G. R. No. 136773 June 25, 2003
and the
MILAGROS MANONGSONG, joined by her husband, CARLITO
MANONGSONG, Petitioners,
vs.
FELOMENA JUMAQUIO ESTIMO, EMILIANA JUMAQUIO,
NARCISO ORTIZ, CELESTINO ORTIZ, RODOLFO ORTIZ,
ERLINDA O. OCAMPO, PASTOR ORTIZ, JR., ROMEO ORTIZ
BENJAMIN DELA CRUZ, SR., BENJAMIN DELA CRUZ, JR.,
AURORA NICOLAS, GLORIA RACADIO, ROBERTO DELA CRUZ,
JOSELITO DELA CRUZ and LEONCIA S. LOPEZ, Respondents.
DECISION
CARPIO, J.:
The Case
Before this Court is a petition for review1 assailing the Decision2 of 26
June 1998 and the Resolution of 21 December 1998 of the Court of
Appeals in CA-G.R. CV No. 51643. The Court of Appeals reversed the
Decision dated 10 April 1995 of the Regional Trial Court of Makati
City, Branch 135, in Civil Case No. 92-1685, partitioning the property
in controversy and awarding to petitioners a portion of the property.
Antecedent Facts
Spouses Agatona Guevarra ("Guevarra") and Ciriaco Lopez had six
(6) children, namely: (1) Dominador Lopez; (2) Enriqueta Lopez-
Jumaquio, the mother of respondents Emiliana Jumaquio Rodriguez
and Felomena Jumaquio Estimo ("Jumaquio sisters"); (3) Victor
Lopez, married to respondent Leoncia Lopez; (4) Benigna Lopez-
Ortiz, the mother of respondents Narciso, Celestino, Rodolfo, Pastor
Jr. and Romeo Ortiz, and Erlinda Ortiz Ocampo; (5) Rosario Lopez-
dela Cruz, married to respondent Benjamin dela Cruz, Sr.
mother of respondents Benjamin Jr., Roberto, and Joselito, all
surnamed dela Cruz, and of Gloria dela Cruz Racadio and Aurora dela
Cruz Nicolas; and (6) Vicente Lopez, the father of petitioner Milagros
Lopez Manongsong ("Manongsong").
The contested property is a parcel of land on San Jose Street,
Manuyo Uno, Las Piñas, Metro Manila with an area of approximately
152 square meters ("Property"). The records do not show that the
Property is registered under the Torrens system. The Property is
particularly described in Tax Declaration No. B-001-003903 as
bounded in the north by Juan Gallardo, south by Calle Velay, east by
Domingo Lavana and west by San Jose Street. Tax Declaration No.
B-001-00390 was registered with the Office of the Municipal Assessor
of Las Piñas on 30 September 1984 in the name of "Benigna Lopez,
et al".4 However, the improvements on the portion of the Property
denominated as No. 831 San Jose St., Manuyo Uno, Las Piñas were
separately declared in the name of "Filomena J. Estimo" under Tax
Declaration No. 90-001-02145 dated 14 October 1991.5
Milagros and Carlito Manongsong ("petitioners") filed a Complaint6 on
19 June 1992, alleging that Manongsong and respondents are the
owners pro indiviso of the Property. Invoking Article 494 of the Civil
Code,7 petitioners prayed for the partition and award to them of an
area equivalent to one-fifth (1/5) of the Property or its prevailing
market value, and for damages.
Petitioners alleged that Guevarra was the original owner of the
Property. Upon Guevarra’s death, her children inherited the Property.
Since Dominador Lopez died without offspring, there were only five
children left as heirs of Guevarra. Each of the five children, including
Vicente Lopez, the father of Manongsong, was entitled to a fifth of
the Property. As Vicente Lopez’ sole surviving heir, Manongsong
claims her father’s 1/5 share in the Property by right of
representation.
There is no dispute that respondents, who are the surviving spouses
of Guevarra’s children and their offspring, have been in possession
of the Property for as long as they can remember. The area actually
occupied by each respondent family differs, ranging in size from
approximately 25 to 50 square meters. Petitioners are the only
descendants not occupying any portion of the Property.
Most respondents, specifically Narciso, Rodolfo, Pastor Jr., and
Celestino Ortiz, and Erlinda Ortiz Ocampo ("Ortiz family"), as well as
Benjamin Sr., Benjamin Jr., and Roberto dela Cruz, Aurora dela Cruz
Nicolas and Gloria Dela Cruz Racadio ("Dela Cruz family"), entered
into a compromise agreement with petitioners. Under the Stipulation
of Facts and Compromise Agreement8 dated 12 September 1992
("Agreement"), petitioners and the Ortiz and Dela Cruz families
agreed that each group of heirs would receive an equal share in the
Property. The signatories to the Agreement asked the trial court to
issue an order of partition to this effect and prayed further that
"those who have exceeded said one-fifth (1/5) must be reduced so
that those who have less and those who have none shall get the
correct and proper portion."9
Among the respondents, the Jumaquio sisters and Leoncia Lopez –
who each occupy 50 square meter portions of the Property – and
Joselito dela Cruz, did not sign the Agreement.10 However, only the
Jumaquio sisters actively opposed petitioners’ claim. The Jumaquio
sisters contended that Justina Navarro ("Navarro"), supposedly the
mother of Guevarra, sold the Property to Guevarra’s daughter
Enriqueta Lopez Jumaquio.
The Jumaquio sisters presented provincial Tax Declaration No.
91111 for the year 1949 in the sole name of Navarro. Tax Declaration
No. 911 described a residential parcel of land with an area of 172.51
square meters, located on San Jose St., Manuyo, Las Piñas, Rizal
with the following boundaries: Juan Gallardo to the north, I.
Guevarra Street to the south, Rizal Street to the east and San Jose
Street to the west. In addition, Tax Declaration No. 911 stated that
the houses of "Agatona Lopez" and "Enriquita Lopez" stood on the
Property as improvements.
The Jumaquio sisters also presented a notarized KASULATAN SA
BILIHAN NG LUPA12 ("Kasulatan") dated 11 October 1957, the
relevant portion of which states:
AKO SI JUSTINA NAVARRO, sapat ang gulang, may asawa, Pilipino
at naninirahan sa LAS PIÑAS, ay siyang nagma-may-ari at
nagtatangkilik ng isang lagay na lupa na matatagpuan sa Manuyo,
Las Piñas, Rizal, lihis sa anomang pagkakautang lalong napagkikilala
sa pamamagitan ng mga sumusunod na palatandaan:
BOUNDARIES:
NORTH: JUAN GALLARDO SOUTH: I. GUEVARRA ST. EAST: RIZAL
ST., WEST: SAN JOSE ST.,
na may sukat na 172.51 metros cuadrados na may TAX
DECLARATION BILANG 911.
NA DAHIL AT ALANG ALANG sa halagang DALAWANG DAAN
LIMANGPUNG PISO (₱250.00), SALAPING PILIPINO, na sa akin ay
kaliwang iniabot at ibinayad ni ENRIQUETA LOPEZ, may sapat na
gulang, Pilipino, may asawa at naninirahan sa Las Piñas, Rizal, at sa
karapatang ito ay aking pinatutunayan ng pagkakatanggap ng
nasabing halaga na buong kasiyahan ng aking kalooban ay aking
IPINAGBILI, ISINALIN AT INILIPAT sa nasabing, ENRIQUETA LOPEZ,
sa kanyang mga tagapagmana at kahalili, ang kabuuang sukat ng
lupang nabanggit sa itaas nito sa pamamagitan ng bilihang walang
anomang pasubali. Ang lupang ito ay walang kasama at hindi
taniman ng palay o mais.
Simula sa araw na ito ay aking ililipat ang pagmamay-ari at
pagtatangkilik ng nasabing lupa kay ENRIQUETA LOPEZ sa
kanilang/kanyang tagapagmana at kahalili x x x.
The Clerk of Court of the Regional Trial Court of Manila certified on 1
June 1994 that the "‘KASULATAN SA BILIHAN NG LUPA’, between
Justina Navarro (Nagbili) and Enriqueta Lopez (Bumili), was
notarized by Atty. Ruperto Q. Andrada on 11 October 1957 and
entered in his Notarial Register xxx."13 The certification further stated
that Atty. Andrada was a duly appointed notary public for the City of
Manila in 1957.
Because the Jumaquio sisters were in peaceful possession of their
portion of the Property for more than thirty years, they also invoked
the defense of acquisitive prescription against petitioners, and
charged that petitioners were guilty of laches. The Jumaquio sisters
argued that the present action should have been filed years earlier,
either by Vicente Lopez when he was alive or by Manongsong when
the latter reached legal age. Instead, petitioners filed this action for
partition only in 1992 when Manongsong was already 33 years old.
The Ruling of the Trial Court
After trial on the merits, the trial court in its Decision14 of 10 April
1995 ruled in favor of petitioners. The trial court held that the
Kasulatan was void, even absent evidence attacking its validity. The
trial court declared:
It appears that the ownership of the estate in question is
controverted. According to defendants Jumaquios, it pertains to
them through conveyance by means of a Deed of Sale executed by
their common ancestor Justina Navarro to their mother Enriqueta,
which deed was presented in evidence as Exhs. "4" to "4-A". Plaintiff
Milagros Manongsong debunks the evidence as fake. The document
of sale, in the observance of the Court, is however duly authenticated
by means of a certificate issued by the RTC of the Manila Clerk of
Court as duly notarized public document (Exh. "5"). No
countervailing proof was adduced by plaintiffs to overcome or
impugn the document’s legality or its validity.
xxx The conveyance made by Justina Navarro is subject to nullity
because the property conveyed had a conjugal character. No positive
evidence had been introduced that it was solely a paraphernal
property. The name of Justina Navarro’s spouse/husband was not
mentioned and/or whether the husband was still alive at the time the
conveyance was made to Justina Navarro. Agatona Guevarra as her
compulsory heir should have the legal right to participate with the
distribution of the estate under question to the exclusion of others.
She is entitled to her legitime. The Deed of Sale [Exhs "4" & "4-
1"(sic)] did not at all provide for the reserved legitime or the heirs,
and, therefore it has no force and effect against Agatona Guevarra
and her six (6) legitimate children including the grandchildren, by
right of representation, as described in the order of intestate
succession. The same Deed of Sale should be declared a nullity ab
initio. The law on the matter is clear. The compulsory heirs cannot
be deprived of their legitime, except on (sic) cases expressly
specified by law like for instance disinheritance for cause. xxx
(Emphasis supplied)
Since the other respondents had entered into a compromise
agreement with petitioners, the dispositive portion of the trial court’s
decision was directed against the Jumaquio sisters only, as follows:
WHEREFORE, premises considered, judgment is hereby rendered in
favor of plaintiffs and against the remaining active defendants,
Emiliana Jumaquio and Felomena J. Estimo, jointly and severally,
ordering:
1. That the property consisting of 152 square meters referred
to above be immediately partitioned giving plaintiff Milagros
Lopez-Manongsong her lawful share of 1/5 of the area in
square meters, or the prevailing market value on the date of
the decision;
2. Defendants to pay plaintiffs the sum of ₱10,000.00 as
compensatory damages for having deprived the latter the use
and enjoyment of the fruits of her 1/5 share;
3. Defendants to pay plaintiffs’ litigation expenses and
attorney’s fee in the sum of ₱10,000.00; and
4. Defendants to pay the costs of suit.
SO ORDERED.15 (Emphasis supplied)
When the trial court denied their motion for reconsideration, the
Jumaquio sisters appealed to the Court of Appeals.
The Ruling of the Court of Appeals
Petitioners, in their appellee’s brief before the Court of Appeals,
presented for the first time a supposed photocopy of the death
certificate16 of Guevarra, which stated that Guevarra’s mother was a
certain Juliana Gallardo. Petitioner also attached an affidavit17 from
Benjamin dela Cruz, Sr. attesting that he knew Justina Navarro only
by name and had never met her personally, although he had lived
for some years with Agatona Guevarra after his marriage with
Rosario Lopez. On the basis of these documents, petitioners assailed
the genuineness and authenticity of the Kasulatan.
The Court of Appeals refused to take cognizance of the death
certificate and affidavit presented by petitioners on the ground that
petitioners never formally offered these documents in evidence.
The appellate court further held that the petitioners were bound by
their admission that Navarro was the original owner of the Property,
as follows:
Moreover, plaintiffs-appellees themselves admitted before the trial
court that Justina Navarro and not Juliana Gallardo was the original
owner of the subject property and was the mother of Agatona
Navarro (sic). Plaintiffs-appellees in their Reply-Memorandum
averred:
"As regards the existence of common ownership, the defendants
clearly admit as follows:
xxx xxx xxx
‘History of this case tells us that originally the property was owned
by JUSTINA NAVARRO who has a daughter by the name of AGATONA
GUEVARRA who on the other hand has six children namely: xxx xxx
xxx.’
which point-out that co-ownership exists on the property between
the parties. Since this is the admitted history, facts of the case, it
follows that there should have been proper document to extinguish
this status of co-ownership between the common owners either by
(1) Court action or proper deed of tradition, xxx xxx xxx."
The trial court confirms these admissions of plaintiffs-appellees. The
trial court held:
"x x x xxx xxx
With the parties’ admissions and their conformity to a factual
common line of relationship of the heirs with one another, it has been
elicited ascendant Justina Navarro is the common ancestor of the
heirs herein mentioned, however, it must be noted that the parties
failed to amplify who was the husband and the number of compulsory
heirs of Justina Navarro. xxx xxx xxx"
Therefore, plaintiffs-appellees cannot now be heard contesting the
fact that Justina Navarro was their common ancestor and was the
original owner of the subject property.
The Court of Appeals further held that the trial court erred in
assuming that the Property was conjugal in nature when Navarro
sold it. The appellate court reasoned as follows:
However, it is a settled rule that the party who invokes the
presumption that all property of marriage belongs to the conjugal
partnership, must first prove that the property was
acquired during the marriage. Proof of acquisition during the
coveture is a condition sine qua non for the operation of the
presumption in favor of conjugal ownership.
In this case, not a single iota of evidence was submitted to prove
that the subject property was acquired by Justina Navarro during her
marriage. xxx
The findings of the trial court that the subject property is conjugal in
nature is not supported by any evidence.
To the contrary, records show that in 1949 the subject property was
declared, for taxation purposes under the name of Justina Navarro
alone. This indicates that the land is the paraphernal property of
Justina Navarro.
For these reasons, the Court of Appeals reversed the decision of the
trial court, thus:
WHEREFORE, foregoing considered, the appealed decision is hereby
REVERSED and SET ASIDE. A new one is hereby rendered
DISMISSING plaintiffs-appellees’ complaint in so far as defendants-
appellants are concerned.
Costs against plaintiffs-appellees.
SO ORDERED.18
Petitioners filed a motion for reconsideration, but the Court of
Appeals denied the same in its Resolution of 21 December 1998.19
On 28 January 1999, petitioners appealed the appellate court’s
decision and resolution to this Court. The Court initially denied the
petition for review due to certain procedural defects. The Court,
however, gave due course to the petition in its Resolution of 31
January 2000.20
The Issues
Petitioners raise the following issues before this Court:
1. WHETHER PETITIONER HAS NO COUNTERVAILING
EVIDENCE ON THE ALLEGED SALE BY ONE JUSTINA
NAVARRO;
 2. WHETHER THERE IS PRETERITION AND THE ISSUES
RAISED ARE REVIEWABLE;
3. WHETHER THERE IS CO-OWNERSHIP PRO INDIVISO;
4. WHETHER THE RULE OF THE MAJORITY CO-OWNERS ON
THE LAND SHOULD PREVAIL;
5. WHETHER THE ALLEGED SALE IS VALID AND BINDS THE
OTHER CO-HEIRS;
6. WHETHER PRESCRIPTION APPLIES AGAINST THE SHARE
OF PETITIONERS.21
The fundamental question for resolution is whether petitioners were
able to prove, by the requisite quantum of evidence, that
Manongsong is a co-owner of the Property and therefore entitled to
demand for its partition.
The Ruling of the Court
The petition lacks merit.
The issues raised by petitioners are mainly factual in nature. In
general, only questions of law are appealable to this Court under Rule
45. However, where the factual findings of the trial court and Court
of Appeals conflict, this Court has the authority to review and, if
necessary, reverse the findings of fact of the lower courts.22 This is
precisely the situation in this case.
We review the factual and legal issues of this case in light of the
general rules of evidence and the burden of proof in civil cases, as
explained by this Court in Jison v. Court of Appeals :23
xxx Simply put, he who alleges the affirmative of the issue has the
burden of proof, and upon the plaintiff in a civil case, the burden of
proof never parts. However, in the course of trial in a civil case, once
plaintiff makes out a prima facie case in his favor, the duty or the
burden of evidence shifts to defendant to controvert plaintiff's prima
facie case, otherwise, a verdict must be returned in favor of plaintiff.
Moreover, in civil cases, the party having the burden of proof must
produce a preponderance of evidence thereon, with plaintiff having
to rely on the strength of his own evidence and not upon the
weakness of the defendant’s. The concept of "preponderance of
evidence" refers to evidence which is of greater weight, or more
convincing, that which is offered in opposition to it; at bottom, it
means probability of truth.
Whether the Court of Appeals erred in affirming the validity of
the Kasulatan sa Bilihan ng Lupa
Petitioners anchor their action for partition on the claim that
Manongsong is a co-owner or co-heir of the Property by inheritance,
more specifically, as the heir of her father, Vicente Lopez. Petitioners
likewise allege that the Property originally belonged to Guevarra, and
that Vicente Lopez inherited from Guevarra a 1/5 interest in the
Property. As the parties claiming the affirmative of these issues,
petitioners had the burden of proof to establish their case by
preponderance of evidence.
To trace the ownership of the Property, both contending parties
presented tax declarations and the testimonies of witnesses.
However, the Jumaquio sisters also presented a notarized
KASULATAN SA BILIHAN NG LUPA which controverted petitioners’
claim of co-ownership.
The Kasulatan, being a document acknowledged before a notary
public, is a public document and prima facie evidence of its
authenticity and due execution. To assail the authenticity and due
execution of a notarized document, the evidence must be clear,
convincing and more than merely preponderant.24 Otherwise the
authenticity and due execution of the document should be
upheld.25 The trial court itself held that "(n)o countervailing proof was
adduced by plaintiffs to overcome or impugn the document’s legality
or its validity."26
Even if the Kasulatan was not notarized, it would be deemed an
ancient document and thus still presumed to be authentic. The
Kasulatan is: (1) more than 30 years old, (2) found in the proper
custody, and (3) unblemished by any alteration or by any
circumstance of suspicion. It appears, on its face, to be genuine.27
Nevertheless, the trial court held that the Kasulatan was void
because the Property was conjugal at the time Navarro sold it to
Enriqueta Lopez Jumaquio. We do not agree. The trial court’s
conclusion that the Property was conjugal was not based on
evidence, but rather on a misapprehension of Article 160 of the Civil
Code, which provides:
All property of the marriage is presumed to belong to the conjugal
partnership, unless it be proved that it pertains exclusively to the
husband or to the wife.
As the Court of Appeals correctly pointed out, the presumption under
Article 160 of the Civil Code applies only when there is proof that the
property was acquired during the marriage. Proof of acquisition
during the marriage is an essential condition for the operation of the
presumption in favor of the conjugal partnership.28
There was no evidence presented to establish that Navarro acquired
the Property during her marriage. There is no basis for applying the
presumption under Article 160 of the Civil Code to the present case.
On the contrary, Tax Declaration No. 911 showed that, as far back
as in 1949, the Property was declared solely in Navarro’s
name.29 This tends to support the argument that the Property was
not conjugal.
We likewise find no basis for the trial court’s declaration that the sale
embodied in the Kasulatan deprived the compulsory heirs of
Guevarra of their legitimes. As opposed to a disposition inter vivos
by lucrative or gratuitous title, a valid sale for valuable consideration
does not diminish the estate of the seller. When the disposition is for
valuable consideration, there is no diminution of the estate but
merely a substitution of values,30 that is, the property sold is replaced
by the equivalent monetary consideration.1âwphi1
Under Article 1458 of the Civil Code, the elements of a valid contract
of sale are: (1) consent or meeting of the minds; (2) determinate
subject matter and (3) price certain in money or its equivalent.31 The
presence of these elements is apparent on the face of the Kasulatan
itself. The Property was sold in 1957 for ₱250.00.32
Whether the Court of Appeals erred in not admitting the documents
presented by petitioners for the first time on appeal
We find no error in the Court of Appeals’ refusal to give any probative
value to the alleged birth certificate of Guevarra and the affidavit of
Benjamin dela Cruz, Sr. Petitioners belatedly attached these
documents to their appellee’s brief. Petitioners could easily have
offered these documents during the proceedings before the trial
court. Instead, petitioners presented these documents for the first
time on appeal without any explanation. For reasons of their own,
petitioners did not formally offer in evidence these documents before
the trial court as required by Section 34, Rule 132 of the Rules of
Court.33 To admit these documents now is contrary to due process,
as it deprives respondents of the opportunity to examine and
controvert them.
Moreover, even if these documents were admitted, they would not
controvert Navarro’s ownership of the Property. Benjamin dela Cruz,
Sr.’s affidavit stated merely that, although he knew Navarro by
name, he was not personally acquainted with her.34 Guevarra’s
alleged birth certificate casts doubt only as to whether Navarro was
indeed the mother of Guevarra. These documents do not prove that
Guevarra owned the Property or that Navarro did not own the
Property.
of evidence that the Property belonged to Guevarra’s estate. There
is therefore no legal basis for petitioners’ complaint for partition of
the Property.
WHEREFORE, the Decision of 26 June 1998 of the Court of Appeals
in CA-G.R. CV No. 51643, dismissing the complaint of petitioners
against Felomena Jumaquio Estimo and Emiliana Jumaquio, is
AFFIRMED.
SO ORDERED.

Petitioners admitted before the trial court that Navarro was the
mother of Guevarra. However, petitioners denied before the Court of
Appeals that Navarro was the mother of Guevarra. We agree with
the appellate court that this constitutes an impermissible change of
theory. When a party adopts a certain theory in the court below, he
cannot change his theory on appeal. To allow him to do so is not only
unfair to the other party, it is also offensive to the basic rules of fair
play, justice and due process.35

If Navarro were not the mother of Guevarra, it would only further

undermine petitioners’ case. Absent any hereditary relationship
between Guevarra and Navarro, the Property would not have passed
from Navarro to Guevarra, and then to the latter’s children, including
petitioners, by succession. There would then be no basis for
petitioners’ claim of co-ownership by virtue of inheritance from
Guevarra. On the other hand, this would not undermine respondents’
position since they anchor their claim on the sale under the Kasulatan
and not on inheritance from Guevarra.

Since the notarized Kasulatan is evidence of greater weight which

petitioners failed to refute by clear and convincing evidence, this
Court holds that petitioners were not able to prove by preponderance
G.R. No. 173856 November 20, 2008
DAO HENG BANK, INC., now BANCO DE ORO UNIVERSAL
BANK, petitioner
vs.
SPS. LILIA and REYNALDO LAIGO, respondent.
CARPIO MORALES, J.:
The Spouses Lilia and Reynaldo Laigo (respondents) obtained loans
from Dao Heng Bank, Inc. (Dao Heng) in the total amount of P11
Million, to secure the payment of which they forged on October 28,
1996, November 18, 1996 and April 18, 1997 three Real Estate
Mortgages covering two parcels of land registered in the name of
respondent "Lilia D. Laigo, . . . married to Reynaldo Laigo," one
containing 569 square meters and the other containing 537 square
meters.
The mortgages were duly registered in the Registry of Deeds of
Quezon City.
The loans were payable within 12 months from the execution of the
promissory notes covering the loans. As of 2000, respondents failed
to settle their outstanding obligation, drawing them to verbally offer
to cede to Dao Heng one of the two mortgaged lots by way of dacion
en pago. To appraise the value of the mortgaged lands, Dao Heng in
fact commissioned an appraiser whose fees were shouldered by it
and respondents.
There appears to have been no further action taken by the parties
after the appraisal of the properties.
Dao Heng was later to demand the settlement of respondents'
obligation by letter of August 18, 20001 wherein it indicated that they
had an outstanding obligation of P10,385,109.92 inclusive of
interests and other charges. Respondents failed to heed the demand,
however.
Dao Heng thereupon filed in September 2000 an application to
foreclose the real estate mortgages executed by respondents. The
properties subject of the mortgage were sold for P10,776,242 at a
public auction conducted on December 20, 2000 to Banco de Oro
Universal Bank (hereafter petitioner) which was the highest bidder.
It appears that respondents negotiated for the redemption of the
mortgages for by a June 29, 2001 letter2 to them, petitioner, to
which Dao Heng had been merged, through its Vice President on
Property Management & Credit Services Department, advised
respondent Lilia Laigo as follows:
This is to formally advise you of the bank's response to your proposal
pertaining to the redemption of the two (2) foreclosed lots located in
Fairview, Quezon City as has been relayed to you last June 13, 2001
as follows:
1. Redemption price shall be P11.5MM plus 12% interest
based on diminishing balance payable in staggered payments
up to January 2, 2002 as follows:
a. P3MM - immediately upon receipt of this approval
b. Balance payable in staggered payments (plus
interest) up to January 2, 2002
2. Release Values for Partial Redemption:
a. TCT No. 92257 (along Commonwealth) P7.500 MM*
 b. TCT No. N-146289 (along Regalado) P4.000 MM*
* excluding 12% interest
3. Other Conditions:
a. Payments shall be covered by post dated checks
b. TCT No. 92257 shall be the first property to be
released upon payment of the first P7.5MM plus interest
c. Arrangement to be covered by an Agreement
If you are agreeable to the foregoing terms and conditions, please
affix your signature showing your conformity thereto at the space
provided below. (Emphasis and underscoring in the original; italics
supplied)
Nothing was heard from respondents, hence, petitioner by its
Manager, Property Management & Credit Services Department,
advised her by letter of December 26, 20013 that in view of their
failure to conform to the conditions set by it for the redemption of
the properties, it would proceed to consolidate the titles immediately
after the expiration of the redemption period on January 2, 2002.
Six days before the expiration of the redemption period or on
December 27, 2001, respondents filed a complaint before the
Regional Trial Court (RTC) of Quezon City, for Annulment, Injunction
with Prayer for Temporary Restraining Order (TRO), praying for the
annulment of the foreclosure of the properties subject of the real
estate mortgages and for them to be allowed "to deliver by way of
‘dacion en pago' one of the mortgaged properties as full payment of
[their] mortgaged obligation" and to, in the meantime, issue a TRO
directing the defendant-herein petitioner to desist from consolidating
ownership over their properties.
By respondents' claim, Dao Heng verbally agreed to enter into
a dacion en pago.
In its Opposition to respondents' Application for a TRO,4 petitioner
claimed that there was no meeting of the minds between the parties
on the settlement of respondents' loan via dacion en pago.
A hearing on the application for a TRO was conducted by Branch 215
of the RTC of Quezon City following which it denied the same.
Petitioner thereupon filed a Motion to Dismiss the complaint on the
ground that the claim on which respondents' action is founded is
unenforceable under the Statute of Frauds and the complaint states
no cause of action. Respondents opposed the motion, contending
that their delivery of the titles to the mortgaged properties
constituted partial performance of their obligation under the dacion
en pago to take it out from the coverage of the Statute of Frauds.
The trial court granted petitioner's Motion to Dismiss in this wise:
[P]laintiffs' claim must be based on a document or
writing evidencing the alleged dacion en pago, otherwise, the
same cannot be enforced in an action in court. The Court is
not persuaded by plaintiffs' contention that their case is an
exception to the operation of the rule on statute of frauds
because of their partial performance of the obligation in
the dacion en pago consisting of the delivery of the titles of
the properties to the defendants. As correctly pointed out by
the defendants, the titles were not delivered to them
pursuant to the dacion en pago but by reason of the
execution of the mortgage loan agreement. If indeed
 a dacion en pago agreement was entered into between the
parties, it is inconceivable that a written document would not
be drafted considering the magnitude of the amount
involved.5 (Emphasis and underscoring supplied)
Respondents assailed the dismissal of their complaint via Petition for
Review before this Court which referred it to the Court of Appeals for
disposition.
Reversing the trial court's dismissal of the complaint, the appellate
court, by Decision of January 26, 2006,6 reinstated respondents'
complaint.7
In ordering the reinstatement of respondents' complaint, the
appellate court held that the complaint states a cause of action,
respondents having alleged that there was partial performance of the
agreement to settle their obligation via dacion en pagowhen they
agreed to have the properties appraised to thus place their
agreement within the exceptions provided under Article 14038 of the
Civil Code on Statute of Frauds. Thus the appellate court
ratiocinated:
Particularly, in seeking exception to the application of the
Statute of Frauds, petitioners[-herein respondents] averred
partial performance of the supposed verbal dacion en pago. In
paragraph 5 of their complaint, they stated: "As part of the
agreement, defendant Dao Heng Bank had the mortgaged
property appraised to determine which of the two shall be
delivered as full payment of the mortgage obligation; Also as
part of the deal, plaintiffs for their part paid P5,000.00 for the
appraisal expense. As reported by the appraiser commissioned
by Defendant Dao Heng, the appraised value of the mortgaged
properties were as follows: x x x" Having done so, petitioners
are at least entitled to a reasonable opportunity to prove their
case in the course of a full trial, to which the respondents may
equally present their evidence in refutation of the formers'
case. (Underscoring supplied)
Petitioner's Motion for Reconsideration having been denied by the
appellate court by Resolution of July 19, 2006, the present petition
was filed faulting the appellate court in ruling:
I.
. . . THAT THE COMPLAINT ALLEGED A SUFFICIENT CAUSE OF
ACTION DESPITE THE ALLEGATIONS, AS WELL AS
ADMISSIONS FROM THE RESPONDENTS, THAT THERE WAS
NO PERFECTED DACION EN PAGOCONTRACT;
II.
. . . THAT THE ALLEGED DACION EN PAGO IS NOT
UNENFORCEABLE UNDER THE STATUTE OF FRAUDS, DESPITE
THE ABSENCE OF A WRITTEN & BINDING CONTRACT;
III.
. . . THAT THE COMPLAINT SUFFICIENTLY STATED A CAUSE
OF ACTION.9
Generally, the presence of a cause of action is determined from the
facts alleged in the complaint.
In their complaint, respondents alleged:
xxxx
 4. Sometime in the middle of the year 2000, defendant Dao
Heng Bank as the creditor bank agreed to the full settlement
of plaintiffs' mortgage obligation of P9 Million through the
assignment of one of the two (2) mortgaged properties;
[5] As part of the agreement, defendant Dao Heng Bank had
the mortgaged properties appraised to determine which of the
two (2) mortgaged properties shall be delivered as full
payment of the mortgage obligation; Also as part of the
deal, plaintiffs for their part paid P5,000.00 for the appraisal
expense; As reported by the appraiser commissioned by
defendant Dao Heng, the appraised value of the mortgaged
properties were as follows:
(a) Property No. 1 - T.C.T. No. 92257: P12,518,000.00
L2A Blk 12 Don Mariano Marcos Ave., Fairview, QC
(b) Property No. 2 - T.C.T. No. 146289: P8,055,000.00
L36 Blk 87 Regalado Ave. Cor. Ipil St., Neopolitan, QC
[6] Sometime in December, year 2000, the protest of plaintiffs
notwithstanding and in blatant breach of the agreed "Dacion
en pago" as the mode of full payment of plaintiffs' mortgage
obligation, defendant Dao Heng Bank proceeded to foreclose
the mortgaged properties above-described and sold said
properties which were aggregately valued at more than P20
Million for only P10,776,242.00, an unconscionably very low
price; (Underscoring supplied)
Even if a complaint states a cause of action, however, a motion to
dismiss for insufficiency of cause of action may be granted if the
evidence discloses facts sufficient to defeat the claim and enables
the court to go beyond the disclosures in the complaint. In such
instances, the court can dismiss a complaint on this ground, even
without a hearing, by taking into account the discussions in said
motion to dismiss and the disposition thereto.10
In its Opposition to respondents' application for the issuance of a
TRO,11 petitioner, responding to respondents' allegation that it
agreed to the settlement of their obligation via the assignment of
one of the two mortgaged properties, alleged that there was no
meeting of the minds thereon:
4. Plaintiffs' claim that defendant Dao Heng Bank[s]
foreclosure sale of the mortgaged properties was improper
because there was an agreement to dacion one of the two (2)
mortgaged properties as full settlement of the loan obligation
and that defendant Dao Heng Bank and Banco de Oro were
already negotiating and colluding for the latter's acquisition of
the mortgaged [properties] for the unsconscionably low price
of P10,776.242.00 are clearly WITHOUT BASIS. Quite to the
contrary, there was no meeting of the minds between
defendant Dao Heng Bank and the plaintiffs to dacion any of
the mortgaged properties as full settlement of the
loan. Although there was a PROPOSAL and NEGOTIATIONS to
settle the loan by way of dacion, nothing came out of said
proposal, much less did the negotiations mature into the
execution of a dacion en pago instrument. Defendant Dao
Heng Bank found the offer to settle by way of dacion not
acceptable and thus, it opted to foreclose on the mortgage.
The law clearly provides that "the debtor of a thing cannot
compel the creditor to receive a different one, although the
latter may be of the same value, or more valuable than that
which is due" (Article 1244, New Civil Code). "The oblige is
entitled to demand fulfillment of the obligation or performance
as stipulated" (Palmares v. Court of Appeals, 288 SCRA 422
 at p. 444 [1998]). "The power to decide whether or not to
foreclose on the mortgage is the sole prerogative of the
mortgagee" (Rural Bank of San Mateo, Inc. vs. Intermediate
Appellate Court, 146 SCRA 205, at 213 [1986]) Defendant
Dao Heng Bank merely opted to exercise such
prerogative.12 (Emphasis in the original; capitalization and
underscoring supplied)
Dacion en pago as a mode of extinguishing an existing obligation
partakes of the nature of sale whereby property is alienated to the
creditor in satisfaction of a debt in money.13 It is an objective
novation of the obligation, hence, common consent of the parties is
required in order to extinguish the obligation.
. . . In dacion en pago, as a special mode of payment, the debtor
offers another thing to the creditor who accepts it as equivalent of
payment of an outstanding debt. The undertaking really partakes in
one sense of the nature of sale, that is, the creditor is really buying
the thing or property of the debtor, payment for which is to be
charged against the debtor's debt. As such the elements of a contract
of sale, namely, consent, object certain, and cause or consideration
must be present. In its modern concept, what actually takes place
in dacion en pago is an objective novation of the obligation where
the thing offered as an accepted equivalent of the performance of an
obligation is considered as the object of the contract of sale, while
the debt is considered the purchase price. In any case, common
consent is an essential prerequisite, be it sale or novation, to have
the effect of totally extinguishing the debt or
obligation."14 (Emphasis, italics and underscoring supplied; citation
omitted)
Being likened to that of a contract of sale, dacion en pago is
governed by the law on sales.15 The partial execution of a contract
of sale takes the transaction out of the provisions of the Statute of
Frauds so long as the essential requisites of consent of the
contracting parties, object and cause of the obligation concur and
are clearly established to be present.16
Respondents claim that petitioner's commissioning of an appraiser to
appraise the value of the mortgaged properties, his services for
which they and petitioner paid, and their delivery to petitioner of the
titles to the properties constitute partial performance of their
agreement to take the case out of the provisions on the Statute of
Frauds.
There is no concrete showing, however, that after the appraisal of
the properties, petitioner approved respondents' proposalto settle
their obligation via dacion en pago. The delivery to petitioner of the
titles to the properties is a usual condition sine qua non to the
execution of the mortgage, both for security and registration
purposes. For if the title to a property is not delivered to the
mortgagee, what will prevent the mortgagor from again
encumbering it also by mortgage or even by sale to a third party.
Finally, that respondents did not deny proposing to redeem the
mortgages,17 as reflected in petitioner's June 29, 2001 letter to
them, dooms their claim of the existence of a perfected dacion en
pago.
WHEREFORE, the Court of Appeals Decision of January 26, 2006
is REVERSED and SET ASIDE. The Resolution of July 2, 2002 of
the Regional Trial Court of Quezon City, Branch 215 dismissing
respondents' complaint is REINSTATED.
SO ORDERED.

G.R. No. 168646 January 12, 2011
LUZON DEVELOPMENT BANK, Petitioner,
vs.
ANGELES CATHERINE ENRIQUEZ, Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 168666
DELTA DEVELOPMENT and MANAGEMENT SERVICES,
INC., Petitioner,
vs.
ANGELES CATHERINE ENRIQUEZ and LUZON DEVELOPMENT
BANK, Respondents.
The protection afforded to a subdivision lot buyer under Presidential
Decree (PD) No. 957 or The Subdivision and Condominium Buyer’s
Protective Decree will not be defeated by someone who is not an
innocent purchaser for value. The lofty aspirations of PD 957 should
be read in every provision of the statute, in every contract that
undermines its objects, in every transaction which threatens its
fruition. "For a statute derives its vitality from the purpose for which
it is enacted and to construe it in a manner that disregards or defeats
such purpose is to nullify or destroy the law."1
These cases involve the separate appeals of Luzon Development
Bank2 (BANK) and Delta Development and Management Services,
Inc.3 (DELTA) from the November 30, 2004 Decision of the Court of
Appeals (CA), as well as its June 22, 2005 Resolution in CA-G.R. SP
No. 81280. The dispositive portion of the assailed Decision reads:
WHEREFORE, premises considered, the Decision dated June 17, 2003
and Resolution dated November 24, 2003 are AFFIRMED with
[m]odification in so far as Delta Development and Management
Services, Inc. is liable and directed to pay petitioner Luzon
Development Bank the value of the subject lot subject matter of the
Contract to Sell between Delta Development and Management
Services, Inc. and the private respondent [Catherine Angeles
Enriquez].
SO ORDERED.4
Factual Antecedents
The BANK is a domestic financial corporation that extends loans to
subdivision developers/owners.5
Petitioner DELTA is a domestic corporation engaged in the business
of developing and selling real estate properties, particularly Delta
Homes I in Cavite. DELTA is owned by Ricardo De Leon (De
Leon),6 who is the registered owner of a parcel of land covered by
Transfer Certificate of Title (TCT) No. T-6371837 of the Registry of
Deeds of the Province of Cavite, which corresponds to Lot 4 of Delta
Homes I. Said Lot 4 is the subject matter of these cases.
On July 3, 1995, De Leon and his spouse obtained a ₱4 million loan
from the BANK for the express purpose of developing Delta Homes
I.8 To secure the loan, the spouses De Leon executed in favor of the
BANK a real estate mortgage (REM) on several of their
properties,9 including Lot 4. Subsequently, this REM was
amended10 by increasing the amount of the secured loan from ₱4
million to ₱8 million. Both the REM and the amendment were
annotated on TCT No. T-637183.11
DELTA then obtained a Certificate of Registration12 and a License to
Sell13 from the Housing and Land Use Regulatory Board (HLURB).
Sometime in 1997, DELTA executed a Contract to Sell with
respondent Angeles Catherine Enriquez (Enriquez)14over the house
and lot in Lot 4 for the purchase price of ₱614,950.00. Enriquez made
a downpayment of ₱114,950.00. The Contract to Sell contained the
following provisions:
That the vendee/s offered to buy and the Owner agreed to sell the
above-described property subject to the following terms and
conditions to wit:
xxxx
6. That the (sic) warning shall be served upon the Vendee/s for
failure to pay x x x Provided, however, that for failure to pay three
(3) successive monthly installment payments, the Owner may
consider this Contract to Sell null and void ab initio without further
proceedings or court action and all payments shall be forfeited in
favor of the Owner as liquidated damages and expenses for
documentations. x x x
That upon full payment of the total consideration if payable in cash,
the Owner shall execute a final deed of sale in favor of the Vendee/s.
However, if the term of the contract is for a certain period of time,
only upon full payment of the total consideration that a final deed of
sale shall be executed by the Owner in favor of the Vendee/s.15
When DELTA defaulted on its loan obligation, the BANK, instead of
foreclosing the REM, agreed to a dation in payment or a dacion en
pago. The Deed of Assignment in Payment of Debt was executed on
September 30, 1998 and stated that DELTA "assigns, transfers, and
conveys and sets over [to] the assignee that real estate with the
building and improvements existing thereon x x x in payment of the
total obligation owing to [the Bank] x x x."16Unknown to Enriquez,
among the properties assigned to the BANK was the house and lot
of Lot 4,17 which is the subject of her Contract to Sell with DELTA.
The records do not bear out and the parties are silent on whether
the BANK was able to transfer title to its name. It appears, however,
that the dacion en pago was not annotated on the TCT of Lot 4.18
On November 18, 1999, Enriquez filed a complaint against DELTA
and the BANK before the Region IV Office of the HLURB19 alleging
that DELTA violated the terms of its License to Sell by: (a) selling the
house and lots for a price exceeding that prescribed in Batas
Pambansa (BP) Bilang 220;20 and (b) failing to get a clearance for
the mortgage from the HLURB. Enriquez sought a full refund of the
₱301,063.42 that she had already paid to DELTA, award of damages,
and the imposition of administrative fines on DELTA and the BANK.
In his June 1, 2000 Decision,21 HLURB Arbiter Atty. Raymundo A.
Foronda upheld the validity of the purchase price, but ordered DELTA
to accept payment of the balance of ₱108,013.36 from Enriquez, and
(upon such payment) to deliver to Enriquez the title to the house and
lot free from liens and encumbrances. The dispositive portion reads:
WHEREFORE, premises considered, a decision is hereby rendered as
follows:
1. Ordering [DELTA] to accept complainant[’]s payments in
the amount of ₱108,013.36 representing her balance based
on the maximum selling price of ₱375,000.00;
2. Upon full payment, ordering Delta to deliver the title in favor
of the complainant free from any liens and encumbrances;
 3. Ordering [DELTA] to pay complainant the amount of
₱50,000.00 as and by way of moral damages;
4. Ordering [DELTA] to pay complainant the amount of
₱50,000.00 as and by way of exemplary damages;
5. Ordering [DELTA] to pay complainant ₱10,000.00 as costs
of suit; and
6. Respondent DELTA to pay administrative fine of
₱10,000.00[22] for violation of Section 18 of P.D. 957[23]and
another ₱10,000.00 for violation of Section 22 of P.D. 957.[24
SO ORDERED.25
DELTA appealed the arbiter’s Decision to the HLURB Board of
Commissioners.26 DELTA questioned the imposition of an
administrative fine for its alleged violation of Section 18 of PD 957.
It argued that clearance was not required for mortgages that were
constituted on a subdivision project prior to registration. According
to DELTA, it did not violate the terms of its license because it did not
obtain a new mortgage over the subdivision project. It likewise
assailed the award of moral and exemplary damages to Enriquez on
the ground that the latter has no cause of action.27
Ruling of the Board of Commissioners (Board)28
The Board held that all developers should obtain a clearance for
mortgage from the HLURB, regardless of the date when the
mortgage was secured, because the law does not distinguish. Having
violated this legal requirement, DELTA was held liable to pay the
administrative fine.
The Board upheld the validity of the contract to sell between DELTA
and Enriquez despite the alleged violation of the price ceilings in BP
220. The Board held that DELTA and Enriquez were presumed to
have had a meeting of the minds on the object of the sale and the
purchase price. Absent any circumstance vitiating Enriquez’consent,
she was presumed to have willingly and voluntarily agreed to the
higher purchase price; hence, she was bound by the terms of the
contract.
The Board, however, deleted the arbiter’s award of damages to
Enriquez on the ground that the latter was not free from liability
herself, given that she was remiss in her monthly amortizations to
DELTA.
The dispositive portion of the Board’s Decision reads:
Wherefore, in view of the foregoing, the Office below’s decision dated
June 01, 2000 is hereby modified to read as follows:
1. Ordering [Enriquez] to pay [DELTA] the amount due from
the time she suspended payment up to filing of the complaint
with 12% interest thereon per annum; thereafter the
provisions of the Contract to Sell shall apply until full payment
is made;
2. Ordering [DELTA] to pay an [a]dministrative [f]ine of
₱10,000.00 for violation of its license to sell and for violation
of Section 18 of P.D. 957.
SO ORDERED. Quezon City.29
Enriquez moved for a reconsideration of the Board’s
Decision30 upholding the contractual purchase price. She maintained
that the price for Lot 4 should not exceed the price ceiling provided
in BP 220.31lawph!l
Finding Enriquez’s arguments as having already been passed upon
in the decision, the Board denied reconsideration. The board,
however, modified its decision, with respect to the period for the
imposition of interest payments. The Board’s resolution32 reads:
WHEREFORE, premises considered, to [sic] directive No. 1 of the
dispositive portion of the decision of our decision [sic] is MODIFIED
as follows:
1. Ordering complainant to pay respondent DELTA the amount
due from the time she suspended (sic) at 12% interest per
annum, reckoned from finality of this decision[,] thereafter the
provisions of the Contract to Sell shall apply until full payment
is made.
In all other respects, the decision is AFFIRMED.
SO ORDERED.33
Both Enriquez and the BANK appealed to the Office of the President
(OP).34 The BANK disagreed with the ruling upholding Enriquez’s
Contract to Sell; and insisted on its ownership over Lot 4. It argued
that it has become impossible for DELTA to comply with the terms of
the contract to sell and to deliver Lot 4’s title to Enriquez given that
DELTA had already relinquished all its rights to Lot 4 in favor of the
BANK35 via the dation in payment.
Meanwhile, Enriquez insisted that the Board erred in not applying the
ceiling price as prescribed in BP 220.36
Ruling of the Office of the President 37
The OP adopted by reference the findings of fact and conclusions of
law of the HLURB Decisions, which it affirmed in toto.
Enriquez filed a motion for reconsideration, insisting that she was
entitled to a reduction of the purchase price, in order to conform to
the provisions of BP 220.38 The motion was denied for lack of merit.39
Only the BANK appealed the OP’s Decision to the CA.40 The BANK
reiterated that DELTA can no longer deliver Lot 4 to Enriquez because
DELTA had sold the same to the BANK by virtue of the dacion en
pago.41 As an alternative argument, in case the appellate court
should find that DELTA retained ownership over Lot 4 and could
convey the same to Enriquez, the BANK prayed that its REM over Lot
4 be respected such that DELTA would have to redeem it first before
it could convey the same to Enriquez in accordance with Section
2542 of PD 957.43
The BANK likewise sought an award of exemplary damages and
attorney’s fees in its favor because of the baseless suit filed by
Enriquez against it.44
Ruling of the Court of Appeals45
The CA ruled against the validity of the dacion en pago executed in
favor of the BANK on the ground that DELTA had earlier relinquished
its ownership over Lot 4 in favor of Enriquez via the Contract to Sell.46
Since the dacion en pago is invalid with respect to Lot 4, the appellate
court held that DELTA remained indebted to the BANK to the extent
of Lot 4’s value. Thus, the CA ordered DELTA to pay the
corresponding value of Lot 4 to the BANK.47
The CA also rejected the BANK’s argument that, before DELTA can
deliver the title to Lot 4 to Enriquez, DELTA should first redeem the
mortgaged property from the BANK. The CA held that the BANK does
not have a first lien on Lot 4 because its real estate mortgage over
the same had already been extinguished by the dacion en pago.
Without a mortgage, the BANK cannot require DELTA to redeem Lot
4 prior to delivery of title to Enriquez.48
The CA denied the BANK’s prayer for the award of exemplary
damages and attorney’s fees for lack of factual and legal basis.49
Both DELTA and the BANK moved for a reconsideration of the
50 51
CA’s Decision, but both were denied.52
Hence, these separate petitions of the BANK and DELTA.
Petitioner Delta’s arguments53
DELTA assails the CA Decision for holding that DELTA conveyed its
ownership over Lot 4 to Enriquez via the Contract to Sell. DELTA
points out that the Contract to Sell contained a condition that
ownership shall only be transferred to Enriquez upon the latter’s full
payment of the purchase price to DELTA. Since Enriquez has yet to
comply with this suspensive condition, ownership is retained by
DELTA.54 As the owner of Lot 4, DELTA had every right to enter into
a dation in payment to extinguish its loan obligation to the BANK.
The BANK’s acceptance of the assignment, without any reservation
or exception, resulted in the extinguishment of the entire loan
obligation; hence, DELTA has no more obligation to pay the value of
Enriquez’s house and lot to the BANK.55
DELTA prays for the reinstatement of the OP Decision.
The BANK’s arguments56
Echoing the argument of DELTA, the BANK argues that the Contract
to Sell did not involve a conveyance of DELTA’s ownership over Lot
4 to Enriquez. The Contract to Sell expressly provides that DELTA
retained ownership over Lot 4 until Enriquez paid the full purchase
price. Since Enriquez has not yet made such full payment, DELTA
retained ownership over Lot 4 and could validly convey the same to
the BANK via dacion en pago.57
Should the dacion en pago over Lot 4 be invalidated and the property
ordered to be delivered to Enriquez, the BANK contends that DELTA
should pay the corresponding value of Lot 4 to the BANK. It
maintains that the loan obligation extinguished by the dacion en
pago only extends to the value of the properties delivered; if Lot 4
cannot be delivered to the BANK, then the loan obligation of DELTA
remains to the extent of Lot 4’s value.58
The BANK prays to be declared the rightful owner of the subject
house and lot and asks for an award of exemplary damages and
attorney’s fees.
Enriquez’s waiver
Enriquez did not file comments59 or memoranda in both cases;
instead, she manifested that she will just await the outcome of the
case.60
Issues
The following are the issues raised by the two petitions:
1. Whether the Contract to Sell conveys ownership;
 2. Whether the dacion en pago extinguished the loan
obligation, such that DELTA has no more obligations to the
BANK;
3. Whether the BANK is entitled to damages and attorney’s
fees for being compelled to litigate; and
4. What is the effect of Enriquez’s failure to appeal the OP’s
Decision regarding her obligation to pay the balance on the
purchase price.
Our Ruling
Mortgage contract void
As the HLURB Arbiter and Board of Commissioners both found,
DELTA violated Section 18 of PD 957 in mortgaging the properties in
Delta Homes I (including Lot 4) to the BANK without prior clearance
from the HLURB. This point need not be belabored since the parties
have chosen not to appeal the administrative fine imposed on DELTA
for violation of Section 18.
This violation of Section 18 renders the mortgage executed by DELTA
void. We have held before that "a mortgage contract executed in
breach of Section 18 of [PD 957] is null and void."61 Considering that
"PD 957 aims to protect innocent subdivision lot and condominium
unit buyers against fraudulent real estate practices," we have
construed Section 18 thereof as "prohibitory and acts committed
contrary to it are void."62
Because of the nullity of the mortgage, neither DELTA nor the BANK
could assert any right arising therefrom. The BANK’s loan of ₱8
million to DELTA has effectively become unsecured due to the nullity
of the mortgage. The said loan, however, was eventually settled by
the two contracting parties via a dation in payment. In the appealed
Decision, the CA invalidated this dation in payment on the ground
that DELTA, by previously entering into a Contract to Sell, had
already conveyed its ownership over Lot 4 to Enriquez and could no
longer convey the same to the BANK. This is error, prescinding from
a wrong understanding of the nature of a contract to sell.
Contract to sell does not transfer ownership
Both parties are correct in arguing that the Contract to Sell executed
by DELTA in favor of Enriquez did not transfer ownership over Lot 4
to Enriquez. A contract to sell is one where the prospective seller
reserves the transfer of title to the prospective buyer until the
happening of an event, such as full payment of the purchase price.
What the seller obliges himself to do is to sell the subject property
only when the entire amount of the purchase price has already been
delivered to him. "In other words, the full payment of the purchase
price partakes of a suspensive condition, the non-fulfillment of which
prevents the obligation to sell from arising and thus, ownership is
retained by the prospective seller without further remedies by the
prospective buyer."63 It does not, by itself, transfer ownership to the
buyer.64
In the instant case, there is nothing in the provisions of the contract
entered into by DELTA and Enriquez that would exempt it from the
general definition of a contract to sell. The terms thereof provide for
the reservation of DELTA’s ownership until full payment of the
purchase price; such that DELTA even reserved the right to
unilaterally void the contract should Enriquez fail to pay three
successive monthly amortizations.
Since the Contract to Sell did not transfer ownership of Lot 4 to
Enriquez, said ownership remained with DELTA. DELTA could then
validly transfer such ownership (as it did) to another person (the
BANK). However, the transferee BANK is bound by the Contract to
Sell and has to respect Enriquez’s rights thereunder. This is because
the Contract to Sell, involving a subdivision lot, is covered and
protected by PD 957. One of the protections afforded by PD 957 to
buyers such as Enriquez is the right to have her contract to sell
registered with the Register of Deeds in order to make it binding on
third parties. Thus, Section 17 of PD 957 provides:
Section 17. Registration. All contracts to sell, deeds of sale, and other
similar instruments relative to the sale or conveyance of the
subdivision lots and condominium units, whether or not the purchase
price is paid in full, shall be registered by the seller in the Office of
the Register of Deeds of the province or city where the property is
situated.
x x x x (Emphasis supplied.)
The purpose of registration is to protect the buyers from any future
unscrupulous transactions involving the object of the sale or contract
to sell, whether the purchase price therefor has been fully paid or
not. Registration of the sale or contract to sell makes it binding on
third parties; it serves as a notice to the whole world that the
property is subject to the prior right of the buyer of the property
(under a contract to sell or an absolute sale), and anyone who wishes
to deal with the said property will be held bound by such prior right.
While DELTA, in the instant case, failed to register Enriquez’s
Contract to Sell with the Register of Deeds, this failure will not
prejudice Enriquez or relieve the BANK from its obligation to respect
Enriquez’s Contract to Sell. Despite the non-registration, the BANK
cannot be considered, under the circumstances, an innocent
purchaser for value of Lot 4 when it accepted the latter (together
with other assigned properties) as payment for DELTA’s obligation.
The BANK was well aware that the assigned properties, including Lot
4, were subdivision lots and therefore within the purview of PD 957.
It knew that the loaned amounts were to be used for the
development of DELTA’s subdivision project, for this was indicated in
the corresponding promissory notes. The technical description of Lot
4 indicates its location, which can easily be determined as included
within the subdivision development. Under these circumstances, the
BANK knew or should have known of the possibility and risk that the
assigned properties were already covered by existing contracts to
sell in favor of subdivision lot buyers. As observed by the Court in
another case involving a bank regarding a subdivision lot that was
already subject of a contract to sell with a third party:
[The Bank] should have considered that it was dealing with a
property subject of a real estate development project. A reasonable
person, particularly a financial institution x x x, should have been
aware that, to finance the project, funds other than those obtained
from the loan could have been used to serve the purpose, albeit
partially. Hence, there was a need to verify whether any part of the
property was already intended to be the subject of any other contract
involving buyers or potential buyers. In granting the loan, [the Bank]
should not have been content merely with a clean title, considering
the presence of circumstances indicating the need for a thorough
investigation of the existence of buyers x x x. Wanting in care and
prudence, the [Bank] cannot be deemed to be an innocent
mortgagee. x x x65
Further, as an entity engaged in the banking business, the BANK is
required to observe more care and prudence when dealing with
registered properties. The Court cannot accept that the BANK was
unaware of the Contract to Sell existing in favor of Enriquez. In
Keppel Bank Philippines, Inc. v. Adao,66 we held that a bank dealing
with a property that is already subject of a contract to sell and is
protected by the provisions of PD 957, is bound by the contract to
sell (even if the contract to sell in that case was not registered). In
the Court’s words:
It is true that persons dealing with registered property can rely solely
on the certificate of title and need not go beyond it. However, x x x,
this rule does not apply to banks. Banks are required to exercise
more care and prudence than private individuals in dealing even with
registered properties for their business is affected with public
interest. As master of its business, petitioner should have sent its
representatives to check the assigned properties before signing the
compromise agreement and it would have discovered that
respondent was already occupying one of the condominium units and
that a contract to sell existed between [the vendee] and [the
developer]. In our view, petitioner was not a purchaser in good faith
and we are constrained to rule that petitioner is bound by the
contract to sell.67
Bound by the terms of the Contract to Sell, the BANK is obliged to
respect the same and honor the payments already made by Enriquez
for the purchase price of Lot 4. Thus, the BANK can only collect the
balance of the purchase price from Enriquez and has the obligation,
upon full payment, to deliver to Enriquez a clean title over the subject
property.68
Dacion en pago extinguished the loan obligation
The BANK then posits that, if title to Lot 4 is ordered delivered to
Enriquez, DELTA has the obligation to pay the BANK the
corresponding value of Lot 4. According to the BANK, the dation in
payment extinguished the loan only to the extent of the value of the
thing delivered. Since Lot 4 would have no value to the BANK if it will
be delivered to Enriquez, DELTA would remain indebted to that
extent.
We are not persuaded. Like in all contracts, the intention of the
parties to the dation in payment is paramount and controlling. The
contractual intention determines whether the property subject of the
dation will be considered as the full equivalent of the debt and will
therefore serve as full satisfaction for the debt. "The dation in
payment extinguishes the obligation to the extent of the value of the
thing delivered, either as agreed upon by the parties or as may be
proved, unless the parties by agreement, express or implied, or by
their silence, consider the thing as equivalent to the obligation, in
which case the obligation is totally extinguished."69
In the case at bar, the Dacion en Pago executed by DELTA and the
BANK indicates a clear intention by the parties that the assigned
properties would serve as full payment for DELTA’s entire obligation:
KNOW ALL MEN BY THESE PRESENTS:
This instrument, made and executed by and between:
xxxx
THAT, the ASSIGNOR acknowledges to be justly indebted to the
ASSIGNEE in the sum of ELEVEN MILLION EIGHT HUNDRED
SEVENTY-EIGHT THOUSAND EIGHT HUNDRED PESOS
(₱11,878,800.00), Philippine Currency as of August 25, 1998.
Therefore, by virtue of this instrument, ASSIGNOR hereby ASSIGNS,
TRANSFERS, and CONVEYS AND SETS OVER [TO] the ASSIGNEE that
real estate with the building and improvements existing thereon,
more particularly described as follows:
xxxx
of which the ASSIGNOR is the registered owner being evidenced by
TCT No. x x x issued by the Registry of Deeds of Trece Martires City.
THAT, the ASSIGNEE does hereby accept this ASSIGNMENT IN
PAYMENT OF THE TOTAL OBLIGATION owing to him by the
ASSIGNOR as above-stated;70
Without any reservation or condition, the Dacion stated that the
assigned properties served as full payment of DELTA’s "total
obligation" to the BANK. The BANK accepted said properties as
equivalent of the loaned amount and as full satisfaction of DELTA’s
debt. The BANK cannot complain if, as it turned out, some of those
assigned properties (such as Lot 4) are covered by existing contracts
to sell. As noted earlier, the BANK knew that the assigned properties
were subdivision lots and covered by PD 957. It was aware of the
nature of DELTA’s business, of the location of the assigned properties
within DELTA’s subdivision development, and the possibility that
some of the properties may be subjects of existing contracts to sell
which enjoy protection under PD 957. Banks dealing with subdivision
properties are expected to conduct a thorough due diligence review
to discover the status of the properties they deal with. It may thus
be said that the BANK, in accepting the assigned properties as full
payment of DELTA’s "total obligation," has assumed the risk that
some of the assigned properties (such as Lot 4) are covered by
contracts to sell which it is bound to honor under PD 957.
A dacion en pago is governed by the law of sales.71 Contracts of sale
come with warranties, either express (if explicitly stipulated by the
parties) or implied (under Article 1547 et seq. of the Civil Code). In
this case, however, the BANK does not even point to any breach of
warranty by DELTA in connection with the Dation in Payment. To be
sure, the Dation in Payment has no express warranties relating to
existing contracts to sell over the assigned properties. As to the
implied warranty in case of eviction, it is waivable72 and cannot be
invoked if the buyer knew of the risks or danger of eviction and
assumed its consequences.73 As we have noted earlier, the BANK, in
accepting the assigned properties as full payment of DELTA’s "total
obligation," has assumed the risk that some of the assigned
properties are covered by contracts to sell which must be honored
under PD 957.
Award of damages
There is nothing on record that warrants the award of exemplary
damages74 as well as attorney’s fees75 in favor of the BANK.
Balance to be paid by Enriquez
As already mentioned, the Contract to Sell in favor of Enriquez must
be respected by the BANK.1avvphi1 Upon Enriquez’s full payment of
the balance of the purchase price, the BANK is bound to deliver the
title over Lot 4 to her. As to the amount of the balance which
Enriquez must pay, we adopt the OP’s ruling thereon which sustained
the amount stipulated in the Contract to Sell. We will not review
Enriquez’s initial claims about the supposed violation of the price
ceiling in BP 220, since this issue was no longer pursued by the
parties, not even by Enriquez, who chose not to file the required
pleadings76 before the Court. The parties were informed in the
Court’s September 5, 2007 Resolution that issues that are not
included in their memoranda shall be deemed waived or abandoned.
Since Enriquez did not file a memorandum in either petition, she is
deemed to have waived the said issue.
WHEREFORE, premises considered, the appealed November 30,
2004 Decision of the Court of Appeals, as well as its June 22, 2005
Resolution in CA-G.R. SP No. 81280 are hereby AFFIRMED with the
MODIFICATIONS that Delta Development and Management Services,
Inc. is NOT LIABLE TO PAY Luzon Development Bank the value of the
subject lot; and respondent Angeles Catherine Enriquez is ordered to
PAY the balance of the purchase price and the interests accruing
thereon, as decreed by the Court of Appeals, to the Luzon
Development Bank, instead of Delta Development and Management
Services, Inc., within thirty (30) days from finality of this Decision.
The Luzon Development Bank is ordered to DELIVER a CLEAN TITLE
to Angeles Catherine Enriquez upon the latter’s full payment of the
balance of the purchase price and the accrued interests.
G.R. No. 161004 April 14, 2008
TECNOGAS* PHILIPPINES MANUFACTURING
CORPORATION, petitioner,
vs.
PHILIPPINE NATIONAL BANK, respondent.
DECISION
QUISUMBING, J.:
For review under Rule 45 are the Decision and the Resolution dated
1 2
July 24, 2003 and November 5, 2003, respectively, of the Court of
Appeals in CA-G.R. SP No. 73822. The Court of Appeals reversed the
Orders dated October 8, 20013 and September 11, 20024 of the
Regional Trial Court (RTC) of Parañaque City, Branch 274, granting
petitioner’s application for a writ of preliminary injunction in Civil
Case No. 01-0330.
The antecedent facts are as follows:
On December 3, 1991, petitioner Tecnogas Philippines Manufacturing
Corporation (Tecnogas) obtained from respondent Philippine
National Bank (PNB) an Omnibus Line of P35 million and a 5-year
Term Loan of P14 million. To secure the loan, Tecnogas executed a
Real Estate Mortgage5 (REM) over its parcel of land in Parañaque
City, covered by Transfer Certificate of Title (TCT) No. 1225336 and
registered in the Registry of Deeds of Parañaque City.
The REM authorized PNB to extrajudicially foreclose the mortgage as
the duly constituted attorney-in-fact of Tecnogas7 in case Tecnogas
defaults on its obligations. It also provided that the mortgage will
stand as a security for any and all other obligations of Tecnogas to
PNB, for whatever kind or nature, and regardless of whether the
obligations had been contracted before, during or after the
constitution of the mortgage.8
On several occasions, Tecnogas’ loan had been increased, renewed
and restructured upon its requests whenever it could not pay its
obligations on their due dates. Finally, when the loan matured, PNB
sent collection letters9 to Tecnogas, but the latter only proposed to
pay its obligations by way of dacion en pago conveying TCT No.
122533.10 As of April 15, 2001, petitioner’s loan obligation
was P205,025,743.59, inclusive of interest and penalties.11
On August 16, 2001, PNB filed a petition for extrajudicial foreclosure
of the REM in the RTC of Parañaque City. The auction sale was set
on September 20, 2001.
A day before the auction sale, Tecnogas filed with the Parañaque City
RTC a complaint12 for annulment of extrajudicial foreclosure sale,
with application for the issuance of a temporary restraining order
(TRO) and writ of preliminary injunction docketed as Civil Case No.
01-0330. On the same date, the RTC issued a TRO valid for 72
hours.13 On September 21, 2001, the RTC granted extension of the
TRO for 17 days.14
On October 8, 2001, the RTC granted Tecnogas’ application and
issued a writ of preliminary injunction enjoining the extrajudicial
foreclosure sale of the mortgaged property.15 PNB sought
reconsideration with a motion to dissolve the writ. But its motions
were denied by the court in its Order16 dated September 11, 2002.
On November 29, 2002, PNB filed a petition for certiorari with the
Court of Appeals, seeking the annulment of the October 8, 2001 and
September 11, 2002 Orders of the RTC.
On July 24, 2003, the Court of Appeals issued the assailed decision
and ruled that the trial court committed grave abuse of discretion in
enjoining the extrajudicial foreclosure sale. It held that Tecnogas’
proposal to pay through dacion en pago did not constitute payment
as it was not accepted by PNB. Thus, injunction was not proper as
the extrajudicial foreclosure of the REM was a necessary
consequence of Tecnogas’ default in its loan obligations. Tecnogas
sought reconsideration, but it was denied. Hence, this petition.
Meanwhile, the auction sale was set on August 17 and 24, 2004.
Tecnogas filed an Urgent Motion for the Issuance of a
TRO/Injunction. The August 17, 2004 auction sale was postponed to
permit Tecnogas to settle its obligations, but it failed to do so. Thus,
the auction sale proceeded on August 24, 2004.
In its memorandum, Tecnogas raises the following issues:
I.
WHETHER OR NOT THE TWO (2) RTC JUDGES A
QUO COMMITTED GRAVE ABUSE OF DISCRETION WHICH IS
CORRECTIBLE BY CERTIORARI UNDER RULE 65[.]
II.
WHETHER OR NOT THE COURT OF APPEALS COMMITTED
GRAVE ABUSE OF DISCRETION IN PRE-EMPTING THE MERITS
OF THE MAIN CASE[.]
III.
WHETHER OR NOT THERE WERE ERRORS OF JUDGEMENT
COMMITTED BY THE TWO (2) RTC JUDGES A QUO.
IV.
WHETHER OR NOT THE INSTANT PETITION HAS BEEN
RENDERED MOOT AND ACADEMIC BY THE FORECLOSURE
SALE[.]17
Simply, the issues are: (1) Did the Court of Appeals err in ruling that
Tecnogas was not entitled to an injunctive relief? (2) Did the
foreclosure sale render the petition moot?
Tecnogas admits its liability and that its proposal to pay by way
of dacion en pago was not accepted by PNB. But Tecnogas avers that
its proposal constitutes a valid tender of payment. It further avers
that the Court of Appeals, in issuing the assailed decision, preempted
the merits of the main case in Civil Case No. 01-0330. It finally avers
that the foreclosure sale did not render the petition moot.18
PNB counters that the proposal to pay by way of dacion en pago did
not extinguish Tecnogas’ obligation; thus, the extrajudicial
foreclosure sale was proper. It also contends that the Court of
Appeals did not preempt the resolution of the main case in Civil Case
No. 01-0330, as its findings were necessary to resolve the issue on
injunction. It finally contends that the foreclosure of the REM
rendered the petition moot.19
Considering the submissions and contentions of the parties, we are
in agreement that the petition lacks merit.
A writ of preliminary injunction may be issued only upon clear
showing by the applicant of the existence of the following: (1) a right
in esse or a clear and unmistakable right to be protected; (2) a
violation of that right; and (3) an urgent and paramount necessity
for the writ to prevent serious damage. In the absence of a clear
legal right, the issuance of the injunctive writ constitutes grave abuse
of discretion.20
Dacion en pago is a special mode of payment whereby the debtor
offers another thing to the creditor who accepts it as equivalent of
payment of an outstanding obligation. The undertaking is really one
of sale, that is, the creditor is really buying the thing or property of
the debtor, payment for which is to be charged against the debtor’s
debt. As such, the essential elements of a contract of sale, namely,
consent, object certain, and cause or consideration must be present.
It is only when the thing offered as an equivalent is accepted by the
creditor that novation takes place, thereby, totally extinguishing the
debt.21
On the first issue, the Court of Appeals did not err in ruling that
Tecnogas has no clear legal right to an injunctive relief because its
proposal to pay by way of dacion en pago did not extinguish its
obligation. Undeniably, Tecnogas’ proposal to pay by way of dacion
en pago was not accepted by PNB. Thus, the unaccepted proposal
neither novates the parties’ mortgage contract nor suspends its
execution as there was no meeting of the minds between the parties
on whether the loan will be extinguished by way of dacion en
pago. Necessarily, upon Tecnogas’ default in its obligations, the
foreclosure of the REM becomes a matter of right on the part of PNB,
for such is the purpose of requiring security for the loans.
By disallowing Tecnogas’ prayer for injunctive relief, the Court of
Appeals did not preempt the resolution of the main case in Civil Case
No. 01-0330 for annulment of extrajudicial foreclosure sale. In said
case, the trial court still needs to resolve the issues of whether
Tecnogas observed the procedures prescribed by Act No. 3135,22 as
amended, on extrajudicial foreclosure of REM, and whether it
suffered damage as a result of PNB’s acts. These issues are still
unresolved questions which have to be passed upon by the trial court
after hearing the evidence of both parties so that an adjudication of
the rights of the parties can be had.23
On the second issue, the holding of the extrajudicial foreclosure sale
did not render this case moot. A case becomes moot only when there
is no more actual controversy between the parties, or when no useful
purpose can be served in passing upon the merits.24 In this case, the
decision of the Court of Appeals annulling the grant of preliminary
injunction in favor of Tecnogas has not yet become final on August
24, 2004. The preliminary injunction, therefore, issued by the trial
court remains valid until the decision of the Court of Appeals
annulling the same attains finality, and violation thereof constitutes
indirect contempt which, however, requires either a formal charge or
a verified petition.25
WHEREFORE, the instant petition is DENIED for lack of merit. The
assailed Decision and Resolution dated July 24, 2003 and November
5, 2003, respectively, of the Court of Appeals in CA-G.R. SP No.
73822 are hereby AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 175952 April 30, 2008
SOCIAL SECURITY SYSTEM, petitioner,
vs.
ATLANTIC GULF AND PACIFIC COMPANY OF MANILA, INC. and
SEMIRARA COAL CORPORATION, respondents.
DECISION
TINGA, J.:
Following are the antecedents culled from the decision of the Court
of Appeals:
On 13 February 2004, Atlantic Gulf and Pacific Company of Manila,
Inc. (AG & P) and Semirara Coal Corporation (SEMIRARA)
(collectively referred to as private respondents) filed a complaint for
specific performance and damages against SSS before the Regional
Trial Court of Batangas City, Branch 3, docketed as Civil Case No.
7441. The complaint alleged that:
xxx
3. Sometime in 2000, plaintiff informed the SSS in writing of
its premiums and loan amortization delinquencies covering the
period from January 2000 to May 2000 amounting to P7.3
Million. AG&P proposed to pay its said arrears by end of 2000,
but requested for the condonation of all penalties;
4. In turn, the defendant suggested two (2) options to AG&P,
either to pay by installment or through "dacion en pago";
5. AG&P chose to settle its obligation with the SSS under the
second option, that is through dacion en pago of its 5,999
sq. m. property situated in Baguio City covered by TCT No.
3941 with an appraised value of about P80.0 Million. SSS
proposes to carve-out from the said property an area sufficient
to cover plaintiffs’ delinquencies. AG&P, however, is not
amenable to subdivide its Baguio property;
6. AG&P then made another proposal to SSS. This time,
offering as payment a portion of its 58,153 square meter-lot,
situated in F.S. Sebastian, Sto. Niño, San Pascual, Batangas.
In addition, SSS informed AG&P of its decision to include other
companies within the umbrella of DMCI group with arrearages
with the SSS. In the process of elimination of the companies
belonging to the DMCI group with possible outstanding
obligation with the SSS, it was only SEMIRARA which was left
with outstanding delinquencies with the SSS. Thus,
SEMIRARA’s inclusion in the proposed settlement
through dacion en pago;
7. AG&P was, thereafter, directed by the defendant to submit
certain documents, such as Transfer Certificate of Title, Tax
Declaration covering the subject lot, and the proposed
subdivision plan, which requirements AG&P immediately
complied;
8. On April 4, 2001, SSS, in its Resolution No. 270, finally
approved AG&P’s proposal to settle its and SEMIRARA’s
delinquencies through dacion en pago, which as of March 31,
2001 amounted to P29,261,902.45. Approval of AG&P’s
proposal was communicated to it by Ms. Aurora E.L. Ortega,
Vice-President, NCR-Group of the SSS in a letter dated April
23, 2001. … ;
9. As a result of the approval of the dacion en pago, posting
of contributions and loan amortization to individual member
accounts, both for AG&P and SEMIRARA employees, was
effected immediately thereafter. Thus, the benefits of the
member-employees of both companies were restored;
10. From the time of the approval of AG&P’s proposal up to
the present, AG&P is (sic) religiously remitting the premium
contributions and loan amortization of its member-employees
to the defendant;
11. To effect the property transfer, a Deed of Assignment has
to be executed between the plaintiffs and the defendant.
Because of SSS failure to come up with the required Deed of
Assignment to effect said transfer, AG&P prepared the draft
and submitted it to the Office of the Vice-President – NCR thru
SSS Baclaran Branch in July 2001. Unfortunately, the
defendant failed to take any action on said Deed of
Assignment causing AG&P to re-submit it to the same office of
the Vice-President – NCR in December 2001. From its original
submission of the Deed of Assignment in July 2001 to its re-
submission in December 2001, and SSS returning of the
revised draft in February 28, 2003 AG&P was consistent in its
regular follow ups with SSS as to the status of its submitted
Deed of Assignment;
12. On February 28, 2003, or more than a year after the
approval of AG&P’s proposal, defendant sent the revised copy
of the Deed of Assignment to AG&P. However, the amount of
the plaintiffs’ obligation appearing in the approved Deed of
Assignment has ballooned from P29,261,902.45
to P40,846,610.64 allegedly because of the additional
interests and penalty charges assessed on plaintiffs’
outstanding obligation from April 2001, the date of approval
of the proposal, up to January 2003;
13. AG&P demanded for the waiver and deletion of the
additional interests on the ground that delay in the approval
of the deed and the subsequent delay in conveyance of the
property in defendant’s name was solely attributable to the
defendant; hence, to charge plaintiffs with additional interests
and penalties amounting to more than P10,000,000.00, would
be unreasonable….;
14. AG&P and SEMIRARA maintain their willingness to settle
their alleged obligation of P29,261,902.45 to SSS. Defendant,
however, refused to accept the payment through dacion en
pago, unless plaintiffs also pay the additional interests and
penalties being charged;
xxx
Instead of filing an answer, SSS moved for the dismissal of the
complaint for lack of jurisdiction and non-exhaustion of
administrative remedies. In an order dated 28 July 2004, the trial
court granted SSS’s motion and dismissed private respondents’
complaint. The pertinent portions of the assailed order are as follows:
Clearly, the motion is triggered on the issue of the court’s
jurisdiction over the subject matter and the nature of the
instant complaint. The length and breadth of the complaint as
perused, boils down to the questions of premium and loan
amortization delinquencies of the plaintiff, the option taken for
the payment of the same in favor of the defendant and the
disagreement between the parties as to the amount of the
unpaid contributions and salary loan repayments. In other
words, said questions are directly related to the collection of
 contributions due the defendant. Republic Act No. 1161 as
amended by R.A. No. 8282, specifically provides that any
dispute arising under the said Act shall be cognizable by the
Commission and any case filed with respect thereto shall be
heard by the Commission. Hence, a procedural process
mandated by a special law.
Observingly, the running dispute between plaintiffs and
defendant originated from the disagreement as to the amount
of unpaid contributions and the amount of the penalties
imposed appurtenant thereto. The alleged dacion en pago is
crystal clear manifestation of offering a special form of
payment which to the mind of the court will produce effect
only upon acceptance by the offeree and the observance and
compliance of the required formalities by the parties. No
matter in what form it may be, still the court believes that the
subject matter is the payment of contributions and the
corresponding penalties which are within the ambit of Sec. 5
(a) of R.A. No. 1161, as amended by R.A. No. 8282.
WHEREFORE, the Court having no jurisdiction over the subject
matter of the instant complaint, the motion is granted and this
case is hereby ordered DISMISSED.
SO ORDERED.4
Private respondents moved for the reconsideration of the order but
the same was denied in an Order dated 15 September 2004.
Consequently, private respondents filed an appeal before the Court
of Appeals alleging that the trial court erred in its pronouncement
that it had no jurisdiction over the subject matter of the complaint
and in granting the motion to dismiss.
The Court of Appeals reversed and set aside the trial court’s
challenged order, granted private respondents’ appeal and ordered
the trial court to proceed with the civil case with dispatch. From the
averments in their complaint, the appellate court observed that
private respondents are seeking to implement the Deed of
Assignment which they had drafted and submitted to SSS sometime
in July 2001, pursuant to SSS’s letter addressed to AG& P dated 23
April 2001 approving AG&P and SEMIRARA’S delinquencies
through dacion en pago, which as of 31 March 2001, amounted
to P29,261,902.45. The appellate court thus held that the subject of
the complaint is no longer the payment of the premium and loan
amortization delinquencies, as well as the penalties appurtenant
thereto, but the enforcement of the dacion en pagopursuant to SSS
Resolution No. 270. The action then is one for specific performance
which case law holds is an action incapable of pecuniary estimation
falling under the jurisdiction of the Regional Trial Court.5
SSS filed a motion for reconsideration of the appellate court’s
decision but the same was denied in a Resolution dated 19 December
2006.
Now before the Court, SSS insists on the Social Security
Commission’s (the Commission) jurisdiction over the complaint
pursuant to Section 5 (a) of Republic Act (R.A.) No. 8282. SSS
maintains the Commission’s jurisdiction over all disputes arising from
the provisions of R.A. No. 1161, amended by R.A. No. 8282 to the
exclusion of trial courts.6
The main issue in this case pertains to which body has jurisdiction to
entertain a controversy arising from the non-implementation of
a dacion en pago agreed upon by the parties as a means of
settlement of private respondents’ liabilities.
At the outset, it is well to restate the rule that what determines the
nature of the action as well as the tribunal or body which has
jurisdiction over the case are the allegations in the complaint.7
The pertinent provision of law detailing the jurisdiction of the
Commission is Section 5(a) of R.A. No. 1161, as amended by R.A.
No. 8282, otherwise known as the Social Security Act of 1997, to
wit:
SEC. 5. Settlement of Disputes.– (a) Any dispute arising under
this Act with respect to coverage, benefits, contributions and
penalties thereon or any other matter related thereto, shall be
cognizable by the Commission, and any case filed with respect
thereto shall be heard by the Commission, or any of its
members, or by hearing officers duly authorized by the
Commission and decided within the mandatory period of
twenty (20) days after the submission of the evidence. The
filing, determination and settlement of disputes shall be
governed by the rules and regulations promulgated by the
Commission.
The law clearly vests upon the Commission jurisdiction over
"disputes arising under this Act with respect to coverage, benefits,
contributions and penalties thereon or any matter related thereto..."
Dispute is defined as "a conflict or controversy."8
From the allegations of respondents’ complaint, it readily appears
that there is no longer any dispute with respect to respondents’
accountability to the SSS. Respondents had, in fact, admitted their
delinquency and offered to settle them by way of dacion en
pago subsequently approved by the SSS in Resolution No. 270-s.
2001. SSS stated in said resolution that "the dacion en pago proposal
of AG&P Co. of Manila and Semirara Coals Corporation to pay their
liabilities in the total amount of P30,652,710.71 as of 31 March 2001
by offering their 5.8 ha. property located in San Pascual, Batangas,
be, as it is hereby, approved.."9This statement unequivocally evinces
its consent to the dacion en pago. In Vda. de Jayme v. Court of
Appeals,10 the Court ruled significantly as follows:
Dacion en pago is the delivery and transmission of ownership
of a thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation. It is a special
mode of payment where the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an
outstanding debt. The undertaking really partakes in one
sense of the nature of sale, that is the creditor is really buying
the thing or property of the debtor, payment for which is to be
charged against the debtor’s debt. As such, the essential
elements of a contract of sale, namely, consent, object
certain, and cause or consideration must be present. In its
modern concept, what actually takes place in dacion en
pago is an objective novation of the obligation where the thing
offered as an accepted equivalent of the performance of an
obligation is considered as the object of the contract of sale,
while the debt is considered as the purchase price. In any
case, common consent is an essential prerequisite, be it sale
or novation, to have the effect of totally extinguishing the debt
or obligation.11
The controversy, instead, lies in the non-implementation of the
approved and agreed dacion en pago on the part of the SSS. As such,
respondents filed a suit to obtain its enforcement which is, doubtless,
a suit for specific performance and one incapable of pecuniary
estimation beyond the competence of the Commission.12 Pertinently,
the Court ruled in Singson v. Isabela Sawmill,13 as follows:
In determining whether an action is one the subject matter of
which is not capable of pecuniary estimation this Court has
 adopted the criterion of first ascertaining the nature of the
principal action or remedy sought. If it is primarily for the
recovery of a sum of money, the claim is considered capable
of pecuniary estimation, and whether jurisdiction in the
municipal courts or in the courts of first instance would depend
on the amount of the claim. However, where the basic issue is
something other than the right to recover a sum of money,
where the money claim is purely incidental to, or a
consequence of, the principal relief sought, this Court has
considered such actions as cases where the subject of the
litigation may not be estimated in terms of money, and are
cognizable exclusively by courts of first instance (now Regional
Trial Courts).14

In fine, the Court finds the decision of the Court of Appeals in accord
with law and jurisprudence.

WHEREFORE, the petition is DENIED. The Decision dated 31

August 2006 of the Court of Appeals Eleventh Division in CA-G.R. CV
No. 83775 AFFIRMED.

Let the case be remanded to the trial court for further proceedings.

SO ORDERED.

G.R. No. 149420 October 8, 2003
SONNY LO, petitioner,
vs.
KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent.
DECISION
YNARES-SANTIAGO, J.:
Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation
engaged in the sale of steel scaffoldings, while petitioner Sonny L.
Lo, doing business under the name and style San’s Enterprises, is a
building contractor. On February 22, 1990, petitioner ordered
scaffolding equipments from respondent worth P540,425.80.1 He
paid a downpayment in the amount of P150,000.00. The balance was
made payable in ten monthly installments.
Respondent delivered the scaffoldings to petitioner. Petitioner was
2 and assigns, the full power and authority to demand, collect, receive,
able to pay the first two monthly installments.1a\^/phi1.netHis
business, however, encountered financial difficulties and he was
unable to settle his obligation to respondent despite oral and written
demands made against him.3
On October 11, 1990, petitioner and respondent executed a Deed of
Assignment,4 whereby petitioner assigned to respondent his
receivables in the amount of P335,462.14 from Jomero Realty
Corporation. Pertinent portions of the Deed provide:
WHEREAS, the ASSIGNOR is the contractor for the construction of a
residential house located at Greenmeadow Avenue, Quezon City
owned by Jomero Realty Corporation;
WHEREAS, in the construction of the aforementioned residential
house, the ASSIGNOR purchased on account scaffolding equipments
from the ASSIGNEE payable to the latter;
WHEREAS, up to the present the ASSIGNOR has an obligation to the
ASSIGNEE for the purchase of the aforementioned scaffoldings now
in the amount of Three Hundred Thirty Five Thousand Four Hundred
Sixty Two and 14/100 Pesos (P335,462.14);
NOW, THEREFORE, for and in consideration of the sum of Three
Hundred Thirty Five Thousand Four Hundred Sixty Two and 14/100
Pesos (P335,462.14), Philippine Currency which represents part of
the ASSIGNOR’s collectible from Jomero Realty Corp., said
ASSIGNOR hereby assigns, transfers and sets over unto the
ASSIGNEE all collectibles amounting to the said amount of P335,
462.14;
And the ASSIGNOR does hereby grant the ASSIGNEE, its successors
compound, compromise and give acquittance for the same or any
part thereof, and in the name and stead of the said ASSIGNOR;
And the ASSIGNOR does hereby agree and stipulate to and with said
ASSIGNEE, its successors and assigns that said debt is justly owing
and due to the ASSIGNOR for Jomero Realty Corporation and that
said ASSIGNOR has not done and will not cause anything to be done
to diminish or discharge said debt, or delay or to prevent the
ASSIGNEE, its successors or assigns, from collecting the same;
And the ASSIGNOR further agrees and stipulates as aforesaid that
the said ASSIGNOR, his heirs, executors, administrators, or assigns,
shall and will at times hereafter, at the request of said ASSIGNEE,
its successors or assigns, at his cost and expense, execute and do all
such further acts and deeds as shall be reasonably necessary to
effectually enable said ASSIGNEE to recover whatever collectibles
said ASSIGNOR has in accordance with the true intent and meaning
of these presents. xxx5 (Italics supplied)
However, when respondent tried to collect the said credit from
Jomero Realty Corporation, the latter refused to honor the Deed of
Assignment because it claimed that petitioner was also indebted to
it.6 On November 26, 1990, respondent sent a letter7 to petitioner
demanding payment of his obligation, but petitioner refused to pay
claiming that his obligation had been extinguished when they
executed the Deed of Assignment.
Consequently, on January 10, 1991, respondent filed an action for
recovery of a sum of money against the petitioner before the
Regional Trial Court of Makati, Branch 147, which was docketed as
Civil Case No. 91-074.8
During the trial, petitioner argued that his obligation was
extinguished with the execution of the Deed of Assignment of credit.
Respondent, for its part, presented the testimony of its employee,
Almeda Bañaga, who testified that Jomero Realty refused to honor
the assignment of credit because it claimed that petitioner had an
outstanding indebtedness to it.
On August 25, 1994, the trial court rendered a decision9 dismissing
the complaint on the ground that the assignment of credit
extinguished the obligation. The decretal portion thereof provides:
WHEREFORE, in view of the foregoing, the Court hereby renders
judgment in favor of the defendant and against the plaintiff,
dismissing the complaint and ordering the plaintiff to pay the
defendant attorney’s fees in the amount of
P25,000.00.1a\^/phi1.net
Respondent appealed the decision to the Court of Appeals. On April
19, 2001, the appellate court rendered a decision,10 the dispositive
portion of which reads:
WHEREFORE, finding merit in this appeal, the court REVERSES the
appealed Decision and enters judgment ordering defendant-appellee
Sonny Lo to pay the plaintiff-appellant KJS ECO-FORMWORK SYSTEM
PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four
Hundred Sixty-Two and 14/100 (P335,462.14) with legal interest of
6% per annum from January 10, 1991 (filing of the Complaint) until
fully paid and attorney’s fees equivalent to 10% of the amount due
and costs of the suit.
SO ORDERED.11
In finding that the Deed of Assignment did not extinguish the
obligation of the petitioner to the respondent, the Court of Appeals
held that (1) petitioner failed to comply with his warranty under the
Deed; (2) the object of the Deed did not exist at the time of the
transaction, rendering it void pursuant to Article 1409 of the Civil
Code; and (3) petitioner violated the terms of the Deed of
Assignment when he failed to execute and do all acts and deeds as
shall be necessary to effectually enable the respondent to recover
the collectibles.12
Petitioner filed a motion for reconsideration of the said decision,
which was denied by the Court of Appeals.13
In this petition for review, petitioner assigns the following errors:
I (animo solvendi) which may consist in the delivery of a corporeal
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR
IN DECLARING THE DEED OF ASSIGNMENT (EXH. "4") AS NULL AND
VOID FOR LACK OF OBJECT ON THE BASIS OF A MERE HEARSAY
CLAIM.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE
DEED OF ASSIGNMENT (EXH. "4") DID NOT EXTINGUISH
PETITIONER’S OBLIGATION ON THE WRONG NOTION THAT
PETITIONER FAILED TO COMPLY WITH HIS WARRANTY
THEREUNDER.
III
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE
DECISION OF THE TRIAL COURT AND IN ORDERING PAYMENT OF
INTERESTS AND ATTORNEY’S FEES.14
The petition is without merit.
An assignment of credit is an agreement by virtue of which the owner
of a credit, known as the assignor, by a legal cause, such as
sale, dacion en pago, exchange or donation, and without the consent
of the debtor, transfers his credit and accessory rights to another,
known as the assignee, who acquires the power to enforce it to the
same extent as the assignor could enforce it against the debtor.15
Corollary thereto, in dacion en pago, as a special mode of payment,
the debtor offers another thing to the creditor who accepts it as
equivalent of payment of an outstanding debt.16 In order that there
be a valid dation in payment, the following are the requisites: (1)
There must be the performance of the prestation in lieu of payment
thing or a real right or a credit against the third person; (2) There
must be some difference between the prestation due and that which
is given in substitution (aliud pro alio); (3) There must be an
agreement between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance of a
prestation different from that due.17 The undertaking really partakes
in one sense of the nature of sale, that is, the creditor is really buying
the thing or property of the debtor, payment for which is to be
charged against the debtor’s debt. As such, the vendor in good faith
shall be responsible, for the existence and legality of the credit at the
time of the sale but not for the solvency of the debtor, in specified
circumstances.18
Hence, it may well be that the assignment of credit, which is in the
nature of a sale of personal property,19 produced the effects of a
dation in payment which may extinguish the obligation.20 However,
as in any other contract of sale, the vendor or assignor is bound by
certain warranties. More specifically, the first paragraph of Article
1628 of the Civil Code provides:
The vendor in good faith shall be responsible for the existence and
legality of the credit at the time of the sale, unless it should have
been sold as doubtful; but not for the solvency of the debtor, unless
it has been so expressly stipulated or unless the insolvency was prior
to the sale and of common knowledge.
From the above provision, petitioner, as vendor or assignor, is bound
to warrant the existence and legality of the credit at the time of the
sale or assignment. When Jomero claimed that it was no longer WHEREFORE, in view of the foregoing, the Decision of the Court of
indebted to petitioner since the latter also had an unpaid obligation Appeals dated April 19, 2001 in CA-G.R. CV No. 47713, ordering
to it, it essentially meant that its obligation to petitioner has been petitioner to pay respondent the sum of P335,462.14 with legal
extinguished by compensation.21 In other words, respondent alleged interest of 6% per annum from January 10, 1991 until fully paid is
the non-existence of the credit and asserted its claim to petitioner’s AFFIRMED with MODIFICATION. Upon finality of this Decision, the
warranty under the assignment. Therefore, it behooved on petitioner rate of legal interest shall be 12% per annum, inasmuch as the
to make good its warranty and paid the obligation. obligation shall thereafter become equivalent to a forbearance of
credit.23 The award of attorney’s fees is DELETED for lack of
Furthermore, we find that petitioner breached his obligation under evidentiary basis.
the Deed of Assignment, to wit:
SO ORDERED
And the ASSIGNOR further agrees and stipulates as aforesaid that
the said ASSIGNOR, his heirs, executors, administrators, or assigns,
shall and will at times hereafter, at the request of said ASSIGNEE,
its successors or assigns, at his cost and expense, execute and do all
such further acts and deeds as shall be reasonably necessary to
effectually enable said ASSIGNEE to recover whatever collectibles
said ASSIGNOR has in accordance with the true intent and meaning
of these presents.22 (underscoring ours)

Indeed, by warranting the existence of the credit, petitioner should

be deemed to have ensured the performance thereof in case the
same is later found to be inexistent. He should be held liable to pay
to respondent the amount of his indebtedness.

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

petitioner to pay respondent the sum of P335,462.14 with legal
interest thereon. However, we find that the award by the Court of
Appeals of attorney’s fees is without factual basis. No evidence or
testimony was presented to substantiate this claim. Attorney’s fees,
being in the nature of actual damages, must be duly substantiated
by competent proof.

G.R. No. L-46658 May 13, 1991
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HON. GREGORIO G. PINEDA, in his capacity as Presiding
Judge of the Court of First Instance of Rizal, Branch XXI and
TAYABAS CEMENT COMPANY, INC., respondents.
FERNAN, C.J.:
In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the
Arroyo Spouses), obtained a loan of P580,000.00 from petitioner
bank to purchase 60% of the subscribed capital stock, and thereby
acquire the controlling interest of private respondent Tayabas
Cement Company, Inc. (TCC).2 As security for said loan, the spouses
Arroyo executed a real estate mortgage over a parcel of land covered
by Transfer Certificate of Title No. 55323 of the Register of Deeds of
Quezon City known as the La Vista property.
Thereafter, TCC filed with petitioner bank an application and
agreement for the establishment of an eight (8) year deferred letter
of credit (L/C) for $7,000,000.00 in favor of Toyo Menka Kaisha, Ltd.
of Tokyo, Japan, to cover the importation of a cement plant
machinery and equipment.
Upon approval of said application and opening of an L/C by PNB in
favor of Toyo Menka Kaisha, Ltd. for the account of TCC, the Arroyo
spouses executed the following documents to secure this loan
accommodation: Surety Agreement dated August 5, 19643 and
Covenant dated August 6, 1964.4
The imported cement plant machinery and equipment arrived from
Japan and were released to TCC under a trust receipt agreement.
Subsequently, Toyo Menka Kaisha, Ltd. made the corresponding
drawings against the L/C as scheduled. TCC, however, failed to remit
and/or pay the corresponding amount covered by the drawings.
Thus, on May 19, 1968, pursuant to the trust receipt agreement, PNB
notified TCC of its intention to repossess, as it later did, the imported
machinery and equipment for failure of TCC to settle its obligations
under the L/C.5
In the meantime, the personal accounts of the spouses Arroyo, which
included another loan of P160,000.00 secured by a real estate
mortgage over parcels of agricultural land known as Hacienda Bacon
located in Isabela, Negros Occidental, had likewise become due. The
spouses Arroyo having failed to satisfy their obligations with PNB,
the latter decided to foreclose the real estate mortgages executed
by the spouses Arroyo in its favor.
On July 18, 1975, PNB filed with the City Sheriff of Quezon City a
petition for extra-judicial foreclosure under Act 3138, as amended by
Act 4118 and under Presidential Decree No. 385 of the real estate
mortgage over the properties known as the La Vista property covered
by TCT No. 55323.6 PNB likewise filed a similar petition with the City
Sheriff of Bacolod, Negros Occidental with respect to the mortgaged
properties located at Isabela, Negros Occidental and covered by OCT
No. RT 1615.
The foreclosure sale of the La Vista property was scheduled on
August 11, 1975. At the auction sale, PNB was the highest bidder
with a bid price of P1,000,001.00. However, when said property was
about to be awarded to PNB, the representative of the mortgagor-
spouses objected and demanded from the PNB the difference
between the bid price of P1,000,001.00 and the indebtedness of
P499,060.25 of the Arroyo spouses on their personal account. It was
the contention of the spouses Arroyo's representative that the
foreclosure proceedings referred only to the personal account of the
mortgagor spouses without reference to the account of TCC.
To remedy the situation, PNB filed a supplemental petition on August
13, 1975 requesting the Sheriff's Office to proceed with the sale of
the subject real properties to satisfy not only the amount of
P499,060.25 owed by the spouses Arroyos on their personal account
but also the amount of P35,019,901.49 exclusive of interest,
commission charges and other expenses owed by said spouses as
sureties of TCC.7 Said petition was opposed by the spouses Arroyo
and the other bidder, Jose L. Araneta.
On September 12, 1975, Acting Clerk of Court and Ex-Officio Sheriff
Diana L. Dungca issued a resolution finding that the questions raised
by the parties required the reception and evaluation of evidence,
hence, proper for adjudication by the courts of law. Since said
questions were prejudicial to the holding of the foreclosure sale, she
ruled that her "Office, therefore, cannot properly proceed with the
foreclosure sale unless and until there be a court ruling on the
aforementioned issues."8
Thus, in May, 1976, PNB filed with the Court of First Instance of
Quezon City, Branch V a petition for mandamus9against said Diana
Dungca in her capacity as City Sheriff of Quezon City to compel her
to proceed with the foreclosure sale of the mortgaged properties
covered by TCT No. 55323 in order to satisfy both the personal
obligation of the spouses Arroyo as well as their liabilities as sureties
of TCC.10
On September 6, 1976, the petition was granted and Dungca was
directed to proceed with the foreclosure sale of the mortgaged
properties covered by TCT No. 55323 pursuant to Act No. 3135 and
to issue the corresponding Sheriff's Certificate of Sale.11
Before the decision could attain finality, TCC filed on September 14,
1976 before the Court of First Instance of Rizal, Pasig, Branch XXI a
complaint12 against PNB, Dungca, and the Provincial Sheriff of
Negros Occidental and Ex-Officio Sheriff of Bacolod City
seeking, inter alia, the issuance of a writ of preliminary injunction to
restrain the foreclosure of the mortgages over the La Vista property
and Hacienda Bacon as well as a declaration that its obligation with
PNB had been fully paid by reason of the latter's repossession of the
imported machinery and equipment.13
On October 5, 1976, the CFI, thru respondent Judge Gregorio Pineda,
issued a restraining order14 and on March 4, 1977, granted a writ of
preliminary injunction.15 PNB's motion for reconsideration was
denied, hence this petition.
Petitioner PNB advances four grounds for the setting aside of the writ
of preliminary injunction, namely: a) that it contravenes P.D. No.
385 which prohibits the issuance of a restraining order against a
government financial institution in any action taken by such
institution in compliance with the mandatory foreclosure provided in
Section 1 thereof; b) that the writ countermands a final decision of
a co-equal and coordinate court; c) that the writ seeks to prohibit
the performance of acts beyond the court's territorial jurisdiction;
and, d) private respondent TCC has not shown any clear legal right
or necessity to the relief of preliminary injunction.
Private respondent TCC counters with the argument that P.D. No.
385 does not apply to the case at bar, firstly because no foreclosure
proceedings have been instituted against it by PNB and secondly,
because its account under the L/C has been fully satisfied with the
repossession of the imported machinery and equipment by PNB.
The resolution of the instant controversy lies primarily on the
question of whether or not TCC's liability has been extinguished by
the repossession of PNB of the imported cement plant machinery and
equipment.
We rule for the petitioner PNB. It must be remembered that PNB took
possession of the imported cement plant machinery and equipment
pursuant to the trust receipt agreement executed by and between
PNB and TCC giving the former the unqualified right to the
possession and disposal of all property shipped under the Letter of
Credit until such time as all the liabilities and obligations under said
letter had been discharged.16 In the case of Vintola vs. Insular Bank
of Asia and America17 wherein the same argument was advanced by
the Vintolas as entrustees of imported seashells under a trust receipt
transaction, we said:
Further, the VINTOLAS take the position that their obligation
to IBAA has been extinguished inasmuch as, through no fault
of their own, they were unable to dispose of the seashells, and
that they have relinquished possession thereof to the IBAA, as
owner of the goods, by depositing them with the Court.
The foregoing submission overlooks the nature and mercantile
usage of the transaction involved. A letter of credit-trust
receipt arrangement is endowed with its own distinctive
features and characteristics. Under that set-up, a bank
extends a loan covered by the Letter of Credit, with the trust
receipt as a security for the loan. In other words, the
transaction involves a loan feature represented by the letter
of credit, and a security feature which is in the covering trust
receipt.
xxx xxx xxx
A trust receipt, therefore, is a security agreement, pursuant
to which a bank acquires a "security interest" in the
goods.1âwphi1 It secures an indebtedness and there can be
no such thing as security interest that secures no obligation.
As defined in our laws:
(h) "Security interest" means a property interest in
goods, documents or instruments to secure
performance of some obligations of the entrustee or of
some third persons to the entruster and includes title,
whether or not expressed to be absolute, whenever
such title is in substance taken or retained for security
only.
xxx xxx xxx
Contrary to the allegation of the VINTOLAS, IBAA did not
become the real owner of the goods. It was merely the holder
of a security title for the advances it had made to the
VINTOLAS. The goods the VINTOLAS had purchased through
IBAA financing remain their own property and they hold it at
their own risk. The trust receipt arrangement did not convert
the IBAA into an investor; the latter remained a lender and
creditor.
xxx xxx xxx
Since the IBAA is not the factual owner of the goods, the
VINTOLAS cannot justifiably claim that because they have
surrendered the goods to IBAA and subsequently deposited
them in the custody of the court, they are absolutely relieved
 of their obligation to pay their loan because of their inability
to dispose of the goods. The fact that they were unable to sell
the seashells in question does not affect IBAA's right to
recover the advances it had made under the Letter of Credit.
PNB's possession of the subject machinery and equipment being
precisely as a form of security for the advances given to TCC under
the Letter of Credit, said possession by itself cannot be considered
payment of the loan secured thereby. Payment would legally result
only after PNB had foreclosed on said securities, sold the same and
applied the proceeds thereof to TCC's loan obligation. Mere
possession does not amount to foreclosure for foreclosure denotes
the procedure adopted by the mortgagee to terminate the rights of
the mortgagor on the property and includes the sale itself.18
Neither can said repossession amount to dacion en pago. Dation in
payment takes place when property is alienated to the creditor in
satisfaction of a debt in money and the same is governed by
sales.19 Dation in payment is the delivery and transmission of
ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation.20 As aforesaid, the
repossession of the machinery and equipment in question was
merely to secure the payment of TCC's loan obligation and not for
the purpose of transferring ownership thereof to PNB in satisfaction
of said loan. Thus, no dacion en pago was ever accomplished.
Proceeding from this finding, PNB has the right to foreclose the
mortgages executed by the spouses Arroyo as sureties of TCC. A
surety is considered in law as being the same party as the debtor in
relation to whatever is adjudged touching the obligation of the latter,
and their liabilities are interwoven as to be inseparable.21 As sureties,
the Arroyo spouses are primarily liable as original promissors and are
bound immediately to pay the creditor the amount outstanding.22
Under Presidential Decree No. 385 which took effect on January 31,
1974, government financial institutions like herein petitioner PNB are
required to foreclose on the collaterals and/or securities for any loan,
credit or accommodation whenever the arrearages on such account
amount to at least twenty percent (20%) of the total outstanding
obligations, including interests and charges, as appearing in the
books of account of the financial institution concerned.23 It is further
provided therein that "no restraining order, temporary or permanent
injunction shall be issued by the court against any government
financial institution in any action taken by such institution in
compliance with the mandatory foreclosure provided in Section 1
hereof, whether such restraining order, temporary or permanent
injunction is sought by the borrower(s) or any third party or parties
. . ."24
It is not disputed that the foreclosure proceedings instituted by PNB
against the Arroyo spouses were in compliance with the mandate of
P.D. 385. This being the case, the respondent judge acted in excess
of his jurisdiction in issuing the injunction specifically proscribed
under said decree.
Another reason for striking down the writ of preliminary injunction
complained of is that it interfered with the order of a co-equal and
coordinate court. Since Branch V of the CFI of Rizal had already
acquired jurisdiction over the question of foreclosure of mortgage
over the La Vista property and rendered judgment in relation thereto,
then it retained jurisdiction to the exclusion of all other coordinate
courts over its judgment, including all incidents relative to the control
and conduct of its ministerial officers, namely the sheriff
thereof.25 The foreclosure sale having been ordered by Branch V of
the CFI of Rizal, TCC should not have filed injunction proceedings
with Branch XXI of the same CFI, but instead should have first sought
relief by proper motion and application from the former court which
had exclusive jurisdiction over the foreclosure proceeding.26
This doctrine of non-interference is premised on the principle that a GEORGE NERI, CONNIE NERI, WILLIAM LEONG KOC LEE,
judgment of a court of competent jurisdiction may not be opened, EDUARD JAMES LEE, ROBERTO UY KIM, AND CHARLES UY
modified or vacated by any court of concurrent jurisdiction.27 KIM;1
METROPOLITAN BANK AND TRUST COMPANY, RENE
Furthermore, we find the issuance of the preliminary injunction NATIVIDAD AND/OR JOHN DOE in substitution of MAXIMO
directed against the Provincial Sheriff of Negros Occidental and ex- PEREZ,
officio Sheriff of Bacolod City a jurisdictional faux pas as the Courts sued in his capacity as City Sheriff of Mandaue
of First Instance, now Regional Trial Courts, can only enforce their City, respondents.
writs of injunction within their respective designated territories.28
DECISION
WHEREFORE, the instant petition is hereby granted. The assailed
orders are hereby set aside. Costs against private respondent. QUISUMBING, J.:

The following facts are borne by the records:

G.R. No. 128669 October 4, 2002 The spouses Graciano and Mamerta Jayme are the registered owners
of Lot 2700, situated in the Municipality of Mandaue (now Mandaue
MAMERTA VDA. DE JAYME, City), Cebu, consisting of 2,568 sq.m. and covered by Transfer
and her children and/or heirs of the late GRACIANO JAYME, Certificate of Title No. 8290.
namely: WILFREDO, MARCIAL, MANUEL, ANTONIO, all
surnamed JAYME; On January 8, 1973, they entered into a Contract of Lease5 with
the heirs of DOMINADOR JAYME, namely: SUPREMA George Neri, president of Airland Motors Corporation (now Cebu
(surviving spouse) and his children, namely: ARMANDO, Asiancars Inc.), covering one-half of Lot 2700. The lease was for
NICANOR, ZENAIDA, CATHERINE, ROSALINE, DORIS, VICKY twenty (20) years.
and MARILYN, all surnamed JAYME;
and the heirs of the late NILIE JAYME SANCHEZ, namely, The terms and conditions of the lease contract6 stipulated that Cebu
INOCENCIO SANCHEZ (surviving spouse) and her children: Asiancars Inc. (hereafter, Asiancars) may use the leased premises
ELSA, CONCEPCION, CLEOFE, ALEJANDRO, EFREN and as a collateral to secure payment of a loan which Asiancars may
MACRINA, all surnamed SANCHEZ; obtain from any bank, provided that the proceeds of the loan shall
and FLORA JAYME RAVANES, assisted by her husband, CESAR be used solely for the construction of a building which, upon the
RAVANES, petitioners, termination of the lease or the voluntary surrender of the leased
vs. premises before the expiration of the contract, shall automatically
HON. COURT OF APPEALS, SIXTEENTH DIVISION, CEBU become the property of the Jayme spouses (the lessors).
ASIANCARS INC.,
A Special Power of Attorney7 dated January 26, 1974, was executed
in favor of respondent George Neri, who used the lot to secure a loan
of P300,000 from the General Bank and Trust Company. The loan
was fully paid on August 14, 1977.8
In October 1977, Asiancars obtained a loan of P6,000,000 from the
Metropolitan Bank and Trust Company (MBTC). The entire Lot 2700
was offered as one of several properties given as collateral for the
loan. As mortgagors, the spouses signed a Deed of Real Estate
Mortgage9 dated November 21, 1977 in favor of MBTC. It stated that
the deed was to secure the payment of a loan obtained by Asiancars
from the bank.
To assure the Jayme spouses, Neri and the other officers of
Asiancars, namely Benny Liongben Lee, William Leong Koc Lee,
Connie U. Neri, Edward James Lee, Roberto Uykim and Charles P.
Uykim, executed an undertaking10dated November 7, 1977. In it they
promised, in their personal capacities and/or in representation of
Cebu Asiancars, Inc., "to compensate Mr. & Mrs. Graciano Jayme for
any and all or whatever damage they may sustain or suffer by virtue
and arising out of the mortgage to MBTC of the aforestated parcel of
land."11 In addition, Neri wrote a letter dated September 1,
198112 addressed to Mamerta Jayme acknowledging her "confidence
and help" extended to him, his family and Asiancars. He promised to
pay their indebtedness to MBTC before the loan was due.
Meeting financial difficulties and incurring an outstanding balance on
the loan, Asiancars conveyed ownership of the building on the leased
premises to MBTC, by way of "dacion en pago."13 The building was
valued at P980,000 and the amount was applied as partial payment
for the loan. There still remained a balance of P2,942,449.66, which
Asiancars failed to pay.
Eventually, MBTC extrajudicially foreclosed the mortgage. A public
auction was held on February 4, 1981. MBTC was the highest bidder
for P1,067,344.35. A certificate of sale was issued and was
registered with the Register of Deeds on February 23, 1981.
Meanwhile, Graciano Jayme died, survived by his widow Mamerta
and their children. As a result of the foreclosure, Graciano’s heirs
filed a civil complaint,14 in January of 1982, for Annulment of
Contract with Damages with Prayer for Issuance of Preliminary
Injunction, against respondent Asiancars, its officers and
incorporators and MBTC. Later, in 1999, Mamerta Jayme also passed
away.
Petitioners claim that Neri and Asiancars did not tell them that the
indebtedness secured by the mortgage was for P6,000,000 and that
the security was the whole of Lot 2700. Petitioners allege that the
deed presented to the Jayme spouses was in blank, without
explanation on the stipulations contained therein, except that its
conditions were identical to those of the stipulations when they
mortgaged half the lot’s area previously with General Bank.
Petitioners also alleged that the Jayme spouses were illiterate and
only knew how to sign their names. That because they did not know
how to read nor write, and had given their full trust and confidence
to George Neri, the spouses were deceived into signing the Deed of
Real Estate Mortgage. Their intention as well as consent was only to
be bound as guarantors.
Respondents deny that any fraud was employed, nor was there a
scheme to make the spouses sign as mortgagors instead of
guarantors. They aver that the spouses were fully advised and
compensated for the use of their property as collateral with MBTC;
that they voluntarily signed the deed of mortgage upon the request
of George Neri, whom they previously trusted and who fulfilled his
promise to pay the loan to General Bank and who obtained the
release of the same property by faithfully paying his indebtedness
with General Bank.
After trial, the RTC rendered a decision, disposing as follows:
WHEREFORE, in view of the foregoing evidences, arguments and
considerations, this Court hereby renders judgment as follows:
1. Declaring the Real Estate Mortgage executed by the Jaymes
in favor of Metrobank as valid and binding;
2. Declaring the Undertaking executed by George Neri, Benny
Leongben Lee already deceased, William Leong Koc, Connie U.
Neri, Edward James Lee, Roberto Uykim, and Charles P. Uykim
on November 7, 1977 to be valid and binding as well upon the
signatories thereof;
3. Allowing the Jaymes to redeem the mortgaged property,
Lot 2700 covered by TCT 8290 of the Register of Deeds of
Mandaue City for the amount of P2,942,448.66 plus interest
at the rate of 6% per annum within ninety (90) days from date
of finality of this judgment until paid. However, if the plaintiffs
fail to redeem said property, then let a Certificate of
Sale/definite Deed of Sale be issued in favor of Metropolitan
Bank and Trust Co. covering said Lot 2700;
4. Holding the defendants George Neri, William Leong Koc,
Connie U. Neri, Edward James Lee, Roberto Uykim, and
Charles Uykim jointly liable on their Undertaking dated
November 7, 1977 as they are hereby required to reimburse
the Jaymes the amount that the Jaymes will pay to
Metropolitan Bank and Trust Co. for the redemption;
5. Requiring the defendants George Neri, William Leong Koc,
Connie U. Neri, Edward James Lee, Roberto Uykim and Charles
Uykim to pay jointly attorneys fees to the Jaymes in the
amount of P50,000.00;
6. Requiring the defendants George Neri, William Leong Koc,
Connie U. Neri, Edwards James Lee, Roberto Uykim and
Charles Uykim to pay jointly the cost of this suit.
SO ORDERED.15
Petitioners and respondent MBTC elevated the case to the Court of
Appeals, which affirmed the ruling of the RTC, with modifications
stated in this wise:
1. Declaring valid and binding the Real Estate Mortgage
executed by plaintiffs in favor of defendant MBTC;
2. Declaring valid the foreclosure of the mortgage and the
foreclosure sale;
3. Declaring that the period to redeem Lot 2700 had expired
on February 23, 1982 without plaintiffs redeeming it;
4. Ordering the Sheriff of Mandaue City to issue a definite
Deed of Sale covering Lot 2700 in favor of defendant MBTC;
5. Declaring valid and binding the dacion en pago executed by
defendant Asiancars in favor of defendant MBTC;
6. Declaring defendant MBTC as owner of the building on Lot
2700;
 7. Ordering defendant MBTC to pay to plaintiffs the amount of
P92,083.33 for the use of the land from December 18, 1981
to February 23, 1982, with six percent (6%) interest per
annum until paid;
8. Ordering defendant Asiancars, Neris, Uykims, Lee and Koc
to pay jointly and severally the plaintiffs the (a) actual value
of the lot in the amount of P3,852,000.00; (b) P400,000.00
moral damages; (c) P150,000.00 exemplary damages and
P100,000.00 attorney’s fee, all with six percent (6%) interest
per annum until fully paid;
9. Cost against defendants Asiancars, Neris, Uykims, Lee and
Koc.
SO ORDERED.16
Petitioners filed a motion for reconsideration, which the CA denied.
Hence, this petition which assigns the following errors:
I PHILIPPINES;
THAT WITH GRAVE ABUSE OF DISCRETION, AMOUNTING TO
EXCESS OF JURISDICTION, THE LOWER COURT GROSSLY AND
SERIOUSLY ERRED IN DECLARING VALID AND BINDING THE REAL
ESTATE MORTGAGE EXECUTED BY THE PLAINTIFFS IN FAVOR OF
THE MBTC, FOR SAID DECLARATION IS ILLEGAL AND NOT WELL-
FOUNDED IN LAW BECAUSE IT ULTIMATELY VIOLATED ARTS. 2058,
2076 AND 2077, CIVIL CODE OF THE PHILIPPINES, SINCE THE REAL
ESTATE MORTGAGE, EXH. "G", IS NOT LEGALLY A REAL ESTATE
MORTGAGE, BUT RATHER A DEED OF GUARANTY, CONSIDERING
THAT THE PLAINTIFF MAMERTA VDA. DE JAYME AND HER HUSBAND
GRACIANO JAYME, NOW DECEASED, SIGNED INNOCENTLY THE
SAID DOCUMENT AS GUARANTORS/ACCOMODATORS ONLY AND
DEFINITELY NOT AS DEBTORS/MORTGAGORS;
II
THAT WITH GRAVE ABUSE OF DISCRETION, THE LOWER COURT
ERRED IN DECLARING THE PERIOD TO REDEEM LOT NO. 2700 HAD
EXPIRED ON FEBRUARY 23, 1982, WITHOUT THE PLAINTIFFS
REDEEMING IT FOR SUCH DECLARATION IS NOT WELL-FOUNDED IN
LAW AND IN FACT;
III
THAT WITH GRAVE ABUSE OF DISCRETION, THE LOWER COURT
ERRED IN DECLARING VALID AND BINDING THE DACION EN PAGO
EXECUTED BY DEFENDANT CEBU ASIAN- CARS IN FAVOR OF
DEFENDANT MBTC, FOR SAID DECLARATION IS ILLEGAL AND IS
CLEARLY FOUNDED ON WANTON BAD FAITH COMMITTED BY BOTH
PARTIES, IN VIOLATION OF ART. 1312, CIVIL CODE OF THE
PHILIPPINES AND SEC. 10, ART. III, CONSTITUTION OF THE
IV
GRANTING ARGUENDO THAT THE DACION EN PAGO IS VALID, STILL
THE LOWER COURT COMMITTED GRAVE ABUSE OF DISCRETION, BY
NOT DECLARING THAT THE P574,690.00 INDEBTEDNESS,
INCLUDING INTEREST AND ADDITIONAL CHARGES OF CEBU
ASIANCARS WAS COMPLETELY EXTINGUISHED OR PAID OFF, BY
WAY OF DACION EN PAGO PURSUANT TO ARTS. 1255, 2076 AND
2077 OF THE CIVIL CODE OF THE PHILIPPINES.
V
THAT THE LOWER COURT COMMITTED GRAVE ABUSE OF
DISCRETION, AMOUNTING TO EXCESS OF JURISDICTION, IN
DECLARING VALID AND BINDING THE MORTGAGE AND THE
CORRESPONDING FORECLOSURE, FOR SAID DECLARATION IS
ILLEGAL, IN VIOLATION OF ARTS. 1231 (5), 1245 AND 1255, CIVIL
CODE AND BY THE INDUBITABLE EVIDENCE OF ALL THE PARTIES
TESTIMONIAL AND DOCUMENTARY, TO THE EFFECT THAT THE SIX
(6) MILLION INDEBTEDNESS OF CEBU ASIANCARS WAS OVERPAID,
THUS MBTC ALSO VIOLATED ARTS. 2142, CIVIL CODE OF THE
PHILIPPINES;
VI
THAT WITH GRAVE ABUSE OF DISCRETION, THE LOWER COURT
ERRED BY VIOLATING EXH. "C", THE CONTRACT OF LEASE, WHICH
IS THE LAW BETWEEN THE PARTIES, AND INSTEAD, DELIBERATELY
DECLARED VALID AND BINDING THE MORTGAGE EXH. "G", AND THE
FORECLOSURE OF MORTGAGE, AND IN NOT ORDERING MBTC TO
VACATE THE PREMISES UPON THE TERMINATION OF THE CONTRACT
OF LEASE ON JANUARY 9, 1993 PURSUANT TO EXH. "C", AND
LIKEWISE PAY RENTAL THEREAFTER, FOR ITS USE AT P96,300.00
MONTHLY UNTIL MBTC ACTUALLY VACATES THE PREMISES.17
On March 13, 2002, the Court set a hearing on this petition, and
parties were given thirty days for simultaneous submission of their
respective memoranda. Petitioners additionally submitted
"reply/rejoinder" and respondent MBTC also submitted its "rejoinder
– sur-rejoinder."
Two main issues are for our resolution. First, whether or not the REM
should be annulled on the ground of vitiated consent; and second,
whether or not the dacion en pago by Asiancars in favor of MBTC is
valid and binding despite the stipulation in the lease contract that
ownership of the building will vest on the Jaymes at the termination
of the lease.
The facts show that the spouses affixed their signature on the Deed
of Real Estate Mortgage, in the presence of two instrumental
witnesses, and duly notarized by Atty. Rodolfo Y. Cabrera. As a
notarized document, it has in its favor the presumption of regularity,
and to overcome this presumption, there must be evidence that is
clear, convincing and more than merely preponderant that there was
irregularity in its execution; otherwise, the document should be
upheld.18
The Deed of Real Estate Mortgage entered into by the Jayme spouses
partake of a Third Party Mortgage under Art. 2085 (3) of the Civil
Code which reads:
The following requisites are essential to the contracts of pledge and
mortgage: xxx (3) That the persons constituting the pledge or
mortgage have the free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own property.
In the case of Lustan vs. CA, et al.,19 this Court recognized the
abovecited provision and held that "so long as valid consent was
given, the fact that the loans were solely for the benefit of (the
debtor) would not invalidate the mortgage with respect to
petitioner’s property. In consenting thereto even granting that
petitioner may not be assuming personal liability for the debt, her
property shall nevertheless secure and respond for the performance
of the principal obligation."
Clearly, the law recognizes instances when persons not directly
parties to a loan agreement may give as security their own properties
for the principal transaction. In this case, the spouses should not be
allowed to disclaim the validity of a transaction they voluntarily and
knowingly entered into for the simple reason that such transaction
turned out prejudicial to them later on.
Both the trial and appellate courts found that no fraud attended the
execution of the deed of mortgage. This is a factual finding that binds
this Court. Further, the records clearly show that the spouses Jayme
agreed to use their property as collateral for Neri’s loan because Neri
had their full trust and confidence. Mamerta herself testified that she
and her husband were assured by Neri’s promise that he would take
full responsibility for whatever happens to the property of the
spouses and that he would comply with his obligations to the bank.20
The spouses were assisted by their own lawyer, Atty. Cirilo Sanchez,
in all their transactions, including the ones with Asiancars and MBTC.
Atty. Sanchez even signed as an instrumental witness to a Special
Power of Attorney executed by the spouses in favor of Neri,
authorizing the latter to mortgage the same property to MBTC.
Although the said SPA was eventually not used because MBTC
required that the spouses themselves execute the REM, still, the fact
remains that the spouses were already set on allowing the mortgage.
In addition, we note that Nelia Sanchez, the daughter of the spouses
and one of the petitioners herein, admitted that their parents
consulted her and her siblings before their parents executed the
Deed.21
With the assistance of a lawyer and consultation with their literate
children, the spouses though illiterate could not feign ignorance of
the stipulations in the deed. Patently, theirs was not a vitiated
consent. It could not now be justifiably asserted by petitioners that
the Jayme spouses only intended to be bound as guarantors and not
as mortgagors.
In this jurisdiction, when the property of a third person which has
been expressly mortgaged to guarantee an obligation to which the
said person is a stranger, said property is directly and jointly liable
for the fulfillment thereof, in the same manner as the mortgaged
property of the debtor himself.22
In the case at bar, when Asiancars failed to pay its obligations with
MBTC, the properties given as security (one of them being the land
owned by the Jaymes) became subject to foreclosure. When several
things are given to secure the same debt in its entirety, all of them
are liable for the debt, and the creditor does not have to divide his
action by distributing the debt among the various things pledged or
mortgaged. Even when only a part of the debt remains unpaid, all
the things are liable for such balance.23
At the time of the foreclosure, Asiancars had a remaining balance of
P2,010,633.28. Thus, MBTC had every right to effect the extrajudicial
foreclosure of the mortgaged properties to satisfy its claim.
The appellate court found that the spouses lost their right to redeem
their property. Under Section 78 of the General Banking Act then in
force,24 the mortgagor or debtor whose real property has been
foreclosed and sold at public auction, has the right to redeem the
property within one year from the sale of the real estate as a result
of the foreclosure. The reckoning date in the case of a registered land
is from the date of registration of the certificate of sale.25 If no
redemption is timely made, the buyer in a foreclosure sale becomes
the absolute owner of the property purchased.26 In this case, the
certificate of sale was registered on February 23, 1981, giving
petitioners until February 23, 1982 to redeem the property. This they
failed to do, hence, ownership of the property already vested in the
purchaser, private respondent MBTC.
Much as we sympathize with petitioners’ plight, we are unable to find
merit in their plea for the annulment of the deed of sale covering Lot
2700 as a result of foreclosure of mortgage. Petitioners failed to show
the required quantum of evidence that they were fraudulently made
to sign as mortgagors. As early as Vales v. Villa, 35 Phil. 769 (1916),
this Court has sounded a note of warning to litigants:
…The law furnishes no protection to the inferior simply because he is
inferior any more than it protects the strong because he is strong.
The law furnishes protection to both alike – to one no more or less
than the other. It makes no distinction between the wise and the
foolish, the great and the small, the strong and the weak. The foolish
may lose all they have to the wise; but that does not mean that the
law will give it back to them again. 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.27
Petitioners however, are not without recourse for the loss of their
property. Although they cannot go after respondent MBTC, they have
in their favor the undertaking executed by George Neri and other
members of his family. The undertaking also bound respondent
Asiancars, as well as its officers who were signatories to the aforesaid
Undertaking, to reimburse petitioners for the damages they suffered
by reason of the mortgage.
The alienation of the building by Asiancars in favor of MBTC for the
partial satisfaction of its indebtedness is, in our view, also valid. The
ownership of the building had been effectively in the name of the
lessee-mortgagor (Asiancars), though with the provision that said
ownership be transferred to the Jaymes upon termination of the
lease or the voluntary surrender of the premises. The lease was
constituted on January 8, 1973 and was to expire 20 years
thereafter, or on January 8, 1993. The alienation via dacion en pago
was made by Asiancars to MBTC on December 18, 1980, during the
subsistence of the lease. At this point, the mortgagor, Asiancars,
could validly exercise rights of ownership, including the right to
alienate it, as it did to MBTC.
Dacion en pago is the delivery and transmission of ownership of a
thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation.28 It is a special mode of payment
where the debtor offers another thing to the creditor who accepts it
as equivalent of payment of an outstanding debt. The undertaking
really partakes in one sense of the nature of sale, that is the creditor
is really buying the thing or property of the debtor, payment for
which is to be charged against the debtor’s debt. As such, the
essential elements of a contract of sale, namely, consent, object
certain, and cause or consideration must be present. In its modern
concept, what actually takes place in dacion en pago is an objective
novation of the obligation where the thing offered as an accepted
equivalent of the performance of an obligation is considered as the
object of the contract of sale, while the debt is considered as the
purchase price. In any case, common consent is an essential
prerequisite, be it sale or novation, to have the effect of totally
extinguishing the debt or obligation.29
We also find that the Court of Appeals did not err in considering MBTC
as a purchaser in good faith. MBTC had no knowledge of the
stipulation in the lease contract. Although the same lease was
registered and duly annotated on the certificate of title of Lot 2700,
MBTC was charged with constructive knowledge only of the fact of
lease of the land and not of the specific provision stipulating transfer
of ownership of the building to the Jaymes upon termination of the
lease. There was no annotation on the title of any
encumbrance.30 While the alienation was in violation of the
stipulation in the lease contract between the Jaymes and Asiancars,
MBTC’s own rights could not be prejudiced by Asiancars’ actions
unbeknownst to MBTC. Thus, the transfer of the building in favor of
MBTC was properly held valid and binding by respondent Court of
Appeals.
WHEREFORE, the assailed decision of the Court of Appeals is
AFFIRMED with the MODIFICATION that private respondent MBTC is
ordered to pay petitioners rentals in the total amount of
P602,083.33, with six (6) percent interest per annum until fully paid.
In all other respects, the assailed decision and resolution of the Court
of Appeals are AFFIRMED.

One point, however, has to be cleared. The appellate court ordered SO ORDERED.
MBTC to pay rentals to petitioners at the rate of P25.00 monthly per
square meter. For the Asiancars’ building stood on the lot owned by
the petitioners, until the time MBTC also consolidated its ownership
over the lot. Rentals would have to be paid starting on December 18,
1980, when the building’s ownership was transferred to MBTC, until
February 23, 1982, when MBTC finally consolidated its ownership
over Lot 2700. Hence, we agree that there was error in the
computation of rentals by the CA.31 From December 18, 1980 until
February 23, 1982, is a period of 1 year, 2 months and 5 days. Thus,
MBTC should pay to petitioners rentals for the use of the occupied
lot,32 consisting of 1,700 sq. m. at the monthly rate of P25.00 per
sq. m. for that period, in the total amount of P602,083.33, with six
(6) percent interest per annum until fully paid.

Finally, we are in agreement that bad faith attended Asiancars’

transfer of the building to MBTC. Asiancars was well aware of its
covenant with the Jaymes that the building’s ownership was to be
transferred to the Jaymes upon termination of the lease. Indeed,
petitioners suffered mental anxiety and nervous shock upon learning
that the ownership of the building standing on their property had
already been transferred to MBTC. The apparent disregard of
petitioners’ right by Asiancars and other private respondents
provides enough basis for an award of moral as well as exemplary
damages33 by the appellate court.
 THE COURT OF APPEALS, THE COURT OF TAX APPEALS and
ATENEO DE MANILA UNIVERSITY, respondents.

PANGANIBAN, J.:

The Antecedent Facts

The antecedents as found by the Court of Appeals are reproduced

hereinbelow, the same being largely undisputed by the parties.

Private respondent is a non-stock, non-profit

educational institution with auxiliary units and branches
all over the Philippines. One such auxiliary unit is the
Institute of Philippine Culture (IPC), which has no legal
personality separate and distinct from that of private
respondent. The IPC is a Philippine unit engaged in
social science studies of Philippine society and culture.
Occasionally, it accepts sponsorships for its research
activities from international organizations, private
foundations and government agencies.

On July 8, 1983, private respondent received from

petitioner Commissioner of Internal Revenue a demand
letter dated June 3, 1983, assessing private respondent
the sum of P174,043.97 for alleged deficiency
contractor's tax, and an assessment dated June 27,
1983 in the sum of P1,141,837 for alleged deficiency
income tax, both for the fiscal year ended March 31,
1978. Denying said tax liabilities, private respondent
G.R. No. 115349 April 18, 1997 sent petitioner a letter-protest and subsequently filed
with the latter a memorandum contesting the validity of
COMMISSIONER OF INTERNAL REVENUE, petitioner, the assessments.
vs.
 On March 17, 1988, petitioner rendered a letter- PURVIEW OF INDEPENDENT CONTRACTOR
decision canceling the assessment for deficiency income PURSUANT TO SECTION 205 OF THE TAX
tax but modifying the assessment for deficiency CODE; and
contractor's tax by increasing the amount due to
P193,475.55. Unsatisfied, private respondent 2) WHETHER OR NOT PRIVATE
requested for a reconsideration or reinvestigation of the RESPONDENT IS SUBJECT TO 3%
modified assessment. At the same time, it filed in the CONTRACTOR'S TAX UNDER SECTION 205
respondent court a petition for review of the said letter- OF THE TAX CODE.
decision of the petitioner. While the petition was
pending before the respondent court, petitioner issued The pertinent portions of Section 205 of the National Internal
a final decision dated August 3, 1988 reducing the Revenue Code, as amended, provide:
assessment for deficiency contractor's tax from
P193,475.55 to P46,516.41, exclusive of surcharge and Sec. 205. Contractor, proprietors or operators of
interest. dockyards, and others. — A contractor's tax of threeper
centum of the gross receipts is hereby imposed on the
On July 12, 1993, the respondent court rendered the following:
questioned decision which dispositively reads:
xxx xxx xxx
WHEREFORE, in view of the foregoing,
respondent's decision is SET ASIDE. The (16) Business agents and other
deficiency contractor's tax assessment in independent contractors except persons,
the amount of P46,516.41 exclusive of associations and corporations under
surcharge and interest for the fiscal year contract for embroidery and apparel for
ended March 31, 1978 is hereby export, as well as their agents and
CANCELED. No pronouncement as to cost. contractors and except gross receipts of or
from a pioneer industry registered with the
SO ORDERED. Board of Investments under Republic Act
No. 5186:
Not in accord with said decision, petitioner has come to this
Court via the present petition for review raising the following xxx xxx xxx
issues:
The term "independent contractors"
1) WHETHER OR NOT PRIVATE include persons (juridical or natural) not
RESPONDENT FALLS UNDER THE enumerated above (but not including
 individuals subject to the occupation tax
under Section 12 of the Local Tax Code)
whose activity consists essentially of the
sale of all kinds of services for a fee
regardless of whether or not the
performance of the service calls for the
exercise or use of the physical or mental
faculties of such contractors or their
employees.
xxx xxx xxx
Petitioner contends that the respondent court erred in
holding that private respondent is not an "independent
contractor" within the purview of Section 205 of the Tax
Code. To petitioner, the term "independent contractor",
as defined by the Code, encompasses all kinds of
services rendered for a fee and that the only exceptions
are the following:
a. Persons, association and corporations under contract
for embroidery and apparel for export and gross
receipts of or from pioneer industry registered with the
Board of Investment under R.A. No. 5186;
b. Individuals occupation tax under Section 12 of the
Local Tax Code (under the old Section 182 [b] of the
Tax Code); and
c. Regional or area headquarters established in the
Philippines by multinational corporations, including
their alien executives, and which headquarters do not
earn or derive income from the Philippines and which
act as supervisory, communication and coordinating
centers for their affiliates, subsidiaries or branches in
the Asia Pacific Region (Section 205 of the Tax Code).
Petitioner thus submits that since private respondent
falls under the definition of an "independent contractor"
and is not among the aforementioned exceptions,
private respondent is therefore subject to the 3%
contractor's tax imposed under the same Code. 4
The Court of Appeals disagreed with the Petitioner Commissioner of
Internal Revenue and affirmed the assailed decision of the Court of
Tax Appeals. Unfazed, petitioner now asks us to reverse the CA
through this petition for review.
The Issues
Petitioner submits before us the following issues:
1) Whether or not private respondent falls under the
purview of independent contractor pursuant to Section
205 of the Tax Code.
2) Whether or not private respondent is subject to 3%
contractor's tax under Section 205 of the Tax Code. 5
In fine, these may be reduced to a single issue: Is Ateneo de Manila
University, through its auxiliary unit or branch — the Institute of
Philippine Culture — performing the work of an independent
contractor and, thus, subject to the three percent contractor's tax
levied by then Section 205 of the National Internal Revenue Code?
The Court's Ruling
The petition is unmeritorious.
 Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue Code
germane to the case before us read:
Sec. 205. Contractors, proprietors or operators of
dockyards, and others. — A contractor's tax of threeper
centum of the gross receipts is hereby imposed on the
following:
xxx xxx xxx
(16) Business agents and other independent
contractors, except persons, associations and
corporations under contract for embroidery and apparel
for export, as well as their agents and contractors, and
except gross receipts of or from a pioneer industry
registered with the Board of Investments under the
provisions of Republic Act No. 5186;
xxx xxx xxx
The term "independent contractors" include persons
(juridical or natural) not enumerated above (but not
including individuals subject to the occupation tax
under Section 12 of the Local Tax Code) whose activity
consists essentially of the sale of all kinds of services
for a fee regardless of whether or not the performance
of the service calls for the exercise or use of the physical
or mental faculties of such contractors or their
employees.
The term "independent contractor" shall not include
regional or area headquarters established in the
Philippines by multinational corporations, including
their alien executives, and which headquarters do not
earn or derive income from the Philippines and which
act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in
the Asia-Pacific Region.
The term "gross receipts" means all amounts received
by the prime or principal contractor as the total contract
price, undiminished by amount paid to the
subcontractor, shall be excluded from the taxable gross
receipts of the subcontractor.
Petitioner Commissioner of Internal Revenue contends that Private
Respondent Ateneo de Manila University "falls within the definition"
of an independent contractor and "is not one of those mentioned as
excepted"; hence, it is properly a subject of the three percent
contractor's tax levied by the foregoing provision of law. 6 Petitioner
states that the "term 'independent contractor' is not specifically
defined so as to delimit the scope thereof, so much so that any
person who . . . renders physical and mental service for a fee, is now
indubitably considered an independent contractor liable to 3%
contractor's tax." 7 According to petitioner, Ateneo has the burden of
proof to show its exemption from the coverage of the law.
We disagree. Petitioner Commissioner of Internal Revenue erred in
applying the principles of tax exemption without first applying the
well-settled doctrine of strict interpretation in the imposition of taxes.
It is obviously both illogical and impractical to determine who are
exempted without first determining who are covered by the aforesaid
provision. The Commissioner should have determined first if private
respondent was covered by Section 205, applying the rule of strict
interpretation of laws imposing taxes and other burdens on the
populace, before asking Ateneo to prove its exemption therefrom.
The Court takes this occasion to reiterate the hornbook doctrine in
the interpretation of tax laws that "(a) statute will not be construed
as imposing a tax unless it does so clearly, expressly, and
unambiguously . . . (A) tax cannot be imposed without clear and
express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with
peculiar strictness to tax lawsand the provisions of a taxing act
are not to be extended by implication." 8 Parenthetically, in
answering the question of who is subject to tax statutes, it is basic
that "in case of doubt, such statutes are to be construed most
strongly against the government and in favor of the subjects or
citizens because burdens are not to be imposed nor presumed to be
imposed beyond what statutes expressly and clearly import." 9
To fall under its coverage, Section 205 of the National Internal
Revenue Code requires that the independent contractor be engaged
in the business of selling its services. Hence, to impose the three
percent contractor's tax on Ateneo's Institute of Philippine Culture, it
should be sufficiently proven that the private respondent is indeed
selling its services for a fee in pursuit of an independent business.
And it is only after private respondent has been found clearly to be
subject to the provisions of Sec. 205 that the question of exemption
therefrom would arise. Only after such coverage is shown does the
rule of construction — that tax exemptions are to be strictly
construed against the taxpayer — come into play, contrary to
petitioner's position. This is the main line of reasoning of the Court
of Tax Appeals in its decision, 10 which was affirmed by the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Service of its Institute of Philippine Culture
After reviewing the records of this case, we find no evidence that
Ateneo's Institute of Philippine Culture ever sold its services for a fee
to anyone or was ever engaged in a business apart from and
independently of the academic purposes of the university.
Stressing that "it is not the Ateneo de Manila University per se which
is being taxed," Petitioner Commissioner of Internal Revenue
contends that "the tax is due on its activity of conducting researches
for a fee. The tax is due on the gross receipts made in favor of IPC
pursuant to the contracts the latter entered to conduct researches
for the benefit primarily of its clients. The tax is imposed on the
exercise of a taxable activity. . . . [T]he sale of services of private
respondent is made under a contract and the various contracts
entered into between private respondent and its clients are almost
of the same terms, showing, among others, the compensation and
terms of payment." 11(Emphasis supplied.)
In theory, the Commissioner of Internal Revenue may be correct.
However, the records do not show that Ateneo's IPC in fact
contracted to sell its research services for a fee. Clearly then, as
found by the Court of Appeals and the Court of Tax Appeals,
petitioner's theory is inapplicable to the established factual milieu
obtaining in the instant case.
In the first place, the petitioner has presented no evidence to prove
its bare contention that, indeed, contracts for sale of services were
ever entered into by the private respondent. As appropriately pointed
out by the latter:
An examination of the Commissioner's Written Formal
Offer of Evidence in the Court of Tax Appeals shows that
only the following documentary evidence was
presented:
Exhibit 1 BIR letter of authority no. 331844
 2 Examiner's Field Audit
Report
3 Adjustments to
Sales/Receipts
4 Letter-decision of BIR
Commissioner Bienvenido A.
Tan Jr.
None of the foregoing evidence even comes close to
purport to be contracts between private respondent and
third parties. 12
Moreover, the Court of Tax Appeals accurately and correctly declared
that the " funds received by the Ateneo de Manila University are
technically not a fee. They may however fall as gifts or donations
which are tax-exempt" as shown by private respondent's compliance
with the requirement of Section 123 of the National Internal Revenue
Code providing for the exemption of such gifts to an educational
institution. 13
Respondent Court of Appeals elucidated on the ruling of the Court of
Tax Appeals:
To our mind, private respondent hardly fits into the
definition of an "independent contractor".
For one, the established facts show that IPC, as a unit
of the private respondent, is not engaged in business.
Undisputedly, private respondent is mandated by law to
undertake research activities to maintain its university
status. In fact, the research activities being carried out
by the IPC is focused not on business or profit but on
social sciences studies of Philippine society and
culture. Since it can only finance a limited number of
IPC's research projects, private respondent occasionally
accepts sponsorship for unfunded IPC research projects
from international organizations, private foundations
and governmental agencies. However, such
sponsorships are subject to private respondent's terms
and conditions, among which are, that the research is
confined to topics consistent with the private
respondent's academic agenda; that no proprietary or
commercial purpose research is done; and that private
respondent retains not only the absolute right to publish
but also the ownership of the results of the research
conducted by the IPC. Quite clearly, the
aforementioned terms and conditions belie the
allegation that private respondent is a contractor or is
engaged in business.
For another, it bears stressing that private respondent
is a non-stock, non-profit educational corporation. The
fact that it accepted sponsorship for IPC's unfunded
projects is merely incidental. For, the main function of
the IPC is to undertake research projects under the
academic agenda of the private respondent. Moreover
the records do not show that in accepting sponsorship
of research work, IPC realized profits from such work.
On the contrary, the evidence shows that for about 30
years, IPC had continuously operated at a loss, which
means that sponsored funds are less than actual
expenses for its research projects. That IPC has been
operating at a loss loudly bespeaks of the fact that
education and not profit is the motive for undertaking
the research projects.
 Then, too, granting arguendo that IPC made profits
from the sponsored research projects, the fact still
remains that there is no proof that part of such earnings
or profits was ever distributed as dividends to any
stockholder, as in fact none was so distributed because
they accrued to the benefit of the private respondent
which is a non-profit educational institution. 14
Therefore, it is clear that the funds received by Ateneo's Institute of
Philippine Culture are not given in the concept of a fee or price in
exchange for the performance of a service or delivery of an object.
Rather, the amounts are in the nature of an endowment or donation
given by IPC's benefactors solely for the purpose of sponsoring or
funding the research with no strings attached. As found by the two
courts below, such sponsorships are subject to IPC's terms and
conditions. No proprietary or commercial research is done, and IPC
retains the ownership of the results of the research, including the
absolute right to publish the same. The copyrights over the results
of the research are owned by
Ateneo and, consequently, no portion thereof may be reproduced
without its permission. 15 The amounts given to IPC, therefore, may
not be deemed, it bears stressing as fees or gross receipts that can
be subjected to the three percent contractor's tax.
It is also well to stress that the questioned transactions of Ateneo's
Institute of Philippine Culture cannot be deemed either as a contract
of sale or a contract of a piece of work. "By the contract of sale, one
of the contracting parties obligates himself to transfer the ownership
of and to deliver a determinate thing, and the other to pay therefor
a price certain in money or its equivalent." 16 By its very nature, a
contract of sale requires a transfer of ownership. Thus, Article 1458
of the Civil Code "expressly makes the obligation to transfer
ownership as an essential element of the contract of sale, following
modern codes, such as the German and the Swiss. Even in the
absence of this express requirement, however, most writers,
including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and
Capitant, have considered such transfer of ownership as the primary
purpose of sale. Perez and Alguer follow the same view, stating that
the delivery of the thing does not mean a mere physical transfer, but
is a means of transmitting ownership. Transfer of title or an
agreement to transfer it for a price paid or promised to be paid is the
essence of sale." 17 In the case of a contract for a piece of work, "the
contractor binds himself to execute a piece of work for the employer,
in consideration of a certain price or compensation. . . . If the
contractor agrees to produce the work from materials furnished by
him, he shall deliver the thing produced to the employer and transfer
dominion over the thing, . . ." 18 Ineludably, whether the contract be
one of sale or one for a piece of work, a transfer of ownership is
involved and a party necessarily walks away with an object. 19 In the
case at bench, it is clear from the evidence on record that there was
no sale either of objects or services because, as adverted to earlier,
there was no transfer of ownership over the research data obtained
or the results of research projects undertaken by the Institute of
Philippine Culture.
Furthermore, it is clear that the research activity of the Institute of
Philippine Culture is done in pursuance of maintaining Ateneo's
university status and not in the course of an independent business
of selling such research with profit in mind. This is clear from a
reading of the regulations governing universities:
31. In addition to the legal requisites an institution must
meet, among others, the following requirements before
an application for university status shall be considered:
xxx xxx xxx
 (e) The institution must undertake research and
operate with a competent qualified staff at least three
graduate departments in accordance with the rules and
standards for graduate education. One of the
departments shall be science and technology. The
competence of the staff shall be judged by their
effective teaching, scholarly publications and research
activities published in its school journal as well as their
leadership activities in the profession.
(f) The institution must show evidence of adequate and
stable financial resources and support, a reasonable
portion of which should be devoted to institutional
development and research. (emphasis supplied)
xxx xxx xxx
32. University status may be withdrawn, after due
notice and hearing, for failure to maintain satisfactorily
the standards and requirements therefor. 20
Petitioner's contention that it is the Institute of Philippine Culture that
is being taxed and not the Ateneo is patently erroneous because the
former is not an independent juridical entity that is separate and
distinct form the latter.
Factual Findings and Conclusions of the Court of Tax Appeals
Affirmed by the Court of Appeals Generally Conclusive
In addition, we reiterate that the "Court of Tax Appeals is a highly
specialized body specifically created for the purpose of reviewing tax
cases. Through its expertise, it is undeniably competent to determine
the issue of whether" 21 Ateneo de Manila University may be deemed
a subject of the three percent contractor's tax "through the evidence
presented before it." Consequently, "as a matter of principle, this
Court will not set aside the conclusion reached by . . . the Court of
Tax Appeals which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless there has
been an abuse or improvident exercise of authority . . ." 22 This point
becomes more evident in the case before us where the findings and
conclusions of both the Court of Tax Appeals and the Court of Appeals
appear untainted by any abuse of authority, much less grave abuse
of discretion. Thus, we find the decision of the latter affirming that
of the former free from any palpable error.
Public Service, Not Profit, is the Motive
The records show that the Institute of Philippine Culture conducted
its research activities at a huge deficit of P1,624,014.00 as shown in
its statements of fund and disbursements for the period 1972 to
1985. 23 In fact, it was Ateneo de Manila University itself that had
funded the research projects of the institute, and it was only when
Ateneo could no longer produce the needed funds that the institute
sought funding from outside. The testimony of Ateneo's Director for
Accounting Services, Ms. Leonor Wijangco, provides significant
insight on the academic and nonprofit nature of the institute's
research activities done in furtherance of the university's purposes,
as follows:
Q Now it was testified to earlier by Miss Thelma Padero
(Office Manager of the Institute of Philippine Culture)
that as far as grants from sponsored research it is
possible that the grant sometimes is less than the actual
cost. Will you please tell us in this case when the actual
cost is a lot less than the grant who shoulders the
additional cost?
 A The University.
Q Now, why is this done by the University?
A Because of our faculty development program as a
university, because a university has to have its own
research institute. 24
So, why is it that Ateneo continues to operate and conduct
researches through its Institute of Philippine Culture when it
undisputedly loses not an insignificant amount in the process? The
plain and simple answer is that private respondent is not a contractor
selling its services for a fee but an academic institution conducting
these researches pursuant to its commitments to education and,
ultimately, to public service. For the institute to have tenaciously
continued operating for so long despite its accumulation of significant
losses, we can only agree with both the Court of Tax Appeals and the
Court of Appeals that "education and not profit is [IPC's] motive for
undertaking the research
projects." 25
WHEREFORE, premises considered, the petition is DENIED and the
assailed Decision of the Court of Appeals is hereby AFFIRMED in full.
SO ORDERED.
G.R. No. L-6584 October 16, 1911
INCHAUSTI AND CO., plaintiff-appellant,
vs.
ELLIS CROMWELL, Collector of Internal Revenue, defendant-
appellee.
MORELAND, J.:
This is an appeal by the plaintiff from a judgment of the Court of First
Instance of the city of Manila, the Hon. Simplicio del Rosario
presiding, dismissing the complaint upon the merits after trial,
without costs.
The facts presented to this court are agreed upon by both parties,
consisting, in so far as they are material to a decision of the case, in
the following:
III. That the plaintiff firm for many years past has been and
now is engaged in the business of buying and selling at
wholesale hemp, both for its own account and on commission.
IV. That it is customary to sell hemp in bales which are made
by compressing the loose fiber by means of presses, covering
two sides of the bale with matting, and fastening it by means
of strips of rattan; that the operation of bailing hemp is
designated among merchants by the word "prensaje."
V. That in all sales of hemp by the plaintiff firm, whether for
its own account or on commission for others, the price is
quoted to the buyer at so much per picul, no mention being
made of bailing; but with the tacit understanding, unless
otherwise expressly agreed, that the hemp will be delivered in
bales and that, according to the custom prevailing among
hemp merchants and dealers in the Philippine Islands, a
charge, the amount of which depends upon the then prevailing
rate, is to be made against the buyer under the denomination
of "prensaje." That this charge is made in the same manner in
all cases, even when the operation of bailing was performed
by the plaintiff or by its principal long before the contract of
sale was made. Two specimens of the ordinary form of account
used in these operations are hereunto appended, marked
Exhibits A and B, respectively, and made a part hereof.
VI. That the amount of the charge made against hemp buyers
by the plaintiff firm and other sellers of hemp under the
denomination of "prensaje" during the period involved in this
litigation was P1.75 per bale; that the average cost of the
rattan and matting used on each bale of hemp is fifteen (15)
centavos and that the average total cost of bailing hemp is
one (1) peso per bale.
VII. That insurance companies in the Philippine Islands, in
estimating the insurable value of hemp always add to the
quoted price of same the charge made by the seller under the
denomination of "prensaje."
VII. That the average weight of a bale of hemp is two (2) piculs
(126.5 kilograms).
IX. That between the first day of January, 1905, and the 31st
day of March, 1910, the plaintiff firm, in accordance with the
custom mentioned in paragraph V hereof, collected and
received, under the denomination of "prensaje," from
purchasers of hemp sold by the said firm for its own account,
in addition to the price expressly agreed upon for the said
hemp, sums aggregating P380,124.35; and between the 1st
day of October, 1908, and the 1st day of March, 1910,
collected for the account of the owners of hemp sold by the
plaintiff firm in Manila on commission, and under the said
denomination of "prensaje," in addition to the price expressly
agreed upon the said hemp, sums aggregating P31,080.
X. That the plaintiff firm in estimating the amount due it as
commissions on sales of hemp made by it for its principals has
always based the said amount on the total sum collected from
the purchasers of the hemp, including the charge made in each
case under the denomination of "prensaje."
XI. That the plaintiff has always paid to the defendant or to
his predecessor in the office of the Collector of Internal
Revenue the tax collectible under the provisions of section 139
of Act No. 1189 upon the selling price expressly agreed upon
for all hemp sold by the plaintiff firm both for its own account
and on commission, but has not, until compelled to do so as
hereinafter stated, paid the said tax upon sums received from
the purchaser of such hemp under the denomination of
"prensaje."
XII. That of the 29th day of April, 1910, the defendant, acting
in his official capacity as Collector of Internal Revenue of the
Philippine Islands, made demand in writing upon the plaintiff
firm for the payment within the period of five (5) days of the
sum of P1,370.68 as a tax of one third of one per cent on the
sums of money mentioned in Paragraph IX hereof, and which
the said defendant claimed to be entitled to receive, under the
provisions of the said section 139 of Act No. 1189, upon the
said sums of money so collected from purchasers of hemp
under the denomination of "prensaje."
XIII. That on the 4th day of May, 1910, the plaintiff firm paid
to the defendant under protest the said sum of P1,370.69, and
on the same date appealed to the defendant as Collector of
Internal Revenue, against the ruling by which the plaintiff firm
was required to make said payment, but defendant overruled
said protest and adversely decided said appeal, and refused
 and still refuses to return to plaintiff the said sum of P1,370.68
or any part thereof.1awphil.net
XIV. Upon the facts above set forth t is contended by the
plaintiff that the tax of P1,370.68 assessed by the defendant
upon the aggregate sum of said charges made against said
purchasers of hemp by the plaintiff during the period in
question, under the denomination of "prensaje" as aforesaid,
namely, P411,204.35, is illegal upon the ground that the said
charge does not constitute a part of the selling price of the
hemp, but is a charge made for the service of baling the hemp,
and that the plaintiff firm is therefore entitled to recover of the
defendant the said sum of P1,370.68 paid to him under
protest, together with all interest thereon at the legal rate
since payment, and the costs of this action.
Upon the facts above stated it is the contention of the
defendant that the said charge made under the denomination
of "prensaje" is in truth and in fact a part of the gross value of
the hemp sold and of its actual selling price, and that therefore
the tax imposed by section 139 of Act No. 1189 lawfully
accrued on said sums, that the collection thereof was lawfully
and properly made and that therefore the plaintiff is not
entitled to recover back said sum or any part thereof; and that
the defendant should have judgment against plaintiff for his
costs.
Under these facts we are of the opinion that the judgment of the
court below was right. It is one of the stipulations in the statement
of facts that it is customary to sell hemp in bales, and that the price
quoted in the market for hemp per picul is the price for the hemp
baled. The fact is that among large dealers like the plaintiff in this
case it is practically impossible to handle hemp without its being
baled, and it is admitted by the statement of facts, as well as
demonstrated by the documentary proof introduced in the case, that
if the plaintiff sold a quality of hemp it would be the under standing,
without words, that such hemp would be delivered in bales, and that
the purchase price would include the cost and expense of baling. In
other words, it is the fact as stipulated, as well as it would be the
fact of necessity, that in all dealings in hemp in the general market
the selling price consists of the value of the hemp loose plus the cost
and expense of putting it into marketable form. In the sales made
by the plaintiff, which are the basis of the controversy here, there
were n services performed by him for his vendee. There was
agreement that services should be performed. Indeed, at the time of
such sales it was not known by the vendee whether the hemp was
then actually baled or not. All that he knew and all that concerned
him was that the hemp should be delivered to him baled. He did not
ask the plaintiff to perform services for him, nor did the plaintiff
agree to do so. The contract was single and consisted solely in the
sale and purchase of hemp. The purchaser contracted for nothing
else and the vendor agreed to deliver nothing else.
The word "price" signifies the sum stipulated as the equivalent of the
thing sold and also every incident taken into consideration for the
fixing of the price, put to the debit of the vendee and agreed to by
him. It is quite possible that the plaintiff, in this case in connection
with the hemp which he sold, had himself already paid the additional
expense of baling as a part of the purchase price which he paid and
that he himself had received the hemp baled from his vendor. It is
quite possible also that such vendor of the plaintiff may have
received the same hemp from his vendor in baled form, that he paid
the additions cost of baling as a part of the purchase price which he
paid. In such case the plaintiff performed no service whatever for his
vendee, nor did the plaintiff's vendor perform any service for him.
The distinction between a contract of sale and one for work, labor,
and materials is tested by the inquiry whether the thing transferred
is one no in existence and which never would have existed but for
the order of the party desiring to acquire it, or a thing which would
have existed and been the subject of sale to some other person, even
if the order had not been given. (Groves vs. Buck, 3 Maule & S., 178;
Towers vs. Osborne, 1 Strange, 506; Benjamin on Sales, 90.) It is
clear that in the case at bar the hemp was in existence in baled form
before the agreements of sale were made, or, at least, would have
been in existence even if none of the individual sales here in question
had been consummated. It would have been baled, nevertheless, for
sale to someone else, since, according to the agreed statement of
facts, it is customary to sell hemp in bales. When a person stipulates
for the future sale of articles which he is habitually making, and which
at the time are not made or finished, it is essentially a contract of
sale and not a contract for labor. It is otherwise when the article is
made pursuant to agreement. (Lamb vs. Crafts, 12 Met., 353;
Smith vs. N.Y.C. Ry. Co., 4 Keyes, 180; Benjamin on Sales, 98.)
Where labor is employed on the materials of the seller he can not
maintain an action for work and labor. (Atkinson vs. Bell, 8 Barn. &
C., 277; Lee vs. Griffin, 30 L.J.N. S.Q.B., 252; Prescott vs. Locke, 51
N.H., 94.) If the article ordered by the purchaser is exactly such as
the plaintiff makes and keeps on hand for sale to anyone, and no
change or modification of it is made at the defendant's request, it is
a contract of sale, even though it may be entirely made after, and in
consequence of, the defendant's order for it. (Garbutt s. Watson, 5
Barn. & Ald., 613; Gardner vs. Joy, 9 Met., 177; Lamb vs. Crafts, 12
Met., 353; Waterman vs. Meigs, 4 Cush., 497., Clark vs. Nichols,
107 Mass., 547; May vs. Ward, 134 Mass., 127; Abbott vs.Gilchrist,
38 Me., 260; Crocket vs. Scribner, 64 Me., 105; Pitkin vs. Noyes, 48
N. H., 294; Prescott vs. Locke, 51 N. H., 94; Ellison vs. Brigham, 38
Vt., 64.) It has been held in Massachusetts that a contract to make
is a contract of sale if the article ordered is already substantially in
existence at the time of the order and merely requires some
alteration, modification, or adoption to the buyer's wishes or
purposes. (Mixer vs. Howarth, 21 Pick., 205.) It is also held in that
state that a contract for the sale of an article which the vendor in the
ordinary course of his business manufactures or procures for the
general market, whether the same is on hand at the time or not, is
a contract for the sale of goods to which the statute of frauds applies.
But if the goods are to be manufactured especially for the purchaser
and upon his special order, and not for the general market, the case
is not within the statute. (Goddard vs. Binney, 115 Mass., 450.)
It is clear to our minds that in the case at bar the baling was
performed for the general market and was not something done by
plaintiff which was a result of any peculiar wording of the particular
contract between him and his vendee. It is undoubted that the
plaintiff prepared his hemp for the general market. This would be
necessary. One whose exposes goods for sale in the market must
have them in marketable form. The hemp in question would not have
been in that condition if it had not been baled. the baling, therefore,
was nothing peculiar to the contract between the plaintiff and his
vendee. It was precisely the same contract that was made by every
other seller of hemp, engaged as was the plaintiff, and resulted
simply in the transfer of title to goods already prepared for the
general market. The method of bookkeeping and form of the account
rendered is not controlling as to the nature of the contract made. It
is conceded in the case tat a separate entry and charge would have
been made for the baling even if the plaintiff had not been the one
who baled the hemp but, instead, had received it already baled from
his vendor. This indicates of necessity tat the mere fact of entering
a separate item for the baling of the hemp is formal rather than
essential and in no sense indicates in this case the real transaction
between the parties. It is undisputable that, if the plaintiff had
brought the hemp in question already baled, and that was the hemp
the sale which formed the subject of this controversy, then the
plaintiff would have performed no service for his vendee and could
not, therefore, lawfully charge for the rendition of such service. It is,
nevertheless, admitted that in spite of that fact he would still have
made the double entry in his invoice of sale to such vendee. This
demonstrates the nature of the transaction and discloses, as we have
already said, that the entry of a separate charge for baling does not
accurately describe the transaction between the parties.
Section 139 [Act No. 1189] of the Internal Revenue Law provides
that:
There shall be paid by each merchant and manufacturer a tax
at the rate of one-third of one per centum on the gross value
in money of all goods, wares and merchandise sold, bartered
or exchanged in the Philippine Islands, and that this tax shall
be assessed on the actual selling price at which every such
merchant or manufacturer disposes of his commodities.
seller shall furnish him with unbaled hemp. It is undoubted that the
vendees, in the sales referred to in the case at bar, would have no
right, after having made their contracts, to insists on the delivery of
loose hemp with the purpose in view themselves to perform the
baling and thus save 75 centavos per bale. It is unquestioned that
the seller, the plaintiff, would have stood upon his original contract
of sale, that is, the obligation to deliver baled hemp, and would have
forced his vendees to accept baled hemp, he himself retaining among
his own profits those which accrued from the proceed of baling.
We are of the opinion that the judgment appealed from must be
affirmed, without special finding as to costs, and it is so ordered.

The operation of baling undoubtedly augments the value of the

goods. We agree that there can be no question that, if the value of
the hemp were not augmented to the amount of P1.75 per bale by
said operation, the purchaser would not pay that sum. If one buys a
bale of hemp at a stipulated price of P20, well knowing that there is
an agreement on his part, express or implied, to pay an additional
amount of P1.75 for that bale, he considers the bale of hemp worth
P21. 75. It is agreed, as we have before stated, that hemp is sold in
bales. Therefore, baling is performed before the sale. The purchaser
of hemp owes to the seller nothing whatever by reason of their
contract except the value of the hemp delivered. That value, that
sum which the purchaser pays to the vendee, is the true selling price
of the hemp, and every item which enters into such price is a part of
such selling price. By force of the custom prevailing among hemp
dealers in the Philippine Islands, a purchaser of hemp in the market,
unless he expressly stipulates that it shall be delivered to him in loose
form, obligates himself to purchase and pay for baled hemp. Wheher
or not such agreement is express or implied, whether it is actual or
tacit, it has the same force. After such an agreement has once been
made by the purchaser, he has no right to insists thereafter that the
 ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND THE
COURT OF TAX APPEALS, respondents.

G.R. No. L-27452 June 30, 1975

ENGINEERING EQUIPMENT AND SUPPLY

COMPANY, petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT
OF TAX APPEALS, respondent.

ESGUERRA, J.:

Petition for review on certiorari of the decision of the Court of Tax

Appeals in CTA Case No. 681, dated November 29, 1966, assessing
a compensating tax of P174,441.62 on the Engineering Equipment
and Supply Company.

As found by the Court of Tax Appeals, and as established by the

evidence on record, the facts of this case are as follows:

Engineering Equipment and Supply Co. (Engineering for short), a

domestic corporation, is an engineering and machinery firm. As
operator of an integrated engineering shop, it is engaged, among
others, in the design and installation of central type air conditioning
system, pumping plants and steel fabrications. (Vol. I pp. 12-16
T.S.N. August 23, 1960)

On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now
Commissioner, of Internal Revenue denouncing Engineering for tax
G.R. No. L-27044 June 30, 1975 evasion by misdeclaring its imported articles and failing to pay the
correct percentage taxes due thereon in connivance with its foreign
THE COMMISSIONER OF INTERNAL REVENUE, petitioner, suppliers (Exh. "2" p. 1 BIR record Vol. I). Engineering was likewise
vs. denounced to the Central Bank (CB) for alleged fraud in obtaining its
dollar allocations. Acting on these denunciations, a raid and search
was conducted by a joint team of Central Bank, (CB), National
Bureau of Investigation (NBI) and Bureau of Internal Revenue (BIR)
agents on September 27, 1956, on which occasion voluminous
records of the firm were seized and confiscated. (pp. 173-177
T.S.N.)
On September 30, 1957, revenue examiners Quesada and Catudan
reported and recommended to the then Collector, now
Commissioner, of Internal Revenue (hereinafter referred to as
Commissioner) that Engineering be assessed for P480,912.01 as
deficiency advance sales tax on the theory that it misdeclared its
importation of air conditioning units and parts and accessories
thereof which are subject to tax under Section 185(m)1 of the Tax
Code, instead of Section 186 of the same Code. (Exh. "3" pp. 59-63
BIR rec. Vol. I) This assessment was revised on January 23, 1959,
in line with the observation of the Chief, BIR Law Division, and was
raised to P916,362.56 representing deficiency advance sales tax and
manufacturers sales tax, inclusive of the 25% and 50% surcharges.
(pp. 72-80 BIR rec. Vol. I)
On March 3, 1959. the Commissioner assessed against, and
demanded upon, Engineering payment of the increased amount and
suggested that P10,000 be paid as compromise in extrajudicial
settlement of Engineering's penal liability for violation of the Tax
Code. The firm, however, contested the tax assessment and
requested that it be furnished with the details and particulars of the
Commissioner's assessment. (Exh. "B" and "15", pp. 86-88 BIR rec.
Vol. I) The Commissioner replied that the assessment was in
accordance with law and the facts of the case.
On July 30, 1959, Engineering appealed the case to the Court of Tax
Appeals and during the pendency of the case the investigating
revenue examiners reduced Engineering's deficiency tax liabilities
from P916,362.65 to P740,587.86 (Exhs. "R" and "9" pp. 162-170,
BIR rec.), based on findings after conferences had with Engineering's
Accountant and Auditor.
On November 29, 1966, the Court of Tax Appeals rendered its
decision, the dispositive portion of which reads as follows:
For ALL THE FOREGOING CONSIDERATIONS, the
decision of respondent appealed from is hereby
modified, and petitioner, as a contractor, is declared
exempt from the deficiency manufacturers sales tax
covering the period from June 1, 1948. to September 2,
1956. However, petitioner is ordered to pay
respondent, or his duly authorized collection agent, the
sum of P174,141.62 as compensating tax and 25%
surcharge for the period from 1953 to September 1956.
With costs against petitioner.
The Commissioner, not satisfied with the decision of the Court of Tax
Appeals, appealed to this Court on January 18, 1967, (G.R. No. L-
27044). On the other hand, Engineering, on January 4, 1967, filed
with the Court of Tax Appeals a motion for reconsideration of the
decision abovementioned. This was denied on April 6, 1967,
prompting Engineering to file also with this Court its appeal,
docketed as G.R. No. L-27452.
Since the two cases, G.R. No. L-27044 and G.R. No. L-27452, involve
the same parties and issues, We have decided to consolidate and
jointly decide them.
Engineering in its Petition claims that the Court of Tax Appeals
committed the following errors:
 1. That the Court of Tax Appeals erred in holding
Engineering Equipment & Supply Company liable to the
30% compensating tax on its importations of
equipment and ordinary articles used in the central type
air conditioning systems it designed, fabricated,
constructed and installed in the buildings and premises
of its customers, rather than to the compensating tax
of only 7%;
2. That the Court of Tax Appeals erred in holding
Engineering Equipment & Supply Company guilty of
fraud in effecting the said importations on the basis of
incomplete quotations from the contents of alleged
photostat copies of documents seized illegally from
Engineering Equipment and Supply Company which
should not have been admitted in evidence;
3. That the Court of Tax Appeals erred in holding
Engineering Equipment & Supply Company liable to the
25% surcharge prescribed in Section 190 of the Tax
Code;
4. That the Court of Tax Appeals erred in holding the
assessment as not having prescribed;
5. That the Court of Tax Appeals erred in holding
Engineering Equipment & Supply Company liable for the
sum of P174,141.62 as 30% compensating tax and
25% surcharge instead of completely absolving it from
the deficiency assessment of the Commissioner.
The Commissioner on the other hand claims that the Court of Tax
Appeals erred:
1. In holding that the respondent company is a
contractor and not a manufacturer.
2. In holding respondent company liable to the 3%
contractor's tax imposed by Section 191 of the Tax
Code instead of the 30% sales tax prescribed in Section
185(m) in relation to Section 194(x) both of the same
Code;
3. In holding that the respondent company is subject
only to the 30% compensating tax under Section 190
of the Tax Code and not to the 30% advance sales tax
imposed by section 183 (b), in relation to section
185(m) both of the same Code, on its importations of
parts and accessories of air conditioning units;
4. In not holding the company liable to the 50% fraud
surcharge under Section 183 of the Tax Code on its
importations of parts and accessories of air conditioning
units, notwithstanding the finding of said court that the
respondent company fraudulently misdeclared the said
importations;
5. In holding the respondent company liable for
P174,141.62 as compensating tax and 25% surcharge
instead of P740,587.86 as deficiency advance sales tax,
deficiency manufacturers tax and 25% and 50%
surcharge for the period from June 1, 1948 to
December 31, 1956.
The main issue revolves on the question of whether or not
Engineering is a manufacturer of air conditioning units under Section
185(m), supra, in relation to Sections 183(b) and 194 of the Code,
or a contractor under Section 191 of the same Code.
The Commissioner contends that Engineering is a manufacturer and
seller of air conditioning units and parts or accessories thereof and,
therefore, it is subject to the 30% advance sales tax prescribed by
Section 185(m) of the Tax Code, in relation to Section 194 of the
same, which defines a manufacturer as follows:
Section 194. — Words and Phrases Defined. — In
applying the provisions of this Title, words and phrases
shall be taken in the sense and extension indicated
below:
xxx xxx xxx
(x) "Manufacturer" includes every person who by
physical or chemical process alters the exterior texture
or form or inner substance of any raw material or
manufactured or partially manufactured products in
such manner as to prepare it for a special use or uses
to which it could not have been put in its original
condition, or who by any such process alters the quality
of any such material or manufactured or partially
manufactured product so as to reduce it to marketable
shape, or prepare it for any of the uses of industry, or
who by any such process combines any such raw
material or manufactured or partially manufactured
products with other materials or products of the same
or of different kinds and in such manner that the
finished product of such process of manufacture can be
put to special use or uses to which such raw material or
manufactured or partially manufactured products in
their original condition could not have been put, and
who in addition alters such raw material or
manufactured or partially manufactured products, or
combines the same to produce such finished products
for the purpose of their sale or distribution to others and
not for his own use or consumption.
In answer to the above contention, Engineering claims that it is not
a manufacturer and setter of air-conditioning units and spare parts
or accessories thereof subject to tax under Section 185(m) of the
Tax Code, but a contractor engaged in the design, supply and
installation of the central type of air-conditioning system subject to
the 3% tax imposed by Section 191 of the same Code, which is
essentially a tax on the sale of services or labor of a contractor rather
than on the sale of articles subject to the tax referred to in Sections
184, 185 and 186 of the Code.
The arguments of both the Engineering and the Commissioner call
for a clarification of the term contractor as well as the distinction
between a contract of sale and contract for furnishing services, labor
and materials. The distinction between a contract of sale and one for
work, labor and materials is tested by the inquiry whether the thing
transferred is one not in existence and which never would have
existed but for the order of the party desiring to acquire it, or a thing
which would have existed and has been the subject of sale to some
other persons even if the order had not been given.2 If the article
ordered by the purchaser is exactly such as the plaintiff makes and
keeps on hand for sale to anyone, and no change or modification of
it is made at defendant's request, it is a contract of sale, even though
it may be entirely made after, and in consequence of, the defendants
order for it.3
Our New Civil Code, likewise distinguishes a contract of sale from a
contract for a piece of work thus:
Art. 1467. A contract for the delivery at a certain price
of an article which the vendor in the ordinary course of
his business manufactures or procures for the general
 market, whether the same is on hand at the time or not,
is a contract of sale, but if the goods are to be
manufactured specially for the customer and upon his
special order and not for the general market, it is a
contract for a piece of work.
The word "contractor" has come to be used with special reference to
a person who, in the pursuit of the independent business, undertakes
to do a specific job or piece of work for other persons, using his own
means and methods without submitting himself to control as to the
petty details. (Arañas, Annotations and Jurisprudence on the
National Internal Revenue Code, p. 318, par. 191 (2), 1970 Ed.) The
true test of a contractor as was held in the cases of Luzon
Stevedoring Co., vs. Trinidad, 43, Phil. 803, 807-808, and La Carlota
Sugar Central vs. Trinidad, 43, Phil. 816, 819, would seem to be that
he renders service in the course of an independent occupation,
representing the will of his employer only as to the result of his work,
and not as to the means by which it is accomplished.
With the foregoing criteria as guideposts, We shall now examine
whether Engineering really did "manufacture" and sell, as alleged by
the Commissioner to hold it liable to the advance sales tax under
Section 185(m), or it only had its services "contracted" for
installation purposes to hold it liable under section 198 of the Tax
Code.
I produced locally for sale to the general market; and the
After going over the three volumes of stenographic notes and the
voluminous record of the BIR and the CTA as well as the exhibits
submitted by both parties, We find that Engineering did not
manufacture air conditioning units for sale to the general public, but
imported some items (as refrigeration compressors in complete set,
heat exchangers or coils, t.s.n. p. 39) which were used in executing
contracts entered into by it. Engineering, therefore, undertook
negotiations and execution of individual contracts for the design,
supply and installation of air conditioning units of the central type
(t.s.n. pp. 20-36; Exhs. "F", "G", "H", "I", "J", "K", "L", and "M"),
taking into consideration in the process such factors as the area of
the space to be air conditioned; the number of persons occupying or
would be occupying the premises; the purpose for which the various
air conditioning areas are to be used; and the sources of heat gain
or cooling load on the plant such as sun load, lighting, and other
electrical appliances which are or may be in the plan. (t.s.n. p. 34,
Vol. I) Engineering also testified during the hearing in the Court of
Tax Appeals that relative to the installation of air conditioning
system, Engineering designed and engineered complete each
particular plant and that no two plants were identical but each had
to be engineered separately.
As found by the lower court, which finding4 We adopt —
Engineering, in a nutshell, fabricates, assembles,
supplies and installs in the buildings of its various
customers the central type air conditioning system;
prepares the plans and specifications therefor which are
distinct and different from each other; the air
conditioning units and spare parts or accessories
thereof used by petitioner are not the window type of
air conditioner which are manufactured, assembled and
imported air conditioning units and spare parts or
accessories thereof are supplied and installed by
petitioner upon previous orders of its customers
conformably with their needs and requirements.
The facts and circumstances aforequoted support the theory that
Engineering is a contractor rather than a manufacturer.
The Commissioner in his Brief argues that "it is more in accord with
reason and sound business management to say that anyone who
desires to have air conditioning units installed in his premises and
who is in a position and willing to pay the price can order the same
from the company (Engineering) and, therefore, Engineering could
have mass produced and stockpiled air conditioning units for sale to
the public or to any customer with enough money to buy the same."
This is untenable in the light of the fact that air conditioning units,
packaged, or what we know as self-contained air conditioning units,
are distinct from the central system which Engineering dealt in. To
Our mind, the distinction as explained by Engineering, in its Brief,
quoting from books, is not an idle play of words as claimed by the
Commissioner, but a significant fact which We just cannot ignore. As
quoted by Engineering Equipment & Supply Co., from an Engineering
handbook by L.C. Morrow, and which We reproduce hereunder for
easy reference:
... there is a great variety of equipment in use to do this
job (of air conditioning). Some devices are designed to
serve a specific type of space; others to perform a
specific function; and still others as components to be
assembled into a tailor-made system to fit a particular
building. Generally, however, they may be grouped into
two classifications — unitary and central system.
The unitary equipment classification includes those
designs such as room air conditioner, where all of the
functional components are included in one or two
packages, and installation involves only making service
connection such as electricity, water and drains.
Central-station systems, often referred to as applied or
built-up systems, require the installation of components
at different points in a building and their
interconnection.
The room air conditioner is a unitary equipment
designed specifically for a room or similar small space.
It is unique among air conditioning equipment in two
respects: It is in the electrical appliance classification,
and it is made by a great number of manufacturers.
There is also the testimony of one Carlos Navarro, a licensed
Mechanical and Electrical Engineer, who was once the Chairman of
the Board of Examiners for Mechanical Engineers and who was
allegedly responsible for the preparation of the refrigeration and air
conditioning code of the City of Manila, who said that "the central
type air conditioning system is an engineering job that requires
planning and meticulous layout due to the fact that usually architects
assign definite space and usually the spaces they assign are very
small and of various sizes. Continuing further, he testified:
I don't think I have seen central type of air conditioning
machinery room that are exactly alike because all our
buildings here are designed by architects dissimilar to
existing buildings, and usually they don't coordinate
and get the advice of air conditioning and refrigerating
engineers so much so that when we come to design, we
have to make use of the available space that they are
assigning to us so that we have to design the different
component parts of the air conditioning system in such
a way that will be accommodated in the space assigned
and afterwards the system may be considered as a
definite portion of the building. ...
Definitely there is quite a big difference in the operation
because the window type air conditioner is a sort of
compromise. In fact it cannot control humidity to the
desired level; rather the manufacturers, by hit and
miss, were able to satisfy themselves that the desired
 comfort within a room could be made by a definite
setting of the machine as it comes from the factory;
whereas the central type system definitely requires an
intelligent operator. (t.s.n. pp. 301-305, Vol. II)
The point, therefore, is this — Engineering definitely did not and was
not engaged in the manufacture of air conditioning units but had its
services contracted for the installation of a central system. The cases
cited by the Commissioner (Advertising Associates, Inc. vs. Collector
of Customs, 97, Phil. 636; Celestino Co & Co. vs. Collector of Internal
Revenue, 99 Phil. 841 and Manila Trading & Supply Co. vs. City of
Manila, 56 O.G. 3629), are not in point. Neither are they applicable
because the facts in all the cases cited are entirely different. Take for
instance the case of Celestino Co where this Court held the taxpayer
to be a manufacturer rather than a contractor of sash, doors and
windows manufactured in its factory. Indeed, from the very start,
Celestino Co intended itself to be a manufacturer of doors, windows,
sashes etc. as it did register a special trade name for its sash
business and ordered company stationery carrying the bold print
"ORIENTAL SASH FACTORY (CELESTINO CO AND COMPANY, PROP.)
926 Raon St., Quiapo, Manila, Tel. No. etc., Manufacturers of All
Kinds of Doors, Windows ... ." Likewise, Celestino Co never put up a
contractor's bond as required by Article 1729 of the Civil Code. Also,
as a general rule, sash factories receive orders for doors and windows
of special design only in particular cases, but the bulk of their sales
is derived from ready-made doors and windows of standard sizes for
the average home, which "sales" were reflected in their books of
accounts totalling P118,754.69 for the period from January, 1952 to
September 30, 1952, or for a period of only nine (9) months. This
Court found said sum difficult to have been derived from its few
customers who placed special orders for these items. Applying the
abovestated facts to the case at bar, We found them to he inapposite.
Engineering advertised itself as Engineering Equipment and Supply
Company, Machinery Mechanical Supplies, Engineers, Contractors,
174 Marques de Comillas, Manila (Exh. "B" and "15" BIR rec. p. 186),
and not as manufacturers. It likewise paid the contractors tax on all
the contracts for the design and construction of central system as
testified to by Mr. Rey Parker, its President and General Manager.
(t.s.n. p. 102, 103) Similarly, Engineering did not have ready-made
air conditioning units for sale but as per testimony of Mr. Parker upon
inquiry of Judge Luciano of the CTA —
Q — Aside from the general components,
which go into air conditioning plant or
system of the central type which your
company undertakes, and the procedure
followed by you in obtaining and executing
contracts which you have already testified
to in previous hearing, would you say that
the covering contracts for these different
projects listed ... referred to in the list,
Exh. "F" are identical in every respect? I
mean every plan or system covered by
these different contracts are identical in
standard in every respect, so that you can
reproduce them?
A — No, sir. They are not all standard. On
the contrary, none of them are the same.
Each one must be designed and
constructed to meet the particular
requirements, whether the application is
to be operated. (t.s.n. pp. 101-102)
What We consider as on all fours with the case at bar is the case
of S.M. Lawrence Co. vs. McFarland, Commissioner of Internal
Revenue of the State of Tennessee and McCanless, 355 SW 2d, 100,
101, "where the cause presents the question of whether one engaged
in the business of contracting for the establishment of air
conditioning system in buildings, which work requires, in addition to
the furnishing of a cooling unit, the connection of such unit with
electrical and plumbing facilities and the installation of ducts within
and through walls, ceilings and floors to convey cool air to various
parts of the building, is liable for sale or use tax as a contractor rather
than a retailer of tangible personal property. Appellee took the
Position that appellant was not engaged in the business of selling air
conditioning equipment as such but in the furnishing to its customers
of completed air conditioning systems pursuant to contract, was a
contractor engaged in the construction or improvement of real
property, and as such was liable for sales or use tax as the consumer
of materials and equipment used in the consummation of contracts,
irrespective of the tax status of its contractors. To transmit the warm
or cool air over the buildings, the appellant installed system of ducts
running from the basic units through walls, ceilings and floors to
registers. The contract called for completed air conditioning systems
which became permanent part of the buildings and improvements to
the realty." The Court held the appellant a contractor which used the
materials and the equipment upon the value of which the tax herein
imposed was levied in the performance of its contracts with its
customers, and that the customers did not purchase the equipment
and have the same installed.
Applying the facts of the aforementioned case to the present case,
We see that the supply of air conditioning units to Engineer's various
customers, whether the said machineries were in hand or not, was
especially made for each customer and installed in his building upon
his special order. The air conditioning units installed in a central type
of air conditioning system would not have existed but for the order
of the party desiring to acquire it and if it existed without the special
order of Engineering's customer, the said air conditioning units were
not intended for sale to the general public. Therefore, We have but
to affirm the conclusion of the Court of Tax Appeals that Engineering
is a contractor rather than a manufacturer, subject to the contractors
tax prescribed by Section 191 of the Code and not to the advance
sales tax imposed by Section 185(m) in relation to Section 194 of
the same Code. Since it has been proved to Our satisfaction that
Engineering imported air conditioning units, parts or accessories
thereof for use in its construction business and these items were
never sold, resold, bartered or exchanged, Engineering should be
held liable to pay taxes prescribed under Section 1905 of the Code.
This compensating tax is not a tax on the importation of goods but a
tax on the use of imported goods not subject to sales tax.
Engineering, therefore, should be held liable to the payment of 30%
compensating tax in accordance with Section 190 of the Tax Code in
relation to Section 185(m) of the same, but without the 50% mark
up provided in Section 183(b).
II
We take up next the issue of fraud. The Commissioner charged
Engineering with misdeclaration of the imported air conditioning
units and parts or accessories thereof so as to make them subject to
a lower rate of percentage tax (7%) under Section 186 of the Tax
Code, when they are allegedly subject to a higher rate of tax (30%)
under its Section 185(m). This charge of fraud was denied by
Engineering but the Court of Tax Appeals in its decision found
adversely and said"
... We are amply convinced from the evidence
presented by respondent that petitioner deliberately
and purposely misdeclared its importations. This
evidence consists of letters written by petitioner to its
foreign suppliers, instructing them on how to invoice
and describe the air conditioning units ordered by
petitioner. ... (p. 218 CTA rec.)
Despite the above findings, however, the Court of Tax Appeals
absolved Engineering from paying the 50% surcharge prescribe by
Section 183(a) of the Tax Code by reasoning out as follows:
The imposition of the 50% surcharge prescribed by
Section 183(a) of the Tax Code is based on willful
neglect to file the monthly return within 20 days after
the end of each month or in case a false or fraudulent
return is willfully made, it can readily be seen, that
petitioner cannot legally be held subject to the 50%
surcharge imposed by Section 183(a) of the Tax Code.
Neither can petitioner be held subject to the 50%
surcharge under Section 190 of the Tax Code dealing
on compensating tax because the provisions thereof do
not include the 50% surcharge. Where a particular
provision of the Tax Code does not impose the 50%
surcharge as fraud penalty we cannot enforce a non-
existing provision of law notwithstanding the
assessment of respondent to the contrary. Instances of
the exclusion in the Tax Code of the 50% surcharge are
those dealing on tax on banks, taxes on receipts of
insurance companies, and franchise tax. However, if the
Tax Code imposes the 50% surcharge as fraud penalty,
it expressly so provides as in the cases of income tax,
estate and inheritance taxes, gift taxes, mining tax,
amusement tax and the monthly percentage taxes.
Accordingly, we hold that petitioner is not subject to the
50% surcharge despite the existence of fraud in the
absence of legal basis to support the importation
thereof. (p. 228 CTA rec.)
We have gone over the exhibits submitted by the Commissioner
evidencing fraud committed by Engineering and We reproduce some
of them hereunder for clarity.
As early as March 18, 1953, Engineering in a letter of even date
wrote to Trane Co. (Exh. "3-K" pp. 152-155, BIR rec.) viz:
Your invoices should be made in the name of Madrigal
& Co., Inc., Manila, Philippines, c/o Engineering
Equipment & Supply Co., Manila, Philippines —
forwarding all correspondence and shipping papers
concerning this order to us only and not to the
customer.
When invoicing, your invoices should be exactly as
detailed in the customer's Letter Order dated March
14th, 1953 attached. This is in accordance with the
Philippine import licenses granted to Madrigal & Co.,
Inc. and such details must only be shown on all papers
and shipping documents for this shipment. No mention
of words air conditioning equipment should be made on
any shipping documents as well as on the cases. Please
give this matter your careful attention, otherwise great
difficulties will be encountered with the Philippine
Bureau of Customs when clearing the shipment on its
arrival in Manila. All invoices and cases should be
marked "THIS EQUIPMENT FOR RIZAL CEMENT CO."
The same instruction was made to Acme Industries, Inc., San
Francisco, California in a letter dated March 19, 1953 (Exh. "3-J-1"
pp. 150-151, BIR rec.)
On April 6, 1953, Engineering wrote to Owens-Corning Fiberglass
Corp., New York, U.S.A. (Exh. "3-1" pp. 147-149, BIR rec.) also
enjoining the latter from mentioning or referring to the term 'air
conditioning' and to describe the goods on order as Fiberglass pipe
and pipe fitting insulation instead. Likewise on April 30, 1953,
Engineering threatened to discontinue the forwarding service of
Universal Transcontinental Corporation when it wrote Trane Co.
(Exh. "3-H" p. 146, BIR rec.):
It will be noted that the Universal Transcontinental
Corporation is not following through on the instructions
which have been covered by the above correspondence,
and which indicates the necessity of discontinuing the
use of the term "Air conditioning Machinery or Air
Coolers". Our instructions concerning this general
situation have been sent to you in ample time to have
avoided this error in terminology, and we will ask that
on receipt of this letter that you again write to Universal
Transcontinental Corp. and inform them that, if in the
future, they are unable to cooperate with us on this
requirement, we will thereafter be unable to utilize their
forwarding service. Please inform them that we will not
tolerate another failure to follow our requirements.
And on July 17, 1953 (Exh- "3-g" p. 145, BIR rec.) Engineering wrote
Trane Co. another letter, viz:
In the past, we have always paid the air conditioning
tax on climate changers and that mark is recognized in
the Philippines, as air conditioning equipment. This
matter of avoiding any tie-in on air conditioning is very
important to us, and we are asking that from hereon
that whoever takes care of the processing of our orders
be carefully instructed so as to avoid again using the
term "Climate changers" or in any way referring to the
equipment as "air conditioning."
And in response to the aforequoted letter, Trane Co. wrote on July
30, 1953, suggesting a solution, viz:
We feel that we can probably solve all the problems by
following the procedure outlined in your letter of March
25, 1953 wherein you stated that in all future jobs you
would enclose photostatic copies of your import license
so that we might make up two sets of invoices: one set
describing equipment ordered simply according to the
way that they are listed on the import license and
another according to our ordinary regular methods of
order write-up. We would then include the set made up
according to the import license in the shipping boxes
themselves and use those items as our actual shipping
documents and invoices, and we will send the other
regular invoice to you, by separate correspondence.
(Exh- No. "3-F-1", p. 144 BIR rec.)
Another interesting letter of Engineering is one dated August 27,
1955 (Exh. "3-C" p. 141 BIR rec.)
In the process of clearing the shipment from the piers,
one of the Customs inspectors requested to see the
packing list. Upon presenting the packing list, it was
discovered that the same was prepared on a copy of
your letterhead which indicated that the Trane Co.
manufactured air conditioning, heating and heat
transfer equipment. Accordingly, the inspectors insisted
that this equipment was being imported for air
conditioning purposes. To date, we have not been able
to clear the shipment and it is possible that we will be
required to pay heavy taxes on equipment.
The purpose of this letter is to request that in the future,
no documents of any kind should be sent with the order
that indicate in any way that the equipment could
possibly be used for air conditioning.
 It is realized that this a broad request and fairly difficult
to accomplish and administer, but we believe with
proper caution it can be executed. Your cooperation and
close supervision concerning these matters will be
appreciated. (Emphasis supplied)
The aforequoted communications are strongly indicative of the
fraudulent intent of Engineering to misdeclare its importation of air
conditioning units and spare parts or accessories thereof to evade
payment of the 30% tax. And since the commission of fraud is
altogether too glaring, We cannot agree with the Court of Tax
Appeals in absolving Engineering from the 50% fraud surcharge,
otherwise We will be giving premium to a plainly intolerable act of
tax evasion. As aptly stated by then Solicitor General, now Justice,
Antonio P. Barredo: 'this circumstance will not free it from the 50%
surcharge because in any case whether it is subject to advance sales
tax or compensating tax, it is required by law to truly declare its
importation in the import entries and internal revenue declarations
before the importations maybe released from customs custody. The
said entries are the very documents where the nature, quantity and
value of the imported goods declared and where the customs duties,
internal revenue taxes, and other fees or charges incident to the
importation are computed. These entries, therefore, serve the same
purpose as the returns required by Section 183(a) of the Code.'
Anent the 25% delinquency surcharge, We fully agree to the ruling
made by the Court of Tax Appeals and hold Engineering liable for the
same. As held by the lower court:
At first blush it would seem that the contention of
petitioner that it is not subject to the delinquency,
surcharge of 25% is sound, valid and tenable. However,
a serious study and critical analysis of the historical
provisions of Section 190 of the Tax Code dealing on
compensating tax in relation to Section 183(a) of the
same Code, will show that the contention of petitioner
is without merit. The original text of Section 190 of
Commonwealth Act 466, otherwise known as the
National Internal Revenue Code, as amended by
Commonwealth Act No. 503, effective on October 1,
1939, does not provide for the filing of a compensation
tax return and payment of the 25 % surcharge for late
payment thereof. Under the original text of Section 190
of the Tax Code as amended by Commonwealth Act No.
503, the contention of the petitioner that it is not
subject to the 25% surcharge appears to be legally
tenable. However, Section 190 of the Tax Code was
subsequently amended by the Republic Acts Nos. 253,
361, 1511 and 1612 effective October 1, 1946, July 1,
1948, June 9, 1949, June 16, 1956 and August 24, 1956
respectively, which invariably provides among others,
the following:
... If any article withdrawn from the
customhouse or the post office without
payment of the compensating tax is
subsequently used by the importer for
other purposes, corresponding entry
should be made in the books of accounts if
any are kept or a written notice thereof
sent to the Collector of Internal Revenue
and payment of the corresponding
compensating tax made within 30 days
from the date of such entry or notice and
if tax is not paid within such period the
amount of the tax shall be increased by
25% the increment to be a part of the tax.
Since the imported air conditioning units-and spare parts or
accessories thereof are subject to the compensating tax of 30% as
the same were used in the construction business of Engineering, it is
incumbent upon the latter to comply with the aforequoted
requirement of Section 190 of the Code, by posting in its books of
accounts or notifying the Collector of Internal Revenue that the
imported articles were used for other purposes within 30 days. ...
Consequently; as the 30% compensating tax was not paid by
petitioner within the time prescribed by Section 190 of the Tax Code
as amended, it is therefore subject to the 25% surcharge for
delinquency in the payment of the said tax. (pp. 224-226 CTA rec.)
is applicable, considering the preponderance of evidence of fraud
with the intent to evade the higher rate of percentage tax due from
Engineering. The, tax assessment was made within the period
prescribed by law and prescription had not set in against the
Government.
WHEREFORE, the decision appealed from is affirmed with the
modification that Engineering is hereby also made liable to pay the
50% fraud surcharge.
SO ORDERED.

III

Lastly the question of prescription of the tax assessment has been

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

Section 332. — Exceptions as to period of limitation of

assessment and collection of taxes. —

(a) In the case of a false or fraudulent return with intent

to evade tax or of a failure to file a return, the tax may
be assessed, or a proceeding in court for the collection
of such tax may be begun without assessment at any
time within ten years after the discovery of the falsity,
fraud or omission.
 Martinez Fishing Corporation is engaged in deep-sea
fishing, and in the course of its business, needed
electrical generators for the operation of its business;
that the defendant sells electrical generators with the
brand of "Nagata", a Japanese product; that the
supplier is the manufacturer, the D. Nagata Co. Ltd., of
Japan, that the defendant Schmid & Oberly Inc.
advertised the 12 Nagata generators for sale; that the
plaintiff purchased 12 brand new Nagata generators, as
advertised by herein defendant; that through an
irrevocable line of credit, the D. Nagata Co., Ltd.,
shipped to the plaintiff 12 electric generators, and the
latter paid the amount of the purchase price; that the
12 generators were found to be factory defective; that
the plaintiff informed the defendant herein that it shall
return the 12 generators as in fact three of the 12 were
actually returned to the defendant; that the plaintiff
sued the defendant on the warranty; asking for
rescission of the contract; that the defendant be
ordered to accept the generators and be ordered to pay
back the purchase money; and that the plaintiff asked
for damages. (Record on Appeal, pp. 27-28) [CA
G.R. No. 75198 October 18, 1988 Decision, pp. 34; Rollo, pp. 47-48.]

SCHMID & OBERLY, INC., petitioner, On the basis thereof, the Court of Appeals affirmed the decision of
vs. the trial court ordering petitioner to refund to private respondent the
RJL MARTINEZ FISHING CORPORATION, respondent. purchase price for the twelve (12) generators and to accept delivery
of the same and to pay s and attorney's fees, with a slight
CORTES, J.: modification as to the amount to be refunded. In its resolution of the
motion for reconsideration, the Court of Appeals further modified the
The facts as found by the Court of Appeals, are as follows: trial courts decision as to the award of consequential damages.

The findings of facts by the trial court (Decision, pp. 21- Ordinarily, the Court will not disturb the findings of fact of the Court
28, Record on Appeal) shows: that the plaintiff RJL of Appeals in petitions to review the latter's decisions under Rule 45
of the Revised Rules of Court, the scope of the Court's inquiry being
limited to a review of the imputed errors of law [Chan v. Court of
Appeals, G.R. No. L-27488, June 30, 1970, 33 SCRA 77; Tiongco v.
De la Merced, G.R. No. L-24426, July 25, 1974, 58 SCRA 89; Corona
v. Court of Appeals, G.R. No. 62482, April 28, 1983, 121 SCRA 865;
Baniqued v. Court of Appeals, G.R. No.
L-47531, January 30, 1984, 127 SCRA 596.] However, when, as in
this case, it is the petitioner's position that the appealed judgment is
premised on a misapprehension of
facts, * the Court is compelled to review the Court of Appeal's factual
findings [De la Cruz v. Sosing, 94 Phil. 26 (1953); Castillo v. Court
of Appeals, G.R. No. I,48290, September 29, 1983, 124 SCRA 808.]
Considering the sketchiness of the respondent court's narration of
facts, whether or not the Court of Appeals indeed misapprehended
the facts could not be determined without a thorough review of the
records.
Thus, after a careful scrutiny of the records, the Court has found the
appellate court's narration of facts incomplete. It failed to include
certain material facts.
The facts are actually as follows:
RJL MARTINEZ is engaged in the business of deep-sea fishing. As RJL
MARTINEZ needed electric generators for some of its boats and
SCHMIID sold electric generators of different brands, negotiations
between them for the acquisition thereof took place. The parties had
two separate transactions over "Nagata"-brand generators.
The first transaction was the sale of three (3) generators. In this
transaction, it is not disputed that SCHMID was the vendor of the
generators. The company supplied the generators from its
stockroom; it was also SCHMID which invoiced the sale.
The second transaction, which gave rise to the present controversy,
involves twelve (12) "Nagata"-brand generators. 'These are the facts
surrounding this particular transaction:
As RJL MARTINEZ was canvassing for generators, SC gave RJL
MARTINEZ its Quotation dated August 19, 1975 [Exhibit 'A"] for
twelve (12) "Nagata'-brand generators with the following
specifications:
"NAGATA" Single phase AC Alternators, 110/220 V, 60
cycles, 1800 rpm, unity power factor, rectifier type and
radio suppressor,, 5KVA (5KW) $546.75 @
It was stipulated that payment would be made by confirming an
irrevocable letter of credit in favor of NAGATA CO. Furthermore,
among the General Conditions of Sale appearing on the dorsal side
of the Quotation is the following:
Buyer will, upon request, promptly open irrevocable
Letter of Credit in favor of seller, in the amount stated
on the face of this memorandum, specifying shipment
from any Foreign port to Manila or any safe Philippine
port, permitting partial shipments and providing that in
the event the shippers are unable to ship within the
specified period due to strikes, lack of shipping space or
other circumstances beyond their reasonable control,
Buyer agrees to extend the said Letter of Credit for later
shipment. The Letter of Credit shall otherwise be
subject to the conditions stated in this memorandum of
contract. [Emphasis supplied.]
Agreeing with the terms of the Quotation, RJL MARTINEZ opened a
letter of credit in favor of NAGATA CO. Accordingly, on November
20,1975, SCHMID transmitted to NAGATA CO. an order [Exhibit "4"]
for the twelve (12) generators to be shipped directly to RJL
MARTINEZ. NAGATA CO. thereafter sent RJL MARTINEZ the bill of
lading and its own invoice (Exhibit "B") and, in accordance with the
order, shipped the generators directly to RJL MARTINEZ. The invoice
states that "one (1) case of 'NAGATA' AC Generators" consisting of
twelve sets was—bought by order and for account risk of Messrs. RJL
Martinez Fishing Corporation.
For its efforts, SCHMID received from NAGATA CO. a commission of
$1,752.00 for the sale of the twelve generators to RJL MARTINEZ.
[Exhibits "9", "9-A", "9-B" and "9-C".]
All fifteen (15) generators subject of the two transactions burned out
after continuous use. RJL MARTINEZ informed SCHMID about this
development. In turn, SCHMID brought the matter to the attention
of NAGATA CO. In July 1976, NAGATA CO. sent two technical
representatives who made an ocular inspection and conducted tests
on some of the burned out generators, which by then had been
delivered to the premises of SCHMID.
The tests revealed that the generators were overrated. As indicated
both in the quotation and in the invoice, the capacity of a generator
was supposed to be 5 KVA (kilovolt amperes). However, it turned out
that the actual capacity was only 4 KVA.
SCHMID replaced the three (3) generators subject of the first sale
with generators of a different brand.
As for the twelve (12) generators subject of the second transaction,
the Japanese technicians advised RJL MARTINEZ to ship three (3)
generators to Japan, which the company did. These three (3)
generators were repaired by NAGATA CO. itself and thereafter
returned to RJL MARTINEZ; the remaining nine (9) were neither
repaired nor replaced. NAGATA CO., however, wrote SCHMID
suggesting that the latter check the generators, request for spare
parts for replacement free of charge, and send to NAGATA CO.
SCHMID's warranty claim including the labor cost for repairs [Exhibit
"I".] In its reply letter, SCHMID indicated that it was not agreeable
to these terms [Exhibit "10".]
As not all of the generators were replaced or repaired, RJL MARTINEZ
formally demanded that it be refunded the cost of the generators
and paid damages. SCHMID in its reply maintained that it was not
the seller of the twelve (12) generators and thus refused to refund
the purchase price therefor. Hence, on February 14, 1977, RJL
MARTINEZ brought suit against SCHMID on the theory that the latter
was the vendor of the twelve (12) generators and, as such vendor,
was liable under its warranty against hidden defects.
Both the trial court and the Court of Appeals upheld the contention
of RJL MARTINEZ that SCHMID was the vendor in the second
transaction and was liable under its warranty. Accordingly, the courts
a quo rendered judgment in favor of RJL MARTINEZ. Hence, the
instant recourse to this Court.
In this petition for review, SCHMID seeks reversal on the following
grounds:
(i) Schmid was merely the indentor in the sale [of the
twelve (12) generators] between Nagata Co., the
exporter and RJL Martinez, the importer;
(ii) as mere indentor, Schmid is not liable for the seller's
implied warranty against hidden defects, Schmid not
having personally assumed any such warranty.
(iii) in any event, conformably with Article 1563 of the
Civil Code, there was no implied warranty against
 hidden defects in the sale of these twelve (12)
generators because these were sold under their trade
name "Nagata"; and
(iv) Schmid, accordingly, is not liable for the
reimbursement claimed by RJL Martinez nor for the
latter's unsubstantiated claim of PI 10.33 operational
losses a day nor for exemplary damages, attorney's
fees and costs. [Petition, p. 6.]
1. As may be expected, the basic issue confronting this Court is
whether the second transaction between the parties was a sale or an
indent transaction. SCHMID maintains that it was the latter; RJL
MARTINEZ claims that it was a sale.
At the outset, it must be understood that a contract is what the law
defines it to be, considering its essential elements, and not what it is
caged by the contracting parties [Quiroga v. Parsons Hardware Co.,
38 Phil. 501 (1918).]
The Civil Code defines a contract of sale, thus:
ART. 458. By the contract of sale one of the contracting
parties obligates himself to transfer the ownership of
and to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent.
It has been said that the essence of the contract of sale is transfer
of title or agreement to transfer it for a price paid or promised
[Commissioner of Internal Revenue v. Constantino, G.R. No. L-
25926, February 27, 1970, 31 SCRA 779, 785, citing Salisbury v.
Brooks, 94 SE 117,118-19.] "If such transfer puts the transferee in
the attitude or position of an owner and makes him liable to the
transferor as a debtor for the agreed price, and not merely as an
agent who must account for the proceeds of a resale, the transaction
is, a sale." [Ibid.]
On the other hand, there is no statutory definition of "indent" in this
jurisdiction. However, the Rules and Regulations to Implement
Presidential Decree No. 1789 (the Omnibus Investments Code)
lumps "indentors" together with "commercial brokers" and
"commission merchants" in this manner:
... A foreign firm which does business through
the middlemen acting in their own names, such
as indentors, commercial brokers or commission
merchants, shall not be deemed doing business in the
Philippines. But such indentors, commercial brokers or
commission merchants shall be the ones deemed to be
doing business in the Philippines [Part I, Rule I, Section
1, par. g (1).]
Therefore, an indentor is a middlemen in the same class as
commercial brokers and commission merchants. To get an Idea of
what an indentor is, a look at the definition of those in his class may
prove helpful.
A broker is generally defined as one who is engaged, for
others, on a commission, negotiating contracts relative
to property with the custody of which he has no
concern; the negotiator between other parties, never
acting in his own name but in the name of those who
employed him; he is strictly a middleman and for some
purpose the agent of both parties. (1 9 Cyc 186;
Henderson vs. The State, 50 Ind., 234; Black's Law
Dictionary.) A broker is one whose occupation it is to
bring parties together to bargain, or to bargain for
them, in matters of trade, commerce or navigation.
 Mechem on Agency, sec. 13; Wharton on Agency, sec.
695.) Judge Storey, in his work on Agency, defines a
broker as an agent employed to make bargains and
contracts between other persons, in matters of trade,
commerce or navigation, for compensation commonly
called brokerage. (Storey on Agency, sec. 28.) [Behn
Meyer and Co., Ltd. v. Nolting and Garcia, 35 Phil. 274,
279-80 (1916).]
A commission merchant is one engaged in the purchase
or sale for another of personal property which, for this
purpose, is placed in his possession and at his disposal.
He maintains a relation not only with his principal and
the purchasers or vendors, but also with the property
which is subject matter of the transaction. [Pacific
Commercial Co. v. Yatco, 68 Phil. 398, 401 (1939).]
Thus, the chief feature of a commercial broker and a commercial
merchant is that in effecting a sale, they are merely intermediaries
or middle-men, and act in a certain sense as the agent of both parties
to the transaction.
Webster defines an indent as "a purchase order for goods especially
when sent from a foreign country." [Webster's Ninth New Collegiate
Dictionary 612 (1986).] It would appear that there are three parties
to an indent transaction, namely, the buyer, the indentor, and the
supplier who is usually a non-resident manufacturer residing in the
country where the goods are to be bought [Commissioner of Internal
Revenue v. Cadwallader Pacific Company, G.R. No. L-20343,
September 29, 1976, 73 SCRA 59.] An indentor may therefore be
best described as one who, for compensation, acts as a middleman
in bringing about a purchase and sale of goods between a foreign
supplier and a local purchaser.
Coming now to the case at bar, the admissions of the parties and the
facts appearing on record more than suffice to warrant the conclusion
that SCHMID was not a vendor, but was merely an indentor, in the
second transaction.
In its complaint, RJL MARTINEZ admitted that the generators were
purchased "through indent order" [Record on Appeal, p. 6.] In the
same vein, it admitted in its demand letter previously sent to
SCHMID that twelve (12) of en (15) Nagata-brand generators "were
purchased through your company (SCHMID), by indent order and
three (3) by direct purchase." [Exhibit "D".] The evidence also show
that RJL MARTINEZ paid directly NAGATA CO, for the generators, and
that the latter company itself invoiced the sale [Exhibit "B"], and
shipped the generators directly to the former. The only participation
of SCHMID was to act as an intermediary or middleman between
NAGATA CO. and RJL MARTINEZ, by procuring an order from RJL
MARTINEZ and forwarding the same to NAGATA CO. for which the
company received a commission from NAGATA CO. [Exhibits "9", "9-
A", "9-B" and "9-C".]
The above transaction is significantly different from the first
transaction wherein SCHMID delivered the goods from its own stock
(which it had itself imported from NAGATA CO.), issued its own
invoice, and collected payment directly from the purchaser.
These facts notwithstanding, RJL MARTINEZ insists that SCHMID was
the vendor of the twelve generators on the following grounds:
First, it is contended that the Quotation and the General Conditions
of Sale on the dorsal side thereof do not necessarily lead to the
conclusion that NAGATA CO., and not SCHMID, was the real seller in
the case of the twelve (12) generators in that:
 (i) the signing of the quotation, which was under
SCHMID's letter-head, perfected the contract of sale
(impliedly, as between the signatories thereto—i.e., RJL
MARTINEZ and SCHMID);
(ii) the qualification that the letter of credit shall be in
favor of NAGATA CO. constituted simply the manner of
payment requested by SCHMID (implying that SCHMID,
as seller, merely chose to waive direct payment,
stipulating delivery of payment instead to NAGATA CO.
as supplier);
Second, it is asserted that the acts of SCHMID after it was informed
of the defect in the generators were indicative of its awareness that
it was the vendor and acknowledgment of its liability as such vendor.
Attention is called to these facts: When RJL MARTINEZ complained
to SCHMID that the generators were defective, SCHMID immediately
asked RJL MARTINEZ to send the defective generators to its shop to
determine what was wrong. SCHMID likewise informed NAGATA CO.
about the complaint of RJL MARTINEZ. When the Japanese
technicians arrived, SCHMID made available its technicians, its shop
and its testing equipment. After the generators were found to have
factory defects, SCHMID facilitated the shipment of three (3)
generators to Japan and, after their repair, back to the Philippines
[Memorandum for the Respondent, p. 8.]
Third, it is argued that the contents of the letter from NAGATA CO.
to SCHMID regarding the repair of the generators indicated that the
latter was "within the purview of a seller." [Ibid.]
Fourth, it is argued that if SCHMID is considered as a mere agent of
NAGATA CO., a foreign corporation not licensed to do business in the
Philippines, then the officers and employees of the former may be
penalized for violation of the old Corporation Law which provided:
Sec. 69 ... Any officer or agent of the corporation or any
person transacting business for any foreign corporation
not having the license prescribed shall be punished by
imprisonment for not less than six months nor more
than two years or by a fine 'of not less than two hundred
pesos nor more than one thousand pesos or both such
imprisonment and fine, in the discretion of the Court.
The facts do not bear out these contentions.
The first contention disregards the circumstances surrounding the
second transaction as distinguished from those surrounding the first
transaction, as noted above.
Neither does the solicitous manner by which SCHMID responded to
RJL MARTINEZ's complaint prove that the former was the seller of
the generators. As aptly stated by counsel, no indentor will just fold
its hands when a client complains about the goods it has bought upon
the indentor's mediation. In its desire to promote the product of the
seller and to retain the goodwill of the buyer, a prudent indentor
desirous of maintaining his business would have to act considerably.
towards his clients.
Note that in contrast to its act of replacing the three (3) generators
subject of the first transaction, SCHMID did not replace any of the
twelve (12) generators, but merely rendered assistance to both RJL
TINES and NAGATA CO. so that the latter could repair the defective
generators.
The proposal of NAGATA CO. rejected by SCHMID that the latter
undertake the repair of the nine (9) other defective generators, with
the former supplying the replacement parts free of charge and
subsequently reimbursing the latter for labor costs [Exhibit "I"],
cannot support the conclusion that SCHMID is vendor of the
generators of the second transaction or was acting "within the
purview of a seller."
Finally, the afore-quoted penal provision in the Corporation Law finds
no application to SCHMID and its officers and employees relative to
the transactions in the instant case. What the law seeks to prevent,
through said provision, is the circumvention by foreign corporations
of licensing requirements through the device of employing local
representatives. An indentor, acting in his own name, is not,
however, covered by the above-quoted provision. In fact, the
provision of the Rules and Regulations implementing the Omnibus
Investments Code quoted above, which was copied from the Rules
implementing Republic Act No. 5455, recognizes the distinct role of
an indentor, such that when a foreign corporation does business
through such indentor, the foreign corporation is not deemed doing
business in the Philippines.
In view of the above considerations, this Court rules that SCHMID
was merely acting as an indentor in the purchase and sale of the
twelve (12) generators subject of the second transaction. Not being
the vendor, SCHMID cannot be held liable for the implied warranty
for hidden defects under the Civil Code [Art. 1561, et seq.]
2. However, even as SCHMID was merely an indentor, there was
nothing to prevent it from voluntarily warranting that twelve (12)
generators subject of the second transaction are free from any
hidden defects. In other words, SCHMID may be held answerable for
some other contractual obligation, if indeed it had so bound itself. As
stated above, an indentor is to some extent an agent of both the
vendor and the vendee. As such agent, therefore, he may expressly
obligate himself to undertake the obligations of his principal (See Art.
1897, Civil Code.)
The Court's inquiry, therefore, shifts to a determination of whether
or not SCHMID expressly bound itself to warrant that the twelve (12)
generators are free of any hidden defects.
Again, we consider the facts.
The Quotation (Exhibit A is in writing. It is the repository of the
contract between RJL MARTINEZ and SCHMID. Notably, nowhere is
it stated therein that SCHMID did bind itself to answer for the defects
of the things sold. There being no allegation nor any proof that the
Quotation does not express the true intent and agreement of the
contracting parties, extrinsic parol evidence of warranty will be to no
avail [See Rule 123, Sec. 22.]
The trial court, however, relied on the testimony of Patrocinio
Balagtas, the head of the Electrical Department of RJL MARTINEZ, to
support the finding that SCHMID did warrant the twelve (12)
generators against defects.
Upon careful examination of Balagtas' testimony, what is at once
apparent is that Balagtas failed to disclose the nature or terms and
conditions of the warranty allegedly given by SC Was it a warranty
that the generators would be fit for the fishing business of the buyer?
Was it a warranty that the generators to be delivered would meet
the specifications indicated in the Quotation? Considering the
different kinds of warranties that may be contracted, unless the
nature or terms and conditions of the warranty are known, it would
not be possible to determine whether there has been a breach
thereof.
Moreover, a closer examination of the statements allegedly made by
the representative of SCHMID reveals that they merely constituted
an expression of opinion which cannot by any means be construed
as a warranty [See Art. 1546, Civil Code.]
We quote from Balagtas' testimony:
Atty. CATRAL:
Q Did you not say at the start of your cross examination, Mr.
Balagtas, that the only participation you had in the acquisition of
those twelve (12) units [of] generators was your having issued a
purchase order to your own company for the purchase of the units?
ATTY. AQUINO:
Misleading, your Honor.
Atty. CATRAL:
I am asking the witness.
COURT:
He has the right to ask that question because he is on cross.
Moreover, if I remember, he mentioned something like that. Witness
may answer.
A Yes, sir. Before I submitted that, we negotiated with Schmid and
Oberly the beat generators they can recommend because we are
looking for generators. The representative of Schmid and Oberly said
that Nagata is very good. That is why I recommended that to the
management. [t.s.n., October 14, 1977, pp. 23-25.]
At any rate, when asked where SCHMID's warranty was contained,
Balagtas testified initially that it was in the receipts covering the sale.
(At this point, it may be stated that the invoice [Exhibit "B-l"] was
issued by NAGATA CO. and nowhere is it stated therein that SCHMID
warranted the generators against defects.) When confronted with a
copy of the invoice issued by NAGATA CO., he changed his assertion
and claimed that what he meant was that the date of the
commencement of the period of SCHMID's warranty would be based
on the date of the invoice. On further examination, he again changed
his mind and asserted that the warranty was given verbally [TSN,
October 14, 1977, pp. 19-22.] But then again, as stated earlier, the
witness failed to disclose the nature or terms and conditions of the
warranty allegedly given by SCHMID.
On the other hand, Hernan Adad SCHMID's General Manager, was
categorical that the company does not warrant goods bought on
indent and that the company warrants only the goods bought directly
from it, like the three generators earlier bought by RJL MARTINEZ
itself [TSN, December 19, 1977, pp. 63-64.] It must be recalled that
SCHMID readily replaced the three generators from its own stock. In
the face of these conflicting testimonies, this Court is of the view that
RJL has failed to prove that SCHMID had given a warranty on the
twelve (12) generators subject of the second transaction. Even
assuming that a warranty was given, there is no way to determine
whether there has been a breach thereof, considering that its nature
or terms and conditions have not been shown.
3. In view of the foregoing, it becomes unnecessary to pass upon the
other issues.
WHEREFORE, finding the Court of Appeals to have committed a
reversible error, the petition is GRANTED and the appealed Decision
and Resolution of the Court of Appeals are REVERSED. The complaint
of RJL Martinez Fishing Corporation is hereby DISMISSED. No costs.
SO ORDERED.
 first part, and J. Parsons (to whose rights and obligations the present
defendant later subrogated itself), as party of the second part:

CONTRACT EXECUTED BY AND BETWEEN ANDRES

QUIROGA AND J. PARSONS, BOTH MERCHANTS
ESTABLISHED IN MANILA, FOR THE EXCLUSIVE SALE
OF "QUIROGA" BEDS IN THE VISAYAN ISLANDS.

ARTICLE 1. Don Andres Quiroga grants the exclusive right to

sell his beds in the Visayan Islands to J. Parsons under the
following conditions:

(A) Mr. Quiroga shall furnish beds of his manufacture to Mr.

Parsons for the latter's establishment in Iloilo, and shall
invoice them at the same price he has fixed for sales, in
Manila, and, in the invoices, shall make and allowance of a
discount of 25 per cent of the invoiced prices, as commission
on the sale; and Mr. Parsons shall order the beds by the dozen,
whether of the same or of different styles.

(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds
received, within a period of sixty days from the date of their
shipment.

G.R. No. L-11491 August 23, 1918 (C) The expenses for transportation and shipment shall be
borne by M. Quiroga, and the freight, insurance, and cost of
ANDRES QUIROGA, plaintiff-appellant, unloading from the vessel at the point where the beds are
vs. received, shall be paid by Mr. Parsons.
PARSONS HARDWARE CO., defendant-appellee.
(D) If, before an invoice falls due, Mr. Quiroga should request
AVANCEÑA, J.: its payment, said payment when made shall be considered as
a prompt payment, and as such a deduction of 2 per cent shall
be made from the amount of the invoice.
On January 24, 1911, in this city of manila, a contract in the following
tenor was entered into by and between the plaintiff, as party of the
The same discount shall be made on the amount of any invoice
which Mr. Parsons may deem convenient to pay in cash.
(E) Mr. Quiroga binds himself to give notice at least fifteen
days before hand of any alteration in price which he may plan
to make in respect to his beds, and agrees that if on the date
when such alteration takes effect he should have any order
pending to be served to Mr. Parsons, such order shall enjoy
the advantage of the alteration if the price thereby be lowered,
but shall not be affected by said alteration if the price thereby
be increased, for, in this latter case, Mr. Quiroga assumed the
obligation to invoice the beds at the price at which the order
was given.
(F) Mr. Parsons binds himself not to sell any other kind except
the "Quiroga" beds.
ART. 2. In compensation for the expenses of advertisement
which, for the benefit of both contracting parties, Mr. Parsons
may find himself obliged to make, Mr. Quiroga assumes the
obligation to offer and give the preference to Mr. Parsons in
case anyone should apply for the exclusive agency for any
island not comprised with the Visayan group.
ART. 3. Mr. Parsons may sell, or establish branches of his
agency for the sale of "Quiroga" beds in all the towns of the
Archipelago where there are no exclusive agents, and shall
immediately report such action to Mr. Quiroga for his
approval.
ART. 4. This contract is made for an unlimited period, and may
be terminated by either of the contracting parties on a
previous notice of ninety days to the other party.
Of the three causes of action alleged by the plaintiff in his complaint,
only two of them constitute the subject matter of this appeal and
both substantially amount to the averment that the defendant
violated the following obligations: not to sell the beds at higher prices
than those of the invoices; to have an open establishment in Iloilo;
itself to conduct the agency; to keep the beds on public exhibition,
and to pay for the advertisement expenses for the same; and to
order the beds by the dozen and in no other manner. As may be
seen, with the exception of the obligation on the part of the
defendant to order the beds by the dozen and in no other manner,
none of the obligations imputed to the defendant in the two causes
of action are expressly set forth in the contract. But the plaintiff
alleged that the defendant was his agent for the sale of his beds in
Iloilo, and that said obligations are implied in a contract of
commercial agency. The whole question, therefore, reduced itself to
a determination as to whether the defendant, by reason of the
contract hereinbefore transcribed, was a purchaser or an agent of
the plaintiff for the sale of his beds.
In order to classify a contract, due regard must be given to its
essential clauses. In the contract in question, what was essential, as
constituting its cause and subject matter, is that the plaintiff was to
furnish the defendant with the beds which the latter might order, at
the price stipulated, and that the defendant was to pay the price in
the manner stipulated. The price agreed upon was the one
determined by the plaintiff for the sale of these beds in Manila, with
a discount of from 20 to 25 per cent, according to their class.
Payment was to be made at the end of sixty days, or before, at the
plaintiff's request, or in cash, if the defendant so preferred, and in
these last two cases an additional discount was to be allowed for
prompt payment. These are precisely the essential features of a
contract of purchase and sale. There was the obligation on the part
of the plaintiff to supply the beds, and, on the part of the defendant,
to pay their price. These features exclude the legal conception of an
agency or order to sell whereby the mandatory or agent received the
thing to sell it, and does not pay its price, but delivers to the principal
the price he obtains from the sale of the thing to a third person, and
if he does not succeed in selling it, he returns it. By virtue of the
contract between the plaintiff and the defendant, the latter, on
receiving the beds, was necessarily obliged to pay their price within
the term fixed, without any other consideration and regardless as to
whether he had or had not sold the beds.
It would be enough to hold, as we do, that the contract by and
between the defendant and the plaintiff is one of purchase and sale,
in order to show that it was not one made on the basis of a
commission on sales, as the plaintiff claims it was, for these contracts
are incompatible with each other. But, besides, examining the
clauses of this contract, none of them is found that substantially
supports the plaintiff's contention. Not a single one of these clauses
necessarily conveys the idea of an agency. The words commission
on sales used in clause (A) of article 1 mean nothing else, as stated
in the contract itself, than a mere discount on the invoice price. The
word agency, also used in articles 2 and 3, only expresses that the
defendant was the only one that could sell the plaintiff's beds in the
Visayan Islands. With regard to the remaining clauses, the least that
can be said is that they are not incompatible with the contract of
purchase and sale.
The plaintiff calls attention to the testimony of Ernesto Vidal, a
former vice-president of the defendant corporation and who
established and managed the latter's business in Iloilo. It appears
that this witness, prior to the time of his testimony, had serious
trouble with the defendant, had maintained a civil suit against it, and
had even accused one of its partners, Guillermo Parsons, of
falsification. He testified that it was he who drafted the contract
Exhibit A, and, when questioned as to what was his purpose in
contracting with the plaintiff, replied that it was to be an agent for
his beds and to collect a commission on sales. However, according
to the defendant's evidence, it was Mariano Lopez Santos, a director
of the corporation, who prepared Exhibit A. But, even supposing that
Ernesto Vidal has stated the truth, his statement as to what was his
idea in contracting with the plaintiff is of no importance, inasmuch
as the agreements contained in Exhibit A which he claims to have
drafted, constitute, as we have said, a contract of purchase and sale,
and not one of commercial agency. This only means that Ernesto
Vidal was mistaken in his classification of the contract. But it must
be understood that a contract is what the law defines it to be, and
not what it is called by the contracting parties.
The plaintiff also endeavored to prove that the defendant had
returned beds that it could not sell; that, without previous notice, it
forwarded to the defendant the beds that it wanted; and that the
defendant received its commission for the beds sold by the plaintiff
directly to persons in Iloilo. But all this, at the most only shows that,
on the part of both of them, there was mutual tolerance in the
performance of the contract in disregard of its terms; and it gives no
right to have the contract considered, not as the parties stipulated
it, but as they performed it. Only the acts of the contracting parties,
subsequent to, and in connection with, the execution of the contract,
must be considered for the purpose of interpreting the contract,
when such interpretation is necessary, but not when, as in the instant
case, its essential agreements are clearly set forth and plainly show
that the contract belongs to a certain kind and not to another.
Furthermore, the return made was of certain brass beds, and was
not effected in exchange for the price paid for them, but was for
other beds of another kind; and for the letter Exhibit L-1, requested
the plaintiff's prior consent with respect to said beds, which shows
that it was not considered that the defendant had a right, by virtue
of the contract, to make this return. As regards the shipment of beds
without previous notice, it is insinuated in the record that these brass
beds were precisely the ones so shipped, and that, for this very
reason, the plaintiff agreed to their return. And with respect to the
so-called commissions, we have said that they merely constituted a
discount on the invoice price, and the reason for applying this benefit
to the beds sold directly by the plaintiff to persons in Iloilo was
because, as the defendant obligated itself in the contract to incur the
expenses of advertisement of the plaintiff's beds, such sales were to
be considered as a result of that advertisement.
In respect to the defendant's obligation to order by the dozen, the
only one expressly imposed by the contract, the effect of its breach
would only entitle the plaintiff to disregard the orders which the
defendant might place under other conditions; but if the plaintiff
consents to fill them, he waives his right and cannot complain for
having acted thus at his own free will.
For the foregoing reasons, we are of opinion that the contract by and
between the plaintiff and the defendant was one of purchase and
sale, and that the obligations the breach of which is alleged as a
cause of action are not imposed upon the defendant, either by
agreement or by law.
The judgment appealed from is affirmed, with costs against the
appellant. So ordered.
G.R. No. L-47538 June 20, 1941
GONZALO PUYAT & SONS, INC., petitioner,
vs.
ARCO AMUSEMENT COMPANY (formerly known as Teatro
Arco), respondent.
Feria & Lao for petitioner.
J. W. Ferrier and Daniel Me. Gomez for respondent.
LAUREL, J.:
This is a petition for the issuance of a writ of certiorari to the Court
of Appeals for the purpose of reviewing its Amusement Company
(formerly known as Teatro Arco), plaintiff-appellant, vs. Gonzalo
Puyat and Sons. Inc., defendant-appellee."
It appears that the respondent herein brought an action against the
herein petitioner in the Court of First Instance of Manila to secure a
reimbursement of certain amounts allegedly overpaid by it on
account of the purchase price of sound reproducing equipment and
machinery ordered by the petitioner from the Starr Piano Company
of Richmond, Indiana, U.S.A. The facts of the case as found by the
trial court and confirmed by the appellate court, which are admitted
by the respondent, are as follows:
In the year 1929, the "Teatro Arco", a corporation duly
organized under the laws of the Philippine Islands, with its
office in Manila, was engaged in the business of operating
cinematographs. In 1930, its name was changed to Arco
Amusement Company. C. S. Salmon was the president, while
A. B. Coulette was the business manager. About the same
time, Gonzalo Puyat & Sons, Inc., another corporation doing
business in the Philippine Islands, with office in Manila, in
addition to its other business, was acting as exclusive agents
in the Philippines for the Starr Piano Company of Richmond,
Indiana, U.S. A. It would seem that this last company dealt in
cinematographer equipment and machinery, and the Arco
Amusement Company desiring to equipt its cinematograph
with sound reproducing devices, approached Gonzalo Puyat &
Sons, Inc., thru its then president and acting manager, Gil
Puyat, and an employee named Santos. After some
negotiations, it was agreed between the parties, that is to say,
Salmon and Coulette on one side, representing the plaintiff,
and Gil Puyat on the other, representing the defendant, that
the latter would, on behalf of the plaintiff, order sound
reproducing equipment from the Starr Piano Company and
that the plaintiff would pay the defendant, in addition to the
price of the equipment, a 10 per cent commission, plus all
expenses, such as, freight, insurance, banking charges,
cables, etc. At the expense of the plaintiff, the defendant sent
a cable, Exhibit "3", to the Starr Piano Company, inquiring
about the equipment desired and making the said company to
quote its price without discount. A reply was received by
Gonzalo Puyat & Sons, Inc., with the price, evidently the list
price of $1,700 f.o.b. factory Richmond, Indiana. The
defendant did not show the plaintiff the cable of inquiry nor
the reply but merely informed the plaintiff of the price of
$1,700. Being agreeable to this price, the plaintiff, by means
of Exhibit "1", which is a letter signed by C. S. Salmon dated
November 19, 1929, formally authorized the order. The
equipment arrived about the end of the year 1929, and upon
delivery of the same to the plaintiff and the presentation of
necessary papers, the price of $1.700, plus the 10 per cent
commission agreed upon and plus all the expenses and
charges, was duly paid by the plaintiff to the defendant.
Sometime the following year, and after some negotiations
between the same parties, plaintiff and defendants, another
order for sound reproducing equipment was placed by the
plaintiff with the defendant, on the same terms as the first
order. This agreement or order was confirmed by the plaintiff
by its letter Exhibit "2", without date, that is to say, that the
plaintiff would pay for the equipment the amount of $1,600,
which was supposed to be the price quoted by the Starr Piano
Company, plus 10 per cent commission, plus all expenses
incurred. The equipment under the second order arrived in due
time, and the defendant was duly paid the price of $1,600 with
its 10 per cent commission, and $160, for all expenses and
charges. This amount of $160 does not represent actual out-
of-pocket expenses paid by the defendant, but a mere flat
charge and rough estimate made by the defendant equivalent
to 10 per cent of the price of $1,600 of the equipment.
About three years later, in connection with a civil case in
Vigan, filed by one Fidel Reyes against the defendant herein
Gonzalo Puyat & Sons, Inc., the officials of the Arco
Amusement Company discovered that the price quoted to
them by the defendant with regard to their two orders
mentioned was not the net price but rather the list price, and
that the defendants had obtained a discount from the Starr
Piano Company. Moreover, by reading reviews and literature
on prices of machinery and cinematograph equipment, said
officials of the plaintiff were convinced that the prices charged
them by the defendant were much too high including the
charges for out-of-pocket expense. For these reasons, they
sought to obtain a reduction from the defendant or rather a
reimbursement, and failing in this they brought the present
action.
The trial court held that the contract between the petitioner and the
respondent was one of outright purchase and sale, and absolved that
petitioner from the complaint. The appellate court, however, — by a
division of four, with one justice dissenting — held that the relation
between petitioner and respondent was that of agent and principal,
the petitioner acting as agent of the respondent in the purchase of
the equipment in question, and sentenced the petitioner to pay the
respondent alleged overpayments in the total sum of $1,335.52 or
P2,671.04, together with legal interest thereon from the date of the
filing of the complaint until said amount is fully paid, as well as to
pay the costs of the suit in both instances. The appellate court further
argued that even if the contract between the petitioner and the
respondent was one of purchase and sale, the petitioner was guilty
of fraud in concealing the true price and hence would still be liable
to reimburse the respondent for the overpayments made by the
latter.
The petitioner now claims that the following errors have been
incurred by the appellate court:
I. El Tribunal de Apelaciones incurrio en error de derecho al
declarar que, segun hechos, entre la recurrente y la recurrida
existia una relacion implicita de mandataria a mandante en la
transaccion de que se trata, en vez de la de vendedora a
compradora como ha declarado el Juzgado de Primera Instncia
de Manila, presidido entonces por el hoy Magistrado Honorable
Marcelino Montemayor.
II. El Tribunal de Apelaciones incurrio en error de derecho al
declarar que, suponiendo que dicha relacion fuerra de
vendedora a compradora, la recurrente obtuvo, mediante
dolo, el consentimiento de la recurrida en cuanto al precio de
$1,700 y $1,600 de las maquinarias y equipos en cuestion, y
condenar a la recurrente ha obtenido de la Starr Piano
Company of Richmond, Indiana.
We sustain the theory of the trial court that the contract between the
petitioner and the respondent was one of purchase and sale, and not
one of agency, for the reasons now to be stated.
In the first place, the contract is the law between the parties and
should include all the things they are supposed to have been agreed
upon. What does not appear on the face of the contract should be
regarded merely as "dealer's" or "trader's talk", which can not bind
either party. (Nolbrook v. Conner, 56 So., 576, 11 Am. Rep., 212;
Bank v. Brosscell, 120 III., 161; Bank v. Palmer, 47 III., 92; Hosser
v. Copper, 8 Allen, 334; Doles v. Merrill, 173 Mass., 411.) The letters,
Exhibits 1 and 2, by which the respondent accepted the prices of
$1,700 and $1,600, respectively, for the sound reproducing
equipment subject of its contract with the petitioner, are clear in their
terms and admit no other interpretation that the respondent in
question at the prices indicated which are fixed and determinate. The
respondent admitted in its complaint filed with the Court of First
Instance of Manila that the petitioner agreed to sellto it the first
sound reproducing equipment and machinery. The third paragraph
of the respondent's cause of action states:
3. That on or about November 19, 1929, the herein plaintiff
(respondent) and defendant (petitioner) entered into an
agreement, under and by virtue of which the herein defendant
was to secure from the United States, and sell and deliver to
the herein plaintiff, certain sound reproducing equipment and
machinery, for which the said defendant, under and by virtue
of said agreement, was to receive the actual cost price plus
ten per cent (10%), and was also to be reimbursed for all out
of pocket expenses in connection with the purchase and
delivery of such equipment, such as costs of telegrams,
freight, and similar expenses. (Emphasis ours.)
We agree with the trial judge that "whatever unforseen events might
have taken place unfavorable to the defendant (petitioner), such as
change in prices, mistake in their quotation, loss of the goods not
covered by insurance or failure of the Starr Piano Company to
properly fill the orders as per specifications, the plaintiff (respondent)
might still legally hold the defendant (petitioner) to the prices fixed
of $1,700 and $1,600." This is incompatible with the pretended
relation of agency between the petitioner and the respondent,
because in agency, the agent is exempted from all liability in the
discharge of his commission provided he acts in accordance with the
instructions received from his principal (section 254, Code of
Commerce), and the principal must indemnify the agent for all
damages which the latter may incur in carrying out the agency
without fault or imprudence on his part (article 1729, Civil Code).
While the latters, Exhibits 1 and 2, state that the petitioner was to
receive ten per cent (10%) commission, this does not necessarily
make the petitioner an agent of the respondent, as this provision is
only an additional price which the respondent bound itself to pay,
and which stipulation is not incompatible with the contract of
purchase and sale. (See Quiroga vs. Parsons Hardware Co., 38 Phil.,
501.)
In the second place, to hold the petitioner an agent of the respondent
in the purchase of equipment and machinery from the Starr Piano
Company of Richmond, Indiana, is incompatible with the admitted
fact that the petitioner is the exclusive agent of the same company
in the Philippines. It is out of the ordinary for one to be the agent of
both the vendor and the purchaser. The facts and circumstances
indicated do not point to anything but plain ordinary transaction
where the respondent enters into a contract of purchase and sale
with the petitioner, the latter as exclusive agent of the Starr Piano
Company in the United States.
It follows that the petitioner as vendor is not bound to reimburse the
respondent as vendee for any difference between the cost price and
the sales price which represents the profit realized by the vendor out
of the transaction. This is the very essence of commerce without
which merchants or middleman would not exist.
The respondents contends that it merely agreed to pay the cost price
as distinguished from the list price, plus ten per cent (10%)
commission and all out-of-pocket expenses incurred by the
petitioner. The distinction which the respondents seeks to draw
between the cost price and the list price we consider to be spacious.
It is to be observed that the twenty-five per cent (25%) discount
granted by the Starr piano Company to the petitioner is available
only to the latter as the former's exclusive agent in the Philippines.
The respondent could not have secured this discount from the Starr
Piano Company and neither was the petitioner willing to waive that
discount in favor of the respondent. As a matter of fact, no reason is
advanced by the respondent why the petitioner should waive the 25
per cent discount granted it by the Starr Piano Company in exchange
for the 10 percent commission offered by the respondent. Moreover,
the petitioner was not duty bound to reveal the private arrangement
it had with the Starr Piano Company relative to such discount to its
prospective customers, and the respondent was not even aware of
such an arrangement. The respondent, therefore, could not have
offered to pay a 10 per cent commission to the petitioner provided it
was given the benefit of the 25 per cent discount enjoyed by the
petitioner. It is well known that local dealers acting as agents of
foreign manufacturers, aside from obtaining a discount from the
home office, sometimes add to the list price when they resell to local
purchasers. It was apparently to guard against an exhorbitant
additional price that the respondent sought to limit it to 10 per cent,
and the respondent is estopped from questioning that additional
price. If the respondent later on discovers itself at the short end of a
bad bargain, it alone must bear the blame, and it cannot rescind the
contract, much less compel a reimbursement of the excess price, on
that ground alone. The respondent could not secure equipment and
machinery manufactured by the Starr Piano Company except from
the petitioner alone; it willingly paid the price quoted; it received the
equipment and machinery as represented; and that was the end of
the matter as far as the respondent was concerned. The fact that the
petitioner obtained more or less profit than the respondent calculated
before entering into the contract or reducing the price agreed upon
between the petitioner and the respondent. Not every concealment
is fraud; and short of fraud, it were better that, within certain limits,
business acumen permit of the loosening of the sleeves and of the
sharpening of the intellect of men and women in the business world.
The writ of certiorari should be, as it is hereby, granted. The decision
of the appellate court is accordingly reversed and the petitioner is
absolved from the respondent's complaint in G. R. No. 1023, entitled
"Arco Amusement Company (formerly known as Teatro Arco),
plaintiff-appellant, vs. Gonzalo Puyat & Sons, Inc., defendants-
appellee," without pronouncement regarding costs. So ordered.
Petitioner Ker & Co., Ltd. would have us reverse a decision of the
Court of Tax Appeals, holding it liable as a commercial broker under
Section 194 (t) of the National Internal Revenue Code. Its plea,
notwithstanding the vigorous effort of its counsel, is not sufficiently
persuasive. An obstacle, well-nigh insuperable stands in the way. The
decision under review conforms to and is in accordance with the
controlling doctrine announced in the recent case of Commissioner
of Internal Revenue v. Constantino.1 The decisive test, as therein set
forth, is the retention of the ownership of the goods delivered to the
possession of the dealer, like herein petitioner, for resale to
customers, the price and terms remaining subject to the control of
the firm consigning such goods. The facts, as found by respondent
Court, to which we defer, unmistakably indicate that such a situation
does exist. The juridical consequences must inevitably follow. We
affirm.

It was shown that petitioner was assessed by the then Commissioner

of Internal Revenue Melecio R. Domingo the sum of P20,272.33 as
the commercial broker's percentage tax, surcharge, and compromise
penalty for the period from July 1, 1949 to December 31, 1953.
There was a request on the part of petitioner for the cancellation of
such assessment, which request was turned down. As a result, it filed
a petition for review with the Court of Tax Appeals. In its answer, the
G.R. No. L-20871 April 30, 1971 then Commissioner Domingo maintained his stand that petitioner
should be taxed in such amount as a commercial broker. In the
KER & CO., LTD., petitioner, decision now under review, promulgated on October 19, 1962, the
vs. Court of Tax Appeals held petitioner taxable except as to the
JOSE B. LINGAD, as Acting Commissioner of Internal compromise penalty of P500.00, the amount due from it being fixed
Revenue, respondent. at P19,772.33.

Such liability arose from a contract of petitioner with the United

States Rubber International, the former being referred to as the
FERNANDO, J.: Distributor and the latter specifically designated as the Company.
The contract was to apply to transactions between the former and
petitioner, as Distributor, from July 1, 1948 to continue in force until
terminated by either party giving to the other sixty days' notice.2 The
shipments would cover products "for consumption in Cebu, Bohol,
Leyte, Samar, Jolo, Negros Oriental, and Mindanao except [the]
province of Davao", petitioner, as Distributor, being precluded from
disposing such products elsewhere than in the above places unless
written consent would first be obtained from the
Company. Petitioner, as Distributor, is required to exert every effort
3
to have the shipment of the products in the maximum quantity and
to promote in every way the sale thereof.4 The prices, discounts,
terms of payment, terms of delivery and other conditions of sale
were subject to change in the discretion of the Company.5
Then came this crucial stipulation: "The Company shall from time to
time consign to the Distributor and the Distributor will receive, accept
and/or hold upon consignment the products specified under the
terms of this agreement in such quantities as in the judgment of the
Company may be necessary for the successful solicitation and
maintenance of business in the territory, and the Distributor agrees
that responsibility for the final sole of all goods delivered shall rest
with him. All goods on consignment shall remain the property of the
Company until sold by the Distributor to the purchaser or purchasers,
but all sales made by the Distributor shall be in his name, in which
the sale price of all goods sold less the discount given to the
Distributor by the Company in accordance with the provision of
paragraph 13 of this agreement, whether or not such sale price shall
have been collected by the Distributor from the purchaser or
purchasers, shall immediately be paid and remitted by the
Distributor to the Company. It is further agreed that this agreement
does not constitute Distributor the agent or legal representative 4 of
the Company for any purpose whatsoever. Distributor is not granted
any right or authority to assume or to create any obligation or
responsibility, express or implied, in behalf of or in the name of the
Company, or to bind the Company in any manner or thing
whatsoever."6
All specifications for the goods ordered were subject to acceptance
by the Company with petitioner, as Distributor, required to accept
such goods shipped as well as to clear the same through customs
and to arrange for delivery in its warehouse in Cebu City. Moreover,
orders are to be filled in whole or in part from the stocks carried by
the Company's neighboring branches, subsidiaries or other sources
of Company's brands.7 Shipments were to be invoiced at prices to be
agreed upon, with the customs duties being paid by petitioner, as
Distributor, for account of the Company.8 Moreover, all resale prices,
lists, discounts and general terms and conditions of local resale were
to be subject to the approval of the Company and to change from
time to time in its discretion.9 The dealer, as Distributor, is allowed
a discount of ten percent on the net amount of sales of merchandise
made under such agreement. 10 On a date to be determined by the
Company, the petitioner, as Distributor, was required to report to it
data showing in detail all sales during the month immediately
preceding, specifying therein the quantities, sizes and types together
with such information as may be required for accounting purposes,
with the Company rendering an invoice on sales as described to be
dated as of the date of inventory and sales report. As Distributor,
petitioner had to make payment on such invoice or invoices on due
date with the Company being privileged at its option to terminate
and cancel the agreement forthwith upon the failure to comply with
this obligation. 11 The Company, at its own expense, was to keep the
consigned stock fully insured against loss or damage by fire or as a
result of fire, the policy of such insurance to be payable to it in the
event of loss. Petitioner, as Distributor, assumed full responsibility
with reference to the stock and its safety at all times; and upon
request of the Company at any time, it was to render inventory of
the existing stock which could be subject to change. 12 There was
furthermore this equally tell-tale covenant: "Upon the termination or
any cancellation of this agreement all goods held on consignment
shall be held by the Distributor for the account of the Company,
without expense to the Company, until such time as provision can be
made by the Company for disposition." 13
The issue with the Court of Tax Appeals, as with us now, is whether
the relationship thus created is one of vendor and vendee or of
broker and principal. Not that there would have been the slightest
doubt were it not for the categorical denial in the contract that
petitioner was not constituted as "the agent or legal representative
of the Company for any purpose whatsoever." It would be, however,
to impart to such an express disclaimer a meaning it should not
possess to ignore what is manifestly the role assigned to petitioner
considering the instrument as a whole. That would be to lose sight
altogether of what has been agreed upon. The Court of Tax Appeals
was not misled in the language of the decision now on appeal: "That
the petitioner Ker & Co., Ltd. is, by contractual stipulation, an agent
of U.S. Rubber International is borne out by the facts that petitioner
can dispose of the products of the Company only to certain persons
or entities and within stipulated limits, unless excepted by the
contract or by the Rubber Company (Par. 2); that it merely receives,
accepts and/or holds upon consignment the products, which remain
properties of the latter company (Par. 8); that every effort shall be
made by petitioner to promote in every way the sale of the products
(Par. 3); that sales made by petitioner are subject to approval by the
company (Par. 12); that on dates determined by the rubber
company, petitioner shall render a detailed report showing sales
during the month (Par. 14); that the rubber company shall invoice
the sales as of the dates of inventory and sales report (Par. 14); that
the rubber company agrees to keep the consigned goods fully
insured under insurance policies payable to it in case of loss (Par.
15); that upon request of the rubber company at any time, petitioner
shall render an inventory of the existing stock which may be checked
by an authorized representative of the former (Par. 15); and that
upon termination or cancellation of the Agreement, all goods held on
consignment shall be held by petitioner for the account of the rubber
company until their disposition is provided for by the latter (Par. 19).
All these circumstances are irreconcilably antagonistic to the idea of
an independent merchant." 14 Hence its conclusion: "However, upon
analysis of the contract, as a whole, together with the actual conduct
of the parties in respect thereto, we have arrived at the conclusion
that the relationship between them is one of brokerage or
agency." 15 We find ourselves in agreement, notwithstanding the
able brief filed on behalf of petitioner by its counsel. As noted at the
outset, we cannot heed petitioner's plea for reversal.
1. According to the National Internal Revenue Code, a commercial
broker "includes all persons, other than importers, manufacturers,
producers, or bona fide employees, who, for compensation or profit,
sell or bring about sales or purchases of merchandise for other
persons or bring proposed buyers and sellers together, or negotiate
freights or other business for owners of vessels or other means of
transportation, or for the shippers, or consignors or consignees of
freight carried by vessels or other means of transportation. The term
includes commission merchants." 16 The controlling decision as to
the test to be followed as to who falls within the above definition of
a commercial broker is that of Commissioner of Internal Revenue v.
Constantino. 17 In the language of Justice J. B. L. Reyes, who penned
the opinion: "Since the company retained ownership of the goods,
even as it delivered possession unto the dealer for resale to
customers, the price and terms of which were subject to the
company's control, the relationship between the company and the
dealer is one of agency, ... ." 18 An excerpt from Salisbury v.
Brooks 19 cited in support of such a view follows: " 'The difficulty in
distinguishing between contracts of sale and the creation of an
agency to sell has led to the establishment of rules by the application
of which this difficulty may be solved. The decisions say the transfer
of title or agreement to transfer it for a price paid or promised is the
essence of sale. If such transfer puts the transferee in the attitude
or position of an owner and makes him liable to the transferor as a
debtor for the agreed price, and not merely as an agent who must
account for the proceeds of a resale, the transaction is a sale; while
the essence of an agency to sell is the delivery to an agent, not as
his property, but as the property of the principal, who remains the
owner and has the right to control sales, fix the price, and terms,
demand and receive the proceeds less the agent's commission upon
sales made.' " 20 The opinion relied on the work of Mechem on Sales
as well as Mechem on Agency. Williston and Tiedman both of whom
wrote treatises on Sales, were likewise referred to.
Equally relevant is this portion of the Salisbury opinion: "It is difficult
to understand or appreciate the necessity or presence of these
mutual requirements and obligations on any theory other than that
of a contract of agency. Salisbury was to furnish the mill and put the
timber owned by him into a marketable condition in the form of
lumber; Brooks was to furnish the funds necessary for that purpose,
sell the manufactured product, and account therefor to Salisbury
upon the specific terms of the agreement, less the compensation
fixed by the parties in lieu of interest on the money advanced and
for services as agent. These requirements and stipulations are in tent
with any other conception of the contract. If it constitutes an
agreement to sell, they are meaningless. But they cannot be ignored.
They were placed there for some purpose, doubtless as the result of
definite antecedent negotiations therefore, consummated by the
final written expression of the agreement." 21 Hence the Constantino
opinion could categorically affirm that the mere disclaimer in a
contract that an entity like petitioner is not "the agent or legal
representative for any purpose whatsoever" does not suffice to yield
the conclusion that it is an independent merchant if the control over
the goods for resale of the goods consigned is pervasive in character.
The Court of Tax Appeals decision now under review pays fealty to
such an applicable doctrine.
2. No merit therefore attaches to the first error imputed by petitioner
to the Court of Tax Appeals. Neither did such Court fail to appreciate
in its true significance the act and conduct pursued in the
implementation of the contract by both the United States Rubber
International and petitioner, as was contended in the second
assignment of error. Petitioner ought to have been aware that there
was no need for such an inquiry. The terms of the contract, as noted,
speak quite clearly. There is lacking that degree of ambiguity
sufficient to give rise to serious doubt as to what was contemplated
by the parties. A reading thereof discloses that the relationship
arising therefrom was not one of seller and purchaser. If it were thus
intended, then it would not have included covenants which in their
totality would negate the concept of a firm acquiring as vendee goods
from another. Instead, the stipulations were so worded as to lead to
no other conclusion than that the control by the United States Rubber
International over the goods in question is, in the language of the
Constantino opinion, "pervasive". The insistence on a relationship
opposed to that apparent from the language employed might even
yield the impression that such a mode of construction was resorted
to in order that the applicability of a taxing statute might be rendered
nugatory. Certainly, such a result is to be avoided.
Nor is it to be lost sight of that on a matter left to the discretion of
the Court of Tax Appeals which has developed an expertise in view
of its function being limited solely to the interpretation of revenue
laws, this Court is not prepared to substitute its own judgment unless
a grave abuse of discretion is manifest. It would be to frustrate the
objective for which administrative tribunals are created if the
judiciary, absent such a showing, is to ignore their appraisal on a
matter that forms the staple of their specialized competence. While
it is to be admitted that counsel for petitioner did scrutinize with care
the decision under review with a view to exposing what was
considered its flaws, it cannot be said that there was such a failure
to apply what the law commands as to call for its reversal. Instead,
what cannot be denied is that the Court of Tax Appeals reached a
result to which the Court in the recent Constantino decision gave the
imprimatur of its approval.
WHEREFORE, the Court of Tax Appeals decision of October 19, 1962
is affirmed. With costs against petitioner.
Before us is a petition for review on certiorari under Rule 45 of the
Rules of Court assailing the decision of the Court of Appeals dated
February 24, 1994, in CA-G.R. CV No. 31717, as well as the
respondent court's resolution of September 30, 1994 modifying said
decision. Both decision and resolution amended the judgment dated
February 13, 1991, of the Regional Trial Court of Makati City, Branch
147, in Civil Case No. 90-118.

The facts of this case as found by both the trial and appellate courts
are as follows:

St. Therese Merchandising (hereafter STM) regularly bought sugar

from petitioner Victorias Milling Co., Inc., (VMC). In the course of
their dealings, petitioner issued several Shipping List/Delivery
Receipts (SLDRs) to STM as proof of purchases. Among these was
SLDR No. 1214M, which gave rise to the instant case. Dated October
16, 1989, SLDR No. 1214M covers 25,000 bags of sugar. Each bag
contained 50 kilograms and priced at P638.00 per bag as "per sales
order VMC Marketing No. 042 dated October 16, 1989."1 The
transaction it covered was a "direct sale."2 The SLDR also contains
an additional note which reads: "subject for (sic) availability of a (sic)
stock at NAWACO (warehouse)."3

G.R. No. 117356 June 19, 2000 On October 25, 1989, STM sold to private respondent Consolidated
Sugar Corporation (CSC) its rights in SLDR No. 1214M for P
VICTORIAS MILLING CO., INC., petitioner, 14,750,000.00. CSC issued one check dated October 25, 1989 and
vs. three checks postdated November 13, 1989 in payment. That same
COURT OF APPEALS and CONSOLIDATED SUGAR day, CSC wrote petitioner that it had been authorized by STM to
CORPORATION, respondents. withdraw the sugar covered by SLDR No. 1214M. Enclosed in the
letter were a copy of SLDR No. 1214M and a letter of authority from
DECISION STM authorizing CSC "to withdraw for and in our behalf the refined
sugar covered by Shipping List/Delivery Receipt-Refined Sugar
QUISUMBING, J.: (SDR) No. 1214 dated October 16, 1989 in the total quantity of
25,000 bags."4
On October 27, 1989, STM issued 16 checks in the total amount of
P31,900,000.00 with petitioner as payee. The latter, in turn, issued
Official Receipt No. 33743 dated October 27, 1989 acknowledging
receipt of the said checks in payment of 50,000 bags. Aside from
SLDR No. 1214M, said checks also covered SLDR No. 1213.
Private respondent CSC surrendered SLDR No. 1214M to the
petitioner's NAWACO warehouse and was allowed to withdraw sugar.
However, after 2,000 bags had been released, petitioner refused to
allow further withdrawals of sugar against SLDR No. 1214M. CSC
then sent petitioner a letter dated January 23, 1990 informing it that
SLDR No. 1214M had been "sold and endorsed" to it but that it had
been refused further withdrawals of sugar from petitioner's
warehouse despite the fact that only 2,000 bags had been
withdrawn.5 CSC thus inquired when it would be allowed to withdraw
the remaining 23,000 bags.
On January 31, 1990, petitioner replied that it could not allow any
further withdrawals of sugar against SLDR No. 1214M because STM
had already dwithdrawn all the sugar covered by the cleared
checks.6
On March 2, 1990, CSC sent petitioner a letter demanding the
release of the balance of 23,000 bags.
Seven days later, petitioner reiterated that all the sugar
corresponding to the amount of STM's cleared checks had been fully
withdrawn and hence, there would be no more deliveries of the
commodity to STM's account. Petitioner also noted that CSC had
represented itself to be STM's agent as it had withdrawn the 2,000
bags against SLDR No. 1214M "for and in behalf" of STM.
On April 27, 1990, CSC filed a complaint for specific performance,
docketed as Civil Case No. 90-1118. Defendants were Teresita Ng Sy
(doing business under the name of St. Therese Merchandising) and
herein petitioner. Since the former could not be served with
summons, the case proceeded only against the latter. During the
trial, it was discovered that Teresita Ng Go who testified for CSC was
the same Teresita Ng Sy who could not be reached through
summons.7 CSC, however, did not bother to pursue its case against
her, but instead used her as its witness.
CSC's complaint alleged that STM had fully paid petitioner for the
sugar covered by SLDR No. 1214M. Therefore, the latter had no
justification for refusing delivery of the sugar. CSC prayed that
petitioner be ordered to deliver the 23,000 bags covered by SLDR
No. 1214M and sought the award of P1,104,000.00 in unrealized
profits, P3,000,000.00 as exemplary damages, P2,200,000.00 as
attorney's fees and litigation expenses.
Petitioner's primary defense a quo was that it was an unpaid seller
for the 23,000 bags.8 Since STM had already drawn in full all the
sugar corresponding to the amount of its cleared checks, it could no
longer authorize further delivery of sugar to CSC. Petitioner also
contended that it had no privity of contract with CSC.
Petitioner explained that the SLDRs, which it had issued, were not
documents of title, but mere delivery receipts issued pursuant to a
series of transactions entered into between it and STM. The SLDRs
prescribed delivery of the sugar to the party specified therein and did
not authorize the transfer of said party's rights and interests.
Petitioner also alleged that CSC did not pay for the SLDR and was
actually STM's co-conspirator to defraud it through a
misrepresentation that CSC was an innocent purchaser for value and
in good faith. Petitioner then prayed that CSC be ordered to pay it
the following sums: P10,000,000.00 as moral damages;
P10,000,000.00 as exemplary damages; and P1,500,000.00 as
attorney's fees. Petitioner also prayed that cross-defendant STM be
ordered to pay it P10,000,000.00 in exemplary damages, and
P1,500,000.00 as attorney's fees.
Since no settlement was reached at pre-trial, the trial court heard
the case on the merits.
As earlier stated, the trial court rendered its judgment favoring
private respondent CSC, as follows:
"WHEREFORE, in view of the foregoing, the Court hereby renders
judgment in favor of the plaintiff and against defendant Victorias
Milling Company:
"1) Ordering defendant Victorias Milling Company to deliver to
the plaintiff 23,000 bags of refined sugar due under SLDR No.
1214;
"2) Ordering defendant Victorias Milling Company to pay the
amount of P920,000.00 as unrealized profits, the amount of
P800,000.00 as exemplary damages and the amount of
P1,357,000.00, which is 10% of the acquisition value of the
undelivered bags of refined sugar in the amount of
P13,570,000.00, as attorney's fees, plus the costs.
"SO ORDERED."9
It made the following observations:
"[T]he testimony of plaintiff's witness Teresita Ng Go, that she had
fully paid the purchase price of P15,950,000.00 of the 25,000 bags
of sugar bought by her covered by SLDR No. 1214 as well as the
purchase price of P15,950,000.00 for the 25,000 bags of sugar
bought by her covered by SLDR No. 1213 on the same date, October
16, 1989 (date of the two SLDRs) is duly supported by Exhibits C to
C-15 inclusive which are post-dated checks dated October 27, 1989
issued by St. Therese Merchandising in favor of Victorias Milling
Company at the time it purchased the 50,000 bags of sugar covered
by SLDR No. 1213 and 1214. Said checks appear to have been
honored and duly credited to the account of Victorias Milling
Company because on October 27, 1989 Victorias Milling Company
issued official receipt no. 34734 in favor of St. Therese Merchandising
for the amount of P31,900,000.00 (Exhibits B and B-1). The
testimony of Teresita Ng Go is further supported by Exhibit F, which
is a computer printout of defendant Victorias Milling Company
showing the quantity and value of the purchases made by St.
Therese Merchandising, the SLDR no. issued to cover the purchase,
the official reciept no. and the status of payment. It is clear in Exhibit
'F' that with respect to the sugar covered by SLDR No. 1214 the same
has been fully paid as indicated by the word 'cleared' appearing
under the column of 'status of payment.'
"On the other hand, the claim of defendant Victorias Milling Company
that the purchase price of the 25,000 bags of sugar purchased by St.
Therese Merchandising covered by SLDR No. 1214 has not been fully
paid is supported only by the testimony of Arnulfo Caintic, witness
for defendant Victorias Milling Company. The Court notes that the
testimony of Arnulfo Caintic is merely a sweeping barren assertion
that the purchase price has not been fully paid and is not
corroborated by any positive evidence. There is an insinuation by
Arnulfo Caintic in his testimony that the postdated checks issued by
the buyer in payment of the purchased price were dishonored.
However, said witness failed to present in Court any dishonored
check or any replacement check. Said witness likewise failed to
present any bank record showing that the checks issued by the
buyer, Teresita Ng Go, in payment of the purchase price of the sugar
covered by SLDR No. 1214 were dishonored."10
Petitioner appealed the trial court’s decision to the Court of Appeals.
On appeal, petitioner averred that the dealings between it and STM
were part of a series of transactions involving only one account or
one general contract of sale. Pursuant to this contract, STM or any
of its authorized agents could withdraw bags of sugar only against
cleared checks of STM. SLDR No. 21214M was only one of 22 SLDRs
issued to STM and since the latter had already withdrawn its full
quota of sugar under the said SLDR, CSC was already precluded from
seeking delivery of the 23,000 bags of sugar. "SO ORDERED."11
"1) Deliver to plaintiff-appellee 12,586 bags of sugar covered
by SLDR No. 1214M;
"2) Pay to plaintiff-appellee P792,918.00 which is 10% of the
value of the undelivered bags of refined sugar, as attorneys
fees;
"3) Pay the costs of suit.

Private respondent CSC countered that the sugar purchases Both parties then seasonably filed separate motions for
involving SLDR No. 1214M were separate and independent reconsideration.
transactions and that the details of the series of purchases were
contained in a single statement with a consolidated summary of In its resolution dated September 30, 1994, the appellate court
cleared check payments and sugar stock withdrawals because this a modified its decision to read:
more convenient system than issuing separate statements for each
purchase. "WHEREFORE, the Court hereby modifies the assailed judgment and
orders defendant-appellant to:
The appellate court considered the following issues: (a) Whether or
not the transaction between petitioner and STM involving SLDR No. "(1) Deliver to plaintiff-appellee 23,000 bags of refined sugar
1214M was a separate, independent, and single transaction; (b) under SLDR No. 1214M;
Whether or not CSC had the capacity to sue on its own on SLDR No.
1214M; and (c) Whether or not CSC as buyer from STM of the rights "(2) Pay costs of suit.
to 25,000 bags of sugar covered by SLDR No. 1214M could compel
petitioner to deliver 23,000 bags allegedly unwithdrawn. "SO ORDERED."12

On February 24, 1994, the Court of Appeals rendered its decision The appellate court explained the rationale for the modification as
modifying the trial court's judgment, to wit: follows:

"WHEREFORE, the Court hereby MODIFIES the assailed judgment "There is merit in plaintiff-appellee's position.
and orders defendant-appellant to:
"Exhibit ‘F' We relied upon in fixing the number of bags of sugar
which remained undelivered as 12,586 cannot be made the basis for
such a finding. The rule is explicit that courts should consider the
evidence only for the purpose for which it was offered. (People v.
Abalos, et al, 1 CA Rep 783). The rationale for this is to afford the
party against whom the evidence is presented to object thereto if he
deems it necessary. Plaintiff-appellee is, therefore, correct in its
argument that Exhibit ‘F' which was offered to prove that checks in
the total amount of P15,950,000.00 had been cleared. (Formal Offer
of Evidence for Plaintiff, Records p. 58) cannot be used to prove the
proposition that 12,586 bags of sugar remained undelivered.
"Testimonial evidence (Testimonies of Teresita Ng [TSN, 10 October
1990, p. 33] and Marianito L. Santos [TSN, 17 October 1990, pp. 16,
18, and 36]) presented by plaintiff-appellee was to the effect that it
had withdrawn only 2,000 bags of sugar from SLDR after which it
was not allowed to withdraw anymore. Documentary evidence
(Exhibit I, Id., p. 78, Exhibit K, Id., p. 80) show that plaintiff-appellee
had sent demand letters to defendant-appellant asking the latter to
allow it to withdraw the remaining 23,000 bags of sugar from SLDR
1214M. Defendant-appellant, on the other hand, alleged that sugar
delivery to the STM corresponded only to the value of cleared checks;
and that all sugar corresponded to cleared checks had been
withdrawn. Defendant-appellant did not rebut plaintiff-appellee's
assertions. It did not present evidence to show how many bags of
sugar had been withdrawn against SLDR No. 1214M, precisely
because of its theory that all sales in question were a series of one
single transaction and withdrawal of sugar depended on the clearing
of checks paid therefor.
"After a second look at the evidence, We see no reason to overturn
the findings of the trial court on this point."13
Hence, the instant petition, positing the following errors as grounds
for review:
"1. The Court of Appeals erred in not holding that STM's and
private respondent's specially informing petitioner that
respondent was authorized by buyer STM to withdraw sugar
against SLDR No. 1214M "for and in our (STM) behalf,"
(emphasis in the original) private respondent's withdrawing
2,000 bags of sugar for STM, and STM's empowering other
persons as its agents to withdraw sugar against the same
SLDR No. 1214M, rendered respondent like the other persons,
an agent of STM as held in Rallos v. Felix Go Chan & Realty
Corp., 81 SCRA 252, and precluded it from subsequently
claiming and proving being an assignee of SLDR No. 1214M
and from suing by itself for its enforcement because it was
conclusively presumed to be an agent (Sec. 2, Rule 131, Rules
of Court) and estopped from doing so. (Art. 1431, Civil Code).
"2. The Court of Appeals erred in manifestly and arbitrarily
ignoring and disregarding certain relevant and undisputed
facts which, had they been considered, would have shown that
petitioner was not liable, except for 69 bags of sugar, and
which would justify review of its conclusion of facts by this
Honorable Court.
"3. The Court of Appeals misapplied the law on compensation
under Arts. 1279, 1285 and 1626 of the Civil Code when it
ruled that compensation applied only to credits from one SLDR
or contract and not to those from two or more distinct
contracts between the same parties; and erred in denying
petitioner's right to setoff all its credits arising prior to notice
of assignment from other sales or SLDRs against private
respondent's claim as assignee under SLDR No. 1214M, so as
to extinguish or reduce its liability to 69 bags, because the law
on compensation applies precisely to two or more distinct
contracts between the same parties (emphasis in the original).
 "4. The Court of Appeals erred in concluding that the
settlement or liquidation of accounts in Exh. ‘F’ between
petitioner and STM, respondent's admission of its balance, and
STM's acquiescence thereto by silence for almost one year did
not render Exh. `F' an account stated and its balance binding.
"5. The Court of Appeals erred in not holding that the
conditions of the assigned SLDR No. 1214, namely, (a) its
subject matter being generic, and (b) the sale of sugar being
subject to its availability at the Nawaco warehouse, made the
sale conditional and prevented STM or private respondent
from acquiring title to the sugar; and the non-availability of
sugar freed petitioner from further obligation.
"6. The Court of Appeals erred in not holding that the "clean
hands" doctrine precluded respondent from seeking judicial
reliefs (sic) from petitioner, its only remedy being against its
assignor."14
Simply stated, the issues now to be resolved are:
(1)....Whether or not the Court of Appeals erred in not ruling
that CSC was an agent of STM and hence, estopped to sue
upon SLDR No. 1214M as an assignee.
(2)....Whether or not the Court of Appeals erred in applying
the law on compensation to the transaction under SLDR No.
1214M so as to preclude petitioner from offsetting its credits
on the other SLDRs.
(3)....Whether or not the Court of Appeals erred in not ruling
that the sale of sugar under SLDR No. 1214M was a conditional
sale or a contract to sell and hence freed petitioner from
further obligations.
(4)....Whether or not the Court of Appeals committed an error
of law in not applying the "clean hands doctrine" to preclude
CSC from seeking judicial relief.
The issues will be discussed in seriatim.
Anent the first issue, we find from the records that petitioner raised
this issue for the first time on appeal.1avvphi1 It is settled that an
issue which was not raised during the trial in the court below could
not be raised for the first time on appeal as to do so would be
offensive to the basic rules of fair play, justice, and due
process.15 Nonetheless, the Court of Appeals opted to address this
issue, hence, now a matter for our consideration.
Petitioner heavily relies upon STM's letter of authority allowing CSC
to withdraw sugar against SLDR No. 1214M to show that the latter
was STM's agent. The pertinent portion of said letter reads:
"This is to authorize Consolidated Sugar Corporation or its
representative to withdraw for and in our behalf (stress supplied) the
refined sugar covered by Shipping List/Delivery Receipt = Refined
Sugar (SDR) No. 1214 dated October 16, 1989 in the total quantity
of 25, 000 bags."16
The Civil Code defines a contract of agency as follows:
"Art. 1868. By the contract of agency a person binds himself to
render some service or to do something in representation or on
behalf of another, with the consent or authority of the latter."
It is clear from Article 1868 that the basis of agency is
representation.17 On the part of the principal, there must be an actual
intention to appoint18 or an intention naturally inferable from his
words or actions;19 and on the part of the agent, there must be an
intention to accept the appointment and act on it,20 and in the
absence of such intent, there is generally no agency.21 One factor
which most clearly distinguishes agency from other legal concepts is
control; one person - the agent - agrees to act under the control or
direction of another - the principal. Indeed, the very word "agency"
has come to connote control by the principal.22 The control factor,
more than any other, has caused the courts to put contracts between
principal and agent in a separate category.23 The Court of Appeals,
in finding that CSC, was not an agent of STM, opined:
"This Court has ruled that where the relation of agency is dependent
upon the acts of the parties, the law makes no presumption of
agency, and it is always a fact to be proved, with the burden of proof
resting upon the persons alleging the agency, to show not only the
fact of its existence, but also its nature and extent (Antonio vs.
Enriquez [CA], 51 O.G. 3536]. Here, defendant-appellant failed to
sufficiently establish the existence of an agency relation between
plaintiff-appellee and STM. The fact alone that it (STM) had
authorized withdrawal of sugar by plaintiff-appellee "for and in our
(STM's) behalf" should not be eyed as pointing to the existence of an
agency relation ...It should be viewed in the context of all the
circumstances obtaining. Although it would seem STM represented
plaintiff-appellee as being its agent by the use of the phrase "for and
in our (STM's) behalf" the matter was cleared when on 23 January
1990, plaintiff-appellee informed defendant-appellant that SLDFR
No. 1214M had been "sold and endorsed" to it by STM (Exhibit I,
Records, p. 78). Further, plaintiff-appellee has shown that the 25,
000 bags of sugar covered by the SLDR No. 1214M were sold and
transferred by STM to it ...A conclusion that there was a valid sale
and transfer to plaintiff-appellee may, therefore, be made thus
capacitating plaintiff-appellee to sue in its own name, without need
of joining its imputed principal STM as co-plaintiff."24
In the instant case, it appears plain to us that private respondent
CSC was a buyer of the SLDFR form, and not an agent of STM. Private
respondent CSC was not subject to STM's control. The question of
whether a contract is one of sale or agency depends on the intention
of the parties as gathered from the whole scope and effect of the
language employed.25 That the authorization given to CSC contained
the phrase "for and in our (STM's) behalf" did not establish an
agency. Ultimately, what is decisive is the intention of the
parties.26 That no agency was meant to be established by the CSC
and STM is clearly shown by CSC's communication to petitioner that
SLDR No. 1214M had been "sold and endorsed" to it.27 The use of the
words "sold and endorsed" means that STM and CSC intended a
contract of sale, and not an agency. Hence, on this score, no error
was committed by the respondent appellate court when it held that
CSC was not STM's agent and could independently sue petitioner.
On the second issue, proceeding from the theory that the
transactions entered into between petitioner and STM are but serial
parts of one account, petitioner insists that its debt has been offset
by its claim for STM's unpaid purchases, pursuant to Article 1279 of
the Civil Code.28 However, the trial court found, and the Court of
Appeals concurred, that the purchase of sugar covered by SLDR No.
1214M was a separate and independent transaction; it was not a
serial part of a single transaction or of one account contrary to
petitioner's insistence. Evidence on record shows, without being
rebutted, that petitioner had been paid for the sugar purchased
under SLDR No. 1214M. Petitioner clearly had the obligation to
deliver said commodity to STM or its assignee. Since said sugar had
been fully paid for, petitioner and CSC, as assignee of STM, were not
mutually creditors and debtors of each other. No reversible error
could thereby be imputed to respondent appellate court when, it
refused to apply Article 1279 of the Civil Code to the present case.
Regarding the third issue, petitioner contends that the sale of sugar allegations of fraud. We are now constrained to deem this matter
under SLDR No. 1214M is a conditional sale or a contract to sell, with purely speculative, bereft of concrete proof.
title to the sugar still remaining with the vendor. Noteworthy, SLDR
No. 1214M contains the following terms and conditions: WHEREFORE, the instant petition is DENIED for lack of merit. Costs
against petitioner.
"It is understood and agreed that by payment by buyer/trader of
refined sugar and/or receipt of this document by the buyer/trader SO ORDERED.
personally or through a representative, title to refined sugar is
transferred to buyer/trader and delivery to him/it is deemed effected
and completed (stress supplied) and buyer/trader assumes full
responsibility therefore…"29

The aforequoted terms and conditions clearly show that petitioner

transferred title to the sugar to the buyer or his assignee upon
payment of the purchase price. Said terms clearly establish a
contract of sale, not a contract to sell. Petitioner is now estopped
from alleging the contrary. The contract is the law between the
contracting parties.30 And where the terms and conditions so
stipulated are not contrary to law, morals, good customs, public
policy or public order, the contract is valid and must be
upheld.31 Having transferred title to the sugar in question, petitioner
is now obliged to deliver it to the purchaser or its assignee.

As to the fourth issue, petitioner submits that STM and private

respondent CSC have entered into a conspiracy to defraud it of its
sugar. This conspiracy is allegedly evidenced by: (a) the fact that
STM's selling price to CSC was below its purchasing price; (b) CSC's
refusal to pursue its case against Teresita Ng Go; and (c) the
authority given by the latter to other persons to withdraw sugar
against SLDR No. 1214M after she had sold her rights under said
SLDR to CSC. Petitioner prays that the doctrine of "clean hands"
should be applied to preclude CSC from seeking judicial relief.
However, despite careful scrutiny, we find here the records bare of
convincing evidence whatsoever to support the petitioner's
 This is a petition for review on certiorari of the decision, 1 dated
March 17, 1988, of the Court of Appeals which affirmed with
modification the decision 2 of the Regional Trial Court of Quezon,
Branch LIX, Lucena City. The controversy stemmed from the
following facts: The private respondents, the spouses Jose Sy Bang
and Iluminada Tan, were engaged in the sale of gravel produced from
crushed rocks and used for construction purposes. In order to
increase their production, they engaged the services of Mr. Ruben
Mercurio, the proprietor of Gemini Motor Sales in Lucena City, to look
for a rock crusher which they could buy. Mr. Mercurio referred the
private respondents to the Rizal Consolidated Corporation which then
had for sale one such machinery described as:

ONE UNIT LIPPMAN PORTABLE CRUSHING PLANT

(RECONDITIONED) [sic]

JAW CRUSHER-10xl6 DOUBLE ROLL CRUSHER 16x16

3 UNITS PRODUCT CONVEYOR

75 HP ELECTRIC MOTOR

8 PCS. BRAND NEW TIRES CHASSIS NO. 19696 GOOD

RUNNING CONDITION 3

G.R. No. 82508 September 29, 1989 Oscar Sy Bang, a brother of private respondent Jose Sy Bang, went
to inspect the machine at the Rizal Consolidated's plant site.
FILINVEST CREDIT CORPORATION, petitioner, Apparently satisfied with the machine, the private respondents
vs. signified their intent to purchase the same. They were however
THE COURT OF APPEALS, JOSE SY BANG and ILUMINADA TAN confronted with a problem-the rock crusher carried a cash price tag
SY BANG,*respondents. of P 550,000.00. Bent on acquiring the machinery, the private
respondents applied for financial assistance from the petitioner,
SARMIENTO, J.: Filinvest Credit Corporation. The petitioner agreed to extend to the
private respondents financial aid on the following conditions: that the
machinery be purchased in the petitioner's name; that it be leased
(with option to purchase upon the termination of the lease period) to
the private respondents; and that the private respondents execute a
real estate mortgage in favor of the petitioner as security for the
amount advanced by the latter. Accordingly, on May 18,1981, a
contract of lease of machinery (with option to purchase) was entered
into by the parties whereby the private respondents agreed to lease
from the petitioner the rock crusher for two years starting from July
5, 1 981 payable as follows:
P10,000.00 - first 3 months
23,000.00 - next 6 months
24,800.00 - next 15 months
The contract likewise stipulated that at the end of the two-year
period, the machine would be owned by the private respondents.
Thus, the private respondents issued in favor of the petitioner a
check for P150,550.00, as initial rental (or guaranty deposit), and
twenty-four (24) postdated checks corresponding to the 24 monthly
rentals. In addition, to guarantee their compliance with the lease
contract, the private respondents executed a real estate mortgage
over two parcels of land in favor of the petitioner. The rock crusher
was delivered to the private respondents on June 9, 1981. Three
months from the date of delivery, or on September 7, 1981,
however, the private respondents, claiming that they had only tested
the machine that month, sent a letter-complaint to the petitioner,
alleging that contrary to the 20 to 40 tons per hour capacity of the
machine as stated in the lease contract, the machine could only
process 5 tons of rocks and stones per hour. They then demanded
that the petitioner make good the stipulation in the lease contract.
They followed that up with similar written complaints to the
petitioner, but the latter did not, however, act on them.
Subsequently, the private respondents stopped payment on the
remaining checks they had issued to the petitioner. 5
As a consequence of the non-payment by the private respondents of
the rentals on the rock crusher as they fell due despite the repeated
written demands, the petitioner extrajudicially foreclosed the real
estate mortgage. 6 On April 18, 1983, the private respondents
received a Sheriff s Notice of Auction Sale informing them that their
mortgaged properties were going to be sold at a public auction on
May 25, 1983 at 10:00 o'clock in the morning at the Office of the
Provincial Sheriff in Lucena City to satisfy their indebtedness to the
petitioner. 7 To thwart the impending auction of their properties, the
private respondents filed before the Regional Trial Court of Quezon,
on May 4, 1983, 8 a complaint against the petitioner, for the
rescission of the contract of lease, annullment of the real estate
mortgage, and for injunction and damages, with prayer for the
issuance of a writ of preliminary injunction.9 On May 23, 1983, three
days before the scheduled auction sale, the trial court issued a
temporary restraining order commanding the Provincial Sheriff of
Quezon, and the petitioner, to refrain and desist from proceeding
with the public auction. 10 Two years later, on September 4, 1985,
the trial court rendered a decision in favor of the private respondents,
the dispositive portion of which reads:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby
rendered:
1. making the injunction permanent;
2. rescinding the contract of lease of the machinery and
equipment and ordering the plaintiffs to return to the
defendant corporation the machinery subject of the
lease contract, and the defendant corporation to return
to plaintiffs the sum of P470,950.00 it received from the
 latter as guaranty deposit and rentals with legal interest
thereon until the amount is fully restituted;
3. annulling the real estate mortgage constituted over
the properties of the plaintiffs covered by Transfer
Certificate of Title Nos. T32480 and T-5779 of the
Registry of Deeds of Lucena City;
4. ordering the defendant corporation to pay plaintiffs
P30,000.00 as attorney's fees and the costs of the suit.
SO ORDERED. 11
Dissatisfied with the trial court's decision, the petitioner elevated the
case to the respondent Court of Appeals.
On March 17, 1988, the appellate court, finding no error in the
appealed judgment, affirmed the same in toto. 12Hence, this
petition.
Before us, the petitioner reasserts that the private respondents'
cause of action is not against it (the petitioner), but against either
the Rizal Consolidated Corporation, the original owner-seller of the
subject rock crusher, or Gemini Motors Sales which served as a
conduit facilitator of the purchase of the said machine. The petitioner
argues that it is a financing institution engaged in quasi-banking
activities, primarily the lending of money to entrepreneurs such as
the private respondents and the general public, but certainly not the
leasing or selling of heavy machineries like the subject rock crusher.
The petitioner denies being the seller of the rock crusher and only
admits having financed its acquisition by the private respondents.
Further, the petitioner absolves itself of any liability arising out of the
lease contract it signed with the private respondents due to the
waiver of warranty made by the latter. The petitioner likewise
maintains that the private respondents being presumed to be
knowledgeable about machineries, should be held responsible for the
detection of defects in the machine they had acquired, and on
account of that, they are estopped from claiming any breach of
warranty. Finally, the petitioner interposed the defense of
prescription, invoking Article 1571 of the Civil Code, which provides:
Art. 1571. Actions arising from the provisions of the preceding ten
articles shall be barred after six months, from the delivery of the
thing sold.
We find the petitioner's first contention untenable. While it is
accepted that the petitioner is a financing institution, it is not,
however, immune from any recourse by the private respondents.
Notwithstanding the testimony of private respondent Jose Sy Bang
that he did not purchase the rock crusher from the petitioner, the
fact that the rock crusher was purchased from Rizal Consolidated
Corporation in the name and with the funds of the petitioner proves
beyond doubt that the ownership thereof was effectively transferred
to it. It is precisely this ownership which enabled the petitioner to
enter into the "Contract of Lease of Machinery and Equipment" with
the private respondents.
Be that as it may, the real intention of the parties should prevail. The
nomenclature of the agreement cannot change its true essence, i.e.,
a sale on installments. It is basic that a contract is what the law
defines it and the parties intend it to be, not what it is called by the
parties. 13 It is apparent here thatthe intent of the parties to the
subject contract is for the so-called rentals to be the installment
payments. Upon the completion of the payments, then the rock
crusher, subject matter of the contract, would become the property
of the private respondents. This form of agreement has been
criticized as a lease only in name. Thus in Vda. de Jose v.
Barrueco 14 we stated:
Sellers desirous of making conditional sales of their goods, but who
do not wish openly to make a bargain in that form, for one reason or
another, have frequently resorted to the device of making contracts
in the form of leases either with options to the buyer to purchase for
a small consideration at the end of term, provided the so-called rent
has been duly paid, or with stipulations that if the rent throughout
the term is paid, title shall thereupon vest in the lessee. It is obvious
that such transactions are leases only in name. The so-called rent
must necessarily be regarded as payment of the price in installments
since the due payment of the agreed amount results, by the terms
of bargain, in the transfer of title to the lessee. 15
The importance of the criticism is heightened in the light of Article
1484 of the new Civil Code which provides for the remedies of an
unpaid seller of movables on installment basis.
Article 1484. In a contract of sale of personal property
the price of which is payable in installments, the vendor
may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the
vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay
cover two or more installments;
(3) Foreclose the chattel mortgage or the thing sold, if
one has been constituted, should the vendee's failure to
pay cover two or more installments. In this case, he
shall have no further action against the purchaser to
recover any unpaid balance of the price. Any agreement
to the contrary shall be void.
Under the aforequoted provision, the seller of movables in
installments, in case the buyer fails to pay two or more installments
may elect to pursue either of the following remedies: (1) exact
fulfillment by the purchaser of the obligation; (2) cancel the sale; or
(3) foreclose the mortgage on the purchased property if one was
constituted thereon. It is now settled that the said remedies are
alternative and not cumulative and therefore, the exercise of one
bars the exercise of the others.
Indubitably, the device contract of lease with option to buy is at times
resorted to as a means to circumvent Article 1484, particularly
paragraph (3) thereof.Through the set-up, the vendor, by retaining
ownership over the property in the guise of being the lessor, retains,
likewise, the right to repossess the same, without going through the
process of foreclosure, in the event the vendee-lessee defaults in the
payment of the installments. There arises therefore no need to
constitute a chattel mortgage over the movable sold. More
important, the vendor, after repossessing the property and, in effect,
canceling the contract of sale, gets to keep all the installments-cum-
rentals already paid. It is thus for these reasons that Article 1485 of
the new Civil Code provides that:
Article 1485. The preceding article shall be applied to
contracts purporting to be leases of personal property
with option to buy, when the lessor has deprived the
lessee of possession or enjoyment of the thing.
(Emphasis ours.)
Unfortunately, even with the foregoing findings, we however fail to
find any reason to hold the petitioner liable for the rock crusher's
failure to produce in accordance with its described capacity.
According to the petitioner, it was the private respondents who
chose, inspected, and tested the subject machinery. It was only after
they had inspected and tested the machine, and found it to their
satisfaction, that the private respondents sought financial aid from
the petitioner. These allegations of the petitioner had never been
rebutted by the private respondents. In fact, they were even
admitted by the private respondents in the contract they signed.
Thus:
LESSEE'S SELECTION, INSPECTION AND VERIFICATION.-The
LESSEE hereby confirms and acknowledges that he has
independently inspected and verified the leased property and has
selected and received the same from the Dealer of his own choosing
in good order and excellent running and operating condition and on
the basis of such verification, etc. the LESSEE has agreed to enter
into this Contract." 16
Moreover, considering that between the parties, it is the private
respondents, by reason of their business, who are presumed to be
more knowledgeable, if not experts, on the machinery subject of the
contract, they should not therefore be heard now to complain of any
alleged deficiency of the said machinery. It is their failure or neglect
to exercise the caution and prudence of an expert, or, at least, of a
prudent man, in the selection, testing, and inspection of the rock
crusher that gave rise to their difficulty and to this conflict. A well-
established principle in law is that between two parties, he, who by
his negligence caused the loss, shall bear the same.
At any rate, even if the private respondents could not be adjudged
as negligent, they still are precluded from imputing any liability on
the petitioner. One of the stipulations in the contract they entered
into with the petitioner is an express waiver of warranties in favor of
the latter. By so signing the agreement, the private respondents
absolved the petitioner from any liability arising from any defect or
deficiency of the machinery they bought. The stipulation on the
machine's production capacity being "typewritten" and that of the
waiver being "printed" does not militate against the latter's
effectivity. As such, whether "a capacity of 20 to 40 tons per hour"
is a condition or a description is of no moment. What stands is that
the private respondents had expressly exempted the petitioner from
any warranty whatsoever. Their Contract of Lease Of Machinery And
Equipment states:
WARRANTY-LESSEE absolutely releases the lessor from any liability
whatsoever as to any and all matters in relation to warranty in
accordance with the provisions hereinafter stipulated. 17
Taking into account that due to the nature of its business and its
mode of providing financial assistance to clients, the petitioner deals
in goods over which it has no sufficient know-how or expertise, and
the selection of a particular item is left to the client concerned, the
latter, therefore, shoulders the responsibility of protecting himself
against product defects. This is where the waiver of warranties is of
paramount importance. Common sense dictates that a buyer
inspects a product before purchasing it (under the principle of caveat
emptor or "buyer beware") and does not return it for defects
discovered later on, particularly if the return of the product is not
covered by or stipulated in a contract or warranty. In the case at bar,
to declare the waiver as non-effective, as the lower courts did, would
impair the obligation of contracts. Certainly, the waiver in question
could not be considered a mere surplusage in the contract between
the parties. Moreover, nowhere is it shown in the records of the case
that the private respondent has argued for its nullity or illegality. In
any event, we find no ambiguity in the language of the waiver or the
release of warranty. There is therefore no room for any interpretation
as to its effect or applicability vis-a- vis the deficient output of the
rock crusher. Suffice it to say that the private respondents have
validly excused the petitioner from any warranty on the rock crusher.
Hence, they should bear the loss for any defect found therein.
WHEREFORE, the Petition is GRANTED; the Decision of the Court of the name "UNIVERSAL TOY MASTER
Appeals dated March 17, 1988 is hereby REVERSED AND SET ASIDE, MANUFACTURING", respondents.
and another one rendered DISMISSING the complaint. Costs against
the private respondents. PUNO, J.:

SO ORDERED. Though people say, "better late than never", the law frowns upon
those who assert their rights past the eleventh hour. For failing to
timely institute their action, the petitioners are forever barred from
claiming a sum of money from the respondent.

This is a petition for review on certiorari to annul and set aside the
amended decision of the respondent court dated January 24, 1994
reversing its April 30, 1993 decision and dismissing the plaintiff-
petitioners' Complaint on the ground of prescription.The following
undisputed facts gave rise to the case at bar:

Petitioners spouses Dino, doing business under the trade name

"Candy Claire Fashion Garment" are engaged in the business of
manufacturing and selling shirts.1 Respondent Sio is part owner and
general manager of a manufacturing corporation doing business
under the trade name "Universal Toy Master Manufacturing."2

Petitioners and respondent Sio entered into a contract whereby the

latter would manufacture for the petitioners 20,000 pieces of vinyl
frogs and 20,000 pieces of vinyl mooseheads at P7.00 per piece in
accordance with the sample approved by the petitioners. These frogs
and mooseheads were to be attached to the shirts petitioners would
G.R. No. 113564 June 20, 2001 manufacture and sell.3

INOCENCIA YU DINO and her HUSBAND doing business under Respondent Sio delivered in several installments the 40,000 pieces
the trade name "CANDY CLAIRE FASHION of frogs and mooseheads. The last delivery was made on September
GARMENTS", petitioners, 28, 1988. Petitioner fully paid the agreed price.4 Subsequently,
vs. petitioners returned to respondent 29,772 pieces of frogs and
COURT OF APPEALS and ROMAN SIO, doing business under mooseheads for failing to comply with the approved sample.5 The
return was made on different dates: the initial one on December 12,
1988 consisting of 1,720 pieces,6 the second on January 11,
1989,7 and the last on January 17, 1989.8
Petitioners then demanded from the respondent a refund of the
purchase price of the returned goods in the amount of P208,404.00.
As respondent Sio refused to pay,9 petitioners filed on July 24, 1989
an action for collection of a sum of money in the Regional Trial Court
of Manila, Branch 38.
The trial court ruled in favor of the petitioners, viz:
"WHEREFORE, judgment is hereby rendered in favor of the
plaintiffs Vicente and Inocencia Dino and against defendant
Toy Master Manufacturing, Inc. ordering the latter to pay the
former:
1. The amount of Two Hundred Eight Thousand Four Hundred
Four (P208,404.00) Pesos with legal interest thereon from July
5, 1989, until fully paid; and
2. The amount of Twenty Thousand (P20,000.00) Pesos as
attorney's fees and the costs of this suit.
The counterclaim on the other hand is hereby dismissed for
lack of merit."10
Respondent Sio sought recourse in the Court of Appeals. In its April
30, 1993 decision, the appellate court affirmed the trial court
decision. Respondent then filed a Motion for Reconsideration and a
Supplemental Motion for Reconsideration alleging therein that the
petitioners' action for collection of sum of money based on a breach
of warranty had already prescribed. On January 24, 1994, the
respondent court reversed its decision and dismissed petitioners'
Complaint for having been filed beyond the prescriptive period. The
amended decision read in part, viz:
"Even if there is failure to raise the affirmative defense of
prescription in a motion to dismiss or in an appropriate
pleading (answer, amended or supplemental answer) and an
amendment would no longer be feasible, still prescription, if
apparent on the face of the complaint may be favorably
considered (Spouses Matias B. Aznar, III, et al. vs. Hon.
Juanito A. Bernad, etc., supra, G.R. 81190, May 9, 1988). The
rule in Gicano vs. Gegato (supra) was reiterated in Severo v.
Court of Appeals, (G.R. No. 84051, May 19, 1989).
WHEREFORE the Motion For Reconsideration is granted. The
judgment of this Court is set aside and judgment is hereby
rendered REVERSING the judgment of the trial court and
dismissing plaintiff's complaint."11
Hence, this petition with the following assignment of errors:
I.
The respondent Court of Appeals seriously erred in dismissing
the complaint of the Petitioners on the ground that the action
had prescribed.
II.
The respondent Court of Appeals seriously erred in holding
that the defense of prescription would still be considered
despite the fact that it was not raised in the answer, if
apparent on the face of the complaint.
We first determine the nature of the action filed in the trial court to
resolve the issue of prescription. Petitioners claim that the Complaint
they filed in the trial court on July 24, 1989 was one for the collection
of a sum of money. Respondent contends that it was an action for
breach of warranty as the sum of money petitioners sought to collect
was actually a refund of the purchase price they paid for the alleged
defective goods they bought from the respondent.
We uphold the respondent's contention.
The following provisions of the New Civil Code are apropos:
"Art. 1467. A contract for the delivery at a certain price of an
article which the vendor in the ordinary course of his business
manufactures or procures for the general market, whether the
same is on hand at the time or not, is a contract of sale, but
if the goods are to be manufactured specially for the customer
and upon his special order, and not for the general market, it
is a contract for a piece of work."
"Art. 1713. By the contract for a piece of work the contractor
binds himself to execute a piece of work for the employer, in
consideration of a certain price or compensation. The
contractor may either employ only his labor or skill, or also
furnish the material."
As this Court ruled in Engineering & Machinery Corporation v. Court
of Appeals, et al.,12 "a contract for a piece of work, labor and
materials may be distinguished from a contract of sale by the inquiry
as to whether the thing transferred is one not in existence and which
would never have existed but for the order of the person desiring it.
In such case, the contract is one for a piece of work, not a sale. On
the other hand, if the thing subject of the contract would have
existed and been the subject of a sale to some other person even if
the order had not been given then the contract is one of sale."13 The
contract between the petitioners and respondent stipulated that
respondent would manufacture upon order of the petitioners 20,000
pieces of vinyl frogs and 20,000 pieces of vinyl mooseheads
according to the samples specified and approved by the petitioners.
Respondent Sio did not ordinarily manufacture these products, but
only upon order of the petitioners and at the price agreed
upon.14 Clearly, the contract executed by and between the
petitioners and the respondent was a contract for a piece of work. At
any rate, whether the agreement between the parties was one of a
contract of sale or a piece of work, the provisions on warranty of title
against hidden defects in a contract of sale apply to the case at
bar, viz:
"Art. 1714. If the contractor agrees to produce the work from
material furnished by him, he shall deliver the thing produced
to the employer and transfer dominion over the thing. This
contract shall be governed by the following articles as well as
by the pertinent provisions on warranty of title and against
hidden defects and the payment of price in a contract of sale."
"Art. 1561. The vendor shall be responsible for warranty
against the hidden defects which the thing sold may have,
should they render it unfit for the use for which it is intended,
or should they diminish its fitness for such use to such an
extent that, had the vendee been aware thereof, he would not
have acquired it or would have given a lower price for it; but
said vendor shall not be answerable for patent defects or those
which may be visible, or for those which are not visible if the
vendee is an expert who, by reason of his trade or profession,
should have known them."
Petitioners aver that they discovered the defects in respondent's
products when customers in their (petitioners') shirt business came
back to them complaining that the frog and moosehead figures
attached to the shirts they bought were torn. Petitioners allege that
they did not readily see these hidden defects upon their acceptance.
A hidden defect is one which is unknown or could not have been
known to the vendee.15 Petitioners then returned to the respondent
29,772 defective pieces of vinyl products and demanded a refund of
their purchase price in the amount of P208,404.00. Having failed to
collect this amount, they filed an action for collection of a sum of
money.
Article 1567 provides for the remedies available to the vendee in
case of hidden defects, viz:
"Art. 1567. In the cases of Articles 1561, 1562, 1564, 1565
and 1566, the vendee may elect between withdrawing from
the contract and demanding a proportionate reduction of the
price, with damages in either case."
By returning the 29,772 pieces of vinyl products to respondent and
asking for a return of their purchase price, petitioners were in effect
"withdrawing from the contract" as provided in Art. 1567. The
prescriptive period for this kind of action is provided in Art. 1571 of
the New Civil Code, viz:
"Art. 1571. Actions arising from the provisions of the
preceding ten articles shall be barred after six months from
the delivery of the thing sold." (Emphasis supplied)
There is no dispute that respondent made the last delivery of the
vinyl products to petitioners on September 28, 1988. It is also settled
that the action to recover the purchase price of the goods petitioners
returned to the respondent was filed on July 24, 1989,16 more than
nine months from the date of last delivery. Petitioners having filed
the action three months after the six-month period for filing actions
for breach of warranty against hidden defects stated in Art.
1571,17 the appellate court dismissed the action.
Petitioners fault the ruling on the ground that it was too late in the
day for respondent to raise the defense of prescription. The law then
applicable to the case at bar, Rule 9, Sec. 2 of the Rules of Court,
provides:
"Defenses and objections not pleaded either in a motion to
dismiss or in the answer are deemed waived; except the
failure to state a cause of action . . . "
Thus, they claim that since the respondent failed to raise the defense
of prescription in a motion to dismiss or in its answer, it is deemed
waived and cannot be raised for the first time on appeal in a motion
for reconsideration of the appellate court's decision.
As a rule, the defense of prescription cannot be raised for the first
time on appeal. Thus, we held in Ramos v. Osorio,18 viz:
"It is settled law in this jurisdiction that the defense of
prescription is waivable, and that if it was not raised as a
defense in the trial court, it cannot be considered on appeal,
the general rule being that the appellate court is not
authorized to consider and resolve any question not properly
raised in the lower court (Subido vs. Lacson, 55 O.G. 8281,
8285; Moran, Comments on the Rules of Court, Vol. I, p. 784,
1947 Edition)."
However, this is not a hard and fast rule. In Gicano v. Gegato,19 we
held:
". . .(T)rial courts have authority and discretion to dimiss an
action on the ground of prescription when the parties'
 pleadings or other facts on record show it to be indeed time-
barred; (Francisco v. Robles, Feb, 15, 1954; Sison v. McQuaid,
50 O.G. 97; Bambao v. Lednicky, Jan. 28, 1961; Cordova v.
Cordova, Jan. 14, 1958; Convets, Inc. v. NDC, Feb. 28, 1958;
32 SCRA 529; Sinaon v. Sorongan, 136 SCRA 408); and it
may do so on the basis of a motion to dismiss (Sec. 1,f, Rule
16, Rules of Court), or an answer which sets up such ground
as an affirmative defense (Sec. 5, Rule 16), or even if the
ground is alleged after judgment on the merits, as in a motion
for reconsideration (Ferrer v. Ericta, 84 SCRA 705); or even if
the defense has not been asserted at all, as where no
statement thereof is found in the pleadings (Garcia v. Mathis,
100 SCRA 250; PNB v. Pacific Commission House, 27 SCRA
766; Chua Lamco v. Dioso, et al., 97 Phil. 821); or where a
defendant has been declared in default (PNB v. Perez, 16
SCRA 270). What is essential only, to repeat, is that the facts
demonstrating the lapse of the prescriptive period be
otherwise sufficiently and satisfactorily apparent on the
record; either in the averments of the plaintiff's complaint, or
otherwise established by the evidence." (emphasis supplied)
In Aldovino, et al. v. Alunan, et al.,20 the Court en banc reiterated
the Garcia v. Mathis doctrine cited in the Gicano case that when the
plaintiff's own complaint shows clearly that the action has prescribed,
the action may be dismissed even if the defense of prescription was
not invoked by the defendant.
It is apparent in the records that respondent made the last delivery
of vinyl products to the petitioners on September 28, 1988.
Petitioners admit this in their Memorandum submitted to the trial
court and reiterate it in their Petition for Review.21 It is also apparent
in the Complaint that petitioners instituted their action on July 24,
1989. The issue for resolution is whether or not the respondent Court
of Appeals could dismiss the petitioners' action if the defense of
prescription was raised for the first time on appeal but is apparent in
the records.
Following the Gicano doctrine that allows dismissal of an action on
the ground of prescription even after judgment on the merits, or
even if the defense was not raised at all so long as the relevant dates
are clear on the record, we rule that the action filed by the petitioners
has prescribed. The dates of delivery and institution of the action are
undisputed. There are no new issues of fact arising in connection
with the question of prescription, thus carving out the case at bar as
an exception from the general rule that prescription if not impleaded
in the answer is deemed waived.22
Even if the defense of prescription was raised for the first time on
appeal in respondent's Supplemental Motion for Reconsideration of
the appellate court's decision, this does not militate against the due
process right of the petitioners. On appeal, there was no new issue
of fact that arose in connection with the question of prescription, thus
it cannot be said that petitioners were not given the opportunity to
present evidence in the trial court to meet a factual issue. Equally
important, petitioners had the opportunity to oppose the defense of
prescription in their Opposition to the Supplemental Motion for
Reconsideration filed in the appellate court and in their Petition for
Review in this Court.
This Court's application of the Osorio and Gicano doctrines to the
case at bar is confirmed and now enshrined in Rule 9, Sec. 1 of the
1997 Rules of Civil Procedure, viz:
"Section 1. Defense and objections not pleaded. - Defenses
and objections not pleaded whether in a motion to dismiss or
in the answer are deemed waived. However, when it appears
from the pleadings that the court has no jurisdiction over the
subject matter, that there is another action pending between
 the same parties for the same cause, or that the action is PHILIPPINES, respondents.This is a petition to review the Decision
barred by a prior judgment or by statute of limitations, the of the Court of Appeals in CA-G.R. CR No. 10290, entitled "People v.
court shall dismiss the claim." (Emphasis supplied) Rosa Lim," promulgated on August 30, 1991.

WHEREFORE, the petition is DENIED and the impugned decision of
the Court of Appeals dated January 24, 1994 is AFFIRMED. No costs.
SO ORDERED.
On January 26, 1989, an Information for Estafa was filed against
petitioner Rosa Lim before Branch 92 of the Regional Trial Court of
Quezon City.1 The Information reads:
That on or about the 8th day of October 1987, in Quezon City,
Philippines and within the jurisdiction of this Honorable Court,
the said accused with intent to gain, with unfaithfulness and/or
abuse of confidence, did, then and there, wilfully, unlawfully
and feloniously defraud one VICTORIA SUAREZ, in the
following manner, to wit: on the date and place
aforementioned said accused got and received in trust from
said complainant one (1) ring 3.35 solo worth P169,000.00,
Philippine Currency, with the obligation to sell the same on
commission basis and to turn over the proceeds of the sale to
said complainant or to return said jewelry if unsold, but the
said accused once in possession thereof and far from
complying with her obligation despite repeated demands
therefor, misapplied, misappropriated and converted the same
to her own personal use and benefit, to the damage and
prejudice of the said offended party in the amount
aforementioned and in such other amount as may be awarded
under the provisions of the Civil Code.

CONTRARY TO LAW.2

G.R. No. 102784 February 28, 1996 After arraignment and trial on the merits, the trial court rendered
judgment, the dispositive portion of which reads:
ROSA LIM, petitioner,
vs. WHEREFORE, in view of the foregoing, judgment is hereby
COURT OF APPEALS and PEOPLE OF THE rendered:
 1. Finding accused Rosa Lim GUILTY beyond reasonable doubt
of the offense of estafa as defined and penalized under Article
315, paragraph 1(b) of the Revised Penal Code;
2. Sentencing her to suffer the Indeterminate penalty of FOUR
(4) YEARS and TWO (2) MONTHS of prision correccional as
minimum, to TEN (10) YEARS of prision mayor as maximum;
3. Ordering her to return to the offended party Mrs. Victoria
Suarez the ring or its value in the amount of P169,000 without
subsidiary imprisonment in case insolvency; and
4. To pay costs.3
On appeal, the Court of Appeals affirmed the judgment of conviction
with the modification that the penalty imposed shall be six (6) years,
eight (8) months and twenty-one (21) days to twenty (20) years in
accordance with Article 315, paragraph 1 of the Revised Penal Code.4
Petitioner filed a motion for reconsideration before the appellate
court on September 20, 1991, but the motion was denied in a
Resolution dated November 11, 1991.
In her final bid to exonerate herself, petitioner filed the instant
petition for review alleging the following grounds:
I ARRIVE AT A CONCLUSION THAT THE CRIME HAD BEEN
THE RESPONDENT COURT VIOLATED THE CONSTITUTION,
THE RULES OF COURT AND THE DECISION OF THIS
HONORABLE COURT IN NOT PASSING UPON THE FIRST AND
THIRD ASSIGNED ERRORS IN PETITIONER'S BRIEF;
II
THE RESPONDENT COURT FAILED TO APPLY THE PRINCIPLE
THAT THE PAROL EVIDENCE RULE WAS WAIVED WHEN THE
PRIVATE PROSECUTOR CROSS-EXAMINED THE PETITIONER
AND AURELIA NADERA AND WHEN COMPLAINANT WAS
CROSS-EXAMINED BY THE COUNSEL FOR THE PETITIONER AS
TO THE TRUE NATURE OF THE AGREEMENT BETWEEN THE
PARTIES WHEREIN IT WAS DISCLOSED THAT THE TRUE
AGREEMENT OF THE PARTIES WAS A SALE OF JEWELRIES
AND NOT WHAT WAS EMBODIED IN THE RECEIPT MARKED AS
EXHIBIT "A" WHICH WAS RELIED UPON BY THE RESPONDENT
COURT IN AFFIRMING THE JUDGMENT OF CONVICTION
AGAINST HEREIN PETITIONER; and
III
THE RESPONDENT COURT FAILED TO APPLY IN THIS CASE
THE PRINCIPLE ENUNCIATED BY THIS HONORABLE COURT TO
THE EFFECT THAT "ACCUSATION" IS NOT, ACCORDING TO
THE FUNDAMENTAL LAW, SYNONYMOUS WITH GUILT: THE
PROSECUTION MUST OVERTHROW THE PRESUMPTION OF
INNOCENCE WITH PROOF OF GUILT BEYOND REASONABLE
DOUBT. TO MEET THIS STANDARD, THERE IS NEED FOR THE
MOST CAREFUL SCRUTINY OF THE TESTIMONY OF THE
STATE, BOTH ORAL AND DOCUMENTARY, INDEPENDENTLY OF
WHATEVER DEFENSE IS OFFERED BY THE ACCUSED. ONLY IF
THE JUDGE BELOW AND THE APPELLATE TRIBUNAL COULD
COMMITTED PRECISELY BY THE PERSON ON TRIAL UNDER
SUCH AN EXACTING TEST SHOULD SENTENCE THUS
REQUIRED THAT EVERY INNOCENCE BE DULY TAKEN INTO
ACCOUNT. THE PROOF AGAINST HIM MUST SURVIVE THE
TEST OF REASON; THE STRONGEST SUSPICION MUST NOT
BE PERMITTED TO SWAY JUDGMENT. (People v. Austria, 195
SCRA 700)5
Herein the pertinent facts as alleged by the prosecution.
On or about October 8, 1987, petitioner Rosa Lim who had come
from Cebu received from private respondent Victoria Suarez the
following two pieces of jewelry; one (1) 3.35 carat diamond ring
worth P169,000.00 and one (1) bracelet worth P170,000.00, to be
sold on commission basis. The agreement was reflected in a receipt
marked as Exhibit "A"6 for the prosecution. The transaction took
place at the Sir Williams Apartelle in Timog Avenue, Quezon City,
where Rosa Lim was temporarily billeted.
On December 15, 1987, petitioner returned the bracelet to Vicky
Suarez, but failed to return the diamond ring or to turn over the
proceeds thereof if sold. As a result, private complainant, aside from
making verbal demands, wrote a demand letter7 to petitioner asking
for the return of said ring or the proceeds of the sale thereof. In
response, petitioner, thru counsel, wrote a letter8 to private
respondent's counsel alleging that Rosa Lim had returned both ring
and bracelet to Vicky Suarez sometime in September, 1987, for
which reason, petitioner had no longer any liability to Mrs. Suarez
insofar as the pieces of jewelry were concerned. Irked, Vicky Suarez
filed a complaint for estafa under Article 315, par l(b) of the Revised
Penal Code for which the petitioner herein stands convicted.
Petitioner has a different version.
Rosa Lim admitted in court that she arrived in Manila from Cebu
sometime in October 1987, together with one Aurelia Nadera, who
introduced petitioner to private respondent, and that they were
lodged at the Williams Apartelle in Timog, Quezon City. Petitioner
denied that the transaction was for her to sell the two pieces of
jewelry on commission basis. She told Mrs. Suarez that she would
consider buying the pieces of jewelry far her own use and that she
would inform the private complainant of such decision before she
goes back to Cebu. Thereafter, the petitioner took the pieces of
jewelry and told Mrs. Suarez to prepare the "necessary paper for me
to sign because I was not yet prepare (d) to buy it."9 After the
document was prepared, petitioner signed it. To prove that she did
not agree to the terms of the receipt regarding the sale on
commission basis, petitioner insists that she signed the aforesaid
document on the upper portion thereof and not at the bottom where
a space is provided for the signature of the person(s) receiving the
jewelry. 10
On October 12, 1987 before departing for Cebu, petitioner called up
Mrs. Suarez by telephone in order to inform her that she was no
longer interested in the ring and bracelet. Mrs. Suarez replied that
she was busy at the time and so, she instructed the petitioner to give
the pieces of jewelry to Aurelia Nadera who would in turn give them
back to the private complainant. The petitioner did as she was told
and gave the two pieces of jewelry to Nadera as evidenced by a
handwritten receipt, dated October 12, 1987. 11
Two issues need to be resolved: First, what was the real transaction
between Rosa Lim and Vicky Suarez a contract of agency to sell on
commission basis as set out in the receipt or a sale on credit; and,
second, was the subject diamond ring returned to Mrs. Suarez
through Aurelia Nadera?
Petitioner maintains that she cannot be liable for estafa since she
never received the jewelries in trust or on commission basis from
Vicky Suarez. The real agreement between her and the private
respondent was a sale on credit with Mrs. Suarez as the owner-seller
and petitioner as the buyer, as indicated by the bet that petitioner
did not sign on the blank space provided for the signature of the
person receiving the jewelry but at the upper portion thereof
immediately below the description of the items taken. 12
The contention is far from meritorious.
The receipt marked as Exhibit "A" which establishes a contract of
agency to sell on commission basis between Vicky Suarez and Rosa
Lim is herein reproduced in order to come to a proper perspective:
THIS IS TO CERTIFY, that I received from Vicky
Suarez PINATUTUNAYAN KO na aking tinanggap kay
___________ the following jewelries:
ang mga alahas na sumusunod:
Description Price
Mga Uri Halaga
l ring 3.35 dolo P 169,000.00
1 bracelet 9;170,000.00
total P 339,000.00
Kabuuan
in good condition, to be sold in CASH ONLY within . . . days
from date of signing this receipt na nasa mabuting kalagayan
upang ipagbili ng KALIWAAN (ALCONTADO) lamang sa loob ng
. . . araw mula ng ating pagkalagdaan:
if I could not sell, I shall return all the jewelry within the
period mentioned above; if I would be able to sell, I
shall immediately deliver and account the whole
proceeds of sale thereof to the owner of the jewelries
at his/her residence; my compensation or commission
shall be the over-price on the value of each jewelry
quoted above. I am prohibited to sell any jewelry on
credit or by installment; deposit, give for safekeeping:
lend, pledge or give as security or guaranty under any
circumstance or manner, any jewelry to other person or
persons.
kung hindi ko maipagbili ay isasauli ko ang lahat ng
alahas sa loob ng taning na panahong nakatala sa itaas;
kung maipagbili ko naman ay dagli kong isusulit at
ibibigay ang buong pinagbilhan sa may-ari ng mga
alahas sa kanyang bahay tahanan; ang aking
gantimpala ay ang mapapahigit na halaga sa
nakatakdang halaga sa itaas ng bawat alahas HINDI ko
ipinahihintulutang ipa-u-u-tang o ibibigay na hulugan
ang alin mang alahas, ilalagak, ipagkakatiwala;
ipahihiram; isasangla o ipananagot kahit sa anong
paraan ang alin mang alahas sa ibang mga tao o tao.
I sign my name this . . . day of . . . 19 . . . at Manila,
NILALAGDAAN ko ang kasunduang ito ngayong ika _____ ng
dito sa Maynila.
___________________
Signature of Persons who
received jewelries (Lagda
ng Tumanggap ng mga
Alahas)
Address: . . . . . . . . . . . .
Rosa Lim's signature indeed appears on the upper portion of the
receipt immediately below the description of the items taken: We
find that this fact does not have the effect of altering the terms of
the transaction from a contract of agency to sell on commission basis
to a contract of sale. Neither does it indicate absence or vitiation of
consent thereto on the part of Rosa Lim which would make the
contract void or voidable. The moment she affixed her signature
thereon, petitioner became bound by all the terms stipulated in the
receipt. She, thus, opened herself to all the legal obligations that
may arise from their breach. This is clear from Article 1356 of the
New Civil Code which provides:
Contracts shall be obligatory in whatever form they may have
been entered into, provided all the essential requisites for their
validity are present. . . .
However, there are some provisions of the law which require certain
formalities for particular contracts. The first is when the form is
required for the validity of the contract; the second is when it is
required to make the contract effective as against third parties such
as those mentioned in Articles 1357 and 1358; and the third is when
the form is required for the purpose of proving the existence of the
contract, such as those provided in the Statute of Frauds in article
1403. 13 A contract of agency to sell on commission basis does not
belong to any of these three categories, hence it is valid and
enforceable in whatever form it may be entered into.
Furthermore, there is only one type of legal instrument where the
law strictly prescribes the location of the signature of the parties
thereto. This is in the case of notarial wills found in Article 805 of the
Civil Code, to wit:
Every will, other than a holographic will, must be subscribed
at the end thereof by the testator himself . . . .
The testator or the person requested by him to write his name
and the instrumental witnesses of the will, shall also sign, as
aforesaid, each and every page thereof, except the last, on
the left margin. . . .
In the case before us, the parties did not execute a notarial will but
a simple contract of agency to sell on commission basis, thus making
the position of petitioner's signature thereto immaterial.
Petitioner insists, however, that the diamond ring had been returned
to Vicky Suarez through Aurelia Nadera, thus relieving her of any
liability. Rosa Lim testified to this effect on direct examination by her
counsel:
Q: And when she left the jewelries with you, what did you
do thereafter?
A: On October 12, I was bound for Cebu. So I called up
Vicky through telephone and informed her that I am no longer
interested in the bracelet and ring and that I will just return
it.
Q: And what was the reply of Vicky Suarez?
A: She told me that she could not come to the apartelle
since she was very busy. So, she asked me if Aurelia was there
and when I informed her that Aurelia was there, she instructed
me to give the pieces of jewelry to Aurelia who in turn will give
it back to Vicky.
Q: And you gave the two (2) pieces of jewelry to Aurelia
Nadera?
A: Yes, Your Honor. 14
This was supported by Aurelia Nadera in her direct examination by
petitioner's counsel:
Q: Do you know if Rosa Lim in fact returned the jewelries?
 A: She gave the jewelries to me.
Q: Why did Rosa Lim give the jewelries to you?
A: Rosa Lim called up Vicky Suarez the following morning
and told Vicky Suarez that she was going home to Cebu and
asked if she could give the jewelries to me.
Q: And when did Rosa Lim give to you the jewelries?
A: Before she left for Cebu. 15
On rebuttal, these testimonies were belied by Vicky Suarez herself:
Q: It has been testified to here also by both Aurelia Nadera
and Rosa Lim that you gave authorization to Rosa Lim to turn
over the two (2) pieces of jewelries mentioned in Exhibit "A"
to Aurelia Nadera, what can you say about that?
A: That is not true sir, because at that time Aurelia Nadera
is highly indebted to me in the amount of P140,000.00, so if I
gave it to Nadera, I will be exposing myself to a high risk. 16<
The issue as to the return of the ring boils down to one of credibility.
Weight of evidence is not determined mathematically by the
numerical superiority of the witnesses testifying to a given fact. It
depends upon its practical effect in inducing belief on the part of the
judge trying the case.17 In the case at bench, both the trial court and
the Court of Appeals gave weight to the testimony of Vicky Suarez
that she did not authorize Rosa Lim to return the pieces of jewelry
to Nadera. The respondent court, in affirming the trial court, said:
. . . This claim (that the ring had been returned to Suarez thru
Nadera) is disconcerting. It contravenes the very terms of
Exhibit A. The instruction by the complaining witness to
appellant to deliver the ring to Aurelia Nadera is vehemently
denied by the complaining witness, who declared that she did
not authorize and/or instruct appellant to do so. And thus, by
delivering the ring to Aurelia without the express authority and
consent of the complaining witness, appellant assumed the
right to dispose of the jewelry as if it were hers, thereby
committing conversion, a clear breach of trust, punishable
under Article 315, par. 1(b), Revised Penal Code.
We shall not disturb this finding of the respondent court. It is well
settled that we should not interfere with the judgment of the trial
court in determining the credibility of witnesses, unless there
appears in the record some fact or circumstance of weight and
influence which has been overlooked or the significance of which has
been misinterpreted. The reason is that the trial court is in a better
position to determine questions involving credibility having heard the
witnesses and having observed their deportment and manner of
testifying during the trial. 18
Article 315, par. 1(b) of the Revised Penal Code provides:
Art. 315. Swindling (estafa). Any person who shall defraud
another by any of the means mentioned hereinbelow shall be
punished by:
xxx xxx xxx
(b) By misappropriating or converting, to the prejudice of
another, money, goods, or any other personal property
received by the offender in trust or on commission, or for
administration, or under any other obligation involving the
duty to make delivery of or to return the same, even though
such obligation be totally or partially guaranteed by a bond;
 or by denying having received such money, goods, or other
property.
xxx xxx xxx
The elements of estafa with abuse of confidence under this
subdivision are as follows. (1) That money, goods, or other personal
property be received by the offender in trust, or on commission, or
for administration, or under any other obligation involving the duty
to make delivery of, or to return, the same; (2) That there be
misappropriation or conversion of such money or property by the
offender or denial on his part of such receipt; (3) That such
misappropriation or conversion or denial is to the prejudice of
another; and (4) That there is a demand made by the offended party
to the offender (Note: The 4th element is not necessary when there
is evidence of misappropriation of the goods by the defendant) 19
All the elements of estafa under Article 315, Paragraph 1(b) of the
Revised Penal Code, are present in the case at bench. First, the
receipt marked as Exhibit "A" proves that petitioner Rosa Lim
received the pieces of jewelry in trust from Vicky Suarez to be sold
on commission basis. Second, petitioner misappropriated or
converted the jewelry to her own use; and, third, such
misappropriation obviously caused damage and prejudice to the
private respondent.
WHEREFORE, the petition is DENIED and the Decision of the Court of
Appeals is hereby AFFIRMED.
Costs against petitioner.
SO ORDERED.
A.C. No. 6955 July 27, 2006
MAR YUSON, complainant,
vs.
ATTY. JEREMIAS R. VITAN, respondent.
DECISION
PANGANIBAN, C.J.:
Once again this Court exhorts members of the bar to live up to the
strictures of the Lawyers' Oath, the Code of Professional
Responsibility, and the Canons of Professional Ethics. Otherwise,
they shall be sanctioned by this Court.
The Case
Before us is a Letter-Complaint1 for the disbarment of Atty. Jeremias
R. Vitan, filed by Mar Yuson with the Commission on Bar Discipline
(CBD) of the Integrated Bar of the Philippines (IBP). Respondent was
accused of taking advantage of complainant's generosity and
credulity.
On August 5, 2004, IBP-CBD directed Atty. Vitan to submit his
Answer within 15 days from receipt of the Order;2otherwise, he
would be considered in default and the case heard ex parte.
Because respondent failed to submit his Answer within the given
period, the CBD considered his failure and non-appearance as a
waiver of his right to participate in the proceedings.3 Thus, the
hearing scheduled for August 11, 2005, pushed through, with the
original copies of the checks he had issued presented by complainant
as evidence. Afterwards, the CBD issued an Order submitting the
case for Resolution.4 On August 23, 2005, Commissioner Milagros V.
San Juan rendered her Report and Recommendation.5
Respondent denied having received a copy of the Complaint against
him and alleged that it was only on August 24, 2005, that he received
the Order submitting the case for resolution. Thus, he filed an Urgent
Motion to Revive/Re-open and with Leave to Admit Attached
Answer.6
In its Resolution No. XVII-2005-101 dated October 22, 2005, the IBP
Board of Directors adopted and approved, with modification, the
investigating commissioner's Report and Recommendation. Upon
respondent was imposed the penalty of suspension from the practice
of law for two years, after the board found that he had taken
advantage of complainant through deceit and dishonesty. The lawyer
was further ordered to give back the money he had received from
complainant.
The Facts
Complainant Mar Yuson was a taxi driver with eight children. In
October 2002, he received a sum of money by way of inheritance.
According to him, he and his wife intended to use the money to
purchase a taxi, repair their dilapidated house, and hold a debut
party for their daughter.7
They were able to purchase a secondhand taxi, and Atty. Vitan
helped him with all the legal matters concerning this purchase.
Regrettably, their other plans were put on hold, because the lawyer
borrowed P100,000 from them in December 2002. It was agreed that
the loan would be repaid before the end of the following year,8 in
time for the debut on November 24, 2003.9
To guarantee payment, respondent executed in favor of complainant
several postdated checks to cover the loaned amount. Those checks,
however, turned out to be worthless, because they had been drawn
against the lawyer's closed account in the Bank of Commerce in
Escolta, Manila. The six dishonored checks were presented during
the hearing before the IBP commissioner.10
Complainant maintained that he had repeatedly tried to recover the
debt, only to be turned away empty-handed each time. He conceded,
though, that respondent had given an undisclosed amount covered
by the checks dated January and February 2003.11 The amounts
covered by the dishonored checks remained unpaid.
This development prompted complainant to seek the aid of the IBP
National Committee on Legal Aid (NCLA) in obtaining payment. On
November 14, 2003, the IBP-NCLA, through Deputy Director Rosalie
J. de la Cruz, sent him a letter.12 It informed him of the impending
administrative case and advised him to confer with complainant,
presumably to settle the matter. Upon receipt13 of the letter, he
again gave assurances that he would pay the loan in time for the
debut.14
When the date passed without any payment, complainant demanded
a collateral to secure the loan. Thus, in his favor, Atty. Vitan executed
a document denominated as a Deed of Absolute Sale, covering the
latter's parcel of land located in Sta. Maria, Bulacan. According to
complainant, their intention was to transfer the title of the property
to him temporarily, so that he could either sell or mortgage15 it. It
was further agreed that, if it was mortgaged, respondent would
redeem it as partial or full payment of the loan.16
Curiously, however, the parties executed a second Deed of Absolute
Sale,17 this time in favor of Atty. Vitan, with complainant as vendor.
The purpose of this particular document was not explained by either
party.
On April 12, 2004, complainant was able to mortgage18 the property
for P30,000.19 Contrary to their earlier agreement, respondent did
not redeem it from the mortgagee and, instead, simply sent
complainant a letter20 dated July 7, 2004, promising to pay on or
before July 12, 2004. As this promise was not fulfilled, the mortgagee
demanded payment from complainant and thereby allegedly exposed
the latter to shame and ridicule.21
On July 19, 2004, IBP-NCLA sent another letter22 on behalf of
complainant. Respondent was informed that an administrative case
would be filed against him, unless he settled his obligations by July
30, 2004, the date given by complainant.
On August 30, 2004, the IBP-NCLA received the reply23 dated July
30, 2004, submitted by Atty. Vitan who explained that he had
already settled his obligation. He maintained that he had in fact
executed, in complainant's favor, a Deed of Absolute Sale over his
203-square-meter residential property in Sta. Maria, Bulacan. He
clarified that "[their] understanding was that [complainant] ha[d]
the option to use, mortgage or sell [the property] and return to
me the excess of the proceeds after obtaining his money represented
by my six (6) dishonored checks."24Interestingly, respondent
attached the Deed of Absolute Sale in which he was the vendee and
complainant the vendor.25 It appears that this was the second Deed
of Absolute Sale, also referred to in the Complaint.26
Only after the IBP investigating commissioner had rendered her
Report and Recommendation27 did Atty. Vitan submit his Answer to
the Letter-Complaint. He called the second document a "Counter
Deed of Sale," executed as a "sort of collateral/security for the
account of [his] liaison officer [Evelyn Estur]."28 He admitted having
given several postdated checks amounting to P100,000, supposedly
to guarantee the indebtedness of Estur to complainant. Atty. Vitan
argued for the first time that it was she who had incurred the debts,
and that he had acted only as a "character reference and/or
guarantor."29 He maintained that he had given in to the one-sided
transactions, because he was "completely spellbound by
complainant's seeming sincerity and kindness."30 To corroborate his
statements, he attached Estur's Affidavit.31
Report of the Investigating Commissioner
In her Report and Recommendation, Commissioner San Juan
recommended that Atty. Vitan be suspended until his restitution of
the amount he had borrowed. She held that respondent, having
taken advantage of complainant and thus shown dishonesty and
untrustworthiness, did not deserve to retain his membership in the
bar.
On November 24, 2005, the Supreme Court received the IBP
Resolution adopting, with modification, the Report and
Recommendation of the investigating commissioner.
The Court's Ruling
We agree with the findings of the IBP Board of Governors, but reduce
the period of suspension to six months.
Respondent's Administrative Liability
Lawyers are instruments for the administration of justice. They are
expected to maintain not only legal proficiency but also a high
standard of ethics, honesty, integrity and fair dealing. In this way,
the people's faith and confidence in the judicial system is ensured.32
In the present case, Atty. Vitan undoubtedly owed money to
complainant. In a letter33 to IBP Deputy Director de la Cruz,
respondent admitted having incurred the P100,000 loan. It was only
in his Answer34 that the lawyer suddenly denied that he had
personally incurred this obligation. This time, he pointed to his
employee, Estur, as the true debtor. We find his version of the facts
implausible.
First, the story involving a certain Evelyn Estur was clearly a mere
afterthought, conjured simply to escape his liability. If it were true
that it was she who owed the money, he should have mentioned this
alleged fact in his letter to the IBP NCLA deputy director. Instead,
respondent was completely silent about Estur and merely asserted
that he had already settled his debt with complainant.
Second, the promise of Atty. Vitan to settle his obligations on
particular dates is contained in two handwritten notes signed by him
and worded as follows:
"I undertake to settle the financial obligations of P100,000 –
plus before the end of the year."35
"Mar:
"We will settle on July 12, 2004, on or before said date."36
The wordings of these promissory notes disclose that he had a
personal obligation to complainant, without any mention of Estur at
all. If it were true that Atty. Vitan had executed those notes for the
account of his liaison officer, he should have used words to that
effect. As a lawyer, he was aware that the preparation of promissory
notes was not a "mere formality;" it had legal consequences. It is
quite far-fetched for a lawyer to assume the role of guarantor,
without saying so in the notes.
A lawyer may be disciplined for evading the payment of a debt validly
incurred.37 In this case, the failure of Atty. Vitan to pay his debt for
over three years despite repeated demands puts in question his
standing as a member of the bar. Worse, he made several promises
to pay his debt promptly, but reneged on all of them. He even started
to hide from complainant according to the latter .38
Failure to honor just debts, particularly from clients, constitutes
dishonest conduct that does not speak well of a member of the
bar.39 It is vital that a lawyer's conduct be kept beyond reproach and
above suspicion at all times. Rule 1.01 of the Code of Professional
Responsibility clearly provides that lawyers must not engage in
unlawful, immoral or deceitful conduct. They must comport
themselves in a manner that will secure and preserve the respect
and confidence of the public for the legal profession.40
Atty. Vitan contends that his obligation was already extinguished,
because he had allegedly sold his Bulacan property to
complainant.41 Basically, respondent is asserting that what had
transpired was a dation in payment. Governed by the law on sales,
it is a transaction that takes place when a piece of property is
alienated to the creditor in satisfaction of a debt in money.42 It
involves delivery and transmission of ownership of a thing -- by the
debtor to the creditor -- as an accepted equivalent of the
performance of the obligation.43
Going over the records of this case, we find the contention of Atty.
Vitan undeserving of credence. The records reveal that he did not
really intend to sell and relinquish ownership over his property in Sta.
Maria, Bulacan, notwithstanding the execution of a Deed of Absolute
Sale in favor of complainant. The second Deed of Absolute Sale,
which reconveyed the property to respondent, is proof that he had
no such intention. This second Deed, which he referred to as his
"safety net,"44 betrays his intention to counteract the effects of the
first one .
In a manner of speaking, Atty. Vitan was taking back with his right
hand what he had given with his left. The second Deed of Absolute
Sale returned the parties right back where they started, as if there
were no sale in favor of complainant to begin with. In effect, on the
basis of the second Deed of Sale, respondent took back and asserted
his ownership over the property despite having allegedly sold it.
Thus, he fails to convince us that there was a bona fide dation in
payment or sale that took place between the parties; that is, that
there was an extinguishment of obligation.
It appears that the true intention of the parties was to use the
Bulacan property to facilitate payment. They only made it appear
that the title had been transferred to complainant to authorize him
to sell or mortgage the property.45Atty. Vitan himself admitted in his
letter dated July 30, 2004, that their intention was to convert the
property into cash, so that payment could be obtained by
complainant and the excess returned to respondent.46 The records,
however, do not show that the proceeds derived were sufficient to
discharge the obligation of the lawyer fully; thus, he is still liable to
the extent of the deficiency.
We hasten to add, however, that this administrative case is not the
proper venue for us to determine the extent of the remaining liability.
This Court will not act as a collection agency from faltering debtors,
when the amount of the indebtedness is indefinite and disputed.47
Nevertheless, the records satisfactorily reveal the failure of
respondent to live up to his duties as a lawyer in consonance with
the strictures of the Lawyer's Oath, the Code of Professional
Responsibility, and the Canons of Professional Ethics, thereby
degrading not only his person but his profession as well. So far, we
find that his lack of sincerity in fulfilling his obligations is revealed by
his acts of issuing promissory notes and reneging on them; executing
a simulated Deed of Absolute Sale; and breaking his promise to
redeem the property from the mortgagee.
The repeated failure of Atty. Vitan to fulfill his promise puts in
question his integrity and character. Indeed, not only his integrity as
an individual but, more important, his stature as a member of the
bar is affected by his acts of welching on his promises and misleading
complainant. Canon 1 and Rule 1.01 of the Code of Professional
Responsibility explicitly state thus:
"CANON 1 — A lawyer shall uphold the constitution, obey the
laws of the land and promote respect for law and legal
processes.
"Rule 1.01 — A lawyer shall not engage in unlawful, dishonest,
immoral or deceitful conduct."
Any wrongdoing, whether professional or nonprofessional, indicating
unfitness for the profession justifies disciplinary action.48
There is yet another reason to find Atty. Vitan administratively liable.
In his letter of July 30, 2004, was an admission that the personal
checks he issued in favor of complainant had all been
dishonored.49 Whether those checks were issued for the account of
respondent or of Estur is not important. The fact remains that the
lawyer knowingly issued worthless checks and thus revealed his
disposition to defraud complainant.
The act of a lawyer in issuing a check without sufficient funds to
cover them -- or, worse, drawn against a closed account --
constitutes such willful dishonesty and unethical conduct as to
undermine the public confidence in the law and in lawyers.50 The act
also manifests a low regard for the Oath taken by the lawyer upon
joining the profession, whose image should be held in high esteem,
not seriously and irreparably tarnished.51
Moreover, the inimical effect of the issuance of worthless checks has Philippines and on the Office of the Court Administrator for circulation
been recognized by this Court in an earlier case, from which we to all courts in the country.
quote:
SO ORDERED.
"[T]he effect [of issuance of worthless checks] transcends the
private interests of the parties directly involved in the
transaction and touches the interests of the community at
large. The mischief it creates is not only a wrong to the payee
or holder, but also an injury to the public since the circulation
of valueless commercial papers can very well pollute the
channels of trade and commerce, injure the banking system
and eventually hurt the welfare of society and the public
interest."52

We have also held that the deliberate failure to pay just debts and
the issuance of worthless checks constitute gross misconduct,53 for
which a lawyer may be sanctioned with one year's suspension from
the practice of law,54 or a suspension of six months upon partial
payment of the obligation.55

In the instant case, complainant himself admits that respondent had

already paid the amounts covered by the January and February
checks.56 Thus, there has been a partial payment that justifies a
modification of IBP's recommended penalty.

WHEREFORE, Atty. Jeremias R. Vitan is hereby found guilty of gross

misconduct and SUSPENDED from the practice of law for six (6)
months, effective upon his receipt of this Decision, with the warning
that a repetition of the same or any other misconduct will be dealt
with more severely.

Let a copy of this Decision be entered in respondent's record as a

member of the Bar, and notice served on the Integrated Bar of the
 Before us is a petition for review under Rule 45 of the Revised Rules
on Civil Procedure of the Decision1 of the Court of Appeals in CA-G.R.
CV No. 78075, which affirmed with modification the Decision2 of the
Regional Trial Court (RTC), Branch 61, Baguio City, and the
Resolution3 of the appellate court denying reconsideration thereof.

The Antecedents

On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC of

Baguio City, a complaint for sum of money and damages against the
respondents, spouses Felicidad and Rico Tibong. Agrifina alleged that
Felicidad had secured loans from her on several occasions, at
monthly interest rates of 6% to 7%. Despite demands, the spouses
Tibong failed to pay their outstanding loan, amounting
to P773,000.00 exclusive of interests. The complaint contained the
following prayer:

WHEREFORE, premises considered, it is most respectfully

prayed of this Honorable Court, after due notice and hearing,
to render judgment ordering defendants to pay plaintiff the
following:

a). SEVEN HUNDRED SEVENTY-THREE THOUSAND

PESOS (P773,000.00) representing the principal
obligation of the defendants with the stipulated
interests of six (6%) percent per month from May 11,
1999 to date and or those that are stipulated on the
G.R. No. 166704 December 20, 2006
contracts as mentioned from paragraph two (2) of the
complaint.
AGRIFINA AQUINTEY, petitioner,
vs.
b). FIFTEEN PERCENT (15%) of the total accumulated
SPOUSES FELICIDAD AND RICO TIBONG, respondents.
obligations as attorney's fees.
DECISION
CALLEJO, SR., J.:
 c). Actual expenses representing the filing fee and other On August 17, 2000, the trial court issued a Pre-Trial Order where
charges and expenses to be incurred during the the following issues of the case were defined:
prosecution of this case.
Whether or not plaintiff is entitled to her claim
Further prays for such other relief and remedies just and of P773,000.00;
equitable under the premises.4
Whether or not plaintiff is entitled to stipulated interests in the
Agrifina appended a copy of the Counter-Affidavit executed by promissory notes; and
Felicidad in I.S. No. 93-334, as well as copies of the promissory notes
and acknowledgment receipts executed by Felicidad covering the Whether or not the parties are entitled to their claim for
loaned amounts.5 damages.9

In their Answer with Counterclaim,6 spouses Tibong admitted that The Case for Petitioner
they had secured loans from Agrifina. The proceeds of the loan were
then re-lent to other borrowers at higher interest rates. They, Agrifina and Felicidad were classmates at the University of
likewise, alleged that they had executed deeds of assignment in favor Pangasinan. Felicidad's husband, Rico, also happened to be a distant
of Agrifina, and that their debtors had executed promissory notes in relative of Agrifina. Upon Felicidad's prodding, Agrifina agreed to lend
Agrifina's favor. According to the spouses Tibong, this resulted in a money to Felicidad. According to Felicidad, Agrifina would be earning
novation of the original obligation to Agrifina. They insisted that by interests higher than those given by the bank for her money.
virtue of these documents, Agrifina became the new collector of their Felicidad told Agrifina that since she (Felicidad) was engaged in the
debtors; and the obligation to pay the balance of their loans had sale of dry goods at the GP Shopping Arcade, she would use the
been extinguished. money to buy bonnels and thread.10 Thus, Agrifina lent a total sum
of P773,000.00 to Felicidad, and each loan transaction was covered
The spouses Tibong specifically denied the material averments in by either a promissory note or an acknowledgment receipt.11 Agrifina
paragraphs 2 and 2.1 of the complaint. While they did not state the stated that she had lost the receipts signed by Felicidad for the
total amount of their loans, they declared that they did not receive following amounts: P100,000.00, P34,000.00 and P2,000.00.12 The
anything from Agrifina without any written receipt.7 They prayed for particulars of the transactions are as follows:
that the complaint be dismissed.
Amount Date Obtained Interest Per Due Date
In their Pre-Trial Brief, the spouses Tibong maintained that they have Mo.
never obtained any loan from Agrifina without the benefit of a written P 100,000.00 May 11, 1989 6% August 11, 1989
document.8
4,000.00 June 8, 1989 - -
50,000.00 June 13, 1989 6% On demand
 60,000.00 Aug. 16, 1989 7% January 1990 From August 7, 1990 to October, 1990, Felicidad executed deeds of
205,000.00 Oct. 13, 1989 7% January 1990 assignment of credits (obligations)22 duly notarized by Atty. A-ayo,
in which Felicidad transferred and assigned to Agrifina the total
128,000.00 Oct. 19, 1989 7% January 1990
amount of P546,459.00 due from her debtors.23 In the said deeds,
2,000.00 Nov. 12, 1989 6% April 28, 1990 Felicidad confirmed that her debtors were no longer indebted to her
10,000.00 June 13, 1990 - - for their respective loans. For her part, Agrifina conformed to the
80,000.00 Jan. 4, 1990 - - deeds of assignment relative to the loans of Virginia Morada and
34,000.00 - 6% October 19, 1989
Corazon Dalisay.24 She was furnished copies of the deeds as well as
the promissory notes.25
100,000.00 July 14, 1989 5% October 198913
The following debtors of Felicidad executed promissory notes where
According to Agrifina, Felicidad was able to pay only her loans they obliged themselves to pay directly to Agrifina:
amounting to P122,600.00.14
Debtors Account Date of Instrument
In July 1990, Felicidad gave to Agrifina City Trust Bank Check No.
Juliet & Tommy Tibong P50,000.00 August 7, 1990
126804 dated August 25, 1990 in the amount of P50,000.00 as
partial payment.15 However, the check was dishonored for having
been drawn against insufficient funds.16 Agrifina then filed a criminal Corazon Dalisay 8,000.00 August 7, 1990
case against Felicidad in the Office of the City Prosecutor. An Rita Chomacog 4,480.00 August 8, 1990
Information for violation of Batas Pambansa Bilang 22 was filed Antoinette Manuel 12,000.00 October 19, 1990
against Felicidad, docketed as Criminal Case No. 11181-R. After trial, Rosemarie Bandas 8,000.00 August 8, 1990
the court ordered Felicidad to pay P50,000.00. Felicidad complied
Fely Cirilo 63,600.00 September 13, 1990
and paid the face value of the check.17
Virginia Morada 62,379.00 August 9, 1990
In the meantime, Agrifina learned that Felicidad had re-loaned the Carmelita Casuga 59,000.00 August 28, 1990
amounts to other borrowers.18 Agrifina sought the assistance of Atty. Merlinda Gelacio 17,200.00 August 29, 1990
Torres G. A-ayo who advised her to require Felicidad to execute Total P284,659.00
deeds of assignment over Felicidad's debtors. The lawyer also
suggested that Felicidad's debtors execute promissory notes in
Agrifina's favor, to "turn over" their loans from Felicidad. This Agrifina narrated that Felicidad showed to her the way to the debtors'
arrangement would facilitate collection of Felicidad's account. houses to enable her to collect from them. One of the debtors, Helen
Agrifina agreed to the proposal.19 Agrifina, Felicidad, and the latter's Cabang, did not execute any promissory note but conformed to the
debtors had a conference20 where Atty. A-ayo explained that Agrifina Deed of Assignment of Credit which Felicidad executed in favor of
could apply her collections as payments of Felicidad's account.21 Agrifina.27 Eliza Abance conformed to the deed of assignment for and
in behalf of her sister, Fely Cirilo.28 Edna Papat-iw was not able to
affix her signature on the deed of assignment nor sign the
promissory note because she was in Taipei, Taiwan.29
Following the execution of the deeds of assignment and promissory
notes, Agrifina was able to collect the total amount of P301,000.00
from Felicidad's debtors.30 In April 1990, she tried to collect the
balance of Felicidad's account, but the latter told her to wait until her
debtors had money.31 When Felicidad reneged on her promise,
Agrifina filed a complaint in the Office of the Barangay Captain for
the collection of P773,000.00. However, no settlement was arrived
at.32
The Case for Respondents
Felicidad testified that she and her friend Agrifina had been engaged
in the money-lending business.33 Agrifina would lend her money with
monthly interest,34 and she, in turn, would re-lend the money to
borrowers at a higher interest rate. Their business relationship
turned sour when Agrifina started complaining that she (Felicidad)
was actually earning more than Agrifina.35 Before the respective
maturity dates of her debtors' loans, Agrifina asked her to pay her
account since Agrifina needed money to buy a house and lot in
Manila. However, she told Agrifina that she could not pay yet, as her
debtors' loan payments were not yet due.36 Agrifina then came to
her store every afternoon to collect from her, and persuaded her to
go to Atty. Torres G. A-ayo for legal advice.37 The lawyer suggested
that she indorse the accounts of her debtors to Agrifina so that the
latter would be the one to collect from her debtors and she would no
longer have any obligation to Agrifina.38 She then executed deeds of
assignment in favor of Agrifina covering the sums of money due from
her debtors. She signed the deeds prepared by Atty. A-ayo in the
presence of Agrifina.39 Some of the debtors signed the promissory
notes which were likewise prepared by the lawyer. Thereafter,
Agrifina personally collected from Felicidad's debtors.40 Felicidad
further narrated that she received P250,000.00 from one of her
debtors, Rey Rivera, and remitted the payment to Agrifina.41
Agrifina testified, on rebuttal, that she did not enter into a re-lending
business with Felicidad. When she asked Felicidad to consolidate her
loans in one document, the latter told her to seek the assistance of
Atty. A-ayo.42 The lawyer suggested that Felicidad assign her credits
in order to help her collect her loans.43 She agreed to the deeds of
assignment to help Felicidad collect from the debtors.44
On January 20, 2003, the trial court rendered its Decision45 in favor
of Agrifina. The fallo of the decision reads:
WHEREFORE, judgment is rendered in favor of the plaintiff and
against the defendants ordering the latter to pay the plaintiffs
(sic) the following amounts:
1. P472,000 as actual obligation with the stipulated interest of
6% per month from May 11, 1999 until the said obligation is
fully paid. However, the amount of P50,000 shall be deducted
from the total accumulated interest for the same was already
paid by the defendant as admitted by the plaintiff in her
complaint,
2. P25,000 as attorney's fees,
3. [T]o pay the costs.
SO ORDERED.46
The trial court ruled that Felicidad's obligation had not been novated
by the deeds of assignment and the promissory notes executed by
Felicidad's borrowers. It explained that the documents did not
contain any express agreement to novate and extinguish Felicidad's
obligation. It declared that the deeds and notes were separate
contracts which could stand alone from the original indebtedness of
Felicidad. Considering, however, Agrifina's admission that she was
able to collect from Felicidad's debtors the total amount
of P301,000.00, this should be deducted from the latter's
accountability.47 Hence, the balance, exclusive of interests,
amounted to P472,000.00.
On appeal, the CA affirmed with modification the decision of the RTC
and stated that, based on the promissory notes and acknowledgment
receipts signed by Felicidad, the appellants secured loans from the
appellee in the total principal amount of only P637,000.00,
not P773,000.00 as declared by the trial court. The CA found that,
other than Agrifina's bare testimony that she had lost the promissory
notes and acknowledgment receipts, she failed to present competent
documentary evidence to substantiate her claim that Felicidad had,
likewise, borrowed the amounts of P100,000.00, P34,000.00,
and P2,000.00. Of the P637,000.00 total account, P585,659.00 was
covered by the deeds of assignment and promissory notes; hence,
the balance of Felicidad's account amounted to only P51,341.00.
The fallo of the decision reads:
WHEREFORE, in view of the foregoing, the decision dated
January 20, 2003 of the RTC, Baguio City, Branch 61 in Civil
Case No. 4370-R is hereby MODIFIED. Defendants-
appellants are hereby ordered to pay the balance of the total
indebtedness in the amount of P51,341.00 plus the stipulated
interest of 6% per month from May 11, 1999 until the finality
of this decision.
SO ORDERED.48
The appellate court sustained the trial court's ruling that Felicidad's
obligation to Agrifina had not been novated by the deeds of
assignment and promissory notes executed in the latter's favor.
Although Agrifina was subrogated as a new creditor in lieu of
Felicidad, Felicidad's obligation to Agrifina under the loan transaction
remained; there was no intention on their part to novate the original
obligation. Nonetheless, the appellate court held that the legal
effects of the deeds of assignment could not be totally disregarded.
The assignments of credits were onerous, hence, had the effect of
payment, pro tanto, of the outstanding obligation. The fact that
Agrifina never repudiated or rescinded such assignments only shows
that she had accepted and conformed to it. Consequently, she cannot
collect both from Felicidad and her individual debtors without running
afoul to the principle of unjust enrichment. Agrifina's primary
recourse then is against Felicidad's individual debtors on the basis of
the deeds of assignment and promissory notes.
The CA further declared that the deeds of assignment executed by
Felicidad had the effect of payment of her outstanding obligation to
Agrifina in the amount of P585,659.00. It ruled that, since an
assignment of credit is in the nature of a sale, the assignors remained
liable for the warranties as they are responsible for the existence and
legality of the credit at the time of the assignment.
Both parties moved to have the decision reconsidered,49 but the
appellate court denied both motions on December 21, 2004.50
Agrifina, now petitioner, filed the instant petition, contending that
1. The Honorable Court of Appeals erred in ruling that the
deeds of assignment in favor of petitioner has the effect of
payment of the original obligation even as it ruled out that the
original obligation and the assigned credit are distinct and
separate and can stand independently from each other;
 2. The Honorable Court of Appeals erred in passing upon
issues raised for the first time on appeal; and
3. The Honorable Court of Appeals erred in resolving fact not
in issue.51
Petitioner avers that the appellate court erred in ruling that
respondents' original obligation amounted to only P637,000.00
(instead of P773,000.00) simply because she lost the promissory
notes/receipts which evidenced the loans executed by respondent
Felicidad Tibong. She insists that the issue of whether Felicidad owed
her less than P773,000.00 was not raised by respondents during pre-
trial and in their appellate brief; the appellate court was thus
proscribed from taking cognizance of the issue.
Petitioner avers that respondents failed to deny, in their verified
answer, that they had secured the P773,000.00 loan; hence,
respondents are deemed to have admitted the allegation in the
complaint that the loans secured by respondent from her amounted
to P773,000.00. As gleaned from the trial court's pre-trial order, the
main issue is whether or not she should be made to pay this amount.
Petitioner further maintains that the CA erred in deducting the total
amount of P585,659.00 covered by the deeds of assignment
executed by Felicidad and the promissory notes executed by the
latter's debtors, and that the balance of respondents' account was
only P51,341.00. Moreover, the appellate court's ruling that there
was no novation runs counter to its holding that the primary recourse
was against Felicidad's debtors. Petitioner avers that of the 11 deeds
of assignment and promissory notes, only two bore her
signature.52 She insists that she is not bound by the deeds which she
did not sign. By assigning the obligation to pay petitioner their loan
accounts, Felicidad's debtors merely assumed the latter's obligation
and became co-debtors to petitioner. Respondents were not released
from their obligation under their loan transactions, and she had the
option to demand payment from them or their debtors. Citing the
ruling of this Court in Magdalena Estates, Inc. v.
Rodriguez,53 petitioner insists that the first debtor is not released
from responsibility upon reaching an agreement with the creditor.
The payment by a third person of the first debtor's obligation does
not constitute novation, and the creditor can still enforce the
obligation against the original debtor. Petitioner also cites the ruling
of this Court in Guerrero v. Court of Appeals.54
In their Comment on the petition, respondents aver that by virtue of
respondent Felicidad's execution of the deeds of assignment, and the
original debtors' execution of the promissory notes (along with their
conformity to the deeds of assignment with petitioner's consent),
their loan accounts with petitioner amounting to P585,659.00 had
been effectively extinguished. Respondents point out that this is in
accordance with Article 1291, paragraph 2, of the Civil Code. Thus,
the original debtors of respondents had been substituted as
petitioner's new debtors.
Respondents counter that petitioner had been subrogated to their
right to collect the loan accounts of their debtors. In fact, petitioner,
as the new creditor of respondents' former debtors had been able to
collect the latter's loan accounts which amounted to P301,000.00.
The sums received by respondents' debtors were the same loans
which they obliged to pay to petitioner under the promissory notes
executed in petitioner's favor.
Respondents aver that their obligation to petitioner cannot stand or
exist separately from the original debtors' obligation to petitioner as
the new creditor. If allowed to collect from them as well as from their
original debtors, petitioner would be enriching herself at the expense
of respondents. Thus, despite the fact that petitioner had
collected P172,600.00 from respondents and P301,000.00 from the
original debtors, petitioner still sought to collect P773,000.00 from
them in the RTC. Under the deeds of assignment executed by
Felicidad and the original debtors' promissory notes, the original
debtors' accounts were assigned to petitioner who would be the new
creditor. In fine, respondents are no longer liable to petitioner for the
balance of their loan account inclusive of interests. Respondents also
insist that petitioner failed to prove that she (petitioner) was merely
authorized to collect the accounts of the original debtors so as to to
facilitate the payment of respondents' loan obligation.
The Issues
The threshold issues are: (1) whether respondent Felicidad Tibong
borrowed P773,000.00 from petitioner; and (2) whether the
obligation of respondents to pay the balance of their loans, including
interest, was partially extinguished by the execution of the deeds of
assignment in favor of petitioner, relative to the loans of Edna Papat-
iw, Helen Cabang, Antoinette Manuel, and Fely Cirilo in the total
amount of P371,000.00.
The Ruling of the Court
We have carefully reviewed the brief of respondents as appellants in
the CA, and find that, indeed, they had raised the issue of whether
they received P773,000.00 by way of loans from petitioner. They
averred that, as gleaned from the documentary evidence of
petitioner in the RTC, the total amount they borrowed was
only P673,000.00. They asserted that petitioner failed to adduce
concrete evidence that they received P773,000.00 from her.55
We agree, however, with petitioner that the appellate court erred in
reversing the finding of the RTC simply because petitioner failed to
present any document or receipt signed by Felicidad.
Section 10, Rule 8 of the Rules of Civil Procedure requires a
defendant to "specify each material allegation of fact the truth of
which he does not admit and, whenever practicable, x x x set forth
the substance of the matters upon which he relies to support his
denial.56
Section 11, Rule 8 of the same Rules provides that allegations of the
complaint not specifically denied are deemed admitted.57
The purpose of requiring the defendant to make a specific denial is
to make him disclose the matters alleged in the complaint which he
succinctly intends to disprove at the trial, together with the matter
which he relied upon to support the denial. The parties are compelled
to lay their cards on the table.58
A denial is not made specific simply because it is so qualified by the
defendant. A general denial does not become specific by the use of
the word "specifically." When matters of whether the defendant
alleges having no knowledge or information sufficient to form a belief
are plainly and necessarily within the defendant's knowledge, an
alleged "ignorance or lack of information" will not be considered as a
specific denial. Section 11, Rule 8 of the Rules also provides that
material averments in the complaint other than those as to the
amount of unliquidated damages shall be deemed admitted when not
specifically denied.59 Thus, the answer should be so definite and
certain in its allegations that the pleader's adversary should not be
left in doubt as to what is admitted, what is denied, and what is
covered by denials of knowledge as sufficient to form a belief.60
In the present case, petitioner alleged the following in her
complaint:
2. That defendants are indebted to the plaintiff in the principal
amount of SEVEN HUNDRED SEVENTY-THREE THOUSAND
 PESOS (P773,000.00) Philippine Currency with a stipulated
interest which are broken down as follows. The said principal
amounts was admitted by the defendants in their counter-
affidavit submitted before the court. Such affidavit is hereby
attached as Annex "A;"61
xxxx
H) The sum of THIRTY FOUR THOUSAND PESOS (P34,000.00)
with interest at six (6%) per cent per month and payable on
October 19, 1989, however[,] the receipt for the meantime
cannot be recovered as it was misplaced by the plaintiff but
the letter of defendant FELICIDAD TIBONG is hereby attached
as Annex "H" for the appreciation of the Honorable court;
I) The sum of ONE HUNDRED THOUSAND PESOS
(P100,000.00) with interest at five (5%) percent per month,
obtained on July 14, 1989 and payable on October 14, 1989.
Such receipt was lost but admitted by the defendants in their
counter-affidavit as attached [to] this complaint and marked
as Annex "A" mentioned in paragraph one (1); x x x62
In their Answer, respondents admitted that they had secured loans
from petitioner. While the allegations in paragraph 2 of the complaint
were specifically denied, respondents merely averred that petitioner
and respondent Felicidad entered into an agreement for the lending
of money to interested borrowers at a higher interest rate.
Respondents failed to declare the exact amount of the loans they had
secured from petitioner. They also failed to deny the allegation in
paragraph 2 of the complaint that respondent Felicidad signed and
submitted a counter-affidavit in I.S. No. 93-334 where she admitted
having secured loans from petitioner in the amount of P773,000.00.
Respondents, likewise, failed to deny the allegation in paragraph
2(h) of the complaint that respondents had secured a P34,000.00
loan payable on October 19, 1989, evidenced by a receipt which
petitioner had misplaced. Although respondents specifically denied
in paragraph 2.11 of their Answer the allegations in paragraph 2(I)
of the complaint, they merely alleged that "they have not received
sums of money from the plaintiff without any receipt therefor."
Respondents, likewise, failed to specifically deny another allegation
in the complaint that they had secured a P100,000.00 loan from
petitioner on July 14, 1989; that the loan was payable on October
14, 1989; and evidenced by a receipt which petitioner claimed to
have lost. Neither did respondents deny the allegation that
respondents admitted their loan of P100,000.00 in the counter-
affidavit of respondent Felicidad, which was appended to the
complaint as Annex "A." In fine, respondents had admitted the
existence of their P773,000.00 loan from petitioner.
We agree with the finding of the CA that petitioner had no right to
collect from respondents the total amount of P301,000.00, which
includes more than P178,980.00 which respondent Felicidad
collected from Tibong, Dalisay, Morada, Chomacog, Cabang, Casuga,
Gelacio, and Manuel. Petitioner cannot again collect the same
amount from respondents; otherwise, she would be enriching herself
at their expense. Neither can petitioner collect from respondents
more than P103,500.00 which she had already collected from Nimo,
Cantas, Rivera, Donguis, Fernandez and Ramirez.
There is no longer a need for the Court to still resolve the issue of
whether respondents' obligation to pay the balance of their loan
account to petitioner was partially extinguished by the promissory
notes executed by Juliet Tibong, Corazon Dalisay, Rita Chomacog,
Carmelita Casuga, Merlinda Gelacio and Antoinette Manuel because,
as admitted by petitioner, she was able to collect the amounts under
the notes from said debtors and applied them to respondents'
accounts.
Under Article 1231(b) of the New Civil Code, novation is enumerated
as one of the ways by which obligations are extinguished. Obligations
may be modified by changing their object or principal creditor or by
substituting the person of the debtor.63 The burden to prove the
defense that an obligation has been extinguished by novation falls
on the debtor.64 The nature of novation was extensively explained
in Iloilo Traders Finance, Inc. v. Heirs of Sps. Oscar Soriano, Jr.,65 as
follows:
Novation may either be extinctive or modificatory, much being
dependent on the nature of the change and the intention of
the parties. Extinctive novation is never presumed; there must
be an express intention to novate; in cases where it is implied,
the acts of the parties must clearly demonstrate their intent
to dissolve the old obligation as the moving consideration for
the emergence of the new one. Implied novation necessitates
that the incompatibility between the old and new obligation be
total on every point such that the old obligation is completely
superseded by the new one. The test of incompatibility is
whether they can stand together, each one having an
independent existence; if they cannot and are irreconciliable,
the subsequent obligation would also extinguish the first.
An extinctive novation would thus have the twin effects of,
first, extinguishing an existing obligation and, second, creating
a new one in its stead. This kind of novation presupposes a
confluence of four essential requisites: (1) a previous valid
obligation; (2) an agreement of all parties concerned to a new
contract; (3) the extinguishment of the old obligation; and (4)
the birth of a valid new obligation. Novation is merely
modificatory where the change brought about by any
subsequent agreement is merely incidental to the main
obligation (e.g., a change in interest rates or an extension of
time to pay); in this instance, the new agreement will not have
the effect of extinguishing the first but would merely
supplement it or supplant some but not all of its
provisions.66 (Citations Omitted)
Novation which consists in substituting a new debtor (delegado) in
the place of the original one (delegante) may be made even without
the knowledge or against the will of the latter but not without the
consent of the creditor. Substitution of the person of the debtor may
be effected by delegacion, meaning, the debtor offers, and the
creditor (delegatario), accepts a third person who consents to the
substitution and assumes the obligation. Thus, the consent of those
three persons is necessary.67 In this kind of novation, it is not enough
to extend the juridical relation to a third person; it is necessary that
the old debtor be released from the obligation, and the third person
or new debtor take his place in the relation.68 Without such release,
there is no novation; the third person who has assumed the
obligation of the debtor merely becomes a co-debtor or a surety. If
there is no agreement as to solidarity, the first and the new debtor
are considered obligated jointly.69
In Di Franco v. Steinbaum,70 the appellate court ruled that as to the
consideration necessary to support a contract of novation, the rule is
the same as in other contracts. The consideration need not be
pecuniary or even beneficial to the person promising. It is sufficient
if it be a loss of an inconvenience, such as the relinquishment of a
right or the discharge of a debt, the postponement of a remedy, the
discontinuance of a suit, or forbearance to sue.
In City National Bank of Huron, S.D. v. Fuller,71 the Circuit Court of
Appeals ruled that the theory of novation is that the new debtor
contracts with the old debtor that he will pay the debt, and
also to the same effect with the creditor, while the latter
agrees to accept the new debtor for the old. A novation is not
made by showing that the substituted debtor agreed to pay the debt;
it must appear that he agreed with the creditor to do so. Moreover,
the agreement must be based on the consideration of the
creditor's agreement to look to the new debtor instead of the
old. It is not essential that acceptance of the terms of the novation
and release of the debtor be shown by express agreement. Facts and
circumstances surrounding the transaction and the subsequent
conduct of the parties may show acceptance as clearly as an express
agreement, albeit implied.72
We find in this case that the CA correctly found that respondents'
obligation to pay the balance of their account with petitioner was
extinguished, pro tanto, by the deeds of assignment of credit
executed by respondent Felicidad in favor of petitioner.
An assignment of credit is an agreement by virtue of which the owner
of a credit, known as the assignor, by a legal cause, such as
sale, dation in payment, exchange or donation, and without the
consent of the debtor, transfers his credit and accessory rights to
another, known as the assignee, who acquires the power to enforce
it to the same extent as the assignor could enforce it against the
debtor.73 It may be in the form of sale, but at times it may constitute
a dation in payment, such as when a debtor, in order to obtain a
release from his debt, assigns to his creditor a credit he has against
a third person.74
In Vda. de Jayme v. Court of Appeals,75 the Court held that dacion
en pago is the delivery and transmission of ownership of a thing by
the debtor to the creditor as an accepted equivalent of the
performance of the obligation. It is a special mode of payment where
the debtor offers another thing to the creditor who accepts it as
equivalent of payment of an outstanding debt. The undertaking really
partakes in one sense of the nature of sale, that is, the creditor is
really buying the thing or property of the debtor, payment for which
is to be charged against the debtor's obligation. As such, the
essential elements of a contract of sale, namely, consent, object
certain, and cause or consideration must be present. In its modern
concept, what actually takes place in dacion en pago is an objective
novation of the obligation where the thing offered as an accepted
equivalent of the performance of an obligation is considered as the
object of the contract of sale, while the debt is considered as the
purchase price. In any case, common consent is an essential
prerequisite, be it sale or novation, to have the effect of totally
extinguishing the debt or obligation.76
The requisites for dacion en pago are: (1) there must be a
performance of the prestation in lieu of payment (animo solvendi)
which may consist in the delivery of a corporeal thing or a real right
or a credit against the third person; (2) there must be some
difference between the prestation due and that which is given in
substitution (aliud pro alio); and (3) there must be an agreement
between the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different
from that due.77
All the requisites for a valid dation in payment are present in this
case. As gleaned from the deeds, respondent Felicidad assigned to
petitioner her credits "to make good" the balance of her obligation.
Felicidad testified that she executed the deeds to enable her to make
partial payments of her account, since she could not comply with
petitioner's frenetic demands to pay the account in cash. Petitioner
and respondent Felicidad agreed to relieve the latter of her obligation
to pay the balance of her account, and for petitioner to collect the
same from respondent's debtors.
Admittedly, some of respondents' debtors, like Edna Papat-iw, were
not able to affix their conformity to the deeds. In an assignment of
credit, however, the consent of the debtor is not essential for its
perfection; the knowledge thereof or lack of it affecting only the
efficaciousness or inefficaciousness of any payment that might have
been made. The assignment binds the debtor upon acquiring
knowledge of the assignment but he is entitled, even then, to raise
against the assignee the same defenses he could set up against the
assignor78 necessary in order that assignment may fully produce
legal effects. Thus, the duty to pay does not depend on the consent
of the debtor. The purpose of the notice is only to inform that debtor
from the date of the assignment. Payment should be made to the
assignee and not to the original creditor.
The transfer of rights takes place upon perfection of the contract,
and ownership of the right, including all appurtenant accessory
rights, is acquired by the assignee79 who steps into the shoes of the
original creditor as subrogee of the latter80 from that amount, the
ownership of the right is acquired by the assignee. The law does not
require any formal notice to bind the debtor to the assignee, all that
the law requires is knowledge of the assignment. Even if the debtor
had not been notified, but came to know of the assignment by
whatever means, the debtor is bound by it. If the document of
assignment is public, it is evidence even against a third person of the
facts which gave rise to its execution and of the date of the latter.
The transfer of the credit must therefore be held valid and effective
from the moment it is made to appear in such instrument, and third
persons must recognize it as such, in view of the authenticity of the
document, which precludes all suspicion of fraud with respect to the
date of the transfer or assignment of the credit.81
As gleaned from the deeds executed by respondent Felicidad relative
to the accounts of her other debtors, petitioner was authorized to
collect the amounts of P6,000.00 from Cabang, and P63,600.00 from
Cirilo. They obliged themselves to pay petitioner. Respondent
Felicidad, likewise, unequivocably declared that Cabang and Cirilo no
longer had any obligation to her.
Equally significant is the fact that, since 1990, when respondent
Felicidad executed the deeds, petitioner no longer attempted to
collect from respondents the balance of their accounts. It was only
in 1999, or after nine (9) years had elapsed that petitioner attempted
to collect from respondents. In the meantime, petitioner had
collected from respondents' debtors the amount of P301,000.00.
While it is true that respondent Felicidad likewise authorized
petitioner in the deeds to collect the debtors' accounts, and for the
latter to pay the same directly, it cannot thereby be considered that
respondent merely authorized petitioner to collect the accounts of
respondents' debtors and for her to apply her collections in partial
payments of their accounts. It bears stressing that petitioner, as
assignee, acquired all the rights and remedies passed by Felicidad,
as assignee, at the time of the assignment.82 Such rights and
remedies include the right to collect her debtors' obligations to her.
Petitioner cannot find solace in the Court's ruling in Magdalena
Estates. In that case, the Court ruled that the mere fact that novation
does not follow as a matter of course when the creditor receives a
guaranty or accepts payments from a third person who has agreed
to assume the obligation when there is no agreement that the first
debtor would be released from responsibility. Thus, the creditor can
still enforce the obligation against the original debtor.
In the present case, petitioner and respondent Felicidad agreed that
the amounts due from respondents' debtors were intended to "make
good in part" the account of respondents. Case law is that, an
assignment will, ordinarily, be interpreted or construed in accordance
with the rules of construction governing contracts generally, the
primary object being always to ascertain and carry out the intention
of the parties. This intention is to be derived from a consideration of
the whole instrument, all parts of which should be given effect, and
is to be sought in the words and language employed.83
Indeed, the Court must not go beyond the rational scope of the words principal account of the respondents to the petitioner is P33,841.00.
used in construing an assignment, words should be construed No costs.SO ORDERED.
according to their ordinary meaning, unless something in the
assignment indicates that they are being used in a special sense. So,
if the words are free from ambiguity and expressed plainly the
purpose of the instrument, there is no occasion for interpretation;
but where necessary, words must be interpreted in the light of the
particular subject matter.84 And surrounding circumstances may be
considered in order to understand more perfectly the intention of the
parties. Thus, the object to be accomplished through the assignment,
and the relations and conduct of the parties may be considered in
construing the document.

Although it has been said that an ambiguous or uncertain assignment

should be construed most strictly against the assignor, the general
rule is that any ambiguity or uncertainty in the meaning of an
assignment will be resolved against the party who prepared it;
hence, if the assignment was prepared by the assignee, it will be
construed most strictly against him or her.85 One who chooses the
words by which a right is given ought to be held to the strict
interpretation of them, rather than the other who only accepts
them.86

Considering all the foregoing, we find that respondents still have a

balance on their account to petitioner in the principal amount
of P33,841.00, the difference between their loan of P773,000.00
less P585,659.00, the payment of respondents' other debtors
amounting to P103,500.00, and the P50,000.00 payment made by
respondents.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The

Decision and Resolution of the Court of Appeals
are AFFIRMED with MODIFICATION in that the balance of the
 This case is certified to Us by the Court of Appeals in its
Resolution 1 dated March 22, 1979 on the ground that it involves
purely questions of law, as raised in the appeal of the decision of the
Court of First Instance of Manila, Branch XII in Civil Case No. 91932,
the dispositive portion of which reads as follows:

In view of the foregoing consideration, the court hereby

renders judgment -

l) directing defendant to pay plaintiff:

a) the sum of P22,227.81 which is the

outstanding unpaid obligation of the
defendant under the assigned credit, with
12 %interest from the date of the firing of
the complaint in this suit until the same is
fully paid;

b) the sum equivalent to l5% of

P22,227.81 as and for attorney's fees;
and

2) directing plaintiff to deliver to, and defendant to

accept, the motor vehicle, subject of the chattel may
G.R. No. L-50449 January 30, 1982 have been changed by the result of ordinary wear and
tear of the vehicle.
FILINVEST CREDIT CORPORATION, plaintiff-appellee,
vs. Defendant to pay the cost of suit.
PHILIPPINE ACETYLENE, CO., INC., defendant-appellant.
SO ORDERED.

The facts, as found in the decision 2

subject of the instant appeal,
DE CASTRO, J.: are undisputed.
On October 30, 1971, the Philippine Acetylene Co., Inc., defendant-
appellant herein, purchased from one Alexander Lim, as evidenced
by a Deed of Sale marked as Exhibit G, a motor vehicle described as
Chevorlet, 1969 model with Serial No. 136699Z303652 for
P55,247.80 with a down payment of P20,000.00 and the balance of
P35,247.80 payable, under the terms and conditions of the
promissory note (Exh. B), at a monthly installment of P1,036.70 for
thirty-four (34) months, due and payable on the first day of each
month starting December 1971 through and inclusive September 1,
1974 with 12 % interest per annum on each unpaid installment, and
attorney's fees in the amount equivalent to 25% of the total of the
outstanding unpaid amount.
As security for the payment of said promissory note, the appellant
executed a chattel mortgage (Exh. C) over the same motor vehicle
in favor of said Alexander Lim. Subsequently, on November 2, 1971.
Alexander Lim assigned to the Filinvest Finance Corporation all his
rights, title, and interests in the promissory note and chattel
mortgage by virtue of a Deed of Assignment (Exh. D).
Thereafter, the Filinvest Finance Corporation, as a consequence of
its merger with the Credit and Development Corporation assigned to
the new corporation, the herein plaintiff-appellee Filinvest Credit
Corporation, all its rights, title, and interests on the aforesaid
promissory note and chattel mortgage (Exh. A) which, in effect, the
payment of the unpaid balance owed by defendant-appellant to
Alexander Lim was financed by plaintiff-appellee such that Lim
became fully paid.
Appellant failed to comply with the terms and conditions set forth in
the promissory note and chattel mortgage since it had defaulted in
the payment of nine successive installments. Appellee then sent a
demand letter (Exh. 1) whereby its counsel demanded "that you
(appellant) remit the aforesaid amount in full in addition to stipulated
interest and charges or return the mortgaged property to my client
at its office at 2133 Taft Avenue, Malate, Manila within five (5) days
from date of this letter during office hours. " Replying thereto,
appellant, thru its assistant general- manager, wrote back (Exh. 2)
advising appellee of its decision to "return the mortgaged property,
which return shall be in full satisfaction of its indebtedness pursuant
to Article 1484 of the New Civil Code." Accordingly, the mortgaged
vehicle was returned to the appellee together with the document
"Voluntary Surrender with Special Power of Attorney To
Sell" 3 executed by appellant on March 12, 1973 and confirmed to by
appellee's vice-president.
On April 4, 1973, appellee wrote a letter (Exh. H) to appellant
informing the latter that appellee cannot sell the motor vehicle as
there were unpaid taxes on the said vehicle in the sum of
P70,122.00. On the last portion of the said letter, appellee requested
the appellant to update its account by paying the installments in
arrears and accruing interest in the amount of P4,232.21 on or
before April 9, 1973.
On May 8, 1973, appellee, in a letter (Exh. 1), offered to deliver back
the motor vehicle to the appellant but the latter refused to accept it,
so appellee instituted an action for collection of a sum of money with
damages in the Court of First Instance of Manila on September 14,
1973.
In its answer, appellant, while admitting the material allegations of
the appellee's complaint, avers that appellee has no cause of action
against it since its obligation towards the appellee was extinguished
when in compliance with the appellee's demand letter, it returned
the mortgaged property to the appellee, and that assuming arguendo
that the return of the property did not extinguish its obligation, it
was nonetheless justified in refusing payment since the appellee is
not entitled to recover the same due to the breach of warranty
committed by the original vendor-assignor Alexander Lim.
After the case was submitted for decision, the Court of First Instance
of Manila, Branch XII rendered its decision dated February 25, 1974
which is the subject of the instant appeal in this Court.
Appellant's five assignment of errors may be reduced to, or said to
revolve around two issues: first, whether or not the return of the
mortgaged motor vehicle to the appellee by virtue of its voluntary
surrender by the appellant totally extinguished and/or cancelled its
obligation to the appellee; second, whether or not the warranty for
the unpaid taxes on the mortgaged motor vehicle may be properly
raised and imputed to or passed over to the appellee.
Consistent with its stand in the court a quo, appellant now reiterates
its main contention that appellee, after giving appellant an option
either to remit payment in full plus stipulated interests and charges
or return the mortgaged motor vehicle, had elected the alternative
remedy of exacting fulfillment of the obligation, thus, precluding the
exercise of any other remedy provided for under Article 1484 of the
Civil Code of the Philippines which reads:
Article 1484. Civil Code. - In a contract of sale of
personal property the price of which is payable in
installments, the vendor may exercise any of the
following remedies:
1) Exact fulfillment of the obligation, should the vendee
fail to pay;
2) Cancel the sale, should the vendee's failure to pay
cover two or more installments;
3) Foreclose the chattel mortgage on the thing sold, if
one has been constituted, should the vendee's failure to
pay cover two or more installments. In this case, he
shall have no further action against the purchaser to
recover any unpaid balance of the price. Any agreement
to the contrary shall be void.
In support of the above contention, appellant maintains that when it
opted to return, as in fact it did return, the mortgaged motor vehicle
to the appellee, said return necessarily had the effect of
extinguishing appellant's obligation for the unpaid price to the
appellee, construing the return to and acceptance by the appellee of
the mortgaged motor vehicle as a mode of payment, specifically,
dation in payment or dacion en pago which according to appellant,
virtually made appellee the owner of the mortgaged motor vehicle
by the mere delivery thereof, citing Articles 1232, 1245, and 1497 of
the Civil Code, to wit:
Article 1232. Payment means not only the delivery of
money but also the performance, in any manner, of an
obligation.
xxx xxx xxx
Article 1245. Dation in payment, whereby property is
alienated to the creditor in satisfaction of a debt in
money, shall be governed by the law of sales.
xxx xxx xxx
Article 1497. The thing sold shall be understood as
delivered, when it is placed in the control and
possession of the vendee.
Passing at once on the relevant issue raised in this appeal, We find
appellant's contention devoid of persuasive force. The mere return
of the mortgaged motor vehicle by the mortgagor, the herein
appellant, to the mortgagee, the herein appellee, does not constitute
dation in payment or dacion en pago in the absence, express or
implied of the true intention of the parties. Dacion en pago, according
to Manresa, is the transmission of the ownership of a thing by the
debtor to the creditor as an accepted equivalent of the performance
of obligation. 4 In dacion en pago, as a special mode of payment, the
debtor offers another thing to the creditor who accepts it as
equivalent of payment of an outstanding debt. The undertaking really
partakes in one sense of the nature of sale, that is, the creditor is
really buying the thing or property of the debtor, payment for which
is to be charged against the debtor's debt. As such, the essential
elements of a contract of sale, namely, consent, object certain, and
cause or consideration must be present. In its modern concept, what
actually takes place in dacion en pago is an objective novation of the
obligation where the thing offered as an accepted equivalent of the
performance of an obligation is considered as the object of the
contract of sale, while the debt is considered as the purchase
price. 5 In any case, common consent is an essential prerequisite, be
it sale or innovation to have the effect of totally extinguishing the
debt or obligation.
The evidence on the record fails to show that the mortgagee, the
herein appellee, consented, or at least intended, that the mere
delivery to, and acceptance by him, of the mortgaged motor vehicle
be construed as actual payment, more specifically dation in payment
or dacion en pago. The fact that the mortgaged motor vehicle was
delivered to him does not necessarily mean that ownership thereof,
as juridically contemplated by dacion en pago, was transferred from
appellant to appellee. In the absence of clear consent of appellee to
the proferred special mode of payment, there can be no transfer of
ownership of the mortgaged motor vehicle from appellant to
appellee. If at all, only transfer of possession of the mortgaged motor
vehicle took place, for it is quite possible that appellee, as
mortgagee, merely wanted to secure possession to forestall the loss,
destruction, fraudulent transfer of the vehicle to third persons, or its
being rendered valueless if left in the hands of the appellant.
A more solid basis of the true intention of the parties is furnished by
the document executed by appellant captioned "Voluntary Surrender
with Special Power of Attorney To Sell" dated March 12, 1973,
attached as Annex "C" of the appellant's answer to the complaint. An
examination of the language of the document reveals that the
possession of the mortgaged motor vehicle was voluntarily
surrendered by the appellant to the appellee authorizing the latter to
look for a buyer and sell the vehicle in behalf of the appellant who
retains ownership thereof, and to apply the proceeds of the sale to
the mortgage indebtedness, with the undertaking of the appellant to
pay the difference, if any, between the selling price and the mortgage
obligation. With the stipulated conditions as stated, the appellee, in
essence was constituted as a mere agent to sell the motor vehicle
which was delivered to the appellee, not as its property, for if it were,
he would have full power of disposition of the property, not only to
sell it as is the limited authority given him in the special power of
attorney. Had appellee intended to completely release appellant of
its mortgage obligation, there would be no necessity of executing the
document captioned "Voluntary Surrender with Special Power of
Attorney To Sell." Nowhere in the said document can We find that
the mere surrender of the mortgaged motor vehicle to the appellee
extinguished appellant's obligation for the unpaid price.
Appellant would also argue that by accepting the delivery of the
mortgaged motor vehicle, appellee is estopped from demanding
payment of the unpaid obligation. Estoppel would not he since, as
clearly set forth above, appellee never accepted the mortgaged
motor vehicle in full satisfaction of the mortgaged debt.
Under the law, the delivery of possession of the mortgaged property
to the mortgagee, the herein appellee, can only operate to extinguish
appellant's liability if the appellee had actually caused the foreclosure
sale of the mortgaged property when it recovered possession
thereof. 6 It is worth noting that it is the fact of foreclosure and actual
sale of the mortgaged chattel that bar the recovery by the vendor of
any balance of the purchaser's outstanding obligation not satisfied
by the sale. 7 As held by this Court, if the vendor desisted, on his
own initiative, from consummating the auction sale, such desistance
was a timely disavowal of the remedy of foreclosure, and the vendor
can still sue for specific performance. 8 This is exactly what happened
in the instant case.
It must be noted that the unpaid taxes on the motor vehicle is a
burden on the property. Since as earlier shown, the ownership of the
mortgaged property never left the mortgagor, the herein appellant,
the burden of the unpaid taxes should be home by him, who, in any
case, may not be said to be without remedy under the law, but
definitely not against appellee to whom were transferred only rights,
title and interest, as such is the essence of assignment of credit. 10
WHEREFORE, the judgment appealed from is hereby affirmed in
toto with costs against defendant-appellant.
SO ORDERED.

On the second issue, there is no dispute that there is an unpaid taxes

of P70,122.00 due on the mortgaged motor vehicle which, according
to appellant, liability for the breach of warranty under the Deed of
Sale is shifted to the appellee who merely stepped into the shoes of
the assignor Alexander Lim by virtue of the Deed of Assignment in
favor of appellee. The Deed of Sale between Alexander Lim and
appellant and the Deed of Assignment between Alexander Lim and
appellee are very clear on this point. There is a specific provision in
the Deed of Sale that the seller Alexander Lim warrants the sale of
the motor vehicle to the buyer, the herein appellant, to be free from
liens and encumbrances. When appellee accepted the assignment of
credit from the seller Alexander Lim, there is a specific agreement
that Lim continued to be bound by the warranties he had given to
the buyer, the herein appellant, and that if it appears subsequently
that "there are such counterclaims, offsets or defenses that may be
interposed by the debtor at the time of the assignment, such
counterclaims, offsets or defenses shall not prejudice the FILINVEST
FINANCE CORPORATION and I (Alexander Lim) further warrant and
hold the said corporation free and harmless from any such claims,
offsets, or defenses that may be availed of." 9