FERNANDO A.

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

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

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

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

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

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

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

To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor of Gaite a surety
bond, and pursuant to the promise, Fonacier delivered to Gaite a surety bond dated December 8, 1954 with himself
(Fonacier) as principal and the Larap Mines and Smelting Co. and its stockholders George Krakower, Segundina
Vivas, Pacifico Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified, however,
that when this bond was presented to him by Fonacier together with the "Revocation of Power of Attorney and
Contract", Exhibit "A", on December 8, 1954, he refused to sign said Exhibit "A" unless another bond underwritten by
a bonding company was put up by defendants to secure the payment of the P65,000.00 balance of their price of the
iron ore in the stockpiles in the mining claims. Hence, a second bond, also dated December 8, 1954 (Exhibit "B"),was
executed by the same parties to the first bond Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as
additional surety, but it provided that the liability of the surety company would attach only when there had been an
actual sale of iron ore by the Larap Mines & Smelting Co. for an amount of not less then P65,000.00, and that,
furthermore, the liability of said surety company would automatically expire on December 8, 1955. Both bonds were
attached to the "Revocation of Power of Attorney and Contract", Exhibit "A", and made integral parts thereof.

On the same day that Fonacier revoked the power of attorney he gave to Gaite and the two executed and signed
the "Revocation of Power of Attorney and Contract", Exhibit "A", Fonacier entered into a "Contract of Mining
Operation", ceding, transferring, and conveying unto the Larap Mines and Smelting Co., Inc. the right to develop,
exploit, and explore the mining claims in question, together with the improvements therein and the use of the name
"Larap Iron Mines" and its good will, in consideration of certain royalties. Fonacier likewise transferred, in the same
document, the complete title to the approximately 24,000 tons of iron ore which he acquired from Gaite, to the Larap
& Smelting Co., in consideration for the signing by the company and its stockholders of the surety bonds delivered
by Fonacier to Gaite (Record on Appeal, pp. 82-94).

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

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

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

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

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

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

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

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

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

The main issues presented by appellants in this appeal are:

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

(2) that the lower court erred in not holding that there were only 10,954.5 tons in the stockpiles of iron ore sold by
appellee Gaite to appellant Fonacier.

The first issue involves an interpretation of the following provision in the contract Exhibit "A":

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

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

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will be paid from and out of the first letter of credit
covering the first shipment of iron ore made by the Larap Mines & Smelting Co., Inc., its assigns, administrators, or
successors in interest.
We find the court below to be legally correct in holding that the shipment or local sale of the iron ore is not a condition
precedent (or suspensive) to the payment of the balance of P65,000.00, but was only a suspensive period or term.
What characterizes a conditional obligation is the fact that its efficacy or obligatory force (as distinguished from its
demandability) is subordinated to the happening of a future and uncertain event; so that if the suspensive condition
does not take place, the parties would stand as if the conditional obligation had never existed. That the parties to the
contract Exhibit "A" did not intend any such state of things to prevail is supported by several circumstances:

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

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

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

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

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

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

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

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

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

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

(1) . . .

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

(3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through
fortuitous event they disappear, unless he immediately gives new ones equally satisfactory.
Appellants' failure to renew or extend the surety company's bond upon its expiration plainly impaired the securities
given to the creditor (appellee Gaite), unless immediately renewed or replaced.

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

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

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

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

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

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

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

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

Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made by appellant's witness
Cipriano Manlañgit is correct, if we multiply it by the average tonnage factor of 3.3 tons to a cubic meter, the product
is 21,809.7 tons, which is not very far from the estimate of 24,000 tons made by appellee Gaite, considering that
actual weighing of each unit of the mass was practically impossible, so that a reasonable percentage of error should
be allowed anyone making an estimate of the exact quantity in tons found in the mass. It must not be forgotten that
the contract Exhibit "A" expressly stated the amount to be 24,000 tons, more or less. (ch. Pine River Logging &
Improvement Co. vs U.S., 279, 46 L. Ed. 1164).
There was, consequently, no short-delivery in this case as would entitle appellants to the payment of damages, nor
could Gaite have been guilty of any fraud in making any misrepresentation to appellants as to the total quantity of ore
in the stockpiles of the mining claims in question, as charged by appellants, since Gaite's estimate appears to be
substantially correct.

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

Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De Leon and Natividad, JJ., concur.
HERNANDO R. PEÑALOSA alias "HENRY PEÑALOSA," petitioner,
vs.
SEVERINO C. SANTOS (deceased), Substituted by his heirs: OLIVER SANTOS and ADYLL M. SANTOS,
and ADELA DURAN MENDEZ SANTOS, respondents.

QUISUMBING, J.:

Petitioner appeals by certiorari from the decision of the Court of Appeals, which affirmed the judgment of the
Regional Trial Court of Quezon City, Branch 78, in Civil Case No. Q-92-13531, declaring the deed of absolute
sale entered into between petitioner and respondents as void and inexistent and ordering petitioner to vacate
the subject property and to pay reasonable compensation for its use.

The facts, as revealed by the records, are as follows:

Respondents Severino C. Santos (deceased) and Adela Mendez Santos are registered owners of a residential
house and lot located at No. 113 Scout Rallos Street, Quezon City under TCT No. PT-23458 (54434).1 In 1988,
Severino and Adela decided to sell their property and for this purpose, negotiated with petitioner Hernando (or
Henry) Peñalosa. The property was then occupied by a lessee, Eleuterio Perez, who was given preference to
buy it under the same terms offered by the buyer.2 Perez proposed less favorable terms3 and expectedly,
Severino rejected his offer.

On August 1, 1988, petitioner Henry Peñalosa and respondent Severino Santos attempted to enter into an
agreement whereby the latter, for a consideration of P1,800.000.00, would sell to the former the property
subject of the instant case. The deed of absolute sale4 (first deed) evidencing this transaction was signed by
Henry but not by Severino, because according to the latter, Henry "took time to decide" on the matter. 5

On August 15, 1988, Henry signed a document6 stating that the first deed was executed between him and
Severino, for the sole purpose of helping the latter eject Perez, the occupant of the property. Henry
acknowledged in said document that although Severino had agreed to sell the property to him, he had not paid
the consideration stated in the first deed.

Thereafter, Henry and Severino executed another deed of absolute sale7 (second deed) for a higher
consideration of P2,000,000.00. Although the second deed was originally dated "August 1988", superimposed
upon the same was the date "September 12, 1988". This second deed was signed by both parties and duly
notarized. It states that Severino sells and transfers the house and lot to Henry, who had paid the full price of
P2,000,000.00 therefor.

Severino explained that his initial asking price for the property was only P1,800,000.00 as shown in the first
deed. But he later asked for a higher price because Henry could not give the money as soon as expected.
However, Severino claimed that he made it clear to Henry that he agreed to sell the property under the second
deed for P2,000,000.00, provided that payment be immediately effected. Severino said that he wanted to use
the money to invest in another property located in Alabang and told Henry that if payment was made at a later
date, the price would be the current market value at the time of payment.

Henry then gave Severino P300,000.00 as "earnest money", purportedly with the understanding that the former
was to pay the balance within 60 days. Otherwise, said amount would be forfeited in favor of Severino.8 The
latter also maintained that he signed the second deed only for the purpose of facilitating Henry's acquisition of
a bank loan to finance payment of the balance of the purchase price9 and added that execution of the second
deed was necessary to enable Henry to file a court action for ejectment of the tenant.10

After execution of the second deed, Henry filed a loan application with the Philippine American Life Insurance
Company (Philam Life) for the amount of P2,500,000.00.11 According to Henry, he had agreed with Severino
during the signing of the second deed, that the balance of P1,700,000.00 would be paid by means of a loan,
with the property itself given as collateral.12

Meanwhile, on the strength of the first deed and as new "owner" of the property, Henry wrote a letter13 dated
August 8, 1988 to the lessee, Eleuterio Perez, demanding that the latter vacate the premises within 10 days.
Failing in this effort, Henry brought a complaint for ejectment14 against Perez before the Office of the Barangay
Captain.

On September 1, 1988, a Certification To File Action15 was issued by the barangay lupon. This led to the
subsequent filing of Civil Case No. 88 0439 for unlawful detainer, before the Metropolitan Trial Court of Quezon
City, Branch 43, entitled "Henry Peñalosa, Plaintiff vs. Eleuterio Perez, Defendant". Claiming that he still had a
subsisting contract of lease over the property, Perez countersued and brought Civil Case No. Q-88-1062 before
the Regional Trial Court of Quezon City, Branch 96, entitled "Eleuterio Perez, Plaintiffs vs. Severino Santos, et.
al, Defendants". In this latter case, Perez assailed the validity of the sale transaction between Henry and
Severino and impleaded the former as co-defendant of Severino.
While the aforesaid court cases were pending resolution, Philam Life informed Severino through a letter,16 that
Henry's loan application had been approved by the company on January 18, 1989. Philam Life stated in the
letter that of the total purchase price of P2,500,000.00, the amount of P1,700,000.00 would be paid directly to
Severino by Philam Life, while P800,000.00 would be paid by Henry.

The release of the loan proceeds was made subject to the submission of certain documents in Severino's
possession, one of which is the owner's duplicate of the Transfer Certificate of Title (TCT) pertaining to the
property. However, when Henry and Severino met with officials of Philam Life to finalize the loan/mortgage
contract, Severino refused to surrender the owner's duplicate title and insisted on being paid immediately in
cash.17 As a consequence, the loan/mortgage contract with Philam Life did not materialize.

Subsequently, on April 28, 1989, judgment18 was rendered by the MTC-QC, Branch 43, in Civil Case No. 0439,
ordering the tenant Perez to vacate and surrender possession of the property to Henry. In said judgment, Henry
was explicitly recognized as the new owner of the property by virtue of the contract of sale dated September
12, 1988, after full payment of the purchase price of P2,000,000.00, receipt of which was duly acknowledged
by Severino.

Upon finality of said judgment, Henry and his family moved into the disputed house and lot on August 1989,
after making repairs and improvements.19 Henry spent a total of P700,000.00 for the renovation, as evidenced
by receipts.20

On July 27, 1992, Severino sent a letter21 to Henry, through counsel, demanding that Henry vacate the house
and lot, on the ground that Henry did not conclusively offer nor tender a price certain for the purchase of the
property. The letter also stated that Henry's alleged offer and promise to buy the property has since been
rejected by Severino.

When Henry refused to vacate the property, Severino brought this action for quieting of title, recovery of
possession and damages before the Regional Trial Court of Quezon City, Branch 78, on September 28, 1992.
Severino alleged in his complaint22 that there was a cloud over the title to the property, brought about by the
existence of the second deed of sale.

Essentially, Severino averred that the second deed was void and inexistent because: a) there was no cause or
consideration therefor, since he did not receive the P2,000,000.00 stated in the deed; b) his wife, Adela, in
whose name the property was titled, did not consent to the sale nor sign the deed; c) the deed was not registered
with the Register of Deeds; d) he did not acknowledge the deed personally before the notary public; e) his
residence certificate, as appearing in the deed, was falsified; and f) the deed is fictitious and simulated because
it was executed only for the purpose of placing Henry in possession of the property because he tendered
"earnest money". Severino also claimed that there was no meeting of minds with respect to the cause or
consideration, since Henry's varied offers of P1,800,000.00, P2,000,000.00, and P2,500,000.00, were all
rejected by him.

For his part, Henry asserted that he was already the owner of the property being claimed by Severino, by virtue
of a final agreement reached with the latter. Contrary to Severino's claim, the price of the property was pegged
at P2,000,000.00, as agreed upon by the parties under the second deed. Prior to the filing of the action, his
possession of the property remained undisturbed for three (3) years. Nevertheless, he admitted that since the
signing of the second deed, he has not paid Severino the balance of the purchase price. He, however, faulted
the latter for the non-payment, since according to him, Severino refused to deliver the owner's duplicate title to
the financing company.

On Aug. 20, 1993, the trial court rendered judgment in favor of Severino and disposed:

WHEREFORE, judgment is rendered as follows:

1) DECLARING the "Deed of Absolute Sale" which was signed by the plaintiff Severino C. Santos as
vendor and the defendant as vendee and which was entered in the notarial register of notary public
Dionilo Marfil of Quezon City as Doc. No. 474, Page No. 95, Book No. 173, Series of 1988, as inexistent
and void from the beginning; and consequently, plaintiff's title to the property under T.C.T. No. PT-23458
(54434) issued by the Register of Deeds of Quezon City is quieted, sustained and maintained;

2) ORDERING the defendant to pay plaintiffs the amount of P15, 000.00 a month as reasonable
compensation for the use of the House and Lot located at No. 113 Scout Rallos St., Quezon City,
beginning on the month of August, 1993, until the premises is fully vacated, (the compensation for the
use thereof from the time the defendant had occupied the premises up to July, 1993, is recompensed
for the repairs made by him); and

3) ORDERING the plaintiffs to reimburse the defendant the amount of P300,000.00 after defendant had
vacated the premises in question, and the reasonable compensation for the use thereof had been paid.
 All other claims and counterclaims are DENIED for lack of legal and factual bases. No pronouncement
as to costs.

SO ORDERED.23

Both Henry and Severino appealed the above decision to the Court of Appeals. Before the appellate court could
decide the same, Severino passed away and was substituted by his wife and children as respondents. Henry
filed a motion for leave to be allowed to deposit P1,700,000.00 in escrow with the Landbank of the Philippines
to answer for the money portion of the decision.24 This motion was granted.

On December 29, 1997, the appellate court affirmed25 the judgment of the trial court and thereafter, denied
Henry's motion for reconsideration.26 Thus, Henry brought this petition, citing the following as alleged errors:

I.

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN CONCLUDING THAT THERE WAS NO
PERFECTED CONTRACT OF SALE BETWEEN SEVERINO C. SANTOS AND PETITIONER HENRY R.
PEÑALOSA.

II.

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN CONSIDERING NON-PAYMENT OF

THE FULL PURCHASE PRICE AS CAUSE FOR DECLARING A PERFECTED CONTRACT OF SALE AS
NULL AND VOID.

III.

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN REFUSING TO RECOGNIZE THAT

OWNERSHIP OF THE SUBJECT PROPERTY HAD BEEN EFFECTIVELY VESTED UPON PETITIONER
HENRY R. PEÑALOSA WHEN ACTUAL POSSESSION THEREOF HAD LAWFULLY TRANSFERRED TO
PETITIONER HENRY R. PEÑALOSA BY VIRTUE OF THE COURT JUDGMENT IN THE EJECTMENT SUIT
AGAINST THE FORMER LESSEE.27

The pivotal issue presented before us is whether or not the second deed is valid and constitutes evidence of
the final agreement between the parties regarding the sale transaction entered into by them.

Petitioner maintains that the existence of a perfected contract of sale in this case is beyond doubt, since there
clearly was a meeting of minds between the parties as to the object and consideration of the contract. According
to petitioner, the agreement of the parties is evidenced by provisions contained in the second deed, which
cannot possibly be simulated or fictitious. Subsequent and contemporaneous acts indubitably point to the fact
that the parties truly intended to be bound by the second deed. Accordingly, the P2,000,000.00 stated therein
was the actual price agreed upon by the parties as consideration for the sale.

On the other hand, in their memorandum, respondents insist that the second deed is a complete nullity because,
as found by both the appellate and trial court: a) the consideration stated in the deed was not paid; b) Severino's
passport showed that he was in the U.S. when said deed was notarized; c) Severino did not surrender a copy
of the title at the time of the alleged sale; d) petitioner did not pay real estate taxes on the property; e) it was
executed only for the purpose of helping Severino eject the tenant; f) Severino's wife, Adela, did not sign the
deed; and g) the various documentary exhibits proved that there was no price certain accepted or paid.

Respondents additionally argue that petitioner merely seeks a review of the aforesaid factual findings of the
lower court and that consequently, we should deny the petition on the ground that it raises only factual
questions.

Considering the pivotal issue presented after close scrutiny of the assigned errors as well as the arguments of
the parties, we are unable to agree with respondents and we must give due course to the petition.

First of all, the petition filed before this Court explicitly questions "the legal significance and consequences of
the established facts"28 and not the findings of fact themselves. As pointed out by petitioner, he submits to the
factual findings of the lower court, but maintains that its legal conclusions are irreconcilable and inconsistent
therewith. He also states that the grounds relied upon in this petition do not call for the weighing of conflicting
evidence submitted by the parties. Rather, he merely asks the Court to give due significance to certain
undisputed and admitted facts spread throughout the record, which, if properly appreciated, would justify a
different conclusion.

At any rate, in Baricuatro, Jr. vs. Court of Appeals, 325 SCRA 137, 145 (2000), we reiterated the doctrine that
findings of fact of the Court of Appeals are binding and conclusive upon this Court, subject to certain exceptions,
one of which is when the judgment is based on a misapprehension of facts. In this case, after carefully poring
over the records, we are convinced that the lower courts misappreciated the evidence presented by the parties
and that, indeed, a reversal of the assailed judgment is in order.

It should have been readily apparent to the trial court that the circumstances it cited in its decision are not proper
grounds for holding that the second deed is simulated. Simulation is a declaration of a fictitious will, deliberately
made by agreement of the parties, in order to produce, for purposes of deception, the appearance of a juridical
act which does not exist or is different from that which was really executed. Its requisites are: a) an outward
declaration of will different from the will of the parties; b) the false appearance must have been intended by
mutual agreement; and c) the purpose is to deceive third persons.29 None of these requisites is present in this
case.

The basic characteristic of an absolutely simulated or fictitious contract is that the apparent contract is not really
desired or intended to produce legal effects or alter the juridical situation of the parties in any way. 30 However,
in this case, the parties already undertook certain acts which were directed towards fulfillment of their respective
covenants under the second deed, indicating that they intended to give effect to their agreement.

In particular, as early as August 8, 1988, after execution of the first deed, Severino authorized petitioner to bring
an action for ejectment against the overstaying tenant and allowed petitioner to pursue the ejectment case to
its final conclusion, presumably to secure possession of the property in petitioner's favor. Petitioner also applied
for a loan, which was approved by Philam Life, to complete payment of the stipulated price. After making
extensive repairs with the knowledge of Severino, petitioner moved into the premises and actually occupied the
same for three years before this action was brought. Moreover, simultaneous with the execution of the second
deed, petitioner gave Severino P300,000.00 in earnest money, which under Article 148231 of the New Civil
Code, is part of the purchase price and proof of perfection of the contract.

What may have led the lower courts into incorrectly believing that the second deed was simulated is Exhibit D
— a document in which petitioner declared that the deed was executed only for the purpose of helping Severino
eject the tenant. However, a perusal of this document reveals that it made reference to the first deed and not
the second deed, which was executed only after Exhibit D. So that while the first deed was qualified by
stipulations contained in Exhibit D, the same cannot be said of the second deed which was signed by both
parties.

Further, the fact that Severino executed the two deeds in question, primarily so that petitioner could eject the
tenant and enter into a loan/mortgage contract with Philam Life, is to our mind, a strong indication that he
intended to transfer ownership of the property to petitioner. For why else would he authorize the latter to sue
the tenant for ejectment under a claim of ownership, if he truly did not intend to sell the property to petitioner in
the first place? Needless to state, it does not make sense for Severino to allow petitioner to pursue the ejectment
case, in petitioner's own name, with petitioner arguing that he had bought the property from Severino and thus
entitled to possession thereof, if petitioner did not have any right to the property.

Also worth noting is the fact that in the case filed by Severino's tenant against Severino and petitioner in 1989,
assailing the validity of the sale made to petitioner, Severino explicitly asserted in his sworn answer to the
complaint that the sale was a legitimate transaction. He further alleged that the ejectment case filed by petitioner
against the tenant was a legitimate action by an owner against one who refuses to turn over possession of his
property.32

Our attention is also drawn to the fact that the genuineness and due execution of the second deed was not
denied by Severino. Except to allege that he was not physically present when the second deed was notarized
before the notary public, Severino did not assail the truth of its contents nor deny that he ever signed the same.
As a matter of fact, he even admitted that he affixed his signature on the second deed to help petitioner acquire
a loan. This can only signify that he consented to the manner proposed by petitioner for payment of the balance
and that he accepted the stipulated price of P2,000,000.00 as consideration for the sale.

Since the genuineness and due execution of the second deed was not seriously put in issue, it should be upheld
as the best evidence of the intent and true agreement of the parties. Oral testimony, depending as it does
exclusively on human memory, is not as reliable as written or documentary evidence.33

It should be emphasized that the non-appearance of the parties before the notary public who notarized the
deed does not necessarily nullify nor render the parties' transaction void ab initio. We have held previously that
the provision of Article 135834 of the New Civil Code on the necessity of a public document is only for
convenience, not for validity or enforceability. Failure to follow the proper form does not invalidate a contract.
Where a contract is not in the form prescribed by law, the parties can merely compel each other to observe that
form, once the contract has been perfected.35 This is consistent with the basic principle that contracts are
obligatory in whatever form they may have been entered into, provided all essential requisites are present. 36

The elements of a valid contract of sale under Art. 1458 of the Civil Code are: (1) consent or meeting of the
minds; (2) determinate subject matter; and (3) price certain in money or its equivalent.37 In the instant case, the
second deed reflects the presence of all these elements and as such, there is already a perfected contract of
sale.

Respondent's contention that the second deed was correctly nullified by the lower court because Severino's
wife, Adela, in whose name the property was titled, did not sign the same, is unavailing. The records are replete
with admissions made by Adela that she had agreed with her husband to sell the property38 which is conjugal
in nature39and that she was aware of this particular transaction with petitioner. She also said that it was Severino
who actually administered their properties with her consent, because she did not consider this as her
responsibility.40

We also observe that Severino's testimony in court contained (1) admissions that he indeed agreed to sell the
property and (2) references to petitioner's failure to pay the purchase price.41 He did not mention that he did not
intend at all to sell the property to petitioner and instead, stressed the fact that the purchase price had not yet
been paid. Why would Severino stress non-payment if there was no sale at all?

However, it is well-settled that non-payment of the purchase price is not among the instances where the law
declares a contract to be null and void. It should be pointed out that the second deed specifically provides:

That for and in consideration of' the sum of TWO MILLION PESOS (P2,000,000.00), Philippine Currency
paid in full by HENRY R. PEÑALOSA, receipt of which is hereby acknowledged by me to my full
satisfaction, I hereby by these presents, sells (sic), cede, convey and otherwise dispose of the above
described parcel of land, unto HENRY R. PEÑALOSA, his heirs, successors and assigns, free from all
liens and encumbrances.

xxx xxx xxx

(SGD.)

SEVERINO C. SANTOS
VENDOR

xxx xxx xxx42

As can be seen from above, the contract in this case is absolute in nature and is devoid of any proviso that title
to the property is reserved in the seller until full payment of the purchase price. Neither does the second deed
give Severino a unilateral right to resolve the contract the moment the buyer fails to pay within a fixed period.43 At
most, the non-payment of the contract price merely results in a breach of contract for non-performance and
warrants an action for rescission or specific performance under Article 1191 of the Civil Code.44

Be that as it may, we agree with petitioner that although the law allows rescission as a remedy for breach of
contract, the same may not be availed of by respondents in this case. To begin with, it was Severino who
prevented full payment of the stipulated price when he refused to deliver the owner's original duplicate title to
Philam Life. His refusal to cooperate was unjustified, because as Severino himself admitted, he signed the
deed precisely to enable petitioner to acquire the loan. He also knew that the property was to be given as
security therefor. Thus, it cannot be said that petitioner breached his obligation towards Severino since the
former has always been willing to and could comply with what was incumbent upon him.

In sum, the only conclusion which can be deduced from the aforesaid circumstances is that ownership of the
property has been transferred to petitioner. Article 1477 of the Civil Code states that ownership of the thing sold
shall be transferred to the vendee upon the actual or constructive delivery thereof. It is undisputed that the
property was placed in the control and possession of petitioner45 when he came into material possession thereof
after judgment in the ejectment case. Not only was the contract of sale perfected, but also actual delivery of the
property effectively consummated the sale.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated December 29, 1997 and
its resolution dated April 15, 1998 in CA-G.R. CV No. 45206 which had affirmed the judgment of the Regional
Trial Court of Quezon City, Branch 78, are REVERSED and SET ASIDE. A new judgment is hereby rendered
UPHOLDING the validity of Exhibit B, the Deed of Absolute Sale dated September 12, 1988, entered into
between the parties. The Landbank of the Philippines is further ordered to RELEASE to respondents the amount
of P1,700,000.00 held in escrow, representing the balance of the purchase price agreed upon by the parties
under the deed of absolute sale. Finally, the respondents are ordered to DELIVER to petitioner the owner's
duplicate copy of TCT No. PT-23458 after said release, with the corresponding payment of taxes due. Costs
against respondents.

SO ORDERED.

Bellosillo, Mendoza, Buena and De Leon, Jr., JJ ., concur.

GREGORIO FULE, Petitioner, v. COURT OF APPEALS, NINEVETCH CRUZ and JUAN
BELARMINO, Respondents.

DECISION

ROMERO, J.:

This petition for review on certiorari questions the affirmance by the Court of Appeals of the decision1 of the
Regional Trial Court of San Pablo City, Branch 30, dismissing the complaint that prayed for the nullification of
a contract of sale of a 10-hectare property in Tanay, Rizal in consideration of the amount of P40,000.00 and a
2.5 carat emerald-cut diamond (Civil Case No. SP-2455). The lower courts decision disposed of the case as
follows:

WHEREFORE, premises considered, the Court hereby renders judgment dismissing the complaint for lack of
merit and ordering plaintiff to pay:

1. Defendant Dra. Ninevetch M. Cruz the sum of P300,000.00 as and for moral damages and the sum
of P100,000.00 as and for exemplary damages;

2. Defendant Atty. Juan Belarmino the sum of P250,000.00 as and for moral damages and the sum
of P150,000.00 as and for exemplary damages;

3. Defendant Dra. Cruz and Atty. Belarmino the sum of P25,000.00 each as and for attorneys fees and litigation
expenses; and

4. The costs of suit.

SO ORDERED.

As found by the Court of Appeals and the lower court, the antecedent facts of this case are as follows:

Petitioner Gregorio Fule, a banker by profession and a jeweler at the same time, acquired a 10-hectare property
in Tanay, Rizal (hereinafter Tanay property), covered by Transfer Certificate of Title No. 320725 which used to
be under the name of Fr. Antonio Jacobe. The latter had mortgaged it earlier to the Rural Bank of Alaminos
(the Bank), Laguna, Inc. to secure a loan in the amount of P10,000.00, but the mortgage was later foreclosed
and the property offered for public auction upon his default.

In July 1984, Petitioner, as corporate secretary of the bank, asked Remelia Dichoso and Oliva Mendoza to look
for a buyer who might be interested in the Tanay property. The two found one in the person of herein private
respondent Dr. Ninevetch Cruz. It so happened that at the time, petitioner had shown interest in buying a pair
of emerald-cut diamond earrings owned by Dr. Cruz which he had seen in January of the same year when his
mother examined and appraised them as genuine. Dr. Cruz, however, declined petitioners offer to buy the
jewelry for P100,000.00. Petitioner then made another bid to buy them for US$6,000.00 at the exchange rate
of $1.00 to P25.00. At this point, petitioner inspected said jewelry at the lobby of the Prudential Bank branch in
San Pablo City and then made a sketch thereof. Having sketched the jewelry for twenty to thirty minutes,
petitioner gave them back to Dr. Cruz who again refused to sell them since the exchange rate of the peso at
the time appreciated to P19.00 to a dollar.

Subsequently, however, negotiations for the barter of the jewelry and the Tanay property ensued. Dr. Cruz
requested herein private respondent Atty. Juan Belarmino to check the property who, in turn, found out that no
sale or barter was feasible because the one-year period for redemption of the said property had not yet expired
at the time.

In an effort to cut through any legal impediment, petitioner executed on October 19, 1984, a deed of redemption
on behalf of Fr. Jacobe purportedly in the amount of P15,987.78, and on even date, Fr. Jacobe sold the property
to petitioner for P75,000.00. The haste with which the two deeds were executed is shown by the fact that the
deed of sale was notarized ahead of the deed of redemption. As Dr. Cruz had already agreed to the proposed
barter, petitioner went to Prudential Bank once again to take a look at the jewelry.

In the afternoon of October 23, 1984, petitioner met Atty. Belarmino at the latters residence to prepare the
documents of sale.2 Dr. Cruz herself was not around but Atty. Belarmino was aware that she and petitioner had
previously agreed to exchange a pair of emerald-cut diamond earrings for the Tanay property. Atty. Belarmino
accordingly caused the preparation of a deed of absolute sale while petitioner and Dr. Cruz attended to the
safekeeping of the jewelry.

The following day, Petitioner, together with Dichoso and Mendoza, arrived at the residence of Atty. Belarmino
to finally execute a deed of absolute sale. Petitioner signed the deed and gave Atty. Belarmino the amount
of P13,700.00 for necessary expenses in the transfer of title over the Tanay property. Petitioner also issued a
certification to the effect that the actual consideration of the sale was P200,000.00 and not P80,000.00 as
indicated in the deed of absolute sale. The disparity between the actual contract price and the one indicated on
the deed of absolute sale was purportedly aimed at minimizing the amount of the capital gains tax that petitioner
would have to shoulder. Since the jewelry was appraised only at P160,000.00, the parties agreed that the
balance of P40,000.00 would just be paid later in cash.

As pre-arranged, petitioner left Atty. Belarminos residence with Dichoso and Mendoza and headed for the bank,
arriving there at past 5:00 p.m. Dr. Cruz also arrived shortly thereafter, but the cashier who kept the other key
to the deposit box had already left the bank. Dr. Cruz and Dichoso, therefore, looked for said cashier and found
him having a haircut. As soon as his haircut was finished, the cashier returned to the bank and arrived there at
5:48 p.m., ahead of Dr. Cruz and Dichoso who arrived at 5:55 p.m. Dr. Cruz and the cashier then opened the
safety deposit box, the former retrieving a transparent plastic or cellophane bag with the jewelry inside and
handing over the same to petitioner. The latter took the jewelry from the bag, went near the electric light at the
banks lobby, held the jewelry against the light and examined it for ten to fifteen minutes. After a while, Dr. Cruz
asked, Okay na ba iyan? Petitioner expressed his satisfaction by nodding his head.

For services rendered, petitioner paid the agents, Dichoso and Mendoza, the amount of US$300.00 and some
pieces of jewelry. He did not, however, give them half of the pair of earrings in question which he had earlier
promised.

Later, at about 8:00 oclock in the evening of the same day, petitioner arrived at the residence of Atty. Belarmino
complaining that the jewelry given to him was fake. He then used a tester to prove the alleged fakery.
Meanwhile, at 8:30 p.m., Dichoso and Mendoza went to the residence of Dr. Cruz to borrow her car so that,
with Atty. Belarmino, they could register the Tanay property. After Dr. Cruz had agreed to lend her car, Dichoso
called up Atty. Belarmino. The latter, however, instructed Dichoso to proceed immediately to his residence
because petitioner was there. Believing that petitioner had finally agreed to give them half of the pair of earrings,
Dichoso went posthaste to the residence of Atty. Belarmino only to find petitioner already demonstrating with a
tester that the earrings were fake. Petitioner then accused Dichoso and Mendoza of deceiving him which they,
however, denied. They countered that petitioner could not have been fooled because he had vast experience
regarding jewelry. Petitioner nonetheless took back the US$300.00 and jewelry he had given them.

Thereafter, the group decided to go to the house of a certain Macario Dimayuga, a jeweler, to have the earrings
tested. Dimayuga, after taking one look at the earrings, immediately declared them counterfeit. At around 9:30
p.m., petitioner went to one Atty. Reynaldo Alcantara residing at Lakeside Subdivision in San Pablo City,
complaining about the fake jewelry. Upon being advised by the latter, petitioner reported the matter to the police
station where Dichoso and Mendoza likewise executed sworn statements.

On October 26, 1984, petitioner filed a complaint before the Regional Trial Court of San Pablo City against
private respondents praying, among other things, that the contract of sale over the Tanay property be declared
null and void on the ground of fraud and deceit.

On October 30, 1984, the lower court issued a temporary restraining order directing the Register of Deeds of
Rizal to refrain from acting on the pertinent documents involved in the transaction. On November 20, 1984,
however, the same court lifted its previous order and denied the prayer for a writ of preliminary injunction.

After trial, the lower court rendered its decision on March 7, 1989. Confronting the issue of whether or not the
genuine pair of earrings used as consideration for the sale was delivered by Dr. Cruz to petitioner, the lower
court said:

The Court finds that the answer is definitely in the affirmative. Indeed, Dra. Cruz delivered (the) subject jewelries
(sic) into the hands of plaintiff who even raised the same nearer to the lights of the lobby of the bank near the
door. When asked by Dra. Cruz if everything was in order, plaintiff even nodded his satisfaction (Hearing of
Feb. 24, 1988). At that instance, plaintiff did not protest, complain or beg for additional time to examine further
the jewelries (sic). Being a professional banker and engaged in the jewelry business plaintiff is conversant and
competent to detect a fake diamond from the real thing. Plaintiff was accorded the reasonable time and
opportunity to ascertain and inspect the jewelries (sic) in accordance with Article 1584 of the Civil Code. Plaintiff
took delivery of the subject jewelries (sic) before 6:00 p.m. of October 24, 1984. When he went at 8:00 p.m.
that same day to the residence of Atty. Belarmino already with a tester complaining about some fake jewelries
(sic), there was already undue delay because of the lapse of a considerable length of time since he got hold of
subject jewelries (sic). The lapse of two (2) hours more or less before plaintiff complained is considered by the
Court as unreasonable delay.3cräläwvirtualibräry

The lower court further ruled that all the elements of a valid contract under Article 1458 of the Civil Code were
present, namely: (a) consent or meeting of the minds; (b) determinate subject matter, and (c) price certain in
money or its equivalent. The same elements, according to the lower court, were present despite the fact that
the agreement between petitioner and Dr. Cruz was principally a barter contract. The lower court explained
thus:
x x x. Plaintiffs ownership over the Tanay property passed unto Dra. Cruz upon the constructive delivery thereof
by virtue of the Deed of Absolute Sale (Exh. D). On the other hand, the ownership of Dra. Cruz over the subject
jewelries (sic) transferred to the plaintiff upon her actual personal delivery to him at the lobby of the Prudential
Bank. It is expressly provided by law that the thing sold shall be understood as delivered, when it is placed in
the control and possession of the vendee (Art. 1497, Civil Code; Kuenzle & Straff vs. Watson & Co. 13 Phil.
26). The ownership and/or title over the jewelries (sic) was transmitted immediately before 6:00 p.m. of October
24, 1984. Plaintiff signified his approval by nodding his head. Delivery or tradition, is one of the modes of
acquiring ownership (Art. 712, Civil Code).

Similarly, when Exhibit D was executed, it was equivalent to the delivery of the Tanay property in favor of Dra.
Cruz. The execution of the public instrument (Exh. D) operates as a formal or symbolic delivery of the Tanay
property and authorizes the buyer, Dra. Cruz to use the document as proof of ownership (Florendo v. Foz, 20
Phil. 399). More so, since Exhibit D does not contain any proviso or stipulation to the effect that title to the
property is reserved with the vendor until full payment of the purchase price, nor is there a stipulation giving the
vendor the right to unilaterally rescind the contract the moment the vendee fails to pay within a fixed period
(Taguba v. Vda. De Leon, 132 SCRA 722; Luzon Brokerage Co. Inc. vs. Maritime Building Co. Inc. 86 SCRA
305; Froilan v. Pan Oriental Shipping Co. et al. 12 SCRA 276).4cräläwvirtualibräry

Aside from concluding that the contract of barter or sale had in fact been consummated when petitioner and
Dr. Cruz parted ways at the bank, the trial court likewise dwelt on the unexplained delay with which petitioner
complained about the alleged fakery. Thus:

x x x. Verily, plaintiff is already estopped to come back after the lapse of considerable length of time to claim
that what he got was fake. He is a Business Management graduate of La Salle University, Class 1978-79, a
professional banker as well as a jeweler in his own right. Two hours is more than enough time to make a switch
of a Russian diamond with the real diamond. It must be remembered that in July 1984 plaintiff made a sketch
of the subject jewelries (sic) at the Prudential Bank. Plaintiff had a tester at 8:00 p.m. at the residence of Atty.
Belarmino. Why then did he not bring it out when he was examining the subject jewelries (sic) at about 6:00
p.m. in the banks lobby? Obviously, he had no need for it after being satisfied of the genuineness of the subject
jewelries (sic). When Dra. Cruz and plaintiff left the bank both of them had fully performed their respective
prestations. Once a contract is shown to have been consummated or fully performed by the parties thereto, its
existence and binding effect can no longer be disputed. It is irrelevant and immaterial to dispute the due
execution of a contract if both of them have in fact performed their obligations thereunder and their respective
signatures and those of their witnesses appear upon the face of the document (Weldon Construction v. CA
G.R. No. L-35721, Oct. 12, 1987).5cräläwvirtualibräry

Finally, in awarding damages to the defendants, the lower court remarked:

The Court finds that plaintiff acted in wanton bad faith. Exhibit 2-Belarmino purports to show that the Tanay
property is worth P25,000.00. However, also on that same day it was executed, the propertys worth was
magnified at P75,000.00 (Exh. 3-Belarmino). How could in less than a day (Oct. 19, 1984) the value would (sic)
triple under normal circumstances? Plaintiff, with the assistance of his agents, was able to exchange the Tanay
property which his bank valued only at P25,000.00 in exchange for a genuine pair of emerald cut diamond
worth P200,000.00 belonging to Dra. Cruz. He also retrieved the US$300.00 and jewelries (sic) from his agents.
But he was not satisfied in being able to get subject jewelries for a song. He had to file a malicious and
unfounded case against Dra. Cruz and Atty. Belarmino who are well known, respected and held in high esteem
in San Pablo City where everybody practically knows everybody. Plaintiff came to Court with unclean hands
dragging the defendants and soiling their clean and good name in the process. Both of them are near the
twilight of their lives after maintaining and nurturing their good reputation in the community only to be stunned
with a court case. Since the filing of this case on October 26, 1984 up to the present they were living under a
pall of doubt. Surely, this affected not only their earning capacity in their practice of their respective professions,
but also they suffered besmirched reputations. Dra. Cruz runs her own hospital and defendant Belarmino is a
well respected legal practitioner.

The length of time this case dragged on during which period their reputation were (sic) tarnished and their
names maligned by the pendency of the case, the Court is of the belief that some of the damages they prayed
for in their answers to the complaint are reasonably proportionate to the sufferings they underwent (Art. 2219,
New Civil Code). Moreover, because of the falsity, malice and baseless nature of the complaint defendants
were compelled to litigate. Hence, the award of attorneys fees is warranted under the circumstances (Art. 2208,
New Civil Code).6cräläwvirtualibräry

From the trial courts adverse decision, petitioner elevated the matter to the Court of Appeals. On October 20,
1992, the Court of Appeals, however, rendered a decision7affirming in toto the lower courts decision.His motion
for reconsideration having been denied on October 19, 1993, petitioner now files the instant petition alleging
that:
I. THE TRIAL COURT ERRED IN DISMISSING PLAINTIFFS COMPLAINT AND IN HOLDING THAT THE
PLAINTIFF ACTUALLY RECEIVED A GENUINE PAIR OF EMERALD CUT DIAMOND EARRING(S) FROM
DEFENDANT CRUZ x x x;

II. THE TRIAL COURT ERRED IN AWARDING MORAL AND EXEMPLARY DAMAGES AND ATTORNEYS
FEES IN FAVOR OF DEFENDANTS AND AGAINST THE PLAINTIFF IN THIS CASE; and

III.THE TRIAL COURT ERRED IN NOT DECLARING THE DEED OF SALE OF THE TANAY PROPERTY
(EXH. `D) AS NULL AND VOID OR IN NOT ANNULLING THE SAME, AND IN FAILING TO GRANT
REASONABLE DAMAGES IN FAVOR OF THE PLAINTIFF.8cräläwvirtualibräry

As to the first allegation, the Court observes that petitioner is essentially raising a factual issue as it invites us
to examine and weigh anew the facts regarding the genuineness of the earrings bartered in exchange for the
Tanay property. This, of course, we cannot do without unduly transcending the limits of our review power in
petitions of this nature which are confined merely to pure questions of law. We accord, as a general rule,
conclusiveness to a lower courts findings of fact unless it is shown, inter alia, that: (1) the conclusion is a finding
grounded on speculations, surmises or conjectures; (2) the inference is manifestly mistaken, absurd and
impossible; (3) when there is a grave abuse of discretion; (4) when the judgment is based on a misapprehension
of facts; (5) when the findings of fact are conflicting; and (6) when the Court of Appeals, in making its findings,
went beyond the issues of the case and the same is contrary to the admission of both parties.9 We find nothing,
however, that warrants the application of any of these exceptions.

Consequently, this Court upholds the appellate courts findings of fact especially because these concur with
those of the trial court which, upon a thorough scrutiny of the records, are firmly grounded on evidence
presented at the trial.10 To reiterate, this Courts jurisdiction is only limited to reviewing errors of law in the
absence of any showing that the findings complained of are totally devoid of support in the record or that they
are glaringly erroneous as to constitute serious abuse of discretion.11cräläwvirtualibräry

Nonetheless, this Court has to closely delve into petitioners allegation that the lower courts decision of March
7, 1989 is a ready-made one because it was handed down a day after the last date of the trial of the
case.12Petitioner, in this regard, finds it incredible that Judge J. Ausberto Jaramillo was able to write a 12-page
single-spaced decision, type it and release it on March 7, 1989, less than a day after the last hearing on March
6, 1989. He stressed that Judge Jaramillo replaced Judge Salvador de Guzman and heard only his rebuttal
testimony.

This allegation is obviously no more than a desperate effort on the part of petitioner to disparage the lower
courts findings of fact in order to convince this Court to review the same. It is noteworthy that Atty. Belarmino
clarified that Judge Jaramillo had issued the first order in the case as early as March 9, 1987 or two years
before the rendition of the decision. In fact, Atty. Belarmino terminated presentation of evidence on October 13,
1987, while Dr. Cruz finished hers on February 4, 1989, or more than a month prior to the rendition of the
judgment. The March 6, 1989 hearing was conducted solely for the presentation of petitioner's rebuttal
testimony.13 In other words, Judge Jaramillo had ample time to study the case and write the decision because
the rebuttal evidence would only serve to confirm or verify the facts already presented by the parties.

The Court finds nothing anomalous in the said situation. No proof has been adduced that Judge Jaramillo was
motivated by a malicious or sinister intent in disposing of the case with dispatch. Neither is there proof that
someone else wrote the decision for him. The immediate rendition of the decision was no more than Judge
Jaramillos compliance with his duty as a judge to dispose of the courts business promptly and decide cases
within the required periods.14 The two-year period within which Judge Jaramillo handled the case provided him
with all the time to study it and even write down its facts as soon as these were presented to court. In fact, this
Court does not see anything wrong in the practice of writing a decision days before the scheduled promulgation
of judgment and leaving the dispositive portion for typing at a time close to the date of promulgation, provided
that no malice or any wrongful conduct attends its adoption.15 The practice serves the dual purposes of
safeguarding the confidentiality of draft decisions and rendering decisions with promptness. Neither can Judge
Jaramillo be made administratively answerable for the immediate rendition of the decision. The acts of a judge
which pertain to his judicial functions are not subject to disciplinary power unless they are committed with fraud,
dishonesty, corruption or bad faith.16 Hence, in the absence of sufficient proof to the contrary, Judge Jaramillo
is presumed to have performed his job in accordance with law and should instead be commended for his close
attention to duty.

Having disposed of petitioners first contention, we now come to the core issue of this petition which is whether
the Court of Appeals erred in upholding the validity of the contract of barter or sale under the circumstances of
this case.

The Civil Code provides that contracts are perfected by mere consent. From this moment, the parties are bound
not only to the fulfillment of what has been expressly stipulated but also to all the consequences which,
according to their nature, may be in keeping with good faith, usage and law.17 A contract of sale is perfected at
the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the
price.18 Being consensual, a contract of sale has the force of law between the contracting parties and they are
expected to abide in good faith by their respective contractual commitments. Article 1358 of the Civil Code
which requires the embodiment of certain contracts in a public instrument, is only for convenience,19 and
registration of the instrument only adversely affects third parties. 20 Formal requirements are, therefore, for the
benefit of third parties. Non-compliance therewith does not adversely affect the validity of the contract nor the
contractual rights and obligations of the parties thereunder.

It is evident from the facts of the case that there was a meeting of the minds between petitioner and Dr. Cruz.
As such, they are bound by the contract unless there are reasons or circumstances that warrant its nullification.
Hence, the problem that should be addressed in this case is whether or not under the facts duly established
herein, the contract can be voided in accordance with law so as to compel the parties to restore to each other
the things that have been the subject of the contract with their fruits, and the price with
interest.21cräläwvirtualibräry

Contracts that are voidable or annullable, even though there may have been no damage to the contracting
parties are: (1) those where one of the parties is incapable of giving consent to a contract; and (2) those where
the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.22 Accordingly, petitioner now
stresses before this Court that he entered into the contract in the belief that the pair of emerald-cut diamond
earrings was genuine. On the pretext that those pieces of jewelry turned out to be counterfeit, however,
petitioner subsequently sought the nullification of said contract on the ground that it was, in fact, tainted with
fraud23 such that his consent was vitiated.

There is fraud when, through the insidious words or machinations of one of the contracting parties, the other is
induced to enter into a contract which, without them, he would not have agreed to.24 The records, however, are
bare of any evidence manifesting that private respondents employed such insidious words or machinations to
entice petitioner into entering the contract of barter. Neither is there any evidence showing that Dr. Cruz induced
petitioner to sell his Tanay property or that she cajoled him to take the earrings in exchange for said property.
On the contrary, Dr. Cruz did not initially accede to petitioners proposal to buy the said jewelry. Rather, it
appears that it was petitioner, through his agents, who led Dr. Cruz to believe that the Tanay property was
worth exchanging for her jewelry as he represented that its value was P400,000.00 or more than double that of
the jewelry which was valued only at P160,000.00. If indeed petitioners property was truly worth that much, it
was certainly contrary to the nature of a businessman-banker like him to have parted with his real estate for
half its price. In short, it was in fact petitioner who resorted to machinations to convince Dr. Cruz to exchange
her jewelry for the Tanay property.

Moreover, petitioner did not clearly allege mistake as a ground for nullification of the contract of sale. Even
assuming that he did, petitioner cannot successfully invoke the same. To invalidate a contract, mistake must
refer to the substance of the thing that is the object of the contract, or to those conditions which have principally
moved one or both parties to enter into the contract.25 An example of mistake as to the object of the contract is
the substitution of a specific thing contemplated by the parties with another.26 In his allegations in the complaint,
petitioner insinuated that an inferior one or one that had only Russian diamonds was substituted for the jewelry
he wanted to exchange with his 10-hectare land. He, however, failed to prove the fact that prior to the delivery
of the jewelry to him, private respondents endeavored to make such substitution.

Likewise, the facts as proven do not support the allegation that petitioner himself could be excused for the
mistake. On account of his work as a banker-jeweler, it can be rightfully assumed that he was an expert on
matters regarding gems. He had the intellectual capacity and the business acumen as a banker to take
precautionary measures to avert such a mistake, considering the value of both the jewelry and his land. The
fact that he had seen the jewelry before October 24, 1984 should not have precluded him from having its
genuineness tested in the presence of Dr. Cruz. Had he done so, he could have avoided the present situation
that he himself brought about. Indeed, the finger of suspicion of switching the genuine jewelry for a fake
inevitably points to him. Such a mistake caused by manifest negligence cannot invalidate a juridical act. 27 As
the Civil Code provides, (t)here is no mistake if the party alleging it knew the doubt, contingency or risk affecting
the object of the contract.28cräläwvirtualibräry

Furthermore, petitioner was afforded the reasonable opportunity required in Article 1584 of the Civil Code within
which to examine the jewelry as he in fact accepted them when asked by Dr. Cruz if he was satisfied with the
same.29 By taking the jewelry outside the bank, petitioner executed an act which was more consistent with his
exercise of ownership over it. This gains credence when it is borne in mind that he himself had earlier delivered
the Tanay property to Dr. Cruz by affixing his signature to the contract of sale. That after two hours he later
claimed that the jewelry was not the one he intended in exchange for his Tanay property, could not sever the
juridical tie that now bound him and Dr. Cruz. The nature and value of the thing he had taken preclude its return
after that supervening period within which anything could have happened, not excluding the alteration of the
jewelry or its being switched with an inferior kind.

Both the trial and appellate courts, therefore, correctly ruled that there were no legal bases for the nullification
of the contract of sale. Ownership over the parcel of land and the pair of emerald-cut diamond earrings had
been transferred to Dr. Cruz and petitioner, respectively, upon the actual and constructive delivery
thereof.30 Said contract of sale being absolute in nature, title passed to the vendee upon delivery of the thing
sold since there was no stipulation in the contract that title to the property sold has been reserved in the seller
until full payment of the price or that the vendor has the right to unilaterally resolve the contract the moment the
buyer fails to pay within a fixed period.31 Such stipulations are not manifest in the contract of sale.

While it is true that the amount of P40,000.00 forming part of the consideration was still payable to petitioner,
its nonpayment by Dr. Cruz is not a sufficient cause to invalidate the contract or bar the transfer of ownership
and possession of the things exchanged considering the fact that their contract is silent as to when it becomes
due and demandable.32cräläwvirtualibräry

Neither may such failure to pay the balance of the purchase price result in the payment of interest thereon.
Article 1589 of the Civil Code prescribes the payment of interest by the vendee for the period between the
delivery of the thing and the payment of the price in the following cases:

(1) Should it have been so stipulated;

(2) Should the thing sold and delivered produce fruits or income;
(3) Should he be in default, from the time of judicial or extrajudicial demand for the payment of the
price.

Not one of these cases obtains here. This case should, of course, be distinguished from De la Cruz v.
Legaspi,33 where the court held that failure to pay the consideration after the notarization of the contract as
previously promised resulted in the vendees liability for payment of interest. In the case at bar, there is no
stipulation for the payment of interest in the contract of sale nor proof that the Tanay property produced fruits
or income. Neither did petitioner demand payment of the price as in fact he filed an action to nullify the contract
of sale.

All told, petitioner appears to have elevated this case to this Court for the principal reason of mitigating the
amount of damages awarded to both private respondents which petitioner considers as exorbitant. He contends
that private respondents do not deserve at all the award of damages. In fact, he pleads for the total deletion of
the award as regards private respondent Belarmino whom he considers a mere nominal party because no
specific claim for damages against him was alleged in the complaint. When he filed the case, all that petitioner
wanted was that Atty. Belarmino should return to him the owners duplicate copy of TCT No. 320725, the deed
of sale executed by Fr. Antonio Jacobe, the deed of redemption and the check alloted for expenses. Petitioner
alleges further that Atty. Belarmino should not have delivered all those documents to Dr. Cruz because as the
lawyer for both the seller and the buyer in the sale contract, he should have protected the rights of both parties.
Moreover, petitioner asserts that there was no firm basis for damages except for Atty. Belarminos
uncorroborated testimony.34cräläwvirtualibräry

Moral and exemplary damages may be awarded without proof of pecuniary loss. In awarding such damages,
the court shall take into account the circumstances obtaining in the case and assess damages according to its
discretion.35 To warrant the award of damages, it must be shown that the person to whom these are awarded
has sustained injury. He must likewise establish sufficient data upon which the court can properly base its
estimate of the amount of damages.36 Statements of facts should establish such data rather than mere
conclusions or opinions of witnesses.37 Thus:

x x x. For moral damages to be awarded, it is essential that the claimant must have satisfactorily proved
during the trial the existence of the factual basis of the damages and its causal connection with the
adverse partys acts. If the court has no proof or evidence upon which the claim for moral damages
could be based, such indemnity could not be outrightly awarded. The same holds true with respect to
the award of exemplary damages where it must be shown that the party acted in a wanton, oppressive
or malevolent manner.38cräläwvirtualibräry

In this regard, the lower court appeared to have awarded damages on a ground analogous to malicious
prosecution under Article 2219(8) of the Civil Code39 as shown by (1) petitioners wanton bad faith in bloating
the value of the Tanay property which he exchanged for a genuine pair of emerald-cut diamond
worth P200,000.00; and (2) his filing of a malicious and unfounded case against private respondents who were
well known, respected and held in high esteem in San Pablo City where everybody practically knows everybody
and whose good names in the twilight of their lives were soiled by petitioners coming to court with unclean
hands, thereby affecting their earning capacity in the exercise of their respective professions and besmirching
their reputation.

For its part, the Court of Appeals affirmed the award of damages to private respondents for these reasons:

The malice with which Fule filed this case is apparent. Having taken possession of the genuine jewelry
of Dra. Cruz, Fule now wishes to return a fake jewelry to Dra. Cruz and, more than that, get back the
real property, which his bank owns. Fule has obtained a genuine jewelry which he could sell anytime,
 anywhere and to anybody, without the same being traced to the original owner for practically nothing.
This is plain and simple, unjust enrichment.40cräläwvirtualibräry

While, as a rule, moral damages cannot be recovered from a person who has filed a complaint against another
in good faith because it is not sound policy to place a penalty on the right to litigate,41 the same, however,
cannot apply in the case at bar. The factual findings of the courts a quo to the effect that petitioner filed this
case because he was the victim of fraud; that he could not have been such a victim because he should have
examined the jewelry in question before accepting delivery thereof, considering his exposure to the banking
and jewelry businesses; and that he filed the action for the nullification of the contract of sale with unclean
hands, all deserve full faith and credit to support the conclusion that petitioner was motivated more by ill will
than a sincere attempt to protect his rights in commencing suit against Respondents.

As pointed out earlier, a closer scrutiny of the chain of events immediately prior to and on October 24, 1984
itself would amply demonstrate that petitioner was not simply negligent in failing to exercise due diligence to
assure himself that what he was taking in exchange for his property were genuine diamonds. He had rather
placed himself in a situation from which it preponderantly appears that his seeming ignorance was actually just
a ruse. Indeed, he had unnecessarily dragged respondents to face the travails of litigation in speculating at the
possible favorable outcome of his complaint when he should have realized that his supposed predicament was
his own making. We, therefore, see here no semblance of an honest and sincere belief on his part that he was
swindled by respondents which would entitle him to redress in court. It must be noted that before petitioner was
able to convince Dr. Cruz to exchange her jewelry for the Tanay property, petitioner took pains to thoroughly
examine said jewelry, even going to the extent of sketching their appearance. Why at the precise moment when
he was about to take physical possession thereof he failed to exert extra efforts to check their genuineness
despite the large consideration involved has never been explained at all by petitioner. His acts thus failed to
accord with what an ordinary prudent man would have done in the same situation. Being an experienced banker
and a businessman himself who deliberately skirted a legal impediment in the sale of the Tanay property and
to minimize the capital gains tax for its exchange, it was actually gross recklessness for him to have merely
conducted a cursory examination of the jewelry when every opportunity for doing so was not denied him.
Apparently, he carried on his person a tester which he later used to prove the alleged fakery but which he did
not use at the time when it was most needed. Furthermore, it took him two more hours of unexplained delay
before he complained that the jewelry he received were counterfeit. Hence, we stated earlier that anything could
have happened during all the time that petitioner was in complete possession and control of the jewelry,
including the possibility of substituting them with fake ones, against which respondents would have a great deal
of difficulty defending themselves. The truth is that petitioner even failed to successfully prove during trial that
the jewelry he received from Dr. Cruz were not genuine. Add to that the fact that he had been shrewd enough
to bloat the Tanay propertys price only a few days after he purchased it at a much lower value. Thus, it is our
considered view that if this slew of circumstances were connected, like pieces of fabric sewn into a quilt, they
would sufficiently demonstrate that his acts were not merely negligent but rather studied and deliberate.

We do not have here, therefore, a situation where petitioners complaint was simply found later to be based on
an erroneous ground which, under settled jurisprudence, would not have been a reason for awarding moral and
exemplary damages.42 Instead, the cause of action of the instant case appears to have been contrived by
petitioner himself. In other words, he was placed in a situation where he could not honestly evaluate whether
his cause of action has a semblance of merit, such that it would require the expertise of the courts to put it to a
test. His insistent pursuit of such case then coupled with circumstances showing that he himself was guilty in
bringing about the supposed wrongdoing on which he anchored his cause of action would render him
answerable for all damages the defendant may suffer because of it. This is precisely what took place in the
petition at bar and we find no cogent reason to disturb the findings of the courts below that respondents in this
case suffered considerable damages due to petitioners unwarranted action.

WHEREFORE, the decision of the Court of Appeals dated October 20, 1992 is hereby AFFIRMED in toto. Dr.
Cruz, however, is ordered to pay petitioner the balance of the purchase price of P40,000.00 within ten (10) days
from the finality of this decision. Costs against petitioner.

SO ORDERED.
ANDRES QUIROGA, plaintiff-appellant,
vs.
PARSONS HARDWARE CO., defendant-appellee.

On January 24, 1911, in this city of manila, a contract in the following tenor was entered into by and between
the plaintiff, as party of the first part, and J. Parsons (to whose rights and obligations the present defendant
later subrogated itself), as party of the second part:

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

ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his beds in the Visayan Islands to J.
Parsons under the following conditions:

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

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

(C) The expenses for transportation and shipment shall be borne by M. Quiroga, and the freight,
insurance, and cost of unloading from the vessel at the point where the beds are received, shall be paid
by Mr. Parsons.

(D) If, before an invoice falls due, Mr. Quiroga should request its payment, said payment when made
shall be considered as a prompt payment, and as such a deduction of 2 per cent shall be made from
the amount of the invoice.

The same discount shall be made on the amount of any invoice which Mr. Parsons may deem
convenient to pay in cash.

(E) Mr. Quiroga binds himself to give notice at least fifteen days before hand of any alteration in price
which he may plan to make in respect to his beds, and agrees that if on the date when such alteration
takes effect he should have any order pending to be served to Mr. Parsons, such order shall enjoy the
advantage of the alteration if the price thereby be lowered, but shall not be affected by said alteration if
the price thereby be increased, for, in this latter case, Mr. Quiroga assumed the obligation to invoice the
beds at the price at which the order was given.

(F) Mr. Parsons binds himself not to sell any other kind except the "Quiroga" beds.

ART. 2. In compensation for the expenses of advertisement which, for the benefit of both contracting
parties, Mr. Parsons may find himself obliged to make, Mr. Quiroga assumes the obligation to offer and
give the preference to Mr. Parsons in case anyone should apply for the exclusive agency for any island
not comprised with the Visayan group.

ART. 3. Mr. Parsons may sell, or establish branches of his agency for the sale of "Quiroga" beds in all
the towns of the Archipelago where there are no exclusive agents, and shall immediately report such
action to Mr. Quiroga for his approval.

ART. 4. This contract is made for an unlimited period, and may be terminated by either of the contracting
parties on a previous notice of ninety days to the other party.

Of the three causes of action alleged by the plaintiff in his complaint, only two of them constitute the subject
matter of this appeal and both substantially amount to the averment that the defendant violated the following
obligations: not to sell the beds at higher prices than those of the invoices; to have an open establishment in
Iloilo; itself to conduct the agency; to keep the beds on public exhibition, and to pay for the advertisement
expenses for the same; and to order the beds by the dozen and in no other manner. As may be seen, with the
exception of the obligation on the part of the defendant to order the beds by the dozen and in no other manner,
none of the obligations imputed to the defendant in the two causes of action are expressly set forth in the
contract. But the plaintiff alleged that the defendant was his agent for the sale of his beds in Iloilo, and that said
obligations are implied in a contract of commercial agency. The whole question, therefore, reduced itself to a
determination as to whether the defendant, by reason of the contract hereinbefore transcribed, was a purchaser
or an agent of the plaintiff for the sale of his beds.
In order to classify a contract, due regard must be given to its essential clauses. In the contract in question,
what was essential, as constituting its cause and subject matter, is that the plaintiff was to furnish the defendant
with the beds which the latter might order, at the price stipulated, and that the defendant was to pay the price
in the manner stipulated. The price agreed upon was the one determined by the plaintiff for the sale of these
beds in Manila, with a discount of from 20 to 25 per cent, according to their class. Payment was to be made at
the end of sixty days, or before, at the plaintiff's request, or in cash, if the defendant so preferred, and in these
last two cases an additional discount was to be allowed for prompt payment. These are precisely the essential
features of a contract of purchase and sale. There was the obligation on the part of the plaintiff to supply the
beds, and, on the part of the defendant, to pay their price. These features exclude the legal conception of an
agency or order to sell whereby the mandatory or agent received the thing to sell it, and does not pay its price,
but delivers to the principal the price he obtains from the sale of the thing to a third person, and if he does not
succeed in selling it, he returns it. By virtue of the contract between the plaintiff and the defendant, the latter,
on receiving the beds, was necessarily obliged to pay their price within the term fixed, without any other
consideration and regardless as to whether he had or had not sold the beds.

It would be enough to hold, as we do, that the contract by and between the defendant and the plaintiff is one of
purchase and sale, in order to show that it was not one made on the basis of a commission on sales, as the
plaintiff claims it was, for these contracts are incompatible with each other. But, besides, examining the clauses
of this contract, none of them is found that substantially supports the plaintiff's contention. Not a single one of
these clauses necessarily conveys the idea of an agency. The words commission on sales used in clause (A)
of article 1 mean nothing else, as stated in the contract itself, than a mere discount on the invoice price. 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.
CELESTINO CO & COMPANY, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent.

Office of the Solicitor General Ambrosio Padilla, Fisrt Assistant Solicitor General Guillermo E. Torres and
Solicitor Federico V. Sian for respondent.

BENGZON, J.:

Appeal from a decision of the Court of Tax Appeals.

Celestino Co & Company is a duly registered general copartnership doing business under the trade name of
"Oriental Sash Factory". From 1946 to 1951 it paid percentage taxes of 7 per cent on the gross receipts of its
sash, door and window factory, in accordance with section one hundred eighty-six of the National Revenue
Code imposing taxes on sale of manufactured articles. However in 1952 it began to claim liability only to the
contractor's 3 per cent tax (instead of 7 per cent) under section 191 of the same Code; and having failed to
convince the Bureau of Internal Revenue, it brought the matter to the Court of Tax Appeals, where it also failed.
Said the Court:

To support his contention that his client is an ordinary contractor . . . counsel presented . . . duplicate
copies of letters, sketches of doors and windows and price quotations supposedly sent by the manager
of the Oriental Sash Factory to four customers who allegedly made special orders to doors and window
from the said factory. The conclusion that counsel would like us to deduce from these few exhibits is
that the Oriental Sash Factory does not manufacture ready-made doors, sash and windows for the
public but only upon special order of its select customers. . . . I cannot believe that petitioner company
would take, as in fact it has taken, all the trouble and expense of registering a special trade name for its
sash business and then orders company stationery carrying the bold print "Oriental Sash
Factory (Celestino Co & Company, Prop.) 926 Raon St. Quiapo, Manila, Tel. No. 33076, Manufacturers
of all kinds of doors, windows, sashes, furniture, etc. used season-dried and kiln-dried lumber, of the
best quality workmanships" solely for the purpose of supplying the needs for doors, windows and sash
of its special and limited customers. One ill note that petitioner has chosen for its tradename and has
offered itself to the public as a "Factory", which means it is out to do business, in its chosen lines on a
big scale. As a general rule, sash factories receive orders for doors and windows of special design only
in particular cases but the bulk of their sales is derived from a ready-made doors and windows of
standard sizes for the average home. Moreover, as shown from the investigation of petitioner's book of
accounts, during the period from January 1, 1952 to September 30, 1952, it sold sash, doors and
windows worth P188,754.69. I find it difficult to believe that this amount which runs to six figures was
derived by petitioner entirely from its few customers who made special orders for these items.

Even if we were to believe petitioner's claim that it does not manufacture ready-made sash, doors and
windows for the public and that it makes these articles only special order of its customers, that does not
make it a contractor within the purview of section 191 of the national Internal Revenue Code. there are
no less than fifty occupations enumerated in the aforesaid section of the national Internal Revenue Code
subject to percentage tax and after reading carefully each and every one of them, we cannot find under
which the business of manufacturing sash, doors and windows upon special order of customers fall
under the category of "road, building, navigation, artesian well, water workers and other construction
work contractors" are those who alter or repair buildings, structures, streets, highways, sewers, street
railways railroads logging roads, electric lines or power lines, and includes any other work for the
construction, altering or repairing for which machinery driven by mechanical power is used. (Payton vs.
City of Anadardo 64 P. 2d 878, 880, 179 Okl. 68).

Having thus eliminated the feasibility off taxing petitioner as a contractor under 191 of the national
Internal Revenue Code, this leaves us to decide the remaining issue whether or not petitioner could be
taxed with lesser strain and more accuracy as seller of its manufactured articles under section 186 of
the same code, as the respondent Collector of Internal Revenue has in fact been doing the Oriental
Sash Factory was established in 1946.

The percentage tax imposed in section 191 of our Tax Code is generally a tax on the sales of services,
in contradiction with the tax imposed in section 186 of the same Code which is a tax on the original
sales of articles by the manufacturer, producer or importer. (Formilleza's Commentaries and
Jurisprudence on the National Internal Revenue Code, Vol. II, p. 744). The fact that the articles sold are
manufactured by the seller does not exchange the contract from the purview of section 186 of the
National Internal Revenue Code as a sale of articles.

There was a strong dissent; but upon careful consideration of the whole matter are inclines to accept the above
statement of the facts and the law. The important thing to remember is that Celestino Co & Company habitually
makes sash, windows and doors, as it has represented in its stationery and advertisements to the public. That
it "manufactures" the same is practically admitted by appellant itself. The fact that windows and doors are made
by it only when customers place their orders, does not alter the nature of the establishment, for it is obvious
that it only accepted such orders as called for the employment of such material-moulding, frames, panels-as it
ordinarily manufactured or was in a position habitually to manufacture.

Perhaps the following paragraph represents in brief the appellant's position in this Court:

Since the petitioner, by clear proof of facts not disputed by the respondent, manufacturers sash,
windows and doors only for special customers and upon their special orders and in accordance with the
desired specifications of the persons ordering the same and not for the general market: since the doors
ordered by Don Toribio Teodoro & Sons, Inc., for instance, are not in existence and which never would
have existed but for the order of the party desiring it; and since petitioner's contractual relation with his
customers is that of a contract for a piece of work or since petitioner is engaged in the sale of services,
it follows that the petitioner should be taxed under section 191 of the Tax Code and NOT under section
185 of the same Code." (Appellant's brief, p. 11-12).

But the argument rests on a false foundation. Any builder or homeowner, with sufficient money, may order
windows or doors of the kind manufactured by this appellant. Therefore it is not true that it serves special
customers only or confines its services to them alone. And anyone who sees, and likes, the doors ordered by
Don Toribio Teodoro & Sons Inc. may purchase from appellant doors of the same kind, provided he pays the
price. Surely, the appellant will not refuse, for it can easily duplicate or even mass-produce the same doors-it
is mechanically equipped to do so.

That the doors and windows must meet desired specifications is neither here nor there. If these specifications
do not happen to be of the kind habitually manufactured by appellant — special forms for sash, mouldings of
panels — it would not accept the order — and no sale is made. If they do, the transaction would be no different
from a purchasers of manufactured goods held is stock for sale; they are bought because they meet the
specifications desired by the purchaser.

Nobody will say that when a sawmill cuts lumber in accordance with the peculiar specifications of a customer-
sizes not previously held in stock for sale to the public-it thereby becomes an employee or servant of the
customer,1 not the seller of lumber. The same consideration applies to this sash manufacturer.

The Oriental Sash Factory does nothing more than sell the goods that it mass-produces or habitually makes;
sash, panels, mouldings, frames, cutting them to such sizes and combining them in such forms as its customers
may desire.

On the other hand, petitioner's idea of being a contractor doing construction jobs is untenable. Nobody would
regard the doing of two window panels a construction work in common parlance.2

Appellant invokes Article 1467 of the New Civil Code to bolster its contention that in filing orders for windows
and doors according to specifications, it did not sell, but merely contracted for particular pieces of work or
"merely sold its services".

Said article reads as follows:

A contract for the delivery at a certain price of an article which the vendor in the ordinary course of his
business manufactures or procures for the general market, whether the same is on hand at the time or
not, is a contract of sale, but if the goods are to be manufactured specially for the customer and upon
his special order, and not for the general market, it is contract for a piece of work.

It is at once apparent that the Oriental Sash Factory did not merely sell its services to Don Toribio Teodoro &
Co. (To take one instance) because it also sold the materials. The truth of the matter is that it sold materials
ordinarily manufactured by it — sash, panels, mouldings — to Teodoro & Co., although in such form or
combination as suited the fancy of the purchaser. Such new form does not divest the Oriental Sash Factory of
its character as manufacturer. Neither does it take the transaction out of the category of sales under Article
1467 above quoted, because although the Factory does not, in the ordinary course of its business, manufacture
and keep on stock doors of the kind sold to Teodoro, it could stock and/or probably had in stock the sash,
mouldings and panels it used therefor (some of them at least).

In our opinion when this Factory accepts a job that requires the use of extraordinary or additional equipment,
or involves services not generally performed by it-it thereby contracts for a piece of work — filing special orders
within the meaning of Article 1467. The orders herein exhibited were not shown to be special. They were merely
orders for work — nothing is shown to call them special requiring extraordinary service of the factory.

The thought occurs to us that if, as alleged-all the work of appellant is only to fill orders previously made, such
orders should not be called special work, but regular work. Would a factory do business performing only special,
extraordinary or peculiar merchandise?
Anyway, supposing for the moment that the transactions were not sales, they were neither lease of services
nor contract jobs by a contractor. But as the doors and windows had been admittedly "manufactured" by the
Oriental Sash Factory, such transactions could be, and should be taxed as "transfers" thereof under section
186 of the National Revenue Code.

The appealed decision is consequently affirmed. So ordered.

Paras, C. J., Padilla, Montemayor, Bautista Angelo, Concepcion, Reyes, J. B. L., and Felix, JJ., concur.
THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND THE COURT OF TAX APPEALS, respondents.

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

ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner,

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

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete,
Solicitor Lolita O. Gal-lang, and Special Attorney Gemaliel H. Montalino for Commissioner of Internal
Revenue, etc.

Melquides C. Gutierrez, Jose U. Ong, Juan G. Collas, Jr., Luis Ma. Guerrero and J.R. Balonkita for
Engineering and Supply Company.

ESGUERRA, J.:

Petition for review on certiorari of the decision of the Court of Tax Appeals in CTA Case No. 681, dated
November 29, 1966, assessing a compensating tax of P174,441.62 on the Engineering Equipment and
Supply Company.

As found by the Court of Tax Appeals, and as established by the evidence on record, the facts of this
case are as follows:

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

On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now Commissioner, of Internal Revenue
denouncing Engineering for tax evasion by misdeclaring its imported articles and failing to pay the
correct percentage taxes due thereon in connivance with its foreign suppliers (Exh. "2" p. 1 BIR record
Vol. I). Engineering was likewise denounced to the Central Bank (CB) for alleged fraud in obtaining its
dollar allocations. Acting on these denunciations, a raid and search was conducted by a joint team of
Central Bank, (CB), National Bureau of Investigation (NBI) and Bureau of Internal Revenue (BIR) agents
on September 27, 1956, on which occasion voluminous records of the firm were seized and confiscated.
(pp. 173-177 T.S.N.)

On September 30, 1957, revenue examiners Quesada and Catudan reported and recommended to the
then Collector, now Commissioner, of Internal Revenue (hereinafter referred to as Commissioner) that
Engineering be assessed for P480,912.01 as deficiency advance sales tax on the theory that it
misdeclared its importation of air conditioning units and parts and accessories thereof which are
subject to tax under Section 185(m)1 of the Tax Code, instead of Section 186 of the same Code. (Exh. "3"
pp. 59-63 BIR rec. Vol. I) This assessment was revised on January 23, 1959, in line with the observation of the
Chief, BIR Law Division, and was raised to P916,362.56 representing deficiency advance sales tax and
manufacturers sales tax, inclusive of the 25% and 50% surcharges. (pp. 72-80 BIR rec. Vol. I)

On March 3, 1959. the Commissioner assessed against, and demanded upon, Engineering payment of the
increased amount and suggested that P10,000 be paid as compromise in extrajudicial settlement of
Engineering's penal liability for violation of the Tax Code. The firm, however, contested the tax assessment and
requested that it be furnished with the details and particulars of the Commissioner's assessment. (Exh. "B" and
"15", pp. 86-88 BIR rec. Vol. I) The Commissioner replied that the assessment was in accordance with law and
the facts of the case.

On July 30, 1959, Engineering appealed the case to the Court of Tax Appeals and during the pendency of the
case the investigating revenue examiners reduced Engineering's deficiency tax liabilities from P916,362.65 to
P740,587.86 (Exhs. "R" and "9" pp. 162-170, BIR rec.), based on findings after conferences had with
Engineering's Accountant and Auditor.

On November 29, 1966, the Court of Tax Appeals rendered its decision, the dispositive portion of which reads
as follows:
 For ALL THE FOREGOING CONSIDERATIONS, the decision of respondent appealed from is
hereby modified, and petitioner, as a contractor, is declared exempt from the deficiency
manufacturers sales tax covering the period from June 1, 1948. to September 2, 1956. However,
petitioner is ordered to pay respondent, or his duly authorized collection agent, the sum of
P174,141.62 as compensating tax and 25% surcharge for the period from 1953 to September
1956. With costs against petitioner.

The Commissioner, not satisfied with the decision of the Court of Tax Appeals, appealed to this Court on
January 18, 1967, (G.R. No. L-27044). On the other hand, Engineering, on January 4, 1967, filed with the Court
of Tax Appeals a motion for reconsideration of the decision abovementioned. This was denied on April 6, 1967,
prompting Engineering to file also with this Court its appeal, docketed as G.R. No. L-27452.

Since the two cases, G.R. No. L-27044 and G.R. No. L-27452, involve the same parties and issues, We have
decided to consolidate and jointly decide them.

Engineering in its Petition claims that the Court of Tax Appeals committed the following errors:

1. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
liable to the 30% compensating tax on its importations of equipment and ordinary articles used
in the central type air conditioning systems it designed, fabricated, constructed and installed in
the buildings and premises of its customers, rather than to the compensating tax of only 7%;

2. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
guilty of fraud in effecting the said importations on the basis of incomplete quotations from the
contents of alleged photostat copies of documents seized illegally from Engineering Equipment
and Supply Company which should not have been admitted in evidence;

3. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
liable to the 25% surcharge prescribed in Section 190 of the Tax Code;

4. That the Court of Tax Appeals erred in holding the assessment as not having prescribed;

5. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
liable for the sum of P174,141.62 as 30% compensating tax and 25% surcharge instead of
completely absolving it from the deficiency assessment of the Commissioner.

The Commissioner on the other hand claims that the Court of Tax Appeals erred:

1. In holding that the respondent company is a contractor and not a manufacturer.

2. In holding respondent company liable to the 3% contractor's tax imposed by Section 191 of
the Tax Code instead of the 30% sales tax prescribed in Section 185(m) in relation to Section
194(x) both of the same Code;

3. In holding that the respondent company is subject only to the 30% compensating tax under
Section 190 of the Tax Code and not to the 30% advance sales tax imposed by section 183 (b),
in relation to section 185(m) both of the same Code, on its importations of parts and accessories
of air conditioning units;

4. In not holding the company liable to the 50% fraud surcharge under Section 183 of the Tax
Code on its importations of parts and accessories of air conditioning units, notwithstanding the
finding of said court that the respondent company fraudulently misdeclared the said importations;

5. In holding the respondent company liable for P174,141.62 as compensating tax and 25%
surcharge instead of P740,587.86 as deficiency advance sales tax, deficiency manufacturers
tax and 25% and 50% surcharge for the period from June 1, 1948 to December 31, 1956.

The main issue revolves on the question of whether or not Engineering is a manufacturer of air conditioning
units under Section 185(m), supra, in relation to Sections 183(b) and 194 of the Code, or a contractor under
Section 191 of the same Code.

The Commissioner contends that Engineering is a manufacturer and seller of air conditioning units and parts
or accessories thereof and, therefore, it is subject to the 30% advance sales tax prescribed by Section 185(m)
of the Tax Code, in relation to Section 194 of the same, which defines a manufacturer as follows:

Section 194. — Words and Phrases Defined. — In applying the provisions of this Title, words
and phrases shall be taken in the sense and extension indicated below:
 xxx xxx xxx

(x) "Manufacturer" includes every person who by physical or chemical process alters the exterior
texture or form or inner substance of any raw material or manufactured or partially manufactured
products in such manner as to prepare it for a special use or uses to which it could not have
been put in its original condition, or who by any such process alters the quality of any such
material or manufactured or partially manufactured product so as to reduce it to marketable
shape, or prepare it for any of the uses of industry, or who by any such process combines any
such raw material or manufactured or partially manufactured products with other materials or
products of the same or of different kinds and in such manner that the finished product of such
process of manufacture can be put to special use or uses to which such raw material or
manufactured or partially manufactured products in their original condition could not have been
put, and who in addition alters such raw material or manufactured or partially manufactured
products, or combines the same to produce such finished products for the purpose of their sale
or distribution to others and not for his own use or consumption.

In answer to the above contention, Engineering claims that it is not a manufacturer and setter of air-conditioning
units and spare parts or accessories thereof subject to tax under Section 185(m) of the Tax Code, but a
contractor engaged in the design, supply and installation of the central type of air-conditioning system subject
to the 3% tax imposed by Section 191 of the same Code, which is essentially a tax on the sale of services or
labor of a contractor rather than on the sale of articles subject to the tax referred to in Sections 184, 185 and
186 of the Code.

The arguments of both the Engineering and the Commissioner call for a clarification of the term contractor as
well as the distinction between a contract of sale and contract for furnishing services, labor and materials. The
distinction between a contract of sale and one for work, labor and materials is tested by the inquiry whether the
thing transferred is one not in existence and which never would have existed but for the order of the party
desiring to acquire it, or a thing which would have existed and has been the subject of sale to some other
persons even if the order had not been given.2 If the article ordered by the purchaser is exactly such as the
plaintiff makes and keeps on hand for sale to anyone, and no change or modification of it is made at defendant's
request, it is a contract of sale, even though it may be entirely made after, and in consequence of, the
defendants order for it.3

Our New Civil Code, likewise distinguishes a contract of sale from a contract for a piece of work thus:

Art. 1467. A contract for the delivery at a certain price of an article which the vendor in the
ordinary course of his business manufactures or procures for the general market, whether the
same is on hand at the time or not, is a contract of sale, but if the goods are to be manufactured
specially for the customer and upon his special order and not for the general market, it is a
contract for a piece of work.

The word "contractor" has come to be used with special reference to a person who, in the pursuit of the
independent business, undertakes to do a specific job or piece of work for other persons, using his own means
and methods without submitting himself to control as to the petty details. (Arañas, Annotations and
Jurisprudence on the National Internal Revenue Code, p. 318, par. 191 (2), 1970 Ed.) The true test of a
contractor as was held in the cases of Luzon Stevedoring Co., vs. Trinidad, 43, Phil. 803, 807-808, and La
Carlota Sugar Central vs. Trinidad, 43, Phil. 816, 819, would seem to be that he renders service in the course
of an independent occupation, representing the will of his employer only as to the result of his work, and not as
to the means by which it is accomplished.

With the foregoing criteria as guideposts, We shall now examine whether Engineering really did "manufacture"
and sell, as alleged by the Commissioner to hold it liable to the advance sales tax under Section 185(m), or it
only had its services "contracted" for installation purposes to hold it liable under section 198 of the Tax Code.

After going over the three volumes of stenographic notes and the voluminous record of the BIR and the CTA
as well as the exhibits submitted by both parties, We find that Engineering did not manufacture air conditioning
units for sale to the general public, but imported some items (as refrigeration compressors in complete set, heat
exchangers or coils, t.s.n. p. 39) which were used in executing contracts entered into by it. Engineering,
therefore, undertook negotiations and execution of individual contracts for the design, supply and installation of
air conditioning units of the central type (t.s.n. pp. 20-36; Exhs. "F", "G", "H", "I", "J", "K", "L", and "M"), taking
into consideration in the process such factors as the area of the space to be air conditioned; the number of
persons occupying or would be occupying the premises; the purpose for which the various air conditioning
areas are to be used; and the sources of heat gain or cooling load on the plant such as sun load, lighting, and
other electrical appliances which are or may be in the plan. (t.s.n. p. 34, Vol. I) Engineering also testified during
the hearing in the Court of Tax Appeals that relative to the installation of air conditioning system, Engineering
designed and engineered complete each particular plant and that no two plants were identical but each had to
be engineered separately.

As found by the lower court, which finding4 We adopt —

Engineering, in a nutshell, fabricates, assembles, supplies and installs in the buildings of its
various customers the central type air conditioning system; prepares the plans and specifications
therefor which are distinct and different from each other; the air conditioning units and spare
parts or accessories thereof used by petitioner are not the window type of air conditioner which
are manufactured, assembled and produced locally for sale to the general market; and the
imported air conditioning units and spare parts or accessories thereof are supplied and installed
by petitioner upon previous orders of its customers conformably with their needs and
requirements.

The facts and circumstances aforequoted support the theory that Engineering is a contractor rather than a
manufacturer.

The Commissioner in his Brief argues that "it is more in accord with reason and sound business management
to say that anyone who desires to have air conditioning units installed in his premises and who is in a position
and willing to pay the price can order the same from the company (Engineering) and, therefore, Engineering
could have mass produced and stockpiled air conditioning units for sale to the public or to any customer with
enough money to buy the same." This is untenable in the light of the fact that air conditioning units, packaged,
or what we know as self-contained air conditioning units, are distinct from the central system which Engineering
dealt in. To Our mind, the distinction as explained by Engineering, in its Brief, quoting from books, is not an idle
play of words as claimed by the Commissioner, but a significant fact which We just cannot ignore. As quoted
by Engineering Equipment & Supply Co., from an Engineering handbook by L.C. Morrow, and which We
reproduce hereunder for easy reference:

... there is a great variety of equipment in use to do this job (of air conditioning). Some devices
are designed to serve a specific type of space; others to perform a specific function; and still
others as components to be assembled into a tailor-made system to fit a particular building.
Generally, however, they may be grouped into two classifications — unitary and central system.

The unitary equipment classification includes those designs such as room air conditioner, where
all of the functional components are included in one or two packages, and installation involves
only making service connection such as electricity, water and drains. Central-station systems,
often referred to as applied or built-up systems, require the installation of components at different
points in a building and their interconnection.

The room air conditioner is a unitary equipment designed specifically for a room or similar small
space. It is unique among air conditioning equipment in two respects: It is in the electrical
appliance classification, and it is made by a great number of manufacturers.

There is also the testimony of one Carlos Navarro, a licensed Mechanical and Electrical Engineer, who was
once the Chairman of the Board of Examiners for Mechanical Engineers and who was allegedly responsible for
the preparation of the refrigeration and air conditioning code of the City of Manila, who said that "the central
type air conditioning system is an engineering job that requires planning and meticulous layout due to the fact
that usually architects assign definite space and usually the spaces they assign are very small and of various
sizes. Continuing further, he testified:

I don't think I have seen central type of air conditioning machinery room that are exactly alike
because all our buildings here are designed by architects dissimilar to existing buildings, and
usually they don't coordinate and get the advice of air conditioning and refrigerating engineers
so much so that when we come to design, we have to make use of the available space that they
are assigning to us so that we have to design the different component parts of the air conditioning
system in such a way that will be accommodated in the space assigned and afterwards the
system may be considered as a definite portion of the building. ...

Definitely there is quite a big difference in the operation because the window type air conditioner
is a sort of compromise. In fact it cannot control humidity to the desired level; rather the
manufacturers, by hit and miss, were able to satisfy themselves that the desired comfort within
a room could be made by a definite setting of the machine as it comes from the factory; whereas
the central type system definitely requires an intelligent operator. (t.s.n. pp. 301-305, Vol. II)

The point, therefore, is this — Engineering definitely did not and was not engaged in the manufacture of air
conditioning units but had its services contracted for the installation of a central system. The cases cited by the
Commissioner (Advertising Associates, Inc. vs. Collector of Customs, 97, Phil. 636; Celestino Co & Co. vs.
Collector of Internal Revenue, 99 Phil. 841 and Manila Trading & Supply Co. vs. City of Manila, 56 O.G. 3629),
are not in point. Neither are they applicable because the facts in all the cases cited are entirely different. Take
for instance the case of Celestino Co where this Court held the taxpayer to be a manufacturer rather than a
contractor of sash, doors and windows manufactured in its factory. Indeed, from the very start, Celestino Co
intended itself to be a manufacturer of doors, windows, sashes etc. as it did register a special trade name for
its sash business and ordered company stationery carrying the bold print "ORIENTAL SASH FACTORY
(CELESTINO CO AND COMPANY, PROP.) 926 Raon St., Quiapo, Manila, Tel. No. etc., Manufacturers of All
Kinds of Doors, Windows ... ." Likewise, Celestino Co never put up a contractor's bond as required by Article
1729 of the Civil Code. Also, as a general rule, sash factories receive orders for doors and windows of special
design only in particular cases, but the bulk of their sales is derived from ready-made doors and windows of
standard sizes for the average home, which "sales" were reflected in their books of accounts totalling
P118,754.69 for the period from January, 1952 to September 30, 1952, or for a period of only nine (9) months.
This Court found said sum difficult to have been derived from its few customers who placed special orders for
these items. Applying the abovestated facts to the case at bar, We found them to he inapposite. Engineering
advertised itself as Engineering Equipment and Supply Company, Machinery Mechanical Supplies, Engineers,
Contractors, 174 Marques de Comillas, Manila (Exh. "B" and "15" BIR rec. p. 186), and not as manufacturers.
It likewise paid the contractors tax on all the contracts for the design and construction of central system as
testified to by Mr. Rey Parker, its President and General Manager. (t.s.n. p. 102, 103) Similarly, Engineering
did not have ready-made air conditioning units for sale but as per testimony of Mr. Parker upon inquiry of Judge
Luciano of the CTA —

Q — Aside from the general components, which go into air conditioning plant or
system of the central type which your company undertakes, and the procedure
followed by you in obtaining and executing contracts which you have already
testified to in previous hearing, would you say that the covering contracts for these
different projects listed ... referred to in the list, Exh. "F" are identical in every
respect? I mean every plan or system covered by these different contracts are
identical in standard in every respect, so that you can reproduce them?

A — No, sir. They are not all standard. On the contrary, none of them are the
same. Each one must be designed and constructed to meet the particular
requirements, whether the application is to be operated. (t.s.n. pp. 101-102)

What We consider as on all fours with the case at bar is the case of S.M. Lawrence Co. vs.
McFarland, Commissioner of Internal Revenue of the State of Tennessee and McCanless, 355 SW 2d, 100,
101, "where the cause presents the question of whether one engaged in the business of contracting for the
establishment of air conditioning system in buildings, which work requires, in addition to the furnishing of a
cooling unit, the connection of such unit with electrical and plumbing facilities and the installation of ducts within
and through walls, ceilings and floors to convey cool air to various parts of the building, is liable for sale or use
tax as a contractor rather than a retailer of tangible personal property. Appellee took the Position that appellant
was not engaged in the business of selling air conditioning equipment as such but in the furnishing to its
customers of completed air conditioning systems pursuant to contract, was a contractor engaged in the
construction or improvement of real property, and as such was liable for sales or use tax as the consumer of
materials and equipment used in the consummation of contracts, irrespective of the tax status of its contractors.
To transmit the warm or cool air over the buildings, the appellant installed system of ducts running from the
basic units through walls, ceilings and floors to registers. The contract called for completed air conditioning
systems which became permanent part of the buildings and improvements to the realty." The Court held the
appellant a contractor which used the materials and the equipment upon the value of which the tax herein
imposed was levied in the performance of its contracts with its customers, and that the customers did not
purchase the equipment and have the same installed.

Applying the facts of the aforementioned case to the present case, We see that the supply of air conditioning
units to Engineer's various customers, whether the said machineries were in hand or not, was especially made
for each customer and installed in his building upon his special order. The air conditioning units installed in a
central type of air conditioning system would not have existed but for the order of the party desiring to acquire
it and if it existed without the special order of Engineering's customer, the said air conditioning units were not
intended for sale to the general public. Therefore, We have but to affirm the conclusion of the Court of Tax
Appeals that Engineering is a contractor rather than a manufacturer, subject to the contractors tax prescribed
by Section 191 of the Code and not to the advance sales tax imposed by Section 185(m) in relation to Section
194 of the same Code. Since it has been proved to Our satisfaction that Engineering imported air conditioning
units, parts or accessories thereof for use in its construction business and these items were never sold, resold,
bartered or exchanged, Engineering should be held liable to pay taxes prescribed under Section 190 5 of the
Code. This compensating tax is not a tax on the importation of goods but a tax on the use of imported goods
not subject to sales tax. Engineering, therefore, should be held liable to the payment of 30% compensating tax
in accordance with Section 190 of the Tax Code in relation to Section 185(m) of the same, but without the 50%
mark up provided in Section 183(b).

II
We take up next the issue of fraud. The Commissioner charged Engineering with misdeclaration of the imported
air conditioning units and parts or accessories thereof so as to make them subject to a lower rate of percentage
tax (7%) under Section 186 of the Tax Code, when they are allegedly subject to a higher rate of tax (30%)
under its Section 185(m). This charge of fraud was denied by Engineering but the Court of Tax Appeals in its
decision found adversely and said"

... We are amply convinced from the evidence presented by respondent that petitioner
deliberately and purposely misdeclared its importations. This evidence consists of letters written
by petitioner to its foreign suppliers, instructing them on how to invoice and describe the air
conditioning units ordered by petitioner. ... (p. 218 CTA rec.)

Despite the above findings, however, the Court of Tax Appeals absolved Engineering from paying the 50%
surcharge prescribe by Section 183(a) of the Tax Code by reasoning out as follows:

The imposition of the 50% surcharge prescribed by Section 183(a) of the Tax Code is based on
willful neglect to file the monthly return within 20 days after the end of each month or in case a
false or fraudulent return is willfully made, it can readily be seen, that petitioner cannot legally
be held subject to the 50% surcharge imposed by Section 183(a) of the Tax Code. Neither can
petitioner be held subject to the 50% surcharge under Section 190 of the Tax Code dealing on
compensating tax because the provisions thereof do not include the 50% surcharge. Where a
particular provision of the Tax Code does not impose the 50% surcharge as fraud penalty we
cannot enforce a non-existing provision of law notwithstanding the assessment of respondent to
the contrary. Instances of the exclusion in the Tax Code of the 50% surcharge are those dealing
on tax on banks, taxes on receipts of insurance companies, and franchise tax. However, if the
Tax Code imposes the 50% surcharge as fraud penalty, it expressly so provides as in the cases
of income tax, estate and inheritance taxes, gift taxes, mining tax, amusement tax and the
monthly percentage taxes. Accordingly, we hold that petitioner is not subject to the 50%
surcharge despite the existence of fraud in the absence of legal basis to support the importation
thereof. (p. 228 CTA rec.)

We have gone over the exhibits submitted by the Commissioner evidencing fraud committed by Engineering
and We reproduce some of them hereunder for clarity.

As early as March 18, 1953, Engineering in a letter of even date wrote to Trane Co. (Exh. "3-K" pp. 152-155,
BIR rec.) viz:

Your invoices should be made in the name of Madrigal & Co., Inc., Manila, Philippines, c/o
Engineering Equipment & Supply Co., Manila, Philippines — forwarding all correspondence and
shipping papers concerning this order to us only and not to the customer.

When invoicing, your invoices should be exactly as detailed in the customer's Letter Order dated
March 14th, 1953 attached. This is in accordance with the Philippine import licenses granted to
Madrigal & Co., Inc. and such details must only be shown on all papers and shipping documents
for this shipment. No mention of words air conditioning equipment should be made on any
shipping documents as well as on the cases. Please give this matter your careful attention,
otherwise great difficulties will be encountered with the Philippine Bureau of Customs when
clearing the shipment on its arrival in Manila. All invoices and cases should be marked "THIS
EQUIPMENT FOR RIZAL CEMENT CO."

The same instruction was made to Acme Industries, Inc., San Francisco, California in a letter dated March 19,
1953 (Exh. "3-J-1" pp. 150-151, BIR rec.)

On April 6, 1953, Engineering wrote to Owens-Corning Fiberglass Corp., New York, U.S.A. (Exh. "3-1" pp. 147-
149, BIR rec.) also enjoining the latter from mentioning or referring to the term 'air conditioning' and to describe
the goods on order as Fiberglass pipe and pipe fitting insulation instead. Likewise on April 30, 1953, Engineering
threatened to discontinue the forwarding service of Universal Transcontinental Corporation when it wrote Trane
Co. (Exh. "3-H" p. 146, BIR rec.):

It will be noted that the Universal Transcontinental Corporation is not following through on the
instructions which have been covered by the above correspondence, and which indicates the
necessity of discontinuing the use of the term "Air conditioning Machinery or Air Coolers". Our
instructions concerning this general situation have been sent to you in ample time to have
avoided this error in terminology, and we will ask that on receipt of this letter that you again write
to Universal Transcontinental Corp. and inform them that, if in the future, they are unable to
cooperate with us on this requirement, we will thereafter be unable to utilize their forwarding
service. Please inform them that we will not tolerate another failure to follow our requirements.

And on July 17, 1953 (Exh- "3-g" p. 145, BIR rec.) Engineering wrote Trane Co. another letter, viz:
 In the past, we have always paid the air conditioning tax on climate changers and that mark is
recognized in the Philippines, as air conditioning equipment. This matter of avoiding any tie-in
on air conditioning is very important to us, and we are asking that from hereon that whoever
takes care of the processing of our orders be carefully instructed so as to avoid again using the
term "Climate changers" or in any way referring to the equipment as "air conditioning."

And in response to the aforequoted letter, Trane Co. wrote on July 30, 1953, suggesting a solution, viz:

We feel that we can probably solve all the problems by following the procedure outlined in your
letter of March 25, 1953 wherein you stated that in all future jobs you would enclose photostatic
copies of your import license so that we might make up two sets of invoices: one set describing
equipment ordered simply according to the way that they are listed on the import license and
another according to our ordinary regular methods of order write-up. We would then include the
set made up according to the import license in the shipping boxes themselves and use those
items as our actual shipping documents and invoices, and we will send the other regular invoice
to you, by separate correspondence. (Exh- No. "3-F-1", p. 144 BIR rec.)

Another interesting letter of Engineering is one dated August 27, 1955 (Exh. "3-C" p. 141 BIR rec.)

In the process of clearing the shipment from the piers, one of the Customs inspectors requested
to see the packing list. Upon presenting the packing list, it was discovered that the same was
prepared on a copy of your letterhead which indicated that the Trane Co. manufactured air
conditioning, heating and heat transfer equipment. Accordingly, the inspectors insisted that this
equipment was being imported for air conditioning purposes. To date, we have not been able to
clear the shipment and it is possible that we will be required to pay heavy taxes on equipment.

The purpose of this letter is to request that in the future, no documents of any kind should be
sent with the order that indicate in any way that the equipment could possibly be used for air
conditioning.

It is realized that this a broad request and fairly difficult to accomplish and administer, but we
believe with proper caution it can be executed. Your cooperation and close supervision
concerning these matters will be appreciated. (Emphasis supplied)

The aforequoted communications are strongly indicative of the fraudulent intent of Engineering to misdeclare
its importation of air conditioning units and spare parts or accessories thereof to evade payment of the 30%
tax. And since the commission of fraud is altogether too glaring, We cannot agree with the Court of Tax Appeals
in absolving Engineering from the 50% fraud surcharge, otherwise We will be giving premium to a plainly
intolerable act of tax evasion. As aptly stated by then Solicitor General, now Justice, Antonio P. Barredo: 'this
circumstance will not free it from the 50% surcharge because in any case whether it is subject to advance sales
tax or compensating tax, it is required by law to truly declare its importation in the import entries and internal
revenue declarations before the importations maybe released from customs custody. The said entries are the
very documents where the nature, quantity and value of the imported goods declared and where the customs
duties, internal revenue taxes, and other fees or charges incident to the importation are computed. These
entries, therefore, serve the same purpose as the returns required by Section 183(a) of the Code.'

Anent the 25% delinquency surcharge, We fully agree to the ruling made by the Court of Tax Appeals and hold
Engineering liable for the same. As held by the lower court:

At first blush it would seem that the contention of petitioner that it is not subject to the
delinquency, surcharge of 25% is sound, valid and tenable. However, a serious study and critical
analysis of the historical provisions of Section 190 of the Tax Code dealing on compensating tax
in relation to Section 183(a) of the same Code, will show that the contention of petitioner is
without merit. The original text of Section 190 of Commonwealth Act 466, otherwise known as
the National Internal Revenue Code, as amended by Commonwealth Act No. 503, effective on
October 1, 1939, does not provide for the filing of a compensation tax return and payment of the
25 % surcharge for late payment thereof. Under the original text of Section 190 of the Tax Code
as amended by Commonwealth Act No. 503, the contention of the petitioner that it is not subject
to the 25% surcharge appears to be legally tenable. However, Section 190 of the Tax Code was
subsequently amended by the Republic Acts Nos. 253, 361, 1511 and 1612 effective October
1, 1946, July 1, 1948, June 9, 1949, June 16, 1956 and August 24, 1956 respectively, which
invariably provides among others, the following:

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

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

III

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

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

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

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

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

SO ORDERED.
G.R. No. 44471 September 26, 1938

H. E. HEACOCK COMPANY, Plaintiff-Appellee, vs. BUNTAL MANUFACTURING COMPANY, GREGORIO

NIEVA, and MARIA A. DE NIEVA Defendants-Appellant.

Crispin Oben for appellants.

Eulalio Chavez for appellee.

DIAZ, J.:

The main, if not the sole, question raised by the appeal taken by defendants from the judgment of the lower
court is the following:chanrobles virtual law library

Is the document Exhibit A which plaintiff and the first two defendants executed on May 12, 1931 a contract for
the lease of an adding and calculating machine therein described, with option to purchase by defendants; or is
it, on the contrary, a contract of purchase and sale on installments in which said defendants were vendees and
plaintiff, vendor?chanrobles virtual law library

The lower court held that it was one of lease and thereafter decided that since defendants failed to pay plaintiff
the rents which they had bound themselves to pay it, at the rate of P35 a month from August, 1931, and which
then amounted to P555, they should deliver to plaintiff the aforesaid sum with costs. This it resolved
notwithstanding that it had been shown at the trial that upon plaintiff's demand in its complaint for preliminary
attachment, defendants had to return to it the said machine which it accepted to its satisfaction, without the
necessity of making use of the writ of attachment. Said acts of defendants constituted compliance with the
prayer in plaintiff's complaint that one of these things, and not both at the same time, be done: "The delivery of
said personal property, and if delivery cannot be effected then judgment for the rents in arrears." chanrobles
virtual law library

Defendants chose to make delivery so as to dispose of the question in this

manner.chanroblesvirtualawlibrary chanrobles virtual law library

Defendants maintain that in deciding the case in the way it has done, the lower court erred in the following
respects:

I. In granting plaintiff's petition that it be allowed to file an amended complaint after defendants had been
declared in default with respect to the original complaint.chanroblesvirtualawlibrary chanrobles virtual law
library

II. In granting plaintiff the two alternative remedies for which it had prayed in its original complaint upon its
asking for both in the amended complaint.chanroblesvirtualawlibrary chanrobles virtual law library

III. In not holding that the contract entered into between the parties was one of purchase and sale on
installments and that once the same was rescinded by plaintiff upon its taking the machine which is the subject
matter thereof, it lost all right to recover from them the balance of its price.

1. Two hearings were held in the case: The first took place in the absence and default of defendants, and the
second after the original complaint had been amended and the answer of defendants filed. Upon the objection
of the latter's attorney, who appeared in the first trial, upon the ground that plaintiff could have no other relief
than the confirmation of its possession of the machine in question after it had taken and received the same
from defendants for the reason that the prayer for relief in the complaint did not ask for more than "the delivery
of said personal property" (referring to the machine in question), or for "judgment for the rents in arrears," "if
delivery cannot be effected then," plaintiff decided to ask for, which it did and obtained, leave from the lower
court to amend its complaint in the sense of eliminating from the prayer thereof the phrase "if delivery cannot
be effected then." This it did, no doubt, so as to be able to secure two things at the same time: The return of its
machine and the amount it claimed as rents. After amendment of the complaint a second hearing was held in
which the lower court rendered the judgment appealed from. We find no error in the act of the lower court
granting leave to plaintiff to amend its complaint, which error may be considered prejudicial to defendants.
There was no attempt to amend an essential part of the complaint, but only a part of its prayer for relief; and it
is known that the prayer for relief is not the complaint itself nor is it a part of the allegations which state the
cause or causes of action submitted to the consideration of the court for its resolution. (Aguilar vs. Rubiato and
Gonzalez Vila, 40 Phil., 570; Campomanes vs. Bartolome and German and Co., 38 Phil., 808;
Rosales vs. Reyes and Ordoveza, 25 Phil., 495.) Moreover, the amendment was made substantially in
accordance with the provisions of sections 109 and 110 of Act No. 190. The first error attributed to the lower
court, is therefore, without merit.chanroblesvirtualawlibrary chanrobles virtual law library

2. The determination of the other error alleged to have been committed by the lower court depends upon our
consideration of the nature of the contract Exhibit A and upon the conclusion which we may reach with respect
thereto. If it is a lease, then said errors can not exist.chanroblesvirtualawlibrary chanrobles virtual law library
Among the clauses appearing in the contract in question, there are several showing that it is not really a contract
of lease but of purchase and sale on installments. Said clauses are the following:

That the owner hereby leases unto the hirer and the hirer P860.00
hereby hires from the owner one Dalton adding, calculating
and posting machine, Multiplex Model 490-180 Serial No. 4-
103493

To credit one Dalton adding machine S. H. Serial No. 116182 160.00

for P110 and by cash P50. Initial payment

Balance due 700.00

which the hirer acknowledges having received in good state and condition, for the term of 20 calendar months
from the date hereof at the rental of P35 per calendar month, and . . . calendar months at the rental . . . subject
to the following terms and conditions:

1. The hirer agrees with the owner as follows:chanrobles virtual law library

( a) To pay the owner at its office at 122 Escolta, the said hire monthly on the 12th day of every month within
three days thereafter.chanroblesvirtualawlibrary chanrobles virtual law library

6. In consideration of the sum of P160 to it in hand paid by the hirer, the owner hereby grants to the hirer the
option to purchase, while the present lease is in force and effect, the property made the subject of this
agreement, at the purchase price of P860. In the event of the exercise of said option, the hirer shall be entitled
to a credit on the purchase price for an amount equal to the rentals actually paid hereunder and the payment
made under this paragraph; it being expressly understood and agreed, however, that the said chattel shall
remain the property of the owner until after the complete exercise of such option, and the payment in full of the
purchase price agreed upon, and, until such time the hirer shall not have any property right in said chattel or
be deemed to have purchased or obligated to purchase the same. Should the hirer not exercise the option
herein granted, the amount paid by him for said option under this paragraph shall become forfeited to the owner.

In the first clause above-quoted it appears that defendants paid the amount of P160 on account of the price of
the machine which was fixed at P860. It is therein stated that said amount was delivered to plaintiff as "initial
payment." It was for this reason that upon the signing of the contract care was taken to express therein that the
balance which defendants were bound to pay to plaintiff for the machine was only P700. So as to facilitate the
payment of this amount by defendants, it was agreed between them and plaintiff that the former would complete
the same in twenty monthly installments of P35. Dividing P700 by 20, the resulting amount is exactly
P35.chanroblesvirtualawlibrary chanrobles virtual law library

It is true that in the contract it is often stated that plaintiff leased the machine to defendants, giving them the
option to buy it upon their paying it the sum of P860 and crediting them with so much as they might be able to
pay as rents at the above rate of P35 a month. It should be noted, however, that in the clause aforementioned,
it is clearly stated that defendant paid the sum of P160 on account of the price of the machine. This payment
shows that the real contract between the parties was that of purchase and sale on installments and not a lease.
In spite of any effort to prove the contrary, the aforesaid amount of P160 can not be understood to constitute
payment in advance of the rents agreed upon for there is nothing in the contract to indicate that it was and
because, according to the contract itself, the rents could not be more nor less than P35 a month, payable
monthly. Following the theory of plaintiff and in accordance with the sound principles of accounting, the amount
of P160 can not be considered as payment of rents in advance; otherwise we would reach the conclusion that
defendants, without being bound to do so and in violation of the terms of the contract, paid plaintiff rents not
monthly but from day to day inasmuch as said sum corresponds to four months and twenty days. Furthermore,
it must be borne in mind that the mention in the aforesaid contract of the fact that the sum of P160 constituted
an "initial payment" on account of the price of the machine in question can have no other effect than to contradict
and nullify that stated in clause 6, which is one of those above-quoted, to the effect that the same is the
consideration by virtue of which plaintiff granted defendants the option to buy the machine. Defendants did not
have to pay anything for the option for the reason that they made the payment of P160 to buy the machine on
installments, binding themselves to pay the balance by delivering to plaintiff the sum of P35 a month. It should
be stated, moreover, that the fact that the price of the machine was fixed in the contract makes the latter not a
lease but a purchase and sale because in contracts of lease, as distinguished from those of purchase and sale,
it is plain redundancy to fix or make any mention of the price of the thing given in lease (article 1445, 1543, Civil
Code). When the terms of a contract are not clear or conflict with each other, as those appearing in Exhibit A,
effect must be given to the intention of the parties (article 1281, Civil Code); and the intention of plaintiff and
defendants in this case as we gather it from Exhibit A, considered in connection with all its terms and clauses,
is that the contract entered into between them is one of purchase and sale on installments and not a
lease.chanroblesvirtualawlibrary chanrobles virtual law library
Accordingly, the act of plaintiff in requiring, as it did, the return of the machine in question, receiving and
accepting the same thereafter from defendants when the latter voluntarily returned it, shows that plaintiff not
only consented to, but desired the rescission of the contract it had entered with defendants, specially when it is
taken into consideration that it thus expressed itself in its original complaint wherein it prayed not for the return
of the machine and payment of supposed rents due at the same time, but only for one of these things. Upon
taking the machine under such circumstances plaintiff performed a positive act indicating its intention to rescind
the contract, and having done so and retained what defendants had up to then paid to it, amounting to P305
without any objection on their part, it can not and must not have any right to anything more. Its right was reduced
to demanding compliance with the terms of Exhibit A as contract of purchase and sale or to rescind the same,
and it chose the latter alternative and to retain the aforesaid sum of P305 (articles 1506 and 1124, Civil
Code).chanroblesvirtualawlibrary chanrobles virtual law library

In conclusion we hold that the contract Exhibit A is that of purchase and sale on installments; that said contract
was rescinded without objection on the part of defendants; and that the appeal of the latter is well
taken.chanroblesvirtualawlibrary chanrobles virtual law library

Wherefore, declaring Exhibit A rescinded, the judgment appealed from is reversed, absolving defendants from
the complaint and sentencing plaintiff to pay the costs in both instances. So
ordered.chanroblesvirtualawlibrary chanrobles virtual law library

G.R. No. 142618 July 12, 2007

PCI LEASING AND FINANCE, INC., Petitioner,
vs.
GIRAFFE-X CREATIVE IMAGING, INC., Respondent.

DECISION

GARCIA, J.:

On a pure question of law involving the application of Republic Act (R.A.) No. 5980, as amended by R.A. No. 8556¸
in relation to Articles 1484 and 1485 of the Civil Code, petitioner PCI Leasing and Finance, Inc. (PCI LEASING, for
short) has directly come to this Court via this petition for review under Rule 45 of the Rules of Court to nullify and set
aside the Decision and Resolution dated December 28, 1998 and February 15, 2000, respectively, of the Regional
Trial Court (RTC) of Quezon City, Branch 227, in its Civil Case No. Q-98-34266, a suit for a sum of money and/or
personal property with prayer for a writ of replevin, thereat instituted by the petitioner against the herein respondent,
Giraffe-X Creative Imaging, Inc. (GIRAFFE, for brevity).

The facts:

On December 4, 1996, petitioner PCI LEASING and respondent GIRAFFE entered into a Lease
Agreement,1whereby the former leased out to the latter one (1) set of Silicon High Impact Graphics and accessories
worth ₱3,900,00.00 and one (1) unit of Oxberry Cinescan 6400-10 worth ₱6,500,000.00. In connection with this
agreement, the parties subsequently signed two (2) separate documents, each denominated as Lease
Schedule.2Likewise forming parts of the basic lease agreement were two (2) separate documents denominated
Disclosure Statements of Loan/Credit Transaction (Single Payment or Installment Plan) 3 that GIRAFFE also
executed for each of the leased equipment. These disclosure statements inter alia described GIRAFFE, vis-à-vis the
two aforementioned equipment, as the "borrower" who acknowledged the "net proceeds of the loan," the "net amount
to be financed," the "financial charges," the "total installment payments" that it must pay monthly for thirty-six (36)
months, exclusive of the 36% per annum "late payment charges." Thus, for the Silicon High Impact Graphics,
GIRAFFE agreed to pay ₱116,878.21 monthly, and for Oxberry Cinescan, ₱181.362.00 monthly. Hence, the total
amount GIRAFFE has to pay PCI LEASING for 36 months of the lease, exclusive of monetary penalties imposable,
if proper, is as indicated below:

P116,878.21 @ month (for the Silicon High

Impact Graphics) x 36 months = P 4,207,615.56

-- PLUS--

P181,362.00 @ month (for the Oxberry

Cinescan) x 36 months = P 6,529,032.00

Total Amount to be paid by GIRAFFE

(or the NET CONTRACT AMOUNT) P 10,736,647.56

By the terms, too, of the Lease Agreement, GIRAFFE undertook to remit the amount of ₱3,120,000.00 by way of
"guaranty deposit," a sort of performance and compliance bond for the two equipment. Furthermore, the same
agreement embodied a standard acceleration clause, operative in the event GIRAFFE fails to pay any rental and/or
other accounts due.

A year into the life of the Lease Agreement, GIRAFFE defaulted in its monthly rental-payment obligations. And
following a three-month default, PCI LEASING, through one Atty. Florecita R. Gonzales, addressed a formal pay-or-
surrender-equipment type of demand letter4 dated February 24, 1998 to GIRAFFE.

The demand went unheeded.

Hence, on May 4, 1998, in the RTC of Quezon City, PCI LEASING instituted the instant case against GIRAFFE. In
its complaint,5 docketed in said court as Civil Case No. 98-34266 and raffled to Branch 2276 thereof, PCI LEASING
prayed for the issuance of a writ of replevin for the recovery of the leased property, in addition to the following relief:

2. After trial, judgment be rendered in favor of plaintiff [PCI LEASING] and against the defendant [GIRAFFE], as
follows:

a. Declaring the plaintiff entitled to the possession of the subject properties;

b. Ordering the defendant to pay the balance of rental/obligation in the total amount of ₱8,248,657.47
inclusive of interest and charges thereon;

c. Ordering defendant to pay plaintiff the expenses of litigation and cost of suit…. (Words in bracket added.)
Upon PCI LEASING’s posting of a replevin bond, the trial court issued a writ of replevin, paving the way for PCI
LEASING to secure the seizure and delivery of the equipment covered by the basic lease agreement.

Instead of an answer, GIRAFFE, as defendant a quo, filed a Motion to Dismiss, therein arguing that the seizure of
the two (2) leased equipment stripped PCI LEASING of its cause of action. Expounding on the point, GIRAFFE
argues that, pursuant to Article 1484 of the Civil Code on installment sales of personal property, PCI LEASING is
barred from further pursuing any claim arising from the lease agreement and the companion contract documents,
adding that the agreement between the parties is in reality a lease of movables with option to buy. The given situation,
GIRAFFE continues, squarely brings into applicable play Articles 1484 and 1485 of the Civil Code, commonly
referred to as the Recto Law. The cited articles respectively provide:

ART. 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 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. (Emphasis added.)

ART. 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 the possession or enjoyment of the thing.

It is thus GIRAFFE’s posture that the aforequoted Article 1484 of the Civil Code applies to its contractual relation
with PCI LEASING because the lease agreement in question, as supplemented by the schedules documents, is
really a lease with option to buy under the companion article, Article 1485. Consequently, so GIRAFFE argues, upon
the seizure of the leased equipment pursuant to the writ of replevin, which seizure is equivalent to foreclosure, PCI
LEASING has no further recourse against it. In brief, GIRAFFE asserts in its Motion to Dismiss that the civil complaint
filed by PCI LEASING is proscribed by the application to the case of Articles 1484 and 1485, supra, of the Civil Code.

In its Opposition to the motion to dismiss, PCI LEASING maintains that its contract with GIRAFFE is a straight lease
without an option to buy. Prescinding therefrom, PCI LEASING rejects the applicability to the suit of Article 1484 in
relation to Article 1485 of the Civil Code, claiming that, under the terms and conditions of the basic agreement, the
relationship between the parties is one between an ordinary lessor and an ordinary lessee.

In a decision7 dated December 28, 1998, the trial court granted GIRAFFE’s motion to dismiss mainly on the interplay
of the following premises: 1) the lease agreement package, as memorialized in the contract documents, is akin to
the contract contemplated in Article 1485 of the Civil Code, and 2) GIRAFFE’s loss of possession of the leased
equipment consequent to the enforcement of the writ of replevin is "akin to foreclosure, … the condition precedent
for application of Articles 1484 and 1485 [of the Civil Code]." Accordingly, the trial court dismissed Civil Case No. Q-
98-34266, disposing as follows:

WHEREFORE, premises considered, the defendant [GIRAFFE] having relinquished any claim to the personal
properties subject of replevin which are now in the possession of the plaintiff [PCI LEASING], plaintiff is DEEMED
fully satisfied pursuant to the provisions of Articles 1484 and 1485 of the New Civil Code. By virtue of said provisions,
plaintiff is DEEMED estopped from further action against the defendant, the plaintiff having recovered thru (replevin)
the personal property sought to be payable/leased on installments, defendants being under protection of said
RECTO LAW. In view thereof, this case is hereby DISMISSED.

With its motion for reconsideration having been denied by the trial court in its resolution of February 15,
2000,8petitioner has directly come to this Court via this petition for review raising the sole legal issue of whether or
not the underlying Lease Agreement, Lease Schedules and the Disclosure Statements that embody the financial
leasing arrangement between the parties are covered by and subject to the consequences of Articles 1484 and 1485
of the New Civil Code.

As in the court below, petitioner contends that the financial leasing arrangement it concluded with the respondent
represents a straight lease covered by R.A. No. 5980, the Financing Company Act, as last amended by R.A. No.
8556, otherwise known as Financing Company Act of 1998, and is outside the application and coverage of the Recto
Law. To the petitioner, R.A. No. 5980 defines and authorizes its existence and business.

The recourse is without merit.

R.A. No. 5980, in its original shape and as amended, partakes of a supervisory or regulatory legislation, merely
providing a regulatory framework for the organization, registration, and regulation of the operations of financing
companies. As couched, it does not specifically define the rights and obligations of parties to a financial leasing
arrangement. In fact, it does not go beyond defining commercial or transactional financial leasing and other financial
leasing concepts. Thus, the relevancy of Article 18 of the Civil Code which reads:
Article 18. - In matters which are governed by … special laws, their deficiency shall be supplied by the provisions of
this [Civil] Code.

Petitioner foists the argument that the Recto Law, i.e., the Civil Code provisions on installment sales of movable
property, does not apply to a financial leasing agreement because such agreement, by definition, does not confer
on the lessee the option to buy the property subject of the financial lease. To the petitioner, the absence of an option-
to-buy stipulation in a financial leasing agreement, as understood under R.A. No. 8556, prevents the application
thereto of Articles 1484 and 1485 of the Civil Code.

We are not persuaded.

The Court can allow that the underlying lease agreement has the earmarks or made to appear as a financial
leasing,9 a term defined in Section 3(d) of R.A. No. 8556 as -

a mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires,
at the instance of the lessee, machinery, equipment, … office machines, and other movable or immovable property
in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least
seventy (70%) of the purchase price or acquisition cost, including any incidental expenses and a margin of profit
over an obligatory period of not less than two (2) years during which the lessee has the right to hold and use the
leased property … but with no obligation or option on his part to purchase the leased property from the owner-lessor
at the end of the lease contract.

In its previous holdings, however, the Court, taking into account the following mix: the imperatives of equity, the
contractual stipulations in question and the actuations of parties vis-à-vis their contract, treated disguised
transactions technically tagged as financing lease, like here, as creating a different contractual relationship. Notable
among the Court’s decisions because of its parallelism with this case is BA Finance Corporation v. Court of
Appeals10 which involved a motor vehicle. Thereat, the Court has treated a purported financial lease as actually a
sale of a movable property on installments and prevented recovery beyond the buyer’s arrearages. Wrote the Court
in BA Finance:

The transaction involved … is one of a "financial lease" or "financial leasing," where a financing company would, in
effect, initially purchase a mobile equipment and turn around to lease it to a client who gets, in addition, an option to
purchase the property at the expiry of the lease period. xxx.

xxx xxx xxx

The pertinent provisions of [RA] 5980, thus implemented, read:

"'Financing companies,' … are primarily organized for the purpose of extending credit facilities to consumers … either
by … leasing of motor vehicles, … and office machines and equipment, … and other movable property."

"'Credit' shall mean any loan, … any contract to sell, or sale or contract of sale of property or service, … under which
part or all of the price is payable subsequent to the making of such sale or contract; any rental-purchase contract;
….;"

The foregoing provisions indicate no less than a mere financing scheme extended by a financing company to a client
in acquiring a motor vehicle and allowing the latter to obtain the immediate possession and use thereof pending full
payment of the financial accommodation that is given.

In the case at bench, xxx. [T]he term of the contract [over a motor vehicle] was for thirty six (36) months at a "monthly
rental" … (P1,689.40), or for a total amount of P60,821.28. The contract also contained [a] clause [requiring the
Lessee to give a guaranty deposit in the amount of P20,800.00] xxx

After the private respondent had paid the sum of P41,670.59, excluding the guaranty deposit of P20,800.00, he
stopped further payments. Putting the two sums together, the financing company had in its hands the amount of
P62,470.59 as against the total agreed "rentals" of P60,821.28 or an excess of P1,649.31.

The respondent appellate court considered it only just and equitable for the guaranty deposit made by the private
respondent to be applied to his arrearages and thereafter to hold the contract terminated. Adopting the ratiocination
of the court a quo, the appellate court said:

xxx In view thereof, the guaranty deposit of P20,800.00 made by the defendant should and must be credited in his
favor, in the interest of fairness, justice and equity. The plaintiff should not be allowed to unduly enrich itself at the
expense of the defendant. xxx This is even more compelling in this case where although the transaction, on its face,
appear ostensibly, to be a contract of lease, it is actually a financing agreement, with the plaintiff financing the
purchase of defendant's automobile …. The Court is constrained, in the interest of truth and justice, to go into this
aspect of the transaction between the plaintiff and the defendant … with all the facts and circumstances existing in
this case, and which the court must consider in deciding the case, if it is to decide the case according to all the facts.
xxx.
xxx xxx xxx

Considering the factual findings of both the court a quo and the appellate court, the only logical conclusion is that
the private respondent did opt, as he has claimed, to acquire the motor vehicle, justifying then the application of the
guarantee deposit to the balance still due and obligating the petitioner to recognize it as an exercise of the option by
the private respondent. The result would thereby entitle said respondent to the ownership and possession of the
vehicle as the buyer thereof. We, therefore, see no reversible error in the ultimate judgment of the appellate
court.11(Italics in the original; underscoring supplied and words in bracket added.)

In Cebu Contractors Consortium Co. v. Court of Appeals,12 the Court viewed and thus declared a financial lease
agreement as having been simulated to disguise a simple loan with security, it appearing that the financing company
purchased equipment already owned by a capital-strapped client, with the intention of leasing it back to the latter.

In the present case, petitioner acquired the office equipment in question for their subsequent lease to the respondent,
with the latter undertaking to pay a monthly fixed rental therefor in the total amount of ₱292,531.00, or a total of
₱10,531,116.00 for the whole 36 months. As a measure of good faith, respondent made an up-front guarantee
deposit in the amount of ₱3,120,000.00. The basic agreement provides that in the event the respondent fails to pay
any rental due or is in a default situation, then the petitioner shall have cumulative remedies, such as, but not limited
to, the following:13

1. Obtain possession of the property/equipment;

2. Retain all amounts paid to it. In addition, the guaranty deposit may be applied towards the payment of
"liquidated damages";

3. Recover all accrued and unpaid rentals;

4. Recover all rentals for the remaining term of the lease had it not been cancelled, as additional penalty;

5. Recovery of any and all amounts advanced by PCI LEASING for GIRAFFE’s account xxx;

6. Recover all expenses incurred in repossessing, removing, repairing and storing the property; and,

7. Recover all damages suffered by PCI LEASING by reason of the default.

In addition, Sec. 6.1 of the Lease Agreement states that the guaranty deposit shall be forfeited in the event the
respondent, for any reason, returns the equipment before the expiration of the lease.

At bottom, respondent had paid the equivalent of about a year’s lease rentals, or a total of ₱3,510,372.00, more or
less. Throw in the guaranty deposit (₱3,120,000.00) and the respondent had made a total cash outlay of
₱6,630,372.00 in favor of the petitioner. The replevin-seized leased equipment had, as alleged in the complaint, an
estimated residual value of ₱6,900.000.00 at the time Civil Case No. Q-98-34266 was instituted on May 4, 1998.
Adding all cash advances thus made to the residual value of the equipment, the total value which the petitioner had
actually obtained by virtue of its lease agreement with the respondent amounts to ₱13,530,372.00 (₱3,510,372.00
+ ₱3,120,000.00 + ₱6,900.000.00 = ₱13,530,372.00).

The acquisition cost for both the Silicon High Impact Graphics equipment and the Oxberry Cinescan was, as stated
in no less than the petitioner’s letter to the respondent dated November 11, 199614 approving in the latter’s favor a
lease facility, was ₱8,100,000.00. Subtracting the acquisition cost of ₱8,100,000.00 from the total amount, i.e.,
₱13,530,372.00, creditable to the respondent, it would clearly appear that petitioner realized a gross income of
₱5,430,372.00 from its lease transaction with the respondent. The amount of ₱5,430,372.00 is not yet a final figure
as it does not include the rentals in arrears, penalties thereon, and interest earned by the guaranty deposit.

As may be noted, petitioner’s demand letter15 fixed the amount of ₱8,248,657.47 as representing the respondent’s
"rental" balance which became due and demandable consequent to the application of the acceleration and other
clauses of the lease agreement. Assuming, then, that the respondent may be compelled to pay ₱8,248,657.47, then
it would end up paying a total of ₱21,779,029.47 (₱13,530,372.00 + ₱8,248,657.47 = ₱21,779,029.47) for its use -
for a year and two months at the most - of the equipment. All in all, for an investment of ₱8,100,000.00, the petitioner
stands to make in a year’s time, out of the transaction, a total of ₱21,779,029.47, or a net of ₱13,679,029.47, if we
are to believe its outlandish legal submission that the PCI LEASING-GIRAFFE Lease Agreement was an honest-to-
goodness straight lease.

A financing arrangement has a purpose which is at once practical and salutary. R.A. No. 8556 was, in fact, precisely
enacted to regulate financing companies’ operations with the end in view of strengthening their critical role in
providing credit and services to small and medium enterprises and to curtail acts and practices prejudicial to the
public interest, in general, and to their clienteles, in particular.16 As a regulated activity, financing arrangements are
not meant to quench only the thirst for profit. They serve a higher purpose, and R.A. No. 8556 has made that
abundantly clear.
We stress, however, that there is nothing in R.A. No. 8556 which defines the rights and obligations, as between each
other, of the financial lessor and the lessee. In determining the respective responsibilities of the parties to the
agreement, courts, therefore, must train a keen eye on the attendant facts and circumstances of the case in order to
ascertain the intention of the parties, in relation to the law and the written agreement. Likewise, the public interest
and policy involved should be considered. It may not be amiss to state that, normally, financing contracts come in a
standard prepared form, unilaterally thought up and written by the financing companies requiring only the personal
circumstances and signature of the borrower or lessee; the rates and other important covenants in these agreements
are still largely imposed unilaterally by the financing companies. In other words, these agreements are usually one-
sided in favor of such companies. A perusal of the lease agreement in question exposes the many remedies available
to the petitioner, while there are only the standard contractual prohibitions against the respondent. This is
characteristic of standard printed form contracts.

There is more. In the adverted February 24, 1998 demand letter17 sent to the respondent, petitioner fashioned its
claim in the alternative: payment of the full amount of ₱8,248,657.47, representing the unpaid balance for the entire
36-month lease period or the surrender of the financed asset under pain of legal action. To quote the letter:

Demand is hereby made upon you to pay in full your outstanding balance in the amount of P8,248,657.47 on or
before March 04, 1998 OR to surrender to us the one (1) set Silicon High Impact Graphics and one (1) unit Oxberry
Cinescan 6400-10…

We trust you will give this matter your serious and preferential attention. (Emphasis added).

Evidently, the letter did not make a demand for the payment of the ₱8,248,657.47 AND the return of the equipment;
only either one of the two was required. The demand letter was prepared and signed by Atty. Florecita R. Gonzales,
presumably petitioner’s counsel. As such, the use of "or" instead of "and" in the letter could hardly be treated as a
simple typographical error, bearing in mind the nature of the demand, the amount involved, and the fact that it was
made by a lawyer. Certainly Atty. Gonzales would have known that a world of difference exists between "and" and
"or" in the manner that the word was employed in the letter.

A rule in statutory construction is that the word "or" is a disjunctive term signifying dissociation and independence of
one thing from other things enumerated unless the context requires a different interpretation.18

In its elementary sense, "or", as used in a statute, is a disjunctive article indicating an alternative. It often connects
a series of words or propositions indicating a choice of either. When "or" is used, the various members of the
enumeration are to be taken separately.19

The word "or" is a disjunctive term signifying disassociation and independence of one thing from each of the other
things enumerated.20

The demand could only be that the respondent need not return the equipment if it paid the ₱8,248,657.47 outstanding
balance, ineluctably suggesting that the respondent can keep possession of the equipment if it exercises its option
to acquire the same by paying the unpaid balance of the purchase price. Stated otherwise, if the respondent was not
minded to exercise its option of acquiring the equipment by returning them, then it need not pay the outstanding
balance. This is the logical import of the letter: that the transaction in this case is a lease in name only. The so-called
monthly rentals are in truth monthly amortizations of the price of the leased office equipment.

On the whole, then, we rule, as did the trial court, that the PCI LEASING- GIRAFFE lease agreement is in reality a
lease with an option to purchase the equipment. This has been made manifest by the actions of the petitioner itself,
foremost of which is the declarations made in its demand letter to the respondent. There could be no other
explanation than that if the respondent paid the balance, then it could keep the equipment for its own; if not, then it
should return them. This is clearly an option to purchase given to the respondent. Being so, Article 1485 of the Civil
Code should apply.

The present case reflects a situation where the financing company can withhold and conceal - up to the last moment
- its intention to sell the property subject of the finance lease, in order that the provisions of the Recto Law may be
circumvented. It may be, as petitioner pointed out, that the basic "lease agreement" does not contain a "purchase
option" clause. The absence, however, does not necessarily argue against the idea that what the parties are into is
not a straight lease, but a lease with option to purchase. This Court has, to be sure, long been aware of the practice
of vendors of personal property of denominating a contract of sale on installment as one of lease to prevent the
ownership of the object of the sale from passing to the vendee until and unless the price is fully paid. As this Court
noted in Vda. de Jose v. Barrueco:21

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 the
bargain, in the transfer of title to the lessee.
In another old but still relevant case of U.S. Commercial v. Halili, 22 a lease agreement was declared to be in fact a
sale of personal property by installments. Said the Court:

. . . There can hardly be any question that the so-called contracts of lease on which the present action is based were
veritable leases of personal property with option to purchase, and as such come within the purview of the above
article [Art. 1454-A of the old Civil Code on sale of personal property by installment]. xxx

Being leases of personal property with option to purchase as contemplated in the above article, the contracts in
question are subject to the provision that when the lessor in such case "has chosen to deprive the lessee of the
enjoyment of such personal property," "he shall have no further action" against the lessee "for the recovery of any
unpaid balance" owing by the latter, "agreement to the contrary being null and void."

In choosing, through replevin, to deprive the respondent of possession of the leased equipment, the petitioner waived
its right to bring an action to recover unpaid rentals on the said leased items. Paragraph (3), Article 1484 in relation
to Article 1485 of the Civil Code, which we are hereunder re-reproducing, cannot be any clearer.

ART. 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:

xxx xxx xxx

(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.

ART. 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 the possession or enjoyment of the thing.

As we articulated in Elisco Tool Manufacturing Corp. v. Court of Appeals,23 the remedies provided for in Article 1484
of the Civil Code are alternative, not cumulative. The exercise of one bars the exercise of the others. This limitation
applies to contracts purporting to be leases of personal property with option to buy by virtue of the same Article 1485.
The condition that the lessor has deprived the lessee of possession or enjoyment of the thing for the purpose of
applying Article 1485 was fulfilled in this case by the filing by petitioner of the complaint for a sum of money with
prayer for replevin to recover possession of the office equipment.24 By virtue of the writ of seizure issued by the trial
court, the petitioner has effectively deprived respondent of their use, a situation which, by force of the Recto Law, in
turn precludes the former from maintaining an action for recovery of "accrued rentals" or the recovery of the balance
of the purchase price plus interest. 25

The imperatives of honest dealings given prominence in the Civil Code under the heading: Human Relations, provide
another reason why we must hold the petitioner to its word as embodied in its demand letter. Else, we would witness
a situation where even if the respondent surrendered the equipment voluntarily, the petitioner can still sue upon its
claim. This would be most unfair for the respondent. We cannot allow the petitioner to renege on its word. Yet more
than that, the very word "or" as used in the letter conveys distinctly its intention not to claim both the unpaid balance
and the equipment. It is not difficult to discern why: if we add up the amounts paid by the respondent, the residual
value of the property recovered, and the amount claimed by the petitioner as sued upon herein (for a total of
₱21,779,029.47), then it would end up making an instant killing out of the transaction at the expense of its client, the
respondent. The Recto Law was precisely enacted to prevent this kind of aberration. Moreover, due to considerations
of equity, public policy and justice, we cannot allow this to happen. Not only to the respondent, but those similarly
1avvphil.zw+

situated who may fall prey to a similar scheme.

WHEREFORE, the instant petition is DENIED and the trial court’s decision is AFFIRMED.

Costs against petitioner.

SO ORDERED.