1

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-11827 July 31, 1961

FERNANDO A. GAITE, plaintiff-appellee,

vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES & SMELTING CO., INC., SEGUNDINA VIVAS, FRNACISCO
DANTE, PACIFICO ESCANDOR and FERNANDO TY, defendants-appellants.

Alejo Mabanag for plaintiff-appellee.

Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-appellants.

REYES, J.B.L., J.:

This appeal comes to us directly from the Court of First Instance because the claims involved aggregate more than P200,000.00.

Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in a representative capacity, of 11 iron lode
mineral claims, known as the Dawahan Group, situated in the municipality of Jose Panganiban, province of Camarines Norte.

By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier constituted and appointed plaintiff-appellee Fernando
A. Gaite as his true and lawful attorney-in-fact to enter into a contract with any individual or juridical person for the exploration and
development of the mining claims aforementioned on a royalty basis of not less than P0.50 per ton of ore that might be extracted
therefrom. On March 19, 1954, Gaite in turn executed a general assignment (Record on Appeal, pp. 17-19) conveying the
development and exploitation of said mining claims into the Larap Iron Mines, a single proprietorship owned solely by and belonging
to him, on the same royalty basis provided for in Exhibit "3". Thereafter, Gaite embarked upon the development and exploitation of
the mining claims in question, opening and paving roads within and outside their boundaries, making other improvements and
installing facilities therein for use in the development of the mines, and in time extracted therefrom what he claim and estimated to
be approximately 24,000 metric tons of iron ore.

For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to Gaite to exploit and develop the
mining claims in question, and Gaite assented thereto subject to certain conditions. As a result, a document entitled "Revocation of
Power of Attorney and Contract" was executed on December 8, 1954 (Exhibit "A"),wherein Gaite transferred to Fonacier, for the
consideration of P20,000.00, plus 10% of the royalties that Fonacier would receive from the mining claims, all his rights and
interests on all the roads, improvements, and facilities in or outside said claims, the right to use the business name "Larap Iron
Mines" and its goodwill, and all the records and documents relative to the mines. In the same document, Gaite transferred to
Fonacier all his rights and interests over the "24,000 tons of iron ore, more or less" that the former had already extracted from the
mineral claims, in consideration of the sum of P75,000.00, P10,000.00 of which was paid upon the signing of the agreement, and

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid from and out of the first letter of credit
covering the first shipment of iron ores and of the first amount derived from the local sale of iron ore made by the Larap
Mines & Smelting Co. Inc., its assigns, administrators, or successors in interests.

To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor of Gaite a surety bond, and
pursuant to the promise, Fonacier delivered to Gaite a surety bond dated December 8, 1954 with himself (Fonacier) as principal and
the Larap Mines and Smelting Co. and its stockholders George Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante,
and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified, however, that when this bond was presented to him by Fonacier
together with the "Revocation of Power of Attorney and Contract", Exhibit "A", on December 8, 1954, he refused to sign said Exhibit
"A" unless another bond under written by a bonding company was put up by defendants to secure the payment of the P65,000.00
balance of their price of the iron ore in the stockpiles in the mining claims. Hence, a second bond, also dated December 8, 1954
(Exhibit "B"),was executed by the same parties to the first bond Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as
additional surety, but it provided that the liability of the surety company would attach only when there had been an actual sale of iron
ore by the Larap Mines & Smelting Co. for an amount of not less then P65,000.00, and that, furthermore, the liability of said surety
company would automatically expire on December 8, 1955. Both bonds were attached to the "Revocation of Power of Attorney and
Contract", Exhibit "A", and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he gave to Gaite and the two executed and signed the "Revocation of
Power of Attorney and Contract", Exhibit "A", Fonacier entered into a "Contract of Mining Operation", ceding, transferring, and
conveying unto the Larap Mines and Smelting Co., Inc. the right to develop, exploit, and explore the mining claims in question,
together with the improvements therein and the use of the name "Larap Iron Mines" and its good will, in consideration of certain
royalties. Fonacier likewise transferred, in the same document, the complete title to the approximately 24,000 tons of iron ore which
he acquired from Gaite, to the Larap & Smelting Co., in consideration for the signing by the company and its stockholders of the
surety bonds delivered by Fonacier to Gaite (Record on Appeal, pp. 82-94).

Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far Eastern Surety and Insurance Company, no
sale of the approximately 24,000 tons of iron ore had been made by the Larap Mines & Smelting Co., Inc., nor had the P65,000.00
balance of the price of said ore been paid to Gaite by Fonacier and his sureties payment of said amount, on the theory that they had
lost right to make use of the period given them when their bond, Exhibit "B" automatically expired (Exhibits "C" to "C-24"). And when
Fonacier and his sureties failed to pay as demanded by Gaite, the latter filed the present complaint against them in the Court of First
Instance of Manila (Civil Case No. 29310) for the payment of the P65,000.00 balance of the price of the ore, consequential
damages, and attorney's fees.

All the defendants except Francisco Dante set up the uniform defense that the obligation sued upon by Gaite was subject to a
condition that the amount of P65,000.00 would be payable out of the first letter of credit covering the first shipment of iron ore and/or
the first amount derived from the local sale of the iron ore by the Larap Mines & Smelting Co., Inc.; that up to the time of the filing of
the complaint, no sale of the iron ore had been made, hence the condition had not yet been fulfilled; and that consequently, the
obligation was not yet due and demandable. Defendant Fonacier also contended that only 7,573 tons of the estimated 24,000 tons
of iron ore sold to him by Gaite was actually delivered, and counterclaimed for more than P200,000.00 damages.

At the trial of the case, the parties agreed to limit the presentation of evidence to two issues:

(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000.00 become due and demandable when the
defendants failed to renew the surety bond underwritten by the Far Eastern Surety and Insurance Co., Inc. (Exhibit "B"), which
expired on December 8, 1955; and

(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant Fonacier were actually in existence in the
mining claims when these parties executed the "Revocation of Power of Attorney and Contract", Exhibit "A."

On the first question, the lower court held that the obligation of the defendants to pay plaintiff the P65,000.00 balance of the price of
the approximately 24,000 tons of iron ore was one with a term: i.e., that it would be paid upon the sale of sufficient iron ore by
defendants, such sale to be effected within one year or before December 8, 1955; that the giving of security was a condition
precedent to Gait's giving of credit to defendants; and that as the latter failed to put up a good and sufficient security in lieu of the
Far Eastern Surety bond (Exhibit "B") which expired on December 8, 1955, the obligation became due and demandable under
Article 1198 of the New Civil Code.

As to the second question, the lower court found that plaintiff Gaite did have approximately 24,000 tons of iron ore at the mining
claims in question at the time of the execution of the contract Exhibit "A."

Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to pay him, jointly and severally, P65,000.00 with
interest at 6% per annum from December 9, 1955 until payment, plus costs. From this judgment, defendants jointly appealed to this
Court.

During the pendency of this appeal, several incidental motions were presented for resolution: a motion to declare the appellants
Larap Mines & Smelting Co., Inc. and George Krakower in contempt, filed by appellant Fonacier, and two motions to dismiss the
appeal as having become academic and a motion for new trial and/or to take judicial notice of certain documents, filed by appellee
Gaite. The motion for contempt is unmeritorious because the main allegation therein that the appellants Larap Mines & Smelting
Co., Inc. and Krakower had sold the iron ore here in question, which allegedly is "property in litigation", has not been substantiated;
and even if true, does not make these appellants guilty of contempt, because what is under litigation in this appeal is appellee
Gaite's right to the payment of the balance of the price of the ore, and not the iron ore itself. As for the several motions presented by
appellee Gaite, it is unnecessary to resolve these motions in view of the results that we have reached in this case, which we shall
hereafter discuss.

The main issues presented by appellants in this appeal are:

(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay appellee Gaite the P65,000.00 (balance of
the price of the iron ore in question)is one with a period or term and not one with a suspensive condition, and that the term expired
on December 8, 1955; and

(2) that the lower court erred in not holding that there were only 10,954.5 tons in the stockpiles of iron ore sold by appellee Gaite to
appellant Fonacier.
The first issue involves an interpretation of the following provision in the contract Exhibit "A":

7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F. Fonacier all his rights and interests over the
24,000 tons of iron ore, more or less, above-referred to together with all his rights and interests to operate the mine in
consideration of the sum of SEVENTY-FIVE THOUSAND PESOS (P75,000.00) which the latter binds to pay as follows:

a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing of this agreement.

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will be paid from and out of the first letter of credit
covering the first shipment of iron ore made by the Larap Mines & Smelting Co., Inc., its assigns, administrators, or
successors in interest.

We find the court below to be legally correct in holding that the shipment or local sale of the iron ore is not a condition precedent (or
suspensive) to the payment of the balance of P65,000.00, but was only a suspensive period or term. What characterizes a
conditional obligation is the fact that its efficacy or obligatory force (as distinguished from its demandability) is subordinated to the
happening of a future and uncertain event; so that if the suspensive condition does not take place, the parties would stand as if the
conditional obligation had never existed. That the parties to the contract Exhibit "A" did not intend any such state of things to prevail
is supported by several circumstances:

1) The words of the contract express no contingency in the buyer's obligation to pay: "The balance of Sixty-Five Thousand Pesos
(P65,000.00) will be paid out of the first letter of credit covering the first shipment of iron ores . . ." etc. There is no uncertainty that
the payment will have to be made sooner or later; what is undetermined is merely the exact date at which it will be made. By the
very terms of the contract, therefore, the existence of the obligation to pay is recognized; only its maturity or demandability is
deferred.

2) A contract of sale is normally commutative and onerous: not only does each one of the parties assume a correlative obligation
(the seller to deliver and transfer ownership of the thing sold and the buyer to pay the price),but each party anticipates performance
by the other from the very start. While in a sale the obligation of one party can be lawfully subordinated to an uncertain event, so
that the other understands that he assumes the risk of receiving nothing for what he gives (as in the case of a sale of hopes or
expectations, emptio spei), it is not in the usual course of business to do so; hence, the contingent character of the obligation must
clearly appear. Nothing is found in the record to evidence that Gaite desired or assumed to run the risk of losing his right over the
ore without getting paid for it, or that Fonacier understood that Gaite assumed any such risk. This is proved by the fact that Gaite
insisted on a bond a to guarantee payment of the P65,000.00, an not only upon a bond by Fonacier, the Larap Mines & Smelting
Co., and the company's stockholders, but also on one by a surety company; and the fact that appellants did put up such bonds
indicates that they admitted the definite existence of their obligation to pay the balance of P65,000.00.

3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or shipment of the ore as a condition precedent, would
be tantamount to leaving the payment at the discretion of the debtor, for the sale or shipment could not be made unless the
appellants took steps to sell the ore. Appellants would thus be able to postpone payment indefinitely. The desireability of avoiding
such a construction of the contract Exhibit "A" needs no stressing.

4) Assuming that there could be doubt whether by the wording of the contract the parties indented a suspensive condition or a
suspensive period (dies ad quem) for the payment of the P65,000.00, the rules of interpretation would incline the scales in favor of
"the greater reciprocity of interests", since sale is essentially onerous. The Civil Code of the Philippines, Article 1378, paragraph 1,
in fine, provides:

If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.

and there can be no question that greater reciprocity obtains if the buyer' obligation is deemed to be actually existing, with only its
maturity (due date) postponed or deferred, that if such obligation were viewed as non-existent or not binding until the ore was sold.

The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on credit, and not an aleatory contract
where the transferor, Gaite, would assume the risk of not being paid at all; and that the previous sale or shipment of the ore was not
a suspensive condition for the payment of the balance of the agreed price, but was intended merely to fix the future date of the
payment.

This issue settled, the next point of inquiry is whether appellants, Fonacier and his sureties, still have the right to insist that Gaite
should wait for the sale or shipment of the ore before receiving payment; or, in other words, whether or not they are entitled to take
full advantage of the period granted them for making the payment.

We agree with the court below that the appellant have forfeited the right court below that the appellants have forfeited the right to
compel Gaite to wait for the sale of the ore before receiving payment of the balance of P65,000.00, because of their failure to renew
the bond of the Far Eastern Surety Company or else replace it with an equivalent guarantee. The expiration of the bonding
company's undertaking on December 8, 1955 substantially reduced the security of the vendor's rights as creditor for the unpaid
P65,000.00, a security that Gaite considered essential and upon which he had insisted when he executed the deed of sale of the
ore to Fonacier (Exhibit "A"). The case squarely comes under paragraphs 2 and 3 of Article 1198 of the Civil Code of the
Philippines:

"ART. 1198. The debtor shall lose every right to make use of the period:

(1) . . .

(2) When he does not furnish to the creditor the guaranties or securities which he has promised.

(3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through
fortuitous event they disappear, unless he immediately gives new ones equally satisfactory.

Appellants' failure to renew or extend the surety company's bond upon its expiration plainly impaired the securities given to the
creditor (appellee Gaite), unless immediately renewed or replaced.

There is no merit in appellants' argument that Gaite's acceptance of the surety company's bond with full knowledge that on its face it
would automatically expire within one year was a waiver of its renewal after the expiration date. No such waiver could have been
intended, for Gaite stood to lose and had nothing to gain barely; and if there was any, it could be rationally explained only if the
appellants had agreed to sell the ore and pay Gaite before the surety company's bond expired on December 8, 1955. But in the
latter case the defendants-appellants' obligation to pay became absolute after one year from the transfer of the ore to Fonacier by
virtue of the deed Exhibit "A.".

All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in demanding payment and instituting this
action one year from and after the contract (Exhibit "A") was executed, either because the appellant debtors had impaired the
securities originally given and thereby forfeited any further time within which to pay; or because the term of payment was originally
of no more than one year, and the balance of P65,000.00 became due and payable thereafter.

Coming now to the second issue in this appeal, which is whether there were really 24,000 tons of iron ore in the stockpiles sold by
appellee Gaite to appellant Fonacier, and whether, if there had been a short-delivery as claimed by appellants, they are entitled to
the payment of damages, we must, at the outset, stress two things: first, that this is a case of a sale of a specific mass of fungible
goods for a single price or a lump sum, the quantity of "24,000 tons of iron ore, more or less," stated in the contract Exhibit "A,"
being a mere estimate by the parties of the total tonnage weight of the mass; and second, that the evidence shows that neither of
the parties had actually measured of weighed the mass, so that they both tried to arrive at the total quantity by making an estimate
of the volume thereof in cubic meters and then multiplying it by the estimated weight per ton of each cubic meter.

The sale between the parties is a sale of a specific mass or iron ore because no provision was made in their contract for the
measuring or weighing of the ore sold in order to complete or perfect the sale, nor was the price of P75,000,00 agreed upon by the
parties based upon any such measurement.(see Art. 1480, second par., New Civil Code). The subject matter of the sale is,
therefore, a determinate object, the mass, and not the actual number of units or tons contained therein, so that all that was required
of the seller Gaite was to deliver in good faith to his buyer all of the ore found in the mass, notwithstanding that the quantity
delivered is less than the amount estimated by them (Mobile Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171
So. 872, applying art. 2459 of the Louisiana Civil Code). There is no charge in this case that Gaite did not deliver to appellants all
the ore found in the stockpiles in the mining claims in questions; Gaite had, therefore, complied with his promise to deliver, and
appellants in turn are bound to pay the lump price.

But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not a definite mass, but approximately 24,000
tons of ore, so that any substantial difference in this quantity delivered would entitle the buyers to recover damages for the short-
delivery, was there really a short-delivery in this case?

We think not. As already stated, neither of the parties had actually measured or weighed the whole mass of ore cubic meter by cubic
meter, or ton by ton. Both parties predicate their respective claims only upon an estimated number of cubic meters of ore multiplied
by the average tonnage factor per cubic meter.

Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles of ore that he sold to Fonacier, while
appellants contend that by actual measurement, their witness Cirpriano Manlagit found the total volume of ore in the stockpiles to
be only 6.609 cubic meters. As to the average weight in tons per cubic meter, the parties are again in disagreement, with appellants
claiming the correct tonnage factor to be 2.18 tons to a cubic meter, while appellee Gaite claims that the correct tonnage factor is
about 3.7.

In the face of the conflict of evidence, we take as the most reliable estimate of the tonnage factor of iron ore in this case to be that
made by Leopoldo F. Abad, chief of the Mines and Metallurgical Division of the Bureau of Mines, a government pensionado to the
States and a mining engineering graduate of the Universities of Nevada and California, with almost 22 years of experience in the
Bureau of Mines. This witness placed the tonnage factor of every cubic meter of iron ore at between 3 metric tons as minimum to 5
metric tons as maximum. This estimate, in turn, closely corresponds to the average tonnage factor of 3.3 adopted in his corrected
report (Exhibits "FF" and FF-1") by engineer Nemesio Gamatero, who was sent by the Bureau of Mines to the mining claims
involved at the request of appellant Krakower, precisely to make an official estimate of the amount of iron ore in Gaite's stockpiles
after the dispute arose.

Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made by appellant's witness Cipriano Manlagit
is correct, if we multiply it by the average tonnage factor of 3.3 tons to a cubic meter, the product is 21,809.7 tons, which is not very
far from the estimate of 24,000 tons made by appellee Gaite, considering that actual weighing of each unit of the mass was
practically impossible, so that a reasonable percentage of error should be allowed anyone making an estimate of the exact quantity
in tons found in the mass. It must not be forgotten that the contract Exhibit "A" expressly stated the amount to be 24,000 tons, more
or less. (ch. Pine River Logging & Improvement Co. vs U.S., 279, 46 L. Ed. 1164).

There was, consequently, no short-delivery in this case as would entitle appellants to the payment of damages, nor could Gaite
have been guilty of any fraud in making any misrepresentation to appellants as to the total quantity of ore in the stockpiles of the
mining claims in question, as charged by appellants, since Gaite's estimate appears to be substantially correct.

WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same, with costs against appellants.

Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De Leon and Natividad, JJ., concur.
2
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

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
indicate that such a situation does exist. The juridical consequences must inevitably follow. We affirm.

It was shown that petitioner was assessed by the then Commissioner of Internal Revenue Melecio R. Domingo the
sum of P20,272.33 as the commercial broker's percentage tax, surcharge, and compromise penalty for the period
from July 1, 1949 to December 31, 1953. There was a request on the part of petitioner for the cancellation of such
assessment, which request was turned down. As a result, it filed a petition for review with the Court of Tax Appeals.
In its answer, the then Commissioner Domingo maintained his stand that petitioner should be taxed in such amount
as a commercial broker. In the decision now under review, promulgated on October 19, 1962, the Court of Tax
Appeals held petitioner taxable except as to the compromise penalty of P500.00, the amount due from it being fixed
at P19,772.33.

Such liability arose from a contract of petitioner with the United States Rubber International, the former being referred
to as the Distributor and the latter specifically designated as the Company. The contract was to apply to transactions
between the former and petitioner, as Distributor, from July 1, 1948 to continue in force until terminated by either
party giving to the other sixty days' notice. 2 The shipments would cover products "for consumption in Cebu, Bohol, Leyte,
Samar, Jolo, Negros Oriental, and Mindanao except [the] province of Davao", petitioner, as Distributor, being precluded from
disposing such products elsewhere than in the above places unless written consent would first be obtained from the
Company. 3 Petitioner, as Distributor, is required to exert every effort to have the shipment of the products in the maximum quantity
and to promote in every way the sale thereof. 4 The prices, discounts, terms of payment, terms of delivery and other conditions of
sale were subject to change in the discretion of the Company. 5

Then came this crucial stipulation: "The Company shall from time to time consign to the Distributor and the Distributor
will receive, accept and/or hold upon consignment the products specified under the terms of this agreement in such
quantities as in the judgment of the Company may be necessary for the successful solicitation and maintenance of
business in the territory, and the Distributor agrees that responsibility for the final sole of all goods delivered shall rest
with him. All goods on consignment shall remain the property of the Company until sold by the Distributor to the
purchaser or purchasers, but all sales made by the Distributor shall be in his name, in which the sale price of all
goods sold less the discount given to the Distributor by the Company in accordance with the provision of paragraph
13 of this agreement, whether or not such sale price shall have been collected by the Distributor from the purchaser
or purchasers, shall immediately be paid and remitted by the Distributor to the Company. It is further agreed that this
agreement does not constitute Distributor the agent or legal representative 4 of the Company for any purpose
whatsoever. Distributor is not granted any right or authority to assume or to create any obligation or responsibility,
express or implied, in behalf of or in the name of the Company, or to bind the Company in any manner or thing
whatsoever." 6

All specifications for the goods ordered were subject to acceptance by the Company with petitioner, as Distributor,
required to accept such goods shipped as well as to clear the same through customs and to arrange for delivery in its
warehouse in Cebu City. Moreover, orders are to be filled in whole or in part from the stocks carried by the
Company's neighboring branches, subsidiaries or other sources of Company's brands. 7 Shipments were to be invoiced at
prices to be agreed upon, with the customs duties being paid by petitioner, as Distributor, for account of the Company. 8 Moreover,
all resale prices, lists, discounts and general terms and conditions of local resale were to be subject to the approval of the Company
and to change from time to time in its discretion. 9 The dealer, as Distributor, is allowed a discount of ten percent on the net amount
of sales of merchandise made under such agreement. 10 On a date to be determined by the Company, the petitioner, as Distributor,
was required to report to it data showing in detail all sales during the month immediately preceding, specifying therein the quantities,
sizes and types together with such information as may be required for accounting purposes, with the Company rendering an invoice
on sales as described to be dated as of the date of inventory and sales report. As Distributor, petitioner had to make payment on
such invoice or invoices on due date with the Company being privileged at its option to terminate and cancel the agreement
forthwith upon the failure to comply with this obligation. 11 The Company, at its own expense, was to keep the consigned stock fully
insured against loss or damage by fire or as a result of fire, the policy of such insurance to be payable to it in the event of loss.
Petitioner, as Distributor, assumed full responsibility with reference to the stock and its safety at all times; and upon request of the
Company at any time, it was to render inventory of the existing stock which could be subject to change. 12 There was furthermore
this equally tell-tale covenant: "Upon the termination or any cancellation of this agreement all goods held on consignment shall be
held by the Distributor for the account of the Company, without expense to the Company, until such time as provision can be made
by the Company for disposition." 13

The issue with the Court of Tax Appeals, as with us now, is whether the relationship thus created is one of vendor
and vendee or of broker and principal. Not that there would have been the slightest doubt were it not for the
categorical denial in the contract that petitioner was not constituted as "the agent or legal representative of the
Company for any purpose whatsoever." It would be, however, to impart to such an express disclaimer a meaning it
should not possess to ignore what is manifestly the role assigned to petitioner considering the instrument as a whole.
That would be to lose sight altogether of what has been agreed upon. The Court of Tax Appeals was not misled in the
language of the decision now on appeal: "That the petitioner Ker & Co., Ltd. is, by contractual stipulation, an agent of
U.S. Rubber International is borne out by the facts that petitioner can dispose of the products of the Company only to
certain persons or entities and within stipulated limits, unless excepted by the contract or by the Rubber Company
(Par. 2); that it merely receives, accepts and/or holds upon consignment the products, which remain properties of the
latter company (Par. 8); that every effort shall be made by petitioner to promote in every way the sale of the products
(Par. 3); that sales made by petitioner are subject to approval by the company (Par. 12); that on dates determined by
the rubber company, petitioner shall render a detailed report showing sales during the month (Par. 14); that the
rubber company shall invoice the sales as of the dates of inventory and sales report (Par. 14); that the rubber
company agrees to keep the consigned goods fully insured under insurance policies payable to it in case of loss (Par.
15); that upon request of the rubber company at any time, petitioner shall render an inventory of the existing stock
which may be checked by an authorized representative of the former (Par. 15); and that upon termination or
cancellation of the Agreement, all goods held on consignment shall be held by petitioner for the account of the rubber
company until their disposition is provided for by the latter (Par. 19). All these circumstances are irreconcilably
antagonistic to the idea of an independent merchant." 14 Hence its conclusion: "However, upon analysis of the contract, as a
whole, together with the actual conduct of the parties in respect thereto, we have arrived at the conclusion that the relationship
between them is one of brokerage or agency." 15 We find ourselves in agreement, notwithstanding the able brief filed on behalf of
petitioner by its counsel. As noted at the outset, we cannot heed petitioner's plea for reversal.

1. According to the National Internal Revenue Code, a commercial broker "includes all persons, other than importers,
manufacturers, producers, or bona fide employees, who, for compensation or profit, sell or bring about sales or
purchases of merchandise for other persons or bring proposed buyers and sellers together, or negotiate freights or
other business for owners of vessels or other means of transportation, or for the shippers, or consignors or
consignees of freight carried by vessels or other means of transportation. The term includes commission
merchants." 16 The controlling decision as to the test to be followed as to who falls within the above definition of a commercial
broker is that of Commissioner of Internal Revenue v. Constantino. 17 In the language of Justice J. B. L. Reyes, who penned the
opinion: "Since the company retained ownership of the goods, even as it delivered possession unto the dealer for resale to
customers, the price and terms of which were subject to the company's control, the relationship between the company and the
dealer is one of agency, ... ." 18 An excerpt from Salisbury v. Brooks 19 cited in support of such a view follows: " 'The difficulty in
distinguishing between contracts of sale and the creation of an agency to sell has led to the establishment of rules by the application
of which this difficulty may be solved. The decisions say the transfer of title or agreement to transfer it for a price paid or promised is
the essence of sale. If such transfer puts the transferee in the attitude or position of an owner and makes him liable to the transferor
as a debtor for the agreed price, and not merely as an agent who must account for the proceeds of a resale, the transaction is a
sale; while the essence of an agency to sell is the delivery to an agent, not as his property, but as the property of the principal, who
remains the owner and has the right to control sales, fix the price, and terms, demand and receive the proceeds less the agent's
commission upon sales made.' " 20 The opinion relied on the work of Mechem on Sales as well as Mechem on Agency. Williston and
Tiedman both of whom wrote treatises on Sales, were likewise referred to.

Equally relevant is this portion of the Salisbury opinion: "It is difficult to understand or appreciate the necessity or
presence of these mutual requirements and obligations on any theory other than that of a contract of agency.
Salisbury was to furnish the mill and put the timber owned by him into a marketable condition in the form of lumber;
Brooks was to furnish the funds necessary for that purpose, sell the manufactured product, and account therefor to
Salisbury upon the specific terms of the agreement, less the compensation fixed by the parties in lieu of interest on
the money advanced and for services as agent. These requirements and stipulations are in tent with any other
conception of the contract. If it constitutes an agreement to sell, they are meaningless. But they cannot be ignored.
They were placed there for some purpose, doubtless as the result of definite antecedent negotiations therefore,
consummated by the final written expression of the agreement." 21 Hence the Constantino opinion could categorically affirm
that the mere disclaimer in a contract that an entity like petitioner is not "the agent or legal representative for any purpose
whatsoever" does not suffice to yield the conclusion that it is an independent merchant if the control over the goods for resale of the
goods consigned is pervasive in character. The Court of Tax Appeals decision now under review pays fealty to such an applicable
doctrine.

2. No merit therefore attaches to the first error imputed by petitioner to the Court of Tax Appeals. Neither did such
Court fail to appreciate in its true significance the act and conduct pursued in the implementation of the contract by
both the United States Rubber International and petitioner, as was contended in the second assignment of error.
Petitioner ought to have been aware that there was no need for such an inquiry. The terms of the contract, as noted,
speak quite clearly. There is lacking that degree of ambiguity sufficient to give rise to serious doubt as to what was
contemplated by the parties. A reading thereof discloses that the relationship arising therefrom was not one of seller
and purchaser. If it were thus intended, then it would not have included covenants which in their totality would negate
the concept of a firm acquiring as vendee goods from another. Instead, the stipulations were so worded as to lead to
no other conclusion than that the control by the United States Rubber International over the goods in question is, in
the language of the Constantino opinion, "pervasive". The insistence on a relationship opposed to that apparent from
the language employed might even yield the impression that such a mode of construction was resorted to in order
that the applicability of a taxing statute might be rendered nugatory. Certainly, such a result is to be avoided.

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

WHEREFORE, the Court of Tax Appeals decision of October 19, 1962 is affirmed. With costs against petitioner.

Concepcion C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Teehankee, Barredo, Villamor and Makasiar, JJ.,
concur.
3
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

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.]

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;

(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 theretoi.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
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.

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.

4
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 82508 September 29, 1989

FILINVEST CREDIT CORPORATION, petitioner,

vs.
THE COURT OF APPEALS, JOSE SY BANG and ILUMINADA TAN SY BANG,*respondents.

Labaquis, Loyola, Angara and Associates for petitioner.

Alfredo 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 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 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

5
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-25885 January 31, 1972

LUZON BROKERAGE CO., INC., plaintiff-appellee,

vs.
MARITIME BUILDING CO., INC., and MYERS BUILDING CO., INC., defendants, MARITIME
BUILDING CO., INC., defendant-appellant.

Ross, Salcedo, Del Rosario, Bito and Misa for plaintiff-appellee.

C. R. Tiongson and L. V. Simbulan and Araneta, Mendoza and Papa for defendant Myers Building Co.,
Inc.

Ambrosio Padilla Law Offices for defendant-appellant Maritima Building Co., Inc.

REYES, J.B.L., J.:p

Direct appeal (prior to the effectivity of Republic Act 5440) by Maritime Building Co., Inc. from a decision
of the Court of First Instance of Manila (in its Civil Case No. 47319), the dispositive part of which provides
as follows:

FOR ALL THE FOREGOING CONSIDERATIONS, judgment is hereby rendered

declaring that the Myers Building Co., Inc. is entitled to receive the rentals which the
plaintiff has been paying, including those already deposited in Court, thereby relieving the
plaintiff of any obligation to pay the same to any other party, and ordering the Maritime
Building Co., Inc. to pay the commission fees paid by the Myers Building Co., Inc. to the
Clerk of this Court, plus the sum of P3,000.00 as and for attorney's fees.

On the cross-claim by the Myers Building Co., Inc., the Maritima Building Co., Inc. is
hereby ordered to pay the Myers Building Co., Inc. the sum of P10,000.00 damages, plus
the sum of P30,000.00, representing rentals wrongfully collected by it from the plaintiff
corresponding to the months of March, April and May, 1961 and the costs hereof.

The antecedents of the litigation are summarized in the appealed judgment thus:

This is an action for interpleading.

It appears that on April 30, 1949, in the City of Manila, the defendant Myers Building Co.,
Inc., owner of three parcels of land in the City of Manila, together with the improvements
thereon, entered into a contract entitled "Deed of Conditional Sale" in favor of Bary
Building Co., Inc., later known as Maritime Building Co., Inc., whereby the former sold the
same to the latter for P1,000,000.00, Philippine currency. P50,000.00 of this price was
paid upon the execution of the said contract and the parties agreed that the balance of
P950,000.00 was to be paid in monthly installments at the rate of P10,000.00 with
interest of 5% per annum until the same was fully paid.

In Par. (O), they agreed that in case of failure on the part of the vendee to pay any of the
installments due and payable, the contract shall be annulled at the option of the vendor
and all payments already made by vendee shall be forfeited and the vendor shall have
right to re-enter the property and take possession thereof.

Later, the monthly installment of P10,000.00 above-stipulated with 5% interest per annum
was amended or decreased to P5,000.00 per month and the interest was raised to 5-
1/2% per annum. The monthly installments under the contract was regularly paid by the
Bary Building Co., Inc. and/or the Maritime Co., Inc. until the end of February, 1961. It
failed to pay the monthly installment corresponding to the month of March 1961, for which
the Vice-President, George Schedler, of the Maritime Building Co., Inc., wrote a letter to
the President of Myers, Mr. C. Parsons, requesting for a moratorium on the monthly
payment of the installments until the end of the year 1961, for the reason that the said
company was encountering difficulties in connection with the operation of the warehouse
business. However, Mr. C. Parsons, in behalf of the Myers Estate, answered that the
monthly payments due were not payable to the Myers Estate but to the Myers Building
Co., Inc., and that the Board of Directors of the Myers Co., Inc. refused to grant the
request for moratorium for suspension of payments under any condition.

Notwithstanding the denial of this request for moratorium by the Myers Board of Directors
the Maritime Building Co., Inc. failed to pay the monthly installments corresponding to the
months of March, April and May, 1961. Whereupon, on May 16, 1961, the Myers Building
Co., Inc. made a demand upon the Maritime Building Co., Inc., for the payment of the
installments that had become due and payable, which letter, however, was returned
unclaimed.

Then, on June 5, 1961, the Myers Building Co., Inc. wrote the Maritime Building Co., Inc.
another letter advising it of the cancellation of the Deed of Conditional Sale entered into
between them and demanding the return of the possession of the properties and holding
the Maritime Building Co., Inc. liable for use and occupation of the said properties at
P10,000.00 monthly.

In the meantime, the Myers Building Co., Inc. demanded upon the Luzon Brokerage Co.,
Inc. to whom the Maritime Building Co., Inc. leased the properties, the payment of
monthly rentals of P10,000.00 and the surrender of the same to it. As a consequence, the
Luzon Brokerage Co., Inc. found itself in a payment to the wrong party, filed this action
for interpleader against the Maritime Building Co., Inc.

After the filing of this action, the Myers Building Co., Inc. in its answer filed a cross-claim
against the Maritime Building Co., Inc. praying for the confirmation of its right to cancel
the said contract. In the meantime, the contract between the Maritime Building Co., Inc.
and the Luzon Brokerage Co., Inc. was extended by mutual agreement for a period of
four (4) more years, from April, 1964 to March 31, 1968.

The Maritime Building Co., Inc. now contends (1) that the Myers Building Co., Inc. cannot
cancel the contract entered into by them for the conditional sale of the properties in
question extrajudicially and (2) that it had not failed to pay the monthly installments due
under the contract and, therefore, is not guilty of having violated the same.
It should be further elucidated that the suspension by the appellant Maritime Building Co., Inc.
(hereinafter called Maritime) of the payment of installments due from it to appellee Myers Building Co.,
Inc. (hereinafter designated as Myers Corporation) arose from an award of backwages made by the Court
of Industrial Relations in favor of members of Luzon Labor Union who served the Fil-American forces in
Bataan in early 1942 at the instance of the employer Luzon Brokerage Co. and for which F. H. Myers,
former majority stockholder of the Luzon Brokerage Co., had allegedly promised to indemnify E. M.
Schedler (who controlled Maritime) when the latter purchased Myers' stock in the Brokerage Company.
Schedler contended that he was being sued for the backpay award of some P325,000, when it was a
liability of Myers, or of the latter's estate upon his death. In his letter to Myers Corporation (Exhibit "11",
Maritime) dated 7 April 1961 (two months and ten days before the initial complaint in the case at bar),
Schedler claimed the following:

At all times when the F. H. Myers Estate was open in the Philippine Islands and open in
San Francisco, the Myers Estate or heirs assumed the defense of the Labor Union claims
and led us to believe that they would indemnify us therefrom.

Recently, however, for the first time, and after both the Philippine and San Francisco F.
H. Myers Estates were closed, we have been notified that the F. H. Myers indemnity on
the Labor Union case will not be honored, and in fact Mrs. Schedler and I have been
sued in the Philippines by my successor in interest, Mr. Wentholt, and have been put to
considerable expense.

You are advised that my wife and I, as the owners of the Maritime Building Company,
intend to withhold any further payments to Myers Building Company or Estate, in order
that we can preserve those funds and assets to set off against the potential liability to
which I am now exposed by the failure of the Myers heirs to honor the indemnity
agreement pertaining to the Labor claims.

The trial court found the position of Schedler indefensible, and that Maritime, by its failure to pay,
committed a breach of the sale contract; that Myers Company, from and after the breach, became entitled
to terminate the contract, to forfeit the installments paid, as well as to repossess, and collect the rentals
of, the building from its lessee, Luzon Brokerage Co., in view of the terms of the conditional contract of
sale stipulating that:

(d) It is hereby agreed, covenanted and stipulated by and between the parties hereto that
the Vendor will execute and deliver to the Vendee a definite or absolute deed of sale
upon the full payment by the vendee of the unpaid balance of the purchase price
hereinabove stipulated; that should the Vendee fail to pay any of the monthly
installments, when due, or otherwise fail to comply with any of the terms and conditions
herein stipulated, then this Deed of Conditional Sale shall automatically and without any
further formality, become null and void, and all sums so paid by the Vendee by reason
thereof, shall be considered as rentals and the Vendor shall then and there be free to
enter into the premises, take possession thereof or sell the properties to any other party.

xxx xxx xxx

(o) In case the Vendee fails to make payment or payments, or any part thereof, as herein
provided, or fails to perform any of the covenants or agreements hereof, this contract
shall, at the option of the Vendor, be annulled and, in such event, all payments made by
the Vendee to the Vendor by virtue of this contract shall be forfeited and retained by the
Vendor in full satisfaction of the liquidated damages by said Vendor sustained; and the
said Vendor shall have the right to forthwith re-enter, and take possession of, the
premises subject-matter of this contract.
 "The remedy of forfeiture stated in the next-preceding paragraph shall not be exclusive of
any other remedy, but the Vendor shall have every other remedy granted it by virtue of
this contract, by law, and by equity."

From the judgment of the court below, the dispositive portion whereof has been transcribed at the start of
this opinion, Myers duly appealed to this Court.

The main issue posed by appellant is that there has been no breach of contract by Maritime; and
assuming that there was one, that the appellee Myers was not entitled to rescind or resolve the contract
without recoursing to judicial process.

It is difficult to understand how appellant Maritime can seriously contend that its failure or refusal to pay
the P5,000 monthly installments corresponding to the months of March, April and May, 1961 did not
constitute a breach of contract with Myers, when said agreement (transcribed in the Record on Appeal,
pages 59-71) expressly stipulated that the balance of the purchase price (P950,000)

shall be paid at the rate of Ten Thousand Pesos (P10,000) monthly on or before the 10th
day of each month with interest at 5% per annum, this amount to be first applied on the
interest, and the balance paid to the principal thereof; and the failure to pay any
installment or interest when due shall ipso factocause the whole unpaid balance of the
principal and interest to be and become immediately due and payable. (Contract,
paragraph b; Record on Appeal, page 63)

Contrary to appellant Maritime's averments, the default was not made in good faith. The text of the letter
to Myers (Exhibit "11", Maritime), heretofore quoted, leaves no doubt that the non-payment of the
installments was the result of a deliberate course of action on the part of appellant, designed to coerce
the appellee Myers Corporation into answering for an alleged promise of the late F. H. MYERS to
indemnify E. W. Schedler, the controlling stock-holder of appellant, for any payments to be made to the
members of the Luzon Labor Union. This is apparent also from appellant's letter to his counsel (Exhibit
"12", Maritime):

... I do not wish to deposit pesos representing the months of March, April and May, since
the Myers refusal to honor the indemnity concerning the labor claims has caused me to
disburse (sic) roughly $10,000.00 to date in fees, cost and travel expenses. However, if
the Myers people will deposit in trust with Mr. C. Parsons 25,000 pesos to cover my costs
to date, I will then deposit with Mr. Parsons, in trust, 15,000 pesos for March, April and
May and will also post a monthly deposit of 5,000 pesos until the dispute is settled. The
dispute won't be settled in my mind, unless and until:

a) The Myers people indemnify me fully the labor cases;

b) The labor cases are terminated favorably to Luzon Brokerage and no liability exists;

c) The Myers people pay any judgment entered on the labor cases thereby releasing me;
or

d) It is finally determined either in San Francisco or in the Philippines by a court that the
Myers heirs must honor the indemnity which Mr. F. H. Myers promised when I purchased
Luzon Brokerage Company.

Yet appellant Maritime (assuming that it had validly acquired the claims of its president and controlling
stockholder, E. M. Schedler) could not ignore the fact that whatever obligation F. H. Myers or his estate
had assumed in favor of Schedler with respect to the Luzon Brokerage labor case was not, and could not
have been, an obligation of appellee corporation (Myers Building Company). No proof exists that the
board of directors of the Myers Corporation had agreed to assume responsibility for the debts (if any) that
the late Myers or his heirs had incurred in favor of Schedler. Not only this, but it is apparent from the
letters quoted heretofore that Schedler had allowed the estate proceedings of the late F. M. Myers to
close without providing for any contingent liability in Schedler's favor; so that by offsetting the alleged debt
of Myers to him, against the balance of the price due under the "Deed of Conditional Sale", appellant
Maritime was in fact attempting to burden the Myers Building Company with an uncollectible debt, since
enforcement thereof against the estate of F. H. Myers was already barred.

Under the circumstances, the action of Maritime in suspending payments to Myers Corporation was a
breach of contract tainted with fraud or malice (dolo), as distinguished from mere negligence (culpa),
"dolo" being succinctly defined as a "conscious and intentional design to evade the normal fulfillment of
existing obligations" (Capistrano, Civil Code of the Philippines, Vol. 3, page 38), and therefore
incompatible with good faith (Castan, Derecho Civil, 7th Ed., Vol. 3, page 129; Diaz Pairo, Teoria de
Obligaciones, Vol. 1, page 116).

Maritime having acted in bad faith, it was not entitled to ask the court to give it further time to make
payment and thereby erase the default or breach that it had deliberately incurred. Thus the lower court
committed no error in refusing to extend the periods for payment. To do otherwise would be to sanction a
deliberate and reiterated infringement of the contractual obligations incurred by Maritime, an attitude
repugnant to the stability and obligatory force of contracts.

From another point of view, it is irrelevant whether appellant Maritime's infringement of its contract was
casual or serious, for as pointed out by this Court in Manuel vs. Rodriguez, 109 Phil. 1, at page 10

The contention of plaintiff-appellant that Payatas Subdivision Inc. had no right to cancel
the contract as there was only a "casual breach" is likewise untenable. In contracts to
sell, where ownership is retained by the seller and is not to pass until the full payment of
the price, such payment, as we said, is a positive suspensive condition, the failure of
which is not a breach, casual or serious, but simply an event that prevented the obligation
of the vendor to convey title from acquiring binding force, in accordance with Article 1117
of the Old Civil Code. To argue that there was only a casual breach is to proceed from
the assumption that the contract is one of absolute sale, where non-payment is a
resolutory condition, which is not the case.

But it is argued for Maritime that even if it had really violated the Contract of Conditional Sale with Myers,
the latter could not extrajudicially rescind or resolve the contract, but must first recourse to the courts.
While recognizing that paragraph (d) of the deed of conditional sale expressly provides inter alia

that should the Vendee fail to pay any of the monthly installments when due, or otherwise
fail to comply with any of the terms and conditions herein stipulated, then this Deed of
Conditional Sale shall automatically and without any further formality, become null and
void, and all sums so paid by the Vendee by reason thereof shall be considered as
rentals.. (Emphasis supplied)

herein appellant Maritime avers that paragraph (e) of the deed contemplates that a suit should be brought
in court for a judicial declaration of rescission. The paragraph relied upon by Maritime is couched in the
following, terms:

(e) It is also hereby agreed, covenanted and stipulated by and between the parties hereto
that should the Vendor rescind this Deed of Conditional Sale, for any of the reasons
stipulated in the preceding paragraph, the Vendee by these presents obligates itself to
peacefully deliver the properties subject of this contract to the Vendor, and in the event
that the Vendee refuses to peacefully deliver the possession of the properties subject of
 this contract to the Vendor in case of rescission, and a suit should be brought in court by
the Vendor to seek judicial declaration of rescission and take possession of the
properties subject of this contract, the Vendee hereby obligates itself to pay all the
expenses to be incurred by reason of such suit and in addition obligates itself to pay the
sum of P10,000.00, in concept of damages, penalty and attorney's fees.

Correlation of this paragraph (e) with the preceding paragraph (d) of the Deed of Conditional Sale (quoted
in page 5 of this opinion) reveals no incompatibility between the two; and the suit to "be brought in Court
by the Vendor to seek judicial declaration of rescission" is provided for by paragraph(e) only in the
eventuality that, notwithstanding the automatic annulment of the deed under paragraph (d), the Vendee
"refuses to peacefully deliver the possession of the properties subject of this contract". The step
contemplated is logical since the Vendor can not, by himself, dispossess the Vendee manu militari, if the
latter should refuse to vacate despite the violation of the contract, since no party can take the law in his
own hands. But the bringing of such an action in no way contradicts or restricts the automatic termination
of the contract in case the Vendee (i.e., appellant Maritime) should not comply with the agreement.

Anyway, this Court has repeatedly held that

Well settled is, however, the rule that a judicial action for the rescission of a contract is
not necessary where the contract provides that it may be revoked and cancelled for
violation of any of its terms and conditions" (Lopez vs. Commissioner of Customs, L-
28235, 30 January 1971, 37 SCRA 327, 334,, and cases cited therein). 1 (Emphasis
supplied.)

Resort to judicial action for rescission is obviously not contemplated.... The validity of the
stipulation can not be seriously disputed. It is in the nature of a facultative resolutory
condition which in many cases has been upheld by this Court. (Ponce Enrile vs. Court of
Appeals, L-27549, 30 Sept. 1969; 29 SCRA 504).

The obvious remedy of the party opposing the rescission for any reason being to file the corresponding
action to question the rescission and enforce the agreement, as indicated in our decision in University of
the Philippines vs. Walfrido de los Angeles,
L-28602, 29 September 1970, 35 SCRA 107.

Of course, it must be understood that the act of a party in treating a contract as cancelled
or resolved on account of infractions by the other contracting party must be made known
to the other and is always provisional, being ever subject to scrutiny and review by the
proper court. If the other party denies that rescission is justified, it is free to resort to
judicial action in its own behalf, and bring the matter to court. Then, should the court,
after due hearing, decide that the resolution of the contract was not warranted, the
responsible party will be sentenced to damages; in the contrary case, the resolution will
be affirmed, and the consequent indemnity awarded to the party prejudiced.

In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its own
risk. For it is only the final judgment of the corresponding court that will conclusively and
finally settle whether the action taken was or was not correct in law. But the law definitely
does not require that the contracting party who believes itself injured must first file suit
and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise,
the party injured by the other's breach will have to passively sit and watch its damages
accumulate during the pendency of the suit until the final judgment of rescission is
rendered when the law itself requires that he should exercise due diligence to minimize
its own damages (Civil Code, Article 2203).
Maritime likewise invokes Article 1592 of the Civil Code of the Philippines as entitling it to pay despite its
default:

ART. 1592. In the sale of immovable property, even though it may have been stipulated
that upon failure to pay the price at the time agreed upon the rescission of the contract
shall of right take place, the vendee may pay, even after the expiration of the period, as
long as no demand for rescission of the contract has been made upon him either
judicially or by a notarial act. After the demand, the court may not grant him a new term.

Assuming arguendo that Article 1592 is applicable, the cross-claim filed by Myers against Maritime in the
court below constituted a judicial demand for rescission that satisfies the requirements of said article.

But even if it were not so, appellant overlooks that its contract with appellee Myers is not the ordinary sale
envisaged by Article 1592, transferring ownership simultaneously with the delivery of the real property
sold, but one in which the vendor retained ownership of the immovable object of the sale, merely
undertaking to convey it provided the buyer strictly complied with the terms of the contract (see paragraph
[d], ante, page 5). In suing to recover possession of the building from Maritime, appellee Myers is not
after the resolution or setting aside of the contract and the restoration of the parties to the status quo
ante, as contemplated by Article 1592, but precisely enforcing the provisions of the agreement that it is no
longer obligated to part with the ownership or possession of the property because Maritime failed to
comply with the specified condition precedent, which is to pay the installments as they fell due.

The distinction between contracts of sale and contract to sell with reserved title has been recognized by
this Court in repeated decisions 2 upholding the power of promisors under contracts to sell in case of failure of the
other party to complete payment, to extrajudicially terminate the operation of the contract, refuse conveyance and
retain the sums or installments already received, where such rights are expressly provided for, as in the case at bar.

Maritime's appeal that it would be iniquituous that it should be compelled to forfeit the P973,000 already
paid to Myers, as a result of its failure to make good a balance of only P319,300.65, payable at P5,000
monthly, becomes unimpressive when it is considered that while obligated to pay the price of one million
pesos at P5,000 monthly, plus interest, Maritime, on the other hand, had leased the building to Luzon
Brokerage, Inc. since 1949; and Luzon paid P13,000 a month rent, from September, 1951 to August
1956, and thereafter until 1961, at P10,000 a month, thus paying a total of around one and a half million
pesos in rentals to Maritime. Even adding to Maritime's losses of P973,000 the P10,000 damages and
P3,000 attorneys' fees awarded by the trial court, it is undeniable that appellant Maritime has come out of
the entire transaction still at a profit to itself.

There remains the procedural objection raised by appellant Maritime to this interpleader action filed by the
Luzon Brokerage Co., the lessee of the building conditionally sold by Myers to Maritime. It should be
recalled that when Maritime defaulted in its payments to Myers, and the latter notified the former that it
was cancelling the contract of conditional sale, Myers also notified Luzon Brokerage, Maritime's lessee of
the building, of the cancellation of the sale, and demanded that Luzon should pay to Myers the rentals of
the building beginning from June, 1961, under penalty of ejectment (Record on Appeal, pages 14-15). In
doubt as to who was entitled to the rentals, Luzon filed this action for interpleader against Myers and
Maritime, and deposited the rentals in court as they fell due. The appellant Maritime moved to dismiss on
the ground that (a) Luzon could not entertain doubts as to whom the rentals should be paid since Luzon
had leased the building from Maritime since 1949, renewing the contract from time to time, and Myers
had no right to cancel the lease; and (b) that Luzon was not a disinterested party, since it tended to favor
appellee Myers. The court below overruled Maritime's objections and We see no plausible reason to
overturn the order. While Myers was not a party to the lease, its cancellation of the conditional sale of the
premises to Maritime, Luzon's lessor, could not but raise reasonable doubts as to the continuation of the
lease, for the termination of the lessor's right of possession of the premises necessarily ended its right to
the rentals falling due thereafter. The preceding portion of our opinion is conclusive that Luzon's doubts
were grounded under the law and the jurisprudence of this Court.
No adequate proof exists that Luzon was favoring any one of the contending parties. It was interested in
being protected against prejudice deriving from the result of the controversy, regardless of who should
win. For the purpose it was simpler for Luzon to compel the disputants to litigate between themselves,
rather than chance being sued by Myers, and later being compelled to proceed against Maritime to
recoup its losses. In any event, Maritime ultimately confirmed the act of Luzon in suing for interpleader, by
agreeing to renew Luzon's lease in 1963 during the pendency of the present action, and authorizing
Luzon to continue depositing the rentals in court "until otherwise directed by a court of competent
jurisdiction" (Exhibit "18-Maritime"). The procedural objection has thus become moot.

PREMISES CONSIDERED, the appealed decision should be, and hereby is, affirmed, and appellant
Maritime Building Co., as well as appellee Luzon Brokerage Co., are further ordered to surrender the
premises to the appellee Myers Building Co. Costs against appellant.

Concepcion, C.J., Makalintal, Zaldivar, Castro, Teehankee, Barredo, Villamor and Makasiar, JJ., concur.

Fernando, J., took no part.

6
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. L-59266 February 29, 1988

SILVESTRE DIGNOS and ISABEL LUMUNGSOD, petitioners,

vs.
HON. COURT OF APPEALS and ATILANO G. JABIL, respondents.

BIDIN, J.:

This is a petition for review on certiorari seeking the reversal of the: (1) Decision * of the 9th Division, Court
of Appeals dated July 31,1981, affirming with modification the Decision, dated August 25, 1972 of the Court of First Instance ** of Cebu in
civil Case No. 23-L entitled Atilano G. Jabil vs. Silvestre T. Dignos and Isabela Lumungsod de Dignos and Panfilo Jabalde, as Attorney-in-
Fact of Luciano Cabigas and Jovita L. de Cabigas; and (2) its Resolution dated December 16, 1981, denying defendant-appellant's
(Petitioner's) motion for reconsideration, for lack of merit.

The undisputed facts as found by the Court of Appeals are as follows:

The Dignos spouses were owners of a parcel of land, known as Lot No. 3453, of the
cadastral survey of Opon, Lapu-Lapu City. On June 7, 1965, appellants (petitioners)
Dignos spouses sold the said parcel of land to plaintiff-appellant (respondent Atilano
J. Jabil) for the sum of P28,000.00, payable in two installments, with an assumption
of indebtedness with the First Insular Bank of Cebu in the sum of P12,000.00, which
was paid and acknowledged by the vendors in the deed of sale (Exh. C) executed in
favor of plaintiff-appellant, and the next installment in the sum of P4,000.00 to be
paid on or before September 15, 1965.

On November 25, 1965, the Dignos spouses sold the same land in favor of
defendants spouses, Luciano Cabigas and Jovita L. De Cabigas, who were then U.S.
citizens, for the price of P35,000.00. A deed of absolute sale (Exh. J, also marked
Exh. 3) was executed by the Dignos spouses in favor of the Cabigas spouses, and
which was registered in the Office of the Register of Deeds pursuant to the
provisions of Act No. 3344.

As the Dignos spouses refused to accept from plaintiff-appellant the balance of the
purchase price of the land, and as plaintiff- appellant discovered the second sale
made by defendants-appellants to the Cabigas spouses, plaintiff-appellant brought
the present suit. (Rollo, pp. 27-28)

After due trial, the Court of first Instance of Cebu rendered its Decision on August 25,1972, the
decretal portion of which reads:

WHEREFORE, the Court hereby declares the deed of sale executed on November
25, 1965 by defendant Isabela L. de Dignos in favor of defendant Luciano Cabigas, a
 citizen of the United States of America, null and void ab initio, and the deed of sale
executed by defendants Silvestre T. Dignos and Isabela Lumungsod de Dignos not
rescinded. Consequently, the plaintiff Atilano G. Jabil is hereby ordered to pay the
sum, of Sixteen Thousand Pesos (P16,000.00) to the defendants-spouses upon the
execution of the Deed of absolute Sale of Lot No. 3453, Opon Cadastre and when
the decision of this case becomes final and executory.

The plaintiff Atilano G. Jabil is ordered to reimburse the defendants Luciano Cabigas
and Jovita L. de Cabigas, through their attorney-in-fact, Panfilo Jabalde, reasonable
amount corresponding to the expenses or costs of the hollow block fence, so far
constructed.

It is further ordered that defendants-spouses Silvestre T. Dignos and Isabela

Lumungsod de Dignos should return to defendants-spouses Luciano Cabigas and
Jovita L. de Cabigas the sum of P35,000.00, as equity demands that nobody shall
enrich himself at the expense of another.

The writ of preliminary injunction issued on September 23, 1966, automatically

becomes permanent in virtue of this decision.

With costs against the defendants.

From the foregoing, the plaintiff (respondent herein) and defendants-spouss (petitioners herein)
appealed to the Court of Appeals, which appeal was docketed therein as CA-G.R. No. 54393-R,
"Atilano G. Jabil v. Silvestre T. Dignos, et al."

On July 31, 1981, the Court of Appeals affirmed the decision of the lower court except as to the
portion ordering Jabil to pay for the expenses incurred by the Cabigas spouses for the building of a
fence upon the land in question. The disposive portion of said decision of the Court of Appeals
reads:

IN VIEW OF THE FOREGOING CONSIDERATIONS, except as to the modification

of the judgment as pertains to plaintiff-appellant above indicated, the judgment
appealed from is hereby AFFIRMED in all other respects.

With costs against defendants-appellants.

SO ORDERED.

Judgment MODIFIED.

A motion for reconsideration of said decision was filed by the defendants- appellants (petitioners)
Dignos spouses, but on December 16, 1981, a resolution was issued by the Court of Appeals
denying the motion for lack of merit.

Hence, this petition.

In the resolution of February 10, 1982, the Second Division of this Court denied the petition for lack
of merit. A motion for reconsideration of said resolution was filed on March 16, 1982. In the
resolution dated April 26,1982, respondents were required to comment thereon, which comment was
filed on May 11, 1982 and a reply thereto was filed on July 26, 1982 in compliance with the
resolution of June 16,1 982. On August 9,1982, acting on the motion for reconsideration and on all
subsequent pleadings filed, this Court resolved to reconsider its resolution of February 10, 1982 and
to give due course to the instant petition. On September 6, 1982, respondents filed a rejoinder to
reply of petitioners which was noted on the resolution of September 20, 1982.

Petitioners raised the following assignment of errors:

THE COURT OF APPEALS COMMITTED A GRAVE ERROR OF LAW IN GROSSLY,

INCORRECTLY INTERPRETING THE TERMS OF THE CONTRACT, EXHIBIT C, HOLDING IT AS
AN ABSOLUTE SALE, EFFECTIVE TO TRANSFER OWNERSHIP OVER THE PROPERTY IN
QUESTION TO THE RESPONDENT AND NOT MERELY A CONTRACT TO SELL OR PROMISE
TO SELL; THE COURT ALSO ERRED IN MISAPPLYING ARTICLE 1371 AS WARRANTING
READING OF THE AGREEMENT, EXHIBIT C, AS ONE OF ABSOLUTE SALE, DESPITE THE
CLARITY OF THE TERMS THEREOF SHOWING IT IS A CONTRACT OF PROMISE TO SELL.

II

THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN INCORRECTLY APPLYING

AND OR IN MISAPPLYING ARTICLE 1592 OF THE NEW CIVIL CODE AS WARRANTING THE
ERRONEOUS CONCLUSION THAT THE NOTICE OF RESCISSION, EXHIBIT G, IS INEFFECTIVE
SINCE IT HAS NOT BEEN JUDICIALLY DEMANDED NOR IS IT A NOTARIAL ACT.

III

THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN REJECTING THE

APPLICABILITY OF ARTICLES 2208,2217 and 2219 OF THE NEW CIVIL CODE AND
ESTABLISHED JURISPRUDENCE AS TO WARRANT THE AWARD OF DAMAGES AND
ATTORNEY'S FEES TO PETITIONERS.

IV

PLAINTIFF'S COMPLAINT FOR SPECIFIC PERFORMANCE SHOULD HAVE BEEN DISMISSED,

HE HAVING COME TO COURT WITH UNCLEAN HANDS.

BY AND LARGE, THE COURT OF APPEALS COMMITTED AN ERROR IN AFFIRMING WITH

MODIFICATION THE DECISION OF THE TRIAL COURT DUE TO GRAVE MISINTERPRETATION,
MISAPPLICATION AND MISAPPREHENSION OF THE TERMS OF THE QUESTIONED
CONTRACT AND THE LAW APPLICABLE THERETO.

The foregoing assignment of errors may be synthesized into two main issues, to wit:

I. Whether or not subject contract is a deed of absolute sale or a contract Lot sell.

II. Whether or not there was a valid rescission thereof.

There is no merit in this petition.

It is significant to note that this petition was denied by the Second Division of this Court in its
Resolution dated February 1 0, 1 982 for lack of merit, but on motion for reconsideration and on the
basis of all subsequent pleadings filed, the petition was given due course.

I.

The contract in question (Exhibit C) is a Deed of Sale, with the following conditions:

1. That Atilano G..Jabilis to pay the amount of Twelve Thousand Pesos P12,000.00)
Phil. Philippine Currency as advance payment;

2. That Atilano G. Jabil is to assume the balance of Twelve Thousand Pesos

(P12,000.00) Loan from the First Insular Bank of Cebu;

3. That Atilano G. Jabil is to pay the said spouses the balance of Four. Thousand
Pesos (P4,000.00) on or before September 15,1965;

4. That the said spouses agrees to defend the said Atilano G. Jabil from other claims
on the said property;

5. That the spouses agrees to sign a final deed of absolute sale in favor of Atilano G.
Jabil over the above-mentioned property upon the payment of the balance of Four
Thousand Pesos. (Original Record, pp. 10-11)

In their motion for reconsideration, petitioners reiterated their contention that the Deed of Sale
(Exhibit "C") is a mere contract to sell and not an absolute sale; that the same is subject to two (2)
positive suspensive conditions, namely: the payment of the balance of P4,000.00 on or before
September 15,1965 and the immediate assumption of the mortgage of P12,000.00 with the First
Insular Bank of Cebu. It is further contended that in said contract, title or ownership over the property
was expressly reserved in the vendor, the Dignos spouses until the suspensive condition of full and
punctual payment of the balance of the purchase price shall have been met. So that there is no
actual sale until full payment is made (Rollo, pp. 51-52).

In bolstering their contention that Exhibit "C" is merely a contract to sell, petitioners aver that there is
absolutely nothing in Exhibit "C" that indicates that the vendors thereby sell, convey or transfer their
ownership to the alleged vendee. Petitioners insist that Exhibit "C" (or 6) is a private instrument and
the absence of a formal deed of conveyance is a very strong indication that the parties did not intend
"transfer of ownership and title but only a transfer after full payment" (Rollo, p. 52). Moreover,
petitioners anchored their contention on the very terms and conditions of the contract, more
particularly paragraph four which reads, "that said spouses has agreed to sell the herein mentioned
property to Atilano G. Jabil ..." and condition number five which reads, "that the spouses agrees to
sign a final deed of absolute sale over the mentioned property upon the payment of the balance of
four thousand pesos."

Such contention is untenable.

By and large, the issues in this case have already been settled by this Court in analogous cases.

Thus, it has been held that a deed of sale is absolute in nature although denominated as a "Deed of
Conditional Sale" where nowhere in the contract in question is a proviso or stipulation to the effect
that title to the property sold is reserved in the vendor until full payment of the purchase price, nor is
there a stipulation giving the vendor the right to unilaterally rescind the contract the moment the
vendee fails to pay within a fixed period Taguba v. Vda. de Leon, 132 SCRA 722; Luzon Brokerage
Co., Inc. v. Maritime Building Co., Inc., 86 SCRA 305).

A careful examination of the contract shows that there is no such stipulation reserving the title of the
property on the vendors nor does it give them the right to unilaterally rescind the contract upon non-
payment of the balance thereof within a fixed period.

On the contrary, all the elements of a valid contract of sale under Article 1458 of the Civil Code, are
present, such as: (1) consent or meeting of the minds; (2) determinate subject matter; and (3) price
certain in money or its equivalent. In addition, Article 1477 of the same Code provides that "The
ownership of the thing sold shall be transferred to the vendee upon actual or constructive delivery
thereof." As applied in the case of Froilan v. Pan Oriental Shipping Co., et al. (12 SCRA 276), this
Court held that in the absence of stipulation to the contrary, the ownership of the thing sold passes
to the vendee upon actual or constructive delivery thereof.

While it may be conceded that there was no constructive delivery of the land sold in the case at bar,
as subject Deed of Sale is a private instrument, it is beyond question that there was actual delivery
thereof. As found by the trial court, the Dignos spouses delivered the possession of the land in
question to Jabil as early as March 27,1965 so that the latter constructed thereon Sally's Beach
Resort also known as Jabil's Beach Resort in March, 1965; Mactan White Beach Resort on January
15,1966 and Bevirlyn's Beach Resort on September 1, 1965. Such facts were admitted by petitioner
spouses (Decision, Civil Case No. 23-L; Record on Appeal, p. 108).

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

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

II.

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

Applying the rationale of the case of Taguba v. Vda. de Leon (supra) which is on all fours with the
case at bar, the contract of sale being absolute in nature is governed by Article 1592 of the Civil
Code. It is undisputed that petitioners never notified private respondents Jabil by notarial act that
they were rescinding the contract, and neither did they file a suit in court to rescind the sale. The
most that they were able to show is a letter of Cipriano Amistad who, claiming to be an emissary of
Jabil, informed the Dignos spouses not to go to the house of Jabil because the latter had no money
and further advised petitioners to sell the land in litigation to another party (Record on Appeal, p. 23).
As correctly found by the Court of Appeals, there is no showing that Amistad was properly
authorized by Jabil to make such extra-judicial rescission for the latter who, on the contrary,
vigorously denied having sent Amistad to tell petitioners that he was already waiving his rights to the
land in question. Under Article 1358 of the Civil Code, it is required that acts and contracts which
have for their object the extinguishment of real rights over immovable property must appear in a
public document.
Petitioners laid considerable emphasis on the fact that private respondent Jabil had no money on the
stipulated date of payment on September 15,1965 and was able to raise the necessary amount only
by mid-October 1965.

It has been ruled, however, that "where time is not of the essence of the agreement, a slight delay
on the part of one party in the performance of his obligation is not a sufficient ground for the
rescission of the agreement" (Taguba v. Vda. de Leon, supra). Considering that private respondent
has only a balance of P4,000.00 and was delayed in payment only for one month, equity and justice
mandate as in the aforecited case that Jabil be given an additional period within which to complete
payment of the purchase price.

WHEREFORE, the petition filed is hereby Dismissed for lack of merit and the assailed decision of
the Court of Appeals is Affirmed in toto.

SO ORDERED.

Fernan (Chairman), Gutierrez, Jr., Feliciano and Cortes, JJ., concur.

7
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-4402 July 28, 1952

CANUTO MARTIN, petitioner,

vs.
MARIA REYES and PEDRO REVILLA, respondents.

Delgado and Flores for petitioner.

Ramon Diokono and Jose W. Diokno for respondents.

BENGSON, J.:

Coming from the Court of Appeals for revision, this litigation presents two principal question: the price at
which the respondents were entitled to repurchase the property, and the exercise of such right within the
period of redemption. Apparently issues of fact, they really depend upon legal points, as will presently be
seen.

According to the Court of Appeals, the respondents Pedro Revilla and Maria Reyes obtained from the La
Previsora Filipina sometime before November 18, 1939 a loan of P6,500; and with the money, they the
price of a lot, with improvements, which they paid had previously purchased from the Archibishop of
Manila. And they mortgaged the property to La Previsora for the purpose of guaranteeing repayment of
the debt in installments with interest at 12 per cent per annum.

It turned out later that Monte de Piedad y Caja de Ahorros had obtained a judgment against Pedro Revilla
for the sum of P45,000 and had levied execution therefor upon the property and its rentals. Apprised of
this development, the La Previsora started foreclosure proceedings, alleging non-payment of its credit by
the mortgagors. The conflicting interests were later the object of amicable settlement among the parties,
as a result of which the herein respondents notarized the deed Exhibit E whereby in satisfaction of their
obligations to La Previsora (then amounting to P8,204.60) they ceded the property to the said institutions,
reserving the right to repurchase for P8,204.60 within sixty days. The deed was acknowledged on
November 3, 1941.

It seems that La Previsora at the same time, or immediately thereafter conveyed the property by Exhibit C
to petitioner Canuto Martin, who then executed the document Exhibit D undertaking to allow respondents
to repurchase the property within sixty days from October 31, 1941, but at the price of P14,000. This
document Exhibit D was signed by Maria Reyes signifying her assent. At the trial she pleaded that the
document, without embodying their true agreement, had been obtained thru deceit and abuse of
confidence. However, her assertions were not credited by the Court of Appeals. Nevertheless, that court
declared the document void (Exhibit D) for the only reasons that it had been signed by Canuto Martin
before acquiring ownership of the property by the cession of Maria Reyes and Pedro Revilla to the La
Previsora, and from the latter to them. The Court noted that whereas Exhibit E was acknowledged before
the notary on November 3, 1941, Exhibit Dbore the date October 30, 1941, a few days before.

Wherefore the Court of Appeals held that the respondent's right to repurchase was to be found in Exhibit
E, and that they had seasonably exercised such right.
The validity of Exhibit D is the subject-matter of Martin's principal attack on the appellate court's judgment.

The documents Exhibits C, D and E were undoubtedly part of the same amicable settlement.
Acknowledgment of the document Exhibit E was delayed on account of the necessity of securing the
approval of the Monte de Piedad y Caja de Ahorros. For that reason it bears the date November 3. The
arrangements were obviously: (a) transfer to La Previsora with right to repurchase at P8,204.60; (b)
transfer by La Previsora to Canuto Martin and (c) option to repurchase from Martin at P14,000.

Why at P14,00, when it is admitted that Martin got the property at P7,000 from La Previsora the claims of
Monte de Piedad arising from the attachment heretofore described.

The Court of Appeals pronounced Exhibit D invalid because at the time of its execution, Martin had no
title over the property. This is rather too technical a viewpoint. Remembering that Exhibit D constituted a
part of the whole friendly settlement and could be considered as simultaneous with the other documents,
specially the documents of transfer from Maria Reyes and La Previsora, the disparity of dates should
imply no annulling consequences. At any rate, Exhibit D may be placed in the same category as a
promise to convey land not yet owned by the vendor, obligation which may be enforced, according to the
authorities:

Property or goods which, at the time of the sale, are not owned by the seller, but which are
thereafter to be acquired by him, cannot be the subject of an executed sale, but may be the
subject of a contract for the future sale and delivery thereof, and it has been held that even
though the contract is in the form of the present sale it will not pass the title, after the goods have
been acquired, until the seller has done some act appropriating them to the contract. Such a
contract of the future sale and delivery of goods, which the seller has not in possession but which
he intends to acquire by producing, manufacturing, or purchasing before the day of delivery, is
valid as an executory contract to be fulfilled by acquiring and delivering the goods specified in the
contract, even though the acquisition of the goods by the seller depends upon a contingency
which may or may not happen. (55 Corpus Juris, 65). (Emphasis ours)

It is not unusual for persons to agree to convey by a certain time, notwithstanding they have no
title to the land at the time of the contract, and the validity of such agreement is upheld. In such
cases, the vendor assume the risk of acquiring the title and making the conveyance, or
responding in damages for the vendee's loss of his bargain, One having an option to purchase
real estate has a legal right to enter into an executory contract to sell the property. A fortiori, it is
not necessary that the vendor be the absolute owner of the property at the time he enters into
agreement of sale because the owner of the land, is as much the subject of sale as is the land
itself, and whenever one is so suited with reference to a tract of land that he can acquire the title
thereto, either by the voluntary act of the parties holding the title, or by proceeding at law or in
equity, he is in a position to make a valid agreement for the sale thereof, without disclosing the
nature of his title. (55 American Jurisprudence, 480). (Emphasis ours)

The above principles express the same the ideas in articles 1462 and 1459 of the New Civil Code.

Therefore erroneous is the ruling that, because executed before Canuto Martin became the owner,
Exhibit D, was null and void. Consequently, as Reyes voluntarily agreed under Exhibit D, to repurchase at
P14,000, she should not repurchase at any other price.

Now, have the respondents properly exercised their right to repurchase?

The Court of Appeals stated that in December 1941, Maria Reyes accompanied by Marcela Mota de
Malonso went to the office of La Previsora, not for the purpose of repurchasing the property, but to ask for
extension of the period. Nevertheless, that Court opined that inasmuch as the complaint to compel
repurchase had been filed on January 2, 1952 within the sixty-day period mentioned in Exhibit E, the
vendors had preserved their redemption option. Upon a move to reconsider, the Court of Appeals
amplified its decision saying,

In view of the refusal of Atty. Pete A. Revilla who was acting in behalf of appellee Canuto Martin,
to receive any amount less than P14,000, nor to accept in behalf of the La Previsora Filipina,
claiming that the latter's right were already ceded to appellee Canuto Martin, we hold that the
question to the efficiency of the amount offered at the time is not as vital to the issue as the
necessity of making one. . . . We find that the plaintiff Maria Reyes, accompanied to one Marcela
Mota de Malonso did make an offer to redeem the property in the property days of December,
1941. Whether or not the amount they had on that occasion was sufficient to redeem the property
at P8,204.60 or P10,204.60 is not vital to the preservation of the rights of the plaintiff's in view of
the refusal to accept any amount less than P14,000.

Having declared that Exhibit E was valid and that the repurchase had to be made at P14,000, we must
necessarily conclude that under the above findings of the Court of Appeals the right to repurchase had
not been preserved.

Nevertheless, let us suppose for the moment that the rights of Revilla and Reyes are governed by Exhibit
E only-not by Exhibit D.

From the findings of the Court of Appeals it is to be deduced that in December Maria Reyes offered to
redeem for less than P8,204.60. The decision of the court of first instance says "all the money she had at
that time was P7,000."

Now then: the repurchase price was P8,204.60 (on the supposition that Exhibit E governs the parties'
rights); Maria Reyes offered to repay in December P7,000 only. The fact that she was told Canuto Martin
wanted P14,000, does not excuse her obligation to offer, within the time stipulated, the full price for the
repurchase: P8,204.60. If it was her theory and position that she had a right to redeem from La Previsora
in accordance with Exhibit E, she would have acted in accordance therewith by offering P8,204.60 to La
Previsora entirely disregarding the demands of any other individual. Undoubtedly, she failed to offer that
amount.

Furthermore, there is no evidenceand the Court of Appeals did not findthat Pedro Revilla was
actually authorized by La Previsora to refuse to repurchase at P8,204.60.

Needless to add, the date of filing of the complaint is immaterial, so long as it is filed within the period of
limitations, its purpose being to enforce a right which must be established within the time to repurchase.

Wherefore with the declaration that option to repurchase, whether under Exhibit E or under Exhibit D, had
not been asserted to the proper time, we hereby absolve the petitioner Canuto Martin from the complaint.
Costs against respondents.

Pablo, Padilla, Tuason, Montemayor, Bautista Angelo, and Labrador, JJ., concur.
8
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-17681 February 26, 1965

MINDANAO ACADEMY, INC., MAURICIO O. BAS, ERLINDA D. DIAZ, accompanied by her husband
ANTOLIN DIAZ, ESTER AIDA D. BAS, accompanied by her husband MAURICIO O. BAS,
ROSALINDA D. BELLEZA, accompanied by her husband APOLINARIO BELLEZA, LUZ MINDA D.
DAJAO, accompanied by her husband ELIGIO C. DAJAO, ADELAIDA D. NUESA, accompanied by
her husband WILSON NUESA, PEDRO N. ABUTON, SY PAOCO, JOSEFA DIGNUM, and PERFECTO
VELASQUEZ, plaintiffs-appellees,
vs.
ILDEFONSO D. YAP, ROSENDA A. DE NUQUI, and SOTERO A. DIONISIO, JR., defendants,
ILDEFONSO D. YAP, defendant-appellant.

-----------------------------

G.R. No. L-17682 February 26, 1965

ROSENDA A. DE NUQUI, SOTERO DIONISIO, JR., ERLINDA DIONISIO-DIAZ and ANTOLIN

DIAZ, plaintiffs-appellees,
vs.
ILDEFONSO D. YAP, defendant-appellant.

Mauricio O. Bas for and in his own behalf as plaintiff-appellee.

Eligio C. Dayao for and in his own behalf as plaintiff-appellee.
Roque Desquitado for other plaintiffs-appellees.
Ambrosio Padilla Law Offices for defendant-appellant.

MAKALINTAL, J.:

By deed entitled "Mutual Agreement," executed on May 10, 1964, Rosenda A. de Nuqui (widow of
deceased Sotero Dionisio) and her son Sotero Dionisio, Jr. sold three parcels of residential land in
Oroquieta, Misamis Occidental, and another parcel in Ozamis City in favor of Ildefonso D. Yap. Included
in the sale were certain buildings situated on said lands as well as laboratory equipment, books, furniture
and fixtures used by two schools established in the respective properties, the Mindanao Academy in
Oroquieta and the Misamis Academy in Ozamis City. The aggregate price stated in the deed was
P100,700.00, to be paid according to the terms and conditions specified in the contract.

Besides Rosenda and her son Sotero, Jr., both of whom signed the instrument, Adelaida Dionisio-Nuesa
(a daughter of Rosenda) is also named therein as co-vendor, but actually did not take part either
personally or through her uncle and supposed attorney-in-fact, Restituto Abuton.

These three Rosenda and her two children above named are referred to in the deed as the owners
pro-indiviso of the properties sold. The truth, however, was that there were other co-owners of the lands,
namely, Erlinda D. Diaz, Ester Aida D. Bas, Rosalinda D. Belleza, and Luz Minda D. Dajao, children also
of Rosenda by her deceased husband Sotero Dionisio, Sr., and that as far as the school building,
equipment, books, furniture and fixtures were concerned, they were owned by the Mindanao Academy,
Inc., a corporation operating both the Mindanao Academy in Oroquieta and the Misamis Academy in
Ozamis City.

The buyer, Ildefonso D. Yap, obtained possession of the properties by virtue of the sale, took over the
operation of the two schools and even changed their names to Harvardian Colleges. In view thereof two
actions were commenced in the Court of First Instance of Misamis Occidental. The first was for
annulment of the sale and recovery of rents and damages (Civil Case No. 1774, filed May 3, 1955) with
the Mindanao Academy, Inc., the five children of Rosenda Nuqui who did not take part in the deed of
sale, and several other persons who were stockholders of the said corporation, as plaintiffs, and the
parties who signed the deed of sale as defendants. The second action was for rescission (Civil Case No.
1907, filed July 17, 1956) with Rosenda Nuqui, Sotero Dionisio, Jr. and Erlinda D. Diaz (and the latter's
husband Antolin Diaz) as plaintiffs, and Ildefonso D. Yap as lone defendant. The other four children of
Rosenda did not join, having previously ceded and quitclaimed their shares in the litigated properties in
favor of their sister Erlinda D. Diaz.

The two actions were tried jointly and on March 31, 1960 the court a quo rendered judgment as follows:

In both Cases

(1) The Mutual Agreement is hereby declared null and void ab initio;

(2) Defendant Ildefonso D. Yap is hereby ordered to pay the costs of the proceedings in both
cases.

In Civil Case No. 1907 only

(1) Defendant Ildefonso D. Yap is hereby ordered to restore to the plaintiffs in said case all the
buildings and grounds described in the Mutual Agreement together with all the permanent
improvements thereon;

(2) To pay to the plaintiffs therein the amount of P300.00 monthly from July 31, 1956 up to the
time he shall have surrendered the properties in question to the plaintiffs herein, plus P1,000.00
as attorney's fees to plaintiffs Antolin and Erlinda D. Diaz.

In Civil Case No. 1774 only

(1) Defendant Ildefonso D. Yap is hereby ordered to restore to the Mindanao Academy, Inc., all
the books laboratory apparatus, furniture and other equipments described in the Mutual
Agreement and specified in the inventory attached to the Records of this case; or in default
thereof, their value in the amount of P23,500.00;

(2) To return all the Records of the Mindanao Academy and Misamis Academy;

(3) To pay to the plaintiffs stockholders of the Mindanao Academy, Inc., the amount of
P10,000.00 as nominal damages, P3,000.00 as exemplary damages; and P2,000.00 as
attorney's fees. These damages shall be apportioned to each of the stockholders named as
plaintiffs in said case in proportion to their respective interests in the corporation.

Ildefonso D. Yap appealed from the foregoing judgment and has assigned five errors therein.

I. He first contends that the lower court erred "in declaring that the mutual agreement dated May 10, 1954
... is entirely void and legally non-existent in that the vendors therein ceded to defendant-appellant not
only their interests, rights, shares and participation in the property sold but also those that belonged to
persons who were not parties thereto."

The lower court did not rule categorically on the question of rescission considering it unnecessary to do
so in view of its conclusion that the contract of sale is null and void. This conclusion is premised on two
grounds: (a) the contract purported to sell properties of which the sellers were not the only owners, since
of the four parcels of land mentioned in the deed their shares consisted only of 7/12, (6/12 for Rosenda
Nuqui and 1/12 for Sotero, Jr.), while in the buildings, laboratory equipment, books, furniture and fixtures
they had no participation at all, the owner being the Mindanao Academy, Inc.; and (b) the prestation
involved in the sale was indivisible, and therefore incapable of partial annulment, inasmuch as the buyer
Yap, by his own admission, would not have entered into the transaction except to acquire all of the
properties purchased by him.

These premises are not challenged by appellant. But he calls attention to one point, namely, that the four
children of Rosenda Nuqui who did not take part in the sale, besides Erlinda Dionisio Diaz, quitclaimed in
favor of the latter their interests in the properties; and that the trial court held that Erlinda as well as her
husband acted in bad faith, because "having reasonable notice of defendants' having unlawfully taken
possession of the property, they failed to make reasonable demands for (him) to vacate the premises to
respect their rights thereto." It is argued that being herself guilty of bad faith, Erlinda D. Diaz, as owner of
5/12 undivided interest in the properties (including the 4/12 ceded to her by her four sisters), is in no
position to ask for annulment of the sale. The argument does not convince us. In the first place the
quitclaim, in the form of an extrajudicial partition, was made on May 6, 1956, after the action for
annulment was filed, wherein the plaintiffs were not only Erlinda but also the other co-owners who took no
part in the sale and to whom there has been no imputation of bad faith. Secondly, the trial court's finding
of bad faith is an erroneous conclusion induced by a manifest oversight of an undisputed fact, namely,
that on July 10, 1954, just a month after the deed of sale in question, Erlinda D. Diaz did file an action
against Ildefonso D. Yap and Rosenda Nuqui, among others, asserting her rights as co-owner of the
properties (Case No. 1646). Finally, bad faith on the part of Erlinda would not militate against the nullity of
the sale, considering that it included not only the lands owned in common by Rosenda Nuqui and her six
children but also the buildings and school facilities owned by the Mindanao Academy, Inc., an entity
which had nothing to do with the transaction and which could be represented solely by its Board of
Trustees.

The first assignment of error is therefore without merit.

II. The second and third errors are discussed jointly in appellant's brief. They read as follows:

THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE FOR RENTS

AND ATTORNEY'S FEES IN THE SUM OF P1,000.00 AFTER DECLARING THAT ALL THE
PLAINTIFFS-APPELLEES IN CIVIL CASE NO. 1907 ACTED IN BAD FAITH.

THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFS-APPELLEES IN SAID CIVIL

CASE NO. 1907 ARE ENTITLED TO RECOVER ALL THE LANDS, BUILDINGS AND OTHER
PERMANENT IMPROVEMENTS DESCRIBED IN THE MUTUAL AGREEMENT DATED MAY 10,
1954.

The lower court correctly found that both vendors and vendee in the sale acted in bad faith and therefore
must be treated, vis-a-vis each other, as having acted in good faith. The return of the properties by the
vendee is a necessary consequence of the decree of annulment. No part of the purchase price having
been paid, as far as the record shows, the trial court correctly made no corresponding order for the
restitution thereof.

In regard to the rents the trial court found that prior to the sale the Mindanao Academy, Inc., was paying
P300.00 monthly for its occupancy of the lands on which the buildings are situated. This is the amount the
defendant has been ordered to pay to the plaintiffs in Civil Case No. 1907, beginning July 31, 1956, when
he filed his "first pleading" in the case. There can be no doubt that Erlinda D. Diaz is entitled to recover a
share of the said rents in proportion to her own interests in the lands and the interest in the four co-
owners which she had acquired. Rosenda Nuqui and her son Sotero, it is true, acted in bad faith when
they sold the properties as theirs alone, but so did the defendant Yap when he purchased them with
knowledge of the fact that there were other co-owners. Although the bad faith of one party neutralizes that
of the other and hence as between themselves their rights would be as if both of them had acted in good
faith at the time of the transaction, this legal fiction of Yap's good faith ceased when the complaint against
him was filed, and consequently the court's declaration of liability for the rents thereafter is correct and
proper. A possessor in good faith is entitled to the fruits only so long as his possession is not legally
interrupted, and such interruption takes place upon service of judicial summons (Arts. 544 and 1123, Civil
Code).

In our opinion the award of attorney's fees to Erlinda D. Diaz and her husband is erroneous. Civil Case
No. 1907, in which said fees have been adjudged, is for rescission (more properly resolution) of the so-
called "mutual agreement" on the ground that the defendant Yap failed to comply with certain
undertakings specified therein relative to the payment of the purchase price. Erlinda Diaz was not a party
to that agreement and hence had no cause of action for rescission. And as already stated, the trial court
did not decide the matter of rescission because of the decree of annulment it rendered in the other case
(Civil Case No. 1774), wherein the defendants are not only Ildefonso D. Yap but also Rosenda Nuqui and
her son Sotero. Erlinda D. Diaz could just as well have refrained from joining as plaintiff in the action for
rescission, not being a party to the contract sought to be rescission and being already one of the plaintiffs
in the other action. In other words, it cannot be said with justification that she was constrained to litigate,
in Civil Case No. 1907, because of some cause attributable to the appellant.

The appellant claims reimbursement for the value of the improvements he allegedly introduced in the
schools, consisting of a new building worth P8,000.00 and a toilet costing P800.00, besides laboratory
equipment, furniture, fixtures and books for the libraries. It should be noted that the judgment of the trial
court specifies, for delivery to the plaintiffs (in Civil Case No. 1907), only "the buildings and
grounds described in the mutual agreement together with all the permanent improvements thereon." If the
defendant constructed a new building, as he alleges, he cannot recover its value because the
construction was done after the filing of the action for annulment, thus rendering him a builder in bad faith
who is denied by law any right of reimbursement.

In connection with the equipment, books, furniture and fixtures brought in by him, he is not entitled to
reimbursement either, because the judgment does not award them to any of the plaintiffs in these two
actions. What is adjudged (in Civil Case No. 1774) is for the defendant to restore to the Mindanao
Academy, Inc. all the books, laboratory apparatus, furniture and other equipment "described in the Mutual
Agreement and specified in the Inventory attached to the records of this case; or in default thereof, their
value in the amount of P23,500.00." In other words, whatever has been brought in by the defendant is
outside the scope of the judgment and may be retained by him.

III. The appellant's fourth assignment of error refers to the nominal and exemplary damages, as well as
the attorney's fees, granted to the stockholders of the Mindanao Academy, Inc. The trial court awarded no
compensatory damages because the Mindanao Academy, Inc. had been operating the two schools at a
loss before the sale in question, and the defendant himself was no more successful after he took over.
Are the stockholders of the said corporation who joined as plaintiffs in Civil Case No. 1774 entitled to
nominal and exemplary damages? We do not believe so. According to their second amended complaint
they were joined merely pro forma, and "for the sole purpose of the moral damage which has been all the
time alleged in the original complaint." Indeed the interests of the said stockholders, if any, were already
represented by the corporation itself, which was the proper party plaintiff; and no cause of action accruing
to them separately from the corporation is alleged in the complaint, other than that for moral damages
due to "extreme mental anguish, serious anxiety and wounded feelings." The trial court, however, ruled
out this claim for moral damages and no appeal from such ruling has been taken. The award for nominal
and exemplary damages should be eliminated in toto.
The award for attorney's fees in the amount of P2,000.00 should be upheld, although the same should be
for the account, not of the plaintiff stockholders of the Mindanao Academy, Inc., but of the corporation
itself, and payable to their common counsel as prayed for in the complaint.

IV. Under the fifth and last assignment of error the appellant insists on the warranty provided for in clause
VI of the deed of sale in view of the claims of the co-owners who did not take part therein. The said
clause provides: "if any claim shall be filed against the properties or any right, share or interest which are
in the possession of the party of the First Part (vendors) which had been hereby transferred, ceded and
conveyed unto the party of the Second Part (vendee) the party of the First Part assumes as it hereby
holds itself answerable.

It is unnecessary to pass upon the question posed in this assignment of error in view of the total
annulment of the sale on grounds concerning which both parties thereto were at fault. The nullity of the
contract precludes enforcement of any of its stipulations.

WHEREFORE, the judgment appealed from is modified by eliminating therefrom the award of attorney's
fees of P1,000.00 in favor of Erlinda D. Diaz and her husband, plaintiffs in Civil Case No. 1907, and the
award of nominal and exemplary damages in Civil Case No. 1774; and making the award of attorney's
fees in the sum of P2,000.00 payable to counsel for the account of the Mindanao Academy, Inc. instead
of the plaintiff stockholders. In all other respects the judgment appealed from is affirmed. No
pronouncement as to costs.

Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Paredes and Bengzon, J.P., JJ., concur.
Barrera, Dizon, Regala and Zaldivar, JJ., took no part.