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G.R. No. 118114 December 7, 1995 The document was signed by all of Pido's heirs.

Private respondent Edy


de los Reyes did not sign said document.
TEODORO ACAP, petitioner,
vs. It will be noted that at the time of Cosme Pido's death, title to the property
COURT OF APPEALS and EDY DE LOS REYES, respondents. continued to be registered in the name of the Vasquez spouses. Upon
obtaining the Declaration of Heirship with Waiver of Rights in his favor,
private respondent Edy de los Reyes filed the same with the Registry of
Deeds as part of a notice of an adverse claimagainst the original certificate
of title.
PADILLA, J.:
Thereafter, private respondent sought for petitioner (Acap) to personally
This is a petition for review on certiorari of the decision1 of the inform him that he (Edy) had become the new owner of the land and that
Court of Appeals, 2nd Division, in CA-G.R. No. 36177, which the lease rentals thereon should be paid to him. Private respondent further
affirmed the decision2 of the Regional Trial Court of Himamaylan, alleged that he and petitioner entered into an oral lease agreement
Negros Occidental holding that private respondent Edy de los wherein petitioner agreed to pay ten (10) cavans of palay per annum as
Reyes had acquired ownership of Lot No. 1130 of the Cadastral lease rental. In 1982, petitioner allegedly complied with said obligation. In
Survey of Hinigaran, Negros Occidental based on a document 1983, however, petitioner refused to pay any further lease rentals on the
entitled "Declaration of Heirship and Waiver of Rights", and land, prompting private respondent to seek the assistance of the then
ordering the dispossession of petitioner as leasehold tenant of the Ministry of Agrarian Reform (MAR) in Hinigaran, Negros Occidental. The
land for failure to pay rentals. MAR invited petitioner to a conference scheduled on 13 October 1983.
Petitioner did not attend the conference but sent his wife instead to the
The facts of the case are as follows: conference. During the meeting, an officer of the Ministry informed Acap's
wife about private respondent's ownership of the said land but she stated
that she and her husband (Teodoro) did not recognize private
The title to Lot No. 1130 of the Cadastral Survey of Hinigaran, respondent's claim of ownership over the land.
Negros Occidental was evidenced by OCT No. R-12179. The lot
has an area of 13,720 sq. meters. The title was issued and is
registered in the name of spouses Santiago Vasquez and Lorenza On 28 April 1988, after the lapse of four (4) years, private respondent filed
Oruma. After both spouses died, their only son Felixberto inherited a complaint for recovery of possession and damages against petitioner,
the lot. In 1975, Felixberto executed a duly notarized document alleging in the main that as his leasehold tenant, petitioner refused and
entitled "Declaration of Heirship and Deed of Absolute Sale" in failed to pay the agreed annual rental of ten (10) cavans of palay despite
favor of Cosme Pido. repeated demands.

The evidence before the court a quo established that since 1960, During the trial before the court a quo, petitioner reiterated his refusal to
petitioner Teodoro Acap had been the tenant of a portion of the recognize private respondent's ownership over the subject land. He
said land, covering an area of nine thousand five hundred (9,500) averred that he continues to recognize Cosme Pido as the owner of the
meters. When ownership was transferred in 1975 by Felixberto to said land, and having been a registered tenant therein since 1960, he
Cosme Pido, Acap continued to be the registered tenant thereof never reneged on his rental obligations. When Pido died, he continued to
and religiously paid his leasehold rentals to Pido and thereafter, pay rentals to Pido's widow. When the latter left for abroad, she instructed
upon Pido's death, to his widow Laurenciana. him to stay in the landholding and to pay the accumulated rentals upon her
demand or return from abroad.

The controversy began when Pido died intestate and on 27


November 1981, his surviving heirs executed a notarized Petitioner further claimed before the trial court that he had no knowledge
document denominated as "Declaration of Heirship and Waiver of about any transfer or sale of the lot to private respondent in 1981 and even
Rights of Lot No. 1130 Hinigaran Cadastre," wherein they declared; the following year after Laurenciana's departure for abroad. He denied
to quote its pertinent portions, that: having entered into a verbal lease tenancy contract with private
respondent and that assuming that the said lot was indeed sold to private
respondent without his knowledge, R.A. 3844, as amended, grants him
. . . Cosme Pido died in the Municipality of Hinigaran, Negros the right to redeem the same at a reasonable price. Petitioner also
Occidental, he died intestate and without any known debts and bewailed private respondent's ejectment action as a violation of his right to
obligations which the said parcel of land is (sic) held liable. security of tenure under P.D. 27.

That Cosme Pido was survived by his/her legitimate heirs, namely: On 20 August 1991, the lower court rendered a decision in favor of private
LAURENCIANA PIDO, wife, ELY, ERVIN, ELMER, and ELECHOR respondent, the dispositive part of which reads:
all surnamed PIDO; children;

WHEREFORE, premises considered, the Court renders judgment in favor


That invoking the provision of Section 1, Rule 74 of the Rules of of the plaintiff, Edy de los Reyes, and against the defendant, Teodoro
Court, the above-mentioned heirs do hereby declare unto [sic] Acap, ordering the following, to wit:
ourselves the only heirs of the late Cosme Pido and that we hereby
adjudicate unto ourselves the above-mentioned parcel of land in
equal shares. 1. Declaring forfeiture of defendant's preferred right to issuance of a
Certificate of Land Transfer under Presidential Decree No. 27 and his
farmholdings;
Now, therefore, We LAURENCIANA3 , ELY, ELMER, ERVIN and
ELECHOR all surnamed PIDO, do hereby waive, quitclaim all our
rights, interests and participation over the said parcel of land in 2. Ordering the defendant Teodoro Acap to deliver possession of said
favor of EDY DE LOS REYES, of legal age, (f)ilipino, married to farm to plaintiff, and;
VIRGINIA DE LOS REYES, and resident of Hinigaran, Negros
Occidental, Philippines. . . .4 (Emphasis supplied)

Page 1 of 105
3. Ordering the defendant to pay P5,000.00 as attorney's fees, the through the aforementioned Declaration of Heirship and Waiver of Rights.
sum of P1,000.00 as expenses of litigation and the amount of
P10,000.00 as actual damages.5
Hence, the issues to be resolved presently are the following:

In arriving at the above-mentioned judgment, the trial court stated


1. WHETHER OR NOT THE SUBJECT DECLARATION OF HEIRSHIP
that the evidence had established that the subject land was "sold"
AND WAIVER OF RIGHTS IS A RECOGNIZED MODE OF ACQUIRING
by the heirs of Cosme Pido to private respondent. This is clear from
OWNERSHIP BY PRIVATE RESPONDENT OVER THE LOT IN
the following disquisitions contained in the trial court's six (6) page
QUESTION.
decision:

2. WHETHER OR NOT THE SAID DOCUMENT CAN BE CONSIDERED


There is no doubt that defendant is a registered tenant of Cosme
A DEED OF SALE IN FAVOR OF PRIVATE RESPONDENT OF THE LOT
Pido. However, when the latter died their tenancy relations
IN QUESTION.
changed since ownership of said land was passed on to his heirs
who, by executing a Deed of Sale, which defendant admitted in his
affidavit, likewise passed on their ownership of Lot 1130 to herein Petitioner argues that the Regional Trial Court, in its order dated 7 August
plaintiff (private respondent). As owner hereof, plaintiff has the right 1990, explicitly excluded the document marked as Exhibit "D" (Declaration
to demand payment of rental and the tenant is obligated to pay of Heirship, etc.) as private respondent's evidence because it was not
rentals due from the time demand is made. . . .6 registered with the Registry of Deeds and was not identified by anyone of
the heirs of Cosme Pido. The Court of Appeals, however, held the same to
be admissible, it being a notarized document, hence, a prima facie proof
xxx xxx xxx
of private respondents' ownership of the lot to which it refers.

Certainly, the sale of the Pido family of Lot 1130 to herein plaintiff
Petitioner points out that the Declaration of Heirship and Waiver of Rights
does not of itself extinguish the relationship. There was only a
is not one of the recognized modes of acquiring ownership under Article
change of the personality of the lessor in the person of herein 712 of the Civil Code. Neither can the same be considered a deed of sale
plaintiff Edy de los Reyes who being the purchaser or transferee,
so as to transfer ownership of the land to private respondent because no
assumes the rights and obligations of the former landowner to the
consideration is stated in the contract (assuming it is a contract or deed of
tenant Teodoro Acap, herein defendant.7
sale).

Aggrieved, petitioner appealed to the Court of Appeals, imputing


Private respondent defends the decision of respondent Court of Appeals
error to the lower court when it ruled that private respondent
as in accord with the evidence and the law. He posits that while it may
acquired ownership of Lot No. 1130 and that he, as tenant, should indeed be true that the trial court excluded his Exhibit "D" which is the
pay rentals to private respondent and that failing to pay the same
Declaration of Heirship and Waiver of Rights as part of his evidence, the
from 1983 to 1987, his right to a certificate of land transfer under
trial court declared him nonetheless owner of the subject lot based on
P.D. 27 was deemed forfeited.
other evidence adduced during the trial, namely, the notice of adverse
claim (Exhibit "E") duly registered by him with the Registry of Deeds,
The Court of Appeals brushed aside petitioner's argument that the which contains the questioned Declaration of Heirship and Waiver of
Declaration of Heirship and Waiver of Rights (Exhibit "D"), the Rights as an integral part thereof.
document relied upon by private respondent to prove his ownership
to the lot, was excluded by the lower court in its order dated 27
We find the petition impressed with merit.
August 1990. The order indeed noted that the document was not
identified by Cosme Pido's heirs and was not registered with the
Registry of Deeds of Negros Occidental. According to respondent In the first place, an asserted right or claim to ownership or a real right
court, however, since the Declaration of Heirship and Waiver of over a thing arising from a juridical act, however justified, is not per
Rights appears to have been duly notarized, no further proof of its se sufficient to give rise to ownership over the res. That right or title must
due execution was necessary. Like the trial court, respondent court be completed by fulfilling certain conditions imposed by law. Hence,
was also convinced that the said document stands as prima ownership and real rights are acquired only pursuant to a legal mode or
facie proof of appellee's (private respondent's) ownership of the process. While title is the juridical justification, mode is the actual process
land in dispute. of acquisition or transfer of ownership over a thing in question.8

With respect to its non-registration, respondent court noted that Under Article 712 of the Civil Code, the modes of acquiring ownership are
petitioner had actual knowledge of the subject saleof the land in generally classified into two (2) classes, namely, the original mode (i.e.,
dispute to private respondent because as early as 1983, he through occupation, acquisitive prescription, law or intellectual creation)
(petitioner) already knew of private respondent's claim over the and the derivative mode (i.e., through succession mortis causa or tradition
said land but which he thereafter denied, and that in 1982, he as a result of certain contracts, such as sale, barter, donation, assignment
(petitioner) actually paid rent to private respondent. Otherwise or mutuum).
stated, respondent court considered this fact of rental payment in
1982 as estoppel on petitioner's part to thereafter refute private In the case at bench, the trial court was obviously confused as to the
respondent's claim of ownership over the said land. Under these nature and effect of the Declaration of Heirship and Waiver of Rights,
circumstances, respondent court ruled that indeed there was equating the same with a contract (deed) of sale. They are not the same.
deliberate refusal by petitioner to pay rent for a continued period of
five years that merited forfeiture of his otherwise preferred right to
the issuance of a certificate of land transfer. In a Contract of Sale, one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other
party to pay a price certain in money or its equivalent.9
In the present petition, petitioner impugns the decision of the Court
of Appeals as not in accord with the law and evidence when it rules
that private respondent acquired ownership of Lot No. 1130 Upon the other hand, a declaration of heirship and waiver of rights
operates as a public instrument when filed with the Registry of Deeds

Page 2 of 105
whereby the intestate heirs adjudicate and divide the estate left by have in fact delivered 10 cavans of palay as annual rental for 1982 to
the decedent among themselves as they see fit. It is in effect an private respondent. But in 1983, it is clear that petitioner had misgivings
extrajudicial settlement between the heirs under Rule 74 of the over private respondent's claim of ownership over the said land because
Rules of Court.10 in the October 1983 MAR conference, his wife Laurenciana categorically
denied all of private respondent's allegations. In fact, petitioner even
secured a certificate from the MAR dated 9 May 1988 to the effect that he
Hence, there is a marked difference between a sale of hereditary
continued to be the registered tenant of Cosme Pido and not of private
rights and a waiver of hereditary rights. The first presumes the
respondent. The reason is that private respondent never registered the
existence of a contract or deed of sale between the parties. 11 The
Declaration of Heirship with Waiver of Rights with the Registry of Deeds or
second is, technically speaking, a mode of extinction of ownership
where there is an abdication or intentional relinquishment of a with the MAR. Instead, he (private respondent) sought to do indirectly
what could not be done directly, i.e., file a notice of adverse claim on the
known right with knowledge of its existence and intention to
said lot to establish ownership thereover.
relinquish it, in favor of other persons who are co-heirs in the
succession.12 Private respondent, being then a stranger to the
succession of Cosme Pido, cannot conclusively claim ownership It stands to reason, therefore, to hold that there was no unjustified or
over the subject lot on the sole basis of the waiver document which deliberate refusal by petitioner to pay the lease rentals or amortizations to
neither recites the elements of either a sale, 13 or a donation,14 or the landowner/agricultural lessor which, in this case, private respondent
any other derivative mode of acquiring ownership. failed to establish in his favor by clear and convincing evidence. 16

Quite surprisingly, both the trial court and public respondent Court Consequently, the sanction of forfeiture of his preferred right to be issued
of Appeals concluded that a "sale" transpired between Cosme a Certificate of Land Transfer under P.D. 27 and to the possession of his
Pido's heirs and private respondent and that petitioner acquired farmholdings should not be applied against petitioners, since private
actual knowledge of said sale when he was summoned by the respondent has not established a cause of action for recovery of
Ministry of Agrarian Reform to discuss private respondent's claim possession against petitioner.
over the lot in question. This conclusion has no basis both in fact
and in law.
WHEREFORE, premises considered, the Court hereby GRANTS the
petition and the decision of the Court of Appeals dated 1 May 1994 which
On record, Exhibit "D", which is the "Declaration of Heirship and affirmed the decision of the RTC of Himamaylan, Negros Occidental dated
Waiver of Rights" was excluded by the trial court in its order 20 August 1991 is hereby SET ASIDE. The private respondent's complaint
dated 27 August 1990 because the document was neither for recovery of possession and damages against petitioner Acap is hereby
registered with the Registry of Deeds nor identified by the heirs of DISMISSED for failure to properly state a cause of action, without
Cosme Pido. There is no showing that private respondent had the prejudice to private respondent taking the proper legal steps to establish
same document attached to or made part of the record. What the the legal mode by which he claims to have acquired ownership of the land
trial court admitted was Annex "E", a notice of adverse claim filed in question.
with the Registry of Deeds which contained the Declaration of
Heirship with Waiver of rights and was annotated at the back of the
SO ORDERED.
Original Certificate of Title to the land in question.

Davide, Jr., Bellosillo, Kapunan and Hermosisima, Jr., JJ., concur.


A notice of adverse claim, by its nature, does not however prove
private respondent's ownership over the tenanted lot. "A notice of
adverse claim is nothing but a notice of a claim adverse to the
registered owner, the validity of which is yet to be established in
court at some future date, and is no better than a notice of lis
pendens which is a notice of a case already pending in court."15
G.R. No. L-116650 May 23, 1995

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


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

Consequently, while the transaction between Pido's heirs and


private respondent may be binding on both parties, the right of DAVIDE, JR., J.:
petitioner as a registered tenant to the land cannot be perfunctorily
forfeited on a mere allegation of private respondent's ownership
without the corresponding proof thereof.
At the heart of the present controversy is the document marked Exhibit "A"
1 for the private respondent, which was signed by a sales representative
Petitioner had been a registered tenant in the subject land since
of Toyota Shaw, Inc. named Popong Bernardo. The document reads as
1960 and religiously paid lease rentals thereon. In his mind, he
follows:
continued to be the registered tenant of Cosme Pido and his family
(after Pido's death), even if in 1982, private respondent allegedly
informed petitioner that he had become the new owner of the land.
4 June 1989
Under the circumstances, petitioner may have, in good faith,
assumed such statement of private respondent to be true and may
Page 3 of 105
AGREEMENTS BETWEEN MR. SOSA The next day, 15 June 1989, Sosa and Gilbert went to Toyota to deliver
the downpayment of P100,000.00. They met Bernardo who then
& POPONG BERNARDO OF TOYOTA accomplished a printed Vehicle Sales Proposal (VSP) No. 928,2 on which
Gilbert signed under the subheading CONFORME. This document shows
SHAW, INC. that the customer's name is "MR. LUNA SOSA" with home address at No.
2316 Guijo Street, United Parañaque II; that the model series of the
vehicle is a "Lite Ace 1500" described as "4 Dr minibus"; that payment is
1. all necessary documents will be submitted to TOYOTA by "installment," to be financed by "B.A.," 3 with the initial cash outlay of
SHAW, INC. (POPONG BERNARDO) a week after, upon arrival of P100,000.00 broken down as follows:
Mr. Sosa from the Province (Marinduque) where the unit will be
used on the 19th of June.
a)

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


June 15, 1989. downpayment

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


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

P 53,148.00
Very truly yours,

b)
(Sgd.) POPONG BERNARDO.

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

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


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

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


Page 4 of 105
Thereafter, Sosa sent two letters to Toyota. In the first letter, dated 27
June 1989 and signed by him, he demanded the refund, within five days
P 500.00 from receipt, of the downpayment of P100,000.00 plus interest from the
time he paid it and the payment of damages with a warning that in case of
Toyota's failure to do so he would be constrained to take legal action. 6
The second, dated 4 November 1989 and signed by M. O. Caballes,
accessories
Sosa's counsel, demanded one million pesos representing interest and
damages, again, with a warning that legal action would be taken if
payment was not made within three days.7 Toyota's counsel answered
— through a letter dated 27 November 1989 8 refusing to accede to the
demands of Sosa. But even before this answer was made and received by
Sosa, the latter filed on 20 November 1989 with Branch 38 of the Regional
Trial Court (RTC) of Marinduque a complaint against Toyota for damages
P 29,000.00 under Articles 19 and 21 of the Civil Code in the total amount of
P1,230,000.00.9 He alleges, inter alia, that:

9. As a result of defendant's failure and/or refusal to deliver the vehicle


to plaintiff, plaintiff suffered embarrassment, humiliation, ridicule, mental
and that the "BALANCE TO BE FINANCED" is "P274,137.00." The anguish and sleepless nights because: (i) he and his family were
spaces provided for "Delivery Terms" were not filled-up. It also constrained to take the public transportation from Manila to Lucena City on
contains the following pertinent provisions: their way to Marinduque; (ii) his balikbayan-guest canceled his scheduled
first visit to Marinduque in order to avoid the inconvenience of taking public
transportation; and (iii) his relatives, friends, neighbors and other
provincemates, continuously irked him about "his Brand-New Toyota Lite
CONDITIONS OF SALES Ace — that never was." Under the circumstances, defendant should be
made liable to the plaintiff for moral damages in the amount of One Million
Pesos (P1,000,000.00). 10
1. This sale is subject to availability of unit.

In its answer to the complaint, Toyota alleged that no sale was entered
into between it and Sosa, that Bernardo had no authority to sign Exhibit
2. Stated Price is subject to change without prior notice, Price
"A" for and in its behalf, and that Bernardo signed Exhibit "A" in his
prevailing and in effect at time of selling will apply. . . .
personal capacity. As special and affirmative defenses, it alleged that: the
VSP did not state date of delivery; Sosa had not completed the documents
required by the financing company, and as a matter of policy, the vehicle
Rodrigo Quirante, the Sales Supervisor of Bernardo, checked and could not and would not be released prior to full compliance with financing
approved the VSP. requirements, submission of all documents, and execution of the sales
agreement/invoice; the P100,000.00 was returned to and received by
Sosa; the venue was improperly laid; and Sosa did not have a sufficient
cause of action against it. It also interposed compulsory counterclaims.
On 17 June 1989, at around 9:30 a.m., Bernardo called Gilbert to
inform him that the vehicle would not be ready for pick up at 10:00
a.m. as previously agreed upon but at 2:00 p.m. that same day. At
2:00 p.m., Sosa and Gilbert met Bernardo at the latter's office. After trial on the issues agreed upon during the pre-trial session, 11 the
According to Sosa, Bernardo informed them that the Lite Ace was trial court rendered on 18 February 1992 a decision in favor of Sosa. 12 It
being readied for delivery. After waiting for about an hour, Bernardo ruled that Exhibit "A," the "AGREEMENTS BETWEEN MR. SOSA AND
told them that the car could not be delivered because "nasulot ang POPONG BERNARDO," was a valid perfected contract of sale between
unit ng ibang malakas." Sosa and Toyota which bound Toyota to deliver the vehicle to Sosa, and
further agreed with Sosa that Toyota acted in bad faith in selling to another
the unit already reserved for him.

Toyota contends, however, that the Lite Ace was not delivered to
Sosa because of the disapproval by B.A. Finance of the credit
financing application of Sosa. It further alleged that a particular unit As to Toyota's contention that Bernardo had no authority to bind it through
had already been reserved and earmarked for Sosa but could not Exhibit "A," the trial court held that the extent of Bernardo's authority "was
be released due to the uncertainty of payment of the balance of the not made known to plaintiff," for as testified to by Quirante, "they do not
purchase price. Toyota then gave Sosa the option to purchase the volunteer any information as to the company's sales policy and guidelines
unit by paying the full purchase price in cash but Sosa refused. because they are internal matters." 13 Moreover, "[f]rom the beginning of
the transaction up to its consummation when the downpayment was made
by the plaintiff, the defendants had made known to the plaintiff the
impression that Popong Bernardo is an authorized sales executive as it
After it became clear that the Lite Ace would not be delivered to him, permitted the latter to do acts within the scope of an apparent authority
Sosa asked that his downpayment be refunded. Toyota did so on holding him out to the public as possessing power to do these acts." 14
the very same day by issuing a Far East Bank check for the full Bernardo then "was an agent of the defendant Toyota Shaw, Inc. and
amount of P100,000.00, 4 the receipt of which was shown by a hence bound the defendants." 15
check voucher of Toyota,5 which Sosa signed with the reservation,
"without prejudice to our future claims for damages."

Page 5 of 105
The court further declared that "Luna Sosa proved his social Art. 1458. By the contract of sale one of the contracting parties obligates
standing in the community and suffered besmirched reputation, himself to transfer the ownership of and to deliver a determinate thing, and
wounded feelings and sleepless nights for which he ought to be the other to pay therefor a price certain in money or its equivalent.
compensated." 16 Accordingly, it disposed as follows:

A contract of sale may be absolute or conditional.


WHEREFORE, viewed from the above findings, judgment is hereby
rendered in favor of the plaintiff and against the defendant:
and Article 1475 specifically provides when it is deemed perfected:

1. ordering the defendant to pay to the plaintiff the sum of


P75,000.00 for moral damages;
Art. 1475. The contract of sale is perfected at the moment there is a
meeting of minds upon the thing which is the object of the contract and
upon the price.
2. ordering the defendant to pay the plaintiff the sum of
P10,000.00 for exemplary damages;
From that moment, the parties may reciprocally demand performance,
subject to the provisions of the law governing the form of contracts.
3. ordering the defendant to pay the sum of P30,000.00
attorney's fees plus P2,000.00 lawyer's transportation fare per trip
in attending to the hearing of this case;
What is clear from Exhibit "A" is not what the trial court and the Court of
Appeals appear to see. It is not a contract of sale. No obligation on the part
of Toyota to transfer ownership of a determinate thing to Sosa and no
4. ordering the defendant to pay the plaintiff the sum of correlative obligation on the part of the latter to pay therefor a price certain
P2,000.00 transportation fare per trip of the plaintiff in attending the appears therein. The provision on the downpayment of P100,000.00 made
hearing of this case; and no specific reference to a sale of a vehicle. If it was intended for a contract
of sale, it could only refer to a sale on installment basis, as the VSP
executed the following day confirmed. But nothing was mentioned about
the full purchase price and the manner the installments were to be paid.
5. ordering the defendant to pay the cost of suit.

This Court had already ruled that a definite agreement on the manner of
SO ORDERED. payment of the price is an essential element in the formation of a binding
and enforceable contract of sale. 18 This is so because the agreement as
to the manner of payment goes into the price such that a disagreement on
Dissatisfied with the trial court's judgment, Toyota appealed to the the manner of payment is tantamount to a failure to agree on the price.
Court of Appeals. The case was docketed as CA-G.R. CV No. Definiteness as to the price is an essential element of a binding agreement
40043. In its decision promulgated on 29 July 1994,17 the Court of to sell personal property. 19
Appeals affirmed in toto the appealed decision.

Moreover, Exhibit "A" shows the absence of a meeting of minds between


Toyota now comes before this Court via this petition and raises the Toyota and Sosa. For one thing, Sosa did not even sign it. For another,
core issue stated at the beginning of the ponencia and also the Sosa was well aware from its title, written in bold letters, viz.,
following related issues: (a) whether or not the standard VSP was
the true and documented understanding of the parties which would
have led to the ultimate contract of sale, (b) whether or not Sosa AGREEMENTS BETWEEN MR. SOSA & POPONG BERNARDO OF
has any legal and demandable right to the delivery of the vehicle TOYOTA SHAW, INC.
despite the non-payment of the consideration and the non-approval
of his credit application by B.A. Finance, (c) whether or not Toyota
acted in good faith when it did not release the vehicle to Sosa, and
(d) whether or not Toyota may be held liable for damages. that he was not dealing with Toyota but with Popong Bernardo and that the
latter did not misrepresent that he had the authority to sell any Toyota
vehicle. He knew that Bernardo was only a sales representative of Toyota
and hence a mere agent of the latter. It was incumbent upon Sosa to act
We find merit in the petition. with ordinary prudence and reasonable diligence to know the extent of
Bernardo's authority as an

agent20 in respect of contracts to sell Toyota's vehicles. A person dealing


Neither logic nor recourse to one's imagination can lead to the
with an agent is put upon inquiry and must discover upon his peril the
conclusion that Exhibit "A" is a perfected contract of sale.
authority of the agent.21

Article 1458 of the Civil Code defines a contract of sale as follows:


At the most, Exhibit "A" may be considered as part of the initial phase of
the generation or negotiation stage of a contract of sale. There are three
stages in the contract of sale, namely:

Page 6 of 105
not be ready for pick-up at 10:00 a.m. of June 17, 1989 but at 2:00 p.m. of
that day instead. Plaintiff and his son went to defendant's office on June
(a) preparation, conception, or generation, which is the period of 17 1989 at 2:00 p.m. in order to pick-up the vehicle but the defendant for
negotiation and bargaining, ending at the moment of agreement of reasons known only to its representatives, refused and/or failed to release
the parties; the vehicle to the plaintiff. Plaintiff demanded for an explanation, but
nothing was given; . . . (Emphasis supplied). 25

(b) perfection or birth of the contract, which is the moment when


the parties come to agree on the terms of the contract; and The VSP was a mere proposal which was aborted in lieu of subsequent
events. It follows that the VSP created no demandable right in favor of
Sosa for the delivery of the vehicle to him, and its non-delivery did not
cause any legally indemnifiable injury.
(c) consummation or death, which is the fulfillment or
performance of the terms agreed upon in the contract.22

The award then of moral and exemplary damages and attorney's fees and
costs of suit is without legal basis. Besides, the only ground upon which
The second phase of the generation or negotiation stage in this
Sosa claimed moral damages is that since it was known to his friends,
case was the execution of the VSP. It must be emphasized that
townmates, and relatives that he was buying a Toyota Lite Ace which they
thereunder, the downpayment of the purchase price was
expected to see on his birthday, he suffered humiliation, shame, and
P53,148.00 while the balance to be paid on installment should be
sleepless nights when the van was not delivered. The van became the
financed by B.A. Finance Corporation. It is, of course, to be
subject matter of talks during his celebration that he may not have paid for
assumed that B.A. Finance Corp. was acceptable to Toyota,
it, and this created an impression against his business standing and
otherwise it should not have mentioned B.A. Finance in the VSP.
reputation. At the bottom of this claim is nothing but misplaced pride and
ego. He should not have announced his plan to buy a Toyota Lite Ace
knowing that he might not be able to pay the full purchase price. It was he
Financing companies are defined in Section 3(a) of R.A. No. 5980, who brought embarrassment upon himself by bragging about a thing
as amended by P.D. No. 1454 and P.D. No. 1793, as "corporations which he did not own yet.
or partnerships, except those regulated by the Central Bank of the
Philippines, the Insurance Commission and the Cooperatives
Administration Office, which are primarily organized for the purpose
Since Sosa is not entitled to moral damages and there being no award for
of extending credit facilities to consumers and to industrial,
temperate, liquidated, or compensatory damages, he is likewise not
commercial, or agricultural enterprises, either by discounting or
entitled to exemplary damages. Under Article 2229 of the Civil Code,
factoring commercial papers or accounts receivables, or by buying
exemplary or corrective damages are imposed by way of example or
and selling contracts, leases, chattel mortgages, or other evidence
correction for the public good, in addition to moral, temperate, liquidated,
of indebtedness, or by leasing of motor vehicles, heavy equipment
or compensatory damages.
and industrial machinery, business and office machines and
equipment, appliances and other movable property." 23

Also, it is settled that for attorney's fees to be granted, the court must
explicitly state in the body of the decision, and not only in the dispositive
Accordingly, in a sale on installment basis which is financed by a
portion thereof, the legal reason for the award of attorney's fees. 26 No
financing company, three parties are thus involved: the buyer who
such explicit determination thereon was made in the body of the decision
executes a note or notes for the unpaid balance of the price of the
of the trial court. No reason thus exists for such an award.
thing purchased on installment, the seller who assigns the notes or
discounts them with a financing company, and the financing
company which is subrogated in the place of the seller, as the
creditor of the installment buyer. 24 Since B.A. Finance did not WHEREFORE, the instant petition is GRANTED. The challenged decision
approve Sosa's application, there was then no meeting of minds on of the Court of Appeals in CA-G.R. CV NO. 40043 as well as that of
the sale on installment basis. Branch 38 of the Regional Trial Court of Marinduque in Civil Case No.
89-14 are REVERSED and SET ASIDE and the complaint in Civil Case
No. 89-14 is DISMISSED. The counterclaim therein is likewise
DISMISSED.
We are inclined to believe Toyota's version that B.A. Finance
disapproved Sosa's application for which reason it suggested to
Sosa that he pay the full purchase price. When the latter refused,
Toyota cancelled the VSP and returned to him his P100,000.00. No pronouncement as to costs.
Sosa's version that the VSP was cancelled because, according to
Bernardo, the vehicle was delivered to another who was "mas
malakas" does not inspire belief and was obviously a delayed
afterthought. It is claimed that Bernardo said, "Pasensiya kayo, SO ORDERED.
nasulot ang unit ng ibang malakas," while the Sosas had already
been waiting for an hour for the delivery of the vehicle in the
afternoon of 17 June 1989. However, in paragraph 7 of his
complaint, Sosa solemnly states:

G.R. No. 143513 November 14, 2001

On June 17, 1989 at around 9:30 o'clock in the morning,


defendant's sales representative, Mr. Popong Bernardo, called
plaintiff's house and informed the plaintiff's son that the vehicle will
Page 7 of 105
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES, petitioner, pursuance of the resolution, the parties entered into a new agreement for
vs. a ten-year lease of the property, renewable for another ten (10) years,
COURT OF APPEALS and FIRESTONE CERAMICS, expressly granting FIRESTONE the first option to purchase the leased
INC., respondents. premises in the event that it decided "to dispose and sell these properties
including the lot . . . . "5
x---------------------------------------------------------x
The contracts of lease conspicuously contain an identically worded
G.R. No. 143590 November 14, 2001 provision requiring FIRESTONE to construct buildings and other
improvements within the leased premises worth several hundred
thousands of pesos.6
NATIONAL DEVELOPMENT CORPORATION, petitioner,
vs.
FIRESTONE CERAMICS, INC., respondents. The parties' lessor-lessee relationship went smoothly until early 1988
when FIRESTONE, cognizant of the impending expiration of their lease
agreement with NDC, informed the latter through several letters and
BELLOSILLO, J.: telephone calls that it was renewing its lease over the property. While its
letter of 17 March 1988 was answered by Antonio A. Henson, General
A litigation is not simply a contest of litigants before the bar of Manager of NDC, who promised immediate action on the matter, the rest
public opinion; more than that, it is a pursuit of justice through legal of its communications remained unacknowledged.7 FIRESTONE's
and equitable means. To prevent the search for justice from predicament worsened when rumors of NDC's supposed plans to dispose
evolving into a competition for public approval, society invests the of the subject property in favor of petitioner Polytechnic University of the
judiciary with complete independence thereby insulating it from Philippines (PUP) came to its knowledge. Forthwith, FIRESTONE served
demands expressed through any medium, the press not excluded. notice on NDC conveying its desire to purchase the property in the
Thus, if the court would merely reflect, and worse, succumb to the exercise of its contractual right of first refusal.
great pressures of the day, the end result, it is feared, would be a
travesty of justice. Apprehensive that its interest in the property would be disregarded,
FIRESTONE instituted an action for specific performance to compel NDC
In the early sixties, petitioner National Development Corporation to sell the leased property in its favor. FIRESTONE averred that it was
(NDC), a government owned and controlled corporation created pre-empting the impending sale of the NDC compound to petitioner PUP
under CA 182 as amended by CA 311 and PD No. 668, had in its in violation of its leasehold rights over the 2.60-hectare8property and the
disposal a ten (10)-hectare property located along Pureza St., Sta. warehouses thereon which would expire in 1999. FIRESTONE likewise
Mesa, Manila. The estate was popularly known as the NDC prayed for the issuance of a writ of preliminary injunction to enjoin NDC
compound and covered by Transfer Certificates of Title Nos. 92885, from disposing of the property pending the settlement of the controversy.9
110301 and 145470.
In support of its complaint, FIRESTONE adduced in evidence a letter of
Sometime in May 1965 private respondent Firestone Ceramics Inc. Antonio A. Henson dated 15 July 1988 addressed to Mr. Jake C. Lagonera,
(FIRESTONE) manifested its desire to lease a portion of the Director and Special Assistant to Executive Secretary Catalino Macaraeg,
property for its ceramic manufacturing business. On 24 August reviewing a proposed memorandum order submitted to then President
1965 NDC and FIRESTONE entered into a contract of lease Corazon C. Aquino transferring the whole NDC compound, including the
denominated as Contract No. C-30-65 covering a portion of the leased property, in favor of petitioner PUP. Attached to the letter was a
property measured at 2.90118 hectares for use as a manufacturing draft of the proposed memorandum order as well as a summary of existing
plant for a term of ten (10) years, renewable for another ten (10) leases on the subject property. The survey listed FIRESTONE as lessee
years under the same terms and conditions.1 In consequence of of a portion of the property, placed at 29,00010 square meters, whose
the agreement, FIRESTONE constructed on the leased premises contract with NDC was set to expire on 31 December 198911 renewable for
several warehouses and other improvements needed for the another ten (10) years at the option of the lessee. The report expressly
fabrication of ceramic products. recognized FIRESTONE's right of first refusal to purchase the leased
property "should the lessor decide to sell the same."12

Three and a half (3-1/2) years later, or on 8 January 1969,


FIRESTONE entered into a second contract of lease with NDC Meanwhile, on 21 February 1989 PUP moved to intervene and asserted
over the latter's four (4)-unit pre-fabricated reparation steel its interest in the subject property, arguing that a "purchaser pendente
warehouse stored in Daliao, Davao. FIRESTONE agreed to ship lite of property which is subject of a litigation is entitled to intervene in the
the warehouse to Manila for eventual assembly within the NDC proceedings."13 PUP referred to Memorandum Order No. 214 issued by
compound. The second contract, denominated as Contract No. then President Aquino ordering the transfer of the whole NDC compound
C-26-68, was for similar use as a ceramic manufacturing plant and to the National Government, which in turn would convey the
was agreed expressly to be "co-extensive with the lease of aforementioned property in favor of PUP at acquisition cost. The issuance
LESSEE with LESSOR on the 2.60 hectare-lot."2 was supposedly made in recognition of PUP's status as the "Poor Man's
University" as well as its serious need to extend its campus in order to
accommodate the growing student population. The order of conveyance of
On 31 July 1974 the parties signed a similar contract concerning a the 10.31-hectare property would automatically result in the cancellation of
six (6)-unit pre-fabricated steel warehouse which, as agreed upon NDC's total obligation in favor of the National Government in the amount
by the parties, would expire on 2 December 1978.3 Prior to the of P57,193,201.64.
expiration of the aforementioned contract, FIRESTONE wrote NDC
requesting for an extension of their lease agreement. Consequently
on 29 November 1978 the Board of Directors of NDC adopted Convinced that PUP was a necessary party to the controversy that ought
Resolution No. 11-78-117 extending the term of the lease, subject to be joined as party defendant in order to avoid multiplicity of suits, the
to several conditions among which was that in the event NDC "with trial court granted PUP's motion to intervene. FIRESTONE moved for
the approval of higher authorities, decide to dispose and sell these reconsideration but was denied. On certiorari, the Court of Appeals
properties including the lot, priority should be given to the affirmed the order of the trial court. FIRESTONE came to us on review but
LESSEE"4 (underscoring supplied). On 22 December 1978, in in a Resolution dated 11 July 1990 we upheld PUP's inclusion as
party-defendant in the present controversy.
Page 8 of 105
Following the denial of its petition, FIRESTONE amended its finality of the court's judgment within which to purchase the property in
complaint to include PUP and Executive Secretary Catalino questioned in the exercise of its right of first refusal. The Court of Appeals
Macaraeg, Jr., as party-defendants, and sought the annulment observed that as there was a sale of the subject property, NDC could not
of Memorandum Order No. 214. FIRESTONE alleged that excuse itself from its obligation TO OFFER THE PROPERTY FOR SALE
although Memorandum Order No. 214 was issued "subject to such FIRST TO FIRESTONE BEFORE IT COULD TO OTHER PARTIES. The
liens/leases existing [on the subject property]," PUP disregarded Court of Appeals held: "NDC cannot look to Memorandum Order No.
and violated its existing lease by increasing the rental rate 214 to excuse or shield it from its contractual obligations to FIRESTONE.
at P200,000.00 a month while demanding that it vacated the There is nothing therein that allows NDC to disavow or repudiate the
premises immediately.14 FIRESTONE prayed that in the solemn engagement that it freely and voluntarily undertook, or agreed to
event Memorandum Order No. 214 was not declared undertake."21
unconstitutional, the property should be sold in its favor at the price
for which it was sold to PUP - P554.74 per square meter or for a
PUP moved for reconsideration asserting that in ordering the sale of the
total purchase price of P14,423,240.00.15
property in favor of FIRESTONE the courts a quo unfairly created a
contract to sell between the parties. It argued that the "court cannot
Petitioner PUP, in its answer to the amended complaint, argued in substitute or decree its mind or consent for that of the parties in
essence that the lease contract covering the property had expired determining whether or not a contract (has been) perfected between PUP
long before the institution of the complaint, and that further, the and NDC."22 PUP further contended that since "a real property located in
right of first refusal invoked by FIRESTONE applied solely to the Sta. Mesa can readily command a sum of P10,000.00 per square (meter),"
six-unit pre-fabricated warehouse and not the lot upon which it the lower court gravely erred in ordering the sale of the property at
stood. only P1,500.00 per square meter. PUP also advanced the theory that the
enactment of Memorandum Order No. 214 amounted to a withdrawal of
the option to purchase the property granted to FIRESTONE. NDC, for its
After trial on the merits, judgment was rendered declaring the
part, vigorously contended that the contracts of lease executed between
contracts of lease executed between FIRESTONE and NDC
the parties had expired without being renewed by FIRESTONE;
covering the 2.60-hectare property and the warehouses
consequently, FIRESTONE was no longer entitled to any preferential right
constructed thereon valid and existing until 2 June 1999. PUP was
in the sale or disposition of the leased property.
ordered and directed to sell to FIRESTONE the "2.6 hectare leased
premises or as may be determined by actual verification and survey
of the actual size of the leased properties where plaintiff's fire brick We do not see it the way PUP and NDC did. It is elementary that a party to
factory is located" at P1,500.00 per square meter considering that, a contract cannot unilaterally withdraw a right of first refusal that stands
as admitted by FIRESTONE, such was the prevailing market price upon valuable consideration. That principle was clearly upheld by the
thereof. Court of Appeals when it denied on 6 June 2000 the twin motions for
reconsideration filed by PUP and NDC on the ground that the appellants
failed to advance new arguments substantial enough to warrant a reversal
The trial court ruled that the contracts of lease executed between
of the Decision sought to be reconsidered. 23 On 28 June 2000 PUP filed
FIRESTONE and NDC were interrelated and inseparable because
an urgent motion for an additional period of fifteen (15) days from 29 June
"each of them forms part of the integral system of plaintiff's brick
2000 or until 14 July 2000 within which to file a Petition for Review on
manufacturing plant x x x if one of the leased premises will be taken
Certiorari of the Decision of the Court of Appeals.
apart or otherwise detached from the two others, the purpose of the
lease as well as plaintiff's business operations would be rendered
useless and inoperative."16 It thus decreed that FIRESTONE could On the last day of the extended period PUP filed its Petition for Review on
exercise its option to purchase the property until 2 June 1999 Certiorari assailing the Decision of the Court of Appeals of 6 December
inasmuch as the 22 December 1978 contract embodied a covenant 1999 as well as the Resolution of 6 June 2000 denying reconsideration
to renew the lease for another ten (10) years at the option of the thereof. PUP raised two issues: (a) whether the courts a quo erred when
lessee as well as an agreement giving the lessee the right of first they "conjectured" that the transfer of the leased property from NDC to
refusal. PUP amounted to a sale; and, (b) whether FIRESTONE can rightfully
invoke its right of first refusal. Petitioner posited that if we were to place
our imprimatur on the decisions of the courts a quo, "public welfare or
The trial court also sustained the constitutionality of Memorandum
specifically the constitutional priority accorded to education" would greatly
Order No. 214 which was not per se hostile to FIRESTONE's
be prejudiced.24
property rights, but deplored as prejudicial thereto the "very manner
with which defendants NDC and PUP interpreted and applied the
same, ignoring in the process that plaintiff has existing contracts of Paradoxically, our paramount interest in education does not license us, or
lease protectable by express provisions in the Memorandum No. any party for that matter, to destroy the sanctity of binding obligations.
214 itself."17 It further explained that the questioned memorandum Education may be prioritized for legislative or budgetary purposes, but we
was issued "subject to such liens/leases existing thereon" 18 and doubt if such importance can be used to confiscate private property such
petitioner PUP was under express instructions "to enter, occupy as FIRESTONE's right of first refusal.
and take possession of the transferred property subject to such
leases or liens and encumbrances that may be existing
On 17 July 2000 we denied PUP's motion for extension of fifteen (15) days
thereon"19 (italics supplied).
within which to appeal inasmuch as the aforesaid pleading lacked an
affidavit of service of copies thereof on the Court of Appeals and the
Petitioners PUP, NDC and the Executive Secretary separately filed adverse party, as well as written explanation for not filing and serving the
their Notice of Appeal, but a few days thereafter, or on 3 pleading personally.25
September 1996, perhaps realizing the groundlessness and the
futility of it all, the Executive Secretary withdrew his appeal. 20
Accordingly, on 26 July 2000 we issued a Resolution dismissing
PUP's Petition for Review for having been filed out of time. PUP moved for
Subsequently, the Court of Appeals affirmed the decision of the reconsideration imploring a resolution or decision on the merits of its
trial court ordering the sale of the property in favor of FIRESTONE petition. Strangely, about the same time, several articles came out in the
but deleted the award of attorney's fees in the amount of Three newspapers assailing the denial of the petition. The daily papers reported
Hundred Thousand Pesos (P300,000.00). Accordingly, that we unreasonably dismissed PUP's petition on technical grounds,
FIRESTONE was given a grace period of six (6) months from affirming in the process the decision of the trial court to sell the disputed
Page 9 of 105
property to the prejudice of the government in the amount was only the government which was involved in the transaction thus
of P1,000,000,000.00.26 Counsel for petitioner PUP, alleged that reveals itself. Tersely put, it is not necessary to write an extended
the trial court and the Court of Appeals "have decided a question of dissertation on government owned and controlled corporations and their
substance in a way definitely not in accord with law or legal personalities. Beyond cavil, a government owned and controlled
jurisprudence."27 corporation has a personality of its own, distinct and separate from that of
the government.34 The intervention in the transaction of the Office of the
President through the Executive Secretary did not change the
At the outset, let it be noted that the amount of P1,000,000,000.00
independent existence of these entities. The involvement of the Office of
as reported in the papers was way too exaggerated, if not fantastic.
the President was limited to brokering the consequent relationship
We stress that NDC itself sold the whole 10.31-hectare property to
PUP at only P57,193,201.64 which represents NDC's obligation to between NDC and PUP. But the withdrawal of the appeal by the Executive
Secretary is considered significant as he knew, after a review of the
the national government that was, in exchange, written off. The
records, that the transaction was subject to existing liens and
price offered per square meter of the property was pegged
encumbrances, particularly the priority to purchase the leased premises in
at P554.74. FIRESTONE's leased premises would therefore be
favor of FIRESTONE.
worth only P14,423,240.00. From any angle, this amount is
certainly far below the ballyhooed price of P1,000,000,000.00.
True that there may be instances when a particular deed does not disclose
the real intentions of the parties, but their action may nevertheless indicate
On 4 October 2000 we granted PUP's Motion for
that a binding obligation has been undertaken. Since the conduct of the
Reconsideration to give it a chance to ventilate its right, if any it still
parties to a contract may be sufficient to establish the existence of an
had in the leased premises, thereby paving the way for a
agreement and the terms thereof, it becomes necessary for the courts to
reinstatement of its Petition for Review.28 In its appeal, PUP took to
task the courts a quo for supposedly "substituting or decreeing its examine the contemporaneous behavior of the parties in establishing the
existence of their contract.
mind or consent for that of the parties (referring to NDC and PUP)
in determining whether or not a contract of sale was perfected."
PUP also argued that inasmuch as "it is the parties alone whose The preponderance of evidence shows that NDC sold to PUP the whole
minds must meet in reference to the subject matter and cause," it NDC compound, including the leased premises, without the knowledge
concluded that it was error for the lower courts to have decreed the much less consent of private respondent FIRESTONE which had a valid
existence of a sale of the NDC compound thus allowing and existing right of first refusal.
FIRESTONE to exercise its right of first refusal.
All three (3) essential elements of a valid sale, without which there can be
On the other hand, NDC separately filed its own Petition for no sale, were attendant in the "disposition" and "transfer" of the property
Review and advanced arguments which, in fine, centered on from NDC to PUP - consent of the parties, determinate subject
whether or not the transaction between petitioners NDC and PUP matter,and consideration therefor.
amounted to a sale considering that "ownership of the property
remained with the government."29 Petitioner NDC introduced the
Consent to the sale is obvious from the prefatory clauses of Memorandum
novel proposition that if the parties involved are both government
Order No. 214 which explicitly states the acquiescence of the parties to
entities the transaction cannot be legally called a sale.
the sale of the property -

In due course both petitions were consolidated. 30


WHEREAS, PUP has expressed its willingness to acquire said NDC
properties and NDC has expressed its willingness to sell the properties to
We believe that the courts a quo did not hypothesize, much less PUP (underscoring supplied).35
conjure, the sale of the disputed property by NDC in favor of
petitioner PUP. Aside from the fact that the intention of NDC and
Furthermore, the cancellation of NDC's liabilities in favor of the National
PUP to enter into a contract of sale was clearly expressed in
Government in the amount of P57,193,201.64 constituted the
the Memorandum Order No. 214,31 a close perusal of the
"consideration" for the sale. As correctly observed by the Court of
circumstances of this case strengthens the theory that the
Appeals-
conveyance of the property from NDC to PUP was one of absolute
sale, for a valuable consideration, and not a mere paper transfer as
argued by petitioners. The defendants-appellants' interpretation that there was a mere transfer,
and not a sale, apart from being specious sophistry and a mere play of
words, is too strained and hairsplitting. For it is axiomatic that every sale
A contract of sale, as defined in the Civil Code, is a contract where
imposes upon the vendor the obligation to transfer ownership as an
one of the parties obligates himself to transfer the ownership of and
essential element of the contract. Transfer of title or an agreement to
to deliver a determinate thing to the other or others who shall pay
transfer title for a price paid, or promised to be paid, is the very essence of
therefore a sum certain in money or its equivalent.32 It is therefore a sale (Kerr & Co. v. Lingad, 38 SCRA 524; Schmid & Oberly, Inc., v. RJL
general requisite for the existence of a valid and enforceable
Martinez Fishing Corp., 166 SCRA 493). At whatever legal angle we view
contract of sale that it be mutually obligatory, i.e., there should be a
it, therefore, the inescapable fact remains that all the requisites of a valid
concurrence of the promise of the vendor to sell a determinate
sale were attendant in the transaction between co-defendants-appellants
thing and the promise of the vendee to receive and pay for the
NDC and PUP concerning the realities subject of the present suit. 36
property so delivered and transferred. The Civil Code provision is,
in effect, a "catch-all" provision which effectively brings within its
grasp a whole gamut of transfers whereby ownership of a thing is What is more, the conduct of petitioner PUP immediately after the
ceded for a consideration. transaction is in itself an admission that there was a sale of the NDC
compound in its favor. Thus, after the issuance of Memorandum Order No.
214 petitioner PUP asserted its ownership over the property by posting
Contrary to what petitioners PUP and NDC propose, there is not
notices within the compound advising residents and occupants to vacate
just one party involved in the questioned transaction. Petitioners
the premises.37 In its Motion for Intervention petitioner PUP also admitted
NDC and PUP have their respective charters and therefore each
that its interest as a "purchaser pendente lite" would be better protected if
possesses a separate and distinct individual personality. 33 The
it was joined as party-defendant in the controversy thereby confessing that
inherent weakness of NDC's proposition that there was no sale as it
it indeed purchased the property.
Page 10 of 105
In light of the foregoing disquisition, we now proceed to determine Inc.,42 where after much deliberation we declared, and so we hold, that a
whether FIRESTONE should be allowed to exercise its right of first right of first refusal is neither "amorphous nor merely preparatory" and can
refusal over the property. Such right was expressly stated by NDC be enforced and executed according to its terms. Thus, in Equatorial we
and FIRESTONE in par. XV of their third contract denominated as ordered the rescission of the sale which was made in violation of the
A-10-78 executed on 22 December 1978 which, as found by the lessee's right of first refusal and further ordered the sale of the leased
courts a quo, was interrelated to and inseparable from their first property in favor of Mayfair Theater, as grantee of the right. Emphatically,
contract denominated as C-30-65 executed on 24 August 1965 and we held that "(a right of first priority) should be enforced according to the
their second contract denominated as C-26-68 executed on 8 law on contracts instead of the panoramic and indefinite rule on human
January 1969. Thus - relations." We then concluded that the execution of the right of first refusal
consists in directing the grantor to comply with his obligation according to
the terms at which he should have offered the property in favor of the
Should the LESSOR desire to sell the leased premises during the
grantee and at that price when the offer should have been made.
term of this Agreement, or any extension thereof, the LESSOR
shall first give to the LESSEE, which shall have the right of first
option to purchase the leased premises subject to mutual One final word. Petitioner PUP should be cautioned against bidding for
agreement of both parties.38 public sympathy by bewailing the dismissal of its petition before the press.
Such advocacy is not likely to elicit the compassion of this Court or of any
court for that matter. An entreaty for a favorable disposition of a case not
In the instant case, the right of first refusal is an integral and
made directly through pleadings and oral arguments before the courts do
indivisible part of the contract of lease and is inseparable from the
not persuade us, for as judges, we are ruled only by our forsworn duty to
whole contract. The consideration for the right is built into the
give justice where justice is due.
reciprocal obligations of the parties. Thus, it is not correct for
petitioners to insist that there was no consideration paid by
FIRESTONE to entitle it to the exercise of the right, inasmuch as WHEREFORE, the petitions in G.R. No. 143513 and G.R. No. 143590 are
the stipulation is part and parcel of the contract of lease making the DENIED. Inasmuch as the first contract of lease fixed the area of the
consideration for the lease the same as that for the option. leased premises at 2.90118 hectares while the second contract placed it
at 2.60 hectares, let a ground survey of the leased premises be
immediately conducted by a duly licensed, registered surveyor at the
It is a settled principle in civil law that when a lease contract
expense of private respondent FIRESTONE CERAMICS, INC., within two
contains a right of first refusal, the lessor is under a legal duty to the
lessee not to sell to anybody at any price until after he has made an (2) months from finality of the judgment in this case. Thereafter, private
respondent FIRESTONE CERAMICS, INC., shall have six (6) months
offer to sell to the latter at a certain price and the lessee has failed
from receipt of the approved survey within which to exercise its right to
to accept it.39 The lessee has a right that the lessor's first offer shall
purchase the leased property at P1,500.00 per square meter, and
be in his favor.
petitioner Polytechnic University of the Philippines is ordered to reconvey
the property to FIRESTONE CERAMICS, INC., in the exercise of its right
The option in this case was incorporated in the contracts of lease of first refusal upon payment of the purchase price thereof.
by NDC for the benefit of FIRESTONE which, in view of the total
amount of its investments in the property, wanted to be assured
SO ORDERED.
that it would be given the first opportunity to buy the property at a
price for which it would be offered. Consistent with their agreement,
it was then implicit for NDC to have first offered the leased G.R. No. 137290 July 31, 2000
premises of 2.60 hectares to FIRESTONE prior to the sale in favor
of PUP. Only if FIRESTONE failed to exercise its right of first
SAN MIGUEL PROPERTIES PHILIPPINES, INC., petitioner,
priority could NDC lawfully sell the property to petitioner PUP.
vs.
SPOUSES ALFREDO HUANG and GRACE HUANG, respondents.
It now becomes apropos to ask whether the courts a quo were
correct in fixing the proper consideration of the sale at P1,500.00
DECISION
per square meter. In contracts of sale, the basis of the right of first
refusal must be the current offer of the seller to sell or the offer to
purchase of the prospective buyer. Only after the lessee-grantee MENDOZA, J.:
fails to exercise its right under the same terms and within the period
contemplated can the owner validly offer to sell the property to a This is a petition for review of the decision,1 dated April 8, 1997, of the
third person, again, under the same terms as offered to the Court of Appeals which reversed the decision of the Regional Trial Court,
grantee.40 It appearing that the whole NDC compound was sold to Branch 153, Pasig City dismissing the complaint brought by respondents
PUP for P554.74 per square meter, it would have been more against petitioner for enforcement of a contract of sale.
proper for the courts below to have ordered the sale of the property
also at the same price. However, since FIRESTONE never raised
this as an issue, while on the other hand it admitted that the value The facts are not in dispute.
of the property stood at P1,500.00 per square meter, then we see
no compelling reason to modify the holdings of the courts a Petitioner San Miguel Properties Philippines, Inc. is a domestic
quo that the leased premises be sold at that price. corporation engaged in the purchase and sale of real properties. Part of its
inventory are two parcels of land totalling 1, 738 square meters at the
Our attention is invited by petitioners to Ang Yu Asuncion v. CA41 in corner of Meralco Avenue and General Capinpin Street, Barrio Oranbo,
concluding that if our holding in Ang Yu would be applied to the Pasig City, which are covered by TCT Nos. PT-82395 and PT-82396 of
facts of this case then FIRESTONE's "option, if still subsisting, is the Register of Deeds of Pasig City.
not enforceable," the option being merely a preparatory contract
which cannot be enforced. On February 21, 1994, the properties were offered for sale for
₱52,140,000.00 in cash. The offer was made to Atty. Helena M. Dauz who
The contention has no merit. At the heels of Ang was acting for respondent spouses as undisclosed principals. In a letter 2
Yu came Equatorial Realty Development, Inc., v. Mayfair Theater, dated March 24, 1994, Atty. Dauz signified her clients’ interest in

Page 11 of 105
purchasing the properties for the amount for which they were Court, Branch 133, Pasig City where it was docketed as Civil Case No.
offered by petitioner, under the following terms: the sum of 64660.
₱500,000.00 would be given as earnest money and the balance
would be paid in eight equal monthly installments from May to
Within the period for filing a responsive pleading, petitioner filed a motion
December, 1994. However, petitioner refused the counter-offer.
to dismiss the complaint alleging that (1) the alleged "exclusive option" of
respondent spouses lacked a consideration separate and distinct from the
On March 29, 1994, Atty. Dauz wrote another letter3 proposing the purchase price and was thus unenforceable and (2) the complaint did not
following terms for the purchase of the properties, viz: allege a cause of action because there was no "meeting of the minds"
between the parties and, therefore, no perfected contract of sale. The
motion was opposed by respondents.
This is to express our interest to buy your-above-mentioned
property with an area of 1, 738 sq. meters. For this purpose, we are
enclosing herewith the sum of ₱1,000,000.00 representing On December 12, 1994, the trial court granted petitioner’s motion and
earnest-deposit money, subject to the following conditions. dismissed the action. Respondents filed a motion for reconsideration, but
it was denied by the trial court. They then appealed to the Court of
Appeals which, on April 8, 1997, rendered a decision6 reversing the
1. We will be given the exclusive option to purchase the property
judgment of the trial court. The appellate court held that all the requisites
within the 30 days from date of your acceptance of this offer.
of a perfected contract of sale had been complied with as the offer made
on March 29, 1994, in connection with which the earnest money in the
2. During said period, we will negotiate on the terms and conditions amount of ₱1 million was tendered by respondents, had already been
of the purchase; SMPPI will secure the necessary Management accepted by petitioner. The court cited Art. 1482 of the Civil Code which
and Board approvals; and we initiate the documentation if there is provides that "[w]henever earnest money is given in a contract of sale, it
mutual agreement between us. shall be considered as part of the price and as proof of the perfection of
the contract." The fact the parties had not agreed on the mode of payment
3. In the event that we do not come to an agreement on this did not affect the contract as such is not an essential element for its
transaction, the said amount of ₱1,000,000.00 shall be refundable validity. In addition, the court found that Sobrecarey had authority to act in
to us in full upon demand. . . . behalf of petitioner for the sale of the properties.7

Isidro A. Sobrecarey, petitioner’s vice-president and operations Petitioner moved for reconsideration of the trial court’s decision, but its
manager for corporate real estate, indicated his conformity to the motion was denied. Hence, this petition.
offer by affixing his signature to the letter and accepted the
"earnest-deposit" of ₱1 million. Upon request of respondent Petitioner contends that the Court of Appeals erred in finding that there
spouses, Sobrecarey ordered the removal of the "FOR SALE" sign was a perfected contract of sale between the parties because the March
from the properties. 29, 1994 letter of respondents, which petitioner accepted, merely resulted
in an option contract, albeit it was unenforceable for lack of a distinct
Atty. Dauz and Sobrecarey then commenced negotiations. During consideration. Petitioner argues that the absence of agreement as to the
their meeting on April 8, 1994, Sobrecarey informed Atty. Dauz that mode of payment was fatal to the perfection of the contract of sale.
petitioner was willing to sell the subject properties on a 90-day term. Petitioner also disputes the appellate court’s ruling that Isidro A.
Atty. Dauz countered with an offer of six months within which to Sobrecarey had authority to sell the subject real properties. 8
pay.
Respondents were required to comment within ten (10) days from notice.
On April 14, 1994, the parties again met during which Sobrecarey However, despite 13 extensions totalling 142 days which the Court had
informed Atty. Dauz that petitioner had not yet acted on her given to them, respondents failed to file their comment. They were thus
counter-offer. This prompted Atty. Dauz to propose a four-month considered to have waived the filing of a comment.
period of amortization.
The petition is meritorious.
On April 25, 1994, Atty. Dauz asked for an extension of 45 days
from April 29, 1994 to June 13, 1994 within which to exercise her In holding that there is a perfected contract of sale, the Court of Appeals
option to purchase the property, adding that within that period, "[we] relied on the following findings: (1) earnest money was allegedly given by
hope to finalize [our] agreement on the matter."4 Her request was respondents and accepted by petitioner through its vice-president and
granted. operations manager, Isidro A. Sobrecarey; and (2) the documentary
evidence in the records show that there was a perfected contract of sale.
On July 7, 1994, petitioner, through its president and chief
executive officer, Federico Gonzales, wrote Atty. Dauz informing With regard to the alleged payment and acceptance of earnest money, the
her that because the parties failed to agree on the terms and Court holds that respondents did not give the ₱1 million as "earnest
conditions of the sale despite the extension granted by petitioner, money" as provided by Art. 1482 of the Civil Code. They presented the
the latter was returning the amount of ₱1 million given as amount merely as a deposit of what would eventually become the earnest
"earnest-deposit."5 money or downpayment should a contract of sale be made by them. The
amount was thus given not as a part of the purchase price and as proof of
On July 20, 1994, respondent spouses, through counsel, wrote the perfection of the contract of sale but only as a guarantee that
petitioner demanding the execution within five days of a deed of respondents would not back out of the sale. Respondents in fact described
sale covering the properties. Respondents attempted to return the the amount as an "earnest-deposit." In Spouses Doromal, Sr. v. Court of
"earnest-deposit" but petitioner refused on the ground that Appeals,9 it was held:
respondents’ option to purchase had already expired.
. . . While the ₱5,000 might have indeed been paid to Carlos in October,
On August 16, 1994, respondent spouses filed a complaint for 1967, there is nothing to show that the same was in the concept of the
specific performance against petitioner before the Regional Trial earnest money contemplated in Art. 1482 of the Civil Code, invoked by

Page 12 of 105
petitioner, as signifying perfection of the sale. Viewed in the The appellate court opined that the failure to agree on the terms of
backdrop of the factual milieu thereof extant in the record, We are payment was no bar to the perfection of the sale because Art. 1475 only
more inclined to believe that the said ₱5,000.00 were paid in the requires agreement by the parties as to the price of the object. This is error.
concept of earnest money as the term was understood under the In Navarro v. Sugar Producers Cooperative Marketing Association, Inc.,14
Old Civil Code, that is, as a guarantee that the buyer would not we laid down the rule that the manner of payment of the purchase price is
back out, considering that it is not clear that there was already a an essential element before a valid and binding contract of sale can exist.
definite agreement as to the price then and that petitioners were Although the Civil Code does not expressly state that the minds of the
decided to buy 6/7 only of the property should respondent parties must also meet on the terms or manner of payment of the price,
Javellana refuse to agree to part with her 1/7 share.10 the same is needed, otherwise there is no sale. As held in Toyota Shaw,
Inc. v. Court of Appeals,15 agreement on the manner of payment goes into
the price such that a disagreement on the manner of payment is
In the present case, the ₱1 million "earnest-deposit" could not have
tantamount to a failure to agree on the price. 16 In Velasco v. Court of
been given as earnest money as contemplated in Art. 1482
Appeals,17 the parties to a proposed sale had already agreed on the object
because, at the time when petitioner accepted the terms of
of sale and on the purchase price. By the buyer’s own admission, however,
respondents’ offer of March 29, 1994, their contract had not yet
the parties still had to agree on how and when the downpayment and the
been perfected. This is evident from the following conditions
installments were to be paid. It was held:
attached by respondents to their letter, to wit: (1) that they be given
the exclusive option to purchase the property within 30 days from
acceptance of the offer; (2) that during the option period, the parties . . . Such being the situation, it can not, therefore, be said that a definite
would negotiate the terms and conditions of the purchase; and (3) and firm sales agreement between the parties had been perfected over
petitioner would secure the necessary approvals while respondents the lot in question. Indeed, this Court has already ruled before that a
would handle the documentation. definite agreement on the manner of payment of the purchase price is an
essential element in the formation of a binding and enforceable contract of
sale. The fact, therefore, that the petitioners delivered to the respondent
The first condition for an option period of 30 days sufficiently shows
the sum of P10,000 as part of the down-payment that they had to pay
that a sale was never perfected.1âwphi1 As petitioner correctly
cannot be considered as sufficient proof of the perfection of any purchase
points out, acceptance of this condition did not give rise to a
and sale agreement between the parties herein under Art. 1482 of the new
perfected sale but merely to an option or an accepted unilateral
Civil Code, as the petitioners themselves admit that some essential matter
promise on the part of respondents to buy the subject properties
- the terms of the payment - still had to be mutually covenanted.18
within 30 days from the date of acceptance of the offer. Such option
giving respondents the exclusive right to buy the properties within
the period agreed upon is separate and distinct from the contract of Thus, it is not the giving of earnest money, but the proof of the
sale which the parties may enter.11 All that respondents had was concurrence of all the essential elements of the contract of sale which
just the option to buy the properties which privilege was not, establishes the existence of a perfected sale.
however, exercised by them because there was a failure to agree
on the terms of payment. No contract of sale may thus be enforced
In the absence of a perfected contract of sale, it is immaterial whether
by respondents.
Isidro A. Sobrecarey had the authority to enter into a contract of sale in
behalf of petitioner. This issue, therefore, needs no further discussion.
Furthermore, even the option secured by respondents from
petitioner was fatally defective. Under the second paragraph of Art. WHEREFORE, the decision of the Court of Appeals is REVERSED and
1479, an accepted unilateral promise to buy or sell a determinate respondents’ complaint is DISMISSED.
thing for a price certain is binding upon the promisor only if the
promise is supported by a distinct consideration. Consideration in
an option contract may be anything of value, unlike in sale where it SO ORDERED.
must be the price certain in money or its equivalent. There is no
showing here of any consideration for the option. Lacking any proof G.R. No. 154493 December 6, 2006
of such consideration, the option is unenforceable.

REYNALDO VILLANUEVA, petitioner,


Equally compelling as proof of the absence of a perfected sale is vs.
the second condition that, during the option period, the parties PHILIPPINE NATIONAL BANK (PNB), respondent.
would negotiate the terms and conditions of the purchase. The
stages of a contract of sale are as follows: (1) negotiation, covering
the period from the time the prospective contracting parties indicate
interest in the contract to the time the contract is perfected;
(2) perfection, which takes place upon the concurrence of the DECISION
essential elements of the sale which are the meeting of the minds
of the parties as to the object of the contract and upon the price;
and (3) consummation, which begins when the parties perform
their respective undertakings under the contract of sale,
culminating in the extinguishment thereof.12 In the present case, AUSTRIA-MARTINEZ, J.:
the parties never got past the negotiation stage. The alleged
"indubitable evidence"13 of a perfected sale cited by the appellate The Petition for Review on Certiorari under Rule 45 before this Court
court was nothing more than offers and counter-offers which did assails the January 29, 2002 Decision1 and June 27, 2002 Resolution2 of
not amount to any final arrangement containing the essential the Court of Appeals (CA) in CA-G.R. CV No. 520083 which reversed and
elements of a contract of sale. While the parties already agreed on set aside the September 14, 1995 Decision4 of the Regional Trial Court,
the real properties which were the objects of the sale and on the Branch 22, General Santos City (RTC) in Civil Case No. 4553.
purchase price, the fact remains that they failed to arrive at
mutually acceptable terms of payment, despite the 45-day
extension given by petitioner. As culled from the records, the facts are as follows:

Page 13 of 105
The Special Assets Management Department (SAMD) of the Hence, Villanueva filed with the RTC a Complaint16 for specific
Philippine National Bank (PNB) issued an advertisement for the performance and damages against PNB. In its September 14, 1995
sale thru bidding of certain PNB properties in Calumpang, General Decision, the RTC granted the Complaint, thus:
Santos City, including Lot No. 17, covered by TCT No. T-15042,
consisting of 22,780 square meters, with an advertised floor price
WHEREFORE, judgment is rendered in favor of the plaintiff and against
of P1,409,000.00, and Lot No. 19, covered by TCT No. T-15036,
the defendant directing it to do the following:
consisting of 41,190 square meters, with an advertised floor price
of P2,268,000.00.5 Bidding was subject to the following conditions:
1) that cash bids be submitted not later than April 27, 1989; 2) that 1. To execute a deed of sale in favor of the plaintiff over Lot 19 comprising
said bids be accompanied by a 10% deposit in manager’s or 41,190 square meters situated at Calumpang, General Santos City
cashier’s check; and 3) that all acceptable bids be subject to covered by TCT No. T-15036 after payment of the balance in cash in the
approval by PNB authorities. amount of P2,303,300.00;

In a June 28, 1990 letter6 to the Manager, PNB-General Santos 2. To pay the plaintiff P1,000,000.00 as moral damages; P500,000.00 as
Branch, Reynaldo Villanueva (Villanueva) offered to purchase Lot attorney’s fees, plus litigation expenses and costs of the suit.
Nos. 17 and 19 for P3,677,000.00. He also manifested that he was
depositing P400,000.00 to show his good faith but with the SO ORDERED.17
understanding that said amount may be treated as part of the
payment of the purchase price only when his offer is accepted by
PNB. At the bottom of said letter there appears an unsigned The RTC anchored its judgment on the finding that there existed a
marginal note stating that P400,000.00 was deposited into perfected contract of sale between PNB and Villanueva. It found:
Villanueva’s account (Savings Account No. 43612) with
PNB-General Santos Branch. 7 The following facts are either admitted or undisputed:

PNB-General Santos Branch forwarded the June 28, 1990 letter of xxx
Villanueva to Ramon Guevara (Guevara), Vice President,
SAMD.8 On July 6, 1990, Guevara informed Villanueva that only
The defendant through Vice-President Guevara negotiated with the
Lot No. 19 is available and that the asking price therefor
plaintiff in connection with the offer of the plaintiff to buy Lots 17 & 19. The
is P2,883,300.00.9 Guevara further wrote:
offer of plaintiff to buy, however, was accepted by the defendant only
insofar as Lot 19 is concerned as exemplified by its letter dated July 6,
If our quoted price is acceptable to you, please submit a revised 1990 where the plaintiff signified his concurrence after conferring with the
offer to purchase. Sale shall be subject to our Board of Director’s defendant’s vice-president. The conformity of the plaintiff was typewritten
approval and to other terms and conditions imposed by the Bank by the defendant’s own people where the plaintiff accepted the price
on sale of acquired assets. 10 (Emphasis ours) of P2,883,300.00. The defendant also issued a receipt to the plaintiff on
the same day when the plaintiff paid the amount of P200,000.00 to
Instead of submitting a revised offer, Villanueva merely inserted at complete the downpayment of P600,000.00 (Exhibit "F" & Exhibit "I"). With
the bottom of Guevara’s letter a July 11, 1990 marginal note, which this development, the plaintiff was also given the go signal by the
reads: defendant to improve Lot 19 because it was already in effect sold to him
and because of that the defendant fenced the lot and completed his two
houses on the property.18
C O N F O R M E:

The RTC also pointed out that Villanueva’s P580,000.00 downpayment


PRICE OF P2,883,300.00 (downpayment of P600,000.00 and was actually in the nature of earnest money acceptance of which by PNB
the balance payable in two (2) years at quarterly signified that there was already a sale.19 The RTC further cited
amortizations.) 11 contemporaneous acts of PNB purportedly indicating that, as early as July
25, 1990, it considered Lot 19 already sold, as shown by Guevara’s July
Villanueva paid P200,000.00 to PNB which issued O.R. No. 16997 25, 1990 letter (Exh. "H")20 to another interested buyer.
to acknowledge receipt of the "partial payment deposit on offer to
purchase."12 On the dorsal portion of Official Receipt No. 16997, PNB appealed to the CA which reversed and set aside the September 14,
Villanueva signed a typewritten note, stating: 1995 RTC Decision, thus:

This is a deposit made to show the sincerity of my purchase offer WHEREFORE, the appealed decision is REVERSED and SET ASIDE and
with the understanding that it shall be returned without interest if my another rendered DISMISSING the complaint.
offer is not favorably considered or be forfeited if my offer is
approved but I fail/refuse to push through the purchase. 13
SO ORDERED.21

Also, on July 24, 1990, P380,000.00 was debited from Villanueva’s


Savings Account No. 43612 and credited to SAMD.14 According to the CA, there was no perfected contract of sale because the
July 6, 1990 letter of Guevara constituted a qualified acceptance of the
June 28, 1990 offer of Villanueva, and to which Villanueva replied on July
On October 11, 1990, however, Guevara wrote Villanueva that, 11, 1990 with a modified offer. The CA held:
upon orders of the PNB Board of Directors to conduct another
appraisal and public bidding of Lot No. 19, SAMD is deferring
negotiations with him over said property and returning his deposit In the case at bench, consent, in respect to the price and manner of its
of P580,000.00.15 Undaunted, Villanueva attempted to deliver payment, is lacking. The record shows that appellant, thru Guevara’s July
postdated checks covering the balance of the purchase price but 6, 1990 letter, made a qualified acceptance of appellee’s letter-offer dated
PNB refused the same. June 28, 1990 by imposing an asking price of P2,883,300.00 in cash for
Lot 19. The letter dated July 6, 1990 constituted a counter-offer (Art. 1319,

Page 14 of 105
Civil Code), to which appellee made a new proposal, i.e., to pay the On June 28, 1990, petitioner made an offer to buy Lot No. 17 and Lot No.
amount of P2,883,300.00 in staggered amounts, that 19 for an aggregate price of P3,677,000.00. It is noted that this offer
is, P600,000.00 as downpayment and the balance within two years exactly corresponded to the April 1989 invitation to bid issued by
in quarterly amortizations. respondent in that the proposed aggregate purchase price for Lot Nos. 17
and 19 matched the advertised floor prices for the same properties.
However, it cannot be said that the June 28, 1990 letter of petitioner was
A qualified acceptance, or one that involves a new proposal,
an effective acceptance of the April 1989 invitation to bid for, by its
constitutes a counter-offer and a rejection of the original offer (Art.
express terms, said invitation lapsed on April 27, 1989.28More than that,
1319, id.). Consequently, when something is desired which is not
the April 1989 invitation was subject to the condition that all sealed bids
exactly what is proposed in the offer, such acceptance is not
sufficient to generate consent because any modification or submitted and accepted be approved by respondent’s higher authorities.
variation from the terms of the offer annuls the offer (Tolentino,
Commentaries and Jurisprudence on the Civil Code of the Thus, the June 28, 1990 letter of petitioner was an offer to buy
Philippines, 6th ed., 1996, p. 450, cited in ABS-CBN Broadcasting independent of the April 1989 invitation to bid. It was a definite offer as it
Corporation v. Court of Appeals, et al., 301 SCRA 572). identified with certainty the properties sought to be purchased and fixed
the contract price.
Appellee’s new proposal, which constitutes a counter-offer, was not
accepted by appellant, its board having decided to have Lot 19 However, respondent replied to the June 28, 1990 offer with a July 6, 1990
reappraised and sold thru public bidding. letter that only Lot No. 19 is available and that the price therefor is
now P2,883,300.00. As the CA pointed out, this reply was certainly not an
acceptance of the June 28, 1990 offer but a mere counter-offer. It deviated
Moreover, it was clearly stated in Guevara’s July 6, 1990 letter that
from the original offer on three material points: first, the object of the
"the sale shall be subject to our Board of Director’s approval and to
proposed sale is now only Lot No. 19 rather than Lot Nos. 17 and 19;
other terms and conditions imposed by the Bank on sale of
second, the area of the property to be sold is still 41,190 sq. m but an
acquired assets."22
8,797-sq. m portion is now part of a public road; and third, the
consideration is P2,883,300 for one lot rather than P3,677,000.00 for two
Villanueva’s Motion for Reconsideration23 was denied by the CA in lots. More important, this July 6, 1990 counter-offer imposed two
its Resolution of June 27, 2002. conditions: one, that petitioner submit a revised offer to purchase based
on the quoted price; and two, that the sale of the property be approved by
Petitioner Villanueva now assails before this Court the January 29, the Board of Directors and subjected to other terms and conditions
2002 Decision and June 27, 2002 Resolution of the CA. He assigns imposed by the Bank on the sale of acquired assets.
five issues which may be condensed into two: first, whether a
perfected contract of sale exists between petitioner and respondent In reply to the July 6, 1990 counter-offer, petitioner signed his July 11,
PNB; and second, whether the conduct and actuation of 1990 conformity to the quoted price of P2,883,300.00 but inserted the
respondent constitutes bad faith as to entitle petitioner to moral and term "downpayment of P600,000.00 and the balance payable in two years
exemplary damages and attorney’s fees. at quarterly amortization." The CA viewed this July 11, 1990 conformity
not as an acceptance of the July 6, 1990 counter-offer but a further
The Court sustains the CA on both issues. counter-offer for, while petitioner accepted the P2,883,300.00 price for Lot
No. 19, he qualified his acceptance by proposing a two-year payment
term.
Contracts of sale are perfected by mutual consent whereby the
seller obligates himself, for a price certain, to deliver and transfer
ownership of a specified thing or right to the buyer over which the Petitioner does not directly impugn such reasoning of the CA. He merely
latter agrees.24 Mutual consent being a state of mind, its existence questions it for taking up the issue of whether his July 11, 1990 conformity
may only be inferred from the confluence of two acts of the parties: modified the July 6, 1990 counter-offer as this was allegedly never raised
an offer certain as to the object of the contract and its consideration, during the trial nor on appeal.29
and an acceptance of the offer which is absolute in that it refers to
the exact object and consideration embodied in said offer.25 While it Such argument is not well taken. From beginning to end, respondent
is impossible to expect the acceptance to echo every nuance of the denied that a contract of sale with petitioner was ever perfected. 30 Its
offer, it is imperative that it assents to those points in the offer defense was broad enough to encompass every issue relating to the
which, under the operative facts of each contract, are not only concurrence of the elements of contract, specifically on whether it
material but motivating as well. Anything short of that level of consented to the object of the sale and its consideration. There was
mutuality produces not a contract but a mere counter-offer awaiting nothing to prevent the CA from inquiring into the offers and counter-offers
acceptance.26 More particularly on the matter of the consideration of the parties to determine whether there was indeed a perfected contract
of the contract, the offer and its acceptance must be unanimous between them.
both on the rate of the payment and on its term. An acceptance of
an offer which agrees to the rate but varies the term is ineffective. 27
Moreover, there is merit in the ruling of the CA that the July 11, 1990
marginal note was a further counter-offer which did not lead to the
To determine whether there was mutual consent between the perfection of a contract of sale between the parties. Petitioner’s own June
parties herein, it is necessary to retrace each offer and acceptance 28, 1990 offer quoted the price of P3,677,000.00 for two lots but was silent
they made. on the term of payment. Respondent’s July 6, 1990 counter-offer quoted
the price of P2,833,300.00 and was also silent on the term of payment. Up
Respondent began with an invitation to bid issued in April 1989 to that point, the term or schedule of payment was not on the negotiation
covering several of its acquired assets in Calumpang, General table. Thus, when petitioner suddenly introduced a term of payment in his
Santos City, including Lot No. 19 for which the floor price July 11, 1990 counter-offer, he interjected into the negotiations a new
was P2,268,000.00. The offer was subject to the condition that substantial matter on which the parties had no prior discussion and over
sealed bids, accompanied by a 10% deposit in manager’s or which they must yet agree.31 Petitioner’s July 11, 1990 counter-offer,
cashier’s check, be submitted not later than 10 o’clock in the therefore, did not usher the parties beyond the negotiation stage of
morning of April 27, 1989. contract making towards its perfection. He made a counter-offer that
required acceptance by respondent.
Page 15 of 105
As it were, respondent, through its Board of Directors, did not With the foregoing disquisition, the Court foregoes resolution of the
accept this last counter-offer. As stated in its October 11, 1990 second issue as it is evident that respondent acted well within its rights
letter to petitioner, respondent ordered the reappraisal of the when it rejected the last counter-offer of petitioner.
property, in clear repudiation not only of the proposed price but also
the term of payment thereof.
In fine, petitioner’s petition lacks merit.

Petitioner insists, however, that the October 11, 1990 repudiation WHEREFORE, the petition is DENIED. The Decision dated January 29,
was belated as respondent had already agreed to his July 11, 1990
2002 and Resolution dated June 27, 2002 of the Court of Appeals
counter-offer when it accepted his "downpayment" or "earnest are AFFIRMED.
money" of P580,000.00.32 He cites Article 1482 of the Civil Code
where it says that acceptance of "downpayment" or "earnest
money" presupposes the perfection of a contract. No costs.

Not so. Acceptance of petitioner’s payments did not amount to an


implied acceptance of his last counter-offer.

To begin with, PNB-General Santos Branch, which accepted


petitioner’s P380,000.00 payment, and PNB-SAMD, which G.R. No. 126444 December 4, 1998
accepted his P200,000.00 payment, had no authority to bind
respondent to a contract of sale with petitioner.33 Petitioner is well ALFONSO QUIJADA, CRESENTE QUIJADA, REYNELDA QUIJADA,
aware of this. To recall, petitioner sent his June 28, 1990 offer to DEMETRIO QUIJADA, ELIUTERIA QUIJADA, EULALIO QUIJADA, and
PNB-General Santos Branch. Said branch did not act on his offer WARLITO QUIJADA, petitioners,
except to endorse it to Guevarra. Thereafter, petitioner transacted vs.
directly with Guevarra. Petitioner then cannot pretend that COURT OF APPEALS, REGALADO MONDEJAR, RODULFO
PNB-General Santos Branch had authority to accept his July 11, GOLORAN, ALBERTO ASIS, SEGUNDINO RAS, ERNESTO
1990 counter-offer by merely accepting his P380,000.00 payment. GOLORAN, CELSO ABISO, FERNANDO BAUTISTA, ANTONIO
MACASERO, and NESTOR MAGUINSAY, respondents.
Neither did SAMD have authority to bind PNB. In its April 1989
invitation to bid, as well as its July 6, 1990 counter-offer, SAMD
was always careful to emphasize that whatever offer is made and
entertained will be subject to the approval of respondent’s higher
MARTINEZ, J.:
authorities. This is a reasonable disclaimer considering the
corporate nature of respondent. 34
Petitioners, as heirs of the late Trinidad Quijada, filed a complaint against
private respondents for quieting of title, recovery of possession and
Moreover, petitioner’s payment of P200,000.00 was with the clear
ownership of parcels of land with claim for attorney's fees and damages.
understanding that his July 11, 1990 counter-offer was still subject
The suit was premised on the following facts found by the court of Appeals
to approval by respondent. This is borne out by respondent’s
which is materially the same as that found by the trial court:
Exhibits "2-a" and "2-b", which petitioner never controverted, where
it appears on the dorsal portion of O.R. No. 16997 that petitioner
acceded that the amount he paid was a mere "x x x deposit made Plaintiffs-appellees (petitioners) are the children of the late Trinidad
to show the sincerity of [his] purchase offer with the understanding Corvera Vda, de Quijada. Trinidad was one of the heirs of the late Pedro
that it shall be returned without interest if [his] offer is not favorably Corvera and inherited from the latter the two-hectare parcel of land subject
considered x x x."35 This was a clear acknowledgment on his part of the case, situated in the barrio of San Agustin, Talacogon, Agusan del
that there was yet no perfected contract with respondent and that Sur. On April 5, 1956, Trinidad Quijada together with her sisters Leonila
even with the payments he had advanced, his July 11, 1990 Corvera Vda. de Sequeña and Paz Corvera Cabiltes and brother
counter-offer was still subject to consideration by respondent. Epapiadito Corvera executed a conditional deed of donation (Exh. C) of
the two-hectare parcel of land subject of the case in favor of the
Municipality of Talacogon, the condition being that the parcel of land shall
Not only that, in the same Exh. "2-a" as well as in his June 28, 1990
be used solely and exclusively as part of the campus of the proposed
offer, petitioner referred to his payments as mere "deposits." Even
provincial high school in Talacogon. Apparently, Trinidad remained in
O.R. No. 16997 refers to petitioner’s payment as mere deposit. It is
possession of the parcel of land despite the donation. On July 29, 1962,
only in the debit notice issued by PNB-General Santos Branch
Trinidad sold one (1) hectare of the subject parcel of land to
where petitioner’s payment is referred to as "downpayment". But
defendant-appellant Regalado Mondejar (Exh. 1). Subsequently, Trinidad
then, as we said, PNB-General Santos Branch has no authority to
verbally sold the remaining one (1) hectare to defendant-appellant
bind respondent by its interpretation of the nature of the payment
(respondent) Regalado Mondejar without the benefit of a written deed of
made by petitioner.
sale and evidenced solely by receipts of payment. In 1980, the heirs of
Trinidad, who at that time was already dead, filed a complaint for forcible
In sum, the amounts paid by petitioner were not in the nature of entry (Exh. E) against defendant-appellant (respondent) Regalado
downpayment or earnest money but were mere deposits or proof of Mondejar, which complaint was, however, dismissed for failure to
his interest in the purchase of Lot No. 19. Acceptance of said prosecute (Exh. F). In 1987, the proposed provincial high school having
amounts by respondent does not presuppose perfection of any failed to materialize, the Sangguniang Bayan of the municipality of
contract.36 Talacogon enacted a resolution reverting the two (2) hectares of land
donated back to the donors (Exh. D). In the meantime,
It must be noted that petitioner has expressly admitted that he had defendant-appellant (respondent) Regalado Mondejar sold portions of the
withdrawn the entire amount of P580,000.00 deposit from land to defendants-appellants (respondents) Fernando Bautista (Exh. 5),
PNB-General Santos Branch.37 Rodolfo Goloran (Exh. 6), Efren Guden (Exh. 7) and Ernesto Goloran (Exh.
8).

Page 16 of 105
On July 5, 1988, plaintiffs-appellees (petitioners) filed this action petitioners filed a motion for reconsideration. When the CA denied
against defendants-appellants (respondents). In the complaint, their motion,5 petitioners instituted a petition for review to this Court
plaintiffs-appellees (petitioners) alleged that their deceased mother arguing principally that the sale of the subject property made by
never sold, conveyed, transferred or disposed of the property in Trinidad Quijada to respondent Mondejar is void, considering that at
question to any person or entity much less to Regalado Mondejar that time, ownership was already transferred to the Municipality of
save the donation made to the Municipality of Talacogon in 1956; Talacogon. On the contrary, private respondents contend that the
that at the time of the alleged sale to Regalado Mondejar by sale was valid, that they are buyers in good faith, and that
Trinidad Quijada, the land still belongs to the Municipality of petitioners' case is barred by laches. 6
Talacogon, hence, the supposed sale is null and void.
We affirm the decision of the respondent court.
Defendants-appellants (respondents), on the other hand, in their
answer claimed that the land in dispute was sold to Regalado The donation made on April 5, 1956 by Trinidad Quijada and her
Mondejar, the one (1) hectare on July 29, 1962, and the remaining brother and sisters7 was subject to the condition that the donated
one (1) hectare on installment basis until fully paid. As affirmative property shall be "used solely and exclusively as a part of the
and/or special defense, defendants-appellants (respondents) campus of the proposed Provincial High School in Talacogon."8 The
alleged that plaintiffs action is barred by laches or has prescribed. donation further provides that should "the proposed Provincial High
School be discontinued or if the same shall be opened but for some
The court a quo rendered judgment in favor of plaintiffs-appellees reason or another, the same may in the future be closed" the donated
(petitioners): firstly because "Trinidad Quijada had no legal title or property shall automatically revert to the donor.9 Such condition, not
right to sell the land to defendant Mondejar in 1962, 1966, 1967 being contrary to law, morals, good customs, public order or public
and 1968, the same not being hers to dispose of because policy was validly imposed in the donation. 10
ownership belongs to the Municipality of Talacogon (Decision, p.
4; Rollo, p. 39) and, secondly, that the deed of sale executed by When the Municipality's acceptance of the donation was made
Trinidad Quijada in favor of Mondejar did not carry with it the known to the donor, the former became the new owner of the
conformity and acquiescence of her children, more so that she was donated property — donation being a mode of acquiring and
already 63 years old at the time, and a widow (Decision, p. 6; Rollo, transmitting ownership 11 — notwithstanding the condition imposed
p. 41)."1
by the donee. The donation is perfected once the acceptance by the
donee is made known to the donor.12 According, ownership is
The dispositive portion of the trial court's decision reads: immediately transferred to the latter and that ownership will only
revert to the donor if the resolutory condition is not fulfilled.
WHEREFORE, viewed from the above perceptions, the scale of
justice having tilted in favor of the plaintiffs, judgment is, as it is In this case, that resolutory condition is the construction of the
hereby rendered: school. It has been ruled that when a person donates land to another
on the condition that the latter would build upon the land a school,
the condition imposed is not a condition precedent or a suspensive
1) ordering the Defendants to return and vacate the two (2)
condition but a resolutory one. 13 Thus, at the time of the sales made
hectares of land to Plaintiffs as described in Tax Declaration No.
in 1962 towards 1968, the alleged seller (Trinidad) could not have
1209 in the name of Trinidad Quijada;
sold the lots since she had earlier transferred ownership thereof by
virtue of the deed of donation. So long as the resolutory condition
2) ordering any person acting in Defendants' behalf to vacate and subsists and is capable of fulfillment, the donation remains effective
restore the peaceful possession of the land in question to Plaintiffs; and the donee continues to be the owner subject only to the rights of
the donor or his successors-in-interest under the deed of donation.
3) ordering the cancellation of the Deed of Sale executed by the Since no period was imposed by the donor on when must the donee
late Trinidad Quijada in favor of Defendant Regalado Mondejar as comply with the condition, the latter remains the owner so long as he
well as the Deeds of Sale/Relinquishments executed by Mondejar has tried to comply with the condition within a reasonable period.
in favor of the other Defendants; Such period, however, became irrelevant herein when the
donee-Municipality manifested through a resolution that it cannot
comply with the condition of building a school and the same was
4) ordering Defendants to remove their improvements constructed made known to the donor. Only then — when the non-fulfillment of
on the questioned lot; the resolutory condition was brought to the donor's knowledge —
that ownership of the donated property reverted to the donor as
5) ordering the Defendants to pay Plaintiffs, jointly and severally, provided in the automatic reversion clause of the deed of donation.
the amount of P10,000.00 representing attorney's fees;
The donor may have an inchoate interest in the donated property
6) ordering Defendants to pays the amount of P8,000.00 as during the time that ownership of the land has not reverted to her.
expenses of litigation; and Such inchoate interest may be the subject of contracts including a
contract of sale. In this case, however, what the donor sold was the
land itself which she no longer owns. It would have been different if
7) ordering Defendants to pay the sum of P30,000.00 representing
the donor-seller sold her interests over the property under the deed
moral damages.
of donation which is subject to the possibility of reversion of
ownership arising from the non-fulfillment of the resolutory
SO ORDERED.2 condition.

On appeal, the Court of Appeals reversed and set aside the As to laches, petitioners' action is not yet barred thereby. Laches
judgment a quo3 ruling that the sale made by Trinidad Quijada presupposes failure or neglect for an unreasonable and unexplained
to respondent Mondejar was valid as the former retained an length of time, to do that which, by exercising due diligence, could or
inchoate interest on the lots by virtue of the automatic should have been done earlier; 14 "it is negligence or omission to
reversion clause in the deed of donation.4 Thereafter, assert a right within a reasonable time, thus, giving rise to a
Page 17 of 105
presumption that the party entitled to assert it either has inexistent and void from the beginning. However, nowhere in Article
abandoned or declined to assert it." 15 Its essential elements 1409 (4) is it provided that the properties of a municipality, whether it
of: be those for public use or its patrimonial property 25 are outside the
commerce of men. Besides, the lots in this case were conditionally
owned by the municipality. To rule that the donated properties are
a) Conduct on the part of the defendant, or of one under whom
outside the commerce of men would render nugatory the
he claims, giving rise to the situation complained of;
unchallenged reasonableness and justness of the condition which
the donor has the right to impose as owner thereof. Moreover, the
b) Delay in asserting complainant's right after he had objects referred to as outsides the commerce of man are those which
knowledge of the defendant's conduct and after he has an cannot be appropriated, such as the open seas and the heavenly
opportunity to sue; bodies.

c) Lack of knowledge or notice on the part of the defendant With respect to the trial court's award of attorney's fees, litigation
that the complainant would assert the right on which he bases expenses and moral damages, there is neither factual nor legal basis
his suit; and, thereof. Attorney's fees and expenses of litigation cannot, following
the general rule in Article 2208 of the New Civil Code, be recovered in
d) Injury or prejudice to the defendant in the event relief is this case, there being no stipulation to that effect and the case does
accorded to the complainant. 16 not fall under any of the
exceptions. 26 It cannot be said that private respondents had
compelled petitioners to litigate with third persons. Neither can it be
are absent in this case. Petioners' cause of action to quiet title ruled that the former acted in "gross and evident bad faith" in
commenced only when the property reverted to the donor refusing to satisfy the latter's claims considering that private
and/or his successors-in-interest in 1987. Certainly, when the respondents were under an honest belief that they have a legal right
suit was initiated the following year, it cannot be said that over the property by virtue of the deed of sale. Moral damages
petioners had slept on their rights for a long time. The 1960's cannot likewise be justified as none of the circumstances
sales made by Trinidad Quijada cannot be the reckoning point enumerated under Articles 2219. 27 and 2220 28 of the New Civil Code
as to when petitioners' cause of action arose. They had no concur in this case
interest over the property at that time except under the deed of
donation to which private respondents were not privy.
Moreover, petitioners had previously filed an ejectment suit WHEREFORE, by virtue of the foregoing, the assailed decision of the
against private respondents only that it did not prosper on a Court of Appeals is AFFIRMED.
technicality.
SO ORDERED.
Be that at it may, there is one thing which militates against the
claim of petitioners. Sale, being a consensual contract, is G.R. No. 133638 April 15, 2005
perfected by mere consent, which is manifested the moment
there is a meeting of the minds17 as to the offer and
acceptance thereof on three (3) elements: subject matter, PERPETUA VDA. DE APE, Petitioner,
price and terms of payment of the price. 18 Ownership by the vs.
seller on the thing sold at the time of the perfection of the THE HONORABLE COURT OF APPEALS and GENOROSA CAWIT
contract of sale is not an element for its perfection. What the VDA. DE LUMAYNO, Respondents.
law requires is that the seller has the right to transfer
ownership at the time the thing sold is DECISION
delivered. 19 Perfection per se does not transfer ownership
which occurs upon the actual or constructive delivery of the
CHICO-NAZARIO, J.:
thing sold. 20 A perfected contract of sale cannot be
challenged on the ground of non-ownership on the part of the
seller at the time of its perfection; hence, the sale is still valid. Before Us is a petition for review on certiorari of the Decision1 of the Court
of Appeals in CA-G.R. CV No. 45886 entitled, "Generosa Cawit de
Lumayno, accompanied by her husband Braulio Lumayno v. Fortunato
The consummation, however, of the perfected contract is
Ape, including his wife Perpetua de Ape."
another matter. It occurs upon the constructive or actual
delivery of the subject matter to the buyer when the seller or
her successors-in-interest subsequently acquires ownership The pertinent facts are as follows:
thereof. Such circumstance happened in this case when
petitioners — who are Trinidad Quijada's heirs and Cleopas Ape was the registered owner of a parcel of land particularly
successors-in-interest — became the owners of the subject known as Lot No. 2319 of the Escalante Cadastre of Negros Occidental
property upon the reversion of the ownership of the land to and covered by Original Certificate of Title (OCT) No. RP 1379 (RP-154
them. Consequently, ownership is transferred to respondent [300]).2Upon Cleopas Ape's death sometime in 1950, the property passed
Mondejar and those who claim their right from him. Article on to his wife, Maria Ondoy, and their eleven (11) children,
1434 of the New Civil Code supports the ruling that the seller's namely: Fortunato, Cornelio, Bernalda, Bienvenido, Encarnacion, Loreta,
"title passes by operation of law to the buyer." 21 This rule Lourdes, Felicidad, Adela, Dominador, and Angelina, all surnamed Ape.
applies not only when the subject matter of the contract of
sale is goods,22 but also to other kinds of property, including
real property. 23 On 15 March 1973, Generosa Cawit de Lumayno (private respondent
herein), joined by her husband, Braulio,3instituted a case for "Specific
Performance of a Deed of Sale with Damages" against Fortunato and his
There is also no merit in petitioners' contention that since the wife Perpetua (petitioner herein) before the then Court of First Instance of
lots were owned by the municipality at the time of the sale, Negros Occidental. It was alleged in the complaint that on 11 April 1971,
they were outside the commerce of men under Article 1409 (4) private respondent and Fortunato entered into a contract of sale of land
of the NCC;24 thus, the contract involving the same is
Page 18 of 105
under which for a consideration of P5,000.00, Fortunato agreed to During the trial, private respondent testified that she and her husband
sell his share in Lot No. 2319 to private respondent. The acquired the various portions of Lot No. 2319 belonging to Fortunato's
agreement was contained in a receipt prepared by private co-owners. Thereafter, her husband caused the annotation of an adverse
respondent's son-in-law, Andres Flores, at her behest. Said claim on the certificate of title of Lot No. 2319.10 The annotation states:
receipt was attached to the complaint as Annex "A" thereof and
later marked as Exhibit "G" for private respondent. The receipt
Entry No. 123539 – Adverse claim filed by Braulio Lumayno. – Notice of
states:
adverse claim filed by Braulio Lumayno affecting the lot described in this
title to the extent of 77511.93 square meters, more or less, the aggregate
area of shares sold to him on the basis of (alleged) sales in his
April 11, 1971 possession. Doc. No. 157, Page No. 33, Book No. XI, Series of 1967 of
Alexander Cawit of Escalante, Neg. Occ. Date of instrument. – June 22,
1967 at 8:30 a.m. (SGD) FEDENCIORRAZ, Actg. Register of Deeds.11
TO WHOM IT MAY CONCERN:

In addition, private respondent claimed that after the acquisition of those


This date received from Mrs. Generosa Cawit de Lumayno the sum shares, she and her husband had the whole Lot No. 2319 surveyed by a
of THIRTY PESOS ONLY as Advance Payment of my share in certain Oscar Mascada who came up with a technical description of said
Land Purchased, for FIVE THOUSAND PESOS – LOT #2319. piece of land.12 Significantly, private respondent alleged that Fortunato
was present when the survey was conducted.13

(Signed)
FORTUNATO APE Also presented as evidence for private respondent were pictures taken of
some parts of Lot No. 2319 purportedly showing the land belonging to
Fortunato being bounded by a row of banana plants thereby separating it
P30.00 WITNESS: from the rest of Lot No. 2319.14
(Illegible)4
As regards the circumstances surrounding the sale of Fortunato's portion
As private respondent wanted to register the claimed sale of the land, private respondent testified that Fortunato went to her store at
transaction, she supposedly demanded that Fortunato execute the the time when their lease contract was about to expire. He allegedly
corresponding deed of sale and to receive the balance of the demanded the rental payment for his land but as she was no longer
consideration. However, Fortunato unjustifiably refused to heed interested in renewing their lease agreement, they agreed instead to enter
her demands. Private respondent, therefore, prayed that into a contract of sale which Fortunato acceded to provided private
Fortunato be ordered to execute and deliver to her "a sufficient and respondent bought his portion of Lot No. 2319 for P5,000.00. Thereafter,
registrable deed of sale involving his one-eleventh (1/11) share or she asked her son-in-law Flores to prepare the aforementioned
participation in Lot No. 2319 of the Escalante Cadastre; to pay receipt. Flores read the document to Fortunato and asked the latter
P5,000.00 in damages; P500.00 reimbursement for litigation whether he had any objection thereto. Fortunato then went on to affix his
expenses as well as additional P500.00 for every appeal made; signature on the receipt.
P2,000.00 for attorney's fees; and to pay the costs.5
For her part, petitioner insisted that the entire Lot No. 2319 had not yet
Fortunato and petitioner denied the material allegations of the been formally subdivided;15 that on 11 April 1971 she and her husband
complaint and claimed that Fortunato never sold his share in Lot went to private respondent's house to collect past rentals for their land
No. 2319 to private respondent and that his signature appearing on then leased by the former, however, they managed to collect only thirty
the purported receipt was forged. By way of counterclaim, the pesos;16 that private respondent made her (petitioner's) husband sign a
defendants below maintained having entered into a contract of receipt acknowledging the receipt of said amount of money; 17 and that the
lease with respondent involving Fortunato's portion of Lot No. contents of said receipt were never explained to them.18 She also stated in
2319. This purported lease contract commenced in 1960 and was her testimony that her husband was an illiterate and only learned how to
supposed to last until 1965 with an option for another five (5) write his name in order to be employed in a sugar central. 19 As for private
years. The annual lease rental was P100.00 which private respondent's purchase of the shares owned by Fortunato's co-owners,
respondent and her husband allegedly paid on installment petitioner maintained that neither she nor her husband received any notice
basis. Fortunato and petitioner also assailed private respondent regarding those sales transactions.20 The testimony of petitioner was later
and her husband's continued possession of the rest of Lot No. on corroborated by her daughter-in-law, Marietta Ape Dino.21
2319 alleging that in the event they had acquired the shares of
Fortunato's co-owners by way of sale, he was invoking his right to After due trial, the court a quo rendered a decision22 dismissing both the
redeem the same. Finally, Fortunato and petitioner prayed that complaint and the counterclaim. The trial court likewise ordered that
the lease contract between them and respondent be ordered deeds or documents representing the sales of the shares previously
annulled; and that respondent be ordered to pay them attorney's owned by Fortunato's co-owners be registered and annotated on the
fees; moral damages; and exemplary damages.6 existing certificate of title of Lot No. 2319. According to the trial court,
private respondent failed to prove that she had actually paid the purchase
In their reply,7 the private respondent and her husband alleged that price of P5,000.00 to Fortunato and petitioner. Applying, therefore, the
they had purchased from Fortunato's co-owners, as evidenced by provision of Article 1350 of the Civil Code,23 the trial court concluded that
various written instruments,8 their respective portions of Lot No. private respondent did not have the right to demand the delivery to her of
2319. By virtue of these sales, they insisted that Fortunato was no the registrable deed of sale over Fortunato's portion of the Lot No. 2319.
longer a co-owner of Lot No. 2319 thus, his right of redemption no
longer existed. The trial court also rejected Fortunato and petitioner's claim that they had
the right of redemption over the shares previously sold to private
Prior to the resolution of this case at the trial court level, Fortunato respondent and the latter's husband, reasoning as follows:
died and was substituted in this action by his children named
Salodada, Clarita, Narciso, Romeo, Rodrigo, Marieta, Fortunato, Defendants in their counterclaim invoke their right of legal redemption
Jr., and Salvador, all surnamed Ape.9 under Article 1623 of the New Civil Code in view of the alleged sale of the
Page 19 of 105
undivided portions of the lot in question by their co-heirs and It is not right for the trial court to expect plaintiff-appellant to pay the
co-owners as claimed by the plaintiffs in their complaint. They balance of the purchase price before the final deed is executed, or for her
have been informed by the plaintiff about said sales upon the filing to deposit the equivalent amount in court in the form of
of the complaint in the instant case as far back as March 14, consignation. Consignation comes into fore in the case of a creditor to
1973. Defendant themselves presented as their very own exhibits whom tender of payment has been made and refuses without just cause
copies of the respective deeds of sale or conveyance by their said to accept it (Arts. 1256 and 1252, N.C.C.; Querino vs. Pelarca, 29 SCRA
co-heirs and co-owners in favor of the plaintiffs or their 1). As vendee, plaintiff-appellant Generosa Cawit de Lumayno does not
predecessors-in-interest way back on January 2, 1992 when they fall within the purview of a debtor.
formally offered their exhibits in the instant case; meaning, they
themselves acquired possession of said documentary exhibits We, therefore, find and so hold that the trial court should have found that
even before they formally offered them in evidence. Under Art.
exhibit G bears all the earmarks of a private deed of sale which is valid,
1623 of the New Civil Code, defendants have only THIRTY (30)
binding and enforceable between the parties, and that as a consequence
DAYS counted from their actual knowledge of the exact terms and
of the failure and refusal on the part of the vendor Fortunato Ape to live up
conditions of the deeds of sale or conveyance of their co-heirs' and
to his contractual obligation, he and/or his heirs and successors-in-interest
co-owners' share within which to exercise their right of legal
can be compelled to execute in favor of, and to deliver to the vendee,
redemption.24
plaintiff-appellant Generosa Cawit de Lumayno a registerable deed of
absolute sale involving his one-eleventh (1/11th) share or participation in
Within the reglementary period, both parties filed their respective Lot No. 2319, Escalante Cadastre, containing an area of 12,527.19 square
notices of appeal before the trial court with petitioner and her meters, more or less, within 30 days from finality of this decision, and, in
children taking exception to the finding of the trial court that the case of non-compliance within said period, this Court appoints the Clerk of
period within which they could invoke their right of redemption had Court of the trial court to execute on behalf of the vendor the said
already lapsed.25 For her part, private respondent raised as errors document.28
the trial court's ruling that there was no contract of sale between
herself and Fortunato and the dismissal of their complaint for
The Court of Appeals, however, affirmed the trial court's ruling on the
specific performance.26
issue of petitioner and her children's right of redemption. It ruled that
Fortunato's receipt of the Second Owner's Duplicate of OCT (RP) 1379
The Court of Appeals, in the decision now assailed before us, (RP-154 ([300]), containing the adverse claim of private respondent and
reversed and set aside the trial court's dismissal of the private her husband, constituted a sufficient compliance with the written notice
respondent's complaint but upheld the portion of the court a requirement of Article 1623 of the Civil Code and the period of redemption
quo's decision ordering the dismissal of petitioner and her under this provision had long lapsed.
children's counterclaim. The dispositive portion of the appellate
court's decision reads:
Aggrieved by the decision of the appellate court, petitioner is now before
us raising, essentially, the following issues: whether Fortunato was
WHEREFORE, the decision dated March 11, 1994, is hereby furnished with a written notice of sale of the shares of his co-owners as
REVERSED and SET ASIDE insofar as the dismissal of required by Article 1623 of the Civil Code; and whether the receipt signed
plaintiffs-appellants' complaint is concerned, and another one is by Fortunato proves the existence of a contract of sale between him and
entered ordering the defendant-appellant Fortunato Ape and/or his private respondent.
wife Perpetua de Ape and successors-in-interest to execute in
favor of plaintiff-appellant Generosa Cawit de Lumayno a Deed of In her memorandum, petitioner claimed that the Court of Appeals erred in
Absolute Sale involving the one-eleventh (1/11) share or
sustaining the court a quo's pronouncement that she could no longer
participation of Fortunato Ape in Lot No. 2319, Escalante Cadastre,
redeem the portion of Lot No. 2319 already acquired by private
containing an area of 12,527.19 square meters, more or less,
respondent for no written notice of said sales was furnished
within (30) days from finality of this decision, and in case of
them. According to her, the Court of Appeals unduly expanded the scope
non-compliance with this Order, that the Clerk of Court of said court
of the law by equating Fortunato's receipt of Second Owner's Duplicate of
is ordered to execute the deed on behalf of the vendor. The
OCT (RP) 1379 (RP-154 ([300]) with the written notice requirement of
decision is AFFIRMED insofar as the dismissal of
Article 1623. In addition, she argued that Exhibit "G" could not possibly
defendants-appellants' counterclaim is concerned.
be a contract of sale of Fortunato's share in Lot No. 2319 as said
document does not contain "(a) definite agreement on the manner of
Without pronouncement as to costs.27 payment of the price."29 Even assuming that Exhibit "G" is, indeed, a
contract of sale between private respondent and Fortunato, the latter did
not have the obligation to deliver to private respondent a registrable deed
The Court of Appeals upheld private respondent's position that
of sale in view of private respondent's own failure to pay the full purchase
Exhibit "G" had all the earmarks of a valid contract of sale, thus:
price of Fortunato's portion of Lot No. 2319. Petitioner is also of the view
that, at most, Exhibit "G" merely contained a unilateral promise to sell
Exhibit G is the best proof that the P5,000.00 representing the which private respondent could not enforce in the absence of a
purchase price of the 1/11th share of Fortunato Ape was not paid by consideration distinct from the purchase price of the land. Further,
the vendee on April 11, 1971, and/or up to the present, but that petitioner reiterated her claim that due to the illiteracy of her husband, it
does not affect the binding force and effect of the document. The was incumbent upon private respondent to show that the contents of
vendee having paid the vendor an advance payment of the agreed Exhibit "G" were fully explained to him. Finally, petitioner pointed out that
purchase price of the property, what the vendor can exact from the the Court of Appeals erred when it took into consideration the same exhibit
vendee is full payment upon his execution of the final deed of despite the fact that only its photocopy was presented before the court.
sale. As is shown, the vendee precisely instituted this action to
compel the vendor Fortunato Ape to execute the final document,
On the other hand, private respondent argued that the annotation on the
after she was informed that he would execute the same upon
second owner's certificate over Lot No. 2319 constituted constructive
arrival of his daughter "Bala" from Mindanao, but afterwards failed
notice to the whole world of private respondent's claim over the majority of
to live up to his contractual obligation (TSN, pp. 11-13, June 10,
said parcel of land. Relying on our decision in the case of Cabrera v.
1992).
Villanueva,30 private respondent insisted that when Fortunato received a
copy of the second owner's certificate, he became fully aware of the
Page 20 of 105
contracts of sale entered into between his co-owners on one hand al.,35 Cabrera v. Villanueva,36 Garcia, et al. v. Calaliman, et al.,37 Distrito,
and private respondent and her deceased husband on the other. et al. v. The Honorable Court of Appeals, et al.,38 and Mariano, et al. v.
Hon. Court of Appeals, et al.39
Private respondent also averred that "although (Lot No. 2319) was
not actually partitioned in a survey after the death of Cleopas Ape, However, in the case of Salatandol v. Retes,40 wherein the plaintiffs were
the land was partitioned in a 'hantal-hantal' manner by the not furnished any written notice of sale or a copy thereof by the vendor,
heirs. Each took and possessed specific portion or premises as this Court again referred to the principle enunciated in the case of
his/her share in land, farmed their respective portion or premises, Butte. As observed by Justice Vicente Mendoza, such reversion is only
and improved them, each heir limiting his/her improvement within sound, thus:
the portion or premises which were his/her respective
share."31Thus, when private respondent and her husband
… Art. 1623 of the Civil Code is clear in requiring that the written
purchased the other parts of Lot No. 2319, it was no longer
notification should come from the vendor or prospective vendor, not from
undivided as petitioner claims.
any other person. There is, therefore, no room for construction. Indeed,
the principal difference between Art. 1524 of the former Civil Code and Art.
The petition is partly meritorious. 1623 of the present one is that the former did not specify who must give
the notice, whereas the present one expressly says the notice must be
Article 1623 of the Civil Code provides: given by the vendor. Effect must be given to this change in statutory
language.41

The right of legal pre-emption or redemption shall not be exercised


In this case, the records are bereft of any indication that Fortunato was
except within thirty days from the notice in writing by the
given any written notice of prospective or consummated sale of the
prospective vendor, or by the vendor, as the case may be. The
portions of Lot No. 2319 by the vendors or would-be vendors. The thirty
deed of sale shall not be recorded in the Registry of Property,
(30)-day redemption period under the law, therefore, has not commenced
unless accompanied by an affidavit of the vendor that he has given
to run.
written notice thereof to all possible redemptioners.

Despite this, however, we still rule that petitioner could no longer invoke
Despite the plain language of the law, this Court has, over the
her right to redeem from private respondent for the exercise of this right
years, been tasked to interpret the "written notice requirement" of
"presupposes the existence of a co-ownership at the time the conveyance
the above-quoted provision. In the case Butte v. Manuel Uy &
is made by a co-owner and when it is demanded by the other co-owner or
Sons, Inc.,32 we declared that –
co-owners."42 The regime of co-ownership exists when ownership of an
undivided thing or right belongs to different persons.43 By the nature of a
In considering whether or not the offer to redeem was timely, we co-ownership, a co-owner cannot point to specific portion of the property
think that the notice given by the vendee (buyer) should not be owned in common as his own because his share therein remains
taken into account. The text of Article 1623 clearly and expressly intangible.44 As legal redemption is intended to minimize co-ownership,45
prescribes that the thirty days for making the redemption are to be once the property is subdivided and distributed among the co-owners, the
counted from notice in writing by the vendor. Under the old law community ceases to exist and there is no more reason to sustain any
(Civ. Code of 1889, Art. 1524), it was immaterial who gave the right of legal redemption.46
notice; so long as the redeeming co-owner learned of the alienation
in favor of the stranger, the redemption period began to run. It is
In this case, records reveal that although Lot No. 2319 has not yet been
thus apparent that the Philippine legislature in Article 1623
formally subdivided, still, the particular portions belonging to the heirs of
deliberately selected a particular method of giving notice, and that
Cleopas Ape had already been ascertained and they in fact took
method must be deemed exclusive. (39 Am. Jur., 237; Payne vs.
possession of their respective parts. This can be deduced from the
State, 12 S.W. 2(d) 528). As ruled in Wampler vs. Lecompte, 150
testimony of petitioner herself, thus:
Atl. 458 (affd. in 75 Law Ed. [U.S.] 275) –

Q When the plaintiffs leased the share of your husband, were


why these provisions were inserted in the statute we are not
there any metes and bounds?
informed, but we may assume until the contrary is shown, that a
state of facts in respect thereto existed, which warranted the
legislature in so legislating. A It was not formally subdivided. We have only a definite
portion. (hantal-hantal)
The reasons for requiring that the notice should be given by the
seller, and not by the buyer, are easily divined. The seller of an Q This hantal-hantal of your husband, was it also separate and
undivided interest is in the best position to know who are his distinct from the hantal-hantal or the share of the brothers and sisters of
co-owners that under the law must be notified of the sale. Also, your husband?
the notice by the seller removes all doubts as to fact of the sale, its
perfection; and its validity, the notice being a reaffirmation thereof,
A Well, this property in question is a common property.
so that the party notified need not entertain doubt that the seller
may still contest the alienation. This assurance would not exist if
the notice should be given by the buyer.33 Q To the north, whose share was that which is adjacent to your
husband's assumed partition?
The interpretation was somehow modified in the case of De
Conejero, et al. v. Court of Appeals, et al. 34 wherein it was pointed A I do not know what [does] this "north" [mean].
out that Article 1623 "does not prescribe a particular form of notice,
nor any distinctive method for notifying the redemptioner" thus, as COURT
long as the redemptioner was notified in writing of the sale and the
particulars thereof, the redemption period starts to run. This view
was reiterated in Etcuban v. The Honorable Court of Appeals, et (To Witness)

Page 21 of 105
Q To the place from where the sun rises, whose share was Q In re-possessing this portion of the land corresponding to the
that? share of your husband, did your husband demand that they should
re-possess the land from the Lumayno[s] or did the Lumayno[s] return
them to your husband voluntarily?
A The shares of Cornelia, Loreta, Encarnacion and Adela.

A They just returned to us without paying the rentals.


Q How could you determine their own shares?

COURT
A They were residing in their respective assumed portions.

Q Was the return the result of your husband's request or just


Q How about determining their respective boundaries?
voluntarily they returned it to your husband?

A It could be determined by stakes and partly a row of


A No, sir, it was just returned voluntarily, and they abandoned the
banana plantations planted by my son-in-law.
area but my husband continued farming.48

Q Who is this son-in-law you mentioned?


Similarly telling of the partition is the stipulation of the parties during the
pre-trial wherein it was admitted that Lot No. 2319 had not been
A Narciso Ape. subdivided nevertheless, "Fortunato Ape had possessed a specific portion
of the land ostensibly corresponding to his share."49
ATTY. CAWIT
From the foregoing, it is evident that the partition of Lot No. 2319 had
(Continuing) already been effected by the heirs of Cleopas Ape. Although the partition
might have been informal is of no moment for even an oral agreement of
partition is valid and binding upon the parties.50 Likewise, the fact that the
Q You said that there were stakes to determine the respective shares of Cleopas Ape's heirs are still embraced in one and the
hantal-hantal of your husband and the hantal-hantal of the other same certificate of title and have not been technically apportioned does
heirs, did I get you right? not make said portions less determinable and identifiable from one
another nor does it, in any way, diminish the dominion of their respective
ATTY. TAN owners.51

Admitted, Your Honor. Turning now to the second issue of the existence of a contract of sale, we
rule that the records of this case betray the stance of private respondent
that Fortunato Ape entered into such an agreement with her.

A contract of sale is a consensual contract, thus, it is perfected by mere


ATTY. CAWIT
consent of the parties. It is born from the moment there is a meeting of
minds upon the thing which is the object of the sale and upon the price. 52
Q Mrs. Ape, in 1960, Cleopas Ape was already dead, is that Upon its perfection, the parties may reciprocally demand performance,
correct? that is, the vendee may compel the transfer of the ownership and to deliver
the object of the sale while the vendor may demand the vendee to pay the
A Certainly, since he died in 1950. thing sold.53 For there to be a perfected contract of sale, however, the
following elements must be present: consent, object, and price in money
or its equivalent. In the case of Leonardo v. Court of Appeals, et al.,54 we
Q By the manifestation of your counsel that the entire land explained the element of consent, to wit:
(13 hectares) of your father-in-law, Cleopas Ape, was leased to
Generosa Lumayno, is this correct?
The essence of consent is the agreement of the parties on the terms of the
contract, the acceptance by one of the offer made by the other. It is the
A No, it is only the assumed portion of my husband [which] concurrence of the minds of the parties on the object and the cause which
was leased to Generosa Lumayno. constitutes the contract. The area of agreement must extend to all points
that the parties deem material or there is no consent at all.
Q For clarification, it was only the share of your husband
[which] was leased to Generosa Cawit Lumayno? To be valid, consent must meet the following requisites: (a) it should be
intelligent, or with an exact notion of the matter to which it refers; (b) it
A Yes.47 should be free and (c) it should be spontaneous. Intelligence in consent
is vitiated by error; freedom by violence, intimidation or undue influence;
spontaneity by fraud.55
ATTY. CAWIT

In this jurisdiction, the general rule is that he who alleges fraud or mistake
Q My question: is that portion which you said was leased by
in a transaction must substantiate his allegation as the presumption is that
your husband to the Lumayno[s] and which was included to the
a person takes ordinary care for his concerns and that private dealings
lease by your mother-in-law to the Lumayno[s], when the
have been entered into fairly and regularly.56 The exception to this rule is
Lumayno[s] returned your husband['s] share, was that the same
provided for under Article 1332 of the Civil Code which provides that
premises that your husband leased to the Lumayno[s]?
"[w]hen one of the parties is unable to read, or if the contract is in a
language not understood by him, and mistake or fraud is alleged, the
A The same.

Page 22 of 105
person enforcing the contract must show that the terms thereof A The one who represented Fortunato Ape doesn't know also how
have been fully explained to the former." to read and write English. One a maid.

In this case, as private respondent is the one seeking to enforce Q You mentioned that there [was another] person inside the store,
the claimed contract of sale, she bears the burden of proving that under your previous statement, when the document was signed, there
the terms of the agreement were fully explained to Fortunato Ape [was another] person in the store aside from you, your mother-in-law and
who was an illiterate. This she failed to do. While she claimed in Fortunato Ape, is not true?
her testimony that the contents of the receipt were made clear to
Fortunato, such allegation was debunked by Andres Flores himself
A That is true, there is one person, but that person doesn't know
when the latter took the witness stand. According to Flores:
how to read also.

ATTY. TAN

Q Mr. Witness, that receipt is in English, is it not?


Q Of course, Mr. Witness, since it occurred to you that there was
need for other witness to sign that document for Fortunato Ape, is it not a
A Yes, sir. fact that the Municipal Building is very near your house?

Q When you prepared that receipt, were you aware that A Quite (near).
Fortunato Ape doesn't know how to read and write English?
Q But you could readily proceed to the Municipal Building and
A Yes, sir, I know. request one who is knowledgeable in English to act as witness?

Q Mr. Witness, you said you were present at the time of the A I think there is no need for that small receipt. So I don't bother
signing of that alleged receipt of P30.00, correct? myself to go.

A Yes, sir. Q You did not consider that receipt very important because you
said that small receipt?
Q Where, in what place was this receipt signed?
A Yes, I know.57
A At the store.
As can be gleaned from Flores's testimony, while he was very much aware
of Fortunato's inability to read and write in the English language, he did not
Q At the time of the signing of this receipt, were there other
bother to fully explain to the latter the substance of the receipt (Exhibit
person[s] present aside from you, your mother-in-law and
"G"). He even dismissed the idea of asking somebody else to assist
Fortunato Ape?
Fortunato considering that a measly sum of thirty pesos was
involved. Evidently, it did not occur to Flores that the document he
A In the store, yes, sir. himself prepared pertains to the transfer altogether of Fortunato's property
to his mother-in-law. It is precisely in situations such as this when the
Q When you signed that document of course you acted as wisdom of Article 1332 of the Civil Code readily becomes apparent which
witness upon request of your mother-in-law? is "to protect a party to a contract disadvantaged by illiteracy, ignorance,
mental weakness or some other handicap."58

A No, this portion, I was the one who prepared that


document. In sum, we hold that petitioner is no longer entitled to the right of
redemption under Article 1632 of the Civil Code as Lot No. 2319 had long
been partitioned among its co-owners. This Court likewise annuls the
Q Without asking of (sic) your mother-in-law, you prepared contract of sale between Fortunato and private respondent on the ground
that document or it was your mother-in-law who requested you to of vitiated consent.
prepare that document and acted as witness?

WHEREFORE, premises considered, the decision dated 25 March 1998


A She requested me to prepare but does not instructed (sic) of the Court of Appeals is hereby REVERSED and SET ASIDE and the
me to act as witness. It was our opinion that whenever I prepared decision dated 11 March 1994 of the Regional Trial Court, Branch 58, San
the document, I signed it as a witness. Carlos City, Negros Occidental, dismissing both the complaint and the
counterclaim, is hereby REINSTATED. No costs.
Q Did it not occur to you to ask other witness to act on the
side of Fortunato Ape who did not know how to read and write SO ORDERED.
English?

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.


A It occurred to me.

Q But you did not bother to request a person who is not


related to your mother-in-law, considering that Fortunato Ape did
not know how to read and write English? G.R. No. 137552 June 16, 2000

Page 23 of 105
ROBERTO Z. LAFORTEZA, GONZALO Z. LAFORTEZA, extra-judicial settlement of the decedent's estate with sale in favor of the
MICHAEL Z. LAFORTEZA, DENNIS Z. LAFORTEZA, and LEA Z. plaintiff (Par. 2, Exh. "E", record, pp. 335-336).
LAFORTEZA, petitioners,
vs.
Significantly, the fourth paragraph of the Memorandum of Agreement
ALONZO MACHUCA, respondent.
(Contract to Sell) dated January 20, 1989 (Exh. "E", supra.) contained a
provision as follows:
GONZAGA-REYES, J.:
. . . . Upon issuance by the proper Court of the new title, the
This Petition for Review on Certiorari seeks the reversal of the BUYER-LESSEE shall be notified in writing and said BUYER-LESSEE
Decision of the Court of Appeals 1 in CA G.R. CV No. 147457 shall have thirty (30) days to produce the balance of P600,000.00 which
entitled "ALONZO MACHUCA versus ROBERTO Z. LAFORTEZA, shall be paid to the SELLER-LESSORS upon the execution of the
GONZALO Z. LAFORTEZA, LEA ZULUETA-LAFORTEZA, Extrajudicial Settlement with sale.
MICHAEL Z. LAFORTEZA, and DENNIS Z. LAFORTEZA".
On January 20, 1989, plaintiff paid the earnest money of THIRTY
The following facts as found by the Court of Appeals are THOUSAND PESOS (P30,000.00), plus rentals for the subject property
undisputed: (Exh. "F", Plaintiff, record, p. 339).

The property involved consists of a house and lot located at No. On September 18, 1998 3 , defendant heirs, through their counsel wrote a
7757 Sherwood Street, Marcelo Green Village, Parañaque, Metro letter (Exh. 1, Defendants, record, p. 370) to the plaintiff furnishing the
Manila, covered by Transfer Certificate of Title (TCT) No. (220656) latter a copy of the reconstituted title to the subject property, advising him
8941 of the Registered of Deeds of Parañaque (Exhibit "D", Plaintiff, that he had thirty (3) days to produce the balance of SIX HUNDRED
record, pp. 331-332). The subject property is registered in the PESOS (sic) (P600,000.00) under the Memorandum of Agreement which
name of the late Francisco Q. Laforteza, although it is conjugal in plaintiff received on the same date.
nature (Exhibit "8", Defendants, record pp. 331-386).
On October 18, 1989, plaintiff sent the defendant heirs a letter requesting
On August 2, 1988, defendant Lea Zulueta-Laforteza executed a for an extension of the THIRTY (30) DAYS deadline up to November 15,
Special Power of Attorney in favor of defendants Roberto Z. 1989 within which to produce the balance of SIX HUNDRED THOUSAND
Laforteza and Gonzalo Z. Laforteza, Jr., appointing both as her PESOS (P600,000.00) (Exh. "G", Plaintiff, record, pp. 341-342).
Attorney-in-fact authorizing them jointly to sell the subject property Defendant Roberto Z. Laforteza, assisted by his counsel Atty. Romeo L.
and sign any document for the settlement of the estate of the late Gutierrez, signed his conformity to the plaintiff's letter request (Exh. "G-1
Francisco Q. Laforteza (Exh. "A", Plaintiff, record, pp. 323-325). and "G-2", Plaintiff, record, p. 342). The extension, however, does not
appear to have been approved by Gonzalo Z. Laforteza, the second
attorney-in-fact as his conformity does not appear to have been secured.
Likewise on the same day, defendant Michael Z. Laforteza
executed a Special Power of Attorney in favor of defendants
Roberto Z. Laforteza and Gonzalo Laforteza, Jr., likewise, granting On November 15, 1989, plaintiff informed the defendant heirs, through
the same authority (Exh. "B", record, pp. 326-328) Both agency defendant Roberto Z. Laforteza, that he already had the balance of SIX
instruments contained a provision that in any document or paper to HUNDRED THOUSAND PESOS (P600,000.00) covered by United
exercise authority granted, the signature of both attorneys- in-fact Coconut Planters Bank Manager's Check No. 000814 dated November 15,
must be affixed. 1989 (TSN, August 25, 1992, p. 11; Exhs. "H", record, pp. 343-344; "M",
records p. 350; and "N", record, p. 351). However, the defendants, refused
to accept the balance (TSN, August 24, 1992, p. 14; Exhs. "M-1", Plaintiff,
On October 27, 1988, defendant Dennis Z. Laforteza executed a
Special Power of Attorney in favor of defendant Roberto Z. record, p. 350; and "N-1", Plaintiff, record, p. 351). Defendant Roberto Z.
Laforteza had told him that the subject property was no longer for sale
Laforteza for the purpose of selling the subject property (Exh. "C",
(TSN, October 20, 1992, p. 19; Exh. "J", record, p. 347).
Plaintiff, record, pp. 329-330). A year later, on October 30, 1989,
Dennis Z. Laforteza executed another Special Power of Attorney in
favor of defendants Roberto Z. Laforteza and Gonzalo Laforteza, Jr. On November 20, 1998 4 , defendants informed plaintiff that they were
naming both attorneys-in-fact for the purpose of selling the subject canceling the Memorandum of Agreement (Contract to Sell) in view of the
property and signing any document for the settlement of the estate plaintiff's failure to comply with his contractual obligations (Exh. "3").
of the late Francisco Q. Laforteza. The subsequent agency
instrument (Exh, "2", record, pp. 371-373) contained similar
Thereafter, plaintiff reiterated his request to tender payment of the balance
provisions that both attorneys-in-fact should sign any document or
of SIX HUNDRED THOUSAND PESOS (P600,000.00). Defendants,
paper executed in the exercise of their authority.1âwphi1.nêt
however, insisted on the rescission of the Memorandum of Agreement.
Thereafter, plaintiff filed the instant action for specific performance. The
In the exercise of the above authority, on January 20, 1989, the lower court rendered judgment on July 6, 1994 in favor of the plaintiff, the
heirs of the late Francisco Q. Laforteza represented by Roberto Z. dispositive portion of which reads:
Laforteza and Gonzalo Z. Laforteza, Jr. entered into a
Memorandum of Agreement (Contract to Sell) with the plaintiff 2
WHEREFORE, judgment is hereby rendered in favor of plaintiff Alonzo
over the subject property for the sum of SIX HUNDRED THIRTY
Machuca and against the defendant heirs of the late Francisco Q.
THOUSAND PESOS (P630,000.00) payable as follows:
Laforteza, ordering the said defendants.

(a) P30,000.00 as earnest money, to be forfeited in favor of the


(a) To accept the balance of P600,000.00 as full payment of the
defendants if the sale is not effected due to the fault of the plaintiff;
consideration for the purchase of the house and lot located at No. 7757
Sherwood Street, Marcelo Green Village, Parañaque, Metro Manila,
(b) P600,000.00 upon issuance of the new certificate of title in the covered by Transfer Certificate of Title No. (220656) 8941 of the Registry
name of the late Francisco Q. Laforteza and upon execution of an of Deeds of Rizal Parañaque, Branch;

Page 24 of 105
(b) To execute a registrable deed of absolute sale over the subject The obligation of the petitioners to sell the property to the respondent was
property in favor of the plaintiff; conditioned upon the issuance of a new certificate of title and the
execution of the extrajudicial partition with sale and payment of the
P600,000.00. This is why possession of the subject property was not
(c) Jointly and severally to pay the plaintiff the sum of P20,000.00
delivered to the respondent as the owner of the property but only as the
as attorney's fees plus cost of suit.
lessee thereof. And the failure of the respondent to pay the purchase price
in full prevented the petitioners' obligation to convey title from acquiring
SO ORDERED. (Rollo, pp. 74-75). 5 obligatory force.

Petitioners appealed to the Court of Appeals, which affirmed with Petitioners also allege that assuming for the sake of argument that a
modification the decision of the lower court; the dispositive portion contract of sale was indeed perfected, the Court of Appeals still erred in
of the Decision reads: holding that respondent's failure to pay the purchase price of P600,000.00
was only a "slight or casual breach".
WHEREFORE, the questioned decision of the lower court is hereby
AFFIRMED with the MODIFICATION that defendant heirs Lea The petitioners also claim that the Court of Appeals erred in ruling that
Zulueta-Laforteza, Michael Z. Laforteza, Dennis Z. Laforteza and they were not ready to comply with their obligation to execute the
Roberto Z. Laforteza including Gonzalo Z. Laforteza, Jr. are hereby extrajudicial settlement. The Power of Attorney to execute a Deed of Sale
ordered to pay jointly and severally the sum of FIFTY THOUSAND made by Dennis Z. Laforteza was sufficient and necessarily included the
PESOS (P50,000.00) as moral damages. power to execute an extrajudicial settlement. At any rate, the respondent
is estopped from claiming that the petitioners were not ready to comply
SO ORDERED. 6 with their obligation for he acknowledged the petitioners' ability to do so
when he requested for an extension of time within which to pay the
purchase price. Had he truly believed that the petitioners were not ready,
Motion for Reconsideration was denied but the Decision was he would not have needed to ask for said extension.
modified so as to absolve Gonzalo Z. Laforteza, Jr. from liability for
the payment of moral damages. 7 Hence this petition wherein the
petitioners raise the following issues: Finally, the petitioners allege that the respondent's uncorroborated
testimony that third persons offered a higher price for the property is
hearsay and should not be given any evidentiary weight. Thus, the order
I. WHETHER THE TRIAL AND APPELLATE COURTS of the lower court awarding moral damages was without any legal basis.
CORRECTLY CONSTRUED THE MEMORANDUM OF
AGREEMENT AS IMPOSING RECIPROCAL OBLIGATIONS.
The appeal is bereft of merit.

II. WHETHER THE COURTS A QUO CORRECTLY RULED THAT


RESCISSION WILL NOT LIE IN THE INSTANT CASE. A perusal of the Memorandum Agreement shows that the transaction
between the petitioners and the respondent was one of sale and lease.
The terms of the agreement read:
III. WHETHER THE RESPONDENT IS UNDER ESTOPPEL FROM
RAISING THE ALLEGED DEFECT IN THE SPECIAL POWER OF
ATTORNEY DATED 30 OCTOBER 1989 EXECUTED BY DENNIS 1. For and in consideration of the sum of PESOS: SIX HUNDRED THIRTY
LAFORTEZA. THOUSAND (P630,000.00) payable in a manner herein below indicated,
SELLER-LESSOR hereby agree to sell unto BUYER-LESSEE the
property described in the first WHEREAS of this Agreement within six (6)
IV. SUPPOSING EX GRATIA ARGUMENTI THE MEMORANDUM months from the execution date hereof, or upon issuance by the Court of a
OF AGREEMENT IMPOSES RECIPROCAL OBLIGATIONS, new owner's certificate of title and the execution of extrajudicial partition
WHETHER THE PETITIONERS MAY BE COMPELLED TO SELL with sale of the estate of Francisco Laforteza, whichever is earlier;
THE SUBJECT PROPERTY WHEN THE RESPONDENT FAILED
TO MAKE A JUDICIAL CONSIGNATION OF THE PURCHASE
PRICE? 2. The above-mentioned sum of PESOS: SIX HUNDRED THIRTY
THOUSAND (P630,000.00) shall be paid in the following manner:

V. WHETHER THE PETITIONERS ARE IN BAD FAITH SO TO AS


MAKE THEM LIABLE FOR MORAL DAMAGES? 8 P30,000.00 — as earnest money and as consideration for this Agreement,
which amount shall be forfeited in favor of SELLER-LESSORS if the sale
is not effected because of the fault or option of BUYER-LESSEE;
The petitioners contend that the Memorandum of Agreement is
merely a lease agreement with "option to purchase". As it was
merely an option, it only gave the respondent a right to purchase P600,000.00 — upon the issuance of the new certificate of title in the
the subject property within a limited period without imposing upon name of the late Francisco Laforteza and upon the execution of an
them any obligation to purchase it. Since the respondent's tender of Extrajudicial Settlement of his estate with sale in favor of BUYER-LESSEE
payment was made after the lapse of the option agreement, his free from lien or any encumbrances.
tender did not give rise to the perfection of a contract of sale.
3. Parties reasonably estimate that the issuance of a new title in place of
It is further maintained by the petitioners that the Court of Appeals the lost one, as well as the execution of extrajudicial settlement of estate
erred in ruling that rescission of the contract was already out of the with sale to herein BUYER-LESSEE will be completed within six (6)
question. Rescission implies that a contract of sale was perfected months from the execution of this Agreement. It is therefore agreed that
unlike the Memorandum of Agreement in question which as during the six months period, BUYER-LESSEE will be leasing the subject
previously stated is allegedly only an option contract. property for six months period at the monthly rate of PESOS: THREE
THOUSAND FIVE HUNDRED (P3,500.00). Provided however, that if the
issuance of new title and the execution of Extrajudicial Partition is
Petitioner adds that at most, the Memorandum of Agreement completed prior to the expiration of the six months period,
(Contract to Sell) is a mere contract to sell, as indicated in its title. BUYER-LESSEE shall only be liable for rentals for the corresponding
Page 25 of 105
period commencing from his occupancy of the premises to the An accepted unilateral promise to buy or to sell a determinate thing for a
execution and completion of the Extrajudicial Settlement of the price certain is binding upon the promissor if the promise is supported by a
estate, provided further that if after the expiration of six (6) months, consideration distinct from the price.
the lost title is not yet replaced and the extra judicial partition is not
executed, BUYER-LESSEE shall no longer be required to pay
In the present case, the six-month period merely delayed the
rentals and shall continue to occupy, and use the premises until
demandability of the contract of sale and did not determine its perfection
subject condition is complied by SELLER-LESSOR;
for after the expiration of the six-month period, there was an absolute
obligation on the part of the petitioners and the respondent to comply with
4. It is hereby agreed that within reasonable time from the the terms of the sale. The parties made a "reasonable estimate" that the
execution of this Agreement and the payment by BUYER-LESSEE reconstitution the lost title of the house and lot would take approximately
of the amount of P30,000.00 as herein above provided, six months and thus presumed that after six months, both parties would be
SELLER-LESSORS shall immediately file the corresponding able to comply with what was reciprocally incumbent upon them. The fact
petition for the issuance of a new title in lieu of the lost one in the that after the expiration of the six-month period, the respondent would
proper Courts. Upon issuance by the proper Courts of the new title, retain possession of the house and lot without need of paying rentals for
the BUYER-LESSEE shall have thirty (30) days to produce the the use therefor, clearly indicated that the parties contemplated that
balance of P600,000.00 which shall be paid to the ownership over the property would already be transferred by that time.
SELLER-LESSORS upon the execution of the Extrajudicial
Settlement with sale. 9
The issuance of the new certificate of title in the name of the late
Francisco Laforteza and the execution of an extrajudicial settlement of his
A contract of sale is a consensual contract and is perfected at the estate was not a condition which determined the perfection of the contract
moment there is a meeting of the minds upon the thing which is the of sale. Petitioners' contention that since the condition was not met, they
object of the contract and upon the price. 10 From that moment the no longer had an obligation to proceed with the sale of the house and lot is
parties may reciprocally demand performance subject to the unconvincing. The petitioners fail to distinguish between a condition
provisions of the law governing the form of contracts. 11 The imposed upon the perfection of the contract and a condition imposed on
elements of a valid contract of sale under Article 1458 of the Civil the performance of an obligation. Failure to comply with the first condition
Code are (1) consent or meeting of the minds; (2) determinate results in the failure of a contract, while the failure to comply with the
subject matter and (3) price certain money or its equivalent. 12 second condition only gives the other party the option either to refuse to
proceed with the sale or to waive the condition. Thus, Art. 1545 of the Civil
Code states:
In the case at bench, there was a perfected agreement between
the petitioners and the respondent whereby the petitioners
obligated themselves to transfer the ownership of and deliver the Art. 1545. Where the obligation of either party to a contract of sale is
house and lot located at 7757 Sherwood St., Marcelo Green Village, subject to any condition which is not performed, such party may refuse to
Parañaque and the respondent to pay the price amounting to six proceed with the contract or he may waive performance of the condition. If
hundred thousand pesos (P600,000.00). All the elements of a the other party has promised that the condition should happen or be
contract of sale were thus present. However, the balance of the performed, such first mentioned party may also treat the nonperformance
purchase price was to be paid only upon the issuance of the new of the condition as a breach of warranty.
certificate of title in lieu of the one in the name of the late Francisco
Laforteza and upon the execution of an extrajudicial settlement of
Where the ownership in the things has not passed, the buyer may treat the
his estate. Prior to the issuance of the "reconstituted" title, the fulfillment by the seller of his obligation to deliver the same as described
respondent was already placed in possession of the house and lot
and as warranted expressly or by implication in the contract of sale as a
as lessee thereof for six months at a monthly rate of three thousand
condition of the obligation of the buyer to perform his promise to accept
five hundred pesos (P3,500.00). It was stipulated that should the
and pay for the thing. 16
issuance of the new title and the execution of the extrajudicial
settlement be completed prior to expiration of the six-month period,
the respondent would be liable only for the rentals pertaining to the In the case at bar, there was already a perfected contract. The condition
period commencing from the date of the execution of the was imposed only on the performance of the obligations contained therein.
agreement up to the execution of the extrajudicial settlement. It Considering however that the title was eventually "reconstituted" and that
was also expressly stipulated that if after the expiration of the six the petitioners admit their ability to execute the extrajudicial settlement of
month period, the lost title was not yet replaced and the their father's estate, the respondent had a right to demand fulfillment of the
extrajudicial partition was not yet executed, the respondent would petitioners' obligation to deliver and transfer ownership of the house and
no longer be required to pay rentals and would continue to occupy lot.
and use the premises until the subject condition was complied with
the petitioners. What further militates against petitioners' argument that they did not enter
into a contract or sale is the fact that the respondent paid thirty thousand
The six-month period during which the respondent would be in pesos (P30,000.00) as earnest money. Earnest money is something of
possession of the property as lessee, was clearly not a period value to show that the buyer was really in earnest, and given to the seller
within which to exercise an option. An option is a contract granting to bind the bargain.17 Whenever earnest money is given in a contract of
a privilege to buy or sell within an agreed time and at a determined sale, it is considered as part of the purchase price and proof of the
price. An option contract is a separate and distinct contract from perfection of the contract. 18
that which the parties may enter into upon the consummation of the
option. 13 An option must be supported by consideration.14 An We do not subscribe to the petitioners' view that the Memorandum
option contract is governed by the second paragraph of Article Agreement was a contract to sell. There is nothing contained in the
1479 of the Civil Code 15 , which reads: Memorandum Agreement from which it can reasonably be deduced that
the parties intended to enter into a contract to sell, i.e. one whereby the
Art. 1479. . . . prospective seller would explicitly reserve the transfer of title to the
prospective buyer, meaning, the prospective seller does not as yet agree
or consent to transfer ownership of the property subject of the contract to
sell until the full payment of the price, such payment being a positive

Page 26 of 105
suspensive condition, the failure of which is not considered a parties did not contain a clause expressly authorizing the automatic
breach, casual or serious, but simply an event which prevented the cancellation of the contract without court intervention in the event that the
obligation from acquiring any obligatory force. 19 There is clearly no terms thereof were violated. A seller cannot unilaterally and extrajudicially
express reservation of title made by the petitioners over the rescind a contract or sale where there is no express stipulation authorizing
property, or any provision which would impose non-payment of the him to extrajudicially rescind. 28 Neither was there a judicial demand for
price as a condition for the contract's entering into force. Although the rescission thereof. Thus, when the respondent filed his complaint for
the memorandum agreement was also denominated as a "Contract specific performance, the agreement was still in force inasmuch as the
to Sell", we hold that the parties contemplated a contract of sale. A contract was not yet rescinded. At any rate, considering that the six-month
deed of sale is absolute in nature although denominated a period was merely an approximation of the time if would take to
conditional sale in the absence of a stipulation reserving title in the reconstitute the lost title and was not a condition imposed on the
petitioners until full payment of the purchase price. 20 In such cases, perfection of the contract and considering further that the delay in payment
ownership of the thing sold passes to the vendee upon actual or was only thirty days which was caused by the respondents justified but
constructive delivery thereof. 21 The mere fact that the obligation of mistaken belief that an extension to pay was granted to him, we agree with
the respondent to pay the balance of the purchase price was made the Court of Appeals that the delay of one month in payment was a mere
subject to the condition that the petitioners first deliver the casual breach that would not entitle the respondents to rescind the
reconstituted title of the house and lot does not make the contract a contract. Rescission of a contract will not be permitted for a slight or
contract to sell for such condition is not inconsistent with a contract casual breach, but only such substantial and fundamental breach as
of sale. 22 would defeat the very object of the parties in making the agreemant. 29

The next issue to be addressed is whether the failure of the Petitioners' insistence that the respondent should have consignated the
respondent to pay the balance of the purchase price within the amount is not determinative of whether respondent's action for specific
period allowed is fatal to his right to enforce the agreement. performance will lie. Petitioners themselves point out that the effect of
cansignation is to extinguish the obligation. It releases the debtor from
responsibility therefor. 30 The failure of the respondent to consignate the
We rule in the negative.
P600,000.00 is not tantamount to a breach of the contract for by the fact of
tendering payment, he was willing and able to comply with his obligation.
Admittedly, the failure of the respondent to pay the balance of the
purchase price was a breach of the contract and was a ground for
rescission thereof. The extension of thirty (30) days allegedly The Court of Appeals correctly found the petitioners guilty of bad faith and
awarded moral damages to the respondent. As found by the said Court,
granted to the respondent by Roberto Z. Laforteza (assisted by his
the petitioners refused to comply with, their obligation for the reason that
counsel Attorney Romeo Gutierrez) was correctly found by the
they were offered a higher price therefor and the respondent was even
Court of Appeals to be ineffective inasmuch as the signature of
offered P100,000.00 by the petitioners' lawyer, Attorney Gutierrez, to
Gonzalo Z. Laforteza did not appear thereon as required by the
relinquish his rights over the property. The award of moral damages is in
Special Powers of Attorney. 23 However, the evidence reveals that
accordance with Article 1191 31 of the Civil Code pursuant to Article 2220
after the expiration of the six-month period provided for in the
which provides that moral damages may be awarded in case of breach of
contract, the petitioners were not ready to comply with what was
contract where the defendant acted in bad faith. The amount awarded
incumbent upon them, i.e. the delivery of the reconstituted title of
depends on the discretion of the court based on the circumstances of each
the house and lot. It was only on September 18, 1989 or nearly
case. 32 Under the circumstances, the award given by the Court of
eight months after the execution of the Memorandum of Agreement
Appeals amounting to P50,000.00 appears to us to be fair and reasonable.
when the petitioners informed the respondent that they already had
a copy of the reconstituted title and demanded the payment of the
balance of the purchase price. The respondent could not therefore ACCORDINGLY, the decision of the Court of Appeals in CA G.R. CV No.
be considered in delay for in reciprocal obligations, neither party 47457 is AFFIRMED and the instant petition is hereby DENIED.
incurs in delay if the other party does not comply or is not ready to
comply in a proper manner with what was incumbent upon him. 24
No pronouncement as to costs.

Even assuming for the sake of argument that the petitioners were SO ORDERED.
ready to comply with their obligation, we find that rescission of the
contract will still not prosper. The rescission of a sale of an
immovable property is specifically governed by Article 1592 of the Melo, Panganiban and Purisima, JJ., concur.
New Civil Code, which reads: Vitug, J., abroad on official business.

In the sale of immovable property, even though it may have been G.R. No. 126083 July 12, 2006
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 ANTONIO R. CORTES (in his capacity as Administrator of the estate
may pay, even after the expiration of the period, as long as no of Claro S. Cortes), petitioner,
demand for rescission of the contract has been made upon him vs.
either judicially or by a notarial act. After the demand, the court may HON. COURT OF APPEALS and VILLA ESPERANZA DEVELOPMENT
not grant him a new term. 25 CORPORATION, respondents.

It is not disputed that the petitioners did not make a judicial or DECISION
notarial demand for rescission.1avvphi1 The November 20, 1989
letter of the petitioners informing the respondent of the automatic
rescission of the agreement did not amount to a demand for YNARES-SANTIAGO, J.:
rescission, as it was not notarized. 26 It was also made five days
after the respondent's attempt to make the payment of the The instant petition for review seeks the reversal of the June 13, 1996
purchase price. This offer to pay prior to the demand for rescission Decision1 of the Court of Appeals in CA-G.R. CV No. 47856, setting aside
is sufficient to defeat the petitioners' right under article 1592 of the the June 24, 1993 Decision2 of the Regional Trial Court of Makati, Branch
Civil Code. 27 Besides, the Memorandum Agreement between the
Page 27 of 105
138, which rescinded the contract of sale entered into by petitioner having failed to pay in full the amount of P2,200,000.00 despite Cortes'
Antonio Cortes (Cortes) and private respondent Villa Esperanza delivery of the Deed of Absolute Sale and the TCTs, rescission of the
Development Corporation (Corporation). contract is proper.

The antecedents show that for the purchase price of P3,700,000.00, In its motion for reconsideration, the Corporation contended that the trial
the Corporation as buyer, and Cortes as seller, entered into a court failed to consider their agreement that it would pay the balance of the
contract of sale over the lots covered by Transfer Certificate of Title down payment when Cortes delivers the TCTs. The motion was, however,
(TCT) No. 31113-A, TCT No. 31913-A and TCT No. 32013-A, denied by the trial court holding that the rescission should stand because
located at Baclaran, Parañaque, Metro Manila. On various dates in the Corporation did not act on the offer of Cortes' counsel to deliver the
1983, the Corporation advanced to Cortes the total sum of TCTs upon payment of the balance of the down payment. Thus:
P1,213,000.00. Sometime in September 1983, the parties
executed a deed of absolute sale containing the following terms: 3
The Court finds no merit in the [Corporation's] Motion for Reconsideration.
As stated in the decision sought to be reconsidered, [Cortes'] counsel at
1. Upon execution of this instrument, the Vendee shall pay unto the the pre-trial of this case, proposed that if [the Corporation] completes the
Vendor sum of TWO MILLION AND TWO HUNDRED THOUSAND down payment agreed upon and make arrangement for the payment of the
(P2,200,000.00) PESOS, Philippine Currency, less all advances balances of the purchase price, [Cortes] would sign the Deed of Sale and
paid by the Vendee to the Vendor in connection with the sale; turn over the certificate of title to the [Corporation]. [The Corporation] did
nothing to comply with its undertaking under the agreement between the
parties.
2. The balance of ONE MILLION AND FIVE HUNDRED
THOUSAND [P1,500,000.00] PESOS, Phil. Currency shall be
payable within ONE (1) YEAR from date of execution of this WHEREFORE, in view of the foregoing considerations, the Motion for
instrument, payment of which shall be secured by an irrevocable Reconsideration is hereby DENIED.
standby letter of credit to be issued by any reputable local banking
institution acceptable to the Vendor.
SO ORDERED.7

xxxx
On appeal, the Court of Appeals reversed the decision of the trial court
and directed Cortes to execute a Deed of Absolute Sale conveying the
4. All expense for the registration of this document with the properties and to deliver the same to the Corporation together with the
Register of Deeds concerned, including the transfer tax, shall be TCTs, simultaneous with the Corporation's payment of the balance of the
divided equally between the Vendor and the Vendee. Payment of purchase price of P2,487,000.00. It found that the parties agreed that the
the capital gains shall be exclusively for the account of the Vendor; Corporation will fully pay the balance of the down payment upon Cortes'
5% commission of Marcosa Sanchez to be deducted upon signing delivery of the three TCTs to the Corporation. The records show that no
of sale.4 such delivery was made, hence, the Corporation was not remiss in the
performance of its obligation and therefore justified in not paying the
balance. The decretal portion thereof, provides:
Said Deed was retained by Cortes for notarization.

WHEREFORE, premises considered, [the Corporation's] appeal is


On January 14, 1985, the Corporation filed the instant case5 for
GRANTED. The decision appealed from is hereby REVERSED and SET
specific performance seeking to compel Cortes to deliver the TCTs
ASIDE and a new judgment rendered ordering [Cortes] to execute a deed
and the original copy of the Deed of Absolute Sale. According to
of absolute sale conveying to [the Corporation] the parcels of land subject
the Corporation, despite its readiness and ability to pay the
of and described in the deed of absolute sale, Exhibit D. Simultaneously
purchase price, Cortes refused delivery of the sought documents. It
thus prayed for the award of damages, attorney's fees and litigation with the execution of the deed of absolute sale and the delivery of the
corresponding owner's duplicate copies of TCT Nos. 31113-A, 31931-A
expenses arising from Cortes' refusal to deliver the same
and 32013-A of the Registry of Deeds for the Province of Rizal, Metro
documents.
Manila, District IV, [the Corporation] shall pay [Cortes] the balance of the
purchase price of P2,487,000.00. As agreed upon in paragraph 4 of the
In his Answer with counterclaim,6 Cortes claimed that the owner's Deed of Absolute Sale, Exhibit D, under terms and conditions, "All
duplicate copy of the three TCTs were surrendered to the expenses for the registration of this document (the deed of sale) with the
Corporation and it is the latter which refused to pay in full the Register of Deeds concerned, including the transfer tax, shall be divided
agreed down payment. He added that portion of the subject equally between [Cortes and the Corporation]. Payment of the capital
property is occupied by his lessee who agreed to vacate the gains shall be exclusively for the account of the Vendor; 5% commission
premises upon payment of disturbance fee. However, due to the of Marcosa Sanchez to be deducted upon signing of sale." There is no
Corporation's failure to pay in full the sum of P2,200,000.00, he in pronouncement as to costs.
turn failed to fully pay the disturbance fee of the lessee who now
refused to pay monthly rentals. He thus prayed that the Corporation
SO ORDERED.8
be ordered to pay the outstanding balance plus interest and in the
alternative, to cancel the sale and forfeit the P1,213,000.00 partial
down payment, with damages in either case. Cortes filed the instant petition praying that the decision of the trial court
rescinding the sale be reinstated.
On June 24, 1993, the trial court rendered a decision rescinding the
sale and directed Cortes to return to the Corporation the amount of There is no doubt that the contract of sale in question gave rise to a
P1,213,000.00, plus interest. It ruled that pursuant to the contract reciprocal obligation of the parties. Reciprocal obligations are those which
of the parties, the Corporation should have fully paid the amount of arise from the same cause, and which each party is a debtor and a
P2,200,000.00 upon the execution of the contract. It stressed that creditor of the other, such that the obligation of one is dependent upon the
such is the law between the parties because the Corporation failed obligation of the other. They are to be performed simultaneously, so that
to present evidence that there was another agreement that the performance of one is conditioned upon the simultaneous fulfillment of
modified the terms of payment as stated in the contract. And, the other.9

Page 28 of 105
Article 1191 of the Civil Code, states: Q Of course, you have it transferred in the name of the plaintiff, the title?

ART. 1191. The power to rescind obligations is implied in reciprocal A Upon full payment.
ones, in case one of the obligors should not comply with what is
incumbent upon him.
xxxx

xxxx
ATTY. SARTE

As to when said failure or delay in performance arise, Article 1169


Q When you said upon full payment, are you referring to the agreed down
of the same Code provides that –
payment of P2,200,000.00?

ART. 1169
A Yes, sir.13

xxxx
By agreeing to transfer title upon full payment of P2,200,000.00, Cortes'
impliedly agreed to deliver the TCTs to the Corporation in order to effect
In reciprocal obligations, neither party incurs in delay if the other said transfer. Hence, the phrase "execution of this instrument" 14 as
does not comply or is not ready to comply in a proper manner with appearing in the Deed of Absolute Sale, and which event would give rise
what is incumbent upon him. From the moment one of the to the Corporation's obligation to pay in full the amount of P2,200,000.00,
parties fulfills his obligation, delay by the other begins. can not be construed as referring solely to the signing of the deed. The
(Emphasis supplied) meaning of "execution" in the instant case is not limited to the signing of a
contract but includes as well the performance or implementation or
accomplishment of the parties' agreement.15 With the transfer of titles as
The issue therefore is whether there is delay in the performance of
the corresponding reciprocal obligation of payment, Cortes' obligation is
the parties' obligation that would justify the rescission of the
not only to affix his signature in the Deed, but to set into motion the
contract of sale. To resolve this issue, we must first determine the
process that would facilitate the transfer of title of the lots, i.e., to have the
true agreement of the parties.
Deed notarized and to surrender the original copy thereof to the
Corporation together with the TCTs.
The settled rule is that the decisive factor in evaluating an
agreement is the intention of the parties, as shown not necessarily
Having established the true agreement of the parties, the Court must now
by the terminology used in the contract but by their conduct, words,
determine whether Cortes delivered the TCTs and the original Deed to the
actions and deeds prior to, during and immediately after executing
Corporation. The Court of Appeals found that Cortes never surrendered
the agreement. As such, therefore, documentary and parol
said documents to the Corporation. Cortes testified that he delivered the
evidence may be submitted and admitted to prove such intention. 10
same to Manny Sanchez, the son of the broker, and that Manny told him
that her mother, Marcosa Sanchez, delivered the same to the Corporation.
In the case at bar, the stipulation in the Deed of Absolute Sale was
that the Corporation shall pay in full the P2,200,000.00 down
Q Do you have any proof to show that you have indeed surrendered these
payment upon execution of the contract. However, as correctly
titles to the plaintiff?
noted by the Court of Appeals, the transcript of stenographic notes
reveal Cortes' admission that he agreed that the Corporation's full
payment of the sum of P2,200,000.00 would depend upon his A Yes, sir.
delivery of the TCTs of the three lots. In fact, his main defense in
the Answer is that, he performed what is incumbent upon him by
Q I am showing to you a receipt dated October 29, 1983, what relation has
delivering to the Corporation the TCTs and the carbon duplicate of
this receipt with that receipt that you have mentioned?
the Deed of Absolute Sale, but the latter refused to pay in full the
down payment.11 Pertinent portion of the transcript, reads:
A That is the receipt of the real estate broker when she received the titles.
[Q] Now, why did you deliver these three titles to the plaintiff
despite the fact that it has not been paid in full the agreed down Q On top of the printed name is Manny Sanchez, there is a signature, do
payment? you know who is that Manny Sanchez?

A Well, the broker told me that the down payment will be given if I A That is the son of the broker.
surrender the titles.
xxxx
Q Do you mean to say that the plaintiff agreed to pay in full the
down payment of P2,200,000.00 provided you surrender or entrust Q May we know the full name of the real estate broker?
to the plaintiff the titles?

A Marcosa Sanchez
A Yes, sir.12

xxxx
What further confirmed the agreement to deliver the TCTs is the
testimony of Cortes that the title of the lots will be transferred in the
name of the Corporation upon full payment of the P2,200,000.00 Q Do you know if the broker or Marcosa Sanchez indeed delivered the
down payment. Thus – titles to the plaintiff?

ATTY. ANTARAN A That is what [s]he told me. She gave them to the plaintiff.

Page 29 of 105
x x x x.16 performance thereof must be simultaneous. The mutual inaction of Cortes
and the Corporation therefore gave rise to a compensation morae or
default on the part of both parties because neither has completed their
ATTY. ANTARAN
part in their reciprocal obligation.20 Cortes is yet to deliver the original copy
of the notarized Deed and the TCTs, while the Corporation is yet to pay in
Q Are you really sure that the title is in the hands of the plaintiff? full the agreed down payment of P2,200,000.00. This mutual delay of the
parties cancels out the effects of default, 21 such that it is as if no one is
xxxx guilty of delay.22

Q It is in the hands of the broker but there is no showing that it is in We find no merit in Cortes' contention that the failure of the Corporation to
the hands of the plaintiff? act on the proposed settlement at the pre-trial must be construed against
the latter. Cortes argued that with his counsel's offer to surrender the
original Deed and the TCTs, the Corporation should have consigned the
A Yes, sir. balance of the down payment. This argument would have been correct if
Cortes actually surrendered the Deed and the TCTs to the Corporation.
COURT With such delivery, the Corporation would have been placed in default if it
chose not to pay in full the required down payment. Under Article 1169 of
the Civil Code, from the moment one of the parties fulfills his obligation,
Q How do you know that it was delivered to the plaintiff by the son
delay by the other begins. Since Cortes did not perform his part, the
of the broker?
provision of the contract requiring the Corporation to pay in full the down
payment never acquired obligatory force. Moreover, the Corporation could
A The broker told me that she delivered the title to the plaintiff. not be faulted for not automatically heeding to the offer of Cortes. For one,
its complaint has a prayer for damages which it may not want to waive by
ATTY. ANTARAN agreeing to the offer of Cortes' counsel. For another, the previous
representation of Cortes that the TCTs were already delivered to the
Corporation when no such delivery was in fact made, is enough reason for
Q Did she not show you any receipt that she delivered to [Mr.] the Corporation to be more cautious in dealing with him.
Dragon17 the title without any receipt?

The Court of Appeals therefore correctly ordered the parties to perform


A I have not seen any receipt. their respective obligation in the contract of sale, i.e., for Cortes to, among
others, deliver the necessary documents to the Corporation and for the
Q So, therefore, you are not sure whether the title has been latter to pay in full, not only the down payment, but the entire purchase
delivered to the plaintiff or not. It is only upon the allegation of the price. And since the Corporation did not question the Court of Appeal's
broker? decision and even prayed for its affirmance, its payment should rightfully
consist not only of the amount of P987,000.00, representing the balance of
the P2,200,000.00 down payment, but the total amount of P2,487,000.00,
A Yes, sir.18
the remaining balance in the P3,700,000.00 purchase price.

However, Marcosa Sanchez's unrebutted testimony is that, she did


WHEREFORE, the petition is DENIED and the June 13, 1996 Decision of
not receive the TCTs. She also denied knowledge of delivery
the Court of Appeals in CA-G.R. CV No. 47856, is AFFIRMED.
thereof to her son, Manny, thus:

SO ORDERED.
Q The defendant, Antonio Cortes testified during the hearing on
March 11, 1986 that he allegedly gave you the title to the property
in question, is it true? Panganiban, C.J., Austria-Martinez, Callejo, Sr., Chico-Nazario,
J.J., concur.
A I did not receive the title.
G.R. No. 108346 July 11, 2001
Q He likewise said that the title was delivered to your son, do you
know about that? Spouses MARIANO Z. VELARDE and AVELINA D.
VELARDE, petitioners,
vs.
A I do not know anything about that.19
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE
RAYMUNDO, respondents.
What further strengthened the findings of the Court of Appeals that
Cortes did not surrender the subject documents was the offer of
PANGANIBAN, J.:
Cortes' counsel at the pre-trial to deliver the TCTs and the Deed of
Absolute Sale if the Corporation will pay the balance of the down
payment. Indeed, if the said documents were already in the hands A substantial breach of a reciprocal obligation, like failure to pay the price
of the Corporation, there was no need for Cortes' counsel to make in the manner prescribed by the contract, entitled the injured party to
such offer. rescind the obligation. Rescission abrogates the contract from its inception
and requires a mutual restitution of benefits received.
Since Cortes did not perform his obligation to have the Deed
notarized and to surrender the same together with the TCTs, the The Case
trial court erred in concluding that he performed his part in the
contract of sale and that it is the Corporation alone that was remiss Before us is a Petition for Review on Certiorari1 questioning the
in the performance of its obligation. Actually, both parties were in Decision2 of the Court of Appeals (CA) in CA-GR CV No. 32991 dated
delay. Considering that their obligation was reciprocal,
Page 30 of 105
October 9, 1992, as well as its Resolution3 dated December 29, 'It is further agreed and understood by the parties herein that the capital
1992 denying petitioner's motion for reconsideration.4 gains tax and documentary stamps on the sale shall be for the account of
the VENDOR; whereas, the registration fees and transfer tax thereon shall
be the account of the VENDEE.' (Exh. 'A', pp. 11-12, Record).'
The dispositive portion of the assailed Decision reads:

"On the same date, and as part of the above-document, plaintiff Avelina
"WHEREFORES the Order dated May 15, 1991 is hereby
Velarde, with the consent of her husband, Mariano, executed an
ANNULLED and SET ASIDE and the Decision dated November 14,
Undertaking (Exh. 'C', pp. 13-14, Record).'
1990 dismissing the [C]omplaint is RESINSTATED. The bonds
posted by plaintiffs-appellees and defendants-appellants are
hereby RELEASED."5 'x x x xxx xxx

The Facts 'Whereas, as per deed of Sale with Assumption of Mortgage, I paid Mr.
David A. Raymundo the sum of EIGHT HUNDRED THOUSAND PESOS
(P800,000.00), Philippine currency, and assume the mortgage obligations
The factual antecedents of the case, as found by the CA, are as
on the property with the Bank of the Philippine Islands in the amount of
follows:
ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),
Philippine currency, in accordance with the terms and conditions of the
"x x x. David Raymundo [herein private respondent] is the absolute Deed of Real Estate Mortgage dated _____, signed and executed by Mr.
and registered owner of a parcel of land, together with the house David A. Raymundo with the said Bank, acknowledged before Notary
and other improvements thereon, located at 1918 Kamias St., Public for Makati, _____, as Doc. No. _____, Page No. _____, Book No.
Dasmariñas Village, Makati and covered by TCT No. 142177. _____, Series of 1986 of his Notarial Register.
Defendant George Raymundo [herein private petitioners] is David's
father who negotiated with plaintiffs Avelina and Mariano Velarde
'WHEREAS, while my application for the assumption of the mortgage
[herein petitioners] for the sale of said property, which was,
however, under lease (Exh. '6', p. 232, Record of Civil Case No. obligations on the property is not yet approved by the mortgagee Bank, I
have agreed to pay the mortgage obligations on the property with the
15952).
Bank in the name of Mr. David A. Raymundo, in accordance with the terms
and conditions of the said Deed of Real Estate Mortgage, including all
"On August 8, 1986, a Deed of Sale with Assumption of Mortgage interests and other charges for late payment.
(Exh. 'A'; Exh. '1', pp. 11-12, Record) was executed by defendant
David Raymundo, as vendor, in favor of plaintiff Avelina Velarde,
'WHEREAS, this undertaking is being executed in favor of Mr. David A.
as vendee, with the following terms and conditions:
Raymundo, for purposes of attesting and confirming our private
understanding concerning the said mortgage obligations to be assumed.
'x x x xxx xxx
'NOW, THEREFORE, for and in consideration of the foregoing premises,
'That for and in consideration of the amount of EIGHT HUNDRED and the assumption of the mortgage obligations of ONE MILLION EIGHT
THOUSAND PESOS (P800,000.00), Philippine currency, receipt of HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency,
which in full is hereby acknowledged by the VENDOR from the with the bank of the Philippine Islands, I, Mrs, Avelina D, Velarde with the
VENDEE, to his entire and complete satisfaction, by these presents consent of my husband, Mariano Z. Velardo, do hereby bind and obligate
the VENDOR hereby SELLS, CEDES, TRANSFERS, CONVEYS myself, my heirs, successors and assigns, to strictly and faithfully comply
AND DELIVERS, freely and voluntarily, with full warranty of a legal with the following terms and conditions:
and valid title as provided by law, unto the VENDEE, her heirs,
successors and assigns, the parcel of land mentioned and
'1. That until such time as my assumption of the mortgage obligations on
described above, together with the house and other improvements
the property purchased is approved by the mortgagee bank, the Bank of
thereon.
the Philippine Islands, I shall continue to pay the said loan in accordance
with the terms and conditions of the Deed of Real Estate Mortgage in the
'That the aforesaid parcel of land, together with the house and name of Mr. David A. Raymundo, the original Mortgagor.
other improvements thereon, were mortgaged by the VENDOR to
the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila to
'2. That, in the event I violate any of the terms and conditions of the said
secure the payment of a loan of ONE MILLION EIGHT HUNDRED
Deed of Real Estate Mortgage, I hereby agree that my downpayment of
THOUSAND PESOS (P1,800,000.00), Philippine currency, as
P800,000.00, plus all payments made with the Bank of the Philippine
evidenced by a Real Estate Mortgage signed and executed by the
Islands on the mortgage loan, shall be forfeited in favor of Mr. David A.
VENDOR in favor of the said Bank of the Philippine Islands, on
Raymundo, as and by way of liquidated damages, without necessity of
_____ and which Real Estate Mortgage was ratified before Notary
notice or any judicial declaration to that effect, and Mr. David A.
Public for Makati, _____, as Doc. No. ______, Page No. _____,
Raymundo shall resume total and complete ownership and possession of
Book No. ___, Series of 1986 of his Notarial Register.
the property sold by way of Deed of Sale with Assumption of Mortgage,
and the same shall be deemed automatically cancelled and be of no
'That as part of the consideration of this sale, the VENDEE hereby further force or effect, in the same manner as it (the) same had never been
assumes to pay the mortgage obligations on the property herein executed or entered into.
sold in the amount of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, in favor
'3. That I am executing the Undertaking for purposes of binding myself, my
of Bank of Philippine Islands, in the name of the VENDOR, and
heirs, successors and assigns, to strictly and faithfully comply with the
further agrees to strictly and faithfully comply with all the terms and
terms and conditions of the mortgage obligations with the Bank of the
conditions appearing in the Real Estate Mortgage signed and
Philippine Islands, and the covenants, stipulations and provisions of this
executed by the VENDOR in favor of BPI, including interests and
Undertaking.
other charges for late payment levied by the Bank, as if the same
were originally signed and executed by the VENDEE.

Page 31 of 105
'That, David A. Raymundo, the vendor of the property mentioned 1991,9 Judge Abad Santos granted petitioner's Motion for Reconsideration
and identified above, [does] hereby confirm and agree to the and directed the parties to proceed with the sale. He instructed petitioners
undertakings of the Vendee pertinent to the assumption of the to pay the balance of P1.8 million to private respondents who, in turn, were
mortgage obligations by the Vendee with the Bank of the Philippine ordered to execute a deed of absolute sale and to surrender possession of
Islands. (Exh. 'C', pp. 13-14, Record).' the disputed property to petitioners.

"This undertaking was signed by Avelina and Mariano Velarde and Private respondents appealed to the CA.
David Raymundo.
Ruling of the Court of Appeal
"It appears that the negotiated terms for the payment of the balance
of P1.8 million was from the proceeds of a loan that plaintiffs were
The CA set aside the Order of Judge Abad Santos and reinstated then
to secure from a bank with defendant's help. Defendants had a
Judge Ynares-Santiago's earlier Decision dismissing petitioners'
standing approved credit line with the Bank of the Philippine
Complaint. Upholding the validity of the rescission made by private
Islands (BPI). The parties agreed to avail of this, subject to BPI's
respondents, the CA explained its ruling in this wise:
approval of an application for assumption of mortgage by plaintiffs.
Pending BPI's approval o[f] the application, plaintiffs were to
continue paying the monthly interests of the loan secured by a real "In the Deed of Sale with Assumption of Mortgage, it was stipulated that
estate mortgage. 'as part of the consideration of this sale, the VENDEE (Velarde)' would
assume to pay the mortgage obligation on the subject property in the
amount of P 1.8 million in favor of BPI in the name of the Vendor
"Pursuant to said agreements, plaintiffs paid BPI the monthly
(Raymundo). Since the price to be paid by the Vendee Velarde includes
interest on the loan secured by the aforementioned mortgage for
the downpayment of P800,000.00 and the balance of Pl.8 million, and the
three (3) months as follows: September 19, 1986 at P27,225.00;
balance of Pl.8 million cannot be paid in cash, Vendee Velarde, as part of
October 20, 1986 at P23,000.00; and November 19, 1986 at
the consideration of the sale, had to assume the mortgage obligation on
P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15, 17and 18, Record).
the subject property. In other words, the assumption of the mortgage
obligation is part of the obligation of Velarde, as vendee, under the
"On December 15, 1986, plaintiffs were advised that the contract. Velarde further agreed 'to strictly and faithfully comply with all the
Application for Assumption of Mortgage with BPI, was not approved terms and conditions appearing in the Real Estate Mortgage signed and
(Exh. 'J', p. 133, Record). This prompted plaintiffs not to make any executed by the VENDOR in favor of BPI x x x as if the same were
further payment. originally signed and executed by the Vendee. (p. 2, thereof, p. 12,
Record). This was reiterated by Velarde in the document entitled
'Undertaking' wherein the latter agreed to continue paying said loan in
"On January 5, 1987, defendants, thru counsel, wrote plaintiffs
accordance with the terms and conditions of the Deed of Real Estate
informing the latter that their non-payment to the mortgage bank
Mortgage in the name of Raymundo. Moreover, it was stipulated that in
constitute[d] non-performance of their obligation (Exh. '3', p. 220,
the event of violation by Velarde of any terms and conditions of said deed
Record).
of real estate mortgage, the downpayment of P800,000.00 plus all
payments made with BPI or the mortgage loan would be forfeited and the
"In a Letter dated January 7, 1987, plaintiffs, thru counsel, [D]eed of [S]ale with [A]ssumption of [M]ortgage would thereby be
responded, as follows: Cancelled automatically and of no force and effect (pars. 2 & 3, thereof, pp
13-14, Record).
'This is to advise you, therefore, that our client is willing to pay the
balance in cash not later than January 21, 1987 provided: (a) you "From these 2 documents, it is therefore clear that part of the
deliver actual possession of the property to her not later than consideration of the sale was the assumption by Velarde of the mortgage
January 15, 1987 for her immediate occupancy; (b) you cause the obligation of Raymundo in the amount of Pl.8 million. This would mean
re- lease of title and mortgage from the Bank of P.I. and make the that Velarde had to make payments to BPI under the [D]eed of [R]eal
title available and free from any liens and encumbrances; and (c) [E]state [M]ortgage the name of Raymundo. The application with BPI for
you execute an absolute deed of sale in her favor free from any the approval of the assumption of mortgage would mean that, in case of
liens or encumbrances not later than January 21, 1987.' (Exhs. 'k', approval, payment of the mortgage obligation will now be in the name of
'4', p. 223, Record). Velarde. And in the event said application is disapproved, Velarde had to
pay in full. This is alleged and admitted in Paragraph 5 of the Complaint.
"On January 8, 1987 defendants sent plaintiffs a notarial notice of Mariano Velarde likewise admitted this fact during the hearing on
cancellation/rescission of the intended saleof the subject property September 15, 1997 (p. 47, t.s.n., September 15, 1987; see also pp. 16-26,
allegedly due to the latter's failure to comply with the terms and t.s.n., October 8, 1989). This being the case, the non-payment of the
conditions of the Deed of Sale with Assumption of Mortgage and mortgage obligation would result in a violation of the contract. And, upon
the Undertaking (Exh. '5', pp. 225-226, Record)."6 Velarde's failure to pay the agreed price, the[n] Raymundo may choose
either of two (2) actions - (1) demand fulfillment of the contract, or (2)
demand its rescission (Article 1191, Civil Code).
Consequently, petitioners filed on February 9, 1987 a Complaint
against private respondents for specific performance, nullity of
cancellation, writ of possession and damages. This was docketed "The disapproval by BPI of the application for assumption of mortgage
as Civil Case No. 15952 at the Regional Trial Court of Makati, cannot be used as an excuse for Velarde's non-payment of the balance of
Branch 149. The case was tried and heard by then Judge Consuelo the purchase price. As borne out by the evidence, Velarde had to pay in
Ynares-Santiago (now an associate justice of this Court), who full in case of BPI's disapproval of the application for assumption of
dismissed the Complaint in a Decision dated November 14, mortgage. What Velarde should have done was to pay the balance of P1.8
1990.7 Thereafter, petitioners filed a Motion for Reconsideration.8 million. Instead, Velarde sent Raymundo a letter dated January 7, 1987
(Exh. 'K', '4') which was strongly given weight by the lower court in
reversing the decision rendered by then Judge Ynares-Santiago. In said
Meanwhile, then Judge Ynares-Santiago was promoted to the letter, Velarde registered their willingness to pay the balance in cash but
Court of Appeals and Judge Salvador S. A. Abad Santos was enumerated 3 new conditions which, to the mind of this Court, would
assigned to the sala she vacated. In an Order dated May 15, constitute a new undertaking or new agreement which is subject to the
Page 32 of 105
consent or approval of Raymundo. These 3 conditions were not Breach of Contract
among those previously agreed upon by Velarde and Raymundo.
These are mere offers or, at most, an attempt to novate. But then
Petitioner aver that their nonpayment of private respondents' mortgage
again, there can be no novation because there was no agreement
obligation did not constitute a breach of contract, considering that their
of all the parties to the new contract (Garcia, Jr. vs. Court of
request to assume the obligation had been disapproved by the mortgagee
Appeals, 191 SCRA 493).
bank. Accordingly, payment of the monthly amortizations ceased to be
their obligation and, instead, it devolved upon private respondents again.
"It was likewise agreed that in case of violation of the mortgage
obligation, the Deed of Sale with Assumption of Mortgage would be
However, petitioners did not merely stop paying the mortgage obligations;
deemed 'automatically cancelled and of no further force and effect,
they also failed to pay the balance of the purchase price. As admitted by
as if the same had never been executed or entered into.' While it is
both parties, their agreement mandated that petitioners should pay the
true that even if the contract expressly provided for automatic
purchase price balance of P1.8 million to private respondents in case the
rescission upon failure to pay the price, the vendee may still pay,
request to assume the mortgage would be disapproved. Thus, on
he may do so only for as long as no demand for rescission of the
December 15, 1986, when petitioners received notice of the bank's
contract has been made upon him either judicially or by a notarial
disapproval of their application to assume respondents' mortgage, they
act (Article 1592, Civil Code). In the case at bar, Raymundo sent
should have paid the balance of the P1.8 million loan.
Velarde notarial notice dated January 8, 1987 of
cancellation/rescission of the contract due to the latter's failure to
comply with their obligation. The rescission was justified in view of Instead of doing so, petitioners sent a letter to private respondents offering
Velarde's failure to pay the price (balance) which is substantial and to make such payment only upon the fulfillment of certain conditions not
fundamental as to defeat the object of the parties in making the originally agreed upon in the contract of sale. Such conditional offer to pay
agreement. As adverted to above, the agreement of the parties cannot take the place of actual payment as would discharge the obligation
involved a reciprocal obligation wherein the obligation of one is a of a buyer under a contract of sale.
resolutory condition of the obligation of the other, the non-fulfillment
of which entitles the other party to rescind the contract (Songcuan In a contract of sale, the seller obligates itself to transfer the ownership of
vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage and deliver a determinate things, and the buyer to pay therefor a price
obligation by appellees Velarde would create a right to demand certain in money or its equivalent.13
payment or to rescind the contract, or to criminal prosecution (Edca
Publishing & Distribution Corporation vs. Santos, 184 SCRA 614).
Upon appellee's failure, therefore, to pay the balance, the contract Private respondents had already performed their obligation through the
was properly rescinded (Ruiz vs. IAC, 184 SCRA 720). execution of the Deed of Sale, which effectively transferred ownership of
Consequently, appellees Velarde having violated the contract, they the property to petitioner through constructive delivery. Prior physical
have lost their right to its enforcement and hence, cannot avail of delivery or possession is not legally required, and the execution of the
the action for specific performance (Voysaw vs. Interphil Deed of Sale is deemed equivalent to delivery.14
Promotions, Inc., 148 SCRA 635)."10
Petitioners, on the other hand, did not perform their correlative obligation
Hence, this appeal. 11 of paying the contract price in the manner agreed upon. Worse, they
wanted private respondents to perform obligations beyond those
stipulated in the contract before fulfilling their own obligation to pay the full
The Issues purchase price.

Petitioners, in their Memorandum,12 interpose the following Second Issue


assignment of errors:

Validity of the Rescission


"I.

Petitioners likewise claim that the rescission of the contract by private


The Court of Appeals erred in holding that the non-payment of the respondents was not justified, inasmuch as the former had signified their
mortgage obligation resulted in a breach of the contract. willingness to pay the balance of the purchase price only a little over a
month from the time they were notified of the disapproval of their
"II application for assumption of mortgage. Petitioners also aver that the
breach of the contract was not substantial as would warrant a rescission.
They cite several cases15 in which this Court declared that rescission of a
The Court of Appeals erred in holding that the rescission
contract would not be permitted for a slight or casual breach. Finally, they
(resolution) of the contract by private respondents was justified.
argue that they have substantially performed their obligation in good faith,
considering that they have already made the initial payment of P800,000
"III and three (3) monthly mortgage payments.

The Court of Appeals erred in holding that petitioners' January 7, As pointed out earlier, the breach committed by petitioners was not so
1987 letter gave three 'new conditions' constituting mere offers or much their nonpayment of the mortgage obligations, as their
an attempt to novate necessitating a new agreement between the nonperformance of their reciprocal obligation to pay the purchase price
parties." under the contract of sale. Private respondents' right to rescind the
contract finds basis in Article 1191 of the Civil Code, which explicitly
The Court's Ruling provides as follows:

The Petition is partially meritorious. "Art. 1191. -- The power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent upon
him.
First Issue:
Page 33 of 105
The injured party may choose between fulfillment and the the contract does not apply. Instead, Civil Code provisions shall govern
rescission of the obligation, with the payment of damages in either and regulate the resolution of this controversy.
case. He may also seek rescission even after he has chosen
fulfillment, if the latter should become impossible."
Considering that the rescission of the contract is based on Article 1191 of
the Civil Code, mutual restitution is required to bring back the parties to
The right of rescission of a party to an obligation under Article 1191 their original situation prior to the inception of the contract. Accordingly,
of the Civil Code is predicated on a breach of faith by the other the initial payment of P800,000 and the corresponding mortgage
party who violates the reciprocity between them. 16 The breach payments in the amounts of P27,225, P23,000 and P23,925 (totaling
contemplated in the said provision is the obligor's failure to comply P874,150.00) advanced by petitioners should be returned by private
with an existing obligation.17 When the obligor cannot comply with respondents, lest the latter unjustly enrich themselves at the expense of
what is incumbent upon it, the obligee may seek rescission and, in the former.
the absence of any just cause for the court to determine the period
of compliance, the court shall decree the rescission. 18
Rescission creates the obligation to return the object of the contract. It can
be carried out only when the one who demands rescission can return
In the present case, private respondents validly exercised their whatever he may be obliged to restore.20 To rescind is to declare a
right to rescind the contract, because of the failure of petitioners to contract void at its inception and to put an end to it as though it never was.
comply with their obligation to pay the balance of the purchase It is not merely to terminate it and release the parties from further
price. Indubitably, the latter violated the very essence of reciprocity obligations to each other, but to abrogate it from the beginning and restore
in the contract of sale, a violation that consequently gave rise to the parties to their relative positions as if no contract has been made.21
private respondent's right to rescind the same in accordance with
law.

True, petitioners expressed their willingness to pay the balance of Third Issue
the purchase price one month after it became due; however, this
was not equivalent to actual payment as would constitute a faithful
compliance of their reciprocal obligation. Moreover, the offer to pay Attempt to Novate
was conditioned on the performance by private respondents of
additional burdens that had not been agreed upon in the original In view of the foregoing discussion, the Court finds it no longer necessary
contract. Thus, it cannot be said that the breach committed by to discuss the third issue raised by petitioners. Suffice it to say that the
petitioners was merely slight or casual as would preclude the three conditions appearing on the January 7, 1987 letter of petitioners to
exercise of the right to rescind. private respondents were not part of the original contract. By that time, it
was already incumbent upon the former to pay the balance of the sale
Misplaced is petitioners' reliance on the cases 19 they cited, price. They had no right to demand preconditions to the fulfillment of their
because the factual circumstances in those cases are not obligation, which had become due.
analogous to those in the present one. In Song Fo there was, on
the part of the buyer, only a delay of twenty (20) days to pay for the WHEREFORE, the assailed Decision is hereby AFFIRMED with
goods delivered. Moreover, the buyer's offer to pay was the MODIFICATION that private respondents are ordered to return to
unconditional and was accepted by the seller. petitioners the amount of P874,150, which the latter paid as a
consequence of the rescinded contract, with legal interest thereon from
In Zepeda, the breach involved a mere one-week delay in paying January 8, 1987, the date of rescission. No pronouncement as to costs.
the balance of 1,000 which was actually paid.
SO ORDERED.1âwphi1.nêt
In Tan, the alleged breach was private respondent's delay of only a
few days, which was for the purpose of clearing the title to the Melo, Vitug, and Sandoval-Gutierrez, JJ., concur.
property; there was no reference whatsoever to the nonpayment of
the contract price.

In the instant case, the breach committed did not merely consist of
a slight delay in payment or an irregularity; such breach would not
normally defeat the intention of the parties to the contract. Here,
G.R. No. L-11827 July 31, 1961
petitioners not only failed to pay the P1.8 million balance, but they
also imposed upon private respondents new obligations as
preconditions to the performance of their own obligation. In effect, FERNANDO A. GAITE, plaintiff-appellee,
the qualified offer to pay was a repudiation of an existing obligation, vs.
which was legally due and demandable under the contract of sale. ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES &
Hence, private respondents were left with the legal option of SMELTING CO., INC., SEGUNDINA VIVAS, FRNACISCO DANTE,
seeking rescission to protect their own interest. PACIFICO ESCANDOR and FERNANDO TY, defendants-appellants.

Mutual Restitution Alejo Mabanag for plaintiff-appellee.


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

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


As discussed earlier, the breach committed by petitioners was the
nonperformance of a reciprocal obligation, not a violation of the
terms and conditions of the mortgage contract. Therefore, the This appeal comes to us directly from the Court of First Instance because
automatic rescission and forfeiture of payment clauses stipulated in the claims involved aggregate more than P200,000.00.
Page 34 of 105
Defendant-appellant Isabelo Fonacier was the owner and/or holder, Both bonds were attached to the "Revocation of Power of Attorney and
either by himself or in a representative capacity, of 11 iron lode Contract", Exhibit "A", and made integral parts thereof.
mineral claims, known as the Dawahan Group, situated in the
municipality of Jose Panganiban, province of Camarines Norte.
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
By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Attorney and Contract", Exhibit "A", Fonacier entered into a "Contract of
Fonacier constituted and appointed plaintiff-appellee Fernando A. Mining Operation", ceding, transferring, and conveying unto the Larap
Gaite as his true and lawful attorney-in-fact to enter into a contract Mines and Smelting Co., Inc. the right to develop, exploit, and explore the
with any individual or juridical person for the exploration and mining claims in question, together with the improvements therein and the
development of the mining claims aforementioned on a royalty use of the name "Larap Iron Mines" and its good will, in consideration of
basis of not less than P0.50 per ton of ore that might be extracted certain royalties. Fonacier likewise transferred, in the same document, the
therefrom. On March 19, 1954, Gaite in turn executed a general complete title to the approximately 24,000 tons of iron ore which he
assignment (Record on Appeal, pp. 17-19) conveying the acquired from Gaite, to the Larap & Smelting Co., in consideration for the
development and exploitation of said mining claims into the Larap signing by the company and its stockholders of the surety bonds delivered
Iron Mines, a single proprietorship owned solely by and belonging by Fonacier to Gaite (Record on Appeal, pp. 82-94).
to him, on the same royalty basis provided for in Exhibit "3".
Thereafter, Gaite embarked upon the development and exploitation
Up to December 8, 1955, when the bond Exhibit "B" expired with respect
of the mining claims in question, opening and paving roads within
to the Far Eastern Surety and Insurance Company, no sale of the
and outside their boundaries, making other improvements and
approximately 24,000 tons of iron ore had been made by the Larap Mines
installing facilities therein for use in the development of the mines,
& Smelting Co., Inc., nor had the P65,000.00 balance of the price of said
and in time extracted therefrom what he claim and estimated to be ore been paid to Gaite by Fonacier and his sureties payment of said
approximately 24,000 metric tons of iron ore.
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"
For some reason or another, Isabelo Fonacier decided to revoke to "C-24"). And when Fonacier and his sureties failed to pay as demanded
the authority granted by him to Gaite to exploit and develop the by Gaite, the latter filed the present complaint against them in the Court of
mining claims in question, and Gaite assented thereto subject to First Instance of Manila (Civil Case No. 29310) for the payment of the
certain conditions. As a result, a document entitled "Revocation of P65,000.00 balance of the price of the ore, consequential damages, and
Power of Attorney and Contract" was executed on December 8, attorney's fees.
1954 (Exhibit "A"),wherein Gaite transferred to Fonacier, for the
consideration of P20,000.00, plus 10% of the royalties that
All the defendants except Francisco Dante set up the uniform defense that
Fonacier would receive from the mining claims, all his rights and
the obligation sued upon by Gaite was subject to a condition that the
interests on all the roads, improvements, and facilities in or outside
amount of P65,000.00 would be payable out of the first letter of credit
said claims, the right to use the business name "Larap Iron Mines"
covering the first shipment of iron ore and/or the first amount derived from
and its goodwill, and all the records and documents relative to the
the local sale of the iron ore by the Larap Mines & Smelting Co., Inc.; that
mines. In the same document, Gaite transferred to Fonacier all his
up to the time of the filing of the complaint, no sale of the iron ore had been
rights and interests over the "24,000 tons of iron ore, more or less"
made, hence the condition had not yet been fulfilled; and that
that the former had already extracted from the mineral claims, in
consequently, the obligation was not yet due and demandable. Defendant
consideration of the sum of P75,000.00, P10,000.00 of which was
Fonacier also contended that only 7,573 tons of the estimated 24,000 tons
paid upon the signing of the agreement, and
of iron ore sold to him by Gaite was actually delivered, and counterclaimed
for more than P200,000.00 damages.
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
At the trial of the case, the parties agreed to limit the presentation of
shipment of iron ores and of the first amount derived from the local
evidence to two issues:
sale of iron ore made by the Larap Mines & Smelting Co. Inc., its
assigns, administrators, or successors in interests.
(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
To secure the payment of the said balance of P65,000.00, Fonacier
renew the surety bond underwritten by the Far Eastern Surety and
promised to execute in favor of Gaite a surety bond, and pursuant
Insurance Co., Inc. (Exhibit "B"), which expired on December 8, 1955; and
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 (2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to
Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante, defendant Fonacier were actually in existence in the mining claims when
and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified, these parties executed the "Revocation of Power of Attorney and
however, that when this bond was presented to him by Fonacier Contract", Exhibit "A."
together with the "Revocation of Power of Attorney and Contract",
Exhibit "A", on December 8, 1954, he refused to sign said Exhibit On the first question, the lower court held that the obligation of the
"A" unless another bond under written by a bonding company was defendants to pay plaintiff the P65,000.00 balance of the price of the
put up by defendants to secure the payment of the P65,000.00 approximately 24,000 tons of iron ore was one with a term: i.e., that it
balance of their price of the iron ore in the stockpiles in the mining would be paid upon the sale of sufficient iron ore by defendants, such sale
claims. Hence, a second bond, also dated December 8, 1954 to be effected within one year or before December 8, 1955; that the giving
(Exhibit "B"),was executed by the same parties to the first bond of security was a condition precedent to Gait's giving of credit to
Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as defendants; and that as the latter failed to put up a good and sufficient
additional surety, but it provided that the liability of the surety security in lieu of the Far Eastern Surety bond (Exhibit "B") which expired
company would attach only when there had been an actual sale of on December 8, 1955, the obligation became due and demandable under
iron ore by the Larap Mines & Smelting Co. for an amount of not Article 1198 of the New Civil Code.
less then P65,000.00, and that, furthermore, the liability of said
surety company would automatically expire on December 8, 1955.

Page 35 of 105
As to the second question, the lower court found that plaintiff Gaite condition does not take place, the parties would stand as if the conditional
did have approximately 24,000 tons of iron ore at the mining claims obligation had never existed. That the parties to the contract Exhibit "A"
in question at the time of the execution of the contract Exhibit "A." did not intend any such state of things to prevail is supported by several
circumstances:
Judgment was, accordingly, rendered in favor of plaintiff Gaite
ordering defendants to pay him, jointly and severally, P65,000.00 1) The words of the contract express no contingency in the buyer's
with interest at 6% per annum from December 9, 1955 until obligation to pay: "The balance of Sixty-Five Thousand Pesos
payment, plus costs. From this judgment, defendants jointly (P65,000.00) will be paid out of the first letter of credit covering the first
appealed to this Court. 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,
During the pendency of this appeal, several incidental motions
the existence of the obligation to pay is recognized; only
were presented for resolution: a motion to declare the appellants
its maturity or demandability is deferred.
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 2) A contract of sale is normally commutative and onerous: not only does
and/or to take judicial notice of certain documents, filed by appellee each one of the parties assume a correlative obligation (the seller to
Gaite. The motion for contempt is unmeritorious because the main deliver and transfer ownership of the thing sold and the buyer to pay the
allegation therein that the appellants Larap Mines & Smelting Co., price),but each party anticipates performance by the other from the very
Inc. and Krakower had sold the iron ore here in question, which start. While in a sale the obligation of one party can be lawfully
allegedly is "property in litigation", has not been substantiated; and subordinated to an uncertain event, so that the other understands that he
even if true, does not make these appellants guilty of contempt, assumes the risk of receiving nothing for what he gives (as in the case of a
because what is under litigation in this appeal is appellee Gaite's sale of hopes or expectations, emptio spei), it is not in the usual course of
right to the payment of the balance of the price of the ore, and not business to do so; hence, the contingent character of the obligation must
the iron ore itself. As for the several motions presented by appellee clearly appear. Nothing is found in the record to evidence that Gaite
Gaite, it is unnecessary to resolve these motions in view of the desired or assumed to run the risk of losing his right over the ore without
results that we have reached in this case, which we shall hereafter getting paid for it, or that Fonacier understood that Gaite assumed any
discuss. 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
The main issues presented by appellants in this appeal are:
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
(1) that the lower court erred in holding that the obligation of existence of their obligation to pay the balance of P65,000.00.
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
3) To subordinate the obligation to pay the remaining P65,000.00 to the
and not one with a suspensive condition, and that the term expired
sale or shipment of the ore as a condition precedent, would be tantamount
on December 8, 1955; and
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
(2) that the lower court erred in not holding that there were only ore. Appellants would thus be able to postpone payment indefinitely. The
10,954.5 tons in the stockpiles of iron ore sold by appellee Gaite to desireability of avoiding such a construction of the contract Exhibit "A"
appellant Fonacier. needs no stressing.

The first issue involves an interpretation of the following provision 4) Assuming that there could be doubt whether by the wording of the
in the contract Exhibit "A": 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
7. That Fernando Gaite or Larap Iron Mines hereby transfers to interpretation would incline the scales in favor of "the greater reciprocity of
Isabelo F. Fonacier all his rights and interests over the 24,000 tons interests", since sale is essentially onerous. The Civil Code of the
of iron ore, more or less, above-referred to together with all his Philippines, Article 1378, paragraph 1, in fine, provides:
rights and interests to operate the mine in consideration of the sum
of SEVENTY-FIVE THOUSAND PESOS (P75,000.00) which the If the contract is onerous, the doubt shall be settled in favor of the greatest
latter binds to pay as follows: reciprocity of interests.

a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the and there can be no question that greater reciprocity obtains if the buyer'
signing of this agreement. obligation is deemed to be actually existing, with only its maturity (due
date) postponed or deferred, that if such obligation were viewed as
b. The balance of SIXTY-FIVE THOUSAND PESOS non-existent or not binding until the ore was sold.
(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 & The only rational view that can be taken is that the sale of the ore to
Smelting Co., Inc., its assigns, administrators, or successors in Fonacier was a sale on credit, and not an aleatory contract where the
interest. 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
We find the court below to be legally correct in holding that the for the payment of the balance of the agreed price, but was intended
shipment or local sale of the iron ore is not a condition precedent merely to fix the future date of the payment.
(or suspensive) to the payment of the balance of P65,000.00, but
was only a suspensive period or term. What characterizes a This issue settled, the next point of inquiry is whether appellants, Fonacier
conditional obligation is the fact that its efficacy or obligatory force and his sureties, still have the right to insist that Gaite should wait for the
(as distinguished from its demandability) is subordinated to the sale or shipment of the ore before receiving payment; or, in other words,
happening of a future and uncertain event; so that if the suspensive
Page 36 of 105
whether or not they are entitled to take full advantage of the period so that they both tried to arrive at the total quantity by making an estimate
granted them for making the payment. of the volume thereof in cubic meters and then multiplying it by the
estimated weight per ton of each cubic meter.
We agree with the court below that the appellant have forfeited the
right court below that the appellants have forfeited the right to The sale between the parties is a sale of a specific mass or iron ore
compel Gaite to wait for the sale of the ore before receiving because no provision was made in their contract for the measuring or
payment of the balance of P65,000.00, because of their failure to weighing of the ore sold in order to complete or perfect the sale, nor was
renew the bond of the Far Eastern Surety Company or else replace the price of P75,000,00 agreed upon by the parties based upon any such
it with an equivalent guarantee. The expiration of the bonding measurement.(see Art. 1480, second par., New Civil Code). The subject
company's undertaking on December 8, 1955 substantially reduced matter of the sale is, therefore, a determinate object, the mass, and not the
the security of the vendor's rights as creditor for the unpaid actual number of units or tons contained therein, so that all that was
P65,000.00, a security that Gaite considered essential and upon required of the seller Gaite was to deliver in good faith to his buyer all of
which he had insisted when he executed the deed of sale of the ore the ore found in the mass, notwithstanding that the quantity delivered is
to Fonacier (Exhibit "A"). The case squarely comes under less than the amount estimated by them (Mobile Machinery & Supply Co.,
paragraphs 2 and 3 of Article 1198 of the Civil Code of the Inc. vs. York Oilfield Salvage Co., Inc. 171 So. 872, applying art. 2459 of
Philippines: 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
"ART. 1198. The debtor shall lose every right to make use of the
deliver, and appellants in turn are bound to pay the lump price.
period:

But assuming that plaintiff Gaite undertook to sell and appellants


(1) . . .
undertook to buy, not a definite mass, but approximately 24,000 tons of
ore, so that any substantial difference in this quantity delivered would
(2) When he does not furnish to the creditor the guaranties or entitle the buyers to recover damages for the short-delivery, was there
securities which he has promised. really a short-delivery in this case?

(3) When by his own acts he has impaired said guaranties or We think not. As already stated, neither of the parties had actually
securities after their establishment, and when through fortuitous measured or weighed the whole mass of ore cubic meter by cubic meter,
event they disappear, unless he immediately gives new ones or ton by ton. Both parties predicate their respective claims only upon an
equally satisfactory. estimated number of cubic meters of ore multiplied by the average
tonnage factor per cubic meter.
Appellants' failure to renew or extend the surety company's bond
upon its expiration plainly impaired the securities given to the Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in
creditor (appellee Gaite), unless immediately renewed or replaced. the stockpiles of ore that he sold to Fonacier, while appellants contend
that by actual measurement, their witness Cirpriano Manlañgit found the
There is no merit in appellants' argument that Gaite's acceptance of total volume of ore in the stockpiles to be only 6.609 cubic meters. As to
the surety company's bond with full knowledge that on its face it the average weight in tons per cubic meter, the parties are again in
would automatically expire within one year was a waiver of its disagreement, with appellants claiming the correct tonnage factor to be
renewal after the expiration date. No such waiver could have been 2.18 tons to a cubic meter, while appellee Gaite claims that the correct
intended, for Gaite stood to lose and had nothing to gain barely; tonnage factor is about 3.7.
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 In the face of the conflict of evidence, we take as the most reliable
surety company's bond expired on December 8, 1955. But in the estimate of the tonnage factor of iron ore in this case to be that made by
latter case the defendants-appellants' obligation to pay became Leopoldo F. Abad, chief of the Mines and Metallurgical Division of the
absolute after one year from the transfer of the ore to Fonacier by Bureau of Mines, a government pensionado to the States and a mining
virtue of the deed Exhibit "A.". engineering graduate of the Universities of Nevada and California, with
almost 22 years of experience in the Bureau of Mines. This witness placed
All the alternatives, therefore, lead to the same result: that Gaite the tonnage factor of every cubic meter of iron ore at between 3 metric
acted within his rights in demanding payment and instituting this tons as minimum to 5 metric tons as maximum. This estimate, in turn,
action one year from and after the contract (Exhibit "A") was closely corresponds to the average tonnage factor of 3.3 adopted in his
executed, either because the appellant debtors had impaired the corrected report (Exhibits "FF" and FF-1") by engineer Nemesio Gamatero,
securities originally given and thereby forfeited any further time who was sent by the Bureau of Mines to the mining claims involved at the
within which to pay; or because the term of payment was originally request of appellant Krakower, precisely to make an official estimate of the
of no more than one year, and the balance of P65,000.00 became amount of iron ore in Gaite's stockpiles after the dispute arose.
due and payable thereafter.
Even granting, then, that the estimate of 6,609 cubic meters of ore in the
Coming now to the second issue in this appeal, which is whether stockpiles made by appellant's witness Cipriano Manlañgit is correct, if we
there were really 24,000 tons of iron ore in the stockpiles sold by multiply it by the average tonnage factor of 3.3 tons to a cubic meter, the
appellee Gaite to appellant Fonacier, and whether, if there had product is 21,809.7 tons, which is not very far from the estimate of 24,000
been a short-delivery as claimed by appellants, they are entitled to tons made by appellee Gaite, considering that actual weighing of each unit
the payment of damages, we must, at the outset, stress two of the mass was practically impossible, so that a reasonable percentage of
things: first, that this is a case of a sale of a specific mass of error should be allowed anyone making an estimate of the exact quantity
fungible goods for a single price or a lump sum, the quantity of in tons found in the mass. It must not be forgotten that the contract Exhibit
"24,000 tons of iron ore, more or less," stated in the contract Exhibit "A" expressly stated the amount to be 24,000 tons, more or less. (ch. Pine
"A," being a mere estimate by the parties of the total tonnage River Logging & Improvement Co. vs U.S., 279, 46 L. Ed. 1164).
weight of the mass; and second, that the evidence shows that
neither of the parties had actually measured of weighed the mass,

Page 37 of 105
There was, consequently, no short-delivery in this case as would pursuant to which TCT No. [36113/T-172] was issued in her name (Exh.
entitle appellants to the payment of damages, nor could Gaite have "C-1");
been guilty of any fraud in making any misrepresentation to
appellants as to the total quantity of ore in the stockpiles of the
2. Deed of Absolute Sale covering Lot 168-I-3 of subdivision plan (LRC)
mining claims in question, as charged by appellants, since Gaite's
Psd-256394 executed on 7 June 1979, in favor of defendant Clarita
estimate appears to be substantially correct.
Joaquin, for a consideration of ₱1[2],000.00 (Exh. "D"), pursuant to which
TCT No. S-109772 was issued in her name (Exh. "D-1");
WHEREFORE, finding no error in the decision appealed from, we
hereby affirm the same, with costs against appellants.
3 Deed of Absolute Sale covering Lot 168-I-1 of subdivision plan (LRC)
Psd-256394 executed on 12 May 1988, in favor of defendant spouses
Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Fidel Joaquin and Conchita Bernardo, for a consideration of ₱54,[3]00.00
Dizon, De Leon and Natividad, JJ., concur. (Exh. "E"), pursuant to which TCT No. 155329 was issued to them (Exh.
"E-1");
G.R. No. 126376 November 20, 2003
4. Deed of Absolute Sale covering Lot 168-I-2 of subdivision plan (LRC)
Psd-256394 executed on 12 May 1988, in favor of defendant spouses
SPOUSES BERNARDO BUENAVENTURA and CONSOLACION
Artemio Joaquin and Socorro Angeles, for a consideration of ₱[54,3]00.00
JOAQUIN, SPOUSES JUANITO EDRA and NORA JOAQUIN,
(Exh. "F"), pursuant to which TCT No. 155330 was issued to them (Exh.
SPOUSES RUFINO VALDOZ and EMMA JOAQUIN, and
"F-1"); and
NATIVIDAD JOAQUIN, petitioners,
vs.
COURT OF APPEALS, SPOUSES LEONARDO JOAQUIN and 5. Absolute Sale of Real Property covering Lot 168-C-4 of subdivision plan
FELICIANA LANDRITO, SPOUSES FIDEL JOAQUIN and (LRC) Psd-256395 executed on 9 September 1988, in favor of Tomas
CONCHITA BERNARDO, SPOUSES TOMAS JOAQUIN and Joaquin, for a consideration of ₱20,000.00 (Exh. "G"), pursuant to which
SOLEDAD ALCORAN, SPOUSES ARTEMIO JOAQUIN and TCT No. 157203 was issued in her name (Exh. "G-1").
SOCORRO ANGELES, SPOUSES ALEXANDER MENDOZA and
CLARITA JOAQUIN, SPOUSES TELESFORO CARREON and 6. Deed of Absolute Sale covering Lot 168-C-1 of subdivision plan (LRC)
FELICITAS JOAQUIN, SPOUSES DANILO VALDOZ and FE Psd-256395 executed on 7 October 1988, in favor of Gavino Joaquin, for a
JOAQUIN, and SPOUSES GAVINO JOAQUIN and LEA consideration of ₱25,000.00 (Exh. "K"), pursuant to which TCT No.
ASIS, respondents. 157779 was issued in his name (Exh. "K-1").]

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

The Facts
c) Thirdly, the deeds of sale do not reflect and express the true intent of
the parties (vendors and vendees); and
The Court of Appeals summarized the facts of the case as follows:

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

Sought to be declared null and void ab initio are certain deeds of Necessarily, and as an inevitable consequence, Transfer Certificates of
sale of real property executed by defendant parents Leonardo Title Nos. 36113/T-172, S-109772, 155329, 155330, 157203 [and 157779]
Joaquin and Feliciana Landrito in favor of their co-defendant issued by the Registrar of Deeds over the properties in litis xxx are NULL
children and the corresponding certificates of title issued in their AND VOID AB INITIO.
names, to wit:
Defendants, on the other hand aver (1) that plaintiffs do not have a cause
1. Deed of Absolute Sale covering Lot 168-C-7 of subdivision plan of action against them as well as the requisite standing and interest to
(LRC) Psd-256395 executed on 11 July 1978, in favor of defendant assail their titles over the properties in litis; (2) that the sales were with
Felicitas Joaquin, for a consideration of ₱6,000.00 (Exh. "C"), sufficient considerations and made by defendants parents voluntarily, in
good faith, and with full knowledge of the consequences of their deeds of
Page 38 of 105
sale; and (3) that the certificates of title were issued with sufficient inadequacy or lack of consideration or for failure to express the true intent
factual and legal basis.4 (Emphasis in the original) of the parties. In point is the ruling of the Supreme Court in Velarde, et al.
vs. Paez, et al., 101 SCRA 376, thus:
The Ruling of the Trial Court
The plaintiffs are not parties to the alleged deed of sale and are not
principally or subsidiarily bound thereby; hence, they have no legal
Before the trial, the trial court ordered the dismissal of the case
capacity to challenge their validity.
against defendant spouses Gavino Joaquin and Lea Asis. 5 Instead
of filing an Answer with their co-defendants, Gavino Joaquin and
Lea Asis filed a Motion to Dismiss.6In granting the dismissal to Plaintiffs-appellants anchor their action on the supposed impairment of
Gavino Joaquin and Lea Asis, the trial court noted that "compulsory their legitime by the dispositions made by their defendant parents in favor
heirs have the right to a legitime but such right is contingent since of their defendant brothers and sisters. But, as correctly held by the
said right commences only from the moment of death of the court a quo, "the legitime of a compulsory heir is computed as of the time
decedent pursuant to Article 777 of the Civil Code of the of the death of the decedent. Plaintiffs therefore cannot claim an
Philippines."7 impairment of their legitime while their parents live."

After trial, the trial court ruled in favor of the defendants and With this posture taken by the Court, consideration of the errors assigned
dismissed the complaint. The trial court stated: by plaintiffs-appellants is inconsequential.

In the first place, the testimony of the defendants, particularly that WHEREFORE, the decision appealed from is hereby AFFIRMED, with
of the xxx father will show that the Deeds of Sale were all executed costs against plaintiffs-appellants.
for valuable consideration. This assertion must prevail over the
negative allegation of plaintiffs.
SO ORDERED.9

And then there is the argument that plaintiffs do not have a valid
Hence, the instant petition.
cause of action against defendants since there can be no legitime
to speak of prior to the death of their parents. The court finds this
contention tenable. In determining the legitime, the value of the Issues
property left at the death of the testator shall be considered (Art.
908 of the New Civil Code). Hence, the legitime of a compulsory Petitioners assign the following as errors of the Court of Appeals:
heir is computed as of the time of the death of the decedent.
Plaintiffs therefore cannot claim an impairment of their legitime
while their parents live. 1. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
CONVEYANCE IN QUESTION HAD NO VALID CONSIDERATION.

All the foregoing considered, this case is DISMISSED.


2. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT EVEN
ASSUMING THAT THERE WAS A CONSIDERATION, THE SAME IS
In order to preserve whatever is left of the ties that should bind GROSSLY INADEQUATE.
families together, the counterclaim is likewise DISMISSED.

3. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE


No costs. DEEDS OF SALE DO NOT EXPRESS THE TRUE INTENT OF THE
PARTIES.
SO ORDERED.8
4. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
The Ruling of the Court of Appeals CONVEYANCE WAS PART AND PARCEL OF A CONSPIRACY AIMED
AT UNJUSTLY DEPRIVING THE REST OF THE CHILDREN OF THE
SPOUSES LEONARDO JOAQUIN AND FELICIANA LANDRITO OF
The Court of Appeals affirmed the decision of the trial
THEIR INTEREST OVER THE SUBJECT PROPERTIES.
court.1âwphi1 The appellate court ruled:

5. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT


To the mind of the Court, appellants are skirting the real and PETITIONERS HAVE A GOOD, SUFFICIENT AND VALID CAUSE OF
decisive issue in this case, which is, whether xxx they have a cause
ACTION AGAINST THE PRIVATE RESPONDENTS.10
of action against appellees.

The Ruling of the Court


Upon this point, there is no question that plaintiffs-appellants, like
their defendant brothers and sisters, are compulsory heirs of
defendant spouses, Leonardo Joaquin and Feliciana Landrito, who We find the petition without merit.
are their parents. However, their right to the properties of their
defendant parents, as compulsory heirs, is merely inchoate and We will discuss petitioners’ legal interest over the properties subject of the
vests only upon the latter’s death. While still alive, defendant Deeds of Sale before discussing the issues on the purported lack of
parents are free to dispose of their properties, provided that such consideration and gross inadequacy of the prices of the Deeds of Sale.
dispositions are not made in fraud of creditors.

Whether Petitioners have a legal interest over the properties subject of the
Plaintiffs-appellants are definitely not parties to the deeds of sale in Deeds of Sale
question. Neither do they claim to be creditors of their defendant
parents. Consequently, they cannot be considered as real parties
in interest to assail the validity of said deeds either for gross Petitioners’ Complaint betrays their motive for filing this case. In their
Complaint, petitioners asserted that the "purported sale of the
Page 39 of 105
properties in litis was the result of a deliberate conspiracy designed It is not the act of payment of price that determines the validity of a
to unjustly deprive the rest of the compulsory heirs (plaintiffs herein) contract of sale. Payment of the price has nothing to do with the perfection
of their legitime." Petitioners’ strategy was to have the Deeds of of the contract. Payment of the price goes into the performance of the
Sale declared void so that ownership of the lots would eventually contract. Failure to pay the consideration is different from lack of
revert to their respondent parents. If their parents die still owning consideration. The former results in a right to demand the fulfillment or
the lots, petitioners and their respondent siblings will then co-own cancellation of the obligation under an existing valid contract while the
their parents’ estate by hereditary succession.11 latter prevents the existence of a valid contract.15

It is evident from the records that petitioners are interested in the Petitioners failed to show that the prices in the Deeds of Sale were
properties subject of the Deeds of Sale, but they have failed to absolutely simulated. To prove simulation, petitioners presented Emma
show any legal right to the properties. The trial and appellate courts Joaquin Valdoz’s testimony stating that their father, respondent Leonardo
should have dismissed the action for this reason alone. An action Joaquin, told her that he would transfer a lot to her through a deed of sale
must be prosecuted in the name of the real party-in-interest.12 without need for her payment of the purchase price.16The trial court did not
find the allegation of absolute simulation of price credible. Petitioners’
failure to prove absolute simulation of price is magnified by their lack of
[T]he question as to "real party-in-interest" is whether he is "the
knowledge of their respondent siblings’ financial capacity to buy the
party who would be benefitted or injured by the judgment, or the
questioned lots.17 On the other hand, the Deeds of Sale which petitioners
‘party entitled to the avails of the suit.’"
presented as evidence plainly showed the cost of each lot sold. Not only
did respondents’ minds meet as to the purchase price, but the real price
xxx was also stated in the Deeds of Sale. As of the filing of the complaint,
respondent siblings have also fully paid the price to their respondent
In actions for the annulment of contracts, such as this action, the father.18
real parties are those who are parties to the agreement or are
bound either principally or subsidiarily or are prejudiced in their Whether the Deeds of Sale are void for gross inadequacy of price
rights with respect to one of the contracting parties and can show
the detriment which would positively result to them from the
Petitioners ask that assuming that there is consideration, the same is
contract even though they did not intervene in it (Ibañez v.
grossly inadequate as to invalidate the Deeds of Sale.
Hongkong & Shanghai Bank, 22 Phil. 572 [1912]) xxx.

Articles 1355 of the Civil Code states:


These are parties with "a present substantial interest, as
distinguished from a mere expectancy or future, contingent,
subordinate, or consequential interest…. The phrase ‘present Art. 1355. Except in cases specified by law, lesion or inadequacy of cause
substantial interest’ more concretely is meant such interest of a shall not invalidate a contract, unless there has been fraud, mistake or
party in the subject matter of the action as will entitle him, under the undue influence. (Emphasis supplied)
substantive law, to recover if the evidence is sufficient, or that he
has the legal title to demand and the defendant will be protected in
Article 1470 of the Civil Code further provides:
a payment to or recovery by him."13

Art. 1470. Gross inadequacy of price does not affect a contract of sale,
Petitioners do not have any legal interest over the properties
except as may indicate a defect in the consent, or that the parties really
subject of the Deeds of Sale. As the appellate court stated,
intended a donation or some other act or contract. (Emphasis supplied)
petitioners’ right to their parents’ properties is merely inchoate and
vests only upon their parents’ death. While still living, the parents of
petitioners are free to dispose of their properties. In their Petitioners failed to prove any of the instances mentioned in Articles 1355
overzealousness to safeguard their future legitime, petitioners and 1470 of the Civil Code which would invalidate, or even affect, the
forget that theoretically, the sale of the lots to their siblings does not Deeds of Sale. Indeed, there is no requirement that the price be equal to
affect the value of their parents’ estate. While the sale of the lots the exact value of the subject matter of sale. All the respondents believed
reduced the estate, cash of equivalent value replaced the lots that they received the commutative value of what they gave. As we stated
taken from the estate. in Vales v. Villa:19

Whether the Deeds of Sale are void for lack of consideration Courts cannot follow one every step of his life and extricate him from bad
bargains, protect him from unwise investments, relieve him from one-sided
contracts, or annul the effects of foolish acts. Courts cannot constitute
Petitioners assert that their respondent siblings did not actually pay
themselves guardians of persons who are not legally incompetent. Courts
the prices stated in the Deeds of Sale to their respondent father.
operate not because one person has been defeated or overcome by
Thus, petitioners ask the court to declare the Deeds of Sale void.
another, but because he has been defeated or overcome illegally. Men
may do foolish things, make ridiculous contracts, use miserable judgment,
A contract of sale is not a real contract, but a consensual contract. and lose money by them – indeed, all they have in the world; but not for
As a consensual contract, a contract of sale becomes a binding that alone can the law intervene and restore. There must be, in addition, a
and valid contract upon the meeting of the minds as to price. If violation of the law, the commission of what the law knows as an
there is a meeting of the minds of the parties as to the price, the actionable wrong, before the courts are authorized to lay hold of the
contract of sale is valid, despite the manner of payment, or even situation and remedy it. (Emphasis in the original)
the breach of that manner of payment. If the real price is not stated
in the contract, then the contract of sale is valid but subject to
Moreover, the factual findings of the appellate court are conclusive on the
reformation. If there is no meeting of the minds of the parties as to
parties and carry greater weight when they coincide with the factual
the price, because the price stipulated in the contract is simulated,
findings of the trial court. This Court will not weigh the evidence all over
then the contract is void.14 Article 1471 of the Civil Code states that
again unless there has been a showing that the findings of the lower court
if the price in a contract of sale is simulated, the sale is void.
are totally devoid of support or are clearly erroneous so as to constitute
serious abuse of discretion.20 In the instant case, the trial court found that
Page 40 of 105
the lots were sold for a valid consideration, and that the defendant In their Answer,2 the Spouses Lu alleged that Pacita Lu obtained loans
children actually paid the purchase price stipulated in their from Babasanta and when the total advances of Pacita reached fifty
respective Deeds of Sale. Actual payment of the purchase price by thousand pesos (₱50,000.00), the latter and Babasanta, without the
the buyer to the seller is a factual finding that is now conclusive knowledge and consent of Miguel Lu, had verbally agreed to transform the
upon us. transaction into a contract to sell the two parcels of land to Babasanta with
the fifty thousand pesos (₱50,000.00) to be considered as the
downpayment for the property and the balance to be paid on or before 31
WHEREFORE, we AFFIRM the decision of the Court of Appeals in
December 1987. Respondents Lu added that as of November 1987, total
toto.
payments made by Babasanta amounted to only two hundred thousand
pesos (₱200,000.00) and the latter allegedly failed to pay the balance of
SO ORDERED. two hundred sixty thousand pesos (₱260,000.00) despite repeated
demands. Babasanta had purportedly asked Pacita for a reduction of the
Davide, Jr., C.J., (Chairman), Panganiban, Ynares-Santiago, and price from fifteen pesos (₱15.00) to twelve pesos (₱12.00) per square
Azcuna, JJ., concur. meter and when the Spouses Lu refused to grant Babasanta’s request, the
latter rescinded the contract to sell and declared that the original loan
transaction just be carried out in that the spouses would be indebted to
G.R. No. 124242 January 21, 2005 him in the amount of two hundred thousand pesos (₱200,000.00).
Accordingly, on 6 July 1989, they purchased Interbank Manager’s Check
SAN LORENZO DEVELOPMENT CORPORATION, petitioner, No. 05020269 in the amount of two hundred thousand pesos
vs. (₱200,000.00) in the name of Babasanta to show that she was able and
COURT OF APPEALS, PABLO S. BABASANTA, SPS. MIGUEL willing to pay the balance of her loan obligation.
LU and PACITA ZAVALLA LU, respondents.
Babasanta later filed an Amended Complaint dated 17 January
DECISION 19903 wherein he prayed for the issuance of a writ of preliminary injunction
with temporary restraining order and the inclusion of the Register of Deeds
of Calamba, Laguna as party defendant. He contended that the issuance
TINGA, J.:
of a preliminary injunction was necessary to restrain the transfer or
conveyance by the Spouses Lu of the subject property to other persons.
From a coaptation of the records of this case, it appears that
respondents Miguel Lu and Pacita Zavalla, (hereinafter, the
The Spouses Lu filed their Opposition4 to the amended complaint
Spouses Lu) owned two (2) parcels of land situated in Sta. Rosa,
contending that it raised new matters which seriously affect their
Laguna covered by TCT No. T-39022 and TCT No. T-39023 both
substantive rights under the original complaint. However, the trial court in
measuring 15,808 square meters or a total of 3.1616 hectares.
its Order dated 17 January 19905 admitted the amended complaint.

On 20 August 1986, the Spouses Lu purportedly sold the two


On 19 January 1990, herein petitioner San Lorenzo Development
parcels of land to respondent Pablo Babasanta, (hereinafter,
Corporation (SLDC) filed a Motion for Intervention6 before the trial court.
Babasanta) for the price of fifteen pesos (₱15.00) per square meter.
SLDC alleged that it had legal interest in the subject matter under litigation
Babasanta made a downpayment of fifty thousand pesos
because on 3 May 1989, the two parcels of land involved, namely Lot
(₱50,000.00) as evidenced by a memorandum receipt issued by
1764-A and 1764-B, had been sold to it in a Deed of Absolute Sale with
Pacita Lu of the same date. Several other payments totaling two
Mortgage.7 It alleged that it was a buyer in good faith and for value and
hundred thousand pesos (₱200,000.00) were made by Babasanta.
therefore it had a better right over the property in litigation.

Sometime in May 1989, Babasanta wrote a letter to Pacita Lu to


In his Opposition to SLDC’s motion for intervention,8 respondent
demand the execution of a final deed of sale in his favor so that he
Babasanta demurred and argued that the latter had no legal interest in the
could effect full payment of the purchase price. In the same letter,
case because the two parcels of land involved herein had already been
Babasanta notified the spouses about having received information
conveyed to him by the Spouses Lu and hence, the vendors were without
that the spouses sold the same property to another without his
legal capacity to transfer or dispose of the two parcels of land to the
knowledge and consent. He demanded that the second sale be
intervenor.
cancelled and that a final deed of sale be issued in his favor.

Meanwhile, the trial court in its Order dated 21 March 1990 allowed SLDC
In response, Pacita Lu wrote a letter to Babasanta wherein she
to intervene. SLDC filed its Complaint-in-Intervention on 19 April
acknowledged having agreed to sell the property to him at fifteen
1990.9 Respondent Babasanta’s motion for the issuance of a preliminary
pesos (₱15.00) per square meter. She, however, reminded
injunction was likewise granted by the trial court in its Order dated 11
Babasanta that when the balance of the purchase price became
January 199110 conditioned upon his filing of a bond in the amount of fifty
due, he requested for a reduction of the price and when she
thousand pesos (₱50,000.00).
refused, Babasanta backed out of the sale. Pacita added that she
returned the sum of fifty thousand pesos (₱50,000.00) to
Babasanta through Eugenio Oya. SLDC in its Complaint-in-Intervention alleged that on 11 February 1989,
the Spouses Lu executed in its favor an Option to Buy the lots subject of
the complaint. Accordingly, it paid an option money in the amount of three
On 2 June 1989, respondent Babasanta, as plaintiff, filed before
hundred sixteen thousand one hundred sixty pesos (₱316,160.00) out of
the Regional Trial Court (RTC), Branch 31, of San Pedro, Laguna,
the total consideration for the purchase of the two lots of one million two
a Complaint for Specific Performance and Damages1 against his
hundred sixty-four thousand six hundred forty pesos (₱1,264,640.00).
co-respondents herein, the Spouses Lu. Babasanta alleged that
After the Spouses Lu received a total amount of six hundred thirty-two
the lands covered by TCT No. T- 39022 and T-39023 had been
thousand three hundred twenty pesos (₱632,320.00) they executed on 3
sold to him by the spouses at fifteen pesos (₱15.00) per square
May 1989 a Deed of Absolute Sale with Mortgage in its favor. SLDC
meter. Despite his repeated demands for the execution of a final
added that the certificates of title over the property were delivered to it by
deed of sale in his favor, respondents allegedly refused.
the spouses clean and free from any adverse claims and/or notice of lis
pendens. SLDC further alleged that it only learned of the filing of the
Page 41 of 105
complaint sometime in the early part of January 1990 which The appellate court denied SLDC’s motion for reconsideration on the
prompted it to file the motion to intervene without delay. Claiming ground that no new or substantial arguments were raised therein which
that it was a buyer in good faith, SLDC argued that it had no would warrant modification or reversal of the court’s decision dated 4
obligation to look beyond the titles submitted to it by the Spouses October 1995.
Lu particularly because Babasanta’s claims were not annotated on
the certificates of title at the time the lands were sold to it.
Hence, this petition.

After a protracted trial, the RTC rendered its Decision on 30 July


SLDC assigns the following errors allegedly committed by the appellate
1993 upholding the sale of the property to SLDC. It ordered the
court:
Spouses Lu to pay Babasanta the sum of two hundred thousand
pesos (₱200,000.00) with legal interest plus the further sum of fifty
thousand pesos (₱50,000.00) as and for attorney’s fees. On the THE COURT OF APPEALS ERRED IN HOLDING
complaint-in-intervention, the trial court ordered the Register of THAT SAN LORENZO WAS NOT A BUYER IN
Deeds of Laguna, Calamba Branch to cancel the notice of lis GOOD FAITH BECAUSE WHEN THE SELLER
pendens annotated on the original of the TCT No. T-39022 (T-7218) PACITA ZAVALLA LU OBTAINED FROM IT THE
and No. T-39023 (T-7219). CASH ADVANCE OF ₱200,000.00, SAN LORENZO
WAS PUT ON INQUIRY OF A PRIOR
TRANSACTION ON THE PROPERTY.
Applying Article 1544 of the Civil Code, the trial court ruled that
since both Babasanta and SLDC did not register the respective
sales in their favor, ownership of the property should pertain to the THE COURT OF APPEALS ERRED IN FAILING TO
buyer who first acquired possession of the property. The trial court APPRECIATE THE ESTABLISHED FACT THAT THE
equated the execution of a public instrument in favor of SLDC as ALLEGED FIRST BUYER, RESPONDENT
sufficient delivery of the property to the latter. It concluded that BABASANTA, WAS NOT IN POSSESSION OF THE
symbolic possession could be considered to have been first DISPUTED PROPERTY WHEN SAN LORENZO
transferred to SLDC and consequently ownership of the property BOUGHT AND TOOK POSSESSION OF THE
pertained to SLDC who purchased the property in good faith. PROPERTY AND NO ADVERSE CLAIM, LIEN,
ENCUMBRANCE OR LIS PENDENS WAS
ANNOTATED ON THE TITLES.
Respondent Babasanta appealed the trial court’s decision to the
Court of Appeals alleging in the main that the trial court erred in
concluding that SLDC is a purchaser in good faith and in upholding THE COURT OF APPEALS ERRED IN FAILING TO
the validity of the sale made by the Spouses Lu in favor of SLDC. APPRECIATE THE FACT THAT RESPONDENT
BABASANTA HAS SUBMITTED NO EVIDENCE
SHOWING THAT SAN LORENZO WAS AWARE OF
Respondent spouses likewise filed an appeal to the Court of
HIS RIGHTS OR INTERESTS IN THE DISPUTED
Appeals. They contended that the trial court erred in failing to
PROPERTY.
consider that the contract to sell between them and Babasanta had
been novated when the latter abandoned the verbal contract of
sale and declared that the original loan transaction just be carried THE COURT OF APPEALS ERRED IN HOLDING
out. The Spouses Lu argued that since the properties involved THAT NOTWITHSTANDING ITS FULL
were conjugal, the trial court should have declared the verbal CONCURRENCE ON THE FINDINGS OF FACT OF
contract to sell between Pacita Lu and Pablo Babasanta null and THE TRIAL COURT, IT REVERSED AND SET
void ab initio for lack of knowledge and consent of Miguel Lu. They ASIDE THE DECISION OF THE TRIAL COURT
further averred that the trial court erred in not dismissing the UPHOLDING THE TITLE OF SAN LORENZO AS A
complaint filed by Babasanta; in awarding damages in his favor BUYER AND FIRST POSSESSOR IN GOOD
and in refusing to grant the reliefs prayed for in their answer. FAITH. 15

On 4 October 1995, the Court of Appeals rendered SLDC contended that the appellate court erred in concluding that it had
its Decision11 which set aside the judgment of the trial court. It prior notice of Babasanta’s claim over the property merely on the basis of
declared that the sale between Babasanta and the Spouses Lu its having advanced the amount of two hundred thousand pesos
was valid and subsisting and ordered the spouses to execute the (₱200,000.00) to Pacita Lu upon the latter’s representation that she
necessary deed of conveyance in favor of Babasanta, and the needed the money to pay her obligation to Babasanta. It argued that it had
latter to pay the balance of the purchase price in the amount of two no reason to suspect that Pacita was not telling the truth that the money
hundred sixty thousand pesos (₱260,000.00). The appellate court would be used to pay her indebtedness to Babasanta. At any rate, SLDC
ruled that the Absolute Deed of Sale with Mortgage in favor of averred that the amount of two hundred thousand pesos (₱200,000.00)
SLDC was null and void on the ground that SLDC was a purchaser which it advanced to Pacita Lu would be deducted from the balance of the
in bad faith. The Spouses Lu were further ordered to return all purchase price still due from it and should not be construed as notice of
payments made by SLDC with legal interest and to pay attorney’s the prior sale of the land to Babasanta. It added that at no instance did
fees to Babasanta. Pacita Lu inform it that the lands had been previously sold to Babasanta.

SLDC and the Spouses Lu filed separate motions for Moreover, SLDC stressed that after the execution of the sale in its favor it
reconsideration with the appellate court. 12 However, in immediately took possession of the property and asserted its rights as new
a Manifestation dated 20 December 1995,13 the Spouses Lu owner as opposed to Babasanta who has never exercised acts of
informed the appellate court that they are no longer contesting the ownership. Since the titles bore no adverse claim, encumbrance, or lien at
decision dated 4 October 1995. the time it was sold to it, SLDC argued that it had every reason to rely on
the correctness of the certificate of title and it was not obliged to go
beyond the certificate to determine the condition of the property. Invoking
In its Resolution dated 11 March 1996,14 the appellate court
the presumption of good faith, it added that the burden rests on Babasanta
considered as withdrawn the motion for reconsideration filed by the
to prove that it was aware of the prior sale to him but the latter failed to do
Spouses Lu in view of their manifestation of 20 December 1995.
so. SLDC pointed out that the notice of lis pendens was annotated only on
Page 42 of 105
2 June 1989 long after the sale of the property to it was title, they could have easily executed the document of sale in its required
consummated on 3 May 1989.1awphi1.nét form simultaneously with their acceptance of the partial payment, but they
did not. Doubtlessly, the receipt signed by Pacita Lu should legally be
considered as a perfected contract to sell.
Meanwhile, in an Urgent Ex-Parte Manifestation dated 27 August
1999, the Spouses Lu informed the Court that due to financial
constraints they have no more interest to pursue their rights in the The distinction between a contract to sell and a contract of sale is quite
instant case and submit themselves to the decision of the Court of germane. In a contract of sale, title passes to the vendee upon the delivery
Appeals.16 of the thing sold; whereas in a contract to sell, by agreement the
ownership is reserved in the vendor and is not to pass until the full
payment of the price.22 In a contract of sale, the vendor has lost and
On the other hand, respondent Babasanta argued that SLDC could
cannot recover ownership until and unless the contract is resolved or
not have acquired ownership of the property because it failed to
rescinded; whereas in a contract to sell, title is retained by the vendor until
comply with the requirement of registration of the sale in good faith.
the full payment of the price, such payment being a positive suspensive
He emphasized that at the time SLDC registered the sale in its
condition and failure of which is not a breach but an event that prevents
favor on 30 June 1990, there was already a notice of lis
the obligation of the vendor to convey title from becoming effective. 23
pendens annotated on the titles of the property made as early as 2
June 1989. Hence, petitioner’s registration of the sale did not
confer upon it any right. Babasanta further asserted that petitioner’s The perfected contract to sell imposed upon Babasanta the obligation to
bad faith in the acquisition of the property is evident from the fact pay the balance of the purchase price. There being an obligation to pay
that it failed to make necessary inquiry regarding the purpose of the the price, Babasanta should have made the proper tender of payment and
issuance of the two hundred thousand pesos (₱200,000.00) consignation of the price in court as required by law. Mere sending of a
manager’s check in his favor. letter by the vendee expressing the intention to pay without the
accompanying payment is not considered a valid tender of
payment.24 Consignation of the amounts due in court is essential in order
The core issue presented for resolution in the instant petition is who
to extinguish Babasanta’s obligation to pay the balance of the purchase
between SLDC and Babasanta has a better right over the two
price. Glaringly absent from the records is any indication that Babasanta
parcels of land subject of the instant case in view of the successive
even attempted to make the proper consignation of the amounts due, thus,
transactions executed by the Spouses Lu.
the obligation on the part of the sellers to convey title never acquired
obligatory force.
To prove the perfection of the contract of sale in his favor,
Babasanta presented a document signed by Pacita Lu
On the assumption that the transaction between the parties is a contract of
acknowledging receipt of the sum of fifty thousand pesos
sale and not a contract to sell, Babasanta’s claim of ownership should
(₱50,000.00) as partial payment for 3.6 hectares of farm lot
nevertheless fail.
situated at Barangay Pulong, Sta. Cruz, Sta. Rosa,
Laguna.17 While the receipt signed by Pacita did not mention the
price for which the property was being sold, this deficiency was Sale, being a consensual contract, is perfected by mere consent25 and
supplied by Pacita Lu’s letter dated 29 May 198918 wherein she from that moment, the parties may reciprocally demand
admitted that she agreed to sell the 3.6 hectares of land to performance.26 The essential elements of a contract of sale, to wit: (1)
Babasanta for fifteen pesos (₱15.00) per square meter. consent or meeting of the minds, that is, to transfer ownership in exchange
for the price; (2) object certain which is the subject matter of the contract;
(3) cause of the obligation which is established.27
An analysis of the facts obtaining in this case, as well as the
evidence presented by the parties, irresistibly leads to the
conclusion that the agreement between Babasanta and the The perfection of a contract of sale should not, however, be confused with
Spouses Lu is a contract to sell and not a contract of sale. its consummation. In relation to the acquisition and transfer of ownership,
it should be noted that sale is not a mode, but merely a title. A mode is the
legal means by which dominion or ownership is created, transferred or
Contracts, in general, are perfected by mere consent, 19 which is
destroyed, but title is only the legal basis by which to affect dominion or
manifested by the meeting of the offer and the acceptance upon
ownership.28 Under Article 712 of the Civil Code, "ownership and other
the thing which are to constitute the contract. The offer must be
real rights over property are acquired and transmitted by law, by donation,
certain and the acceptance absolute.20 Moreover, contracts shall
by testate and intestate succession, and in consequence of certain
be obligatory in whatever form they may have been entered into,
contracts, by tradition." Contracts only constitute titles or rights to the
provided all the essential requisites for their validity are present.21
transfer or acquisition of ownership, while delivery or tradition is the mode
of accomplishing the same.29 Therefore, sale by itself does not transfer or
The receipt signed by Pacita Lu merely states that she accepted affect ownership; the most that sale does is to create the obligation to
the sum of fifty thousand pesos (₱50,000.00) from Babasanta as transfer ownership. It is tradition or delivery, as a consequence of sale,
partial payment of 3.6 hectares of farm lot situated in Sta. Rosa, that actually transfers ownership.
Laguna. While there is no stipulation that the seller reserves the
ownership of the property until full payment of the price which is a
Explicitly, the law provides that the ownership of the thing sold is acquired
distinguishing feature of a contract to sell, the subsequent acts of
by the vendee from the moment it is delivered to him in any of the ways
the parties convince us that the Spouses Lu never intended to
specified in Article 1497 to 1501.30 The word "delivered" should not be
transfer ownership to Babasanta except upon full payment of the
taken restrictively to mean transfer of actual physical possession of the
purchase price.
property. The law recognizes two principal modes of delivery, to wit: (1)
actual delivery; and (2) legal or constructive delivery.
Babasanta’s letter dated 22 May 1989 was quite telling. He stated
therein that despite his repeated requests for the execution of the
Actual delivery consists in placing the thing sold in the control and
final deed of sale in his favor so that he could effect full payment of
possession of the vendee.31 Legal or constructive delivery, on the other
the price, Pacita Lu allegedly refused to do so. In effect, Babasanta
hand, may be had through any of the following ways: the execution of a
himself recognized that ownership of the property would not be
public instrument evidencing the sale;32 symbolical tradition such as the
transferred to him until such time as he shall have effected full
delivery of the keys of the place where the movable sold is being
payment of the price. Moreover, had the sellers intended to transfer
Page 43 of 105
kept;33 traditio longa manu or by mere consent or agreement if the good faith which admittedly had occurred prior to SLDC’s knowledge of
movable sold cannot yet be transferred to the possession of the the transaction in favor of Babasanta?
buyer at the time of the sale;34 traditio brevi manu if the buyer
already had possession of the object even before the
We do not hold so.
sale;35 and traditio constitutum possessorium, where the seller
remains in possession of the property in a different capacity. 36
It must be stressed that as early as 11 February 1989, the Spouses Lu
executed the Option to Buy in favor of SLDC upon receiving ₱316,160.00
Following the above disquisition, respondent Babasanta did not
as option money from SLDC. After SLDC had paid more than one half of
acquire ownership by the mere execution of the receipt by Pacita
the agreed purchase price of ₱1,264,640.00, the Spouses Lu
Lu acknowledging receipt of partial payment for the property. For
subsequently executed on 3 May 1989 a Deed of Absolute Salein favor or
one, the agreement between Babasanta and the Spouses Lu,
SLDC. At the time both deeds were executed, SLDC had no knowledge of
though valid, was not embodied in a public instrument. Hence, no
the prior transaction of the Spouses Lu with Babasanta. Simply stated,
constructive delivery of the lands could have been effected. For
from the time of execution of the first deed up to the moment of transfer
another, Babasanta had not taken possession of the property at
and delivery of possession of the lands to SLDC, it had acted in good faith
any time after the perfection of the sale in his favor or exercised
and the subsequent annotation of lis pendens has no effect at all on the
acts of dominion over it despite his assertions that he was the
consummated sale between SLDC and the Spouses Lu.
rightful owner of the lands. Simply stated, there was no delivery to
Babasanta, whether actual or constructive, which is essential to
transfer ownership of the property. Thus, even on the assumption A purchaser in good faith is one who buys property of
that the perfected contract between the parties was a sale, another without notice that some other person has a right to, or interest in,
ownership could not have passed to Babasanta in the absence of such property and pays a full and fair price for the same at the time of such
delivery, since in a contract of sale ownership is transferred to the purchase, or before he has notice of the claim or interest of some other
vendee only upon the delivery of the thing sold.37 person in the property.40 Following the foregoing definition, we rule that
SLDC qualifies as a buyer in good faith since there is no evidence extant
in the records that it had knowledge of the prior transaction in favor of
However, it must be stressed that the juridical relationship between
Babasanta. At the time of the sale of the property to SLDC, the vendors
the parties in a double sale is primarily governed by Article 1544
were still the registered owners of the property and were in fact in
which lays down the rules of preference between the two
possession of the lands.l^vvphi1.net Time and again, this Court has ruled
purchasers of the same property. It provides: that a person dealing with the owner of registered land is not bound to go
beyond the certificate of title as he is charged with notice of burdens on
Art. 1544. If the same thing should have been sold to different the property which are noted on the face of the register or on the certificate
vendees, the ownership shall be transferred to the person who may of title.41 In assailing knowledge of the transaction between him and the
have first taken possession thereof in good faith, if it should be Spouses Lu, Babasanta apparently relies on the principle of constructive
movable property. notice incorporated in Section 52 of the Property Registration Decree (P.D.
No. 1529) which reads, thus:
Should it be immovable property, the ownership shall belong to the
person acquiring it who in good faith first recorded it in the Registry Sec. 52. Constructive notice upon registration. – Every conveyance,
of Property. mortgage, lease, lien, attachment, order, judgment, instrument or entry
affecting registered land shall, if registered, filed, or entered in the office of
the Register of Deeds for the province or city where the land to which it
Should there be no inscription, the ownership shall pertain to the
relates lies, be constructive notice to all persons from the time of such
person who in good faith was first in the possession; and, in the
registering, filing, or entering.
absence thereof, to the person who presents the oldest title,
provided there is good faith.
However, the constructive notice operates as such¾by the express
wording of Section 52¾from the time of the registration of the notice of lis
The principle of primus tempore, potior jure (first in time, stronger in
pendens which in this case was effected only on 2 June 1989, at which
right) gains greater significance in case of double sale of
time the sale in favor of SLDC had long been consummated insofar as the
immovable property. When the thing sold twice is an immovable,
obligation of the Spouses Lu to transfer ownership over the property to
the one who acquires it and first records it in the Registry of
SLDC is concerned.
Property, both made in good faith, shall be deemed the
owner.38 Verily, the act of registration must be coupled with good
faith— that is, the registrant must have no knowledge of the defect More fundamentally, given the superiority of the right of SLDC to the claim
or lack of title of his vendor or must not have been aware of facts of Babasanta the annotation of the notice of lis pendens cannot help
which should have put him upon such inquiry and investigation as Babasanta’s position a bit and it is irrelevant to the good or bad faith
might be necessary to acquaint him with the defects in the title of characterization of SLDC as a purchaser. A notice of lis pendens, as the
his vendor.39 Court held in Nataño v. Esteban,42 serves as a warning to a prospective
purchaser or incumbrancer that the particular property is in litigation; and
that he should keep his hands off the same, unless he intends to gamble
Admittedly, SLDC registered the sale with the Registry of Deeds
on the results of the litigation." Precisely, in this case SLDC has intervened
after it had acquired knowledge of Babasanta’s claim. Babasanta,
in the pending litigation to protect its rights. Obviously, SLDC’s faith in the
however, strongly argues that the registration of the sale by SLDC
merit of its cause has been vindicated with the Court’s present decision
was not sufficient to confer upon the latter any title to the property
which is the ultimate denouement on the controversy.
since the registration was attended by bad faith. Specifically, he
points out that at the time SLDC registered the sale on 30 June
1990, there was already a notice of lis pendens on the file with the The Court of Appeals has made capital43 of SLDC’s averment in
Register of Deeds, the same having been filed one year before on its Complaint-in-Intervention44 that at the instance of Pacita Lu it issued a
2 June 1989. check for ₱200,000.00 payable to Babasanta and the confirmatory
testimony of Pacita Lu herself on cross-examination.45 However, there is
nothing in the said pleading and the testimony which explicitly relates the
Did the registration of the sale after the annotation of the notice
amount to the transaction between the Spouses Lu and Babasanta for
of lis pendens obliterate the effects of delivery and possession in
Page 44 of 105
what they attest to is that the amount was supposed to pay off the PANGANIBAN, J.:
advances made by Babasanta to Pacita Lu. In any event, the
incident took place after the Spouses Lu had already executed
General propositions do not decide specific cases. Rather, laws are
the Deed of Absolute Sale with Mortgage in favor of SLDC and
interpreted in the context of the peculiar factual situation of each
therefore, as previously explained, it has no effect on the legal
proceeding. Each case has its own flesh and blood and cannot be ruled
position of SLDC.
upon on the basis of isolated clinical classroom principles.

Assuming ex gratia argumenti that SLDC’s registration of the sale


While we agree with the general proposition that a contract of sale is valid
had been tainted by the prior notice of lis pendensand assuming
until rescinded, it is equally true that ownership of the thing sold is not
further for the same nonce that this is a case of double sale, still
acquired by mere agreement, but by tradition or delivery. The peculiar
Babasanta’s claim could not prevail over that of SLDC’s.
facts of the present controversy as found by this Court in an earlier
In Abarquez v. Court of Appeals,46 this Court had the occasion to
relevant Decision show that delivery was not actually effected; in fact, it
rule that if a vendee in a double sale registers the sale after he has
was prevented by a legally effective impediment. Not having been the
acquired knowledge of a previous sale, the registration constitutes
owner, petitioner cannot be entitled to the civil fruits of ownership like
a registration in bad faith and does not confer upon him any right. If
rentals of the thing sold. Furthermore, petitioner's bad faith, as again
the registration is done in bad faith, it is as if there is no registration
demonstrated by the specific factual milieu of said Decision, bars the grant
at all, and the buyer who has taken possession first of the property
of such benefits. Otherwise, bad faith would be rewarded instead of
in good faith shall be preferred.
punished.

In Abarquez, the first sale to the spouses Israel was notarized and
The Case
registered only after the second vendee, Abarquez, registered their
deed of sale with the Registry of Deeds, but the Israels were first in
possession. This Court awarded the property to the Israels Filed before this Court is a Petition for Review1 under Rule 45 of the Rules
because registration of the property by Abarquez lacked the of Court, challenging the March 11, 1998 Order2 of the Regional Trial
element of good faith. While the facts in the instant case Court of Manila (RTC), Branch 8, in Civil Case No. 97-85141. The
substantially differ from that in Abarquez, we would not hesitate to dispositive portion of the assailed Order reads as follows:
rule in favor of SLDC on the basis of its prior possession of the
property in good faith. Be it noted that delivery of the property to "WHEREFORE, the motion to dismiss filed by defendant Mayfair is hereby
SLDC was immediately effected after the execution of the deed in GRANTED, and the complaint filed by plaintiff Equatorial is hereby
its favor, at which time SLDC had no knowledge at all of the prior DISMISSED."3
transaction by the Spouses Lu in favor of Babasanta.1a\^/phi1.net

Also questioned is the May 29, 1998 RTC Order4 denying petitioner's
The law speaks not only of one criterion. The first criterion is priority Motion for Reconsideration.
of entry in the registry of property; there being no priority of such
entry, the second is priority of possession; and, in the absence of
the two priorities, the third priority is of the date of title, with good The Facts
faith as the common critical element. Since SLDC acquired
possession of the property in good faith in contrast to Babasanta, The main factual antecedents of the present Petition are matters of record,
who neither registered nor possessed the property at any time, because it arose out of an earlier case decided by this Court on November
SLDC’s right is definitely superior to that of Babasanta’s. 21, 1996, entitled Equatorial Realty Development, Inc. v. Mayfair Theater,
Inc.5(henceforth referred to as the "mother case"), docketed as G.R No.
At any rate, the above discussion on the rules on double sale would 106063.
be purely academic for as earlier stated in this decision, the
contract between Babasanta and the Spouses Lu is not a contract Carmelo & Bauermann, Inc. ("Camelo" ) used to own a parcel of land,
of sale but merely a contract to sell. In Dichoso v. Roxas,47 we had together with two 2-storey buildings constructed thereon, located at Claro
the occasion to rule that Article 1544 does not apply to a case M. Recto Avenue, Manila, and covered by TCT No. 18529 issued in its
where there was a sale to one party of the land itself while the other name by the Register of Deeds of Manila.
contract was a mere promise to sell the land or at most an actual
assignment of the right to repurchase the same land. Accordingly,
On June 1, 1967, Carmelo entered into a Contract of Lease with Mayfair
there was no double sale of the same land in that case.
Theater Inc. ("Mayfair") for a period of 20 years. The lease covered a
portion of the second floor and mezzanine of a two-storey building with
WHEREFORE, the instant petition is hereby GRANTED. The about 1,610 square meters of floor area, which respondent used as a
decision of the Court of Appeals appealed from is REVERSED and movie house known as Maxim Theater.
SET ASIDE and the decision of the Regional Trial Court, Branch 31,
of San Pedro, Laguna is REINSTATED. No costs.
Two years later, on March 31, 1969, Mayfair entered into a second
Contract of Lease with Carmelo for the lease of another portion of the
SO ORDERED. latter's property — namely, a part of the second floor of the two-storey
building, with a floor area of about 1,064 square meters; and two store
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and spaces on the ground floor and the mezzanine, with a combined floor area
Chico-Nazario, JJ., concur. of about 300 square meters. In that space, Mayfair put up another movie
house known as Miramar Theater. The Contract of Lease was likewise for
a period of 20 years.
G.R. No. 133879 November 21, 2001
Both leases contained a provision granting Mayfair a right of first refusal to
EQUATORIAL REALTY DEVELOPMENT, INC., petitioner, purchase the subject properties. However, on July 30, 1978 — within the
vs. 20-year-lease term — the subject properties were sold by Carmelo to
MAYFAIR THEATER, INC., respondent.

Page 45 of 105
Equatorial Realty Development, Inc. ("Equatorial") for the total sum Meanwhile, on September 18, 1997 — barely five months after Mayfair
of P11,300,000, without their first being offered to Mayfair. had submitted its Motion for Execution before the RTC of Manila, Branch 7
— Equatorial filed with the Regional Trial Court of Manila, Branch 8, an
action for the collection of a sum of money against Mayfair, claiming
As a result of the sale of the subject properties to Equatorial,
payment of rentals or reasonable compensation for the defendant's use of
Mayfair filed a Complaint before the Regional Trial Court of Manila
the subject premises after its lease contracts had expired. This action was
(Branch 7) for (a) the annulment of the Deed of Absolute Sale
the progenitor of the present case.
between Carmelo and Equatorial, (b) specific performance, and (c)
damages. After trial on the merits, the lower court rendered a
Decision in favor of Carmelo and Equatorial. This case, entitled In its Complaint, Equatorial alleged among other things that the Lease
"Mayfair" Theater, Inc. v. Carmelo and Bauermann, Inc., et al.," Contract covering the premises occupied by Maxim Theater expired on
was docketed as Civil Case No. 118019. May 31, 1987, while the Lease Contract covering the premises occupied
by Miramar Theater lapsed on March 31, 1989.10 Representing itself as
the owner of the subject premises by reason of the Contract of Sale on
On appeal (docketed as CA-GR CV No. 32918), the Court of
July 30, 1978, it claimed rentals arising from Mayfair's occupation thereof.
Appeals (CA) completely reversed and set aside the judgment of
the lower court.
Ruling of the RTC Manila, Branch 8
The controversy reached this Court via G.R No. 106063. In this
mother case, it denied the Petition for Review in this wise: As earlier stated, the trial court dismissed the Complaint via the herein
assailed Order and denied the Motion for Reconsideration filed by
Equatorial.11
"WHEREFORE, the petition for review of the decision of the Court
of Appeals, dated June 23, 1992, in CA-G.R. CV No. 32918, is
HEREBY DENIED. The Deed of Absolute Sale between petitioners The lower court debunked the claim of petitioner for unpaid back rentals,
Equatorial Realty Development, Inc. and Carmelo & Bauermann, holding that the rescission of the Deed of Absolute Sale in the mother case
Inc. is hereby deemed rescinded; Carmelo & Bauermann is did not confer on Equatorial any vested or residual proprietary rights, even
ordered to return to petitioner Equatorial Realty Development the in expectancy.
purchase price. The latter is directed to execute the deeds and
documents necessary to return ownership to Carmelo &
In granting the Motion to Dismiss, the court a quo held that the critical
Bauermann of the disputed lots. Carmelo & Bauermann is ordered
issue was whether Equatorial was the owner of the subject property and
to allow Mayfair Theater, Inc. to buy the aforesaid lots for
could thus enjoy the fruits or rentals therefrom. It declared the rescinded
P11,300,000.00."6
Deed of Absolute Sale as avoid at its inception as though it did not
happen."
The foregoing Decision of this Court became final and executory on
March 17, 1997. On April 25, 1997, Mayfair filed a Motion for
The trial court ratiocinated as follows:
Execution, which the trial court granted.

"The meaning of rescind in the aforequoted decision is to set aside. In the


However, Carmelo could no longer be located. Thus, following the
case of Ocampo v. Court of Appeals, G.R. No. 97442, June 30, 1994, the
order of execution of the trial court, Mayfair deposited with the clerk
Supreme Court held that, 'to rescind is to declare a contract void in its
of court a quo its payment to Carmelo in the sum of P11,300,000
inception and to put an end as though it never were. It is not merely to
less; P847,000 as withholding tax. The lower court issued a Deed
terminate it and release parties from further obligations to each other but
of Reconveyance in favor of Carmelo and a Deed of Sale in favor of
to abrogate it from the beginning and restore parties to relative positions
Mayfair. On the basis of these documents, the Registry of Deeds of
which they would have occupied had no contract ever been made.'
Manila canceled Equatorial's titles and issued new Certificates of
Title7 in the name of Mayfair.
"Relative to the foregoing definition, the Deed of Absolute Sale between
Equatorial and Carmelo dated July 31, 1978 is void at its inception as
Ruling on Equatorial's Petition for Certiorari and Petition contesting
though it did not happen.
the foregoing manner of execution, the CA in its Resolution of
November 20, 1998, explained that Mayfair had no right to deduct
the P847,000 as withholding tax. Since Carmelo could no longer be "The argument of Equatorial that this complaint for back rentals as
located, the appellate court ordered Mayfair to deposit the said sum 'reasonable compensation for use of the subject property after expiration
with the Office of the Clerk of Court, Manila, to complete the full of the lease contracts presumes that the Deed of Absolute Sale dated July
amount of P11,300,000 to be turned over to Equatorial. 30, 1978 from whence the fountain of Equatorial's all rights flows is still
valid and existing.
Equatorial questioned the legality of the above CA ruling before this
Court in G.R No. 136221 entitled "Equatorial Realty Development, xxx xxx xxx
Inc. v. Mayfair Theater, Inc." In a Decision promulgated on May 12,
2000,8 this Court directed the trial court to follow strictly the "The subject Deed of Absolute Sale having been rescinded by the
Decision in GR. No. 106063, the mother case. It explained its ruling Supreme Court, Equatorial is not the owner and does not have any right to
in these words: demand backrentals from the subject property. . .12

"We agree that Carmelo and Bauermann is obliged to return the The trial court added: "The Supreme Court in the Equatorial case, G.R No.
entire amount of eleven million three hundred thousand pesos 106063, has categorically stated that the Deed of Absolute Sale dated July
(P11,300,000.00) to Equatorial. On the other hand, Mayfair may 31, 1978 has been rescinded subjecting the present complaint to res
not deduct from the purchase price the amount of eight hundred judicata."13
forty-seven thousand pesos (P847,000.00) as withholding tax. The
duty to withhold taxes due, if any, is imposed on the seller Carmelo
and Bauermann, Inc."9 Hence, the present recourse.14

Page 46 of 105
Issues promulgated in 1996 in the mother case, no right of ownership was
transferred from Carmelo to Equatorial in view of a patent failure to deliver
the property to the buyer.
Petitioner submits, for the consideration of this Court, the following
issues:15
Rental — a Civil
Fruit of Ownership
"A

To better understand the peculiarity of the instant case, let us begin with
The basis of the dismissal of the Complaint by the Regional Trial
some basic parameters. Rent is a civil fruit 16 that belongs to the owner of
Court not only disregards basic concepts and principles in the law
the property producing it17 by right of accession.18 Consequently and
on contracts and in civil law, especially those on rescission and its
ordinarily, the rentals that fell due from the time of the perfection of the
corresponding legal effects, but also ignores the dispositive portion
sale to petitioner until its rescission by final judgment should belong to the
of the Decision of the Supreme Court in G.R. No. 106063 entitled
owner of the property during that period.
'Equatorial Realty Development, Inc. & Carmelo & Bauermann, Inc.
vs. Mayfair Theater, Inc.'
By a contract of sale, "one of the contracting parties obligates himself to
transfer ownership of and to deliver a determinate thing and the other to
"B.
pay therefor a price certain in money or its equivalent."19

The Regional Trial Court erred in holding that the Deed of Absolute
Ownership of the thing sold is a real right,20 which the buyer acquires only
Sale in favor of petitioner by Carmelo & Bauermann, Inc., dated
upon delivery of the thing to him "in any of the ways specified in articles
July 31, 1978, over the premises used and occupied by respondent,
1497 to 1501, or in any other manner signifying an agreement that the
having been 'deemed rescinded' by the Supreme Court in G.R. No.
possession is transferred from the vendor to the vendee." 21 This right is
106063, is 'void at its inception as though it did not happen.'
transferred, not merely by contract, but also by tradition or delivery. 22 Non
nudis pactis sed traditione dominia rerum transferantur. And there is said
"C. to be delivery if and when the thing sold "is placed in the control and
possession of the vendee."23 Thus, it has been held that while the
The Regional Trial Court likewise erred in holding that the aforesaid execution of a public instrument of sale is recognized by law as equivalent
Deed of Absolute Sale, dated July 31, 1978, having been 'deemed to the delivery of the thing sold,24 such constructive or symbolic delivery,
rescinded' by the Supreme Court in G.R. No. 106063, petitioner 'is being merely presumptive, is deemed negated by the failure of the vendee
not the owner and does not have any right to demand backrentals to take actual possession of the land sold.25
from the subject property,' and that the rescission of the Deed of
Absolute Sale by the Supreme Court does not confer to petitioner Delivery has been described as a composite act, a thing in which both
'any vested right nor any residual proprietary rights even in parties must join and the minds of both parties concur. It is an act by which
expectancy.' one party parts with the title to and the possession of the property, and the
other acquires the right to and the possession of the same. In its natural
"D. sense, delivery means something in addition to the delivery of property or
title; it means transfer of possession.26 In the Law on Sales, delivery may
be either actual or constructive, but both forms of delivery contemplate
The issue upon which the Regional Trial Court dismissed the civil "the absolute giving up of the control and custody of the property on the
case, as stated in its Order of March 11, 1998, was not raised by part of the vendor, and the assumption of the same by the vendee."27
respondent in its Motion to Dismiss.

Possession Never
"E. Acquired by Petitioner

The sole ground upon which the Regional Trial Court dismissed Let us now apply the foregoing discussion to the present issue. From the
Civil Case No. 97-85141 is not one of the grounds of a Motion to peculiar facts of this case, it is clear that petitioner never took actual
Dismiss under Sec. 1 of Rule 16 of the 1997 Rules of Civil control and possession of the property sold, in view of respondent's timely
Procedure." objection to the sale and the continued actual possession of the property.
The objection took the form of a court action impugning the sale which, as
Basically, the issues can be summarized into two: (1) the we know, was rescinded by a judgment rendered by this Court in the
substantive issue of whether Equatorial is entitled to back rentals; mother case. It has been held that the execution of a contract of sale as a
and (2) the procedural issue of whether the court a quo's dismissal form of constructive delivery is a legal fiction. It holds true only when there
of Civil Case No. 97-85141 was based on one of the grounds is no impediment that may prevent the passing of the property from the
raised by respondent in its Motion to Dismiss and covered by Rule hands of the vendor into those of the vendee.28 When there is such
16 of the Rules of Court. impediment, "fiction yields to reality — the delivery has not been
effected."29
This Court's Ruling
Hence, respondent's opposition to the transfer of the property by way of
sale to Equatorial was a legally sufficient impediment that effectively
The Petition is not meritorious.
prevented the passing of the property into the latter's hands.

First Issue:
This was the same impediment contemplated in Vda. de Sarmiento v.
Ownership of Subject Properties
Lesaca,30 in which the Court held as follows:

We hold that under the peculiar facts and circumstances of the


"The question that now arises is: Is there any stipulation in the sale in
case at bar, as found by this Court en banc in its Decision
question from which we can infer that the vendor did not intend to deliver
Page 47 of 105
outright the possession of the lands to the vendee? We find none. 28, 1990. Mayfair eventually won them both. However, to be able to
On the contrary, it can be clearly seen therein that the vendor maintain physical possession of the premises while awaiting the outcome
intended to place the vendee in actual possession of the lands of the mother case, it had no choice but to pay the rentals.
immediately as can be inferred from the stipulation that the vendee
'takes actual possession thereof . . . with full rights to dispose,
The rental payments made by Mayfair should not be construed as a
enjoy and make use thereof in such manner and form as would be
recognition of Equatorial as the new owner. They were made merely to
most advantageous to herself.' The possession referred to in the
avoid imminent eviction. It is in this context that one should understand the
contract evidently refers to actual possession and not merely
aforequoted factual statements in the ponencia in the mother case, as well
symbolical inferable from the mere execution of the document.
as the Separate Opinion of Mr. Justice Padilla and the Separate
Concurring Opinion of the herein ponente.
"Has the vendor complied with this express commitment? she did
not. As provided in Article 1462, the thing sold shall be deemed
At bottom, it may be conceded that, theoretically, a rescissible contract is
delivered when the vendee is placed in
valid until rescinded. However, this generalprinciple is not decisive to the
the control and possession thereof, which situation does not here
issue of whether Equatorial ever acquired the right to collect rentals. What
obtain because from the execution of the sale up to the present the
is decisive is the civil law rule that ownership is acquired, not by mere
vendee was never able to take possession of the lands due to the
agreement, but by tradition or delivery. Under the factual environment of
insistent refusal of Martin Deloso to surrender them claiming
this controversy as found by this Court in the mother case, Equatorial was
ownership thereof. And although it is postulated in the same article
never put in actual and effective control or possession of the property
that the execution of a public document is equivalent to delivery,
because of Mayfair's timely objection.
this legal fiction only holds true when there is no impediment that
may prevent the passing of the property from the hands of the
vendor into those of the vendee. x x x."31 As pointed out by Justice Holmes, general propositions do not decide
specific cases. Rather, "laws are interpreted in the context of the peculiar
factual situation of each case. Each case has its own flesh and blood and
The execution of a public instrument gives rise, therefore, only to a
cannot be decided on the basis of isolated clinical classroom principles."36
prima facie presumption of delivery. Such presumption is destroyed
when the instrument itself expresses or implies that delivery was
not intended; or when by other means it is shown that such delivery In short, the sale to Equatorial may have been valid from inception, but it
was not effected, because a third person was actually in was judicially rescinded before it could be consummated. Petitioner never
possession of the thing. In the latter case, the sale cannot be acquired ownership, not because the sale was void, as erroneously
considered consummated. claimed by the trial court, but because the sale was not consummated by
a legally effective delivery of the property sold.
However, the point may be raised that under Article 1164 of the
Civil Code, Equatorial as buyer acquired a right to the fruits of the Benefits Precluded by
thing sold from the time the obligation to deliver the property to Petitioner's Bad Faith
petitioner arose.32 That time arose upon the perfection of the
Contract of Sale on July 30, 1978, from which moment the laws Furthermore, assuming for the sake of argument that there was valid
provide that the parties to a sale may reciprocally demand delivery, petitioner is not entitled to any benefits from the "rescinded" Deed
performance.33 Does this mean that despite the judgment of Absolute Sale because of its bad faith. This being the law of the mother
rescinding the sale, the right to the fruits34 belonged to, and case decided in 1996, it may no longer be changed because it has long
remained enforceable by, Equatorial? become final and executory. Petitioner's bad faith is set forth in the
following pertinent portions of the mother case:
Article 1385 of the Civil Code answers this question in the negative,
because "[r]escission creates the obligation to return the things "First and foremost is that the petitioners acted in bad faith to render
which were the object of the contract, together with their fruits, and Paragraph 8 'inutile.'
the price with its interest; x x x" Not only the land and building sold,
but also the rental payments paid, if any, had to be returned by the
buyer. xxx xxx xxx

Another point. The Decision in the mother case stated that "Since Equatorial is a buyer in bad faith, this finding renders the sale to it
"Equatorial x x x has received rents" from Mayfair "during all the of the property in question rescissible. We agree with respondent
years that this controversy has been litigated." The Separate Appellate Court that the records bear out the fact that Equatorial was
Opinion of Justice Teodoro Padilla in the mother case also said that aware of the lease contracts because its lawyers had, prior to the sale,
Equatorial was "deriving rental income" from the disputed property. studied the said contracts. As such, Equatorial cannot tenably claim to be
Even herein ponente'sSeparate Concurring Opinion in the mother a purchaser in good faith, and, therefore, rescission lies.
case recognized these rentals. The question now is: Do all these
statements concede actual delivery? xxx xxx xxx

The answer is "No." The fact that Mayfair paid rentals to Equatorial "As also earlier emphasized, the contract of sale between Equatorial and
during the litigation should not be interpreted to mean either actual Carmelo is characterized by bad faith, since it was knowingly entered into
delivery or ipso facto recognition of Equatorial's title. in violation of the rights of and to the prejudice of Mayfair. In fact, as
correctly observed by the Court of Appeals, Equatorial admitted that its
The CA Records of the mother case 35 show that Equatorial — as lawyers had studied the contract of lease prior to the sale. Equatorial's
alleged buyer of the disputed properties and as alleged knowledge of the stipulations therein should have cautioned it to look
successor-in-interest of Carmelo's rights as lessor — submitted two further into the agreement to determine if it involved stipulations that would
ejectment suits against Mayfair. Filed in the Metropolitan Trial prejudice its own interests.
Court of Manila, the first was docketed as Civil Case No. 121570
on July 9, 1987; and the second, as Civil Case No. 131944 on May xxx xxx xxx

Page 48 of 105
"On the part of Equatorial, it cannot be a buyer in good Under the doctrine of res judicata or bar by prior judgment, a matter that
faith because it bought the property with notice and full knowledge has been adjudicated by a court of competent jurisdiction must be deemed
that Mayfair had a right to or interest in the property superior to its to have been finally and conclusively settled if it arises in any subsequent
own. Carmelo and Equatorial took unconscientious advantage of litigation between the same parties and for the same cause.40 Thus, "[a]
Mayfair."37 (Italics supplied) final judgment on the merits rendered by a court of competent jurisdiction
is conclusive as to the rights of the parties and their privies and constitutes
an absolute bar to subsequent actions involving the same claim, demand,
Thus, petitioner was and still is entitled solely to he return of the
or cause of action."41 Res judicata is based on the ground that the "party to
purchase price it paid to Carmelo; no more, no less. This Court has
be affected, or some other with whom he is in privity, has litigated the
firmly ruled in the mother case that neither of them is entitled to any
consideration of equity, as both "took unconscientious advantage same matter in a former action in a court of competent jurisdiction, and
should not be permitted to litigate it again.42
of Mayfair."38

It frees the parties from undergoing all over again the rigors of
In the mother case, this Court categorically denied the payment of
unnecessary suits and repetitive trials. At the same time, it prevents the
interest, a fruit of ownership. By the same token, rentals, another
clogging of court dockets. Equally important, it stabilizes rights and
fruit of ownership, cannot be granted without mocking this Court's
promotes the rule of law.@lawphil.net
en banc Decision, which has long become final.

We find no need to repeat the foregoing disquisitions on the first issue to


Petitioner's claim of reasonable compensation for respondent's use
show satisfaction of the elements of res judicata. Suffice it to say that,
and occupation of the subject property from the time the lease
clearly, our ruling in the mother case bars petitioner from claiming back
expired cannot be countenanced. If it suffered any loss, petitioner
rentals from respondent. Although the court a quo erred when it declared
must bear it in silence, since it had wrought that loss upon
"void from inception" the Deed of Absolute Sale between Carmelo and
itself. Otherwise, bad faith would be rewarded instead of
petitioner, our foregoing discussion supports the grant of the Motion to
punished.@lawphil.net
Dismiss on the ground that our prior judgment in G.R No. 106063 has
already resolved the issue of back rentals.
We uphold the trial court's disposition, not for the reason it gave,
but for (a) the patent failure to deliver the property and (b)
On the basis of the evidence presented during the hearing of Mayfair's
petitioner's bad faith, as above discussed.
Motion to Dismiss, the trial court found that the issue of ownership of the
subject property has been decided by this Court in favor of Mayfair. We
Second Issue:itc-alf quote the RTC:
Ground in Motion to Dismiss
"The Supreme Court in the Equatorial case, G.R. No. 106063 has
Procedurally, petitioner claims that the trial court deviated from the categorically stated that the Deed of Absolute Sale dated July 31, 1978
accepted and usual course of judicial proceedings when it has been rescinded subjecting the present complaint to res
dismissed Civil Case No. 97-85141 on a ground not raised in judicata."43(Emphasis in the original)
respondent's Motion to Dismiss. Worse, it allegedly based its
dismissal on a ground not provided for in a motion to dismiss as
Hence, the trial court decided the Motion to Dismiss on the basis of res
enunciated in the Rules of Court.@lawphil.net
judicata, even if it erred in interpreting the meaning of "rescinded" as
equivalent to "void" In short, it ruled on the ground raised; namely, bar by
We are not convinced A review of respondent's Motion to Dismiss prior judgment. By granting the Motion, it disposed correctly, even if its
Civil Case No. 97-85141 shows that there were two grounds legal reason for nullifying the sale was wrong. The correct reasons are
invoked, as follows: given in this Decision.

"(A) WHEREFORE, the Petition is hereby DENIED. Costs against


petitioner.itc-alf
Plaintiff is guilty of forum-shopping.itc-alf
SO ORDERED.
"(B)
Davide Jr., C.J., Quisumbing, Pardo, Buena, Ynares-Santiago and Carpio,
Plaintiff's cause of action, if any, is barred by prior judgment."39 JJ., concur.
Bellosillo, J., I join the dissent of J. Gutierrez.
Melo, J., concurring opinion.
The court a quo ruled, inter alia, that the cause of action of Puno, J., concur and also join the concurring opinion of J. Melo.
petitioner plaintiff in the case below) had been barred by a prior Vitug, J., see dissenting opinion.
judgment of this Court in G.R No. 106063, the mother case. Kapunan, J., join the dissenting opinions of Justices Vitug and
Sandoval-Gutierrez.
Although it erred in its interpretation of the said Decision when it Mendoza, J., concur in this and Melo, J.'s concurring opinion.
argued that the rescinded Deed of Absolute Sale was avoid," we De Leon, Jr., J., join the dissenting opinion of Justice J.C. Vitug.
hold, nonetheless, that petitioner's cause of action is indeed barred
by a prior judgment of this Court. As already discussed, our
Decision in G.R No. 106063 shows that petitioner is not entitled to
back rentals, because it never became the owner of the disputed
properties due to a failure of delivery. And even assuming Concurring Opinion
arguendo that there was a valid delivery, petitioner's bad faith
negates its entitlement to the civil fruits of ownership, like interest MELO, J., concurring:
and rentals.

Page 49 of 105
While I express my conformity to the ponencia of our distinguished On November 21, 1996, this Court En Banc rendered its decision (264
colleague, Mr. Justice Artemio V. Panganiban, I would just like to SCRA 483 [1996]), disposing:
make the following observations:
WHEREFORE, the petition for review of the decision of the Court of
1. The issue in this case was squarely resolved in our 1996 En Appeals dated June 23, 1992, in CA-G.R. CV No. 32918, is HEREBY
Banc decision in the main case. What petitioner is asking us to do DENIED. The Deed of Absolute Sale between petitioners Equatorial
now is to reverse or modify a judgment which is accurate in every Realty Development, Inc. and Carmelo & Bauermann, Inc. is hereby
respect, conformable to law and jurisprudence, and faithful to rescinded; petitioner Carmelo & Bauermann is ordered to return to
principles of fairness and justice. petitioner Equatorial Realty Development the purchase price. The latter is
directed to execute the deeds and documents necessary to return
ownership to Carmelo & Bauermann of the disputed lots. Carmelo and
2. Petitioner's submissions are deceiving. It is trying to collect
Bauermann is ordered to allow Mayfair Theater, Inc. to buy the aforesaid
unjustified and unbelievably increased rentals by provoking a
lots for P11,300,000.00.
purely academic discussion, as far as respondent is concerned, of
a non-applicable provision of the Civil Code on contracts.
In the Court of Appeals decision (CA-G.R. CV No. 32918, June 23, 1992)
in the main case, raised to this Court, Mayfair was ordered to directly pay
3. To grant the petition is to reward bad faith, for petitioner has
deprived respondent of the latter's property rights for twenty-three P11,300,000.00 to Equatorial whereupon Equatorial would execute the
deeds and documents necessary for the transfer of ownership to Mayfair
(23) years and has forced it to defend its interests in case after
and the registration of the property in its name. The execution of
case during that lengthy period. Petitioner now tries to inflict further
documents and the transfer of the property were directly between
injury in the fantastic and groundless amount of P115,947,867.00.
Equatorial and Mayfair. Our decision in 1996 (G.R. No. 106063) affirmed
To remand this case to the lower court in order to determine the
the appellate decision. However, while the 1978 deed of sale questioned
back rentals allegedly due to petitioner Equatorial Realty
by Mayfair was rescinded, we ordered Carmelo to first return to Equatorial
Development Corporation, Inc. is to encourage continuation of
the purchase price of the property, whereupon Equatorial would return
crafty tactics and to allow the further dissipation of scarce judicial
ownership to Carmelo, after which Mayfair would buy the lot for
time and resources.
P11,300,000.00 from Carmelo.

The instant petition arose from a complaint for back rentals,


When the case was remanded to the RTC for execution of the decision, it
increased rentals and interests filed by petitioner Equatorial Realty
was ascertained that Carmelo and Bauermann, Inc. was no longer in
Development, Inc. (Equatorial) against respondent Mayfair Theater,
existence. The Sheriff could not enforce the portions of the judgment
Inc. (Mayfair). It has to be adjudicated in the context of three earlier
calling for acts to be performed by Carmelo. Mayfair, therefore, deposited
petitions decided by this Court.
the amount of P11,300,000.00 with the RTC for payment to Equatorial,
hoping that the latter would faithfully comply with this Court's decision. In
A dispute between the two parties over the ownership of a this regard, it may be mentioned that buyer Mayfair also paid P847,000.00
commercial lot and building along Claro M. Recto Avenue in Manila in taxes which the vendors should have paid. The RTC ordered the
has led to 23 years of protracted litigation, including the filing of 4 execution of deeds of transfer, the cancellation of Equatorial's titles to the
petitions with the Court, namely, G.R. No. L-106063, decided on property, and the issuance of new titles in favor of Mayfair. Accordingly,
November 21, 1996 (264 SCRA 483); G.R. No. 103311 decided on the property was registered in the name of Mayfair and titles issued in its
March 4, 1992; G.R. No. 136221, decided on May 12, 2000; and favor.
the present petition, G.R. No. 133879.
Equatorial, however, saw an opening for further litigation. It questioned the
The case at bar is a classic illustration of how a dubious method employed by the RTC to execute the Court's judgment, arguing
interpretation of the dispositive portion of the 1996 decision for that the directives involving Carmelo's participation were ignored by the
petitioner could lead to 5 more years of bitter litigation after the trial court. The litigation over the alleged incorrectness of the execution
initial 18 years of legal proceedings over the first case. eventually led to the second petition earlier mentioned — G.R. No.
136221.
Lease contracts over the subject property were executed on June 1,
1967 and March 31, 1969 by original owner Carmelo and It may be mentioned at this point that on July 9, 1987, while the
Bauermann, Inc. (Carmelo) in favor of herein respondent Mayfair. right-of-first-refusal and cancellation case was pending, Equatorial filed an
The leases expired on May 31, 1987 and March 31, 1989, action for ejectment against Mayfair. Because the issue of ownership was
respectively. The lease contracts embodied provisions giving still pending in the case for rescission of deed of sale including the
Mayfair a right-of-first-refusal should Carmelo sell the property. enforcement of the right-of-first-refusal provision, the ejectment case was
dismissed. Appeals to the RTC and the Court of Appeals were denied.
In an act characterized as bad faith by this Court, the property, in
violation of the right of first refusal, was sold by Carmelo to herein On March 26, 1990, still another ejectment case was filed by Equatorial. In
petitioner Equatorial, on July 31, 1978 for P11,300,000.00. On decisions which reached all the way to this Court in G.R. No. 103311, the
September 13, 1978, Mayfair filed the first case for annulment of cases for ejectment did not prosper. Mayfair won the cases on March 4,
the contract of sale, specific performance of the right-of-first-refusal 1992.
provision, and damages. The Regional Trial Court (RTC) of Manila
decided the case in favor of Equatorial on February 7, 1991.
The three cases decided by the Court in these litigations between
Counterclaims for compensation arising from the use of the
Equatorial and Mayfair, all of them in favor of Mayfair, are antecedents of
premises were awarded to Equatorial by the 1991 RTC decision.
the present and fourth petition. Equatorial has been adjudged as having
unlawfully and in bad faith acquired property that should have belonged to
On June 23, 1992, the Court of Appeals reversed the RTC decision, Mayfair since 1978. Ownership and title have been unquestionably
thus leading to the first petition, G.R. No. 106063, filed against transferred to Mayfair.
Mayfair by both Equatorial and Carmelo.

Page 50 of 105
Seemingly, Equatorial now seeks to profit from its bad faith. While This June 25, 2001 Resolution in G.R. No. 136221 validated the issuance
the case involving the allegedly incorrect execution of the 1996 of new titles in the name of the adjudicated owner, Mayfair. The Court
decision on cancellation of the deed of sale in G.R. No. 106063 ordered the direct release to Equatorial of the P11,300,000.00 deposited
was being litigated, Equatorial filed on September 18, 1997 with the in court for the account of the defunct Carmelo.
RTC of Manila two complaints for payment of back and increased
rentals arising from the use by Mayfair of the lot, building, and other
In the follow-up Resolution of the First Division in G.R. No. 136221 dated
fixed improvements. From the time the property was sold by
June 25, 2001, the Court, after describing the case as a Promethean one
Carmelo to Equatorial, lessee Mayfair had been paying to
involving the execution of a decision which has been long final, and after
Equatorial the rentals fixed in the 1967 and 1969 lease contracts
calling the efforts to stave off execution as a travesty of justice, instructed
with the original owner. This was during the pendency of the the trial court:
complaint for annulment of the contract of sale, specific
performance of the right-of-first-refusal provision, and damages.
1. To execute the Court's Decision strictly in accordance with the ruling in
G.R. No. 106063 by validating the acts of the sheriff of Manila and the
As found in our 1998 decision in G.R. No. 106063, the disputed
titles in the name of Mayfair Theater, Inc. issued by the Register of Deeds
property should have actually belonged to Mayfair at the time.
of Manila consistent therewith;
However, to avoid the ejectment cases, which Equatorial
nonetheless later filed, Mayfair was forced to pay rentals to
Equatorial. It paid the rentals based on the rates fixed by Carmelo 2. In case of failure of Carmelo and Bauermann to accept the amount of
in the lease contracts. P11,300,000.00 deposited by Mayfair Theater, Inc. with the Clerk of Court,
Regional Trial Court, Manila, to authorize the Clerk of Court to RELEASE
the amount of P11,300,000.00 deposited with the court for the account of
Equatorial, claiming the 1967 and 1969 rentals to be inadequate,
Carmelo and Bauermann, Inc. to petitioner;
claimed increased amounts as reasonable compensation. Because
the amounts fixed by the lease contract with Carmelo but paid to
Equatorial were only at the rate of P17,966.21 monthly while 3. To devolve upon the trial court the determination of other issues that
Equatorial wanted P210,000.00 every month plus legal interests, may remain unresolved among the parties, relating to the execution of this
the suit was for the payment of P115,947,867.68 as of June 19, Court's final decision in G.R. No. 106063.
1997.
In light of the Court's judgments in G.R. No. 106063 and G.R. No. 136221,
Citing the 1996 decision in G.R. No. 106063, Mayfair contended the present petition in G.R. No. 133879 for back rentals should now be
that it owned the property under the decision. It stated that the sale finally resolved, applying the rulings in those earlier decisions.
by Carmelo to Equatorial had been cancelled, and, as owner,
Mayfair owed no increased rentals to Equatorial based on said Indubitably, the 1978 deed of sale executed by Carmelo in favor of
decision. Equatorial over the disputed property has been set aside by this Court.
Equatorial was declared a buyer in bad faith. The contract was
The present case on back rentals could not be conclusively characterized as a fraudulent sale and the entirety of the indivisible
decided because the execution and finality of the issue of property sold to Equatorial was the property we ordered to be conveyed to
ownership were being contested for 5 years in the petition on the Mayfair for the same price paid by Equatorial to Carmelo.
proper execution filed in G.R. No. 136221. This petition had to wait
for the resolution of G.R. No. 136221. It is also beyond question that the method of execution of the 1996
decision by the RTC, the direct payment by Mayfair to Equatorial,
In its decision dated May 12, 2000, in G.R. No. 136221 (First bypassing and detouring the defunct Carmelo corporation, has been
Division, per Mr. Justice Pardo; Davide, Jr., C.J., Kapunan, and validated by this Court. There are no longer any procedural obstacles to
Ynares-Santiago, JJ., concurring), this Court reiterated the the full implementation of the decision.
judgment in G.R. No. 106063. It emphasized that the 1996 decision
awarding the property to Mayfair was clear. It stated that the And finally, the property sold to Equatorial in violation of Mayfair's right of
decision having attained finality, there was nothing left for the first refusal is now indisputably possessed by, and owned and titled in the
parties to do but to adhere to the mandates of the decision. name of, respondent Mayfair.

In the dispositive portion, however, the Court ordered the trial court Parenthetically, the issue on the payment of back and increased rentals,
"to carry out the execution following strictly the terms" of the 1996 plus interests, was actually settled in the 1996 decision in G.R. No.
decision. However, as earlier stated, this could not be done 106063. It could not be enforced at the time only because of the
because Carmelo had ceased to exist. There was no longer any controversy unfortunately raised by Equatorial over the proper execution
Carmelo which could return the P11,300,000.00 consideration of of the 1996 decision.
the 1978 sale to Equatorial as ordered in the dispositive portion of
the 1996 decision. Equatorial could not and would not also execute
the deeds returning the property to Carmelo, as directed in the It is now time to reiterate the 1996 decision on interests and settle the
decision. Neither could the defunct Carmelo sell the property to dispute between Mayfair and Equatorial once and for all.
Mayfair at the sale price in 1978 when the right of first refusal was
violated. Thus, we reiterate that:

Mayfair had to file a motion for partial reconsideration, emphasizing On the question of interest payments on the principal amount of
that it was impossible for a corporation which has gone out of P11,300.000.00, it must be borne in mind that both Carmelo and
existence to obey the specific orders of this Court. A resolution was, Equatorial acted in bad faith. Carmelo knowingly and deliberately broke a
therefore, rendered on June 25, 2001 putting an end to the contract entered into with Mayfair. It sold the property to Equatorial with
controversy over the proper implementation of the 1996 judgment. purpose and intent to withhold any notice or knowledge of the sale coming
to the attention of Mayfair. All the circumstances point to a calculated and
contrived plan of non-compliance with the agreement of first refusal.

Page 51 of 105
On the part of Equatorial, it cannot be a buyer in good faith Equatorial conveniently fails to state that the July 31, 1978 Deed of
because it bought the property with notice and full knowledge the Absolute Sale was between Equatorial and Carmelo only. Respondent
Mayfair had a right to or interest in the property superior to its own. Mayfair was not a party to the contract. The deed of sale was
Carmelo and Equatorial took unconscientious advantage of surreptitiously entered into between Carmelo and Equatorial behind the
Mayfair. back and in violation of the rights of Mayfair. Why should the innocent and
wronged party now be made to bear the consequences of an unlawful
contract to which it was not privy? Insofar as Equatorial and Carmelo are
Neither may Carmelo and Equatorial avail of consideration based
concerned, their 1978 contract may have validly transferred ownership
on equity which might warrant the grant of interests. The vendor
from one to the other. But not as far as Mayfair is concerned.
received as payment from the vendee what, at the time, was a full
and fair price for the property. It has used the P11,300,000.00 all
these years earning income or interest from the amount. Equatorial, Mayfair starts its arguments with a discussion of Article 1381 of the Civil
on the other hand, has received rents and otherwise profited from Code that contracts entered into in fraud of creditors are rescissible. There
the use of the property turned over to it by Carmelo. In fact, during is merit in Mayfair's contention that the legal effects are not restricted to
all the years that this controversy was being litigated. Mayfair paid the contracting parties only. On the contrary, the rescission is for the
rentals regularly to the buyer who had an inferior right to purchase benefit of a third party, a stranger to the contract. Mayfair correctly states
the property. Mayfair is under no obligation to pay any interests that as far as the injured third party is concerned, the fraudulent contract,
arising from this judgment to either Carmelo or Equatorial (264 once rescinded, is non-existent or void from its inception. Hence, from
SCRA 483, pp. 511-512). Mayfair's standpoint, the deed of absolute sale which should not have
been executed in the first place by reason of Mayfair's superior right to
purchase the property and which deed was cancelled for that reason by
Worthy quoting too is the concurring opinion in our 1996 decision of
Mr. Justice Teodoro R. Padilla as follows: this Court, is legally non-existent. There must be a restoration of things to
the condition prior to the celebration of the contract (Respondent relies
on Almeda vs. J. M. & Company, 43072-R, December 16, 1975, as cited
The equities of the case support the foregoing legal disposition. in the Philippine Law Dictionary; IV Arturo M. Tolentino, Civil Code of the
During the intervening years between 1 August 1978 and this Philippines, 570, 1990 Ed., citing Manresa; IV Edgardo L. Paras, Civil
date, Equatorial (after acquiring the C.M. Recto property for the Code of the Philippines, 717-718, 1994 Ed.).
price of P11,300,000.00) had been leasing the property and
deriving rental income therefrom. In fact, one of the lessees in the
property was Mayfair. Carmelo had, in turn, been using the It is hard not to agree with the explanations of Mayfair, to wit:
proceeds of the sale, investment-wise and/or operation wise in its
own business. 4.22. As a consequence of the rescission of the Deed of Absolute Sale, it
was as if Equatorial never bought and became the lessor of the subject
properties. Thus, the court a quo did not err in ruling that Equatorial is not
It may appear, at first blush, that Mayfair is unduly favored by the
the owner and does not have any right to demand back rentals from [the]
solution submitted by this opinion, because the price of
subject property.
P11,300,000.00 which it has to pay Carmelo in the exercise of its
right of first refusal, has been subjected to the inroads of inflation
so that its purchasing power today is less than when the same 4.23. Tolentino, supra, at 577-578 further explains that the effects of
amount was paid by Equatorial to Carmelo. But then it cannot be rescission in an accion pauliana retroact to the date when the credit or
overlooked that it was Carmelo's breach of Mayfair's right of first right being enforced was acquired.
refusal that prevented Mayfair from paying the price of
P11,300,000.00 to Carmelo at about the same time the amount
"While it is necessary that the credit of the plaintiff in the accion
was paid by Equatorial to Carmelo. Moreover, it cannot be ignored
pauliana must be prior to the fraudulent alienation, the date of the
that Mayfair had also incurred consequential or "opportunity"
judgment enforcing it is immaterial. Even if the judgment be subsequent to
losses by reason of its failure to acquire and use the property under
the alienation, it is merely declaratory, with retroactive effect to the date
its right of first refusal. In fine, any loss in purchasing power of the
when the credit was constituted. . ." (emphasis supplied)
price of P11,300,000.00 is for Carmelo to incur or absorb on
account of its bad faith in breaching Mayfair's contractual right of
first refusal to the subject property. (ibid., pp. 511-512). 4.24. The clear rationale behind this is to prevent conniving parties, such
as Equatorial and Carmelo, from benefiting in any manner from their
unlawful act of entering into a contract in fraud of innocent parties with
It can be seen from the above ruling that the issue of rentals and
superior rights like Mayfair. Thus, to allow Equatorial to further collect
interests was fully discussed and passed upon in 1996. Equatorial
rentals from Mayfair is to allow the former to profit from its own act of bad
profited from the use of the building for all the years when it had no
faith. Ex dolo malo non oritur actio. (Respondent's Comment, pp. 338-339,
right or, as stated in our decision, had an inferior right over the
Rollo).
property. Mayfair, which had the superior right, continued to pay
rent but it was the rate fixed in the lease contract with Carmelo. We
see no reason for us to now deviate from the reasoning given in our This brings me to my third and final observation in this case. This Court
main decision. The decision has been final and executory for five (5) emphasized in the main case that the contract of sale between Equatorial
years and petitioner has failed to present any valid and reasonable and Carmelo was characterized by bad faith. The Court described the sale
ground to reconsider, modify or reverse it. Let that which has been as "fraudulent" in its 1996 decision. It stated that the damages which
fairly adjudicated remain final. Mayfair suffered are in terms of actual injury and lost opportunities,
emphasizing that Mayfair should not be given an empty or vacuous victory.
Moreover, altogether too many suits have been filed in this case. Four
My second observation relates to the clever but, to my mind,
separate petitions have come before us, necessitating full length decisions
deceptive argument foisted by Equatorial on the Court.
in at least 3 of them. The 1996 decision stressed that the Court has always
been against multiplicity of suits.
Equatorial relies on the Civil Code provision on rescissible
contracts to bolster its claim. Its argument is that a rescissible
There was bad faith from the execution of the deed of sale because
contract remains valid and binding upon the parties thereto until the
Equatorial and Carmelo affirmatively operated with furtive design or with
same is rescinded in an appropriate judicial proceeding.
some motive of self-interest or ill-will or for ulterior purposes (Air France vs.
Page 52 of 105
Carrascoso, 18 SCRA 166 [1966]). There was breach of a known There is no obligation on the part of respondent Mayfair to pay any
duty by the two parties to the unlawful contract arising from motives increased, additional, back or future rentals or interests of any kind to
of interests or ill-will calculated to cause damage to another (Lopez petitioner Equatorial under the circumstances of this case.
vs. Pan American World Airways, 123 Phil. 264 [1966]).
I, therefore, concur with the majority opinion in denying due course and
The presence of bad faith is clear from the records. Our resolution dismissing the petition.
of this issue in 1996 (G.R. 106063) is res judicata.
Puno and Mendoza, JJ., concur.
We stated:

First and foremost is that the petitioners (referring to Equatorial and


Carmelo) acted in bad faith to render Paragraph 8 "inutile". Dissenting Opinion

xxx xxx xxx VITUG, J., dissenting:

Since Equatorial is a buyer in bad faith, this finding renders the sale
Civil Law, in its usual sophistication, classifies defective contracts (unlike
to it of the property in question rescissible. We agree with
the seemingly generic treatment in Common Law), into, first, the
respondent Appellate Court that the records bear out the fact that
rescissible contracts,1 which are the least infirm; followed by, second, the
Equatorial was aware of the lease contracts because its lawyers
voidable contracts;2 then, third, the unenforceable contracts;3 and,
had, prior to the sale, studied the said contracts. As such Equatorial finally, fourth, the worst of all or the void contracts.4 In terms of their
cannot tenably claim to be a purchaser in good faith and, therefore,
efficaciousness, rescissible contracts are regarded, among the four, as
rescission lies.
being the closest to perfectly executed contracts. A rescissible contract
contains all the requisites of a valid contract and are considered legally
xxx xxx xxx binding, but by reason of injury or damage to either of the contracting
parties or to third persons, such as creditors, it is susceptible to rescission
at the instance of the party who may be prejudiced thereby. A rescissible
As also earlier emphasized, the contract of sale between
contract is valid, binding and effective until it is rescinded. The proper way
Equatorial and Carmelo is characterized by bad faith, since it was
by which it can be assailed is by an action for rescission based on any of
knowingly entered into in violation of the rights of and to the
the causes expressly specified by law.5
prejudice of Mayfair. In fact, as correctly observed by the Court of
Appeals, Equatorial admitted that its lawyers had studied the
contract of lease prior to the sale. Equatorial's knowledge of the The remedy of rescission in the case of rescissible contracts under Article
stipulations therein should have cautioned it to look further into the 1381 is not to be confused with the remedy of rescission, or more properly
agreement to determine if it involved stipulations that would termed "resolution," of reciprocal obligations under Article 1191 of the Civil
prejudice its own interests. Code. While both remedies presuppose the existence of a juridical relation
that, once rescinded, would require mutual restitution, it is basically,
however, in this aspect alone when the two concepts coincide.
xxx xxx xxx

Resolution under Article 1191 would totally release each of the obligors
On the part of Equatorial, it cannot be a buyer in good faith
from compliance with their respective covenants. It might be worthwhile to
because it bought the property with notice and full knowledge that
note that in some cases, notably Ocampo vs. Court of
Mayfair had a right to or interest in the property superior to its own.
Appeals,6 and Velarde vs. Court of Appeals,7 where the Court referred to
Carmelo and Equatorial took unconscientious advantage of Mayfair
rescission as being likened to contracts which are deemed "void at
(264 SCRA 506, 507-511).
inception," the focal issue is the breach of the obligation involved that
would allow resolution pursuant to Article 1191 of the Civil Code. The
We ruled that because of bad faith, neither may Carmelo and obvious reason is that when parties are reciprocally bound, the refusal or
Equatorial avail themselves of considerations based on equity failure of one of them to comply with his part of the bargain should allow
which might warrant the grant of interests and, in this case, the other party to resolve their juridical relationship rather than to leave the
unconscionably increased rentals. matter in a state of continuing uncertainty. The result of the resolution,
when decreed, renders the reciprocal obligations inoperative "at
Verily, if Mayfair were a natural person it could very well have inception."
asked for moral damages instead of facing a lengthy and
expensive suit to pay rentals many times higher than those Upon the other hand, the rescission of a rescissible contract under Article
stipulated in the contract of lease. Under the Civil Code, Mayfair is 1381, taken in conjunction with Article 1385, is a relief which the law
the victim in a breach of contract where Carmelo and Equatorial grants for the protection of a contracting party or a third person from injury
acted fraudulently and in bad faith. and damage that the contract may cause, or to protect some incompatible
and preferent right created by the contract. 8Rescissible contracts are not
Considering the judgments in our 3 earlier decisions, Mayfair is void ab initio, and the principle, "quod nullum est nullum producit
under no obligation to pay any interests, whether based on law or effectum," in void and inexistent contracts is inapplicable. Until set aside in
equity, to Carmelo or Equatorial. Mayfair is the wronged entity, the an appropriate action rescissible contracts are respected as being legally
one which has suffered injury since 1978 or for the 23 years it was valid, binding and in force. It would be wrong to say that rescissible
deprived of the property. contracts produce no legal effects whatsoever and that no acquisition or
loss of rights could meanwhile occur and be attributed to the terminated
contract. The effects of the rescission, prospective in nature, can come
Equatorial has received rentals and other benefits from the use of about only upon its proper declaration as such.
the property during these 23 years, rents and benefits which would
have accrued to Mayfair if its rights had not been violated.

Page 53 of 105
Thus when the Court9 held the contract to be "deemed rescinded" "That if the LESSOR should desire to sell the leased premises, the
in G.R. No. 106063, the Court did not mean a "declaration of nullity" LESSEE shall be given 30-days exclusive option to purchase the same.
of the questioned contract. The agreement between petitioner and
Carmelo being efficacious until rescinded, validly transferred
In the event, however, that the leased premises is sold to someone other
ownership over the property to petitioner from the time the deed of
than the LESSEE, the LESSOR is bound and obligated, as it hereby binds
sale was executed in a public instrument on 30 July 1978 up to the
and obligates itself, to stipulate in the Deed of Sale thereof that the
time that the decision in G.R. No. 106063 became final on 17
purchaser shall recognize this lease and be bound by all the terms and
March 1997. It was only from the latter date that the contract had
conditions thereof.
ceased to be efficacious. The fact that the subject property was in
the hands of a lessee, or for that matter of any possessor with a
juridical title derived from an owner, would not preclude a On July 31, 1978, Carmelo entered into a Deed of Absolute Sale whereby
conferment of ownership upon the purchaser nor be an impediment it sold the subject land and two-storey building to petitioner Equatorial
from the transfer of ownership from the seller to the buyer. Realty Development, Inc. (Equatorial) for P11,300,000.00. Having
Petitioner, being the owner of the property (and none other) until acquired from Carmelo ownership of the subject property, Equatorial
the judicial rescission of the sale in its favor, was entitled to all received rents from Mayfair for sometime.
incidents of ownership inclusive of, among its other elements, the
right to the fruits of the property. Rentals or rental value over that Subsequently, Mayfair, claiming it had been denied its right to purchase
disputed property from 30 July 1978 up to 17 March 1997 should the leased property in accordance with the provisions of its lease contracts
then properly pertain to petitioner. In this respect, the much abused with Carmelo, filed with the Regional Trial Court, Branch 7, Manila, a suit
terms of "good faith" or "bad faith " play no role; ownership, unlike for specific performance and annulment of sale with prayer to enforce its
other concepts, is never described as being either in good faith or "exclusive option to purchase" the property. The dispute between Mayfair,
in bad faith. on the one hand, and Carmelo and Equatorial on the other, reached this
Court in G.R. No. 106063, "Equatorial Realty Development, Inc. &
With all due respect, I am thus unable to join in this instance my Carmelo & Bauermann, Inc. vs. Mayfair Theater, Inc."1 On November 21,
colleagues in the majority. 1996, this Court rendered a Decision, the dispositive portion of which
reads:
Kapunan and De Leon, Jr., JJ., concur.
"WHEREFORE, the petition for review of the decision of the Court of
Appeals, dated June 23, 1992, in CA-G.R. CV No. 32918, is HEREBY
DENIED. The Deed of Absolute Sale between petitioners Equatorial
Realty-Development, Inc. and Carmelo & Bauermann, Inc. is hereby
Dissenting Opinion deemed rescinded; Carmelo & Bauermann is ordered to return to
petitioner Equatorial Realty Development the purchase price. The latter is
SANDOVAL-GUTIERREZ, J., dissenting: directed to execute the deeds and documents necessary to return
ownership to Carmelo & Bauermann of the disputed lots. Carmelo &
Bauermann is ordered to allow Mayfair Theater, Inc. to buy the aforesaid
"Stare decisis et non quieta movere — follow past precedents and lots for P11,300,000.00.
do not disturb what has been settled. Adherence to this principle is
imperative if this Court is to maintain stability in jurisprudence.
SO ORDERED."

I regret that I am unable to agree with the majority opinion.


The Decision of this Court in G.R. No. 106063 became final and executory
on March 17, 1997.
The principal issue in this case is whether a rescissible contract is
void and ineffective from its inception. This issue is not a novel one.
On April 25, 1997, Mayfair filed with the trial court a motion for execution
Neither is it difficult to resolve as it involves the application of
which was granted.
elementary principles in the law on contracts, specifically on
rescissible contracts, as distinguished from void or inexistent
contracts. However, Carmelo could no longer be located. Thus, Mayfair deposited
with the trial court its payment to Carmelo in the sum of P11,300,000.00
less P847,000.00 as withholding tax.
The facts are simple.

The Clerk of Court of the Manila Regional Trial Court, as sheriff, executed
On June 1, 1967, respondent Mayfair Theater, Inc. (Mayfair) leased
a deed of re-conveyance in favor of Carmelo and a deed of sale in favor of
portions of the ground, mezzanine and second floors of a two
Mayfair. On the basis of these documents, the Registry of Deeds of Manila
storey commercial building located along C.M. Recto Avenue
cancelled Equatorial's titles and issued new Certificates of Title2 in the
Manila. The building together with the land on which it was
name of Mayfair.
constructed was then owned by Carmelo & Bauermann, Inc.
(Carmelo). Respondent used these premises as "Maxim Theater."
The lease was for a period of twenty (20) years. In G.R. No. 136221,3 "Equatorial Realty Development, Inc. vs. Mayfair
Theater, Inc.," this Court instructed the trial court to execute strictly this
Court's Decision in G.R. No. 106063.
On March 31, 1969, Mayfair leased from Carmelo another portion
of the second floor, as well as two (2) store spaces on the ground
and mezzanine floors of the same building. Respondent Mayfair On September 18, 1997, or after the execution of this Court's Decision in
used the premises as a movie theater known as "Miramar Theater." G.R. No. 106063, Equatorial filed with the Regional Trial Court of Manila,
Branch 8, an action for collection of a sum of money against Mayfair,
Both leases contained the following identical provisions: docketed as Civil Case No. 97-85141. Equatorial prayed that the trial court
render judgment ordering Mayfair to pay:

Page 54 of 105
(1) the sum of P11,548,941.76 plus legal interest, representing the First, I must take exception to the majority's statement that this Court
total amount of unpaid monthly rentals/reasonable compensation found in G.R. No. 10606310 that, "no right of ownership was transferred
from June 1, 1987 (Maxim Theater) and March 31,1989 (Miramar from Carmelo to Equatorial in view of a patent failure to deliver the
Theater) to July 31, 1997; property to the buyer."11

(2) the sums of P849,567.12 and P458,853.44 a month, plus legal A perusal of the Decision dated November 21, 1996 would reveal
interest, as rental/reasonable compensation for the use and otherwise.
occupation of the subject property from August 1, 1997 to May 31,
1998 (Maxim Theater) and March 31, 1998 (Miramar Theater);
To say that this Court found no transfer of ownership between Equatorial
and Carmelo is very inaccurate. For one, this Court, in disposing of G.R.
(3) the sum of P500,000.00 as and for attorney's fees, plus other No. 106063, explicitly ordered Equatorial to "execute the deeds and
expenses of litigation; and documents necessary to return ownership to Carmelo & Bauermann of the
disputed lots."12 I suppose this Court would not have made such an order
if it did not recognize the transfer of ownership from Carmelo to Equatorial
(4) the costs of the suit.4
under the contract of sale. For why would the Court order Equatorial to
execute the deeds and documents necessary to return ownershipto
On October 14, 1997, before filing its answer, Mayfair filed a Carmelo if, all along, it believed that ownership remained with Carmelo?
"Motion to Dismiss" Civil Case No. 97-85141 on the following
grounds:
Furthermore, is Court explicitly stated in the Decision that Equatorial
received rentals from Mayfair during the pendency of the case. Let me
"(A) quote the pertinent portion of the Decision, thus:

PLAINTIFF IS GUILTY OF FORUM SHOPPING. ". . . Equatorial, on the other hand, has received rents and otherwise
profited from the use of the property turned over to it by Carmelo. In fact,
(B) during all the years that this controversy was being litigated, Mayfair paid
rentals regularly to the buyer (Equatorial) who had an inferior right to
purchase the property. Mayfair is under no obligation to pay any interests
PLAINTIFF'S CAUSE OF ACTION, IF ANY, IS BARRED BY arising from this judgment to either Carmelo or Equatorial."13
PRIOR JUDGMENT."5

Justice Teodoro R. Padilla, in his Separate Opinion, made the following


On March 11, 1998, the court a quo issued an order dismissing similar observations:
Civil Case No. 97-85141 on the ground that since this Court, in G.R.
No. 106063, rescinded the Deed of Absolute Sale between
Carmelo and Equatorial, the contract is void at its "The equities of the case support the foregoing legal disposition. During
inception.6 Correspondingly, Equatorial is not the owner of the the intervening years between 1 August 1978 and this date, Equatorial
subject property and, therefore, does not have any right to demand (after acquiring the C.M. Recto property for the price of P11,300,000.00)
from Mayfair payment of rentals or reasonable compensation for its had been leasing the property and deriving rental income therefrom. In
use and occupation of the premises. fact, one of the lessees in the property was Mayfair. Carmelo had, in turn,
been using the proceeds of the sale, investment-wise and/or
operation-wise in its own business."14
Equatorial filed a motion for reconsideration but was denied.

Obviously, this Court acknowledged the delivery of the property from


Hence, the present petition. Carmelo to Equatorial. As aptly described by Justice Panganiban himself,
the sale between Carmelo and Equatorial had not only been "perfected"
At this stage, I beg to disagree with the ruling of the majority that (1) but also "consummated".15
Equatorial did not acquire ownership of the disputed property from
Carmelo because of lack of delivery; and that (2) Equatorial is not That actual possession of the property was turned over by Carmelo to
entitled to the payment of rentals because of its bad faith. Equatorial is clear from the fact that the latter received rents from Mayfair.
Significantly, receiving rentals is an exercise of actual
Firmly incorporated in our Law on Sales is the principle that possession. Possession, as defined in the Civil Code, is the holding of a
ownership is transferred to the vendee by means of delivery, actual thing or the enjoyment of a right.16 It may either be by material occupation
or constructive.7 There is actual delivery when the thing sold is or by merely subjecting the thing or right to the action of our
placed in the control and possession of the vendee. 8 Upon the will.17 Possession may therefore be exercised through one's self or
other hand, there is constructive delivery when the delivery of the through another.18 It is not necessary that the person in possession should
thing sold is represented by other signs or acts indicative thereof. himself be the occupant of the property, the occupancy can be held by
Article 1498 of the Civil Code is in point. It provides that "When the another in the name of the one who claims possession. In the case at
sale is made through a public instrument, the execution thereof bench, Equatorial exercised possession over the disputed property
shall be equivalent to the delivery of the thing which is the object of through Mayfair. When Mayfair paid its monthly rentals to Equatorial, the
the contract, if from the deed the contrary does not appear or said lessee recognized the superior right of Equatorial to the possession of
cannot clearly be inferred."9 the property. And even if Mayfair did not recognize Equatorial's superior
right over the disputed property, the fact remains that Equatorial was then
enjoying the fruits of its possession.
Contrary to the majority opinion, the facts and circumstances of the
instant case clearly indicate that there was indeed actual and
constructive delivery of the disputed property from Carmelo to At this juncture, it will be of aid to lay down the degrees of possession.
Equatorial. The first degree is the mere holding, or possession without title
whatsoever, and in violation of the right of the owner. Here, both the
possessor and the public know that the possession is wrongful. An
Let me substantiate my claim.
Page 55 of 105
example of this is the possession of a thief or a usurper of land. leased.24 In this case, the fact remains that Mayfair occupied the leased
The second is possession with juridical title, but not that of property. It derived benefit from such occupation, thus, it should pay the
ownership. This is possession peaceably acquired, such that of a corresponding rentals due. Nemo cum alterius detrimento locupletari
tenant, depositary, or pledge. The third is possession with a just potest. No one shall enrich himself at the expense of another. 25
title, or a title sufficient to transfer ownership, but not from the true
owner. An example is the possession of a vendee of a piece of land
Neither should the presence of bad faith prevent the award of rent to
from one who pretends to be the owner but is in fact not the owner
Equatorial. While Equatorial committed bad faith in entering into the
thereof. And the fourth is possession with a just title from the true
contract with Camelo, it has been equitably punished when this Court
owner. This is possession that springs from
rendered the contract rescissible. That such bad faith was the very reason
ownership.19 Undoubtedly, Mayfair's possession is by virtue of why the contract was declared rescissible is evident from the Decision
juridical title under the contract of lease, while that of Equatorial is
itself.26 To utilize it again, this time, to deprive Equatorial of its entitlement
by virtue of its right of ownership under the contract of sale.
to the rent corresponding to the period during which the contract was
supposed to validly exist, would not only be unjust, it would also disturb
Second, granting arguendo that there was indeed no actual the very nature of a rescissible contract.
delivery, would Mayfair's alleged "timely objection to the sale and
continued actual possession of the property" constitute an
Let me elucidate on the matter.
"impediment" that may prevent the passing of the property from
Carmelo to Equatorial?20
Articles 1380 through 1389 of the Civil Code deal with rescissible
contracts. A rescissible contract is one that is validly entered into, but is
I believe the answer is no.
subsequently terminated or rescinded for causes provided for by law.

The fact that Mayfair has remained in "actual possession of the


This is the clear implication of Article 1380 of the same Code which
property," after the perfection of the contract of sale between
provides:
Carmelo and Equatorial up to the finality of this Court's Decision in
G.R. No. 106063 (and even up to the present), could not prevent
the consummation of such contract. As I have previously intimated, "Art. 1380. Contracts validly agreed upon may be rescinded in the cases
Mayfair's possession is not under a claim of ownership. It cannot in established by law."
any way clash with the ownership accruing to Equatorial by virtue
of the sale. The principle has always been that the one who Rescission has been defined as follows:
possesses as a mere holder acknowledges in another a superior
right or right of ownership. A tenant possesses the thing leased as
a mere holder, so does the usufructuary of the thing in usufruct; "Rescission is a remedy granted by law to the contracting parties and even
and the borrower of the thing loaned in commodatum. None of to third persons, to secure the reparation of damages caused to them by a
these holders asserts a claim of ownership in himself over the thing. contract, even if this should be valid, by means of the restoration of things
Similarly, Mayfair does not claim ownership, but only possession as to their condition at the moment prior to the celebration of said contract. It
a lessee with the prior right to purchase the property. is a relief for the protection of one of the contracting parties and third
persons from all injury and damage the contract may cause, or to protect
some incompatible and preferential right created by the contract. It implies
In G.R. No. 106063, Mayfair's main concern in its action for specific a contract which, even if initially valid, produces a lesion or pecuniary
performance was the recognition of its right of first refusal. Hence, damage to someone. It sets aside the act or contract for justifiable reasons
the most that Mayfair could secure from the institution of its suit of equity."27
was to be allowed to exercise its right to buy the property upon
rescission of the contract of sale. Not until Mayfair actually
exercised what it was allowed to do by this Court in G.R. No. Necessarily, therefore, a rescissible contract remains valid and binding
106063, specifically to buy the disputed property for upon the parties thereto until the same is rescinded in an appropriate
P11,300,000.00, would it have any right of ownership. How then, at judicial proceeding.
that early stage, could Mayfair's action be an impediment in the
consummation of the contract between Carmelo and Equatorial? On the other hand, a void contract, which is treated in Articles 1409
through 1422 of the Civil Code, is inexistent and produces no legal effect
Pertinently, it does not always follow that, because a transaction is whatsoever. The contracting parties are not bound thereby and such
prohibited or illegal, title, as between the parties to the transaction, contract is not subject to ratification.
does not pass from the seller, donor, or transferor to the vendee,
donee or transferee.21 In dismissing petitioner Equatorial's complaint in Civil Case No. 97-85141,
the trial court was apparently of the impression that a rescissible contract
And third, conformably to the foregoing disquisition, I maintain that has the same effect as a void contract, thus:
Equatorial has the right to be paid whatever monthly rentals during
the period that the contract of sale was in existence minus the rents "However, the words in the dispositive portion of the Supreme Court "is
already paid. In Guzman v. Court of Appeals,22 this Court decreed hereby deemed rescinded" does not allow any other meaning. The said
that upon the purchase of the leased property and proper notice by Deed of Absolute Sale is void at its inception.
the vendee, the lessee must pay the agreed monthly rentals to the
new owner since, by virtue of the sale the vendee steps into the
xxx xxx xxx
shoes of the original lessor to whom the lessee bound himself to
pay. His belief that the subject property should have been sold to
him does not justify the unilateral withholding of rental payments The subject Deed of Absolute Sale having been rescinded by the
due to the new owner of the property.23 It must be stressed that Supreme Court, Equatorial is not the owner and does not have any right to
under Article 1658 of the Civil Code, there are only two instances demand back rentals from subject property. The law states that only an
wherein the lessee may suspend payment of rent, namely: in case owner can enjoy the fruits of a certain property or jus utendi which
the lessor fails to make the necessary repairs or to maintain the includes the right to receive from subject property what it produces, . . ."
lessee in peaceful and adequate enjoyment of the property
Page 56 of 105
The trial court erred. In G.R. No. 106063 (involving Mayfair's suit for 2. Not only a possessor, but also an owner, can be in bad faith.
specific performance), this Court clearly characterized the Deed of
Absolute Sale between Carmelo and petitioner Equatorial as a
I cannot subscribe to such doctrines.
rescissible contract. We stated therein that:

WHEREFORE, I vote to GRANT the petition.


"Since Equatorial is a buys in bad faith. this finding renders the sale
to it of the property in question rescissible. We agree with
respondent Appellate Court that the records bear out the fact that Bellosillo and Kapunan, JJ., concur.
Equatorial was aware of the lease contracts because its lawyers
had, prior to the sale, studied the said contracts. As such,
Equatorial cannot tenably claim to be a purchaser in good faith, and
therefore, rescission lies."

This Court did not declare the Deed of Absolute Sale between G.R. No. L-6584 October 16, 1911
Carmelo and Equatorial void but merely rescissible. Consequently,
the contract was, at inception, valid and naturally, it validly
INCHAUSTI AND CO., plaintiff-appellant,
transferred ownership of the subject property to Equatorial. It bears
vs.
emphasis that Equatorial was not automatically divested of its
ELLIS CROMWELL, Collector of Internal Revenue, defendant-appellee.
ownership. Rather, as clearly directed in the dispositive portion of
our Decision, Carmelo should return the purchase price to
Equatorial which, in turn, must execute such deeds and documents MORELAND, J.:
necessary to enable Carmelo to reacquire its ownership of the
property. This is an appeal by the plaintiff from a judgment of the Court of First
Instance of the city of Manila, the Hon. Simplicio del Rosario presiding,
As mentioned earlier, Mayfair deposited with the Regional Trial dismissing the complaint upon the merits after trial, without costs.
Court, Branch 7, Manila, the purchase price of P10,452,000.00
(P11,300,000.00 less P847,000.00 as withholding tax). In turn, the The facts presented to this court are agreed upon by both parties,
Clerk of Court executed the deed of sale of the subject property in consisting, in so far as they are material to a decision of the case, in the
favor of Mayfair. following:

In the meantime, Mayfair has continued to occupy and use the III. That the plaintiff firm for many years past has been and now is
premises, the reason why Equatorial filed against it Civil Case No. engaged in the business of buying and selling at wholesale hemp, both for
97-85141 for sum of money representing rentals and reasonable its own account and on commission.
compensation.

IV. That it is customary to sell hemp in bales which are made by


At this point, I must reiterate that Equatorial purchased the subject compressing the loose fiber by means of presses, covering two sides of
property from Carmelo and became its owner on July 31, 1978. the bale with matting, and fastening it by means of strips of rattan; that the
While the contract of sale was "deemed rescinded" by this Court in operation of bailing hemp is designated among merchants by the word
G.R. No. 106063, nevertheless the sale had remained valid and "prensaje."
binding between the contracting parties until March 17, 1997 when
the Decision in G.R. No. 106063 became final. Consequently,
being the owner, Equatorial has the right to demand from Mayfair V. That in all sales of hemp by the plaintiff firm, whether for its own
payment of rentals corresponding to the period from July 31, 1978 account or on commission for others, the price is quoted to the buyer at so
up to March 17, 1997. much per picul, no mention being made of bailing; but with the tacit
understanding, unless otherwise expressly agreed, that the hemp will be
delivered in bales and that, according to the custom prevailing among
Records show that the rentals and reasonable compensation which hemp merchants and dealers in the Philippine Islands, a charge, the
Equatorial demands from Mayfair are those which accrued from the amount of which depends upon the then prevailing rate, is to be made
year 1987 to 1998. As earlier stated, prior thereto, Mayfair had against the buyer under the denomination of "prensaje." That this charge
been paying the rents to Equatorial. is made in the same manner in all cases, even when the operation of
bailing was performed by the plaintiff or by its principal long before the
In line with this Court's finding that Equatorial was the owner of the contract of sale was made. Two specimens of the ordinary form of account
disputed property from July 31, 1978 to March 17, 1997, it is, used in these operations are hereunto appended, marked Exhibits A and
therefore, entitled to the payment of rentals accruing to such B, respectively, and made a part hereof.
period.
VI. That the amount of the charge made against hemp buyers by the
Consequently, whether or not Mayfair paid Equatorial the rentals plaintiff firm and other sellers of hemp under the denomination of
specified in the lease contracts from June 1, 1987 to March 17, "prensaje" during the period involved in this litigation was P1.75 per bale;
1997 is for the trial court to resolve. that the average cost of the rattan and matting used on each bale of hemp
is fifteen (15) centavos and that the average total cost of bailing hemp is
one (1) peso per bale.
One last word. In effect, the majority have enunciated that:

VII. That insurance companies in the Philippine Islands, in estimating the


1. A lessor, in a contract of sale, cannot transfer ownership of his
insurable value of hemp always add to the quoted price of same the
property, occupied by the lessee, to the buyer because there can
charge made by the seller under the denomination of "prensaje."
be no delivery of such property to the latter; and

Page 57 of 105
VII. That the average weight of a bale of hemp is two (2) piculs collection thereof was lawfully and properly made and that therefore the
(126.5 kilograms). plaintiff is not entitled to recover back said sum or any part thereof; and
that the defendant should have judgment against plaintiff for his costs.
IX. That between the first day of January, 1905, and the 31st day of
March, 1910, the plaintiff firm, in accordance with the custom Under these facts we are of the opinion that the judgment of the court
mentioned in paragraph V hereof, collected and received, under below was right. It is one of the stipulations in the statement of facts that it
the denomination of "prensaje," from purchasers of hemp sold by is customary to sell hemp in bales, and that the price quoted in the market
the said firm for its own account, in addition to the price expressly for hemp per picul is the price for the hemp baled. The fact is that among
agreed upon for the said hemp, sums aggregating P380,124.35; large dealers like the plaintiff in this case it is practically impossible to
and between the 1st day of October, 1908, and the 1st day of handle hemp without its being baled, and it is admitted by the statement of
March, 1910, collected for the account of the owners of hemp sold facts, as well as demonstrated by the documentary proof introduced in the
by the plaintiff firm in Manila on commission, and under the said case, that if the plaintiff sold a quality of hemp it would be the under
denomination of "prensaje," in addition to the price expressly standing, without words, that such hemp would be delivered in bales, and
agreed upon the said hemp, sums aggregating P31,080. that the purchase price would include the cost and expense of baling. In
other words, it is the fact as stipulated, as well as it would be the fact of
necessity, that in all dealings in hemp in the general market the selling
X. That the plaintiff firm in estimating the amount due it as
price consists of the value of the hemp loose plus the cost and expense of
commissions on sales of hemp made by it for its principals has
putting it into marketable form. In the sales made by the plaintiff, which are
always based the said amount on the total sum collected from the
the basis of the controversy here, there were n services performed by him
purchasers of the hemp, including the charge made in each case
for his vendee. There was agreement that services should be performed.
under the denomination of "prensaje."
Indeed, at the time of such sales it was not known by the vendee whether
the hemp was then actually baled or not. All that he knew and all that
XI. That the plaintiff has always paid to the defendant or to his concerned him was that the hemp should be delivered to him baled. He
predecessor in the office of the Collector of Internal Revenue the did not ask the plaintiff to perform services for him, nor did the plaintiff
tax collectible under the provisions of section 139 of Act No. 1189 agree to do so. The contract was single and consisted solely in the sale
upon the selling price expressly agreed upon for all hemp sold by and purchase of hemp. The purchaser contracted for nothing else and the
the plaintiff firm both for its own account and on commission, but vendor agreed to deliver nothing else.
has not, until compelled to do so as hereinafter stated, paid the
said tax upon sums received from the purchaser of such hemp
The word "price" signifies the sum stipulated as the equivalent of the thing
under the denomination of "prensaje."
sold and also every incident taken into consideration for the fixing of the
price, put to the debit of the vendee and agreed to by him. It is quite
XII. That of the 29th day of April, 1910, the defendant, acting in his possible that the plaintiff, in this case in connection with the hemp which
official capacity as Collector of Internal Revenue of the Philippine he sold, had himself already paid the additional expense of baling as a
Islands, made demand in writing upon the plaintiff firm for the part of the purchase price which he paid and that he himself had received
payment within the period of five (5) days of the sum of P1,370.68 the hemp baled from his vendor. It is quite possible also that such vendor
as a tax of one third of one per cent on the sums of money of the plaintiff may have received the same hemp from his vendor in baled
mentioned in Paragraph IX hereof, and which the said defendant form, that he paid the additions cost of baling as a part of the purchase
claimed to be entitled to receive, under the provisions of the said price which he paid. In such case the plaintiff performed no service
section 139 of Act No. 1189, upon the said sums of money so whatever for his vendee, nor did the plaintiff's vendor perform any service
collected from purchasers of hemp under the denomination of for him.
"prensaje."
The distinction between a contract of sale and one for work, labor, and
XIII. That on the 4th day of May, 1910, the plaintiff firm paid to the materials is tested by the inquiry whether the thing transferred is one no in
defendant under protest the said sum of P1,370.69, and on the existence and which never would have existed but for the order of the
same date appealed to the defendant as Collector of Internal party desiring to acquire it, or a thing which would have existed and been
Revenue, against the ruling by which the plaintiff firm was required the subject of sale to some other person, even if the order had not been
to make said payment, but defendant overruled said protest and given. (Groves vs. Buck, 3 Maule & S., 178; Towers vs. Osborne, 1
adversely decided said appeal, and refused and still refuses to Strange, 506; Benjamin on Sales, 90.) It is clear that in the case at bar the
return to plaintiff the said sum of P1,370.68 or any part hemp was in existence in baled form before the agreements of sale were
thereof.1awphil.net made, or, at least, would have been in existence even if none of the
individual sales here in question had been consummated. It would have
XIV. Upon the facts above set forth t is contended by the plaintiff been baled, nevertheless, for sale to someone else, since, according to
that the tax of P1,370.68 assessed by the defendant upon the the agreed statement of facts, it is customary to sell hemp in bales. When
aggregate sum of said charges made against said purchasers of a person stipulates for the future sale of articles which he is habitually
hemp by the plaintiff during the period in question, under the making, and which at the time are not made or finished, it is essentially a
denomination of "prensaje" as aforesaid, namely, P411,204.35, is contract of sale and not a contract for labor. It is otherwise when the article
illegal upon the ground that the said charge does not constitute a is made pursuant to agreement. (Lamb vs. Crafts, 12 Met., 353;
part of the selling price of the hemp, but is a charge made for the Smith vs. N.Y.C. Ry. Co., 4 Keyes, 180; Benjamin on Sales, 98.) Where
service of baling the hemp, and that the plaintiff firm is therefore labor is employed on the materials of the seller he can not maintain an
entitled to recover of the defendant the said sum of P1,370.68 paid action for work and labor. (Atkinson vs. Bell, 8 Barn. & C., 277;
to him under protest, together with all interest thereon at the legal Lee vs. Griffin, 30 L.J.N. S.Q.B., 252; Prescott vs. Locke, 51 N.H., 94.) If
rate since payment, and the costs of this action. the article ordered by the purchaser is exactly such as the plaintiff makes
and keeps on hand for sale to anyone, and no change or modification of it
is made at the defendant's request, it is a contract of sale, even though it
Upon the facts above stated it is the contention of the defendant may be entirely made after, and in consequence of, the defendant's order
that the said charge made under the denomination of "prensaje" is for it. (Garbutt s. Watson, 5 Barn. & Ald., 613; Gardner vs. Joy, 9 Met., 177;
in truth and in fact a part of the gross value of the hemp sold and of Lamb vs. Crafts, 12 Met., 353; Waterman vs. Meigs, 4 Cush., 497.,
its actual selling price, and that therefore the tax imposed by Clark vs. Nichols, 107 Mass., 547; May vs. Ward, 134 Mass., 127;
section 139 of Act No. 1189 lawfully accrued on said sums, that the Abbott vs.Gilchrist, 38 Me., 260; Crocket vs. Scribner, 64 Me., 105;
Page 58 of 105
Pitkin vs. Noyes, 48 N. H., 294; Prescott vs. Locke, 51 N. H., 94; that sum which the purchaser pays to the vendee, is the true selling price
Ellison vs. Brigham, 38 Vt., 64.) It has been held in Massachusetts of the hemp, and every item which enters into such price is a part of such
that a contract to make is a contract of sale if the article ordered is selling price. By force of the custom prevailing among hemp dealers in the
already substantially in existence at the time of the order and Philippine Islands, a purchaser of hemp in the market, unless he expressly
merely requires some alteration, modification, or adoption to the stipulates that it shall be delivered to him in loose form, obligates himself
buyer's wishes or purposes. (Mixer vs. Howarth, 21 Pick., 205.) It is to purchase and pay for baled hemp. Wheher or not such agreement is
also held in that state that a contract for the sale of an article which express or implied, whether it is actual or tacit, it has the same force. After
the vendor in the ordinary course of his business manufactures or such an agreement has once been made by the purchaser, he has no right
procures for the general market, whether the same is on hand at to insists thereafter that the seller shall furnish him with unbaled hemp. It is
the time or not, is a contract for the sale of goods to which the undoubted that the vendees, in the sales referred to in the case at bar,
statute of frauds applies. But if the goods are to be manufactured would have no right, after having made their contracts, to insists on the
especially for the purchaser and upon his special order, and not for delivery of loose hemp with the purpose in view themselves to perform the
the general market, the case is not within the statute. baling and thus save 75 centavos per bale. It is unquestioned that the
(Goddard vs. Binney, 115 Mass., 450.) seller, the plaintiff, would have stood upon his original contract of sale, that
is, the obligation to deliver baled hemp, and would have forced his
vendees to accept baled hemp, he himself retaining among his own profits
It is clear to our minds that in the case at bar the baling was
those which accrued from the proceed of baling.
performed for the general market and was not something done by
plaintiff which was a result of any peculiar wording of the particular
contract between him and his vendee. It is undoubted that the We are of the opinion that the judgment appealed from must be affirmed,
plaintiff prepared his hemp for the general market. This would be without special finding as to costs, and it is so ordered.
necessary. One whose exposes goods for sale in the market must
have them in marketable form. The hemp in question would not
Torres, Mapa, Johnson and Carson, JJ., concur.
have been in that condition if it had not been baled. the baling,
therefore, was nothing peculiar to the contract between the plaintiff
and his vendee. It was precisely the same contract that was made
by every other seller of hemp, engaged as was the plaintiff, and
resulted simply in the transfer of title to goods already prepared for
the general market. The method of bookkeeping and form of the
account rendered is not controlling as to the nature of the contract G.R. No. L-8506 August 31, 1956
made. It is conceded in the case tat a separate entry and charge
would have been made for the baling even if the plaintiff had not
CELESTINO CO & COMPANY, petitioner,
been the one who baled the hemp but, instead, had received it
vs.
already baled from his vendor. This indicates of necessity tat the
COLLECTOR OF INTERNAL REVENUE, respondent.
mere fact of entering a separate item for the baling of the hemp is
formal rather than essential and in no sense indicates in this case
the real transaction between the parties. It is undisputable that, if Office of the Solicitor General Ambrosio Padilla, Fisrt Assistant Solicitor
the plaintiff had brought the hemp in question already baled, and General Guillermo E. Torres and Solicitor Federico V. Sian for respondent.
that was the hemp the sale which formed the subject of this
controversy, then the plaintiff would have performed no service for BENGZON, J.:
his vendee and could not, therefore, lawfully charge for the
rendition of such service. It is, nevertheless, admitted that in spite
of that fact he would still have made the double entry in his invoice Appeal from a decision of the Court of Tax Appeals.
of sale to such vendee. This demonstrates the nature of the
transaction and discloses, as we have already said, that the entry Celestino Co & Company is a duly registered general copartnership doing
of a separate charge for baling does not accurately describe the business under the trade name of "Oriental Sash Factory". From 1946 to
transaction between the parties. 1951 it paid percentage taxes of 7 per cent on the gross receipts of its
sash, door and window factory, in accordance with section one hundred
Section 139 [Act No. 1189] of the Internal Revenue Law provides eighty-six of the National Revenue Code imposing taxes on sale of
that: manufactured articles. However in 1952 it began to claim liability only to
the contractor's 3 per cent tax (instead of 7 per cent) under section 191 of
the same Code; and having failed to convince the Bureau of Internal
There shall be paid by each merchant and manufacturer a tax at Revenue, it brought the matter to the Court of Tax Appeals, where it also
the rate of one-third of one per centum on the gross value in money failed. Said the Court:
of all goods, wares and merchandise sold, bartered or exchanged
in the Philippine Islands, and that this tax shall be assessed on the
actual selling price at which every such merchant or manufacturer To support his contention that his client is an ordinary contractor . . .
disposes of his commodities. counsel presented . . . duplicate copies of letters, sketches of doors and
windows and price quotations supposedly sent by the manager of the
Oriental Sash Factory to four customers who allegedly made special
The operation of baling undoubtedly augments the value of the orders to doors and window from the said factory. The conclusion that
goods. We agree that there can be no question that, if the value of counsel would like us to deduce from these few exhibits is that the Oriental
the hemp were not augmented to the amount of P1.75 per bale by Sash Factory does not manufacture ready-made doors, sash and windows
said operation, the purchaser would not pay that sum. If one buys a for the public but only upon special order of its select customers. . . . I
bale of hemp at a stipulated price of P20, well knowing that there is cannot believe that petitioner company would take, as in fact it has taken,
an agreement on his part, express or implied, to pay an additional all the trouble and expense of registering a special trade name for its sash
amount of P1.75 for that bale, he considers the bale of hemp worth business and then orders company stationery carrying the bold
P21. 75. It is agreed, as we have before stated, that hemp is sold in print "Oriental Sash Factory (Celestino Co & Company, Prop.) 926 Raon
bales. Therefore, baling is performed before the sale. The St. Quiapo, Manila, Tel. No. 33076, Manufacturers of all kinds of doors,
purchaser of hemp owes to the seller nothing whatever by reason windows, sashes, furniture, etc. used season-dried and kiln-dried lumber,
of their contract except the value of the hemp delivered. That value, of the best quality workmanships" solely for the purpose of supplying the
Page 59 of 105
needs for doors, windows and sash of its special and limited special customers and upon their special orders and in accordance with
customers. One ill note that petitioner has chosen for its tradename the desired specifications of the persons ordering the same and not for the
and has offered itself to the public as a "Factory", which means it is general market: since the doors ordered by Don Toribio Teodoro & Sons,
out to do business, in its chosen lines on a big scale. As a general Inc., for instance, are not in existence and which never would have existed
rule, sash factories receive orders for doors and windows of special but for the order of the party desiring it; and since petitioner's contractual
design only in particular cases but the bulk of their sales is derived relation with his customers is that of a contract for a piece of work or since
from a ready-made doors and windows of standard sizes for the petitioner is engaged in the sale of services, it follows that the petitioner
average home. Moreover, as shown from the investigation of should be taxed under section 191 of the Tax Code and NOT under
petitioner's book of accounts, during the period from January 1, section 185 of the same Code." (Appellant's brief, p. 11-12).
1952 to September 30, 1952, it sold sash, doors and windows
worth P188,754.69. I find it difficult to believe that this amount
But the argument rests on a false foundation. Any builder or homeowner,
which runs to six figures was derived by petitioner entirely from its
with sufficient money, may order windows or doors of the kind
few customers who made special orders for these items.
manufactured by this appellant. Therefore it is not true that it serves
special customers only or confines its services to them alone. And anyone
Even if we were to believe petitioner's claim that it does not who sees, and likes, the doors ordered by Don Toribio Teodoro & Sons Inc.
manufacture ready-made sash, doors and windows for the public may purchase from appellant doors of the same kind, provided he pays
and that it makes these articles only special order of its customers, the price. Surely, the appellant will not refuse, for it can easily duplicate or
that does not make it a contractor within the purview of section 191 even mass-produce the same doors-it is mechanically equipped to do so.
of the national Internal Revenue Code. there are no less than fifty
occupations enumerated in the aforesaid section of the national
That the doors and windows must meet desired specifications is neither
Internal Revenue Code subject to percentage tax and after reading here nor there. If these specifications do not happen to be of the kind
carefully each and every one of them, we cannot find under which
habitually manufactured by appellant — special forms for sash, mouldings
the business of manufacturing sash, doors and windows upon
of panels — it would not accept the order — and no sale is made. If they
special order of customers fall under the category of "road, building,
do, the transaction would be no different from a purchasers of
navigation, artesian well, water workers and other construction
manufactured goods held is stock for sale; they are bought because they
work contractors" are those who alter or repair buildings, structures,
meet the specifications desired by the purchaser.
streets, highways, sewers, street railways railroads logging roads,
electric lines or power lines, and includes any other work for the
construction, altering or repairing for which machinery driven by Nobody will say that when a sawmill cuts lumber in accordance with the
mechanical power is used. (Payton vs. City of Anadardo 64 P. 2d peculiar specifications of a customer-sizes not previously held in stock for
878, 880, 179 Okl. 68). sale to the public-it thereby becomes an employee or servant of the
customer,1 not the seller of lumber. The same consideration applies to this
sash manufacturer.
Having thus eliminated the feasibility off taxing petitioner as a
contractor under 191 of the national Internal Revenue Code, this
leaves us to decide the remaining issue whether or not petitioner The Oriental Sash Factory does nothing more than sell the goods that it
could be taxed with lesser strain and more accuracy as seller of its mass-produces or habitually makes; sash, panels, mouldings, frames,
manufactured articles under section 186 of the same code, as the cutting them to such sizes and combining them in such forms as its
respondent Collector of Internal Revenue has in fact been doing customers may desire.
the Oriental Sash Factory was established in 1946.
On the other hand, petitioner's idea of being a contractor doing
The percentage tax imposed in section 191 of our Tax Code is construction jobs is untenable. Nobody would regard the doing of two
generally a tax on the sales of services, in contradiction with the tax window panels a construction work in common parlance. 2
imposed in section 186 of the same Code which is a tax on the
original sales of articles by the manufacturer, producer or importer. Appellant invokes Article 1467 of the New Civil Code to bolster its
(Formilleza's Commentaries and Jurisprudence on the National contention that in filing orders for windows and doors according to
Internal Revenue Code, Vol. II, p. 744). The fact that the articles specifications, it did not sell, but merely contracted for particular pieces of
sold are manufactured by the seller does not exchange the contract work or "merely sold its services".
from the purview of section 186 of the National Internal Revenue
Code as a sale of articles.
Said article reads as follows:

There was a strong dissent; but upon careful consideration of the


whole matter are inclines to accept the above statement of the facts A contract for the delivery at a certain price of an article which the vendor
and the law. The important thing to remember is that Celestino Co in the ordinary course of his business manufactures or procures for the
& Company habitually makes sash, windows and doors, as it has general market, whether the same is on hand at the time or not, is a
represented in its stationery and advertisements to the public. That contract of sale, but if the goods are to be manufactured specially for the
it "manufactures" the same is practically admitted by appellant itself. customer and upon his special order, and not for the general market, it is
The fact that windows and doors are made by it only when contract for a piece of work.
customers place their orders, does not alter the nature of the
establishment, for it is obvious that it only accepted such orders as It is at once apparent that the Oriental Sash Factory did not merely sell its
called for the employment of such material-moulding, frames, services to Don Toribio Teodoro & Co. (To take one instance) because it
panels-as it ordinarily manufactured or was in a position habitually also sold the materials. The truth of the matter is that it sold materials
to manufacture. ordinarily manufactured by it — sash, panels, mouldings — to Teodoro &
Co., although in such form or combination as suited the fancy of the
Perhaps the following paragraph represents in brief the appellant's purchaser. Such new form does not divest the Oriental Sash Factory of its
position in this Court: character as manufacturer. Neither does it take the transaction out of the
category of sales under Article 1467 above quoted, because although the
Factory does not, in the ordinary course of its business, manufacture and
Since the petitioner, by clear proof of facts not disputed by the keep on stock doors of the kind sold to Teodoro, it could stock and/or
respondent, manufacturers sash, windows and doors only for
Page 60 of 105
probably had in stock the sash, mouldings and panels it used The Facts
therefor (some of them at least).
Pursuant to the contract dated September 10, 1962 between petitioner
In our opinion when this Factory accepts a job that requires the use and private respondent, the former undertook to fabricate, furnish and
of extraordinary or additional equipment, or involves services not install the air-conditioning system in the latter's building along Buendia
generally performed by it-it thereby contracts for a piece of work — Avenue, Makati in consideration of P210,000.00. Petitioner was to furnish
filing special orders within the meaning of Article 1467. The orders the materials, labor, tools and all services required in order to so fabricate
herein exhibited were not shown to be special. They were merely and install said system. The system was completed in 1963 and accepted
orders for work — nothing is shown to call them special requiring by private respondent, who paid in full the contract price.
extraordinary service of the factory.
On September 2, 1965, private respondent sold the building to the
The thought occurs to us that if, as alleged-all the work of appellant National Investment and Development Corporation (NIDC). The latter took
is only to fill orders previously made, such orders should not be possession of the building but on account of NIDC's noncompliance with
called special work, but regular work. Would a factory do business the terms and conditions of the deed of sale, private respondent was able
performing only special, extraordinary or peculiar merchandise? to secure judicial rescission thereof. The ownership of the building having
been decreed back to private respondent, he re-acquired possession
Anyway, supposing for the moment that the transactions were not sometime in 1971. It was then that he learned from some NIDC,
employees of the defects of the air-conditioning system of the building.
sales, they were neither lease of services nor contract jobs by a
contractor. But as the doors and windows had been admittedly
"manufactured" by the Oriental Sash Factory, such transactions Acting on this information, private respondent commissioned Engineer
could be, and should be taxed as "transfers" thereof under section David R. Sapico to render a technical evaluation of the system in relation
186 of the National Revenue Code. to the contract with petitioner. In his report, Sapico enumerated the defects
of the system and concluded that it was "not capable of maintaining the
desired room temperature of 76ºF - 2ºF (Exhibit C)"5 .
The appealed decision is consequently affirmed. So ordered.

On the basis of this report, private respondent filed on May 8, 1971 an


Paras, C. J., Padilla, Montemayor, Bautista Angelo, Concepcion,
action for damages against petitioner with the then Court of First Instance
Reyes, J. B. L., and Felix, JJ., concur.
of Rizal (Civil Case No. 14712). The complaint alleged that the
air-conditioning system installed by petitioner did not comply with the
agreed plans and specifications. Hence, private respondent prayed for the
amount of P210,000.00 representing the rectification cost, P100,000.00 as
G.R. No. 52267 January 24, 1996 damages and P15,000.00 as attorney's fees.

ENGINEERING & MACHINERY CORPORATION, petitioner, Petitioner moved to dismiss the complaint, alleging that the prescriptive
vs. period of six months had set in pursuant to Articles 1566 and 1567, in
COURT OF APPEALS and PONCIANO L. ALMEDA, respondent. relation to Article 1571 of the Civil Code, regarding the responsibility of a
vendor for any hidden faults or defects in the thing sold.

DECISION
Private respondent countered that the contract dated September 10, 1962
was not a contract for sale but a contract for a piece of work under Article
PANGANIBAN, J.: 1713 of the Civil Code. Thus, in accordance with Article 1144 (1) of the
same Code, the complaint was timely brought within the ten-year
Is a contract for the fabrication and installation of a central prescriptive period.
air-conditioning system in a building, one of "sale" or "for a piece of
work"? What is the prescriptive period for filing actions for breach of In its reply, petitioner argued that Article 1571 of the Civil Code providing
the terms of such contract? for a six-month prescriptive period is applicable to a contract for a piece of
work by virtue of Article 1714, which provides that such a contract shall be
These are the legal questions brought before this Court in this governed by the pertinent provisions on warranty of title and against
Petition for review on certiorari under Rule 45 of the Rules of Court, hidden defects and the payment of price in a contract of sale6 .
to set aside the Decision1 of the Court of Appeals2 in CA-G.R. No.
58276-R promulgated on November 28, 1978 (affirming in toto the The trial court denied the motion to dismiss. In its answer to the complaint,
decision3 dated April 15, 1974 of the then Court of First Instance of petitioner reiterated its claim of prescription as an affirmative defense. It
Rizal, Branch II4 , in Civil Case No. 14712, which ordered petitioner alleged that whatever defects might have been discovered in the
to pay private respondent the amount needed to rectify the faults air-conditioning system could have been caused by a variety of factors,
and deficiencies of the air-conditioning system installed by including ordinary wear and tear and lack of proper and regular
petitioner in private respondent's building, plus damages, attorney's maintenance. It pointed out that during the one-year period that private
fees and costs). respondent withheld final payment, the system was subjected to "very rigid
inspection and testing and corrections or modifications effected" by
By a resolution of the First Division of this Court dated November petitioner. It interposed a compulsory counterclaim suggesting that the
13, 1995, this case was transferred to the Third. After deliberating complaint was filed "to offset the adverse effects" of the judgment in Civil
on the various submissions of the parties, including the petition, Case No. 71494, Court of First Instance of Manila, involving the same
record on appeal, private respondent's comment and briefs for the parties, wherein private respondent was adjudged to pay petitioner the
petitioner and the private respondent, the Court assigned the balance of the unpaid contract price for the air-conditioning system
writing of this Decision to the undersigned, who took his oath as a installed in another building of private respondent, amounting to
member of the Court on October 10, 1995. P138,482.25.

Page 61 of 105
Thereafter, private respondent filed an ex-parte motion for The Court has consistently held that the factual findings of the trial court,
preliminary attachment on the strength of petitioner's own as well as the Court of Appeals, are final and conclusive and may not be
statement to the effect that it had sold its business and was no reviewed on appeal. Among the exceptional circumstances where a
longer doing business in Manila. The trial court granted the motion reassessment of facts found by the lower courts is allowed are when the
and, upon private respondent's posting of a bond of F'50,000.00, conclusion is a finding grounded entirely on speculation, surmises or
ordered the issuance of a writ of attachment. conjectures; when the inference made is manifestly absurd, mistaken or
impossible; when there is grave abuse of discretion in the appreciation of
facts; when the judgment is premised on a misapprehension of facts;
In due course, the trial court rendered a decision finding that
when the findings went beyond the issues of the case and the same are
petitioner failed to install certain parts and accessories called for by
the contract, and deviated from the plans of the system, thus contrary to the admissions of both appellant and appellee. After a careful
study of the case at bench, we find none of the above grounds present to
reducing its operational effectiveness to the extent that 35
justify the re-evaluation of the findings of fact made by the courts below.8
window-type units had to be installed in the building to achieve a
fairly desirable room temperature. On the question of prescription,
the trial court ruled that the complaint was filed within the ten-year We see no valid reason to discard the factual conclusions of the appellate
court prescriptive period although the contract was one for a piece court. . . . (I)t is not the function of this Court to assess and evaluate all
of work, because it involved the "installation of an air-conditioning over again the evidence, testimonial and documentary, adduced by the
system which the defendant itself manufactured, fabricated, parties, particularly where, such as here, the findings of both the trial court
designed and installed." and the appellate court on the matter coincide.9 (Emphasis supplied)

Petitioner appealed to the Court of Appeals, which affirmed the Hence, the first two issues will not be resolved as they raise questions of
decision of the trial court. Hence, it instituted the instant petition. fact.

The Submissions of the Parties Thus, the only question left to be resolved is that of prescription. In their
submissions, the parties argued lengthily on the nature of the contract
entered into by them, viz., whether it was one of sale or for a piece of
In the instant Petition, petitioner raised three issues. First, it
work.
contended that private respondent's acceptance of the work and
his payment of the contract price extinguished any liability with
respect to the defects in the air-conditioning system. Second, it Article 1713 of the Civil Code defines a contract for a piece of work thus:
claimed that the Court of Appeals erred when it held that the
defects in the installation were not apparent at the time of delivery
By the contract for a piece of work the contractor binds himself to execute
and acceptance of the work considering that private respondent
a piece of work for the employer, in consideration of a certain price or
was not an expert who could recognize such defects. Third, it
compensation. The contractor may either employ only his labor or skill, or
insisted that, assuming arguendo that there were indeed hidden
also furnish the material.
defects, private respondent's complaint was barred by prescription
under Article 1571 of the Civil Code, which provides for a six-month
prescriptive period. A contract for a piece of work, labor and materials may be distinguished
from a contract of sale by the inquiry as to whether the thing transferred is
one not in existence and which would never have existed but for the order,
Private respondent, on the other hand, averred that the issues
of the person desiring it10 . In such case, the contract is one for a piece of
raised by petitioner, like the question of whether there was an
work, not a sale. On the other hand, if the thing subject of the contract
acceptance of the work by the owner and whether the hidden
would have existed and been the subject of a sale to some other person
defects in the installation could have been discovered by simple
even if the order had not been given, then the contract is one of sale11 .
inspection, involve questions of fact which have been passed upon
by the appellate court.
Thus, Mr. Justice Vitug12 explains that -
The Court's Ruling
A contract for the delivery at a certain price of an article which the vendor
in the ordinary course of his business manufactures or procures for the
The Supreme Court reviews only errors of law in petitions for
general market, whether the same is on hand at the time or not is a
review on certiorari under Rule 45. It is not the function of this Court
contract of sale, but if the goods are to be manufactured specially for the
to re-examine the findings of fact of the appellate court unless said customer and upon his special order, and not for the general market, it is
findings are not supported by the evidence on record or the
a contract for a piece of work (Art. 1467, Civil Code). The mere fact alone
judgment is based on a misapprehension of facts7 of Appeals erred
that certain articles are made upon previous orders of customers will not
when it held that the defects in the installation were not apparent at
argue against the imposition of the sales tax if such articles are ordinarily
the time of delivery and acceptance of the work considering that
manufactured by the taxpayer for sale to the public (Celestino Co. vs.
private respondent was not an expert who could recognize such
Collector, 99 Phil. 841).
defects. Third. it insisted that, assuming arguendothat there were
indeed hidden defects, private respondent's complaint was barred
by prescription under Article 1571 of the Civil Code, which provides To Tolentino, the distinction between the two contracts depends on the
for a six-month prescriptive period. intention of the parties. Thus, if the parties intended that at some future
date an object has to be delivered, without considering the work or labor of
the party bound to deliver, the contract is one of sale. But if one of the
Private respondent, on the other hand, averred that the issues parties accepts the undertaking on the basis of some plan, taking into
raised by petitioner, like the question of whether here was an
account the work he will employ personally or through another, there is a
acceptance of the work by the owner and whether the hidden
contract for a piece of work13 .
defects in the installation could have been discovered by simple
inspection, involve questions of fact which have been passed upon
by the appellate court. Clearly, the contract in question is one for a piece of work. It is not
petitioner's line of business to manufacture air-conditioning systems to be
sold "off-the-shelf." Its business and particular field of expertise is the
Page 62 of 105
fabrication and installation of such systems as ordered by Consistent with the above discussion, it would appear that this suit is
customers and in accordance with the particular plans and barred by prescription because the complaint was filed more than four
specifications provided by the customers. Naturally, the price or years after the execution of the contract and the completion of the
compensation for the system manufactured and installed will air-conditioning system.
depend greatly on the particular plans and specifications agreed
upon with the customers.
However, a close scrutiny of the complaint filed in the trial court reveals
that the original action is not really for enforcement of the warranties
The obligations of a contractor for a piece of work are set forth in against hidden defects, but one for breach of the contract itself. It alleged17
Articles 1714 and 1715 of the Civil Code, which provide: that the petitioner, "in the installation of the air conditioning system did not
comply with the specifications provided" in the written agreement between
the parties, "and an evaluation of the air-conditioning system as installed
Art. 1714. If the contractor agrees to produce the work from
by the defendant showed the following defects and violations of the
material furnished by him, he shall deliver the thing produced to the
specifications of the agreement, to wit:
employer and transfer dominion over the thing. This contract shall
be governed by the following articles as well as by the pertinent
provisions on warranty of title and against hidden defects and the GROUND FLOOR:
payment of price in a contract of sale.
"A. RIGHT WING:
Art. 1715. The contractor shall execute the work in such a manner
that it has the qualities agreed upon and has no defects which
Equipped with Worthington Compressor, Model 2VC4 directly driven by an
destroy or lessen its value or fitness for its ordinary or stipulated
Hp Elin electric motor 1750 rmp, 3 phase, 60 cycles, 220 volts, complete
use. Should the work be not of such quality, the employer may
with starter evaporative condenser, circulating water pump, air handling
require that the contractor remove the defect or execute another
unit air ducts.
work. If the contractor fails or refuses to comply with this obligation,
the employer may have the defect removed or another work
executed, at the contractor's cost. Defects Noted:

The provisions on warranty against hidden defects, referred to in 1. Deteriorated evaporative condenser panels, coils are full of scales and
Art. 1714 above-quoted, are found in Articles 1561 and 1566, heavy corrosion is very evident.
which read as follows:
2. Defective gauges of compressors;
Art. 1561. The vendor shall be responsible for warranty against the
hidden defects which the thing sold may have, should they render it 3. No belt guard on motor;
unfit for the use for which it is intended, or should they diminish its
fitness for such use to such an extent that, had the vendee been
aware thereof, he would not have acquired it or would have given a 4. Main switch has no cover;
lower price for it; but said vendor shall not be answerable for patent
defects or those which may be visible, or for those which are not 5. Desired room temperature not attained;
visible if the vendee is an expert who, by reason of his trade or
profession, should have known them.
Aside from the above defects, the following were noted not installed
although provided in the specifications.
xxx xxx xxx
1. Face by-pass damper of G.I. sheets No. 16. This damper regulates the
Art. 1566. The vendor is responsible to the vendee for any hidden flow of cooled air depending on room condition.
faults or defects in the thing sold, even though he was not aware
thereof.
2. No fresh air intake provision were provided which is very necessary for
efficient comfort cooling..
This provision shall not apply if the contrary has been stipulated,
and the vendor was not aware of the hidden faults or defects in the
3. No motor to regulate the face and by-pass damper.
thing sold.

4. Liquid level indicator for refrigerant not provided.


The remedy against violations of the warranty against hidden
defects is either to withdraw from the contract (redhibitory action) or
to demand a proportionate reduction of the price (accion quanti 5. Suitable heat exchanger is not installed. This is an important component
manoris), with damages in either case14 . to increase refrigeration efficiency.

In Villostas vs. Court of Appeals15 , we held that, "while it is true 6. Modulating thermostat not provided.
that Article 1571 of the Civil Code provides for a prescriptive period
of six months for a redhibitory action, a cursory reading of the ten 7. Water treatment device for evaporative condenser was not provided.
preceding articles to which it refers will reveal that said rule may be
applied only in case of implied warranties"; and where there is an
express warranty in the contract, as in the case at bench, the 8. Liquid receiver not provided by sight glass.
prescriptive period is the one specified in the express warranty, and
in the absence of such period, "the general rule on rescission of B. LEFT WING:
contract, which is four years (Article 1389, Civil Code) shall
apply"16 .

Page 63 of 105
Worthington Compressor Model 2VC4 is installed complete with 15 specifications. These omissions to install the equipments, parts and
Hp electric motor, 3 phase, 220 volts 60 cycles with starter. accessories called for in the specifications of the contract, as well as the
deviations made in putting into the air-conditioning system equipments,
parts and accessories not in full accord with the contract specification
Defects Noted:
naturally resulted to adversely affect the operational effectiveness of the
air-conditioning system which necessitated the installation of thirty-five
Same as right wing. except No. 4, All other defects on right wing window type of air-conditioning units distributed among the different floor
are common to the left wing. levels in order to be able to obtain a fairly desirable room temperature for
the tenants and actual occupants of the building. The Court opines and so
SECOND FLOOR: (Common up to EIGHT FLOORS) holds that the failure of the defendant to follow the contract specifications
and said omissions and deviations having resulted in the operational
ineffectiveness of the system installed makes the defendant liable to the
Compressors installed are MELCO with 7.5 Hp V-belt driven by plaintiff in the amount necessary to rectify to put the air conditioning
1800 RPM, -220 volts, 60 cycles, 3 phase, Thrige electric motor system in its proper operational condition to make it serve the purpose for
with starters. which the plaintiff entered into the contract with the defendant.

As stated in the specifications under, Section No. IV, the MELCO The respondent Court affirmed the trial court's decision thereby making
compressors do not satisfy the conditions stated therein due to the the latter's findings also its own.
following:

Having concluded that the original complaint is one for damages arising
1. MELCO Compressors are not provided with automatic capacity from breach of a written contract - and not a suit to enforce warranties
unloader. against hidden defects - we here - with declare that the governing law is
Article 1715 (supra). However, inasmuch as this provision does not
2. Not provided with oil pressure safety control. contain a specific prescriptive period, the general law on prescription,
which is Article 1144 of the Civil Code, will apply. Said provision
states, inter alia, that actions "upon a written contract" prescribe in ten (10)
3. Particular compressors do not have provision for renewal
years. Since the governing contract was executed on September 10, 1962
sleeves.
and the complaint was filed on May 8, 1971, it is clear that the action has
not prescribed.
Out of the total 15 MELCO compressors installed to serve the 2nd
floor up to 8th floors, only six (6) units are in operation and the rest
What about petitioner's contention that "acceptance of the work by the
were already replaced. Of the remaining six (6) units, several of
employer relieves the contractor of liability for any defect in the work"?
them have been replaced with bigger crankshafts.
This was answered by respondent Court19 as follows:

NINTH FLOOR:
As the breach of contract which gave rise to the instant case consisted in
appellant's omission to install the equipments (sic), parts and accessories
Two (2) Worthington 2VC4 driven by 15 Hp, 3 phase, 220 volts, 60 not in accordance with the plan and specifications provided for in the
cycles, 1750 rpm, Higgs motors with starters. contract and the deviations made in putting into the air conditioning
system parts and accessories not in accordance with the contract
Defects Noted are similar to ground floor. specifications, it is evident that the defect in the installation was not
apparent at the time of the delivery and acceptance of the work,
considering further that plaintiff is not an expert to recognize the same.
GENERAL REMARKS: From the very nature of things, it is impossible to determine by the simple
inspection of air conditioning system installed in an 8-floor building
Under Section III, Design conditions of specification for air whether it has been furnished and installed as per agreed specifications.
conditioning work, and taking into account "A" & "B" same, the
present systems are not capable of maintaining the desired Verily, the mere fact that the private respondent accepted the work does
temperature of 76 = 2ºF (sic). not, ipso facto, relieve the petitioner from liability for deviations from and
violations of the written contract, as the law gives him ten (10) years within
The present tenant have installed 35 window type air conditioning which to file an action based on breach thereof.
units distributed among the different floor levels. Temperature
measurements conducted on March 29. 1971, revealed that 78ºF WHEREFORE, the petition is hereby DENIED and the assailed Decision
room (sic) is only maintained due to the additional window type is AFFIRMED. No costs.
units.

SO ORDERED.
The trial court, after evaluating the evidence presented, held that,
indeed, petitioner failed to install items and parts required in the
contract and substituted some other items which were not in Narvasa, C.J., Davide Jr., Melo and Francisco, JJ., concur.
accordance with the specifications18 , thus:

From all of the foregoing, the Court is persuaded to believe the


plaintiff that not only had the defendant failed to install items and
parts provided for in the specifications of the air-conditioning
system be installed, like face and by-pass dampers and modulating
thermostat and many others, but also that there are items, parts
and accessories which were used and installed on the
air-conditioning system which were not in full accord with contract
Page 64 of 105
G.R. No. 113564 June 20, 2001 The counterclaim on the other hand is hereby dismissed for lack of
merit."10
INOCENCIA YU DINO and her HUSBAND doing business
under the trade name "CANDY CLAIRE FASHION Respondent Sio sought recourse in the Court of Appeals. In its April 30,
GARMENTS", petitioners, 1993 decision, the appellate court affirmed the trial court decision.
vs. Respondent then filed a Motion for Reconsideration and a Supplemental
COURT OF APPEALS and ROMAN SIO, doing business under Motion for Reconsideration alleging therein that the petitioners' action for
the name "UNIVERSAL TOY MASTER collection of sum of money based on a breach of warranty had already
MANUFACTURING", respondents. prescribed. On January 24, 1994, the respondent court reversed its
decision and dismissed petitioners' Complaint for having been filed
PUNO, J.: beyond the prescriptive period. The amended decision read in part, viz:

"Even if there is failure to raise the affirmative defense of prescription in a


Though people say, "better late than never", the law frowns upon
motion to dismiss or in an appropriate pleading (answer, amended or
those who assert their rights past the eleventh hour. For failing to
supplemental answer) and an amendment would no longer be feasible,
timely institute their action, the petitioners are forever barred from
still prescription, if apparent on the face of the complaint may be favorably
claiming a sum of money from the respondent.
considered (Spouses Matias B. Aznar, III, et al. vs. Hon. Juanito A. Bernad,
etc., supra, G.R. 81190, May 9, 1988). The rule in Gicano vs. Gegato
This is a petition for review on certiorari to annul and set aside the (supra) was reiterated in Severo v. Court of Appeals, (G.R. No. 84051,
amended decision of the respondent court dated January 24, 1994 May 19, 1989).
reversing its April 30, 1993 decision and dismissing the
plaintiff-petitioners' Complaint on the ground of prescription.The
WHEREFORE the Motion For Reconsideration is granted. The judgment
following undisputed facts gave rise to the case at bar:
of this Court is set aside and judgment is hereby rendered REVERSING
the judgment of the trial court and dismissing plaintiff's complaint." 11
Petitioners spouses Dino, doing business under the trade name
"Candy Claire Fashion Garment" are engaged in the business of
Hence, this petition with the following assignment of errors:
manufacturing and selling shirts.1 Respondent Sio is part owner
and general manager of a manufacturing corporation doing
business under the trade name "Universal Toy Master I.
Manufacturing."2
The respondent Court of Appeals seriously erred in dismissing the
Petitioners and respondent Sio entered into a contract whereby the complaint of the Petitioners on the ground that the action had prescribed.
latter would manufacture for the petitioners 20,000 pieces of vinyl
frogs and 20,000 pieces of vinyl mooseheads at P7.00 per piece in
II.
accordance with the sample approved by the petitioners. These
frogs and mooseheads were to be attached to the shirts petitioners
would manufacture and sell.3 The respondent Court of Appeals seriously erred in holding that the
defense of prescription would still be considered despite the fact that it
was not raised in the answer, if apparent on the face of the complaint.
Respondent Sio delivered in several installments the 40,000 pieces
of frogs and mooseheads. The last delivery was made on
September 28, 1988. Petitioner fully paid the agreed We first determine the nature of the action filed in the trial court to resolve
price.4 Subsequently, petitioners returned to respondent 29,772 the issue of prescription. Petitioners claim that the Complaint they filed in
pieces of frogs and mooseheads for failing to comply with the the trial court on July 24, 1989 was one for the collection of a sum of
approved sample.5 The return was made on different dates: the money. Respondent contends that it was an action for breach of warranty
initial one on December 12, 1988 consisting of 1,720 pieces, 6 the as the sum of money petitioners sought to collect was actually a refund of
second on January 11, 1989,7 and the last on January 17, 1989.8 the purchase price they paid for the alleged defective goods they bought
from the respondent.
Petitioners then demanded from the respondent a refund of the
purchase price of the returned goods in the amount of P208,404.00. We uphold the respondent's contention.
As respondent Sio refused to pay,9 petitioners filed on July 24,
1989 an action for collection of a sum of money in the Regional The following provisions of the New Civil Code are apropos:
Trial Court of Manila, Branch 38.

"Art. 1467. A contract for the delivery at a certain price of an article which
The trial court ruled in favor of the petitioners, viz: the vendor in the ordinary course of his business manufactures or
procures for the general market, whether the same is on hand at the time
"WHEREFORE, judgment is hereby rendered in favor of the or not, is a contract of sale, but if the goods are to be manufactured
plaintiffs Vicente and Inocencia Dino and against defendant Toy specially for the customer and upon his special order, and not for the
Master Manufacturing, Inc. ordering the latter to pay the former: general market, it is a contract for a piece of work."

1. The amount of Two Hundred Eight Thousand Four Hundred "Art. 1713. By the contract for a piece of work the contractor binds himself
Four (P208,404.00) Pesos with legal interest thereon from July 5, to execute a piece of work for the employer, in consideration of a certain
1989, until fully paid; and price or compensation. The contractor may either employ only his labor or
skill, or also furnish the material."
2. The amount of Twenty Thousand (P20,000.00) Pesos as
attorney's fees and the costs of this suit. As this Court ruled in Engineering & Machinery Corporation v. Court of
Appeals, et al.,12 "a contract for a piece of work, labor and materials may

Page 65 of 105
be distinguished from a contract of sale by the inquiry as to whether There is no dispute that respondent made the last delivery of the vinyl
the thing transferred is one not in existence and which would never products to petitioners on September 28, 1988. It is also settled that the
have existed but for the order of the person desiring it. In such case, action to recover the purchase price of the goods petitioners returned to
the contract is one for a piece of work, not a sale. On the other the respondent was filed on July 24, 1989, 16 more than nine months from
hand, if the thing subject of the contract would have existed and the date of last delivery. Petitioners having filed the action three months
been the subject of a sale to some other person even if the order after the six-month period for filing actions for breach of warranty against
had not been given then the contract is one of sale." 13 The contract hidden defects stated in Art. 1571,17 the appellate court dismissed the
between the petitioners and respondent stipulated that respondent action.
would manufacture upon order of the petitioners 20,000 pieces of
vinyl frogs and 20,000 pieces of vinyl mooseheads according to the Petitioners fault the ruling on the ground that it was too late in the day for
samples specified and approved by the petitioners. Respondent
respondent to raise the defense of prescription. The law then applicable to
Sio did not ordinarily manufacture these products, but only upon
the case at bar, Rule 9, Sec. 2 of the Rules of Court, provides:
order of the petitioners and at the price agreed upon.14 Clearly, the
contract executed by and between the petitioners and the
respondent was a contract for a piece of work. At any rate, whether "Defenses and objections not pleaded either in a motion to dismiss or in
the agreement between the parties was one of a contract of sale or the answer are deemed waived; except the failure to state a cause of
a piece of work, the provisions on warranty of title against hidden action . . . "
defects in a contract of sale apply to the case at bar, viz:
Thus, they claim that since the respondent failed to raise the defense of
"Art. 1714. If the contractor agrees to produce the work from prescription in a motion to dismiss or in its answer, it is deemed waived
material furnished by him, he shall deliver the thing produced to the and cannot be raised for the first time on appeal in a motion for
employer and transfer dominion over the thing. This contract shall reconsideration of the appellate court's decision.
be governed by the following articles as well as by the pertinent
provisions on warranty of title and against hidden defects and the As a rule, the defense of prescription cannot be raised for the first time on
payment of price in a contract of sale." appeal. Thus, we held in Ramos v. Osorio,18 viz:

"Art. 1561. The vendor shall be responsible for warranty against the "It is settled law in this jurisdiction that the defense of prescription is
hidden defects which the thing sold may have, should they render it waivable, and that if it was not raised as a defense in the trial court, it
unfit for the use for which it is intended, or should they diminish its cannot be considered on appeal, the general rule being that the appellate
fitness for such use to such an extent that, had the vendee been court is not authorized to consider and resolve any question not properly
aware thereof, he would not have acquired it or would have given a raised in the lower court (Subido vs. Lacson, 55 O.G. 8281, 8285; Moran,
lower price for it; but said vendor shall not be answerable for patent Comments on the Rules of Court, Vol. I, p. 784, 1947 Edition)."
defects or those which may be visible, or for those which are not
visible if the vendee is an expert who, by reason of his trade or
profession, should have known them." However, this is not a hard and fast rule. In Gicano v. Gegato,19 we held:

Petitioners aver that they discovered the defects in respondent's ". . .(T)rial courts have authority and discretion to dimiss an action on the
products when customers in their (petitioners') shirt business came ground of prescription when the parties' pleadings or other facts on record
back to them complaining that the frog and moosehead figures show it to be indeed time-barred; (Francisco v. Robles, Feb, 15, 1954;
attached to the shirts they bought were torn. Petitioners allege that Sison v. McQuaid, 50 O.G. 97; Bambao v. Lednicky, Jan. 28, 1961;
they did not readily see these hidden defects upon their Cordova v. Cordova, Jan. 14, 1958; Convets, Inc. v. NDC, Feb. 28, 1958;
acceptance. A hidden defect is one which is unknown or could not 32 SCRA 529; Sinaon v. Sorongan, 136 SCRA 408); and it may do so on
have been known to the vendee.15 Petitioners then returned to the the basis of a motion to dismiss (Sec. 1,f, Rule 16, Rules of Court), or an
respondent 29,772 defective pieces of vinyl products and answer which sets up such ground as an affirmative defense (Sec. 5, Rule
demanded a refund of their purchase price in the amount of 16), or even if the ground is alleged after judgment on the merits, as in a
P208,404.00. Having failed to collect this amount, they filed an motion for reconsideration (Ferrer v. Ericta, 84 SCRA 705); or even if the
action for collection of a sum of money. defense has not been asserted at all, as where no statement thereof is
found in the pleadings (Garcia v. Mathis, 100 SCRA 250; PNB v. Pacific
Commission House, 27 SCRA 766; Chua Lamco v. Dioso, et al., 97 Phil.
Article 1567 provides for the remedies available to the vendee in 821); or where a defendant has been declared in default (PNB v. Perez,
case of hidden defects, viz: 16 SCRA 270). What is essential only, to repeat, is that the facts
demonstrating the lapse of the prescriptive period be otherwise sufficiently
"Art. 1567. In the cases of Articles 1561, 1562, 1564, 1565 and and satisfactorily apparent on the record; either in the averments of the
1566, the vendee may elect between withdrawing from the contract plaintiff's complaint, or otherwise established by the evidence." (emphasis
and demanding a proportionate reduction of the price, with supplied)
damages in either case."
In Aldovino, et al. v. Alunan, et al.,20 the Court en banc reiterated
By returning the 29,772 pieces of vinyl products to respondent and the Garcia v. Mathis doctrine cited in the Gicano case that when the
asking for a return of their purchase price, petitioners were in effect plaintiff's own complaint shows clearly that the action has prescribed, the
"withdrawing from the contract" as provided in Art. 1567. The action may be dismissed even if the defense of prescription was not
prescriptive period for this kind of action is provided in Art. 1571 of invoked by the defendant.
the New Civil Code, viz:
It is apparent in the records that respondent made the last delivery of vinyl
"Art. 1571. Actions arising from the provisions of the preceding ten products to the petitioners on September 28, 1988. Petitioners admit this
articles shall be barred after six months from the delivery of the in their Memorandum submitted to the trial court and reiterate it in their
thing sold." (Emphasis supplied) Petition for Review.21 It is also apparent in the Complaint that petitioners
instituted their action on July 24, 1989. The issue for resolution is whether
or not the respondent Court of Appeals could dismiss the petitioners'

Page 66 of 105
action if the defense of prescription was raised for the first time on contractor and thus taxable within the purview of then Section 205 of the
appeal but is apparent in the records. National Internal Revenue Code levying a three percent contractor's tax?
This question is answer by the Court in the negative as it resolves this
petition assailing the Decision 1 of the Respondent Court of Appeals 2 in
Following the Gicano doctrine that allows dismissal of an action on
CA-G.R. SP No. 31790 promulgated on April 27, 1994 affirming that of the
the ground of prescription even after judgment on the merits, or
Court of Tax Appeals. 3
even if the defense was not raised at all so long as the relevant
dates are clear on the record, we rule that the action filed by the
petitioners has prescribed. The dates of delivery and institution of The Antecedent Facts
the action are undisputed. There are no new issues of fact arising
in connection with the question of prescription, thus carving out the
The antecedents as found by the Court of Appeals are reproduced
case at bar as an exception from the general rule that prescription if
hereinbelow, the same being largely undisputed by the parties.
not impleaded in the answer is deemed waived.22

Private respondent is a non-stock, non-profit educational institution with


Even if the defense of prescription was raised for the first time on
auxiliary units and branches all over the Philippines. One such auxiliary
appeal in respondent's Supplemental Motion for Reconsideration of
unit is the Institute of Philippine Culture (IPC), which has no legal
the appellate court's decision, this does not militate against the due
personality separate and distinct from that of private respondent. The IPC
process right of the petitioners. On appeal, there was no new issue is a Philippine unit engaged in social science studies of Philippine society
of fact that arose in connection with the question of prescription,
and culture. Occasionally, it accepts sponsorships for its research
thus it cannot be said that petitioners were not given the
activities from international organizations, private foundations and
opportunity to present evidence in the trial court to meet a factual
government agencies.
issue. Equally important, petitioners had the opportunity to oppose
the defense of prescription in their Opposition to the Supplemental
Motion for Reconsideration filed in the appellate court and in their On July 8, 1983, private respondent received from petitioner
Petition for Review in this Court. Commissioner of Internal Revenue a demand letter dated June 3, 1983,
assessing private respondent the sum of P174,043.97 for alleged
deficiency contractor's tax, and an assessment dated June 27, 1983 in the
This Court's application of the Osorio and Gicano doctrines to the
sum of P1,141,837 for alleged deficiency income tax, both for the fiscal
case at bar is confirmed and now enshrined in Rule 9, Sec. 1 of the
year ended March 31, 1978. Denying said tax liabilities, private
1997 Rules of Civil Procedure, viz:
respondent sent petitioner a letter-protest and subsequently filed with the
latter a memorandum contesting the validity of the assessments.
"Section 1. Defense and objections not pleaded. - Defenses and
objections not pleaded whether in a motion to dismiss or in the
On March 17, 1988, petitioner rendered a letter-decision canceling the
answer are deemed waived. However, when it appears from the
assessment for deficiency income tax but modifying the assessment for
pleadings that the court has no jurisdiction over the subject matter,
deficiency contractor's tax by increasing the amount due to P193,475.55.
that there is another action pending between the same parties for
Unsatisfied, private respondent requested for a reconsideration or
the same cause, or that the action is barred by a prior judgment or reinvestigation of the modified assessment. At the same time, it filed in the
by statute of limitations, the court shall dismiss the claim."
respondent court a petition for review of the said letter-decision of the
(Emphasis supplied)
petitioner. While the petition was pending before the respondent court,
petitioner issued a final decision dated August 3, 1988 reducing the
WHEREFORE, the petition is DENIED and the impugned decision assessment for deficiency contractor's tax from P193,475.55 to
of the Court of Appeals dated January 24, 1994 is AFFIRMED. No P46,516.41, exclusive of surcharge and interest.
costs.
On July 12, 1993, the respondent court rendered the questioned decision
SO ORDERED. which dispositively reads:

Davide, Jr., C.J., (Chairman), Kapunan, Pardo, and WHEREFORE, in view of the foregoing, respondent's decision is SET
Ynares-Santiago, JJ., concur. ASIDE. The deficiency contractor's tax assessment in the amount of
P46,516.41 exclusive of surcharge and interest for the fiscal year ended
March 31, 1978 is hereby CANCELED. No pronouncement as to cost.
* This case was transferred to the ponente on March 14, 2001
pursuant to Resolution in A.M. No. 00-9-03-SC. – Re: Creation of
Special Committee on Case Backlog dated February 27, 2001. SO ORDERED.

G.R. No. 115349 April 18, 1997 Not in accord with said decision, petitioner has come to this Court via the
present petition for review raising the following issues:
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. 1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE
THE COURT OF APPEALS, THE COURT OF TAX APPEALS PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT TO
and ATENEO DE MANILA UNIVERSITY, respondents. SECTION 205 OF THE TAX CODE; and

2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3%


CONTRACTOR'S TAX UNDER SECTION 205 OF THE TAX CODE.
PANGANIBAN, J.:
The pertinent portions of Section 205 of the National Internal Revenue
Code, as amended, provide:
In conducting researches and studies of social organizations and
cultural values thru its Institute of Philippine Culture, is the Ateneo
de Manila University performing the work of an independent
Page 67 of 105
Sec. 205. Contractor, proprietors or operators of dockyards, and 2) Whether or not private respondent is subject to 3% contractor's tax
others. — A contractor's tax of threeper centum of the gross under Section 205 of the Tax Code. 5
receipts is hereby imposed on the following:
In fine, these may be reduced to a single issue: Is Ateneo de Manila
xxx xxx xxx University, through its auxiliary unit or branch — the Institute of Philippine
Culture — performing the work of an independent contractor and, thus,
subject to the three percent contractor's tax levied by then Section 205 of
(16) Business agents and other independent contractors except
the National Internal Revenue Code?
persons, associations and corporations under contract for
embroidery and apparel for export, as well as their agents and
contractors and except gross receipts of or from a pioneer industry The Court's Ruling
registered with the Board of Investments under Republic Act No.
5186:
The petition is unmeritorious.

xxx xxx xxx


Interpretation of Tax Laws

The term "independent contractors" include persons (juridical or


The parts of then Section 205 of the National Internal Revenue Code
natural) not enumerated above (but not including individuals
germane to the case before us read:
subject to the occupation tax under Section 12 of the Local Tax
Code) whose activity consists essentially of the sale of all kinds of
services for a fee regardless of whether or not the performance of Sec. 205. Contractors, proprietors or operators of dockyards, and others.
the service calls for the exercise or use of the physical or mental — A contractor's tax of threeper centum of the gross receipts is hereby
faculties of such contractors or their employees. imposed on the following:

xxx xxx xxx xxx xxx xxx

Petitioner contends that the respondent court erred in holding that (16) Business agents and other independent contractors, except persons,
private respondent is not an "independent contractor" within the associations and corporations under contract for embroidery and apparel
purview of Section 205 of the Tax Code. To petitioner, the term for export, as well as their agents and contractors, and except gross
"independent contractor", as defined by the Code, encompasses all receipts of or from a pioneer industry registered with the Board of
kinds of services rendered for a fee and that the only exceptions Investments under the provisions of Republic Act No. 5186;
are the following:
xxx xxx xxx
a. Persons, association and corporations under contract for
embroidery and apparel for export and gross receipts of or from The term "independent contractors" include persons (juridical or natural)
pioneer industry registered with the Board of Investment under R.A. not enumerated above (but not including individuals subject to the
No. 5186; occupation tax under Section 12 of the Local Tax Code) whose activity
consists essentially of the sale of all kinds of services for a fee regardless
b. Individuals occupation tax under Section 12 of the Local Tax of whether or not the performance of the service calls for the exercise or
Code (under the old Section 182 [b] of the Tax Code); and use of the physical or mental faculties of such contractors or their
employees.
c. Regional or area headquarters established in the Philippines by
multinational corporations, including their alien executives, and The term "independent contractor" shall not include regional or area
which headquarters do not earn or derive income from the headquarters established in the Philippines by multinational corporations,
Philippines and which act as supervisory, communication and including their alien executives, and which headquarters do not earn or
coordinating centers for their affiliates, subsidiaries or branches in derive income from the Philippines and which act as supervisory,
the Asia Pacific Region (Section 205 of the Tax Code). communications and coordinating centers for their affiliates, subsidiaries
or branches in the Asia-Pacific Region.
Petitioner thus submits that since private respondent falls under the
definition of an "independent contractor" and is not among the The term "gross receipts" means all amounts received by the prime or
aforementioned exceptions, private respondent is therefore subject principal contractor as the total contract price, undiminished by amount
to the 3% contractor's tax imposed under the same Code. 4 paid to the subcontractor, shall be excluded from the taxable gross
receipts of the subcontractor.
The Court of Appeals disagreed with the Petitioner Commissioner
of Internal Revenue and affirmed the assailed decision of the Court Petitioner Commissioner of Internal Revenue contends that Private
of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA Respondent Ateneo de Manila University "falls within the definition" of an
through this petition for review. independent contractor and "is not one of those mentioned as excepted";
hence, it is properly a subject of the three percent contractor's tax levied
by the foregoing provision of law. 6 Petitioner states that the "term
The Issues
'independent contractor' is not specifically defined so as to delimit the
scope thereof, so much so that any person who . . . renders physical and
Petitioner submits before us the following issues: mental service for a fee, is now indubitably considered an independent
contractor liable to 3% contractor's tax." 7 According to petitioner, Ateneo
has the burden of proof to show its exemption from the coverage of the
1) Whether or not private respondent falls under the purview of
law.
independent contractor pursuant to Section 205 of the Tax Code.

Page 68 of 105
We disagree. Petitioner Commissioner of Internal Revenue erred in ever entered into by the private respondent. As appropriately pointed out
applying the principles of tax exemption without first applying the by the latter:
well-settled doctrine of strict interpretation in the imposition of taxes.
It is obviously both illogical and impractical to determine who are
An examination of the Commissioner's Written Formal Offer of Evidence in
exempted without first determining who are covered by the
the Court of Tax Appeals shows that only the following documentary
aforesaid provision. The Commissioner should have determined
evidence was presented:
first if private respondent was covered by Section 205, applying the
rule of strict interpretation of laws imposing taxes and other
burdens on the populace, before asking Ateneo to prove its Exhibit 1 BIR letter of authority no. 331844
exemption therefrom. The Court takes this occasion to reiterate the
hornbook doctrine in the interpretation of tax laws that "(a) statute 2 Examiner's Field Audit Report
will not be construed as imposing a tax unless it does so clearly,
expressly, and unambiguously . . . (A) tax cannot be imposed
without clear and express words for that purpose. Accordingly, the 3 Adjustments to Sales/Receipts
general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax lawsand the 4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr.
provisions of a taxing act are not to be extended by
implication." 8 Parenthetically, in answering the question of who is
None of the foregoing evidence even comes close to purport to be
subject to tax statutes, it is basic that "in case of doubt, such
contracts between private respondent and third parties. 12
statutes are to be construed most strongly against the government
and in favor of the subjects or citizens because burdens are not to
be imposed nor presumed to be imposed beyond what statutes Moreover, the Court of Tax Appeals accurately and correctly declared that
expressly and clearly import." 9 the " funds received by the Ateneo de Manila University are technically not
a fee. They may however fall as gifts or donations which are tax-exempt"
as shown by private respondent's compliance with the requirement of
To fall under its coverage, Section 205 of the National Internal
Section 123 of the National Internal Revenue Code providing for the
Revenue Code requires that the independent contractor be
exemption of such gifts to an educational institution. 13
engaged in the business of selling its services. Hence, to impose
the three percent contractor's tax on Ateneo's Institute of Philippine
Culture, it should be sufficiently proven that the private respondent Respondent Court of Appeals elucidated on the ruling of the Court of Tax
is indeed selling its services for a fee in pursuit of an independent Appeals:
business. And it is only after private respondent has been found
clearly to be subject to the provisions of Sec. 205 that the question To our mind, private respondent hardly fits into the definition of an
of exemption therefrom would arise. Only after such coverage is "independent contractor".
shown does the rule of construction — that tax exemptions are to
be strictly construed against the taxpayer — come into play,
contrary to petitioner's position. This is the main line of reasoning of For one, the established facts show that IPC, as a unit of the private
the Court of Tax Appeals in its decision, 10 which was affirmed by respondent, is not engaged in business. Undisputedly, private respondent
the CA. is mandated by law to undertake research activities to maintain its
university status. In fact, the research activities being carried out by the
IPC is focused not on business or profit but on social sciences studies of
The Ateneo de Manila University Did Not Contract Philippine society and culture. Since it can only finance a limited number
for the Sale of the Service of its Institute of Philippine Culture of IPC's research projects, private respondent occasionally accepts
sponsorship for unfunded IPC research projects from international
After reviewing the records of this case, we find no evidence that organizations, private foundations and governmental agencies. However,
Ateneo's Institute of Philippine Culture ever sold its services for a such sponsorships are subject to private respondent's terms and
fee to anyone or was ever engaged in a business apart from and conditions, among which are, that the research is confined to topics
independently of the academic purposes of the university. consistent with the private respondent's academic agenda; that no
proprietary or commercial purpose research is done; and that private
respondent retains not only the absolute right to publish but also the
Stressing that "it is not the Ateneo de Manila University per
ownership of the results of the research conducted by the IPC. Quite
se which is being taxed," Petitioner Commissioner of Internal
clearly, the aforementioned terms and conditions belie the allegation that
Revenue contends that "the tax is due on its activity of conducting
private respondent is a contractor or is engaged in business.
researches for a fee. The tax is due on the gross receipts made in
favor of IPC pursuant to the contracts the latter entered to conduct
researches for the benefit primarily of its clients. The tax is imposed For another, it bears stressing that private respondent is a non-stock,
on the exercise of a taxable activity. . . . [T]he sale of services of non-profit educational corporation. The fact that it accepted sponsorship
private respondent is made under a contract and the various for IPC's unfunded projects is merely incidental. For, the main function of
contracts entered into between private respondent and its clients the IPC is to undertake research projects under the academic agenda of
are almost of the same terms, showing, among others, the the private respondent. Moreover the records do not show that in
compensation and terms of payment." 11(Emphasis supplied.) accepting sponsorship of research work, IPC realized profits from such
work. On the contrary, the evidence shows that for about 30 years, IPC
had continuously operated at a loss, which means that sponsored funds
In theory, the Commissioner of Internal Revenue may be correct.
are less than actual expenses for its research projects. That IPC has been
However, the records do not show that Ateneo's IPC in fact
operating at a loss loudly bespeaks of the fact that education and not profit
contracted to sell its research services for a fee. Clearly then, as
is the motive for undertaking the research projects.
found by the Court of Appeals and the Court of Tax Appeals,
petitioner's theory is inapplicable to the established factual milieu
obtaining in the instant case. Then, too, granting arguendo that IPC made profits from the sponsored
research projects, the fact still remains that there is no proof that part of
such earnings or profits was ever distributed as dividends to any
In the first place, the petitioner has presented no evidence to prove
stockholder, as in fact none was so distributed because they accrued to
its bare contention that, indeed, contracts for sale of services were
Page 69 of 105
the benefit of the private respondent which is a non-profit scholarly publications and research activities published in its school
educational institution. 14 journal as well as their leadership activities in the profession.

Therefore, it is clear that the funds received by Ateneo's Institute of (f) The institution must show evidence of adequate and stable financial
Philippine Culture are not given in the concept of a fee or price in resources and support, a reasonable portion of which should be devoted
exchange for the performance of a service or delivery of an object. to institutional development and research. (emphasis supplied)
Rather, the amounts are in the nature of an endowment or donation
given by IPC's benefactors solely for the purpose of sponsoring or
xxx xxx xxx
funding the research with no strings attached. As found by the two
courts below, such sponsorships are subject to IPC's terms and
conditions. No proprietary or commercial research is done, and IPC 32. University status may be withdrawn, after due notice and hearing, for
retains the ownership of the results of the research, including the failure to maintain satisfactorily the standards and requirements
absolute right to publish the same. The copyrights over the results therefor. 20
of the research are owned by
Ateneo and, consequently, no portion thereof may be reproduced Petitioner's contention that it is the Institute of Philippine Culture that is
without its permission. 15 The amounts given to IPC, therefore, may being taxed and not the Ateneo is patently erroneous because the former
not be deemed, it bears stressing as fees or gross receipts that can is not an independent juridical entity that is separate and distinct form the
be subjected to the three percent contractor's tax. latter.

It is also well to stress that the questioned transactions of Ateneo's Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by
Institute of Philippine Culture cannot be deemed either as a the Court of Appeals Generally Conclusive
contract of sale or a contract of a piece of work. "By the contract of
sale, one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to In addition, we reiterate that the "Court of Tax Appeals is a highly
pay therefor a price certain in money or its equivalent." 16 By its specialized body specifically created for the purpose of reviewing tax
very nature, a contract of sale requires a transfer of ownership. cases. Through its expertise, it is undeniably competent to determine the
Thus, Article 1458 of the Civil Code "expressly makes the issue of whether" 21 Ateneo de Manila University may be deemed a
obligation to transfer ownership as an essential element of the subject of the three percent contractor's tax "through the evidence
contract of sale, following modern codes, such as the German and presented before it." Consequently, "as a matter of principle, this Court will
the Swiss. Even in the absence of this express requirement, not set aside the conclusion reached by . . . the Court of Tax Appeals
however, most writers, including Sanchez Roman, Gayoso, which is, by the very nature of its function, dedicated exclusively to the
Valverde, Ruggiero, Colin and Capitant, have considered such study and consideration of tax problems and has necessarily developed
transfer of ownership as the primary purpose of sale. Perez and an expertise on the subject unless there has been an abuse or
Alguer follow the same view, stating that the delivery of the thing improvident exercise of authority . . ." 22 This point becomes more evident
does not mean a mere physical transfer, but is a means of in the case before us where the findings and conclusions of both the Court
transmitting ownership. Transfer of title or an agreement to transfer of Tax Appeals and the Court of Appeals appear untainted by any abuse
it for a price paid or promised to be paid is the essence of of authority, much less grave abuse of discretion. Thus, we find the
sale." 17 In the case of a contract for a piece of work, "the contractor decision of the latter affirming that of the former free from any palpable
binds himself to execute a piece of work for the employer, in error.
consideration of a certain price or compensation. . . . If the
contractor agrees to produce the work from materials furnished by Public Service, Not Profit, is the Motive
him, he shall deliver the thing produced to the employer and
transfer dominion over the thing, . . ." 18 Ineludably, whether the
The records show that the Institute of Philippine Culture conducted its
contract be one of sale or one for a piece of work, a transfer of
research activities at a huge deficit of P1,624,014.00 as shown in its
ownership is involved and a party necessarily walks away with an
statements of fund and disbursements for the period 1972 to 1985. 23 In
object. 19 In the case at bench, it is clear from the evidence on
fact, it was Ateneo de Manila University itself that had funded the research
record that there was no sale either of objects or services because,
projects of the institute, and it was only when Ateneo could no longer
as adverted to earlier, there was no transfer of ownership over the
produce the needed funds that the institute sought funding from outside.
research data obtained or the results of research projects
The testimony of Ateneo's Director for Accounting Services, Ms. Leonor
undertaken by the Institute of Philippine Culture.
Wijangco, provides significant insight on the academic and nonprofit
nature of the institute's research activities done in furtherance of the
Furthermore, it is clear that the research activity of the Institute of university's purposes, as follows:
Philippine Culture is done in pursuance of maintaining Ateneo's
university status and not in the course of an independent business
Q Now it was testified to earlier by Miss Thelma Padero (Office Manager
of selling such research with profit in mind. This is clear from a
of the Institute of Philippine Culture) that as far as grants from sponsored
reading of the regulations governing universities:
research it is possible that the grant sometimes is less than the actual cost.
Will you please tell us in this case when the actual cost is a lot less than
31. In addition to the legal requisites an institution must meet, the grant who shoulders the additional cost?
among others, the following requirements before an application for
university status shall be considered:
A The University.

xxx xxx xxx


Q Now, why is this done by the University?

(e) The institution must undertake research and operate with a


A Because of our faculty development program as a university, because a
competent qualified staff at least three graduate departments in
university has to have its own research institute. 24
accordance with the rules and standards for graduate education.
One of the departments shall be science and technology. The
competence of the staff shall be judged by their effective teaching,
Page 70 of 105
So, why is it that Ateneo continues to operate and conduct prompt payment, and as such a deduction of 2 per cent shall be made
researches through its Institute of Philippine Culture when it from the amount of the invoice.
undisputedly loses not an insignificant amount in the process? The
plain and simple answer is that private respondent is not a
The same discount shall be made on the amount of any invoice which Mr.
contractor selling its services for a fee but an academic institution
Parsons may deem convenient to pay in cash.
conducting these researches pursuant to its commitments to
education and, ultimately, to public service. For the institute to have
tenaciously continued operating for so long despite its (E) Mr. Quiroga binds himself to give notice at least fifteen days before
accumulation of significant losses, we can only agree with both the hand of any alteration in price which he may plan to make in respect to his
Court of Tax Appeals and the Court of Appeals that "education and beds, and agrees that if on the date when such alteration takes effect he
not profit is [IPC's] motive for undertaking the research should have any order pending to be served to Mr. Parsons, such order
projects." 25 shall enjoy the advantage of the alteration if the price thereby be lowered,
but shall not be affected by said alteration if the price thereby be increased,
for, in this latter case, Mr. Quiroga assumed the obligation to invoice the
WHEREFORE, premises considered, the petition is DENIED and
beds at the price at which the order was given.
the assailed Decision of the Court of Appeals is hereby AFFIRMED
in full.
(F) Mr. Parsons binds himself not to sell any other kind except the
"Quiroga" beds.
SO ORDERED.

ART. 2. In compensation for the expenses of advertisement which, for the


G.R. No. L-11491 August 23, 1918 benefit of both contracting parties, Mr. Parsons may find himself obliged to
make, Mr. Quiroga assumes the obligation to offer and give the preference
ANDRES QUIROGA, plaintiff-appellant, to Mr. Parsons in case anyone should apply for the exclusive agency for
vs. any island not comprised with the Visayan group.
PARSONS HARDWARE CO., defendant-appellee.
ART. 3. Mr. Parsons may sell, or establish branches of his agency for the
Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant. sale of "Quiroga" beds in all the towns of the Archipelago where there are
Crossfield & O'Brien for appellee. no exclusive agents, and shall immediately report such action to Mr.
Quiroga for his approval.
AVANCEÑA, J.:
ART. 4. This contract is made for an unlimited period, and may be
terminated by either of the contracting parties on a previous notice of
On January 24, 1911, in this city of manila, a contract in the
ninety days to the other party.
following tenor was entered into by and between the plaintiff, as
party of the first part, and J. Parsons (to whose rights and
obligations the present defendant later subrogated itself), as party Of the three causes of action alleged by the plaintiff in his complaint, only
of the second part: two of them constitute the subject matter of this appeal and both
substantially amount to the averment that the defendant violated the
following obligations: not to sell the beds at higher prices than those of the
CONTRACT EXECUTED BY AND BETWEEN ANDRES
invoices; to have an open establishment in Iloilo; itself to conduct the
QUIROGA AND J. PARSONS, BOTH MERCHANTS
agency; to keep the beds on public exhibition, and to pay for the
ESTABLISHED IN MANILA, FOR THE EXCLUSIVE SALE OF
advertisement expenses for the same; and to order the beds by the dozen
"QUIROGA" BEDS IN THE VISAYAN ISLANDS.
and in no other manner. As may be seen, with the exception of the
obligation on the part of the defendant to order the beds by the dozen and
ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell in no other manner, none of the obligations imputed to the defendant in the
his beds in the Visayan Islands to J. Parsons under the following two causes of action are expressly set forth in the contract. But the plaintiff
conditions: alleged that the defendant was his agent for the sale of his beds in Iloilo,
and that said obligations are implied in a contract of commercial agency.
(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. The whole question, therefore, reduced itself to a determination as to
Parsons for the latter's establishment in Iloilo, and shall invoice whether the defendant, by reason of the contract hereinbefore transcribed,
them at the same price he has fixed for sales, in Manila, and, in the was a purchaser or an agent of the plaintiff for the sale of his beds.
invoices, shall make and allowance of a discount of 25 per cent of
the invoiced prices, as commission on the sale; and Mr. Parsons In order to classify a contract, due regard must be given to its essential
shall order the beds by the dozen, whether of the same or of clauses. In the contract in question, what was essential, as constituting its
different styles. cause and subject matter, is that the plaintiff was to furnish the defendant
with the beds which the latter might order, at the price stipulated, and that
(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds the defendant was to pay the price in the manner stipulated. The price
received, within a period of sixty days from the date of their agreed upon was the one determined by the plaintiff for the sale of these
shipment. beds in Manila, with a discount of from 20 to 25 per cent, according to their
class. Payment was to be made at the end of sixty days, or before, at the
plaintiff's request, or in cash, if the defendant so preferred, and in these
(C) The expenses for transportation and shipment shall be borne last two cases an additional discount was to be allowed for prompt
by M. Quiroga, and the freight, insurance, and cost of unloading payment. These are precisely the essential features of a contract of
from the vessel at the point where the beds are received, shall be purchase and sale. There was the obligation on the part of the plaintiff to
paid by Mr. Parsons. supply the beds, and, on the part of the defendant, to pay their price.
These features exclude the legal conception of an agency or order to sell
(D) If, before an invoice falls due, Mr. Quiroga should request its whereby the mandatory or agent received the thing to sell it, and does not
payment, said payment when made shall be considered as a pay its price, but delivers to the principal the price he obtains from the sale
of the thing to a third person, and if he does not succeed in selling it, he
Page 71 of 105
returns it. By virtue of the contract between the plaintiff and the reason for applying this benefit to the beds sold directly by the plaintiff to
defendant, the latter, on receiving the beds, was necessarily persons in Iloilo was because, as the defendant obligated itself in the
obliged to pay their price within the term fixed, without any other contract to incur the expenses of advertisement of the plaintiff's beds,
consideration and regardless as to whether he had or had not sold such sales were to be considered as a result of that advertisement.
the beds.
In respect to the defendant's obligation to order by the dozen, the only one
It would be enough to hold, as we do, that the contract by and expressly imposed by the contract, the effect of its breach would only
between the defendant and the plaintiff is one of purchase and sale, entitle the plaintiff to disregard the orders which the defendant might place
in order to show that it was not one made on the basis of a under other conditions; but if the plaintiff consents to fill them, he waives
commission on sales, as the plaintiff claims it was, for these his right and cannot complain for having acted thus at his own free will.
contracts are incompatible with each other. But, besides,
examining the clauses of this contract, none of them is found that
For the foregoing reasons, we are of opinion that the contract by and
substantially supports the plaintiff's contention. Not a single one of
between the plaintiff and the defendant was one of purchase and sale, and
these clauses necessarily conveys the idea of an agency. The
that the obligations the breach of which is alleged as a cause of action are
words commission on sales used in clause (A) of article 1 mean
not imposed upon the defendant, either by agreement or by law.
nothing else, as stated in the contract itself, than a mere discount
on the invoice price. The word agency, also used in articles 2 and 3,
only expresses that the defendant was the only one that could sell The judgment appealed from is affirmed, with costs against the appellant.
the plaintiff's beds in the Visayan Islands. With regard to the So ordered.
remaining clauses, the least that can be said is that they are not
incompatible with the contract of purchase and sale. Arellano, C.J., Torres, Johnson, Street and Malcolm, JJ., concur.

The plaintiff calls attention to the testimony of Ernesto Vidal, a G.R. No. L-47538 June 20, 1941
former vice-president of the defendant corporation and who
established and managed the latter's business in Iloilo. It appears
that this witness, prior to the time of his testimony, had serious GONZALO PUYAT & SONS, INC., petitioner,
trouble with the defendant, had maintained a civil suit against it, vs.
and had even accused one of its partners, Guillermo Parsons, of ARCO AMUSEMENT COMPANY (formerly known as Teatro
falsification. He testified that it was he who drafted the contract Arco), respondent.
Exhibit A, and, when questioned as to what was his purpose in
contracting with the plaintiff, replied that it was to be an agent for Feria & Lao for petitioner.
his beds and to collect a commission on sales. However, according J. W. Ferrier and Daniel Me. Gomez for respondent.
to the defendant's evidence, it was Mariano Lopez Santos, a
director of the corporation, who prepared Exhibit A. But, even
LAUREL, J.:
supposing that Ernesto Vidal has stated the truth, his statement as
to what was his idea in contracting with the plaintiff is of no
importance, inasmuch as the agreements contained in Exhibit A This is a petition for the issuance of a writ of certiorari to the Court of
which he claims to have drafted, constitute, as we have said, a Appeals for the purpose of reviewing its Amusement Company (formerly
contract of purchase and sale, and not one of commercial agency. known as Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat and Sons.
This only means that Ernesto Vidal was mistaken in his Inc., defendant-appellee."
classification of the contract. But it must be understood that a
contract is what the law defines it to be, and not what it is called by It appears that the respondent herein brought an action against the herein
the contracting parties. petitioner in the Court of First Instance of Manila to secure a
reimbursement of certain amounts allegedly overpaid by it on account of
The plaintiff also endeavored to prove that the defendant had the purchase price of sound reproducing equipment and machinery
returned beds that it could not sell; that, without previous notice, it ordered by the petitioner from the Starr Piano Company of Richmond,
forwarded to the defendant the beds that it wanted; and that the Indiana, U.S.A. The facts of the case as found by the trial court and
defendant received its commission for the beds sold by the plaintiff confirmed by the appellate court, which are admitted by the respondent,
directly to persons in Iloilo. But all this, at the most only shows that, are as follows:
on the part of both of them, there was mutual tolerance in the
performance of the contract in disregard of its terms; and it gives no In the year 1929, the "Teatro Arco", a corporation duly organized under
right to have the contract considered, not as the parties stipulated it, the laws of the Philippine Islands, with its office in Manila, was engaged in
but as they performed it. Only the acts of the contracting parties, the business of operating cinematographs. In 1930, its name was changed
subsequent to, and in connection with, the execution of the contract, to Arco Amusement Company. C. S. Salmon was the president, while A. B.
must be considered for the purpose of interpreting the contract, Coulette was the business manager. About the same time, Gonzalo Puyat
when such interpretation is necessary, but not when, as in the & Sons, Inc., another corporation doing business in the Philippine Islands,
instant case, its essential agreements are clearly set forth and with office in Manila, in addition to its other business, was acting as
plainly show that the contract belongs to a certain kind and not to exclusive agents in the Philippines for the Starr Piano Company of
another. Furthermore, the return made was of certain brass beds, Richmond, Indiana, U.S. A. It would seem that this last company dealt in
and was not effected in exchange for the price paid for them, but cinematographer equipment and machinery, and the Arco Amusement
was for other beds of another kind; and for the letter Exhibit L-1, Company desiring to equipt its cinematograph with sound reproducing
requested the plaintiff's prior consent with respect to said beds, devices, approached Gonzalo Puyat & Sons, Inc., thru its then president
which shows that it was not considered that the defendant had a and acting manager, Gil Puyat, and an employee named Santos. After
right, by virtue of the contract, to make this return. As regards the some negotiations, it was agreed between the parties, that is to say,
shipment of beds without previous notice, it is insinuated in the Salmon and Coulette on one side, representing the plaintiff, and Gil Puyat
record that these brass beds were precisely the ones so shipped, on the other, representing the defendant, that the latter would, on behalf of
and that, for this very reason, the plaintiff agreed to their return. the plaintiff, order sound reproducing equipment from the Starr Piano
And with respect to the so-called commissions, we have said that Company and that the plaintiff would pay the defendant, in addition to the
they merely constituted a discount on the invoice price, and the
Page 72 of 105
price of the equipment, a 10 per cent commission, plus all I. El Tribunal de Apelaciones incurrio en error de derecho al declarar que,
expenses, such as, freight, insurance, banking charges, cables, etc. segun hechos, entre la recurrente y la recurrida existia una relacion
At the expense of the plaintiff, the defendant sent a cable, Exhibit implicita de mandataria a mandante en la transaccion de que se trata, en
"3", to the Starr Piano Company, inquiring about the equipment vez de la de vendedora a compradora como ha declarado el Juzgado de
desired and making the said company to quote its price without Primera Instncia de Manila, presidido entonces por el hoy Magistrado
discount. A reply was received by Gonzalo Puyat & Sons, Inc., with Honorable Marcelino Montemayor.
the price, evidently the list price of $1,700 f.o.b. factory Richmond,
Indiana. The defendant did not show the plaintiff the cable of
II. El Tribunal de Apelaciones incurrio en error de derecho al declarar que,
inquiry nor the reply but merely informed the plaintiff of the price of
suponiendo que dicha relacion fuerra de vendedora a compradora, la
$1,700. Being agreeable to this price, the plaintiff, by means of recurrente obtuvo, mediante dolo, el consentimiento de la recurrida en
Exhibit "1", which is a letter signed by C. S. Salmon dated
cuanto al precio de $1,700 y $1,600 de las maquinarias y equipos en
November 19, 1929, formally authorized the order. The equipment
cuestion, y condenar a la recurrente ha obtenido de la Starr Piano
arrived about the end of the year 1929, and upon delivery of the
Company of Richmond, Indiana.
same to the plaintiff and the presentation of necessary papers, the
price of $1.700, plus the 10 per cent commission agreed upon and
plus all the expenses and charges, was duly paid by the plaintiff to We sustain the theory of the trial court that the contract between the
the defendant. petitioner and the respondent was one of purchase and sale, and not one
of agency, for the reasons now to be stated.
Sometime the following year, and after some negotiations between
the same parties, plaintiff and defendants, another order for sound In the first place, the contract is the law between the parties and should
reproducing equipment was placed by the plaintiff with the include all the things they are supposed to have been agreed upon. What
defendant, on the same terms as the first order. This agreement or does not appear on the face of the contract should be regarded merely as
order was confirmed by the plaintiff by its letter Exhibit "2", without "dealer's" or "trader's talk", which can not bind either party. (Nolbrook v.
date, that is to say, that the plaintiff would pay for the equipment the Conner, 56 So., 576, 11 Am. Rep., 212; Bank v. Brosscell, 120 III., 161;
amount of $1,600, which was supposed to be the price quoted by Bank v. Palmer, 47 III., 92; Hosser v. Copper, 8 Allen, 334; Doles v. Merrill,
the Starr Piano Company, plus 10 per cent commission, plus all 173 Mass., 411.) The letters, Exhibits 1 and 2, by which the respondent
expenses incurred. The equipment under the second order arrived accepted the prices of $1,700 and $1,600, respectively, for the sound
in due time, and the defendant was duly paid the price of $1,600 reproducing equipment subject of its contract with the petitioner, are clear
with its 10 per cent commission, and $160, for all expenses and in their terms and admit no other interpretation that the respondent in
charges. This amount of $160 does not represent actual question at the prices indicated which are fixed and determinate. The
out-of-pocket expenses paid by the defendant, but a mere flat respondent admitted in its complaint filed with the Court of First Instance
charge and rough estimate made by the defendant equivalent to 10 of Manila that the petitioner agreed to sellto it the first sound reproducing
per cent of the price of $1,600 of the equipment. equipment and machinery. The third paragraph of the respondent's cause
of action states:
About three years later, in connection with a civil case in Vigan,
filed by one Fidel Reyes against the defendant herein Gonzalo 3. That on or about November 19, 1929, the herein plaintiff (respondent)
Puyat & Sons, Inc., the officials of the Arco Amusement Company and defendant (petitioner) entered into an agreement, under and by virtue
discovered that the price quoted to them by the defendant with of which the herein defendant was to secure from the United States,
regard to their two orders mentioned was not the net price but and sell and deliver to the herein plaintiff, certain sound reproducing
rather the list price, and that the defendants had obtained a equipment and machinery, for which the said defendant, under and by
discount from the Starr Piano Company. Moreover, by reading virtue of said agreement, was to receive the actual cost price plus ten per
reviews and literature on prices of machinery and cinematograph cent (10%), and was also to be reimbursed for all out of pocket expenses
equipment, said officials of the plaintiff were convinced that the in connection with the purchase and delivery of such equipment, such as
prices charged them by the defendant were much too high costs of telegrams, freight, and similar expenses. (Emphasis ours.)
including the charges for out-of-pocket expense. For these reasons,
they sought to obtain a reduction from the defendant or rather a We agree with the trial judge that "whatever unforseen events might have
reimbursement, and failing in this they brought the present action. taken place unfavorable to the defendant (petitioner), such as change in
prices, mistake in their quotation, loss of the goods not covered by
The trial court held that the contract between the petitioner and the insurance or failure of the Starr Piano Company to properly fill the orders
respondent was one of outright purchase and sale, and absolved as per specifications, the plaintiff (respondent) might still legally hold the
that petitioner from the complaint. The appellate court, however, — defendant (petitioner) to the prices fixed of $1,700 and $1,600." This is
by a division of four, with one justice dissenting — held that the incompatible with the pretended relation of agency between the petitioner
relation between petitioner and respondent was that of agent and and the respondent, because in agency, the agent is exempted from all
principal, the petitioner acting as agent of the respondent in the liability in the discharge of his commission provided he acts in accordance
purchase of the equipment in question, and sentenced the with the instructions received from his principal (section 254, Code of
petitioner to pay the respondent alleged overpayments in the total Commerce), and the principal must indemnify the agent for all damages
sum of $1,335.52 or P2,671.04, together with legal interest thereon which the latter may incur in carrying out the agency without fault or
from the date of the filing of the complaint until said amount is fully imprudence on his part (article 1729, Civil Code).
paid, as well as to pay the costs of the suit in both instances. The
appellate court further argued that even if the contract between the While the latters, Exhibits 1 and 2, state that the petitioner was to receive
petitioner and the respondent was one of purchase and sale, the ten per cent (10%) commission, this does not necessarily make the
petitioner was guilty of fraud in concealing the true price and hence petitioner an agent of the respondent, as this provision is only an
would still be liable to reimburse the respondent for the additional price which the respondent bound itself to pay, and which
overpayments made by the latter. stipulation is not incompatible with the contract of purchase and sale.
(See Quiroga vs. Parsons Hardware Co., 38 Phil., 501.)
The petitioner now claims that the following errors have been
incurred by the appellate court: In the second place, to hold the petitioner an agent of the respondent in
the purchase of equipment and machinery from the Starr Piano Company

Page 73 of 105
of Richmond, Indiana, is incompatible with the admitted fact that G.R. No. L-20871 April 30, 1971
the petitioner is the exclusive agent of the same company in the
Philippines. It is out of the ordinary for one to be the agent of both KER & CO., LTD., petitioner,
the vendor and the purchaser. The facts and circumstances
vs.
indicated do not point to anything but plain ordinary transaction JOSE B. LINGAD, as Acting Commissioner of Internal
where the respondent enters into a contract of purchase and sale Revenue, respondent.
with the petitioner, the latter as exclusive agent of the Starr Piano
Company in the United States.
Ross, Selph and Carrascoso for petitioner.
It follows that the petitioner as vendor is not bound to reimburse the
respondent as vendee for any difference between the cost price Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B.
and the sales price which represents the profit realized by the Afurong and Special Atty. Balbino Gatdula, Jr. for respondent.
vendor out of the transaction. This is the very essence of
commerce without which merchants or middleman would not exist. FERNANDO, J.:

The respondents contends that it merely agreed to pay the cost Petitioner Ker & Co., Ltd. would have us reverse a decision of the Court of
price as distinguished from the list price, plus ten per cent (10%) Tax Appeals, holding it liable as a commercial broker under Section 194 (t)
commission and all out-of-pocket expenses incurred by the of the National Internal Revenue Code. Its plea, notwithstanding the
petitioner. The distinction which the respondents seeks to draw vigorous effort of its counsel, is not sufficiently persuasive. An obstacle,
between the cost price and the list price we consider to be spacious. well-nigh insuperable stands in the way. The decision under review
It is to be observed that the twenty-five per cent (25%) discount conforms to and is in accordance with the controlling doctrine announced
granted by the Starr piano Company to the petitioner is available in the recent case of Commissioner of Internal Revenue v.
only to the latter as the former's exclusive agent in the Philippines. Constantino.1 The decisive test, as therein set forth, is the retention of the
The respondent could not have secured this discount from the Starr ownership of the goods delivered to the possession of the dealer, like
Piano Company and neither was the petitioner willing to waive that herein petitioner, for resale to customers, the price and terms remaining
discount in favor of the respondent. As a matter of fact, no reason subject to the control of the firm consigning such goods. The facts, as
is advanced by the respondent why the petitioner should waive the found by respondent Court, to which we defer, unmistakably indicate that
25 per cent discount granted it by the Starr Piano Company in such a situation does exist. The juridical consequences must inevitably
exchange for the 10 percent commission offered by the respondent. follow. We affirm.
Moreover, the petitioner was not duty bound to reveal the private
arrangement it had with the Starr Piano Company relative to such
discount to its prospective customers, and the respondent was not It was shown that petitioner was assessed by the then Commissioner of
even aware of such an arrangement. The respondent, therefore, Internal Revenue Melecio R. Domingo the sum of P20,272.33 as the
could not have offered to pay a 10 per cent commission to the commercial broker's percentage tax, surcharge, and compromise penalty
petitioner provided it was given the benefit of the 25 per cent for the period from July 1, 1949 to December 31, 1953. There was a
discount enjoyed by the petitioner. It is well known that local request on the part of petitioner for the cancellation of such assessment,
dealers acting as agents of foreign manufacturers, aside from which request was turned down. As a result, it filed a petition for review
obtaining a discount from the home office, sometimes add to the list with the Court of Tax Appeals. In its answer, the then Commissioner
price when they resell to local purchasers. It was apparently to Domingo maintained his stand that petitioner should be taxed in such
guard against an exhorbitant additional price that the respondent amount as a commercial broker. In the decision now under review,
sought to limit it to 10 per cent, and the respondent is estopped promulgated on October 19, 1962, the Court of Tax Appeals held
from questioning that additional price. If the respondent later on petitioner taxable except as to the compromise penalty of P500.00, the
discovers itself at the short end of a bad bargain, it alone must bear amount due from it being fixed at P19,772.33.
the blame, and it cannot rescind the contract, much less compel a
reimbursement of the excess price, on that ground alone. The Such liability arose from a contract of petitioner with the United States
respondent could not secure equipment and machinery Rubber International, the former being referred to as the Distributor and
manufactured by the Starr Piano Company except from the the latter specifically designated as the Company. The contract was to
petitioner alone; it willingly paid the price quoted; it received the apply to transactions between the former and petitioner, as Distributor,
equipment and machinery as represented; and that was the end of from July 1, 1948 to continue in force until terminated by either party giving
the matter as far as the respondent was concerned. The fact that to the other sixty days' notice.2 The shipments would cover products "for
the petitioner obtained more or less profit than the respondent consumption in Cebu, Bohol, Leyte, Samar, Jolo, Negros Oriental, and
calculated before entering into the contract or reducing the price Mindanao except [the] province of Davao", petitioner, as Distributor, being
agreed upon between the petitioner and the respondent. Not every precluded from disposing such products elsewhere than in the above
concealment is fraud; and short of fraud, it were better that, within places unless written consent would first be obtained from the
certain limits, business acumen permit of the loosening of the Company.3 Petitioner, as Distributor, is required to exert every effort to
sleeves and of the sharpening of the intellect of men and women in have the shipment of the products in the maximum quantity and to
the business world. 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
The writ of certiorari should be, as it is hereby, granted. The change in the discretion of the Company.5
decision of the appellate court is accordingly reversed and the
petitioner is absolved from the respondent's complaint in G. R. No. Then came this crucial stipulation: "The Company shall from time to time
1023, entitled "Arco Amusement Company (formerly known as consign to the Distributor and the Distributor will receive, accept and/or
Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat & Sons, Inc., hold upon consignment the products specified under the terms of this
defendants-appellee," without pronouncement regarding costs. So agreement in such quantities as in the judgment of the Company may be
ordered. 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
Page 74 of 105
his name, in which the sale price of all goods sold less the discount promote in every way the sale of the products (Par. 3); that sales made by
given to the Distributor by the Company in accordance with the petitioner are subject to approval by the company (Par. 12); that on dates
provision of paragraph 13 of this agreement, whether or not such determined by the rubber company, petitioner shall render a detailed
sale price shall have been collected by the Distributor from the report showing sales during the month (Par. 14); that the rubber company
purchaser or purchasers, shall immediately be paid and remitted by shall invoice the sales as of the dates of inventory and sales report (Par.
the Distributor to the Company. It is further agreed that this 14); that the rubber company agrees to keep the consigned goods fully
agreement does not constitute Distributor the agent or legal insured under insurance policies payable to it in case of loss (Par. 15); that
representative 4 of the Company for any purpose whatsoever. upon request of the rubber company at any time, petitioner shall render an
Distributor is not granted any right or authority to assume or to inventory of the existing stock which may be checked by an authorized
create any obligation or responsibility, express or implied, in behalf representative of the former (Par. 15); and that upon termination or
of or in the name of the Company, or to bind the Company in any cancellation of the Agreement, all goods held on consignment shall be
manner or thing whatsoever."6 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
All specifications for the goods ordered were subject to acceptance
merchant." 14 Hence its conclusion: "However, upon analysis of the
by the Company with petitioner, as Distributor, required to accept
contract, as a whole, together with the actual conduct of the parties in
such goods shipped as well as to clear the same through customs
respect thereto, we have arrived at the conclusion that the relationship
and to arrange for delivery in its warehouse in Cebu City. Moreover,
between them is one of brokerage or agency." 15 We find ourselves in
orders are to be filled in whole or in part from the stocks carried by
agreement, notwithstanding the able brief filed on behalf of petitioner by its
the Company's neighboring branches, subsidiaries or other
counsel. As noted at the outset, we cannot heed petitioner's plea for
sources of Company's brands.7 Shipments were to be invoiced at
reversal.
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 1. According to the National Internal Revenue Code, a commercial broker
of local resale were to be subject to the approval of the Company "includes all persons, other than importers, manufacturers, producers, or
and to change from time to time in its discretion. 9 The dealer, as bona fide employees, who, for compensation or profit, sell or bring about
Distributor, is allowed a discount of ten percent on the net amount sales or purchases of merchandise for other persons or bring proposed
of sales of merchandise made under such agreement. 10 On a date buyers and sellers together, or negotiate freights or other business for
to be determined by the Company, the petitioner, as Distributor, owners of vessels or other means of transportation, or for the shippers, or
was required to report to it data showing in detail all sales during consignors or consignees of freight carried by vessels or other means of
the month immediately preceding, specifying therein the quantities, transportation. The term includes commission merchants." 16 The
sizes and types together with such information as may be required controlling decision as to the test to be followed as to who falls within the
for accounting purposes, with the Company rendering an invoice above definition of a commercial broker is that of Commissioner of Internal
on sales as described to be dated as of the date of inventory and Revenue v. Constantino. 17 In the language of Justice J. B. L. Reyes, who
sales report. As Distributor, petitioner had to make payment on penned the opinion: "Since the company retained ownership of the goods,
such invoice or invoices on due date with the Company being even as it delivered possession unto the dealer for resale to customers,
privileged at its option to terminate and cancel the agreement the price and terms of which were subject to the company's control, the
forthwith upon the failure to comply with this obligation. 11 The relationship between the company and the dealer is one of
Company, at its own expense, was to keep the consigned stock agency, ... ." 18 An excerpt from Salisbury v. Brooks 19 cited in support of
fully insured against loss or damage by fire or as a result of fire, the such a view follows: " 'The difficulty in distinguishing between contracts of
policy of such insurance to be payable to it in the event of loss. sale and the creation of an agency to sell has led to the establishment of
Petitioner, as Distributor, assumed full responsibility with reference rules by the application of which this difficulty may be solved. The
to the stock and its safety at all times; and upon request of the decisions say the transfer of title or agreement to transfer it for a price paid
Company at any time, it was to render inventory of the existing or promised is the essence of sale. If such transfer puts the transferee in
stock which could be subject to change. 12 There was furthermore the attitude or position of an owner and makes him liable to the transferor
this equally tell-tale covenant: "Upon the termination or any as a debtor for the agreed price, and not merely as an agent who must
cancellation of this agreement all goods held on consignment shall account for the proceeds of a resale, the transaction is a sale; while the
be held by the Distributor for the account of the Company, without essence of an agency to sell is the delivery to an agent, not as his property,
expense to the Company, until such time as provision can be made but as the property of the principal, who remains the owner and has the
by the Company for disposition." 13 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.
The issue with the Court of Tax Appeals, as with us now, is whether
Williston and Tiedman both of whom wrote treatises on Sales, were
the relationship thus created is one of vendor and vendee or of
likewise referred to.
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 Equally relevant is this portion of the Salisbury opinion: "It is difficult to
of the Company for any purpose whatsoever." It would be, however, understand or appreciate the necessity or presence of these mutual
to impart to such an express disclaimer a meaning it should not requirements and obligations on any theory other than that of a contract of
possess to ignore what is manifestly the role assigned to petitioner agency. Salisbury was to furnish the mill and put the timber owned by him
considering the instrument as a whole. That would be to lose sight into a marketable condition in the form of lumber; Brooks was to furnish
altogether of what has been agreed upon. The Court of Tax the funds necessary for that purpose, sell the manufactured product, and
Appeals was not misled in the language of the decision now on account therefor to Salisbury upon the specific terms of the agreement,
appeal: "That the petitioner Ker & Co., Ltd. is, by contractual less the compensation fixed by the parties in lieu of interest on the money
stipulation, an agent of U.S. Rubber International is borne out by advanced and for services as agent. These requirements and stipulations
the facts that petitioner can dispose of the products of the are in tent with any other conception of the contract. If it constitutes an
Company only to certain persons or entities and within stipulated agreement to sell, they are meaningless. But they cannot be ignored. They
limits, unless excepted by the contract or by the Rubber Company were placed there for some purpose, doubtless as the result of definite
(Par. 2); that it merely receives, accepts and/or holds upon antecedent negotiations therefore, consummated by the final written
consignment the products, which remain properties of the latter expression of the agreement." 21 Hence the Constantino opinion could
company (Par. 8); that every effort shall be made by petitioner to categorically affirm that the mere disclaimer in a contract that an entity like

Page 75 of 105
petitioner is not "the agent or legal representative for any purpose Petitioner seeks reversal of the decision and the resolution of the Court of
whatsoever" does not suffice to yield the conclusion that it is an Appeals, ordering Schmid & Oberly Inc. (hereafter to be referred to simply
independent merchant if the control over the goods for resale of the as "SCHMID") to refund the purchase price paid by RJL Martinez Fishing
goods consigned is pervasive in character. The Court of Tax Corporation (hereafter to be referred to simply as "RJL MARTINEZ") to D.
Appeals decision now under review pays fealty to such an Nagata Co., Ltd. of Japan (hereafter to be referred to simply as NAGATA
applicable doctrine. CO.") for twelve (12) defective "Nagata"-brand generators, plus
consequential damages, and attorneys fees.
2. No merit therefore attaches to the first error imputed by petitioner
to the Court of Tax Appeals. Neither did such Court fail to The facts as found by the Court of Appeals, are as follows:
appreciate in its true significance the act and conduct pursued in
the implementation of the contract by both the United States
The findings of facts by the trial court (Decision, pp. 21-28, Record on
Rubber International and petitioner, as was contended in the
Appeal) shows: that the plaintiff RJL Martinez Fishing Corporation is
second assignment of error. Petitioner ought to have been aware
engaged in deep-sea fishing, and in the course of its business, needed
that there was no need for such an inquiry. The terms of the
electrical generators for the operation of its business; that the defendant
contract, as noted, speak quite clearly. There is lacking that degree
sells electrical generators with the brand of "Nagata", a Japanese product;
of ambiguity sufficient to give rise to serious doubt as to what was
that the supplier is the manufacturer, the D. Nagata Co. Ltd., of Japan, that
contemplated by the parties. A reading thereof discloses that the
the defendant Schmid & Oberly Inc. advertised the 12 Nagata generators
relationship arising therefrom was not one of seller and purchaser.
for sale; that the plaintiff purchased 12 brand new Nagata generators, as
If it were thus intended, then it would not have included covenants
advertised by herein defendant; that through an irrevocable line of credit,
which in their totality would negate the concept of a firm acquiring
the D. Nagata Co., Ltd., shipped to the plaintiff 12 electric generators, and
as vendee goods from another. Instead, the stipulations were so the latter paid the amount of the purchase price; that the 12 generators
worded as to lead to no other conclusion than that the control by
were found to be factory defective; that the plaintiff informed the defendant
the United States Rubber International over the goods in question
herein that it shall return the 12 generators as in fact three of the 12 were
is, in the language of the Constantino opinion, "pervasive". The
actually returned to the defendant; that the plaintiff sued the defendant on
insistence on a relationship opposed to that apparent from the
the warranty; asking for rescission of the contract; that the defendant be
language employed might even yield the impression that such a
ordered to accept the generators and be ordered to pay back the purchase
mode of construction was resorted to in order that the applicability
money; and that the plaintiff asked for damages. (Record on Appeal, pp.
of a taxing statute might be rendered nugatory. Certainly, such a
27-28) [CA Decision, pp. 34; Rollo, pp. 47-48.]
result is to be avoided.

On the basis thereof, the Court of Appeals affirmed the decision of the trial
Nor is it to be lost sight of that on a matter left to the discretion of
court ordering petitioner to refund to private respondent the purchase price
the Court of Tax Appeals which has developed an expertise in view
for the twelve (12) generators and to accept delivery of the same and to
of its function being limited solely to the interpretation of revenue
pay s and attorney's fees, with a slight modification as to the amount to be
laws, this Court is not prepared to substitute its own judgment
refunded. In its resolution of the motion for reconsideration, the Court of
unless a grave abuse of discretion is manifest. It would be to
Appeals further modified the trial courts decision as to the award of
frustrate the objective for which administrative tribunals are created
consequential damages.
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 Ordinarily, the Court will not disturb the findings of fact of the Court of
with care the decision under review with a view to exposing what Appeals in petitions to review the latter's decisions under Rule 45 of the
was considered its flaws, it cannot be said that there was such a Revised Rules of Court, the scope of the Court's inquiry being limited to a
failure to apply what the law commands as to call for its reversal. review of the imputed errors of law [Chan v. Court of Appeals, G.R. No.
Instead, what cannot be denied is that the Court of Tax Appeals L-27488, June 30, 1970, 33 SCRA 77; Tiongco v. De la Merced, G.R. No.
reached a result to which the Court in the recent Constantino L-24426, July 25, 1974, 58 SCRA 89; Corona v. Court of Appeals, G.R. No.
decision gave the imprimatur of its approval. 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
WHEREFORE, the Court of Tax Appeals decision of October 19,
case, it is the petitioner's position that the appealed judgment is premised
1962 is affirmed. With costs against petitioner.
on a misapprehension of
facts, * the Court is compelled to review the Court of Appeal's factual
Concepcion C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, findings [De la Cruz v. Sosing, 94 Phil. 26 (1953); Castillo v. Court of
Teehankee, Barredo, Villamor and Makasiar, JJ., concur. 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
G.R. No. 75198 October 18, 1988 could not be determined without a thorough review of the records.

SCHMID & OBERLY, INC., petitioner, 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
vs.
RJL MARTINEZ FISHING CORPORATION, respondent. material facts.

The facts are actually as follows:


Sycip Salazar Hernandez & Gatmaitan Law Office for petitioner.

RJL MARTINEZ is engaged in the business of deep-sea fishing. As RJL


Siguion Reyna, Montecillo & Ongsiako Law Office for respondent.
MARTINEZ needed electric generators for some of its boats and SCHMIID
sold electric generators of different brands, negotiations between them for
CORTES, J.: the acquisition thereof took place. The parties had two separate
transactions over "Nagata"-brand generators.
Page 76 of 105
The first transaction was the sale of three (3) generators. In this As for the twelve (12) generators subject of the second transaction, the
transaction, it is not disputed that SCHMID was the vendor of the Japanese technicians advised RJL MARTINEZ to ship three (3)
generators. The company supplied the generators from its generators to Japan, which the company did. These three (3) generators
stockroom; it was also SCHMID which invoiced the sale. 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 second transaction, which gave rise to the present controversy,
the generators, request for spare parts for replacement free of charge, and
involves twelve (12) "Nagata"-brand generators. 'These are the
send to NAGATA CO. SCHMID's warranty claim including the labor cost
facts surrounding this particular transaction:
for repairs [Exhibit "I".] In its reply letter, SCHMID indicated that it was not
agreeable to these terms [Exhibit "10".]
As RJL MARTINEZ was canvassing for generators, SC gave RJL
MARTINEZ its Quotation dated August 19, 1975 [Exhibit 'A"] for
As not all of the generators were replaced or repaired, RJL MARTINEZ
twelve (12) "Nagata'-brand generators with the following
formally demanded that it be refunded the cost of the generators and paid
specifications:
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
"NAGATA" Single phase AC Alternators, 110/220 V, 60 cycles, therefor. Hence, on February 14, 1977, RJL MARTINEZ brought suit
1800 rpm, unity power factor, rectifier type and radio suppressor,, against SCHMID on the theory that the latter was the vendor of the twelve
5KVA (5KW) $546.75 @ (12) generators and, as such vendor, was liable under its warranty against
hidden defects.
It was stipulated that payment would be made by confirming an
irrevocable letter of credit in favor of NAGATA CO. Furthermore, Both the trial court and the Court of Appeals upheld the contention of RJL
among the General Conditions of Sale appearing on the dorsal side MARTINEZ that SCHMID was the vendor in the second transaction and
of the Quotation is the following: was liable under its warranty. Accordingly, the courts a quo rendered
judgment in favor of RJL MARTINEZ. Hence, the instant recourse to this
Buyer will, upon request, promptly open irrevocable Letter of Credit Court.
in favor of seller, in the amount stated on the face of this
memorandum, specifying shipment from any Foreign port to Manila In this petition for review, SCHMID seeks reversal on the following
or any safe Philippine port, permitting partial shipments and grounds:
providing that in the event the shippers are unable to ship within the
specified period due to strikes, lack of shipping space or other
(i) Schmid was merely the indentor in the sale [of the twelve (12)
circumstances beyond their reasonable control, Buyer agrees to
generators] between Nagata Co., the exporter and RJL Martinez, the
extend the said Letter of Credit for later shipment. The Letter of
importer;
Credit shall otherwise be subject to the conditions stated in this
memorandum of contract. [Emphasis supplied.]
(ii) as mere indentor, Schmid is not liable for the seller's implied warranty
against hidden defects, Schmid not having personally assumed any such
Agreeing with the terms of the Quotation, RJL MARTINEZ opened
warranty.
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 (iii) in any event, conformably with Article 1563 of the Civil Code, there
RJL MARTINEZ. NAGATA CO. thereafter sent RJL MARTINEZ the was no implied warranty against hidden defects in the sale of these twelve
bill of lading and its own invoice (Exhibit "B") and, in accordance (12) generators because these were sold under their trade name "Nagata";
with the order, shipped the generators directly to RJL MARTINEZ. and
The invoice states that "one (1) case of 'NAGATA' AC Generators"
consisting of twelve sets was—bought by order and for account risk
(iv) Schmid, accordingly, is not liable for the reimbursement claimed by
of Messrs. RJL Martinez Fishing Corporation.
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
For its efforts, SCHMID received from NAGATA CO. a commission costs. [Petition, p. 6.]
of $1,752.00 for the sale of the twelve generators to RJL
MARTINEZ. [Exhibits "9", "9-A", "9-B" and "9-C".]
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
All fifteen (15) generators subject of the two transactions burned transaction. SCHMID maintains that it was the latter; RJL MARTINEZ
out after continuous use. RJL MARTINEZ informed SCHMID about claims that it was a sale.
this development. In turn, SCHMID brought the matter to the
attention of NAGATA CO. In July 1976, NAGATA CO. sent two
At the outset, it must be understood that a contract is what the law defines
technical representatives who made an ocular inspection and
it to be, considering its essential elements, and not what it is caged by the
conducted tests on some of the burned out generators, which by
contracting parties [Quiroga v. Parsons Hardware Co., 38 Phil. 501
then had been delivered to the premises of SCHMID.
(1918).]

The tests revealed that the generators were overrated. As indicated


The Civil Code defines a contract of sale, thus:
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. 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.
SCHMID replaced the three (3) generators subject of the first sale
with generators of a different brand.
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

Page 77 of 105
Internal Revenue v. Constantino, G.R. No. L-25926, February 27, Coming now to the case at bar, the admissions of the parties and the facts
1970, 31 SCRA 779, 785, citing Salisbury v. Brooks, 94 SE appearing on record more than suffice to warrant the conclusion that
117,118-19.] "If such transfer puts the transferee in the attitude or SCHMID was not a vendor, but was merely an indentor, in the second
position of an owner and makes him liable to the transferor as a transaction.
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."
In its complaint, RJL MARTINEZ admitted that the generators were
[Ibid.]
purchased "through indent order" [Record on Appeal, p. 6.] In the same
vein, it admitted in its demand letter previously sent to SCHMID that
On the other hand, there is no statutory definition of "indent" in this twelve (12) of en (15) Nagata-brand generators "were purchased through
jurisdiction. However, the Rules and Regulations to Implement your company (SCHMID), by indent order and three (3) by direct
Presidential Decree No. 1789 (the Omnibus Investments Code) purchase." [Exhibit "D".] The evidence also show that RJL MARTINEZ
lumps "indentors" together with "commercial brokers" and paid directly NAGATA CO, for the generators, and that the latter company
"commission merchants" in this manner: 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,
... A foreign firm which does business through
by procuring an order from RJL MARTINEZ and forwarding the same to
the middlemen acting in their own names, such as indentors,
NAGATA CO. for which the company received a commission from
commercial brokers or commission merchants, shall not be
NAGATA CO. [Exhibits "9", "9-A", "9-B" and "9-C".]
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, The above transaction is significantly different from the first transaction
Section 1, par. g (1).] 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.
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 These facts notwithstanding, RJL MARTINEZ insists that SCHMID was
prove helpful. the vendor of the twelve generators on the following grounds:

A broker is generally defined as one who is engaged, for others, on First, it is contended that the Quotation and the General Conditions of Sale
a commission, negotiating contracts relative to property with the on the dorsal side thereof do not necessarily lead to the conclusion that
custody of which he has no concern; the negotiator between other NAGATA CO., and not SCHMID, was the real seller in the case of the
parties, never acting in his own name but in the name of those who twelve (12) generators in that:
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
(i) the signing of the quotation, which was under SCHMID's letter-head,
Ind., 234; Black's Law Dictionary.) A broker is one whose
perfected the contract of sale (impliedly, as between the signatories
occupation it is to bring parties together to bargain, or to bargain for thereto—i.e., RJL MARTINEZ and SCHMID);
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 (ii) the qualification that the letter of credit shall be in favor of NAGATA CO.
make bargains and contracts between other persons, in matters of constituted simply the manner of payment requested by SCHMID
trade, commerce or navigation, for compensation commonly called (implying that SCHMID, as seller, merely chose to waive direct payment,
brokerage. (Storey on Agency, sec. 28.) [Behn Meyer and Co., Ltd. stipulating delivery of payment instead to NAGATA CO. as supplier);
v. Nolting and Garcia, 35 Phil. 274, 279-80 (1916).]
Second, it is asserted that the acts of SCHMID after it was informed of the
A commission merchant is one engaged in the purchase or sale for defect in the generators were indicative of its awareness that it was the
another of personal property which, for this purpose, is placed in vendor and acknowledgment of its liability as such vendor. Attention is
his possession and at his disposal. He maintains a relation not only called to these facts: When RJL MARTINEZ complained to SCHMID that
with his principal and the purchasers or vendors, but also with the the generators were defective, SCHMID immediately asked RJL
property which is subject matter of the transaction. [Pacific MARTINEZ to send the defective generators to its shop to determine what
Commercial Co. v. Yatco, 68 Phil. 398, 401 (1939).] 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
Thus, the chief feature of a commercial broker and a commercial
generators were found to have factory defects, SCHMID facilitated the
merchant is that in effecting a sale, they are merely intermediaries
shipment of three (3) generators to Japan and, after their repair, back to
or middle-men, and act in a certain sense as the agent of both the Philippines [Memorandum for the Respondent, p. 8.]
parties to the transaction.

Third, it is argued that the contents of the letter from NAGATA CO. to
Webster defines an indent as "a purchase order for goods
SCHMID regarding the repair of the generators indicated that the latter
especially when sent from a foreign country." [Webster's Ninth New
was "within the purview of a seller." [Ibid.]
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 Fourth, it is argued that if SCHMID is considered as a mere agent of
manufacturer residing in the country where the goods are to be NAGATA CO., a foreign corporation not licensed to do business in the
bought [Commissioner of Internal Revenue v. Cadwallader Pacific Philippines, then the officers and employees of the former may be
Company, G.R. No. L-20343, September 29, 1976, 73 SCRA 59.] penalized for violation of the old Corporation Law which provided:
An indentor may therefore be best described as one who, for
compensation, acts as a middleman in bringing about a purchase Sec. 69 ... Any officer or agent of the corporation or any person transacting
and sale of goods between a foreign supplier and a local business for any foreign corporation not having the license prescribed
purchaser. shall be punished by imprisonment for not less than six months nor more
Page 78 of 105
than two years or by a fine 'of not less than two hundred pesos nor Again, we consider the facts.
more than one thousand pesos or both such imprisonment and fine,
in the discretion of the Court.
The Quotation (Exhibit A is in writing. It is the repository of the contract
between RJL MARTINEZ and SCHMID. Notably, nowhere is it stated
The facts do not bear out these contentions. 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
The first contention disregards the circumstances surrounding the
parol evidence of warranty will be to no avail [See Rule 123, Sec. 22.]
second transaction as distinguished from those surrounding the
first transaction, as noted above.
The trial court, however, relied on the testimony of Patrocinio Balagtas, the
head of the Electrical Department of RJL MARTINEZ, to support the
Neither does the solicitous manner by which SCHMID responded
finding that SCHMID did warrant the twelve (12) generators against
to RJL MARTINEZ's complaint prove that the former was the seller
defects.
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 Upon careful examination of Balagtas' testimony, what is at once apparent
product of the seller and to retain the goodwill of the buyer, a is that Balagtas failed to disclose the nature or terms and conditions of the
prudent indentor desirous of maintaining his business would have warranty allegedly given by SC Was it a warranty that the generators
to act considerably. towards his clients. 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
Note that in contrast to its act of replacing the three (3) generators
contracted, unless the nature or terms and conditions of the warranty are
subject of the first transaction, SCHMID did not replace any of the
known, it would not be possible to determine whether there has been a
twelve (12) generators, but merely rendered assistance to both RJL
breach thereof.
TINES and NAGATA CO. so that the latter could repair the
defective generators.
Moreover, a closer examination of the statements allegedly made by the
representative of SCHMID reveals that they merely constituted an
The proposal of NAGATA CO. rejected by SCHMID that the latter
expression of opinion which cannot by any means be construed as a
undertake the repair of the nine (9) other defective generators, with
warranty [See Art. 1546, Civil Code.]
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 We quote from Balagtas' testimony:
generators of the second transaction or was acting "within the
purview of a seller."
Atty. CATRAL:

Finally, the afore-quoted penal provision in the Corporation Law


Q Did you not say at the start of your cross examination, Mr. Balagtas, that
finds no application to SCHMID and its officers and employees
the only participation you had in the acquisition of those twelve (12) units
relative to the transactions in the instant case. What the law seeks
[of] generators was your having issued a purchase order to your own
to prevent, through said provision, is the circumvention by foreign
company for the purchase of the units?
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 ATTY. AQUINO:
fact, the provision of the Rules and Regulations implementing the
Omnibus Investments Code quoted above, which was copied from Misleading, your Honor.
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 Atty. CATRAL:
deemed doing business in the Philippines.
I am asking the witness.
In view of the above considerations, this Court rules that SCHMID
was merely acting as an indentor in the purchase and sale of the COURT:
twelve (12) generators subject of the second transaction. Not being
the vendor, SCHMID cannot be held liable for the implied warranty
He has the right to ask that question because he is on cross. Moreover, if I
for hidden defects under the Civil Code [Art. 1561, et seq.]
remember, he mentioned something like that. Witness may answer.

2. However, even as SCHMID was merely an indentor, there was


A Yes, sir. Before I submitted that, we negotiated with Schmid and Oberly
nothing to prevent it from voluntarily warranting that twelve (12)
the beat generators they can recommend because we are looking for
generators subject of the second transaction are free from any
generators. The representative of Schmid and Oberly said that Nagata is
hidden defects. In other words, SCHMID may be held answerable
very good. That is why I recommended that to the management. [t.s.n.,
for some other contractual obligation, if indeed it had so bound
October 14, 1977, pp. 23-25.]
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 At any rate, when asked where SCHMID's warranty was contained,
principal (See Art. 1897, Civil Code.) 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
The Court's inquiry, therefore, shifts to a determination of whether
generators against defects.) When confronted with a copy of the invoice
or not SCHMID expressly bound itself to warrant that the twelve (12)
issued by NAGATA CO., he changed his assertion and claimed that what
generators are free of any hidden defects.
he meant was that the date of the commencement of the period of
Page 79 of 105
SCHMID's warranty would be based on the date of the invoice. On SLDR No. 1214M, which gave rise to the instant case. Dated October 16,
further examination, he again changed his mind and asserted that 1989, SLDR No. 1214M covers 25,000 bags of sugar. Each bag contained
the warranty was given verbally [TSN, October 14, 1977, pp. 19-22.] 50 kilograms and priced at P638.00 per bag as "per sales order VMC
But then again, as stated earlier, the witness failed to disclose the Marketing No. 042 dated October 16, 1989."1 The transaction it covered
nature or terms and conditions of the warranty allegedly given by was a "direct sale."2The SLDR also contains an additional note which
SCHMID. reads: "subject for (sic) availability of a (sic) stock at NAWACO
(warehouse)."3
On the other hand, Hernan Adad SCHMID's General Manager, was
categorical that the company does not warrant goods bought on On October 25, 1989, STM sold to private respondent Consolidated Sugar
indent and that the company warrants only the goods bought Corporation (CSC) its rights in SLDR No. 1214M for P 14,750,000.00.
directly from it, like the three generators earlier bought by RJL CSC issued one check dated October 25, 1989 and three checks
MARTINEZ itself [TSN, December 19, 1977, pp. 63-64.] It must be postdated November 13, 1989 in payment. That same day, CSC wrote
recalled that SCHMID readily replaced the three generators from its petitioner that it had been authorized by STM to withdraw the sugar
own stock. In the face of these conflicting testimonies, this Court is covered by SLDR No. 1214M. Enclosed in the letter were a copy of SLDR
of the view that RJL has failed to prove that SCHMID had given a No. 1214M and a letter of authority from STM authorizing CSC "to
warranty on the twelve (12) generators subject of the second withdraw for and in our behalf the refined sugar covered by Shipping
transaction. Even assuming that a warranty was given, there is no List/Delivery Receipt-Refined Sugar (SDR) No. 1214 dated October 16,
way to determine whether there has been a breach thereof, 1989 in the total quantity of 25,000 bags."4
considering that its nature or terms and conditions have not been
shown.
On October 27, 1989, STM issued 16 checks in the total amount of
P31,900,000.00 with petitioner as payee. The latter, in turn, issued Official
3. In view of the foregoing, it becomes unnecessary to pass upon Receipt No. 33743 dated October 27, 1989 acknowledging receipt of the
the other issues. said checks in payment of 50,000 bags. Aside from SLDR No. 1214M,
said checks also covered SLDR No. 1213.
WHEREFORE, finding the Court of Appeals to have committed a
reversible error, the petition is GRANTED and the appealed Private respondent CSC surrendered SLDR No. 1214M to the petitioner's
Decision and Resolution of the Court of Appeals are REVERSED. NAWACO warehouse and was allowed to withdraw sugar. However, after
The complaint of RJL Martinez Fishing Corporation is hereby 2,000 bags had been released, petitioner refused to allow further
DISMISSED. No costs. withdrawals of sugar against SLDR No. 1214M. CSC then sent petitioner a
letter dated January 23, 1990 informing it that SLDR No. 1214M had been
"sold and endorsed" to it but that it had been refused further withdrawals of
SO ORDERED.
sugar from petitioner's warehouse despite the fact that only 2,000 bags
had been withdrawn.5 CSC thus inquired when it would be allowed to
Fernan, C.J., Gutierrez, Jr. and Bidin, JJ., concur. withdraw the remaining 23,000 bags.

Feliciano, J., took no part. On January 31, 1990, petitioner replied that it could not allow any further
withdrawals of sugar against SLDR No. 1214M because STM had already
dwithdrawn all the sugar covered by the cleared checks. 6

G.R. No. 117356 June 19, 2000 On March 2, 1990, CSC sent petitioner a letter demanding the release of
the balance of 23,000 bags.

VICTORIAS MILLING CO., INC., petitioner,


vs. Seven days later, petitioner reiterated that all the sugar corresponding to
COURT OF APPEALS and CONSOLIDATED SUGAR the amount of STM's cleared checks had been fully withdrawn and hence,
CORPORATION, respondents. there would be no more deliveries of the commodity to STM's account.
Petitioner also noted that CSC had represented itself to be STM's agent as
it had withdrawn the 2,000 bags against SLDR No. 1214M "for and in
DECISION behalf" of STM.

QUISUMBING, J.: On April 27, 1990, CSC filed a complaint for specific performance,
docketed as Civil Case No. 90-1118. Defendants were Teresita Ng Sy
Before us is a petition for review on certiorari under Rule 45 of the (doing business under the name of St. Therese Merchandising) and herein
Rules of Court assailing the decision of the Court of Appeals dated petitioner. Since the former could not be served with summons, the case
February 24, 1994, in CA-G.R. CV No. 31717, as well as the proceeded only against the latter. During the trial, it was discovered that
respondent court's resolution of September 30, 1994 modifying Teresita Ng Go who testified for CSC was the same Teresita Ng Sy who
said decision. Both decision and resolution amended the judgment could not be reached through summons.7 CSC, however, did not bother
dated February 13, 1991, of the Regional Trial Court of Makati City, to pursue its case against her, but instead used her as its witness.
Branch 147, in Civil Case No. 90-118.
CSC's complaint alleged that STM had fully paid petitioner for the sugar
The facts of this case as found by both the trial and appellate courts covered by SLDR No. 1214M. Therefore, the latter had no justification for
are as follows: refusing delivery of the sugar. CSC prayed that petitioner be ordered to
deliver the 23,000 bags covered by SLDR No. 1214M and sought the
award of P1,104,000.00 in unrealized profits, P3,000,000.00 as exemplary
St. Therese Merchandising (hereafter STM) regularly bought sugar
damages, P2,200,000.00 as attorney's fees and litigation expenses.
from petitioner Victorias Milling Co., Inc., (VMC). In the course of
their dealings, petitioner issued several Shipping List/Delivery
Receipts (SLDRs) to STM as proof of purchases. Among these was

Page 80 of 105
Petitioner's primary defense a quo was that it was an unpaid seller clear in Exhibit 'F' that with respect to the sugar covered by SLDR No.
for the 23,000 bags.8 Since STM had already drawn in full all the 1214 the same has been fully paid as indicated by the word 'cleared'
sugar corresponding to the amount of its cleared checks, it could appearing under the column of 'status of payment.'
no longer authorize further delivery of sugar to CSC. Petitioner also
contended that it had no privity of contract with CSC.
"On the other hand, the claim of defendant Victorias Milling Company that
the purchase price of the 25,000 bags of sugar purchased by St. Therese
Petitioner explained that the SLDRs, which it had issued, were not Merchandising covered by SLDR No. 1214 has not been fully paid is
documents of title, but mere delivery receipts issued pursuant to a supported only by the testimony of Arnulfo Caintic, witness for defendant
series of transactions entered into between it and STM. The Victorias Milling Company. The Court notes that the testimony of Arnulfo
SLDRs prescribed delivery of the sugar to the party specified Caintic is merely a sweeping barren assertion that the purchase price has
therein and did not authorize the transfer of said party's rights and not been fully paid and is not corroborated by any positive evidence. There
interests. is an insinuation by Arnulfo Caintic in his testimony that the postdated
checks issued by the buyer in payment of the purchased price were
dishonored. However, said witness failed to present in Court any
Petitioner also alleged that CSC did not pay for the SLDR and was
dishonored check or any replacement check. Said witness likewise failed
actually STM's co-conspirator to defraud it through a
to present any bank record showing that the checks issued by the buyer,
misrepresentation that CSC was an innocent purchaser for value
Teresita Ng Go, in payment of the purchase price of the sugar covered by
and in good faith. Petitioner then prayed that CSC be ordered to
SLDR No. 1214 were dishonored."10
pay it the following sums: P10,000,000.00 as moral damages;
P10,000,000.00 as exemplary damages; and P1,500,000.00 as
attorney's fees. Petitioner also prayed that cross-defendant STM Petitioner appealed the trial court’s decision to the Court of Appeals.
be ordered to pay it P10,000,000.00 in exemplary damages, and
P1,500,000.00 as attorney's fees.
On appeal, petitioner averred that the dealings between it and STM were
part of a series of transactions involving only one account or one general
Since no settlement was reached at pre-trial, the trial court heard contract of sale. Pursuant to this contract, STM or any of its authorized
the case on the merits. agents could withdraw bags of sugar only against cleared checks of STM.
SLDR No. 21214M was only one of 22 SLDRs issued to STM and since
the latter had already withdrawn its full quota of sugar under the said
As earlier stated, the trial court rendered its judgment favoring
SLDR, CSC was already precluded from seeking delivery of the 23,000
private respondent CSC, as follows:
bags of sugar.

"WHEREFORE, in view of the foregoing, the Court hereby renders


Private respondent CSC countered that the sugar purchases involving
judgment in favor of the plaintiff and against defendant Victorias
SLDR No. 1214M were separate and independent transactions and that
Milling Company:
the details of the series of purchases were contained in a single statement
with a consolidated summary of cleared check payments and sugar stock
"1) Ordering defendant Victorias Milling Company to deliver to the withdrawals because this a more convenient system than issuing separate
plaintiff 23,000 bags of refined sugar due under SLDR No. 1214; statements for each purchase.

"2) Ordering defendant Victorias Milling Company to pay the The appellate court considered the following issues: (a) Whether or not the
amount of P920,000.00 as unrealized profits, the amount of transaction between petitioner and STM involving SLDR No. 1214M was a
P800,000.00 as exemplary damages and the amount of separate, independent, and single transaction; (b) Whether or not CSC
P1,357,000.00, which is 10% of the acquisition value of the had the capacity to sue on its own on SLDR No. 1214M; and (c) Whether
undelivered bags of refined sugar in the amount of P13,570,000.00, or not CSC as buyer from STM of the rights to 25,000 bags of sugar
as attorney's fees, plus the costs. covered by SLDR No. 1214M could compel petitioner to deliver 23,000
bags allegedly unwithdrawn.
"SO ORDERED."9
On February 24, 1994, the Court of Appeals rendered its decision
It made the following observations: modifying the trial court's judgment, to wit:

"[T]he testimony of plaintiff's witness Teresita Ng Go, that she had "WHEREFORE, the Court hereby MODIFIES the assailed judgment and
fully paid the purchase price of P15,950,000.00 of the 25,000 bags orders defendant-appellant to:
of sugar bought by her covered by SLDR No. 1214 as well as the
purchase price of P15,950,000.00 for the 25,000 bags of sugar "1) Deliver to plaintiff-appellee 12,586 bags of sugar covered by SLDR No.
bought by her covered by SLDR No. 1213 on the same date, 1214M;
October 16, 1989 (date of the two SLDRs) is duly supported by
Exhibits C to C-15 inclusive which are post-dated checks dated
"2) Pay to plaintiff-appellee P792,918.00 which is 10% of the value of the
October 27, 1989 issued by St. Therese Merchandising in favor of
Victorias Milling Company at the time it purchased the 50,000 bags undelivered bags of refined sugar, as attorneys fees;
of sugar covered by SLDR No. 1213 and 1214. Said checks appear
to have been honored and duly credited to the account of Victorias "3) Pay the costs of suit.
Milling Company because on October 27, 1989 Victorias Milling
Company issued official receipt no. 34734 in favor of St. Therese
"SO ORDERED."11
Merchandising for the amount of P31,900,000.00 (Exhibits B and
B-1). The testimony of Teresita Ng Go is further supported by
Exhibit F, which is a computer printout of defendant Victorias Both parties then seasonably filed separate motions for reconsideration.
Milling Company showing the quantity and value of the purchases
made by St. Therese Merchandising, the SLDR no. issued to cover In its resolution dated September 30, 1994, the appellate court modified its
the purchase, the official reciept no. and the status of payment. It is decision to read:
Page 81 of 105
"WHEREFORE, the Court hereby modifies the assailed judgment "2. The Court of Appeals erred in manifestly and arbitrarily ignoring and
and orders defendant-appellant to: disregarding certain relevant and undisputed facts which, had they been
considered, would have shown that petitioner was not liable, except for 69
bags of sugar, and which would justify review of its conclusion of facts by
"(1) Deliver to plaintiff-appellee 23,000 bags of refined sugar under
this Honorable Court.
SLDR No. 1214M;

"3. The Court of Appeals misapplied the law on compensation under Arts.
"(2) Pay costs of suit.
1279, 1285 and 1626 of the Civil Code when it ruled that compensation
applied only to credits from one SLDR or contract and not to those
"SO ORDERED."12 from two or more distinct contracts between the same parties; and erred in
denying petitioner's right to setoff all its credits arising prior to notice of
The appellate court explained the rationale for the modification as assignment from other sales or SLDRs against private respondent's claim
follows: as assignee under SLDR No. 1214M, so as to extinguish or reduce its
liability to 69 bags, because the law on compensation applies precisely to
two or more distinct contracts between the same parties (emphasis in the
"There is merit in plaintiff-appellee's position. original).

"Exhibit ‘F' We relied upon in fixing the number of bags of sugar "4. The Court of Appeals erred in concluding that the settlement or
which remained undelivered as 12,586 cannot be made the basis liquidation of accounts in Exh. ‘F’ between petitioner and STM,
for such a finding. The rule is explicit that courts should consider respondent's admission of its balance, and STM's acquiescence thereto
the evidence only for the purpose for which it was offered. (People by silence for almost one year did not render Exh. `F' an account stated
v. Abalos, et al, 1 CA Rep 783). The rationale for this is to afford and its balance binding.
the party against whom the evidence is presented to object thereto
if he deems it necessary. Plaintiff-appellee is, therefore, correct in
its argument that Exhibit ‘F' which was offered to prove that checks "5. The Court of Appeals erred in not holding that the conditions of the
in the total amount of P15,950,000.00 had been cleared. (Formal assigned SLDR No. 1214, namely, (a) its subject matter being generic,
Offer of Evidence for Plaintiff, Records p. 58) cannot be used to and (b) the sale of sugar being subject to its availability at the Nawaco
prove the proposition that 12,586 bags of sugar remained warehouse, made the sale conditional and prevented STM or private
undelivered. respondent from acquiring title to the sugar; and the non-availability of
sugar freed petitioner from further obligation.

"Testimonial evidence (Testimonies of Teresita Ng [TSN, 10


October 1990, p. 33] and Marianito L. Santos [TSN, 17 October "6. The Court of Appeals erred in not holding that the "clean hands"
1990, pp. 16, 18, and 36]) presented by plaintiff-appellee was to doctrine precluded respondent from seeking judicial reliefs (sic) from
the effect that it had withdrawn only 2,000 bags of sugar from petitioner, its only remedy being against its assignor."14
SLDR after which it was not allowed to withdraw anymore.
Documentary evidence (Exhibit I, Id., p. 78, Exhibit K, Id., p. Simply stated, the issues now to be resolved are:
80) show that plaintiff-appellee had sent demand letters to
defendant-appellant asking the latter to allow it to withdraw the
(1)....Whether or not the Court of Appeals erred in not ruling that CSC was
remaining 23,000 bags of sugar from SLDR 1214M.
an agent of STM and hence, estopped to sue upon SLDR No. 1214M as
Defendant-appellant, on the other hand, alleged that sugar delivery
an assignee.
to the STM corresponded only to the value of cleared checks; and
that all sugar corresponded to cleared checks had been withdrawn.
Defendant-appellant did not rebut plaintiff-appellee's assertions. It (2)....Whether or not the Court of Appeals erred in applying the law on
did not present evidence to show how many bags of sugar had compensation to the transaction under SLDR No. 1214M so as to preclude
been withdrawn against SLDR No. 1214M, precisely because of its petitioner from offsetting its credits on the other SLDRs.
theory that all sales in question were a series of one single
transaction and withdrawal of sugar depended on the clearing of
(3)....Whether or not the Court of Appeals erred in not ruling that the sale
checks paid therefor.
of sugar under SLDR No. 1214M was a conditional sale or a contract to
sell and hence freed petitioner from further obligations.
"After a second look at the evidence, We see no reason to overturn
the findings of the trial court on this point."13
(4)....Whether or not the Court of Appeals committed an error of law in not
applying the "clean hands doctrine" to preclude CSC from seeking judicial
Hence, the instant petition, positing the following errors as grounds relief.
for review:
The issues will be discussed in seriatim.
"1. The Court of Appeals erred in not holding that STM's and
private respondent's specially informing petitioner that respondent
Anent the first issue, we find from the records that petitioner raised this
was authorized by buyer STM to withdraw sugar against SLDR No.
issue for the first time on appeal.1avvphi1 It is settled that an issue which
1214M "for and in our (STM) behalf," (emphasis in the original)
was not raised during the trial in the court below could not be raised for the
private respondent's withdrawing 2,000 bags of sugar for STM, and
first time on appeal as to do so would be offensive to the basic rules of fair
STM's empowering other persons as its agents to withdraw sugar
play, justice, and due process.15 Nonetheless, the Court of Appeals opted
against the same SLDR No. 1214M, rendered respondent like the
to address this issue, hence, now a matter for our consideration.
other persons, an agent of STM as held in Rallos v. Felix Go Chan
& Realty Corp., 81 SCRA 252, and precluded it from subsequently
claiming and proving being an assignee of SLDR No. 1214M and Petitioner heavily relies upon STM's letter of authority allowing CSC to
from suing by itself for its enforcement because it was conclusively withdraw sugar against SLDR No. 1214M to show that the latter was
presumed to be an agent (Sec. 2, Rule 131, Rules of Court) and STM's agent. The pertinent portion of said letter reads:
estopped from doing so. (Art. 1431, Civil Code).
Page 82 of 105
"This is to authorize Consolidated Sugar Corporation or its On the second issue, proceeding from the theory that the transactions
representative to withdraw for and in our behalf (stress supplied) entered into between petitioner and STM are but serial parts of one
the refined sugar covered by Shipping List/Delivery Receipt = account, petitioner insists that its debt has been offset by its claim for
Refined Sugar (SDR) No. 1214 dated October 16, 1989 in the total STM's unpaid purchases, pursuant to Article 1279 of the Civil Code. 28
quantity of 25, 000 bags."16 However, the trial court found, and the Court of Appeals concurred, that
the purchase of sugar covered by SLDR No. 1214M was a separate and
independent transaction; it was not a serial part of a single transaction or
The Civil Code defines a contract of agency as follows:
of one account contrary to petitioner's insistence. Evidence on record
shows, without being rebutted, that petitioner had been paid for the sugar
"Art. 1868. By the contract of agency a person binds himself to purchased under SLDR No. 1214M. Petitioner clearly had the obligation to
render some service or to do something in representation or on deliver said commodity to STM or its assignee. Since said sugar had been
behalf of another, with the consent or authority of the latter." fully paid for, petitioner and CSC, as assignee of STM, were not mutually
creditors and debtors of each other. No reversible error could thereby be
It is clear from Article 1868 that the basis of agency is imputed to respondent appellate court when, it refused to apply Article
representation.17 On the part of the principal, there must be an 1279 of the Civil Code to the present case.
actual intention to appoint18 or an intention naturally inferable from
his words or actions;19 and on the part of the agent, there must be Regarding the third issue, petitioner contends that the sale of sugar under
an intention to accept the appointment and act on it, 20 and in the SLDR No. 1214M is a conditional sale or a contract to sell, with title to the
absence of such intent, there is generally no agency.21 One factor sugar still remaining with the vendor. Noteworthy, SLDR No.
which most clearly distinguishes agency from other legal concepts 1214M contains the following terms and conditions:
is control; one person - the agent - agrees to act under the control
or direction of another - the principal. Indeed, the very word
"It is understood and agreed that by payment by buyer/trader of refined
"agency" has come to connote control by the principal. 22 The
sugar and/or receipt of this document by the buyer/trader personally or
control factor, more than any other, has caused the courts to put
through a representative, title to refined sugar is transferred to
contracts between principal and agent in a separate category. 23
buyer/trader and delivery to him/it is deemed effected and
The Court of Appeals, in finding that CSC, was not an agent of
completed (stress supplied) and buyer/trader assumes full responsibility
STM, opined:
therefore…"29

"This Court has ruled that where the relation of agency is


The aforequoted terms and conditions clearly show that petitioner
dependent upon the acts of the parties, the law makes no
transferred title to the sugar to the buyer or his assignee upon payment of
presumption of agency, and it is always a fact to be proved, with
the purchase price. Said terms clearly establish a contract of sale, not a
the burden of proof resting upon the persons alleging the agency,
contract to sell. Petitioner is now estopped from alleging the contrary. The
to show not only the fact of its existence, but also its nature and
contract is the law between the contracting parties.30 And where the terms
extent (Antonio vs. Enriquez [CA], 51 O.G. 3536]. Here,
and conditions so stipulated are not contrary to law, morals, good customs,
defendant-appellant failed to sufficiently establish the existence of
public policy or public order, the contract is valid and must be upheld.31
an agency relation between plaintiff-appellee and STM. The fact
Having transferred title to the sugar in question, petitioner is now obliged
alone that it (STM) had authorized withdrawal of sugar by
to deliver it to the purchaser or its assignee.
plaintiff-appellee "for and in our (STM's) behalf" should not be eyed
as pointing to the existence of an agency relation ...It should be
viewed in the context of all the circumstances obtaining. Although it As to the fourth issue, petitioner submits that STM and private respondent
would seem STM represented plaintiff-appellee as being its agent CSC have entered into a conspiracy to defraud it of its sugar. This
by the use of the phrase "for and in our (STM's) behalf" the matter conspiracy is allegedly evidenced by: (a) the fact that STM's selling price
was cleared when on 23 January 1990, plaintiff-appellee informed to CSC was below its purchasing price; (b) CSC's refusal to pursue its
defendant-appellant that SLDFR No. 1214M had been "sold and case against Teresita Ng Go; and (c) the authority given by the latter to
endorsed" to it by STM (Exhibit I, Records, p. 78). Further, other persons to withdraw sugar against SLDR No. 1214M after she had
plaintiff-appellee has shown that the 25, 000 bags of sugar covered sold her rights under said SLDR to CSC. Petitioner prays that the doctrine
by the SLDR No. 1214M were sold and transferred by STM to it ...A of "clean hands" should be applied to preclude CSC from seeking judicial
conclusion that there was a valid sale and transfer to relief. However, despite careful scrutiny, we find here the records bare of
plaintiff-appellee may, therefore, be made thus capacitating convincing evidence whatsoever to support the petitioner's allegations of
plaintiff-appellee to sue in its own name, without need of joining its fraud. We are now constrained to deem this matter purely speculative,
imputed principal STM as co-plaintiff."24 bereft of concrete proof.

In the instant case, it appears plain to us that private respondent WHEREFORE, the instant petition is DENIED for lack of merit. Costs
CSC was a buyer of the SLDFR form, and not an agent of STM. against petitioner.
Private respondent CSC was not subject to STM's control. The
question of whether a contract is one of sale or agency depends on SO ORDERED.
the intention of the parties as gathered from the whole scope and
effect of the language employed.25 That the authorization given to
CSC contained the phrase "for and in our (STM's) behalf" did not Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.
establish an agency. Ultimately, what is decisive is the intention of
the parties.26 That no agency was meant to be established by the
CSC and STM is clearly shown by CSC's communication to
petitioner that SLDR No. 1214M had been "sold and endorsed" to
it.27 The use of the words "sold and endorsed" means that STM
and CSC intended a contract of sale, and not an agency. Hence,
on this score, no error was committed by the respondent appellate
court when it held that CSC was not STM's agent and could
independently sue petitioner.

Page 83 of 105
G.R. No. L-46658 May 13, 1991 by Act 4118 and under Presidential Decree No. 385 of the real estate
mortgage over the properties known as the La Vista property covered by
PHILIPPINE NATIONAL BANK, petitioner, TCT No. 55323.6 PNB likewise filed a similar petition with the City Sheriff
of Bacolod, Negros Occidental with respect to the mortgaged properties
vs.
HON. GREGORIO G. PINEDA, in his capacity as Presiding located at Isabela, Negros Occidental and covered by OCT No. RT 1615.
Judge of the Court of First Instance of Rizal, Branch XXI and
TAYABAS CEMENT COMPANY, INC., respondents. The foreclosure sale of the La Vista property was scheduled on August 11,
1975. At the auction sale, PNB was the highest bidder with a bid price of
P1,000,001.00. However, when said property was about to be awarded to
The Chief Legal Counsel for petitioner.
PNB, the representative of the mortgagor-spouses objected and
Ortille Law Office for private respondent.
demanded from the PNB the difference between the bid price of
P1,000,001.00 and the indebtedness of P499,060.25 of the Arroyo
spouses on their personal account. It was the contention of the spouses
Arroyo's representative that the foreclosure proceedings referred only to
FERNAN, C.J.: the personal account of the mortgagor spouses without reference to the
account of TCC.

In this petition for certiorari, petitioner Philippine National Bank


(PNB) seeks to annul and set aside the orders dated March 4, 1977 To remedy the situation, PNB filed a supplemental petition on August 13,
and May 31, 1977 rendered in Civil Case No. 244221 of the Court 1975 requesting the Sheriff's Office to proceed with the sale of the subject
of First Instance of Rizal, Branch XXI, respectively granting private real properties to satisfy not only the amount of P499,060.25 owed by the
respondent Tayabas Cement Company, Inc.'s application for a writ spouses Arroyos on their personal account but also the amount of
of preliminary injunction to enjoin the foreclosure sale of certain P35,019,901.49 exclusive of interest, commission charges and other
properties in Quezon City and Negros Occidental and denying expenses owed by said spouses as sureties of TCC. 7 Said petition was
petitioner's motion for reconsideration thereof. opposed by the spouses Arroyo and the other bidder, Jose L. Araneta.

In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the On September 12, 1975, Acting Clerk of Court and Ex-Officio Sheriff
Arroyo Spouses), obtained a loan of P580,000.00 from petitioner Diana L. Dungca issued a resolution finding that the questions raised by
bank to purchase 60% of the subscribed capital stock, and thereby the parties required the reception and evaluation of evidence, hence,
acquire the controlling interest of private respondent Tayabas proper for adjudication by the courts of law. Since said questions were
Cement Company, Inc. (TCC).2 As security for said loan, the prejudicial to the holding of the foreclosure sale, she ruled that her "Office,
spouses Arroyo executed a real estate mortgage over a parcel of therefore, cannot properly proceed with the foreclosure sale unless and
land covered by Transfer Certificate of Title No. 55323 of the until there be a court ruling on the aforementioned issues."8
Register of Deeds of Quezon City known as the La Vista property.
Thus, in May, 1976, PNB filed with the Court of First Instance of Quezon
Thereafter, TCC filed with petitioner bank an application and City, Branch V a petition for mandamus9against said Diana Dungca in her
agreement for the establishment of an eight (8) year deferred letter capacity as City Sheriff of Quezon City to compel her to proceed with the
of credit (L/C) for $7,000,000.00 in favor of Toyo Menka Kaisha, Ltd. foreclosure sale of the mortgaged properties covered by TCT No. 55323 in
of Tokyo, Japan, to cover the importation of a cement plant order to satisfy both the personal obligation of the spouses Arroyo as well
machinery and equipment. as their liabilities as sureties of TCC.10

Upon approval of said application and opening of an L/C by PNB in On September 6, 1976, the petition was granted and Dungca was directed
favor of Toyo Menka Kaisha, Ltd. for the account of TCC, the to proceed with the foreclosure sale of the mortgaged properties covered
Arroyo spouses executed the following documents to secure this by TCT No. 55323 pursuant to Act No. 3135 and to issue the
loan accommodation: Surety Agreement dated August 5, corresponding Sheriff's Certificate of Sale.11
19643 and Covenant dated August 6, 1964.4
Before the decision could attain finality, TCC filed on September 14, 1976
The imported cement plant machinery and equipment arrived from before the Court of First Instance of Rizal, Pasig, Branch XXI a
Japan and were released to TCC under a trust receipt agreement. complaint12 against PNB, Dungca, and the Provincial Sheriff of Negros
Subsequently, Toyo Menka Kaisha, Ltd. made the corresponding Occidental and Ex-Officio Sheriff of Bacolod City seeking, inter alia, the
drawings against the L/C as scheduled. TCC, however, failed to issuance of a writ of preliminary injunction to restrain the foreclosure of the
remit and/or pay the corresponding amount covered by the mortgages over the La Vista property and Hacienda Bacon as well as a
drawings. Thus, on May 19, 1968, pursuant to the trust receipt declaration that its obligation with PNB had been fully paid by reason of
agreement, PNB notified TCC of its intention to repossess, as it the latter's repossession of the imported machinery and equipment. 13
later did, the imported machinery and equipment for failure of TCC
to settle its obligations under the L/C.5 On October 5, 1976, the CFI, thru respondent Judge Gregorio Pineda,
issued a restraining order14 and on March 4, 1977, granted a writ of
In the meantime, the personal accounts of the spouses Arroyo, preliminary injunction.15 PNB's motion for reconsideration was denied,
which included another loan of P160,000.00 secured by a real hence this petition.
estate mortgage over parcels of agricultural land known as
Hacienda Bacon located in Isabela, Negros Occidental, had Petitioner PNB advances four grounds for the setting aside of the writ of
likewise become due. The spouses Arroyo having failed to satisfy preliminary injunction, namely: a) that it contravenes P.D. No. 385 which
their obligations with PNB, the latter decided to foreclose the real prohibits the issuance of a restraining order against a government
estate mortgages executed by the spouses Arroyo in its favor. financial institution in any action taken by such institution in compliance
with the mandatory foreclosure provided in Section 1 thereof; b) that the
On July 18, 1975, PNB filed with the City Sheriff of Quezon City a writ countermands a final decision of a co-equal and coordinate court; c)
petition for extra-judicial foreclosure under Act 3138, as amended that the writ seeks to prohibit the performance of acts beyond the court's

Page 84 of 105
territorial jurisdiction; and, d) private respondent TCC has not xxx xxx xxx
shown any clear legal right or necessity to the relief of preliminary
injunction.
Since the IBAA is not the factual owner of the goods, the VINTOLAS
cannot justifiably claim that because they have surrendered the goods to
Private respondent TCC counters with the argument that P.D. No. IBAA and subsequently deposited them in the custody of the court, they
385 does not apply to the case at bar, firstly because no are absolutely relieved of their obligation to pay their loan because of their
foreclosure proceedings have been instituted against it by PNB and inability to dispose of the goods. The fact that they were unable to sell the
secondly, because its account under the L/C has been fully seashells in question does not affect IBAA's right to recover the advances
satisfied with the repossession of the imported machinery and it had made under the Letter of Credit.
equipment by PNB.
PNB's possession of the subject machinery and equipment being
The resolution of the instant controversy lies primarily on the precisely as a form of security for the advances given to TCC under the
question of whether or not TCC's liability has been extinguished by Letter of Credit, said possession by itself cannot be considered payment of
the repossession of PNB of the imported cement plant machinery the loan secured thereby. Payment would legally result only after PNB had
and equipment. foreclosed on said securities, sold the same and applied the proceeds
thereof to TCC's loan obligation. Mere possession does not amount to
We rule for the petitioner PNB. It must be remembered that PNB foreclosure for foreclosure denotes the procedure adopted by the
mortgagee to terminate the rights of the mortgagor on the property and
took possession of the imported cement plant machinery and
includes the sale itself.18
equipment pursuant to the trust receipt agreement executed by and
between PNB and TCC giving the former the unqualified right to the
possession and disposal of all property shipped under the Letter of Neither can said repossession amount to dacion en pago. Dation in
Credit until such time as all the liabilities and obligations under said payment takes place when property is alienated to the creditor in
letter had been discharged.16 In the case of Vintola vs. Insular Bank satisfaction of a debt in money and the same is governed by
of Asia and America17 wherein the same argument was advanced sales.19 Dation in payment is the delivery and transmission of ownership of
by the Vintolas as entrustees of imported seashells under a trust a thing by the debtor to the creditor as an accepted equivalent of the
receipt transaction, we said: performance of the obligation.20 As aforesaid, the repossession of the
machinery and equipment in question was merely to secure the payment
of TCC's loan obligation and not for the purpose of transferring ownership
Further, the VINTOLAS take the position that their obligation to
thereof to PNB in satisfaction of said loan. Thus, no dacion en pago was
IBAA has been extinguished inasmuch as, through no fault of their
ever accomplished.
own, they were unable to dispose of the seashells, and that they
have relinquished possession thereof to the IBAA, as owner of the
goods, by depositing them with the Court. Proceeding from this finding, PNB has the right to foreclose the mortgages
executed by the spouses Arroyo as sureties of TCC. A surety is
considered in law as being the same party as the debtor in relation to
The foregoing submission overlooks the nature and mercantile
usage of the transaction involved. A letter of credit-trust receipt whatever is adjudged touching the obligation of the latter, and their
liabilities are interwoven as to be inseparable.21 As sureties, the Arroyo
arrangement is endowed with its own distinctive features and
spouses are primarily liable as original promissors and are bound
characteristics. Under that set-up, a bank extends a loan covered
immediately to pay the creditor the amount outstanding.22
by the Letter of Credit, with the trust receipt as a security for the
loan. In other words, the transaction involves a loan feature
represented by the letter of credit, and a security feature which is in Under Presidential Decree No. 385 which took effect on January 31, 1974,
the covering trust receipt. government financial institutions like herein petitioner PNB are required to
foreclose on the collaterals and/or securities for any loan, credit or
accommodation whenever the arrearages on such account amount to at
xxx xxx xxx
least twenty percent (20%) of the total outstanding obligations, including
interests and charges, as appearing in the books of account of the
A trust receipt, therefore, is a security agreement, pursuant to financial institution concerned.23 It is further provided therein that "no
which a bank acquires a "security interest" in the goods.1âwphi1 It restraining order, temporary or permanent injunction shall be issued by the
secures an indebtedness and there can be no such thing as court against any government financial institution in any action taken by
security interest that secures no obligation. As defined in our laws: such institution in compliance with the mandatory foreclosure provided in
Section 1 hereof, whether such restraining order, temporary or permanent
(h) "Security interest" means a property interest in goods, injunction is sought by the borrower(s) or any third party or parties . . ." 24
documents or instruments to secure performance of some
obligations of the entrustee or of some third persons to the It is not disputed that the foreclosure proceedings instituted by PNB
entruster and includes title, whether or not expressed to be against the Arroyo spouses were in compliance with the mandate of P.D.
absolute, whenever such title is in substance taken or retained for 385. This being the case, the respondent judge acted in excess of his
security only. jurisdiction in issuing the injunction specifically proscribed under said
decree.
xxx xxx xxx
Another reason for striking down the writ of preliminary injunction
Contrary to the allegation of the VINTOLAS, IBAA did not become complained of is that it interfered with the order of a co-equal and
the real owner of the goods. It was merely the holder of a security coordinate court. Since Branch V of the CFI of Rizal had already acquired
title for the advances it had made to the VINTOLAS. The goods the jurisdiction over the question of foreclosure of mortgage over the La Vista
VINTOLAS had purchased through IBAA financing remain their property and rendered judgment in relation thereto, then it retained
own property and they hold it at their own risk. The trust receipt jurisdiction to the exclusion of all other coordinate courts over its judgment,
arrangement did not convert the IBAA into an investor; the latter including all incidents relative to the control and conduct of its ministerial
remained a lender and creditor. officers, namely the sheriff thereof.25 The foreclosure sale having been
ordered by Branch V of the CFI of Rizal, TCC should not have filed

Page 85 of 105
injunction proceedings with Branch XXI of the same CFI, but NOW, THEREFORE, for and in consideration of the sum of Three
instead should have first sought relief by proper motion and Hundred Thirty Five Thousand Four Hundred Sixty Two and 14/100 Pesos
application from the former court which had exclusive jurisdiction (P335,462.14), Philippine Currency which represents part of the
over the foreclosure proceeding.26 ASSIGNOR’s collectible from Jomero Realty Corp., said ASSIGNOR
hereby assigns, transfers and sets over unto the ASSIGNEE all
collectibles amounting to the said amount of P335, 462.14;
This doctrine of non-interference is premised on the principle that a
judgment of a court of competent jurisdiction may not be opened,
modified or vacated by any court of concurrent jurisdiction. 27 And the ASSIGNOR does hereby grant the ASSIGNEE, its successors
and assigns, the full power and authority to demand, collect, receive,
compound, compromise and give acquittance for the same or any part
Furthermore, we find the issuance of the preliminary injunction
thereof, and in the name and stead of the said ASSIGNOR;
directed against the Provincial Sheriff of Negros Occidental and
ex-officio Sheriff of Bacolod City a jurisdictional faux pas as the
Courts of First Instance, now Regional Trial Courts, can only And the ASSIGNOR does hereby agree and stipulate to and with said
enforce their writs of injunction within their respective designated ASSIGNEE, its successors and assigns that said debt is justly owing and
territories.28 due to the ASSIGNOR for Jomero Realty Corporation and that said
ASSIGNOR has not done and will not cause anything to be done to
WHEREFORE, the instant petition is hereby granted. The assailed diminish or discharge said debt, or delay or to prevent the ASSIGNEE, its
successors or assigns, from collecting the same;
orders are hereby set aside. Costs against private respondent.

And the ASSIGNOR further agrees and stipulates as aforesaid that the
Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur.
said ASSIGNOR, his heirs, executors, administrators, or assigns, shall
and will at times hereafter, at the request of said ASSIGNEE, its
G.R. No. 149420 October 8, 2003 successors or assigns, at his cost and expense, execute and do all such
further acts and deeds as shall be reasonably necessary to effectually
SONNY LO, petitioner, enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR
vs. has in accordance with the true intent and meaning of these presents. xxx5
KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent. (Italics supplied)

DECISION However, when respondent tried to collect the said credit from Jomero
Realty Corporation, the latter refused to honor the Deed of Assignment
because it claimed that petitioner was also indebted to it. 6 On November
YNARES-SANTIAGO, J.: 26, 1990, respondent sent a letter7 to petitioner demanding payment of his
obligation, but petitioner refused to pay claiming that his obligation had
Respondent KJS ECO-FORMWORK System Phil., Inc. is a been extinguished when they executed the Deed of Assignment.
corporation engaged in the sale of steel scaffoldings, while
petitioner Sonny L. Lo, doing business under the name and style Consequently, on January 10, 1991, respondent filed an action for
San’s Enterprises, is a building contractor. On February 22, 1990, recovery of a sum of money against the petitioner before the Regional
petitioner ordered scaffolding equipments from respondent worth Trial Court of Makati, Branch 147, which was docketed as Civil Case No.
P540,425.80.1 He paid a downpayment in the amount of 91-074.8
P150,000.00. The balance was made payable in ten monthly
installments.
During the trial, petitioner argued that his obligation was extinguished with
2
the execution of the Deed of Assignment of credit. Respondent, for its part,
Respondent delivered the scaffoldings to petitioner. Petitioner was presented the testimony of its employee, Almeda Bañaga, who testified
able to pay the first two monthly installments.1a\^/phi1.netHis that Jomero Realty refused to honor the assignment of credit because it
business, however, encountered financial difficulties and he was claimed that petitioner had an outstanding indebtedness to it.
unable to settle his obligation to respondent despite oral and
written demands made against him.3
On August 25, 1994, the trial court rendered a decision9 dismissing the
complaint on the ground that the assignment of credit extinguished the
On October 11, 1990, petitioner and respondent executed a Deed obligation. The decretal portion thereof provides:
of Assignment,4 whereby petitioner assigned to respondent his
receivables in the amount of P335,462.14 from Jomero Realty
Corporation. Pertinent portions of the Deed provide: WHEREFORE, in view of the foregoing, the Court hereby renders
judgment in favor of the defendant and against the plaintiff, dismissing the
complaint and ordering the plaintiff to pay the defendant attorney’s fees in
WHEREAS, the ASSIGNOR is the contractor for the construction of the amount of P25,000.00.1a\^/phi1.net
a residential house located at Greenmeadow Avenue, Quezon City
owned by Jomero Realty Corporation;
Respondent appealed the decision to the Court of Appeals. On April 19,
2001, the appellate court rendered a decision, 10 the dispositive portion of
WHEREAS, in the construction of the aforementioned residential which reads:
house, the ASSIGNOR purchased on account scaffolding
equipments from the ASSIGNEE payable to the latter;
WHEREFORE, finding merit in this appeal, the court REVERSES the
appealed Decision and enters judgment ordering defendant-appellee
WHEREAS, up to the present the ASSIGNOR has an obligation to Sonny Lo to pay the plaintiff-appellant KJS ECO-FORMWORK SYSTEM
the ASSIGNEE for the purchase of the aforementioned PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four Hundred
scaffoldings now in the amount of Three Hundred Thirty Five Sixty-Two and 14/100 (P335,462.14) with legal interest of 6% per annum
Thousand Four Hundred Sixty Two and 14/100 Pesos from January 10, 1991 (filing of the Complaint) until fully paid and
(P335,462.14); attorney’s fees equivalent to 10% of the amount due and costs of the suit.
Page 86 of 105
SO ORDERED.11 prestation different from that due.17 The undertaking really partakes in one
sense of the nature of sale, that is, the creditor is really buying the thing or
property of the debtor, payment for which is to be charged against the
In finding that the Deed of Assignment did not extinguish the
debtor’s debt. As such, the vendor in good faith shall be responsible, for
obligation of the petitioner to the respondent, the Court of Appeals
the existence and legality of the credit at the time of the sale but not for the
held that (1) petitioner failed to comply with his warranty under the
solvency of the debtor, in specified circumstances.18
Deed; (2) the object of the Deed did not exist at the time of the
transaction, rendering it void pursuant to Article 1409 of the Civil
Code; and (3) petitioner violated the terms of the Deed of Hence, it may well be that the assignment of credit, which is in the nature
Assignment when he failed to execute and do all acts and deeds as of a sale of personal property,19 produced the effects of a dation in
shall be necessary to effectually enable the respondent to recover payment which may extinguish the obligation.20 However, as in any other
the collectibles.12 contract of sale, the vendor or assignor is bound by certain warranties.
More specifically, the first paragraph of Article 1628 of the Civil Code
provides:
Petitioner filed a motion for reconsideration of the said decision,
which was denied by the Court of Appeals.13
The vendor in good faith shall be responsible for the existence and legality
of the credit at the time of the sale, unless it should have been sold as
In this petition for review, petitioner assigns the following errors:
doubtful; but not for the solvency of the debtor, unless it has been so
expressly stipulated or unless the insolvency was prior to the sale and of
I common knowledge.

THE HONORABLE COURT OF APPEALS From the above provision, petitioner, as vendor or assignor, is bound to
COMMITTED A GRAVE ERROR IN warrant the existence and legality of the credit at the time of the sale or
DECLARING THE DEED OF ASSIGNMENT assignment. When Jomero claimed that it was no longer indebted to
(EXH. "4") AS NULL AND VOID FOR LACK petitioner since the latter also had an unpaid obligation to it, it essentially
OF OBJECT ON THE BASIS OF A MERE meant that its obligation to petitioner has been extinguished by
HEARSAY CLAIM. compensation.21 In other words, respondent alleged the non-existence of
the credit and asserted its claim to petitioner’s warranty under the
II assignment. Therefore, it behooved on petitioner to make good its
warranty and paid the obligation.

THE HONORABLE COURT OF APPEALS


ERRED IN HOLDING THAT THE DEED OF Furthermore, we find that petitioner breached his obligation under the
ASSIGNMENT (EXH. "4") DID NOT Deed of Assignment, to wit:
EXTINGUISH PETITIONER’S OBLIGATION
ON THE WRONG NOTION THAT And the ASSIGNOR further agrees and stipulates as aforesaid that the
PETITIONER FAILED TO COMPLY WITH HIS said ASSIGNOR, his heirs, executors, administrators, or assigns, shall
WARRANTY THEREUNDER. and will at times hereafter, at the request of said ASSIGNEE, its
successors or assigns, at his cost and expense, execute and do all such
III further acts and deeds as shall be reasonably necessary to effectually
enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR
has in accordance with the true intent and meaning of these presents.22
THE HONORABLE COURT OF APPEALS (underscoring ours)
ERRED IN REVERSING THE DECISION OF
THE TRIAL COURT AND IN ORDERING
PAYMENT OF INTERESTS AND Indeed, by warranting the existence of the credit, petitioner should be
ATTORNEY’S FEES.14 deemed to have ensured the performance thereof in case the same is
later found to be inexistent. He should be held liable to pay to respondent
the amount of his indebtedness.
The petition is without merit.

Hence, we affirm the decision of the Court of Appeals ordering petitioner


An assignment of credit is an agreement by virtue of which the to pay respondent the sum of P335,462.14 with legal interest thereon.
owner of a credit, known as the assignor, by a legal cause, such as However, we find that the award by the Court of Appeals of attorney’s fees
sale, dacion en pago, exchange or donation, and without the is without factual basis. No evidence or testimony was presented to
consent of the debtor, transfers his credit and accessory rights to substantiate this claim. Attorney’s fees, being in the nature of actual
another, known as the assignee, who acquires the power to damages, must be duly substantiated by competent proof.
enforce it to the same extent as the assignor could enforce it
against the debtor.15
WHEREFORE, in view of the foregoing, the Decision of the Court of
Appeals dated April 19, 2001 in CA-G.R. CV No. 47713, ordering
Corollary thereto, in dacion en pago, as a special mode of payment, petitioner to pay respondent the sum of P335,462.14 with legal interest of
the debtor offers another thing to the creditor who accepts it as 6% per annum from January 10, 1991 until fully paid is AFFIRMED with
equivalent of payment of an outstanding debt.16 In order that there MODIFICATION. Upon finality of this Decision, the rate of legal interest
be a valid dation in payment, the following are the requisites: (1) shall be 12% per annum, inasmuch as the obligation shall thereafter
There must be the performance of the prestation in lieu of payment become equivalent to a forbearance of credit.23 The award of attorney’s
(animo solvendi) which may consist in the delivery of a corporeal fees is DELETED for lack of evidentiary basis.
thing or a real right or a credit against the third person; (2) There
must be some difference between the prestation due and that
which is given in substitution (aliud pro alio); (3) There must be an SO ORDERED.
agreement between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance of a Davide, Jr., C.J., (Chairman), Vitug, Carpio and Azcuna, JJ., concur.
Page 87 of 105
The spouses Tibong specifically denied the material averments in
paragraphs 2 and 2.1 of the complaint. While they did not state the total
G.R. No. 166704 December 20, 2006 amount of their loans, they declared that they did not receive anything
from Agrifina without any written receipt.7 They prayed for that the
complaint be dismissed.
AGRIFINA AQUINTEY, petitioner,
vs.
SPOUSES FELICIDAD AND RICO TIBONG, respondents. In their Pre-Trial Brief, the spouses Tibong maintained that they have
never obtained any loan from Agrifina without the benefit of a written
document.8
CALLEJO, SR., J.:
On August 17, 2000, the trial court issued a Pre-Trial Order where the
Before us is a petition for review under Rule 45 of the Revised following issues of the case were defined:
Rules on Civil Procedure of the Decision1 of the Court of Appeals in
CA-G.R. CV No. 78075, which affirmed with modification the
Whether or not plaintiff is entitled to her claim of P773,000.00;
Decision2 of the Regional Trial Court (RTC), Branch 61, Baguio
City, and the Resolution3 of the appellate court denying
reconsideration thereof. Whether or not plaintiff is entitled to stipulated interests in the promissory
notes; and
The Antecedents
Whether or not the parties are entitled to their claim for damages. 9
On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC
of Baguio City, a complaint for sum of money and damages against The Case for Petitioner
the respondents, spouses Felicidad and Rico Tibong. Agrifina
alleged that Felicidad had secured loans from her on several
Agrifina and Felicidad were classmates at the University of Pangasinan.
occasions, at monthly interest rates of 6% to 7%. Despite demands,
Felicidad's husband, Rico, also happened to be a distant relative of
the spouses Tibong failed to pay their outstanding loan, amounting
Agrifina. Upon Felicidad's prodding, Agrifina agreed to lend money to
to P773,000.00 exclusive of interests. The complaint contained the
Felicidad. According to Felicidad, Agrifina would be earning interests
following prayer:
higher than those given by the bank for her money. Felicidad told Agrifina
that since she (Felicidad) was engaged in the sale of dry goods at the GP
WHEREFORE, premises considered, it is most respectfully prayed Shopping Arcade, she would use the money to buy bonnels and
of this Honorable Court, after due notice and hearing, to render thread.10 Thus, Agrifina lent a total sum of P773,000.00 to Felicidad, and
judgment ordering defendants to pay plaintiff the following: each loan transaction was covered by either a promissory note or an
acknowledgment receipt.11 Agrifina stated that she had lost the receipts
signed by Felicidad for the following amounts: P100,000.00, P34,000.00
a). SEVEN HUNDRED SEVENTY-THREE THOUSAND PESOS
and P2,000.00.12 The particulars of the transactions are as follows:
(P773,000.00) representing the principal obligation of the
defendants with the stipulated interests of six (6%) percent per
month from May 11, 1999 to date and or those that are stipulated Amount Date Obtained Interest Per Mo. Due Date
on the contracts as mentioned from paragraph two (2) of the
complaint. P 100,000.00 May 11, 1989 6% August 11, 1989
4,000.00 June 8, 1989 - -
b). FIFTEEN PERCENT (15%) of the total accumulated obligations 50,000.00 June 13, 1989 6% On demand
as attorney's fees. 60,000.00 Aug. 16, 1989 7% January 1990
205,000.00 Oct. 13, 1989 7% January 1990
c). Actual expenses representing the filing fee and other charges
and expenses to be incurred during the prosecution of this case. 128,000.00 Oct. 19, 1989 7% January 1990
2,000.00 Nov. 12, 1989 6% April 28, 1990
Further prays for such other relief and remedies just and equitable 10,000.00 June 13, 1990 - -
under the premises.4
80,000.00 Jan. 4, 1990 - -
34,000.00 - 6% October 19, 1989
Agrifina appended a copy of the Counter-Affidavit executed by
Felicidad in I.S. No. 93-334, as well as copies of the promissory 100,000.00 July 14, 1989 5% October 198913
notes and acknowledgment receipts executed by Felicidad
covering the loaned amounts.5
According to Agrifina, Felicidad was able to pay only her loans amounting
to P122,600.00.14
In their Answer with Counterclaim,6 spouses Tibong admitted that
they had secured loans from Agrifina. The proceeds of the loan
In July 1990, Felicidad gave to Agrifina City Trust Bank Check No. 126804
were then re-lent to other borrowers at higher interest rates. They,
dated August 25, 1990 in the amount of P50,000.00 as partial
likewise, alleged that they had executed deeds of assignment in
payment.15 However, the check was dishonored for having been drawn
favor of Agrifina, and that their debtors had executed promissory
against insufficient funds.16 Agrifina then filed a criminal case against
notes in Agrifina's favor. According to the spouses Tibong, this
Felicidad in the Office of the City Prosecutor. An Information for violation
resulted in a novation of the original obligation to Agrifina. They
of Batas Pambansa Bilang 22 was filed against Felicidad, docketed as
insisted that by virtue of these documents, Agrifina became the
Criminal Case No. 11181-R. After trial, the court ordered Felicidad to
new collector of their debtors; and the obligation to pay the balance
pay P50,000.00. Felicidad complied and paid the face value of the
of their loans had been extinguished.
check.17

Page 88 of 105
In the meantime, Agrifina learned that Felicidad had re-loaned the respective maturity dates of her debtors' loans, Agrifina asked her to pay
amounts to other borrowers.18 Agrifina sought the assistance of her account since Agrifina needed money to buy a house and lot in Manila.
Atty. Torres G. A-ayo who advised her to require Felicidad to However, she told Agrifina that she could not pay yet, as her debtors' loan
execute deeds of assignment over Felicidad's debtors. The lawyer payments were not yet due.36 Agrifina then came to her store every
also suggested that Felicidad's debtors execute promissory notes afternoon to collect from her, and persuaded her to go to Atty. Torres G.
in Agrifina's favor, to "turn over" their loans from Felicidad. This A-ayo for legal advice.37 The lawyer suggested that she indorse the
arrangement would facilitate collection of Felicidad's account. accounts of her debtors to Agrifina so that the latter would be the one to
Agrifina agreed to the proposal.19 Agrifina, Felicidad, and the collect from her debtors and she would no longer have any obligation to
latter's debtors had a conference20 where Atty. A-ayo explained Agrifina.38 She then executed deeds of assignment in favor of Agrifina
that Agrifina could apply her collections as payments of Felicidad's covering the sums of money due from her debtors. She signed the deeds
account.21 prepared by Atty. A-ayo in the presence of Agrifina.39 Some of the debtors
signed the promissory notes which were likewise prepared by the lawyer.
Thereafter, Agrifina personally collected from Felicidad's
From August 7, 1990 to October, 1990, Felicidad executed deeds
debtors.40 Felicidad further narrated that she received P250,000.00 from
of assignment of credits (obligations)22 duly notarized by Atty.
one of her debtors, Rey Rivera, and remitted the payment to Agrifina.41
A-ayo, in which Felicidad transferred and assigned to Agrifina the
total amount of P546,459.00 due from her debtors.23 In the said
deeds, Felicidad confirmed that her debtors were no longer Agrifina testified, on rebuttal, that she did not enter into a re-lending
indebted to her for their respective loans. For her part, Agrifina business with Felicidad. When she asked Felicidad to consolidate her
conformed to the deeds of assignment relative to the loans of loans in one document, the latter told her to seek the assistance of Atty.
Virginia Morada and Corazon Dalisay.24 She was furnished copies A-ayo.42 The lawyer suggested that Felicidad assign her credits in order to
of the deeds as well as the promissory notes.25 help her collect her loans.43 She agreed to the deeds of assignment to
help Felicidad collect from the debtors.44
The following debtors of Felicidad executed promissory notes
where they obliged themselves to pay directly to Agrifina: On January 20, 2003, the trial court rendered its Decision45 in favor of
Agrifina. The fallo of the decision reads:
Debtors Account Date of Instrument Date Payable
Juliet & Tommy Tibong P50,000.00 August 7, 1990 WHEREFORE,November
judgment 4,
is 1990
rendered
and in favor of4,the
February plaintiff and against
1991
the defendants ordering the latter to pay the plaintiffs (sic) the following
Corazon Dalisay 8,000.00 August 7, 1990 No date
amounts:
Rita Chomacog 4,480.00 August 8, 1990 September 23, 1990
Antoinette Manuel 12,000.00 October 19, 1990
1. P472,000 asMarchactual30, 1991
obligation with the stipulated interest of 6% per
Rosemarie Bandas 8,000.00 August 8, 1990 month from May February
11, 19993, until
1991the said obligation is fully paid. However,
Fely Cirilo 63,600.00 the amount ofNo
September 13, 1990 P50,000
date shall be deducted from the total accumulated
Virginia Morada 62,379.00 August 9, 1990 interest for the same was9,already
February 1991 paid by the defendant as admitted by the
plaintiff in her complaint,
Carmelita Casuga 59,000.00 August 28, 1990 February 28, 1991
Merlinda Gelacio 17,200.00 August 29, 1990 November 29, 199026
2. P25,000 as attorney's fees,
Total P284,659.00

3. [T]o pay the costs.


Agrifina narrated that Felicidad showed to her the way to the
debtors' houses to enable her to collect from them. One of the SO ORDERED.46
debtors, Helen Cabang, did not execute any promissory note but
conformed to the Deed of Assignment of Credit which Felicidad The trial court ruled that Felicidad's obligation had not been novated by the
executed in favor of Agrifina.27 Eliza Abance conformed to the deed deeds of assignment and the promissory notes executed by Felicidad's
of assignment for and in behalf of her sister, Fely Cirilo. 28 Edna borrowers. It explained that the documents did not contain any express
Papat-iw was not able to affix her signature on the deed of agreement to novate and extinguish Felicidad's obligation. It declared that
assignment nor sign the promissory note because she was in the deeds and notes were separate contracts which could stand alone
Taipei, Taiwan.29 from the original indebtedness of Felicidad. Considering, however,
Agrifina's admission that she was able to collect from Felicidad's debtors
Following the execution of the deeds of assignment and promissory the total amount of P301,000.00, this should be deducted from the latter's
notes, Agrifina was able to collect the total amount of P301,000.00 accountability.47 Hence, the balance, exclusive of interests, amounted
from Felicidad's debtors.30 In April 1990, she tried to collect the to P472,000.00.
balance of Felicidad's account, but the latter told her to wait until
her debtors had money.31 When Felicidad reneged on her promise, On appeal, the CA affirmed with modification the decision of the RTC and
Agrifina filed a complaint in the Office of the Barangay Captain for stated that, based on the promissory notes and acknowledgment receipts
the collection of P773,000.00. However, no settlement was arrived signed by Felicidad, the appellants secured loans from the appellee in the
at.32 total principal amount of only P637,000.00, not P773,000.00 as declared
by the trial court. The CA found that, other than Agrifina's bare testimony
The Case for Respondents that she had lost the promissory notes and acknowledgment receipts, she
failed to present competent documentary evidence to substantiate her
claim that Felicidad had, likewise, borrowed the amounts
Felicidad testified that she and her friend Agrifina had been
of P100,000.00, P34,000.00, and P2,000.00. Of the P637,000.00 total
engaged in the money-lending business.33 Agrifina would lend her
account, P585,659.00 was covered by the deeds of assignment and
money with monthly interest,34 and she, in turn, would re-lend the
promissory notes; hence, the balance of Felicidad's account amounted to
money to borrowers at a higher interest rate. Their business
only P51,341.00. The fallo of the decision reads:
relationship turned sour when Agrifina started complaining that she
(Felicidad) was actually earning more than Agrifina.35 Before the
Page 89 of 105
WHEREFORE, in view of the foregoing, the decision dated January main issue is whether or not she should be made to pay this amount.
20, 2003 of the RTC, Baguio City, Branch 61 in Civil Case No.
4370-R is hereby MODIFIED. Defendants-appellants are hereby
Petitioner further maintains that the CA erred in deducting the total amount
ordered to pay the balance of the total indebtedness in the amount
of P585,659.00 covered by the deeds of assignment executed by
of P51,341.00 plus the stipulated interest of 6% per month from
Felicidad and the promissory notes executed by the latter's debtors, and
May 11, 1999 until the finality of this decision.
that the balance of respondents' account was only P51,341.00. Moreover,
the appellate court's ruling that there was no novation runs counter to its
SO ORDERED.48 holding that the primary recourse was against Felicidad's debtors.
Petitioner avers that of the 11 deeds of assignment and promissory notes,
only two bore her signature.52 She insists that she is not bound by the
The appellate court sustained the trial court's ruling that Felicidad's
deeds which she did not sign. By assigning the obligation to pay petitioner
obligation to Agrifina had not been novated by the deeds of
their loan accounts, Felicidad's debtors merely assumed the latter's
assignment and promissory notes executed in the latter's favor.
obligation and became co-debtors to petitioner. Respondents were not
Although Agrifina was subrogated as a new creditor in lieu of
released from their obligation under their loan transactions, and she had
Felicidad, Felicidad's obligation to Agrifina under the loan
the option to demand payment from them or their debtors. Citing the ruling
transaction remained; there was no intention on their part to novate
of this Court in Magdalena Estates, Inc. v. Rodriguez,53 petitioner insists
the original obligation. Nonetheless, the appellate court held that
that the first debtor is not released from responsibility upon reaching an
the legal effects of the deeds of assignment could not be totally
agreement with the creditor. The payment by a third person of the first
disregarded. The assignments of credits were onerous, hence, had
debtor's obligation does not constitute novation, and the creditor can still
the effect of payment, pro tanto, of the outstanding obligation. The
enforce the obligation against the original debtor. Petitioner also cites the
fact that Agrifina never repudiated or rescinded such assignments
only shows that she had accepted and conformed to it. ruling of this Court in Guerrero v. Court of Appeals.54
Consequently, she cannot collect both from Felicidad and her
individual debtors without running afoul to the principle of unjust In their Comment on the petition, respondents aver that by virtue of
enrichment. Agrifina's primary recourse then is against Felicidad's respondent Felicidad's execution of the deeds of assignment, and the
individual debtors on the basis of the deeds of assignment and original debtors' execution of the promissory notes (along with their
promissory notes. conformity to the deeds of assignment with petitioner's consent), their loan
accounts with petitioner amounting to P585,659.00 had been effectively
The CA further declared that the deeds of assignment executed by extinguished. Respondents point out that this is in accordance with Article
1291, paragraph 2, of the Civil Code. Thus, the original debtors of
Felicidad had the effect of payment of her outstanding obligation to
respondents had been substituted as petitioner's new debtors.
Agrifina in the amount of P585,659.00. It ruled that, since an
assignment of credit is in the nature of a sale, the assignors
remained liable for the warranties as they are responsible for the Respondents counter that petitioner had been subrogated to their right to
existence and legality of the credit at the time of the assignment. collect the loan accounts of their debtors. In fact, petitioner, as the new
creditor of respondents' former debtors had been able to collect the latter's
loan accounts which amounted to P301,000.00. The sums received by
Both parties moved to have the decision reconsidered, 49 but the
respondents' debtors were the same loans which they obliged to pay to
appellate court denied both motions on December 21, 2004. 50
petitioner under the promissory notes executed in petitioner's favor.

Agrifina, now petitioner, filed the instant petition, contending that


Respondents aver that their obligation to petitioner cannot stand or exist
separately from the original debtors' obligation to petitioner as the new
1. The Honorable Court of Appeals erred in ruling that the deeds of creditor. If allowed to collect from them as well as from their original
assignment in favor of petitioner has the effect of payment of the debtors, petitioner would be enriching herself at the expense of
original obligation even as it ruled out that the original obligation respondents. Thus, despite the fact that petitioner had
and the assigned credit are distinct and separate and can stand collected P172,600.00 from respondents and P301,000.00 from the
independently from each other; original debtors, petitioner still sought to collect P773,000.00 from them in
the RTC. Under the deeds of assignment executed by Felicidad and the
2. The Honorable Court of Appeals erred in passing upon issues original debtors' promissory notes, the original debtors' accounts were
raised for the first time on appeal; and assigned to petitioner who would be the new creditor. In fine, respondents
are no longer liable to petitioner for the balance of their loan account
inclusive of interests. Respondents also insist that petitioner failed to
3. The Honorable Court of Appeals erred in resolving fact not in prove that she (petitioner) was merely authorized to collect the accounts of
issue.51 the original debtors so as to to facilitate the payment of respondents' loan
obligation.
Petitioner avers that the appellate court erred in ruling that
respondents' original obligation amounted to only P637,000.00 The Issues
(instead of P773,000.00) simply because she lost the promissory
notes/receipts which evidenced the loans executed by respondent
Felicidad Tibong. She insists that the issue of whether Felicidad The threshold issues are: (1) whether respondent Felicidad Tibong
owed her less than P773,000.00 was not raised by respondents borrowed P773,000.00 from petitioner; and (2) whether the obligation of
during pre-trial and in their appellate brief; the appellate court was respondents to pay the balance of their loans, including interest, was
thus proscribed from taking cognizance of the issue. partially extinguished by the execution of the deeds of assignment in favor
of petitioner, relative to the loans of Edna Papat-iw, Helen Cabang,
Antoinette Manuel, and Fely Cirilo in the total amount of P371,000.00.
Petitioner avers that respondents failed to deny, in their verified
answer, that they had secured the P773,000.00 loan; hence,
respondents are deemed to have admitted the allegation in the The Ruling of the Court
complaint that the loans secured by respondent from her amounted
to P773,000.00. As gleaned from the trial court's pre-trial order, the We have carefully reviewed the brief of respondents as appellants in the
CA, and find that, indeed, they had raised the issue of whether they
Page 90 of 105
received P773,000.00 by way of loans from petitioner. They In their Answer, respondents admitted that they had secured loans from
averred that, as gleaned from the documentary evidence of petitioner. While the allegations in paragraph 2 of the complaint were
petitioner in the RTC, the total amount they borrowed was specifically denied, respondents merely averred that petitioner and
only P673,000.00. They asserted that petitioner failed to adduce respondent Felicidad entered into an agreement for the lending of money
concrete evidence that they received P773,000.00 from her.55 to interested borrowers at a higher interest rate. Respondents failed to
declare the exact amount of the loans they had secured from petitioner.
They also failed to deny the allegation in paragraph 2 of the complaint that
We agree, however, with petitioner that the appellate court erred in
respondent Felicidad signed and submitted a counter-affidavit in I.S. No.
reversing the finding of the RTC simply because petitioner failed to
93-334 where she admitted having secured loans from petitioner in the
present any document or receipt signed by Felicidad.
amount of P773,000.00. Respondents, likewise, failed to deny the
allegation in paragraph 2(h) of the complaint that respondents had
Section 10, Rule 8 of the Rules of Civil Procedure requires a secured a P34,000.00 loan payable on October 19, 1989, evidenced by a
defendant to "specify each material allegation of fact the truth of receipt which petitioner had misplaced. Although respondents specifically
which he does not admit and, whenever practicable, x x x set forth denied in paragraph 2.11 of their Answer the allegations in paragraph 2(I)
the substance of the matters upon which he relies to support his of the complaint, they merely alleged that "they have not received sums of
denial.56