alibudbod; hinalagahan para sa pagbabayad
ng buwis pampamahalaan ng P12,720.00; at kasalukuyang may
nabibinbing kahilingan sa hukuman upang magkaroon ng sariling
titulo; nalilibot ng batong mohon na nagsisilbing hanganan sa
bawa‘t sulok.
Na ang UNANG BAHAGI ay inialok sa IKALAWANG BAHAGI
upang bilihin ang lupang nabanggit sa kabuuang halagang ISANG
DAAN AT LIMAMPUNG LIBONG (P150,000.00) PISO, Salaping
Pilipino, at ang IKALAWANG BAHAGI ay sumangayon na bilhin
ang naulit na lupa batay sa sumusunod na mga pasubali
at Kasunduan:
(1) Na pinatutunayan ng UNANG BAHAGI na tinanggap nila sa
buong kasiyahan ng kalooban buhat sa IKALAWANG BAHAGI ang
halagang ANIMNAPU AT LIMANG LIBONG (P65,000.00) PISO,
salaping Pilipino, bilang paunang bayad, at ang nalalabing
WALUMPU AT LIMANG LIBONG (85,000.00) PISO, ay babayaran
ng IKALAWANG BAHAGI sa UNANG BAHAGI sa loob ng anim na
buwan simula sa takda ng kasulatang ito, sa pasubali na ang
kaukulang titulo sa lupang nabanggit ay maipagkakaloob ng
UNANG BAHAGI;
(2) Na ang UNANG BAHAGI ang siyang mananagot tungkol sa
anumang kasulatang inihanda ukol sa pagbibilihang ito, gayundin
sa gastos sa notaryo publiko, capital gains tax at pagpapatala ng
kasulatan sa lalawigan ng Laguna;
(3) Na ang UNANG BAHAGI ay lalagda sa isang "Kasulatan ng
Bilihang Tuluyan" matapos na mabayarang lahat ng IKALAWANG
BAHAGI ang kaukulang kabuuang halaga ng lupang nabanggit.
Respondent took possession of the property subject of
the Kasunduan and made various payments to petitioners
amounting to P58,500.00. However, upon failure of petitioners to
deliver to him a separate title to the property in the name of Julio
96
Garcia, he refused to make further payments, prompting petitioners to file
a civil action before the Regional Trial Court of San Pedro, Laguna,
Branch 32, on May 13, 1991 for (a) rescission of the Kasunduan; (b) return
by respondent to petitioners of the possession of the subject parcel of land;
and (c) payment by respondent of damages in favor of petitioners.
Petitioners alleged that respondent was bound to pay the balance of the
purchase price within six (6) months from the date of the execution of
the Kasunduan and upon delivery to him of TCT No. RT-1076. Petitioners
claimed that they approached respondent several times to deliver TCT No.
RT-1076 but respondent told them that he did not have money to pay the
balance of the purchase price.4 Respondent, on the other hand, filed a
counterclaim for damages and averred that he refused to make further
payments because of petitioners’ failure to deliver to him a separate title in
the name of Julio Garcia.
On November 26, 1992, the trial court rendered a decision, the dispositive
portion of which reads:
into
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and
against the defendant decreeing the rescission of the "Kasunduan ng
Pagbibilihan" dated July 5, 1984 and ordering the defendant to return and
restore possession of the property subject of the Kasunduan ng
Pagbibilihan to the plaintiffs. For paucity of evidence, no judgment can be
rendered on the other reliefs prayed for in the complaint.
On the other hand, plaintiffs are hereby ordered to refund to the defendant
the downpayment of P65,000.00 and the partial payment of the balance
totaling to P58,500.00 plus legal interest. Defendant’s counterclaim is
hereby dismissed for lack of merit. Costs against defendant.5
In its decision, the trial court noted that proceedings for the issuance of a
separate title covering the property subject of sale entail time and the
parties could not have intended delivery by petitioners to respondent of a
separate title in the name of Julio Garcia as a condition for respondent’s
payment of the full purchase price within six months from the time of the
execution of the Kasunduan. Said court observed that even if petitioners
were obliged to deliver a separate title in the name of Julio Garcia to
respondent, the latter appeared to have insufficient funds to settle his
obligation as indicated by the fact that his payments amounting to
P58,500.00 were made in "trickles," having been given on thirty-nine
occasions within a span of two years from the time of the execution of
the Kasunduan. It concluded that respondent refused to complete
payment of the full purchase price not because of the failure of petitioners
to deliver a separate title in the name of Julio Garcia but because
respondent simply did not have sufficient funds at hand.
The Court of Appeals, however, noting that the Kasunduan made no
reference to TCT No. RT-1076, reversed the decision of the trial court, and
dismissed the complaint. The appellate court opined that the parties
intended to refer to a separate title over the 21,460 square meter lot when
the Kasunduan mentioned a "kaukulang titulo ng lupang nabanggit" since
it was the portion which was covered by a separate tax declaration in the
name of Julio Garcia and it was the portion that petitioners could sell. The
appellate court noted that the actuations of the parties subsequent to the
execution of the Kasunduan confirmed respondent’s claim that a separate
title to the property subject of the Kasunduan should be delivered to him.
Nevertheless, respondent’s counterclaim for damages was dismissed on
the ground that the filing of the complaint for rescission was not attended
by malice, there being an honest difference of opinion between the parties
as to the interpretation of the Kasunduan.
Feeling aggrieved by the aforesaid decision, petitioners filed before us the
instant petition for certiorari, raising issues which may essentially be
summarized as follows: (1) whether payment of the balance of the
purchase price is conditioned upon delivery of a separate title in the name
of Julio Garcia; (2) whether petitioners are entitled to rescind
the Kasunduan for failure of respondent to complete payment of the

purchase price; and (3) whether the Court of Appeals should have
dismissed respondent’s appeal for failure to comply with Circular
28-91.
Petitioners contend that the Kasunduan never made a reference to
a "title in the name of Julio Garcia" and that there was nothing in
the actuations of the parties which would indicate that full payment
of the purchase price is conditioned upon the delivery to
respondent of said title. Petitioners allege that respondent refused
to give further payments not because of their failure to deliver a
separate title in the name of Julio Garcia but because he simply did
not have sufficient funds to complete payment of the purchase
price. Petitioners ask for rescission of the Kasunduan pursuant to
Article 1191 of the Civil Code on the ground that respondent failed
to complete payment of the purchase price. They further aver that
the appellate court should have dismissed respondent’s appeal in
the first place for failure of respondent to comply with Circular No.
28-916 requiring parties to submit a certification of non-forum
shopping in petitions filed before the Supreme Court and the Court
of Appeals. Petitioners lament that although they raised the issue
regarding respondent’s procedural lapse early on at the appellate
court, the latter still entertained respondent’s appeal.
As a rule, our jurisdiction in cases brought before us from the Court
of Appeals under Rule 45 of the Rules of Court is limited to
reviewing errors of law. Factual findings of the appellate court are
generally binding on us.7 However, this principle is subject to
certain exceptions such as the situation in this case where the trial
court and the appellate court arrived at diverse factual findings.8
The subject of conflicting interpretations between the parties
pertains to the provision in the Kasunduan which states:
(1) Na pinatutunayan ng UNANG BAHAGI na tinanggap nila sa
buong kasiyahan ng kalooban buhat sa IKALAWANG BAHAGI ang
halagang ANIMNAPU AT LIMANG LIBO (P65,000.00) PISO,
Salaping Pilipino, bilang paunang bayad, at ang nalalabing
WALUMPU AT LIMANG LIBONG (85,000.00) PISO ay babayaran
ng IKALAWANG BAHAGI sa UNANG BAHAGI sa loob ng anim na
buwan simula sa takda ng kasulatang ito, sa pasubali na ang
kaukulang titulo ng lupang nabanggit ay maipagkakaloob ng
UNANG BAHAGI sa IKALAWANG BAHAGI"
Petitioners allege that the kaukulang titulo ng lupang
nabanggit refers to TCT No. RT-1076 and not to a separate title in
the name of Julio Garcia. Petitioners stress the implausibility of
delivering the separate title to respondent within six (6) months
from the time of the execution of the Kasunduan considering that
issuance of the title required prior settlement of the estates of
Francisco Alibudbud, Vicente de Guzman and Enrique Hemedes;
partition of Lot 1642; and segregation of the portion pertaining to
the share acquired by Julio Garcia. Respondent, for his part, insists
that the kaukulang titulo ng lupang nabanggit refers to a separate
title in the name of Julio Garcia. He argues that he only acceded to
the Kasunduan upon having been assured by petitioners that they
would be able to deliver to him a separate title in the name of Julio
Garcia. Petitioners allegedly told respondent that there was a
pending petition in the court of Biñan for the issuance of a separate
title to the subject property.9
It is basic in the interpretation and construction of contracts that the
literal meaning of the stipulations shall control if the terms of the
contract are clear and leave no doubt on the intention of the
contracting parties. However, if the terms of the agreement are
ambiguous, resort is made to contract interpretation which is the
determination of the meaning attached to written or spoken words
that make the contract.10 To ascertain the true intention of the
parties, their subsequent or contemporaneous actions must be
principally considered.
97
The tenor of the correspondence between petitioners and respondent
shows that the parties intended that a separate title to the property in the
name of Julio Garcia shall be delivered to respondent as a condition for
the latter’s payment of the balance of the purchase price. Thus, petitioner
Juana Almira’s letter dated July 24, 1986 to respondent reads:
Ang totoo po ngayon ay kailangan naming ang halagang LABING
LIMANG LIBO (P15,000.00) PISO, yan po ang dahilan kung bakit kami ay
sumulat sa inyo, sapagkat sa mga unang naghawak at nag-ayos ng
papeles ng lupang ito ay hindi nila naayos at hindi nila natapos, kaya po
kami ay nakakita at malaki po ang nagastos naming sa una na walang
nangyari, kaya nga itong huli ay lalong lumaki
Unawain po naman ninyo kami sa halagang kailangan naming para sa
huling gumagawa ng Titulo ng lupa para naman po maayos na ito. 11
Respondent signified his willingness to pay the balance of the purchase
price but reminded petitioners of their obligation to deliver title to the
property in the following reply:
Hindi lingid sa inyong kaalaman na sa ilalim ng naubit na "Kasunduan ng
Pagbibilihan" ay maliwanag ang inyong tungkulin na ipagkaboob sa amin
ang kaukulang titulo ng lupa sa boob ng anim (6) na buwan simula sa
takda ng nasabing kasulatan at kami naman ay nahahandang magbayad
ng lahat ng nalababing kabayaran x x x at tuwing kayo ay kukuha ng pera
ang lagi niyong idinadahilan ay ang diumano ay paglalakad tungkol sa
titulo. x x x12
Had the parties intended that petitioners deliver TCT No. RT-1076 instead
of a separate title in the name of Julio Garcia to respondent, then there
would have been no need for petitioners to ask for partial sums on the
ground that this would be used to pay for the processing of the title to the
property. Petitioners had only to present the existing title, TCT No.
RT-1076, to respondent and demand the balance of the purchase price.
This, petitioners did not do. Instead, they were content to ask small sums
from respondent on thirty-nine occasions for two years before filing an
action in court for rescission of the Kasunduan another five years later. It
is readily discernible from the tenor of various receipts13 issued by
petitioners that the sums given by respondent on these thirty-nine
occasions were made upon request of petitioners seeking respondent’s
indulgence. A letter14 dated October 11, 1984 and addressed to
respondent’s father, Tata Omy, whom respondent authorized to give
payments during the time he was working abroad reads:
Tata Omy,
Ako si Rogelio A. Garcia ang sumulat nito at ang maydala ay si Rolando
Garcia na kapatid kong bunso at ito ay pinagawa ng aking ina si Juana
Garcia. Ang dahilan ay mayroon silang nabiling t.v. 17 inches at ngayon
ay naririto sa amin. Kaya ako ay labis na nahihiya sa inyo ni Viring ngunit
ano ang magagawa ko para diyan kaya kayo na ang bahalang
magpasensiya sa amin. Ang kailangan nila ay halagang P800.00 at para
mabili nila ang T. V. + P200.00
Ang gumagalang,
(Sgd.) Rogelio Garcia
Received: P1,000.00
By( Sgd). Rosita Garcia
There is thus no basis to conclude that insufficiency of funds rather than
failure of petitioners to deliver a separate title in the name of Julio Garcia
prevented respondent from completing payment of the purchase price.

That the parties agreed on delivery of a separate title in the name
of Julio Garcia as a condition for respondent’s payment of the
balance of the purchase price is bolstered by the fact that there
was already an approved subdivision plan of the 21,460
square-meter lot years before petitioners filed an action in court for
rescission.15 The parties evidently assumed petitioners would be
able to deliver a separate title in the name of Julio Garcia to
respondent within six (6) months from the time of the execution of
the Kasunduan since there was already a pending petition in court
for the issuance of a separate title to 21,460 square-meter lot at
that time. Unfortunately, the petitioners were not able to secure a
separate title in the name of Julio Garcia within the stipulated
period.
Finally, we note that, as quoted earlier, the Kasunduan itself in its
opening paragraph refers to the subject property being sold as
"buong lawak na 21,640 metrong parisukat, x x x at sa kasalukuyan
may nabibinbing kahilingan sa hukuman upang magkaroon ng
sariling titulo; x x x." The next paragraph of the Kasunduan,
therefore, which speaks of "ang kaukulang titulo sa lupang
nabanggit," clearly refers to the separate title being applied for,
even without resort to extraneous evidence.
Petitioners, however, insist that it was respondent’s counsel who
prepared the Kasunduan and any ambiguity therein should be
construed against respondent pursuant to Article 1377 of the Civil
Code which states that the interpretation of obscure words or
stipulations in a contract shall not favor the party who caused the
obscurity.
We find no reason to apply Article 1377 of the Civil Code in this
case where the evident intention of the parties can be readily
discerned by their subsequent and contemporaneous acts. While it
is true that the Kasunduan was prepared by the counsel of
respondent, there is no indication that respondent took unfair
advantage of petitioners when he had the terms of
the Kasunduan drawn by his counsel. Petitioners freely assented to
the Kasunduan which is written entirely in a language spoken and
understood by both parties. That petitioners were fully aware of the
terms of the Kasunduan is evidenced by their attempts to comply
with their obligation by securing a subdivision plan and technical
description16 of the property subject of sale.
Having ruled that the kaukulang titulo ng lupang nabanggit refers to
a separate title in the name of Julio Garcia, we proceed to the issue
as to whether petitioners may rescind the Kasunduan pursuant to
Article 1191 of the Civil Code for failure of respondent to give full
payment of the balance of the purchase price.
The rights of the parties are governed by the terms and the nature
of the contract they enter into. Hence, although the nature of
the Kasunduan was never placed in dispute by both parties, it is
necessary to ascertain whether the Kasunduan is a contract to sell
or a contract of sale before the issue as to whether petitioners may
ask for rescission of the contract may be resolved. In a contract to
sell, ownership is, by agreement, reserved to the vendor and is not
to pass until full payment of the purchase price; whereas, in
contract of sale, title to the property passes to the vendee upon
delivery of the thing sold.17 Non-payment by the vendee in a
contract of sale entitles the vendor to demand specific performance
or rescission of the contract, with damages, under Article 1191 of
the Civil Code.
Although both parties have consistently referred to
the Kasunduan as a contract to sell, a careful reading of the
provisions of the Kasunduan reveals that it is a contract of sale. A
deed of sale is absolute in nature in the absence of any stipulation
reserving title to the vendor until full payment of the purchase price.
In such cases ownership of the thing sold passes to the vendee
upon actual or constructive delivery thereof.18 There is nothing in
98
the Kasunduan which expressly provides that petitioners retain title or
ownership of the property, until full payment of the purchase price. The
absence of such stipulation in the Kasunduan coupled with the fact that
respondent took possession of the property upon the execution of
the Kasunduan indicate that the parties have contemplated a contract of
absolute sale.
Stated otherwise, there was a perfected contract of sale. The parties
agreed on the sale of a determinate object, i.e., 21, 460 square meters of
Lot 1642, covered by a tax declaration in the name of Julio Garcia, and the
price certain therefor, without any reservation of title on the part of
petitioners. Ownership was effectively conveyed by petitioners to
respondent, who was given possession of the property. The delivery of a
separate title in the name of Julio Garcia was a condition imposed on
respondent’s obligation to pay the balance of the purchase price. It was
not a condition imposed on the perfection of the contract of sale.
In Laforteza v. Machuca,19 we stated that the fact that the obligation to pay
the balance of the purchase price was made subject to the condition that
the seller first deliver the reconstituted title of the property does not make
the agreement a contract to sell for such condition is not inconsistent with
a contract of sale.
Addressing now the issue as to whether rescission of the Kasunduan by
petitioners may prosper, we rule in the negative. The power to rescind is
only given to the injured party. The injured party is the party who has
faithfully fulfilled his obligation or is ready and willing to perform with his
obligation. In the case at bar, petitioners were not ready, willing and able
to comply with their obligation to deliver a separate title in the name of
Julio Garcia to respondent. Therefore, they are not in a position to ask for
rescission of the Kasunduan. Moreover, respondent’s obligation to pay the
balance of the purchase price was made subject to delivery by petitioners
of a separate title in the name of Julio Garcia within six (6) months from
the time of the execution of the Kasunduan, a condition with which
petitioners failed to comply. Failure to comply with a condition imposed on
the performance of an obligation gives the other party the option either to
refuse to proceed with the sale or to waive that condition under Article
1545 of the Civil Code.20 Hence, it is the respondent who has the option
either to refuse to proceed with the sale or to waive the performance of the
condition imposed on his obligation to pay the balance of the purchase
price.
It follows that, not having established that they were ready, able and
willing to comply with their obligation to deliver to respondent a separate
title in the name of Julio Garcia, petitioners may not ask for rescission of
the Kasunduannor recover damages.
As regards the issue that the appellate court should have dismissed
respondent’s appeal for failure of respondent to comply with Circular No.
28-91 requiring the submission of a certificate of non-forum shopping in
petitions filed before us and the Court of Appeals, suffice it to say that
when technicality deserts its function of being an aid to justice, the courts
are justified in exempting from its operations a particular
case.21 Procedural rules are intended to insure the orderly conduct of
litigation, because of the higher objective they seek, which is to protect the
parties’ substantive rights.22
WHEREFORE, the petition is DENIED and the decision rendered by the
Court of Appeals in CA G.R. No. 40954 entitled, "Juana Almira, et al.,
plaintiffs-appellees v. Federico Briones, defendant-appellant" is
AFFIRMED. No costs.
SO ORDERED.
Davide, Jr., C.J. (Chairman), Vitug, and Carpio, JJ., concur.
Ynares-Santiago, J., on leave.
G.R. No. 165168 July 9, 2010

SPS. NONILON (MANOY) and IRENE
MONTECALVO, Petitioners,
vs.
HEIRS (Substitutes) OF EUGENIA T. PRIMERO, represented by
their Attorney-in-Fact, ALFREDO T. PRIMERO,
JR., Respondents.
DECISION
DEL CASTILLO, J.:
Jurisprudence is replete with rulings that in civil cases, the party
who alleges a fact has the burden of proving it. Burden of proof is
the duty of a party to present evidence on the facts in issue
necessary to prove the truth of his claim or defense by the amount
of evidence required by law.11 In this case, the petitioners awfully
failed to discharge their burden to prove by preponderance of
evidence that the Agreement they entered into with respondents'
predecessor-in-interest is a contract of sale and not a mere
contract to sell, or that said Agreement was novated after the latter
subsequently entered into an oral contract of sale with them over a
determinate portion of the subject property more than a decade
ago.
Petitioners filed this appeal from the Decision of the Court of
Appeals (CA) affirming the Regional Trial Court's (RTC's) dismissal
of their action for specific performance where they sought to
compel the respondents to convey the property subject of their
purported oral contract of sale.
Factual Antecedents
The property involved in this case is a portion of a parcel of land
known as Lot No. 263 located at Sabayle Street, Iligan City. Lot No.
263 has an area of 860 square meters covered by Original
Certificate of Title (OCT) No. 0-2712registered in the name of
Eugenia Primero (Eugenia), married to Alfredo Primero, Sr.
(Alfredo).
In the early 1980s, Eugenia leased the lot to petitioner Irene
Montecalvo (Irene) for a monthly rental of ₱500.00. On January 13,
1985, Eugenia entered into an un-notarized Agreement3 with Irene,
where the former offered to sell the property to the latter for
₱1,000.00 per square meter. They agreed that Irene would deposit
the amount of ₱40,000.00 which shall form part of the down
payment equivalent to 50% of the purchase price. They also
stipulated that during the term of negotiation of 30 to 45 days from
receipt of said deposit, Irene would pay the balance of ₱410,000.00
on the down payment. In case Irene defaulted in the payment of the
down payment, the deposit would be returned within 10 days from
the lapse of said negotiation period and the Agreement deemed
terminated. However, if the negotiations pushed through, the
balance of the full value of ₱860,000.00 or the net amount of
₱410,000.00 would be paid in 10 equal monthly installments from
receipt of the down payment, with interest at the prevailing rate.
Irene failed to pay the full down payment within the stipulated
30-45-day negotiation period. Nonetheless, she continued to stay
on the disputed property, and still made several payments with an
aggregate amount of ₱293,000.00. On the other hand, Eugenia did
not return the ₱40,000.00 deposit to Irene, and refused to accept
further payments only in 1992.
Thereafter, Irene caused a survey of Lot No. 263 and the
segregation of a portion equivalent to 293 square meters in her
favor. However, Eugenia opposed her claim and asked her to
vacate the property. Then on May 13, 1996, Eugenia and the heirs
of her deceased husband Alfredo filed a complaint for unlawful
99
detainer against Irene and her husband, herein petitioner Nonilon
Montecalvo (Nonilon) before the Municipal Trial Court (MTC) of Iligan City.
During the preliminary conference, the parties stipulated that the issue to
be resolved was whether their Agreement had been rescinded and
novated. Hence, the MTC dismissed the case for lack of jurisdiction since
the issue is not susceptible of pecuniary estimation. The MTC's Decision
dismissing the ejectment case became final as Eugenia and her children
did not appeal therefrom.4
On June 18, 1996, Irene and Nonilon retaliated by instituting Civil Case No.
II-3588 with the RTC of Lanao del Norte for specific performance, to
compel Eugenia to convey the 293-square meter portion of Lot No. 263.5
Proceedings before the Regional Trial Court
Trial on the merits ensued and the contending parties adduced their
respective testimonial and documentary evidence before the trial court.
Irene testified that after their Agreement for the purpose of negotiating the
sale of Lot No. 263 failed to materialize, she and Eugenia entered into an
oral contract of sale and agreed that the amount of ₱40,000.00 she earlier
paid shall be considered as down payment. Irene claimed that she made
several payments amounting to ₱293,000.00 which prompted Eugenia's
daughters Corazon Calacat (Corazon) and Sylvia Primero (Sylvia) to ask
Engr. Antonio Ravacio (Engr. Ravacio) to conduct a segregation survey
on the subject property. Thereafter, Irene requested Eugenia to execute
the deed of sale, but the latter refused to do so because her son, Atty.
Alfredo Primero, Jr. (Atty. Primero), would not agree.
On March 22, 1999, herein respondents filed with the court a quo a
"Notice of Death of the Defendant"6 manifesting that Eugenia passed
away on February 28, 1999 and that the decedent's surviving legal heirs
agreed to appoint their co-heir Atty. Primero, to act as their representative
in said case. In an Order7 dated April 8, 1999, the trial court substituted the
deceased defendant with Atty. Primero.
Respondents, on the other hand, presented the testimony of Atty. Primero
to establish that Eugenia could not have sold the disputed portion of Lot
No. 263 to the petitioners. According to Atty. Primero, at the time of the
signing of the Agreement on January 13, 1985, Eugenia's husband,
Alfredo, was already dead. Eugenia merely managed or administered the
subject property and had no authority to dispose of the same since it was
a conjugal property. In addition, respondents asserted that the deposit of
₱40,000.00 was retained as rental for the subject property.
Respondents likewise presented Sylvia, who testified that the receipts
issued to petitioners were for the lot rentals.8Another sister of Atty.
Primero, Corazon, testified that petitioners were their tenants in subject
land, which she co-owns with her mother Eugenia.9 She denied having
sold the purported 293-square meter portion of Lot No. 263 to the
petitioners.10
As rebuttal witness, petitioners presented Engr. Ravacio, a surveyor who
undertook the segregation of the 293-square meter portion out of the
subject property.11
On October 22, 2001, the RTC rendered a Decision: 12 (1) dismissing the
complaint and the counterclaim for lack of legal and factual bases; (2)
ordering petitioners to pay respondents ₱2,500.00 representing rentals
due, applying therefrom the amount deposited and paid; and (3) ordering
petitioner to pay 12% legal interest from finality of decision until full
payment of the amount due.13
Aggrieved, petitioners appealed the Decision of the trial court to the CA.
Proceedings before the Court of Appeals

Both parties filed their respective briefs before the appellate
court.14 Thereafter, on November 28, 2003, the CA rendered a
Decision15 affirming the RTC Decision.16
Petitioners timely filed a Motion for Reconsideration. 17 However, in
a Resolution18 dated June 27, 2004, the CA resolved to deny the
same for lack of merit.19
Issues
Petitioners thus filed this Petition for Review on Certiorari anchored
on the following grounds.
1. WHETHER AN ORAL CONTRACT OF SALE OF A PORTION
OF [A] LOT IS BINDING [UPON] THE SELLER.
2. WHETHER A SELLER IN AN ORAL CONTRACT OF SALE OF
A PORTION OF [A] LOT CAN BE COMPELLED TO EXECUTE
THE REQUIRED DEED OF SALE AFTER THE AGREED
CONSIDERATION WAS PAID AND POSSESSION THEREOF
DELIVERED TO AND ENJOYED BY THE BUYER.
3. WHETHER THE BUYER HAS A RIGHT TO ENFORCE AN
ORAL CONTRACT OF SALE AFTER THE PORTION SOLD IS
SEGREGATED BY AGREEMENT OF THE PARTIES.
4. WHETHER THE SELLER IS BOUND BY THE HANDWRITTEN
RECEIPTS PREPARED AND SIGNED BY HER EXPRESSLY
INDICATING PAYMENTS OF LOTS.
5. WHETHER THE TRIAL COURT COULD RENDER A
JUDGMENT ON ISSUES NOT DEFINED IN THE PRE-TRIAL
ORDER.
Our Ruling
The petition lacks merit.
The Agreement dated January 13, 1985 is a contract to sell. Hence,
with petitioners' non-compliance with its terms and conditions, the
obligation of the respondents to deliver and execute the
corresponding deed of sale never arose.
The CA found that the Agreement dated January 13, 1985 is not a
contract of sale but a mere contract to sell, the efficacy of which is
dependent upon the resolutory condition that Irene pay at least
50% of the purchase price as down payment within 30-45 days
from the day Eugenia received the ₱40,000.00
deposit.20 Said court further found that such condition was
admittedly not met.21
Petitioners admit that the Agreement dated January 13, 1985 is at
most, "a preliminary agreement for an eventual
contract."22 However, they argue that contrary to the findings of the
appellate court, it was not only the buyer, Irene, who failed to meet
the condition of paying the balance of the 50% down
payment.23 They assert that the Agreement explicitly required
Eugenia to return the deposit of ₱40,000.00 within 10 days, in case
Irene failed to pay the balance of the 50% down payment within the
stipulated period.24 Thus, petitioners posit that for the cancellation
clause to operate, two conditions must concur, namely, (1) buyer
fails to pay the balance of the 50% down payment within the
agreed period and (2) seller should return the deposit of
₱40,000.00 within 10 days if the first condition was not complied
with. Petitioners conclude that since both seller and buyer failed to
100
discharge their reciprocal obligations, being in pari delictu, the seller could
not repudiate their agreement to sell.
The petitioners' contention is without merit.
There is no dispute as to the due execution and existence of the
Agreement. The issue thus presented is whether the said Agreement is a
contract of sale or a contract to sell. For a better understanding and
resolution of the issue at hand, it is apropos to reproduce herein the
Agreement in haec verba:
Agreement
This Agreement, made and executed by and
between:
EUGENIA T. PRIMERO, a Filipino of legal age and
residing in Camague, Iligan City (hereinafter called
the OWNER)
- and -
IRENE P. MONTECALVO, Filipino of legal age and
presently residing at Sabayle St., Iligan City
(hereinafter [called] the INTERESTED PARTY);
WITNESSETH:
1. That the OWNER is the true and absolute owner of
a parcel of land located at Sabayle St. immediately
fronting the St. Peter's College which is presently
leased to the INTERESTED PARTY;
2. That the property referred to contains an area of
EIGHT HUNDRED SIXTY SQUARE METERS at the
value of One Thousand Pesos (₱1,000.00) per
square meters;
3. That this agreement is entered into for the purpose
of negotiating the sale of the above referred property
between the same parties herein under the following
terms and conditions, to wit:
a) That the term of this negotiation is for a period of
Thirty to Forty Five (30-45) days from receipt of a
deposit;
b) That Forty Thousand Pesos (₱40,000.00) shall be
deposited to demonstrate the interest of the
Interested Party to acquire the property referred to
above, which deposit shall not earn any interest;
c) That should the contract or agreement push
through the deposit shall form part of the down
payment of Fifty percent (50%) of the total or full
value. Otherwise the deposit shall be returned within
TEN (10) days from the lapse of the period of
negotiation;
4. That should this push through, the balance of Four
Hundred Ten Thousand on the down payment shall
be made upon execution of the Agreement to Sell and
the balance of the full value of Eight Hundred Sixty
Thousand or Four Hundred Ten Thousand Pesos
shall be paid in equal monthly installment within Ten

(10) months from receipt of the down payment
with [sic] according to prevailing interest.
IN WITNESS WHEREOF, the parties have
signed these presents in the City of Iligan this
13th day of January 1985.
(Signed) (Signed)
IRENE PEPITO EUGENIA TORRES
MONTECALVO PRIMERO
SIGNED IN THE PRESENCE OF:
(Signed) (Signed)
In Salazar v. Court of Appeals,25 we distinguished a contract of sale
from a contract to sell in that in a contract of sale the title to the
property passes to the buyer upon the delivery of the thing sold; in
a contract to sell, ownership is, by agreement, reserved in the seller
and is not to pass to the buyer until full payment of the purchase
price. Otherwise stated, in a contract of sale, the seller loses
ownership over the property and cannot recover it until and unless
the contract is resolved or rescinded; whereas, in a contract to sell,
title is retained by the seller until full payment of the price.26 In the
latter contract, payment of the price is a positive suspensive
condition, failure of which is not a breach but an event that prevents
the obligation of the vendor to convey title from becoming
effective.27
In the Agreement, Eugenia, as owner, did not convey her title to the
disputed property to Irene since the Agreement was made for the
purpose of negotiating the sale of the 860-square meter property.28
On this basis, we are more inclined to characterize the agreement
as a contract to sell rather than a contract of sale. Although not by
itself controlling, the absence of a provision in the Agreement
transferring title from the owner to the buyer is taken as a strong
indication that the Agreement is a contract to sell.29
In a contract to sell, the prospective seller explicitly reserves the
transfer of title to the prospective buyer, meaning, the prospective
seller does not as yet agree or consent to transfer ownership of the
property subject of the contract to sell until the happening of an
event, which for present purposes we shall take as the full payment
of the purchase price.30 What the seller agrees or obliges himself to
do is to fulfill his promise to sell the subject property when the entire
amount of the purchase price is delivered to him. 31 In other words,
the full payment of the purchase price partakes of a suspensive
condition, the non-fulfillment of which prevents the obligation to sell
from arising and thus, ownership is retained by the prospective
seller without further remedies by the prospective buyer. 32 A
contract to sell is commonly entered into in order to protect the
seller against a buyer who intends to buy the property in installment
by withholding ownership over the property until the buyer effects
full payment therefor.33
In this case, the Agreement expressly provided that it was "entered
into for the purpose of negotiating the sale of the above referred
property between the same parties herein x x x." The term of the
negotiation shall be for a period of 30-45 days from receipt of the
₱40,000.00 deposit and the buyer has to pay the balance of the
50% down payment amounting to ₱410,000.00 within the said
period of negotiation. Thereafter, an Agreement to Sell shall be
executed by the parties and the remainder of the purchase price
101
amounting to another ₱410,000.00 shall be paid in 10 equal monthly
installments from receipt of the down payment. The assumption of both
parties that the purpose of the Agreement was for negotiating the sale of
Lot No. 263, in its entirety, for a definite price, with a specific period for
payment of a specified down payment, and the execution of a subsequent
contract for the sale of the same on installment payments leads to no other
conclusion than that the predecessor-in-interest of the herein respondents
and the herein petitioner Irene entered into a contract to sell.
As stated in the Agreement, the payment of the purchase price, in
installments within the period stipulated, constituted a positive suspensive
condition, the failure of which is not really a breach but an event that
prevents the obligation of the seller to convey title in accordance with
Article 1184 of the Civil Code.34 Hence, for petitioners' failure to comply
with the terms and conditions laid down in the Agreement, the obligation of
the predecessor-in-interest of the respondents to deliver and execute the
corresponding deed of sale never arose.
The fact that the predecessor-in-interest of the respondents failed to return
the ₱40,000.00 deposit subsequent to the expiration of the period of
negotiation did not prevent the respondents from repudiating the
Agreement. The obligation of the respondent to convey the property never
came to pass as the petitioners did not comply with the positive
suspensive condition of full payment of the purchase price within the
period as stipulated.
The alleged oral contract of sale for the 293-square meter portion of the
property was not proved by preponderant evidence. Hence, petitioners
cannot compel the successors-in-interest of the deceased Eugenia to
execute a deed of absolute sale in their favor.
Petitioners alleged in their Complaint that in 1992, Eugenia refused to
accept further payments and suggested that she will convey to petitioners
293 square meters of her 860-square meter property, in proportion to
payments already made. Thus, Eugenia caused the segregation of the
area where the petitioners' building now stands, consisting of 293 square
meters.1avvphi1
In support of their contention, petitioners presented the testimony of Irene,
who testified that Eugenia segregated for them an area of 293 square
meters for the agreed price of ₱1,000.00 per square meter. 35 The total
purchase price allegedly agreed upon by the parties, amounting to
₱293,000.00, corresponded to the amount of payments already made by
Irene.36 They likewise presented (1) 82 receipts covering the period
October 13, 1986 to July 10, 1994;37(2) the testimony of the surveyor, Engr.
Ravacio, to show that the segregation survey of the 293-square meter
portion of the property was made with the knowledge and consent of
Eugenia; and (3) the resulting subdivision plan.
On the other hand, respondents counter that the alleged contract of sale is
contradicted by petitioners' own evidence.
We cannot sustain the contention of the petitioners. The primal issue to be
resolved is whether the parties subsequently entered into a contract of
sale over the segregated 293-square meter portion of Lot No. 263. It is a
fundamental principle that for a contract of sale to be valid, the following
elements must be present: (a) consent or meeting of the minds; (b)
determinate subject matter; and (3) price certain in money or its
equivalent.38 Until the contract of sale is perfected, it cannot, as an
independent source of obligation, serve as a binding juridical relation
between the parties.39
Contrary to petitioners' allegations that the 82 receipts indicated that they
were issued "for payment of lot (at Sabayle)",40 a cursory examination
thereof shows that the receipts from 1986 to 1992 do not consistently
indicate "Sabayle Lot" or "Sabayle Lot Deposit". More than half of the
receipts presented merely indicated receipt of differing sums of money
from the petitioners. In addition, the receipts for the years 1993 to 1994 do
not establish installment payments for the purchase of the disputed portion
 102

of Lot No. 263. Rather, the receipts indicate that the same were assessment by the trial court of the area where the property is located is
issued as proof of "cash advance",41 "cash for groceries, electric bill, therefore fairly grounded.
water bill, telephone/long distance",42"cash",43 "cash for
mktg"44 and "x x x cash to be paid a month after". 45 These are not
Furthermore, the trial court also had factual basis in arriving at the said
consistent with the allegation of the petitioners that they have paid
conclusion, the same being based on the un-rebutted testimony of a
the full amount of the purchase price for the 293-square meter
witness who is a real estate broker. With respect to the prevailing
portion of the lot by 1992.
valuation of the property in litigation, witness Atty. Primero, a licensed real
estate broker testified that:
Moreover, the testimony of petitioners' witness, surveyor Engr.
Ravacio, shows that Eugenia was neither around when the survey
x x x There is no fixed pricing for each year because it always depends on
was conducted nor gave her express consent to the conduct of the
the environment so that if the price in 1986, as you were referring to 1986,
same.46 On the other hand, respondents' witness, Sylvia, testified
it would have risen or increased from ₱1,000.00, then it would increase to
that the receipts issued to the petitioners were for the lot
₱3,000.00, then it would increase to ₱7,000.00 and again increase to
rentals.47 In addition, respondents' third witness, Corazon, testified
₱15,000.00 and right now the current price of property in that area is
that petitioners were their tenants in subject land, which she
₱25,000.00 per square meter.55
co-owns with her mother Eugenia, and disclaimed any sale of any
portion of their lot to the petitioners.48
The RTC rightly modified the rental award to ₱2,500.00 per month,
considering that it is settled jurisprudence that courts may take judicial
Thirdly, since the surveyor himself, Engr. Ravacio, admitted that
notice of the general increase in rentals, particularly in business
Eugenia did not give her express consent to the conduct of the
establishments.
segregation plan, the resulting subdivision plan, submitted by the
petitioners to the trial court to prove that Eugenia caused the
segregation of the 293-square meter area, cannot be appreciated. WHEREFORE, the petition is DENIED. The November 28, 2003 Decision
of the Court of Appeals affirming the October 22, 2001 Decision of the
Regional Trial Court of Lanao del Norte, Branch 2, is hereby AFFIRMED.
Section 1 of Rule 133 of the Rules of Court provides that in civil
cases, the party having the burden of proof must establish his case
by a preponderance of evidence. However, the evidence presented SO ORDERED.
by the petitioners, as considered above, fails to convince this Court
that Eugenia gave her consent to the purported oral deed of sale
for the 293-square meter portion of her property. We are hence in
agreement with the finding of the CA that there was no contract of
sale between the parties. As a consequence, petitioners cannot
rightfully compel the successors-in-interest of Eugenia to execute a
deed of absolute sale in their favor.

The courts below correctly modified the rental award to ₱2,500.00

per month.

Lastly, petitioners argue that the courts below erred in imposing a

₱2,500.00 monthly rental from 1985 onwards, since said amount is
far greater than the last agreed monthly rental (December 1984) of
₱500.00.

In its Decision, the CA affirmed the ruling of the RTC "that the trial
court had authority to fix a reasonable value for the continued use
and occupancy of the leased premises after the termination of the
lease contract, and that it was not bound by the stipulated rental in
the contract of lease since it is equally settled that upon termination
or expiration of the contract of lease, the rental stipulated therein
may no longer be the reasonable value for the use and occupation
of the premises as a result of the change or rise in values.
Moreover, the trial court can take judicial notice of the general
increase in rentals of real estate especially of business
establishments".49 The appellate court likewise held that the
petitioners failed to discharge their burden to show that the said
price was exorbitant or unconscionable.50 Hence, the CA found no
reason to disturb the trial court's decision ordering the petitioners to
pay ₱2,500.00 as monthly rentals.51 The appellate court further
held that "to deprive Eugenia of the rentals due her as the
owner-lessor of the subject property would result to unjust
enrichment on the part of Irene."52

The courts below correctly took judicial notice of the nature of the
leased property subject of the case at bench based on its location
and commercial viability. As described in the Agreement, the
property is immediately in front of St. Peter's College.53 More
significantly, it is stated in the Declaration of Real Property
submitted by the petitioners as evidence in the trial court, that the
property is used predominantly for commercial purposes. 54 The