Republic of the Philippines (D) If, before an invoice falls due, Mr.
Quiroga should request its payment,
SUPREME COURT
Manila
EN BANC
G.R. No. L-11491 August 23, 1918
ANDRES QUIROGA, plaintiff-appellant,
vs.
PARSONS HARDWARE CO., defendant-appellee.
Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant.
Crossfield & O'Brien for appellee.
AVANCEÑA, J.:
On January 24, 1911, in this city of manila, a contract in the following tenor was
entered into by and between the plaintiff, as party of the first part, and J. Parsons (to
whose rights and obligations the present defendant later subrogated itself), as party of
the second part:
CONTRACT EXECUTED BY AND BETWEEN ANDRES
QUIROGA AND J. PARSONS, BOTH MERCHANTS
ESTABLISHED IN MANILA, FOR THE EXCLUSIVE SALE OF
"QUIROGA" BEDS IN THE VISAYAN ISLANDS.
ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his beds
in the Visayan Islands to J. Parsons under the following conditions:
(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for the
latter's establishment in Iloilo, and shall invoice them at the same price he
has fixed for sales, in Manila, and, in the invoices, shall make and allowance
of a discount of 25 per cent of the invoiced prices, as commission on the
sale; and Mr. Parsons shall order the beds by the dozen, whether of the
same or of different styles.
(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds received,
within a period of sixty days from the date of their shipment.
(C) The expenses for transportation and shipment shall be borne by M.
Quiroga, and the freight, insurance, and cost of unloading from the vessel at
the point where the beds are received, shall be paid by Mr. Parsons.
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.
Arellano, C.J., Torres, Johnson, Street and Malcolm, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-27044 June 30, 1975
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.
I
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 1905 of the Code. This compensating tax is not a tax on the
importation of goods but a tax on the use of imported goods not subject to sales tax.
Engineering, therefore, should be held liable to the payment of 30% compensating tax
in accordance with Section 190 of the Tax Code in relation to Section 185(m) of the
same, but without the 50% mark up provided in Section 183(b).
II
We take up next the issue of fraud. The Commissioner charged Engineering with
misdeclaration of the imported air conditioning units and parts or accessories thereof
so as to make them subject to a lower rate of percentage tax (7%) under Section 186
of the Tax Code, when they are allegedly subject to a higher rate of tax (30%) under
its Section 185(m). This charge of fraud was denied by Engineering but the Court of
Tax Appeals in its decision found adversely and said"
... We are amply convinced from the evidence presented by
respondent that petitioner deliberately and purposely misdeclared
its importations. This evidence consists of letters written by
petitioner to its foreign suppliers, instructing them on how to
invoice and describe the air conditioning units ordered by
petitioner. ... (p. 218 CTA rec.)
Despite the above findings, however, the Court of Tax Appeals absolved Engineering
from paying the 50% surcharge prescribe by Section 183(a) of the Tax Code by
reasoning out as follows:
The imposition of the 50% surcharge prescribed by Section
183(a) of the Tax Code is based on willful neglect to file the
monthly return within 20 days after the end of each month or in
case a false or fraudulent return is willfully made, it can readily be
seen, that petitioner cannot legally be held subject to the 50%
surcharge imposed by Section 183(a) of the Tax Code. Neither
can petitioner be held subject to the 50% surcharge under Section
190 of the Tax Code dealing on compensating tax because the
 provisions thereof do not include the 50% surcharge. Where a threatened to discontinue the forwarding service of Universal Transcontinental
particular provision of the Tax Code does not impose the 50% Corporation when it wrote Trane Co. (Exh. "3-H" p. 146, BIR rec.):
surcharge as fraud penalty we cannot enforce a non-existing
provision of law notwithstanding the assessment of respondent to
It will be noted that the Universal Transcontinental Corporation is
the contrary. Instances of the exclusion in the Tax Code of the
not following through on the instructions which have been covered
50% surcharge are those dealing on tax on banks, taxes on
by the above correspondence, and which indicates the necessity
receipts of insurance companies, and franchise tax. However, if
of discontinuing the use of the term "Air conditioning Machinery or
the Tax Code imposes the 50% surcharge as fraud penalty, it
Air Coolers". Our instructions concerning this general situation
expressly so provides as in the cases of income tax, estate and
have been sent to you in ample time to have avoided this error in
inheritance taxes, gift taxes, mining tax, amusement tax and the
terminology, and we will ask that on receipt of this letter that you
monthly percentage taxes. Accordingly, we hold that petitioner is
again write to Universal Transcontinental Corp. and inform them
not subject to the 50% surcharge despite the existence of fraud in
that, if in the future, they are unable to cooperate with us on this
the absence of legal basis to support the importation thereof. (p.
requirement, we will thereafter be unable to utilize their forwarding
228 CTA rec.)
service. Please inform them that we will not tolerate another
failure to follow our requirements.
We have gone over the exhibits submitted by the Commissioner evidencing fraud
committed by Engineering and We reproduce some of them hereunder for clarity.
And on July 17, 1953 (Exh- "3-g" p. 145, BIR rec.) Engineering wrote Trane Co.
another letter, viz:
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:
In the past, we have always paid the air conditioning tax on
climate changers and that mark is recognized in the Philippines,
Your invoices should be made in the name of Madrigal & Co., as air conditioning equipment. This matter of avoiding any tie-in
Inc., Manila, Philippines, c/o Engineering Equipment & Supply on air conditioning is very important to us, and we are asking that
Co., Manila, Philippines — forwarding all correspondence and from hereon that whoever takes care of the processing of our
shipping papers concerning this order to us only and not to the orders be carefully instructed so as to avoid again using the term
customer. "Climate changers" or in any way referring to the equipment as
"air conditioning."
When invoicing, your invoices should be exactly as detailed in the
customer's Letter Order dated March 14th, 1953 attached. This is And in response to the aforequoted letter, Trane Co. wrote on July 30, 1953,
in accordance with the Philippine import licenses granted to suggesting a solution, viz:
Madrigal & Co., Inc. and such details must only be shown on all
papers and shipping documents for this shipment. No mention of
We feel that we can probably solve all the problems by following
words air conditioning equipment should be made on any
the procedure outlined in your letter of March 25, 1953 wherein
shipping documents as well as on the cases. Please give this
you stated that in all future jobs you would enclose photostatic
matter your careful attention, otherwise great difficulties will be
copies of your import license so that we might make up two sets
encountered with the Philippine Bureau of Customs when clearing
of invoices: one set describing equipment ordered simply
the shipment on its arrival in Manila. All invoices and cases
according to the way that they are listed on the import license and
should be marked "THIS EQUIPMENT FOR RIZAL CEMENT
another according to our ordinary regular methods of order write-
CO."
up. We would then include the set made up according to the
import license in the shipping boxes themselves and use those
The same instruction was made to Acme Industries, Inc., San Francisco, California in items as our actual shipping documents and invoices, and we will
a letter dated March 19, 1953 (Exh. "3-J-1" pp. 150-151, BIR rec.) send the other regular invoice to you, by separate
correspondence. (Exh- No. "3-F-1", p. 144 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 Another interesting letter of Engineering is one dated August 27, 1955 (Exh. "3-C" p.
referring to the term 'air conditioning' and to describe the goods on order as Fiberglass 141 BIR rec.)
pipe and pipe fitting insulation instead. Likewise on April 30, 1953, Engineering
 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.

Makalintal, C.J., Castro, Makasiar and Martin, JJ., concur.

 THIRD DIVISION
[G.R. No. 153033. June 23, 2005]
DEL MONTE PHILIPPINES, INC., petitioner, vs. NAPOLEON N.
ARAGONES, respondent.
DECISION
CARPIO-MORALES, J.:
The decision in the present Petition for Review on Certiorari hinges on the nature
of the contract denominated Supply Agreement[1] which was forged between
Dynablock Enterprises, represented by its Manager herein respondent Napoleon N.
Aragones (Aragones) and Mega-Engineering Services in joint venture with WAFF
Construction System Corporation (MEGA-WAFF) whether it was one of sale or for a
piece of work.
On September 18, 1988, herein petitioner Del Monte Philippines Inc. (DMPI)
entered into an Agreement[2] with MEGA-WAFF, represented by Managing Principal
Edilberto Garcia (Garcia), whereby the latter undertook the supply and installation of
modular pavement at DMPIs condiments warehouse at Cagayan de Oro City within 60
calendar days from signing of the agreement.
To source its supply of concrete blocks to be installed on the pavement of the
DMPI warehouse, MEGA-WAFF, as CONTRACTOR represented by Garcia, entered
into a Supply Agreement with Dynablock Enterprises, represented by herein
respondent Aragones, as SUPPLIER, under the following terms:
1. ITEMS TO BE SUPPLIED
The SUPPLIER at its own expense shall provide the CONTRACTOR with labor and all
materials, equipment, tools and supplies necessary and incident thereto, the required
concrete blocks at the contractors specified casting site, all in accordance with
the terms and conditions of this agreement, as well as the requirements of the
project specifications and provisions with respect to the fabrication of concrete
blocks.
2. PRICE
The CONTRACTOR will pay the supplier in consideration for the full and total
performance of the above undertaking, inclusive of all applicable taxes, the unit price
of P7.00 per supplied and accepted piece. This price is based on the assumption that
the cost per bag of premium cement is P54.00 and aggregate at P95.00 per cu. m.
Any increase of the above raw materials shall be to the account of the contractor. All
taxes shall be for the account of the contractor.
3. PLANT/EQUIPMENT
3.1 - The machines for the fabrication/casting of the concrete blocks,
including all necessary equipment and accessories, shall
be provided by the SUPPLIER. The machines and
equipment shall be mobilized and made operational at the
specified casting location/stockpiling yard designated and
provided by the CONTRACTOR.
3.2 - The SUPPLIER shall ensure that all plant facilities/equipment
must, at all times, be accessible for inspection by the
representatives of the CONTRACTOR.
3.3 - The SUPPLIER shall ensure that the plant/casting machines
actual operating capacities shall not be lower than 75,000
pieces every month. If at any time within the life of this
agreement the plant/casting machines are proven to be
operating below the required minimum capacity as aforesaid,
the SUPPLIER shall be obliged to take the necessary
actions to upgrade the plant/casting machines and/or make
the necessary rehabilitation to increase the capacity to the
required level.
4. QUALITY OF MATERIALS
4.1 The SUPPLIER guarantees that all materials supplied to the
CONTRACTOR shall meet the approved specifications
(Attached Annex A) at 5,000 pci.
In this connection, the CONTRACTOR shall assign an
inspector at the casting site to ensure that all items
supplied shall conform with the approved standards.
4.2 The CONTRACTOR may reject any finished product or
materials which do not pass the approved standards.
4.3 There shall be a system of sampling the output of the plant
and/or each casting machine for testing in accordance with
the quality standards specified. Result of such sampling
tests shall be the basis for acceptance or rejection of the
finished materials.
 4.4 Where the CONTRACTOR has provided materials to the 6.3 To provide drying racks, measuring boxes, wheel borrows and
SUPPLIER to be incorporated into the SUPPLIERs other necessary hand tools.
production, as in the case of cement and aggregates, the
cost of such materials which becomes part of the rejected
6.4 To supervise and provide the required manpower for the
products due to faulty batching/mixing/curing shall be
operation and production of concrete blocks.
for the account of the SUPPLIER.

6.5 To undertake the following:

5. MATERIALS AND OTHER PROVISIONS SUPPLIED BY THE CONTRACTOR

a) mixing and formulation of proper mix.

5.1 - All the materials are for the account of the SUPPLIER. The
b) to consolidate, form and compress the blocks.
CONTRACTOR shall, however, provide all the cement
c) to unload the formed blocks into the drying racks.
and aggregates requirement for the fabrication of the
d) after initial setting of blocks, to unload and arrange them to
concrete blocks, in which the corresponding cost shall be
wooden pallets.
deducted from the periodical proceeds due to the
e) curing of blocks as per approved standards.
SUPPLIER.

7. OTHER OBLIGATIONS OF CONTRACTOR

5.2- The CONTRACTOR shall provide and make available to the
SUPPLIER the following provisions/facilities free of charge:
7.1 - To provide tarpaulin or canvas or plastic sheets to cover blocks
during the seasoning stage.
a) Casting/Fabrication Area
b) Stockpile Area
c) Warehouse for Cement 7.2 - To provide forklift and wooden pallets.
d) An all-weather working shed for workers
e) Night Watchers
8. EXCLUSIVITY OF PRODUCTION

5.3 The CONTRACTOR shall arrange for the installation of

electrical and water facilities for the work in which the cost
of electricity and water actually consumed shall be borne
by the SUPPLIER.
5.4 The SUPPLIER shall be responsible for all materials already
turned over by the CONTRACTOR at the casting area. The
responsibility, however, of the SUPPLIER on the finished
products ceases upon loading of the same to the
CONTRACTORs truck on way to the project site.
6. OBLIGATIONS OF SUPPLIER
8.1 - Effective upon the execution of this agreement, the SUPPLIER
binds itself to devote the entire plant/casting machines
and its accessories for the CONTRACTORs exclusive
use and full operation and production of the required
concrete blocks for the intended project.
8.2 The SUPPLIER or his agents or representatives shall not,
directly or indirectly, enter into any contract, agreement,
concessions or transactions of whatever nature or kind with
the project owner or of its representative which will affect
the rights, interest or participation of the CONTRACTOR in
regard to the execution and accomplishment of the project.

6.1 To fabricate and provide the required block machines in 8.3 In case of violation of this exclusivity clause, utmost fidelity and
such number adequate to cope up with time schedule. good faith being of the essence, the CONTRACTOR shall
have the right to demand reasonable amount of damages
or terminate this agreement upon due notice.
6.2 To provide concrete mixers: one (1) unit of two-bagger, and two
(2) units of one-bagger.
9. CONDITIONS OF PAYMENT
 9.1 Upon mobilization of the casting machines, equipments
accessories and making some operational at the casting
area by the SUPPLIER, the CONTRACTOR shall advance
to the supplier a downpayment or mobilization fund of TEN
THOUSAND (P10,000.00) PESOS per machine. Said
mobilization fee shall be deducted from the proceeds of the
SUPPLIER at two (2) equal installments beginning at the
first billing.
9.2 - The SUPPLIER shall present its billing every fifteen days
based on the below indicated payment schedule:
a) Billing from 1st/day/month to 15th day payable after
fifteen days from the date the billing is submitted.
b) Billing from the 16th day of the month to the 31st day of
the month, payable after fifteen days from the date the
billing is submitted.
10. EFFECTIVITY OF CONTRACT
This agreement shall be co-terminus with the terms of the contract for the project
and/or upon completion of all requirements therefor; PROVIDED, However, that if for
some reason or another the production of the concrete blocks is temporarily
suspended, this agreement shall remain in force and effective for a period of fifteen
(15) days from the date of the cessation of production. In case the said grace period
expires without the production having resumed, the CONTRACTOR shall be obliged
to pay reasonable compensation for the period of suspension counted from the
expiration of the said grace period.
11. PERFORMANCE BOND
The SUPPLIER shall post a SURETY/PERFORMANCE BOND in such sums which
may be deemed adequate to secure its faithful compliance of the terms and conditions
of this agreement.
12. PENALTY CLAUSE
In the event the SUPPLIER fails to meet the requirements demanded in this
agreement or when the SUPPLIER is in delay in the performance of its obligation to
the prejudice of the CONTRACTOR, the SUPPLIER shall answer for the
corresponding damages equivalent to one-tenth (1/10) of the rated monthly production
capacity. (Emphasis and underscoring supplied).[3]
Aragones thereupon started assembling the machines for the fabrication/casting
of the concrete blocks which MEGA-WAFF specified to be hexagonal shaped. MEGA-
WAFF, through Garcia, later directed Aragones to instead fabricate machines for S
shaped blocks.
As stated in the Agreement between DMPI and MEGA-WAFF, the deadline for
the installation of the pavement of the warehouse was November 18, 1988, but it was
not met. As extended, the installation was finished on or about February 28, 1989, but
MEGA-WAFF was, in accordance with its agreement with DMPI, penalized for the delay,
albeit at a reduced amount.
Aragones, having in the meantime gotten wind of MEGA-WAFF &
DMPIs Agreement, more particularly the imposition of a penalty by DMPI for the delay
in the completion of the installation of the warehouse pavement, appealed to DMPI, by
letter of March 4, 1989,[4] for leniency in the imposition of the penalty which would affect
[him] also although [he] was not a direct party to the contract, he inviting attention to the
intricacy and enormity of the job involved.
Aragones later failed to collect from MEGA-WAFF the full payment of the concrete
blocks. He thus sent DMPI a letter dated March 10, 1989,[5] received by the latter on
March 13, 1989,[6] advising it of MEGA-WAFFs unpaid obligation and requesting it to
earmark and withhold the amount of P188,652.65 from [MEGA-WAFFs] billing to be
paid directly to him [l]est Garcia collects and fails to pay [him].
DMPI, in the meantime, verbally advised Aragones to secure a court order
directing it to withhold payment of the amount due MEGA-WAFF for, in the absence of
such court order, DMPI was under its agreement with MEGA-WAFF obliged to release
full payment within 30 days from acceptance of the completed work.
It appears that Aragones reiterated his request to DMPI for direct payment to him,
by letter of March 28, 1989.[7] This was followed by another letter dated April 6,
1989[8] which was received on April 8, 1989[9] by DMPI, copy of which it referred to
Garcia, by letter of April 27, 1989,[10] for his comment.
By letter of May 3, 1989[11] addressed to DMPI, Garcia, commenting on Aragones
April 6, 1989 letter, stated:
xxx
If there is somebody who have (sic) justifiable ground to complain, it is MEGA-WAFF
against Atty. Aragones for all the miseries and embarrassment we had suffered due to
the factors attributable to Atty. Aragones Dynablock Enterprises.
For proper evaluation of things and to give both parties a fair chance, we enclosed
(sic) pertinent papers for your perusal.
As contractor and businessman, it is our firm policy not to take advantage of other
people and definitely not to renegade (sic) from commitments/obligations.
We are willing to pay Atty. Aragones but based on the actual accomplishment and
amount only due to him as per reconciliation furnished to him. (attached)
We sincerely hope that the facts we had presented will suffice, and please accept our
apology for whatever inconvenience it has caused you and we pray that this matter of
payments be settled soon for the general benefit of all concerned.
x x x (Underscoring supplied).
It turned out that DMPI had, on or about April 6, 1989, released to MEGA-WAFF
a check dated April 4, 1989 in the amount of P157,863.77 representing DMPIs balance
of its obligation to MEGA-WAFF.
Aragones was thus prompted to file on May 25, 1989 a complaint [12] for sum of
money (P188,652.65) with damages against Garcia and/or MEGA-WAFF and DMPI
before the Regional Trial Court (RTC) of Lanao del Norte which was raffled to Branch 5
thereof.
Aragones impleaded DMPI on the strength of Articles 1729 and 1467 of the Civil
Code, he contending that it was liable to him who put labor upon or furnished materials
for a piece of work.
By his July 14, 1989 Answer,[13] Garcia, without disputing the amount being
collected by Aragones, justified his refusal to satisfy [Aragones] demand by claiming
that Aragones defaulted in his obligation under the Supply Agreement.
DMPI, by its Answer[14] of June 25, 1989, pleaded that Aragones had no cause of
action against it as it had no privity of contract with him; that it had already paid MEGA-
WAFF the full amount due it; and that it had not committed any actionable wrong against
Aragones.
Aragones later filed an Amended Complaint,[15] with leave of court, to cure certain
formal defects in the original complaint as to the designation of parties . . .
DMPI also later filed a Motion for Leave to File an Amended Answer with Cross-
Claim against Garcia and WAFF President Francisco Castro[16] which the trial court
granted. In the Amended Answer with Cross Claim, [17] DMPI alleged, inter alia, that [i]n
the event [Aragones] succeeds in obtaining a judgment [against] DMPI, that said
judgment should be charged to and paid by the cross-defendants who have collected
the full contract price of the Agreement wherein [Aragones] claims the rights of a
subcontractor, plus consequential damages (underscoring in the original).
The trial court, upon the following issues:
a. Whether or not [Aragones] has still a collectible amount of P188,652.65 from
defendants Garcia and Castro;
b. Whether or not defendant DMPI may also be held accountable for this unpaid
obligation of defendant Garcia/MEGA-WAFF;
c. Whether or not the remaining balance of defendant DMPI account payable
is P188,652.65 insisted by defendant Garcia/MEGA-WAFF or only P157,863.77
insisted by defendant DMPI;
d. Whether or not the parties are entitled to damages pleaded;
e. Whether or not there was delay in the performance of the respective obligations of
either party or both;
f. Assuming that defendant DMPI is liable to plaintiff, whether or not cross defendant
Garcia/MEGA-WAFF shall be liable to DMPI for reimbursement.[18],
found for the plaintiff Aragones in light of the following considerations:
Those who put their labor upon or furnish materials for a piece of work undertaken by
the contractor have an action against the owner up to the amount owing from the latter
to the contractor at the time the claim is made. However, the following shall not
prejudice the laborers, employees and furnishers of materials:
(1) Payments made by the owner of the contractor before they are due;
(2) Renunciation by the contractor of any amount due him from the owner.
This article is subject to the provisions of special laws (1597a)
(Article 1729, New Civil Code, [emphasis supplied]).
In interpreting the foregoing provision, the Supreme Court made the following
pertinent pronouncement:
Article 1729 is promulgated to protect the laborers and the materialmen from being
taken advantage of by unscrupulous contractors and from possible
connivance between owners and contractors. (Velasco vs. C.A. 95 Phils. (sic) (616-
641).
The legal issue that arises is whether or not GSIS is liable to the petitioners for the
cost of the materials and labor furnished by them in construction of the 63 houses now
owned by the GSIS and for the construction of which no payment has been made on
the balance due to petitioners. Our considered view is and we so hold that even
in equity alone, GSIS should pay the petitioners, without prejudice to its securing
indemnity from Laigo Realty Corp. (Velaso vs. C.A., 95 Phils. (sic) 616-641 [emphasis
and underscoring supplied]).
Moreover, anent this matter another decisional rule, says:
Although there was no privity of contract between plaintiff and defendant Joven, Inc.,
there is sufficient evidence showing that he had really supplied stones and sands to
said defendant and also removed dirt and soil from its construction site. And it is this
main point which calls for resolution in the light of the provisions of Art. 1729 of the
New Civil Code, to determine whether or not defendant corporation is liable for
materials supplied and services rendered by the plaintiff. It is quite clear that the
owner of the building, Joven Inc. is liable for materials and labor furnished to the
contractor up to the amount owing from the latter to the contractor and to enforce such
liability, the law allows the person furnishing labor or materials to bring his right
of action directly against the owner. (Flores vs. Ruelo, CA 52 OG 850, [emphasis
and underscoring supplied]).
Of course, while defendant DMPI is indeed directly liable to pay plaintiff the cost of the
construction material (modular paving blocks) sought to be collected, this defendant
has also a right of recourse against cross defendant Garcia/MEGA-WAFF for
reimbursement of whatever amount it will be required here to pay plaintiff, otherwise it
would result in making defendant Garcia/MEGA-WAFF enrich itself at the expense of
defendant DMPI. Additionally since the evidence on record shows that plaintiff was
compelled to litigate this matter if only to collect a just and demandable obligation, the
refusal of these defendants to pay their obligation upon demand could not be justified
in law, thus both defendants should be condemned to pay exemplary damages in the
amount of P20,000.00 each and attorneys fees in the amount of P10,000.00 each,
including the cost of this suit. (Underscoring supplied)[19]
The trial court accordingly rendered judgment in favor of Aragones by
decision[20] of September 11, 1992, the dispositive portion of which reads:
WHEREFORE, the foregoing premises considered, the Court finds that there is ample
reason in law and preponderant evidence on record to sustain the cause of action of
plaintiff asserted against both defendants, thus judgment is now rendered granting the
following relief:
a. That the defendants Garcia/MEGA-WAFF and DMPI shall be liable to
jointly and severally pay plaintiff the unpaid cost of the modular
paving blocks construction material which he delivered to defendant
DMPI priced at P188,652.65 and in the event that defendant DMPI
will be made to pay the full amount of this particular obligation, the
defendant Garcia MEGA-WAFF must reimburse said defendant such
amount;
b. That this unpaid obligation sought to be collected must bear legal
interest of 12% per annum from the time there was an extrajudicial
demand made by plaintiff last March 01, 1989; and
c. Lastly, these defendants are condemned that each pay
plaintiff P20,000.00 for exemplary damages and P10,000.00 for
attorneys fees, including the cost of this suit.
SO ORDERED. (Emphasis and underscoring supplied).[21]
On appeal to the Court of Appeals (CA) by only DMPI, upon the following
assigned errors:
I
THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF DID NOT INCUR
DELAY AND VIOLATE ITS SUPPLY AGREEMENT WITH DEFENDANT MEGA-
WAFF;
II
THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANT MEGA-WAFFS
LIABILITY TO PLAINTIFF IS P188,652.65 BECAUSE AS STIPULATED IN THE
SUPPLY AGREEMENT, THE CEMENT AND AGGREGATES USED IN THE
MANUFACTURE OF THE BLOCKS WERE ADVANCED BY MEGA-WAFF, THE
COST OF WHICH WILL BE DEDUCED FROM PLAINTIFFS BILLINGS;
III.
THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANT DMPI IS ALSO
LIABLE TO PLAINTIFF FOR ANY LIABILITY OF MEGA-WAFF UNDER THE
SUPPLY AGREEMENT;
IV.
ASSUMING EX GRATIA ARGUMENTI THAT DMPI IS LIABLE TO PLAINTIFF'S
AID LIABILITY CANNOT EXCEED THE SUM OF P157,863.77 BALANCE OF THE
CONTRACT PRICE BETWEEN DMPI AND MEGA-WAFF, LESS AGREED PENALTY
FOR LATE DELIVERY AS LIQUIDATED DAMAGES;
V.
THE TRIAL COURT ERRED IN HOLDING DEFENDANT DMPI LIABLE TO
PLAINTIFF FOR ATTORNEYS FEES AND COSTS OF
COLLECTION CONSIDERING THAT IT HAD THE RIGHT TO RESIST PAYMENT
BECAUSE IT HAS NO PRIVITY OF CONTRACT BETWEEN PLAINTIFF AND
DEFENDANT MEGA-WAFF, (Underscoring supplied),[22]
the CA, by decision of September 19, 2001[23] subject of the petition at bar, affirmed the
trial courts decision in this wise:
At this juncture it is well to note that the Supply Agreement was in the nature of a
contract for a piece of work. The distinction between a contract of sale and one for
work, labor and materials is tested by 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 but has been the subject of sale to
some other persons even if the order had not been given. If the article ordered by the
purchaser is exactly such as the seller makes and keeps on hand for sale to anyone,
and no change or modification of it is made at purchasers request, it is a contract of
sale even though it may be entirely made after, and in consequence of the purchasers
order for it. [Commissioner of Internal Revenue vs. Engineering Equipment and
Supply Company, G.R. No. L-27044, June 30, 1975]
In the case at bench, the modular paving blocks are not exactly what the plaintiff-
appellee makes and keeps on hand for sale to anyone, but with a modification that
the same be S in shape. Hence, the agreement falls within the ambit of Article 1467
making Article 1729 likewise applicable in the instant case.
As regard the issue of privity of contracts, We need to add only that Article 1311 of the
New Civil Code which DMPI invokes is not applicable where the situation
contemplated in Article 1729 obtains. The intention of the latter provision is to protect
the laborers and the materialmen from being taken advantage of by unscrupulous
contractors and from possible connivance between owners and contractors. Thus,
a constructive vinculum or contractual privity is created by this provision, by way of
exception to the principle underlying Article 1311 between the owner, on the one
hand, and those who furnish labor and/or materials, on the other. [Velasco vs. Court of
Appeals, G.R. No. L-47544, January 28, 1980]
As a matter of fact, insofar as the laborers are concerned, by a special law, Act no.
3959, otherwise known as An Act making it obligatory for any person, company, firm
or corporation owning any work of any kind executed by contract to require the
contractor to furnish a bond guaranteeing the payment of the laborers. they are given
added protection by requiring contractors to file bonds guaranteeing payment to them.
It is true that defendant-appellant had already fully paid its obligation to defendant
Garcia however, the formers payment to the latter does not extinguish its legal
obligation to plaintiff-appellee because such payment was irregular. The former should
have taken care not to pay to such contractor the full amount which he is entitled to
receive by virtue of the contract, until he shall have shown that he first paid the wages
of the laborer employed in said work, by means of an affidavit made and subscribed
by said contractor before a notary public or other officer authorized by law to
administer oaths. There is no showing that defendant appellant DMPI, as owner of the
building, complied with this requirement paid down in Act No. 3959. Hence, under
Section 2 of said law, said defendant-appellant is responsible, jointly and severally
with the general contractor, for the payment to plaintiff-appellee as sub-contractor.
In this connection, while, indeed, Article 1729 refers to the laborers and materialmen
themselves, under the peculiar circumstances of this case, it is but fair and just that
plaintiff-appellee be deemed as suing for the reimbursement of what they have
already paid the laborers and materialmen, as otherwise he would be unduly
prejudiced while either defendant-appellant DMPI or defendant Garcia would enrich
themselves at plaintiff-appellees expense.
Be that as it may, We so hold that plaintiff-appellee has a lawful claim against
defendant-appellant DMPI, owner of the constructed warehouse since it disregarded
the notice of claim of plaintiff-appellee, at a time when the amounts owing from
defendant-appellant DMPI to defendant GARCIA were more than sufficient to pay for
plaintiff-appellees claim. The least that defendant-appellant should have done was to
withhold payment of the balance still owing to defendant Garcia as until the claim of
plaintiff-appellee was clarified. (Italics in the original; emphasis and underscoring
supplied).[24]
Its Motion for Reconsideration having been denied by the CA, DMPI (hereinafter
referred to as petitioner) lodged the present Petition for Review on Certiorari, faulting
the CA:
I.
. . . IN FINDING THAT DMPI WAS LIABLE TO RESPONDENT ARAGONES FOR
THE UNPAID PRICE OF THE CONCRETE PAVING BLOCKS OWED BY MEGA-
WAFF TO THE LATTER.
A. IN FINDING THAT THE CONTRACT FOR THE SUPPLY OF THE
CONCRETE PAVING BLOCKS WAS NOT A SALE BUT ONE FOR A
PIECE OF WORK.
B. IN HOLDING DMPI LIABLE BASED UPON THE PROVISIONS OF
ARTICLE 1729 OF THE CIVIL CODE AND ACT 3959, WHICH ARE
INAPPLICABLE.
II.
. . . IN FAILING TO AWARD MORAL DAMAGES, ATTORNEYS FEES, AND
LITIGATION EXPENSES TO DMPI ON ITS COUNTERCLAIM.[25]
As reflected above, only petitioner appealed the trial courts decision. MEGA-
WAFF did not appeal. The decision as to it then is final and executory.
Petitioner, in the main, contends that while the CA correctly stated the test in
determining whether a transfer is a sale or one for a piece of work, it failed to properly
apply the same.
Applying the nature of the object test, petitioner insists that the concrete block to
be produced by Aragones under the Supply Agreement represented by Garcia clearly
shows that the contract was one of sale, advancing the following reasons:
1.4.1 First, the concrete paving blocks were . . . capable of being mass-produced
1.4.2 Second, save for the shape, there was here no consideration of any special
needs or requirements of DMPI taken into account in the design or manufacture of the
concrete paving blocks.[26]
Petitioner cites the following ruling in Commissioner of Internal Revenue v.
Arnoldus Carpentry Shop, Inc.:[27]
x x x As can be clearly seen from the wordings of Art. 1467, what determines whether
the contract is one of work or of sale is whether the thing has been manufactured
specially for the customer and upon his special order. Thus, if the thing is specially
done on the order of another, this is a contract for a piece of work. If, on the other
hand, the thing is manufactured or procured for the general market in the
ordinary course of ones business, it is a contract of sale. (Italics and emphasis in
the original; underscoring supplied),[28]
and argues that given habituality of business and the ability to mass-produce the article
ordered, that customers requires (sic) certain specifications is of no moment, the
transaction remains one of sale.
Petitioner further cites, among other authorities, the following ruling in Celestino
Co. v. Collector of Internal Revenue:[29]
x x x The important thing to remember is that Celestino & Co. 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 of such
materials-moulding, frames, panels as it ordinarily manufactured or was in a position
habitually to manufacture.
xxx
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 of sash, mouldings, panels it would not
accept the order and no sale is made. If they do, the transaction would be no different
from purchaser of manufactured goods held in stock for sale; they are bought because
they meet 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, 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.
xxx
x x x 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 and/or probably had in stock the sash,
mouldings and panels it used therefor (some of them at least). (Emphasis in the
original; underscoring supplied).
Petitioner concludes that as the Supply Agreement between Aragones and
MEGA-WAFF was one of sale to which it (petitioner) was not privy, it cannot be held
liable for any obligation arising therefrom.
Dodging liability for the damages (exemplary and . . . attorneys fees including the
cost of this suit) awarded to Aragones, petitioner claims that it was in fact the one which
was injured by Aragones filing in bad faith of a complaint bereft of cause of action and
at best, [one] barred by full payment of the amount due to MEGA-WAFF, on account of
which it is entitled to moral damages in the amount of P50,000.00 pursuant to Article
2217 of the Civil Code, and to attorneys fees and expenses of litigation in the amount
of at least P30,000.00 plus P2,500.00 per hearing pursuant to Article 2208 of the Civil
Code.
The petition fails.
The authorities petitioner cited in fact show that the nature of the Supply
Agreement between Aragones and MEGA-WAFF was one for a piece of work.
Contrary to petitioners claim that save for the shape, there was no consideration
of any special needs or requirements of DMPI taken into account in the design or
manufacture of the concrete paving blocks, the Supply Agreement is replete with
specifications, terms or conditions showing that it was one for a piece of work.
As reflected in the highlighted and underscored above-quoted provisions of
the Supply Agreement, as well as other evidence on record, the machines Aragones
was obliged to fabricate were those for casting the concrete blocks specified by Garcia.
Aragones did not have those kind of machines in his usual business, hence, the special
order.
While initially Garcia specified that the machines to be fabricated should be for
hexagon shaped blocks, he later asked Aragones to instead fabricate machines for
casting S shaped blocks.
In accordance with the Supply Agreement, Garcia furnished the cement and
aggregates for the fabrication of the blocks and Aragones fabricated three (3) machines
for S shaped blocks which were delivered at the casting site on different dates. And the
entire plant/casting machines and . . . . accessories were, as dictated under the Supply
Agreement, devoted by Aragones for [MEGA-WAFF]s exclusive use.
There can be no gainsaying that the specifications/conditions in the Supply
Agreement and the admitted subsequent directive of Garcia for Aragones to fabricate
machines for casting S shaped, instead of hexagon shaped blocks, show that the
concrete blocks were manufactured specifically for, and upon the special order of
Garcia.
That Garcia supplied the cement and aggregates and that the entire made-to-
order casting machines and accessories used in the manufacture of those unusual
shaped blocks were agreed upon to be devoted only for the exclusive use of MEGA-
WAFF should belie petitioners contention that the concrete blocks were mass-produced
and catered to the general market in the ordinary course of Aragones business.
Under Art. 1467 then of the Civil Code which provides:
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. (Emphasis
and underscoring supplied),
the Supply Agreement was decidedly a contract for a piece of work.
Following Art. 1729 of the Civil Code which provides:
ART. 1729. Those who put their labor upon or furnish materials for a piece of work
undertaken by the contractor have an action against the owner up to the amount
owing from the latter to the contractor at the time the claim is made. x x x
x x x (Underscoring supplied),
Aragones having specially fabricated three casting machines and furnished some
materials for the production of the concrete blocks specially ordered and specified by
MEGA-WAFF which were to be and indeed they were for the exclusive use of MEGA-
WAFF, he has a cause of action upon petitioner up to the amount it owed MEGA-WAFF
at the time Aragones made his claim to petitioner.
As Velasco v. CA[30] explains, the intention of Art. 1729 is
to protect the laborers and materialmen from being taken advantage of by
unscrupulous contractors and from possible connivance between owners and
contractors. Thus, a constructive vinculum or contractual privity is created by this
provision, by way of exception to the principle underlying Article 1311 between the
owner, on the one hand, and those who furnish labor and/or materials, on the other.
In fine, a constructive vinculum or contractual privity was created between
petitioner and Aragones.
Respecting petitioners disclaimer of liability for damages and its claim for moral
damages, attorneys fees and expenses of litigation, the trial courts disposition thereof,
to wit:
. . . since the evidence on record shows that [Aragones] was compelled to litigate this
matter if only to collect a just and demandable obligation, the refusal of [DMPI and
MEGA-WAFF] to pay their obligation upon demand could not be justified by law, thus
both should be condemned to pay exemplary damages in the amount of P20,000.00
each and attorneys fees in the amount of P10,000.00 each including costs of this suit
(underscoring supplied),
merits this Courts approval.
Why should not petitioner be liable for damages. Aragones request, based on a
provision of law, to petitioner for it to pay directly to him his account receivable from
MEGA-WAFF/Garcia out of petitioners account payable to MEGA-WAFF was
made before petitioners obligation to it was due. Yet petitioner settled such obligation
to MEGA-WAFF on or about April 6, 1989 when it released to it its check-payment. For
petitioner to harp on its undertaking under its Agreement with MEGA-WAFF to pay its
full obligation thereunder within 30 days from complete installation of the pavement by
MEGA-WAFF unless a court injunction could be produced by Aragones is too shallow,
under the facts and circumstances surrounding the case, to merit consideration.
Petitioners referral for comment of Garcia, by letter of April 27, 1989, on Aragones
April 6, 1989 reiterative letter for the withholding of the release of so much amount to
MEGA-WAFF even after it (petitioner) had already released on or about April 6, 1989
its check-full payment to MEGA-WAFF reflects a futile attempt to cover-up the apparent
connivance between it and contractor MEGA-WAFF to the prejudice of Aragones,
leaving him no option but to litigate.
As for the assailed citation by the appellate court of Act No. 3959 (which requires
a person or firm owning any work of any kind executed by contract to put up a bond
guaranteeing the payment of the laborers) as additional justification to hold petitioner
liable to Aragones, indeed, said Act had been repealed in 1974 by P.D. No. 442 (The
Labor Code of the Philippines).
WHEREFORE, in light of the foregoing discussions, the petition is hereby
DENIED.
Costs against petitioner.
SO ORDERED.
Panganiban, (Chairman), Sandoval-Gutierrez, Corona, and Garcia, JJ., concur.

THIRD DIVISION
ENRICO S. EULOGIO,
Petitioner,
- versus -
SPOUSES CLEMENTE APELES[1] and LUZ
APELES,
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CHICO-NAZARIO, J.:
Petitioner Enrico S. Eulogio (Enrico) filed this instant Petition for Review
on Certiorari under Rule 45 of the Revised Rules of Court assailing the Decision[2] dated
20 December 2004 of the Court of Appeals in CA-G.R. CV No. 76933 which reversed
the Decision[3] dated 8 October 2002 of the Regional Trial Court (RTC) of Quezon City,
Branch 215, in Civil Case No. Q-99-36834. The RTC directed respondents, spouses
Clemente and Luz Apeles (spouses Apeles) to execute a Deed of Sale over a piece of
real property in favor of Enrico after the latters payment of full consideration therefor.
The factual and procedural antecedents of the present case are as follows:
The real property in question consists of a house and lot situated at No. 87 Timog
Avenue, Quezon City (subject property). The lot has an area of 360.60 square meters,
covered by Transfer Certificate of Title No. 253990 issued by the Registry of Deeds of
Quezon City in the names of the spouses Apeles.[4]
In 1979, the spouses Apeles leased the subject property to Arturo Eulogio (Arturo),
Enricos father. Upon Arturos death, his son Enrico succeeded as lessor of the subject
property. Enrico used the subject property as his residence and place of
business. Enrico was engaged in the business of buying and selling imported cars.[5]
On 6 January 1987, the spouses Apeles and Enrico allegedly entered into a Contract of
Lease[6] with Option to Purchase involving the subject property. According to the said
lease contract, Luz Apeles was authorized to enter into the same as the attorney-in-fact
of her husband, Clemente, pursuant to a Special Power of Attorney executed by the
latter in favor of the former on 24 January 1979. The contract purportedly afforded
Enrico, before the expiration of the three-year lease period, the option to purchase the
subject property for a price not exceeding P1.5 Million. The pertinent provisions of the
Contract of Lease are reproduced below:
G.R. No. 167884
3. That this Contract shall be effective commencing from January
Present: 26, 1987 and shall remain valid and binding for THREE (3) YEARS
from the said date. The LESSOR hereby gives the LESSEE under
YNARES-SANTIAGO, J., this Contract of Lease the right and option to buy the subject house
Chairperson, and lot within the said 3-year lease period.
AUSTRIA-MARTINEZ,
AZCUNA,* 4. That the purchase price or total consideration of the house and
CHICO-NAZARIO, and lot subject of this Contract of Lease shall, should the LESSEE
NACHURA, JJ. exercise his option to buy it on or before the expiration of the 3-year
lease period, be fixed or agreed upon by the LESSOR and the
Promulgated: LESSEE, Provided, that the said purchase price, as it is hereby
agreed, shall not be more than ONE MILLION FIVE HUNDRED
January 20, 2009 THOUSAND PESOS (P1,500,000.00) and, provided further, that
the monthly rentals paid by the LESSEE to the LESSOR during the
3-year lease period shall form part of or be deducted from the
purchase price or total consideration as may hereafter be mutually
fixed or agreed upon by the LESSOR and the LESSEE.
5. That if the LESSEE shall give oral or written notice to the
LESSOR on or before the expiry date of the 3-year lease period
stipulated herein of his desire to exercise his option to buy or
purchase the house and lot herein leased, the LESSOR upon
receipt of the purchase price/total consideration as fixed or agreed
upon less the total amount of monthly rentals paid the LESSEE
during the 3-year lease period shall execute the appropriate Deed
to SELL, TRANSFER and CONVEY the house and lot subject of
this Contract in favor of the LESSEE, his heirs, successors and
assigns, together with all the fixtures and accessories therein, free
from all liens and encumbrances.
Before the expiration of the three-year lease period provided in the lease
contract, Enrico exercised his option to purchase the subject property by communicating
verbally and in writing to Luz his willingness to pay the agreed purchase price, but the
spouses Apeles supposedly ignored Enricos manifestation. This prompted Enrico to
seek recourse from the barangayfor the enforcement of his right to purchase the subject
property, but despite several notices, the spouses Apeles failed to appear before
the barangay for settlement proceedings. Hence, the barangay issued to Enrico a
Certificate to File Action.[7]
In a letter dated 26 January 1997 to Enrico, the spouses Apeles demanded
that he pay his rental arrears from January 1991 to December 1996 and he vacate the
subject property since it would be needed by the spouses Apeles themselves.

Without heeding the demand of the spouses Apeles, Enrico instituted on 23 February
1999 a Complaint for Specific Performance with Damages against the spouses Apeles
before the RTC, docketed as Civil Case No. Q-99-36834. Enricos cause of action is
founded on paragraph 5 of the Contract of Lease with Option to Purchase vesting him
with the right to acquire ownership of the subject property after paying the agreed
amount of consideration.
Following the pre-trial conference, trial on the merits ensued before the RTC.
Enrico himself testified as the sole witness for his side. He narrated that he and Luz
entered into the Contract of Lease with Option to Purchase on 26 January 1987, with
Luz signing the said Contract at Enricos office in Timog Avenue, Quezon City. The
Contract was notarized on the same day as evidenced by the Certification on the Notary
Publics Report issued by the Clerk of Court of the RTC of Manila. [8]
On the other hand, the spouses Apeles denied that Luz signed the Contract of Lease
with Option to Purchase, and posited that Luzs signature thereon was a forgery. To
buttress their contention, the spouses Apeles offered as evidence Luzs Philippine
Passport which showed that on 26 January 1987, the date when Luz allegedly signed
the said Contract, she was in the United States of America. The spouses Apeles
likewise presented several official documents bearing her genuine signatures to reveal
their remarkable discrepancy from the signature appearing in the disputed lease
contract. The spouses Apeles maintained that they did not intend to sell the subject
property.[9]
After the spouses Apeles established by documentary evidence that Luz was not in the
country at the time the Contract of Lease with Option to Purchase was executed, Enrico,
in rebuttal, retracted his prior declaration that the said Contract was signed by Luz on
26 January 1996. Instead, Enrico averred that Luz signed the Contract after she arrived
in the Philippines on 30 May 1987. Enrico further related that after Luz signed the lease
contract, she took it with her for notarization, and by the time the document was returned
to him, it was already notarized.[10]
On 8 October 2002, the RTC rendered a Decision in Civil Case No. Q-99-36834 in favor
of Enrico. Since none of the parties presented a handwriting expert, the RTC relied on
its own examination of the specimen signatures submitted to resolve the issue of
forgery. The RTC found striking similarity between Luzs genuine signatures in the
documents presented by the spouses Apeles themselves and her purportedly forged
signature in the Contract of Lease with Option to Purchase. Absent any finding of
forgery, the RTC bound the parties to the clear and unequivocal stipulations they made
in the lease contract. Accordingly, the RTC ordered the spouses Apeles to execute a
Deed of Sale in favor of Enrico upon the latters payment of the agreed amount of
consideration. The fallo of the RTC Decision reads:
WHEREFORE, this Court finds [Enricos] complaint to be
substantiated by preponderance of evidence and accordingly
orders
(1) [The spouses Apeles] to comply with the
provisions of the Contract of Lease with Option to Purchase; and
upon payment of total consideration as stipulated in the said
CONTRACT for [the spouses Apeles] to execute a Deed of
Absolute Sale in favor of [Enrico], over the parcel of land and the
improvements existing thereon located at No. 87 Timog Avenue,
Quezon City.
(2) [The spouses Apeles] to pay [Enrico] moral and
exemplary damages in the respective amounts of P100,000.00
and P50,000.00.
(3) [The spouses Apeles] to pay attorneys fees
of P50,000.00 and costs of the suit.[11]
The spouses Apeles challenged the adverse RTC Decision before the Court
of Appeals and urged the appellate court to nullify the assailed Contract of Lease with
Option to Purchase since Luzs signature thereon was clearly a forgery. The spouses
Apeles argued that it was physically impossible for Luz to sign the said Contract on 26
January 1987 since she was not in the Philippines on that date and returned five months
thereafter. The spouses Apeles called attention to Enricos inconsistent declarations as
to material details involving the execution of the lease contract, thereby casting doubt
on Enricos credibility, as well as on the presumed regularity of the contract as a
notarized document.
On 20 December 2004, the Court of Appeals rendered a Decision in CA-G.R. CV No.
76933 granting the appeal of the spouses Apeles and overturning the judgment of the
RTC. In arriving at its assailed decision, the appellate court noted that the Notary Public
did not observe utmost care in certifying the due execution of the Contract of Lease with
Option to Purchase. The Court of Appeals chose not to accord the disputed Contract
full faith and credence. The Court of Appeals held, thus:
WHEREFORE, the foregoing premises considered, the
appealed decision dated October 8, 2002 of the Regional Trial
Court of Quezon City, Branch 215 in Civil Case No. Q-99-36834 for
specific performance with damages is hereby REVERSED and a
new is one entered dismissing [Enricos] complaint.[12]
Enricos Motion for Reconsideration was denied by the Court of Appeals in a
Resolution[13] dated 25 April 2005.
Enrico is presently before this Court seeking the reversal of the unfavorable
judgment of the Court of Appeals, assigning the following errors thereto:
I.
THE COURT OF APPEALS COMMITTED (sic) REVERSIBLE
ERROR WHEN IT BRUSHED ASIDE THE RULING OF THE
COURT A QUO UPHOLDING THE VALIDITY OF THE
CONTRACT OF LEASE WITH OPTION TO PURCHASE AND IN
 LIEU THEREOF RULED THAT THE SAID CONTRACT OF LEASE
WAS A FORGERY AND THUS, NULL AND VOID.
II.
THE COURT OF APPEALS COMMITTED (sic) REVERSIBLE
ERROR WHEN CONTRARY TO THE FINDINGS OF THE COURT
A QUO IT RULED THAT THE DEFENSE OF FORGERY WAS
SUBSTANTIALLY AND CONVINCINGLY PROVEN BY
COMPETENT EVIDENCE.
Simply, Enrico faults the Court of Appeals for disturbing the factual findings
of the RTC in disregard of the legal aphorism that the factual findings of the trial court
should be accorded great weight and respect on appeal.
We do not agree.
Enricos insistence on the infallibility of the findings of the RTC seriously
impairs the discretion of the appellate tribunal to make independent determination of the
merits of the case appealed before it. Certainly, the Court of Appeals cannot swallow
hook, line, and sinker the factual conclusions of the trial court without crippling the very
office of review. Although we have indeed held that the factual findings of the trial courts
are to be accorded great weight and respect, they are not absolutely conclusive upon
the appellate court.[14]
The reliance of appellate tribunals on the factual findings of the trial court is
based on the postulate that the latter had firsthand opportunity to hear the witnesses
and to observe their conduct and demeanor during the proceedings. However, when
such findings are not anchored on their credibility and their testimonies, but on the
assessment of documents that are available to appellate magistrates and subject to
their scrutiny, reliance on the trial court finds no application.[15]
Moreover, appeal by writ of error to the Court of Appeals under Rule 41 of the
Revised Rules of Court, the parties may raise both questions of fact and/or of law. In
fact, it is imperative for the Court of Appeals to review the findings of fact made by the
trial court. The Court of Appeals even has the power to try cases and conduct hearings,
receive evidence and perform any and all acts necessary to resolve factual issues
raised in cases falling within its original and appellate jurisdiction.[16]
Enrico assiduously prays before this Court to sustain the validity of the
Contract of Lease with Option to Purchase. Enrico asserts that the said Contract was
voluntarily entered into and signed by Luz who had it notarized herself. The spouses
Apeles should be obliged to respect the terms of the agreement, and not be allowed to
renege on their commitment thereunder and frustrate the sanctity of contracts.
Again, we are not persuaded. We agree with the Court of Appeals that in
ruling out forgery, the RTC heavily relied on the testimony proffered by Enrico during
the trial, ignoring blatant contradictions that destroy his credibility and the veracity of his
claims. On direct examination, Enrico testified that Luz signed the Contract of Lease
with Option to Purchase on 26 January 1987 in his presence,[17] but he recanted his
testimony on the matter after the spouses Apeles established by clear and convincing
evidence that Luz was not in the Philippines on that date.[18] In rebuttal, Enrico made a
complete turnabout and claimed that Luz signed the Contract in question on 30 May
1987 after her arrival in the country.[19] The inconsistencies in Enricos version of events
have seriously impaired the probative value of his testimony and cast serious doubt on
his credibility. His contradictory statements on important details simply eroded the
integrity of his testimony.
While it is true that a notarized document carries the evidentiary weight
conferred upon it with respect to its due execution, and has in its favor the presumption
of regularity, this presumption, however, is not absolute. It may be rebutted by clear and
convincing evidence to the contrary.[20] Enrico himself admitted that Luz took the
document and had it notarized without his presence. Such fact alone overcomes the
presumption of regularity since a notary public is enjoined not to notarize a document
unless the persons who signed the same are the very same persons who executed and
personally appeared before the said notary public to attest to the contents and truth of
what are stated therein.
Although there is no direct evidence to prove forgery, preponderance of
evidence inarguably favors the spouses Apeles. In civil cases, the party having the
burden of proof must establish his case by a preponderance of
evidence. Preponderance of evidence is the weight, credit, and value of the aggregate
evidence on either side and is usually considered to be synonymous with the term
greater weight of the evidence or greater weight of the credible
evidence. Preponderance of evidence is a phrase which, in the last analysis, means
probability of the truth. It is evidence which is more convincing to the court as worthier
of belief than that which is offered in opposition thereto. [21] In the case at bar, the
spouses Apeles were able to overcome the burden of proof and prove by preponderant
evidence in disputing the authenticity and due execution of the Contract of Lease with
Option to Purchase. In contrast, Enrico seemed to rely only on his own self-serving
declarations, without asserting any proof of corroborating testimony or circumstantial
evidence to buttress his claim.
Even assuming for the sake of argument that we agree with Enrico that Luz
voluntarily entered into the Contract of Lease with Option to Purchase and personally
affixed her signature to the said document, the provision on the option to purchase the
subject property incorporated in said Contract still remains unenforceable.
There is no dispute that what Enrico sought to enforce in Civil Case No. Q-
99-36834 was his purported right to acquire ownership of the subject property in the
exercise of his option to purchase the same under the Contract of Lease with Option to
Purchase. He ultimately wants to compel the spouses Apeles to already execute the
Deed of Sale over the subject property in his favor.
An option is a contract by which the owner of the property agrees with another
person that the latter shall have the right to buy the formers property at a fixed price
within a certain time. It is a condition offered or contract by which the owner stipulates
with another that the latter shall have the right to buy the property at a fixed price within
a certain time, or under, or in compliance with certain terms and conditions; or which
gives to the owner of the property the right to sell or demand a sale. [22] An option is not
of itself a purchase, but merely secures the privilege to buy. It is not a sale of property
but a sale of the right to purchase. It is simply a contract by which the owner of the
property agrees with another person that he shall have the right to buy his property at a
fixed price within a certain time. He does not sell his land; he does not then agree to sell
it; but he does sell something, i.e., the right or privilege to buy at the election or option
of the other party. Its distinguishing characteristic is that it imposes no binding obligation
on the person holding the option, aside from the consideration for the offer.[23]
It is also sometimes called an unaccepted offer and is sanctioned by Article
1479 of the Civil Code:
Art. 1479. A promise to buy and sell a determinate thing
for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a
determinate thing for a price certain is binding upon the promissor
if the promise is supported by a consideration distinct from the
price.
The second paragraph of Article 1479 provides for the definition and
consequent rights and obligations under an option contract. For an option contract to be
valid and enforceable against the promissor, there must be a separate and distinct
consideration that supports it.[24]
In the landmark case of Southwestern Sugar and Molasses Company v.
Atlantic Gulf and Pacific Co.,[25] we declared that for an option contract to bind the
promissor, it must be supported by consideration:
There is no question that under Article 1479 of the new
Civil Code an option to sell, or a promise to buy or to sell, as used
in said article, to be valid must be supported by a consideration
distinct from the price. This is clearly inferred from the context of
said article that a unilateral promise to buy or to sell, even if
accepted, is only binding if supported by a consideration. In other
words, an accepted unilateral promise can only have a binding
effect if supported by a consideration, which means that the
option can still be withdrawn, even if accepted, if the same is
not supported by any consideration. Here it is not disputed
that the option is without consideration. It can therefore be
withdrawn notwithstanding the acceptance made of it by
appellee. (Emphasis supplied.)
The doctrine requiring the payment of consideration in an option contract
enunciated in Southwestern Sugar is resonated in subsequent cases and remains
controlling to this day.Without consideration that is separate and distinct from the
purchase price, an option contract cannot be enforced; that holds true even if the
unilateral promise is already accepted by the optionee.
The consideration is the why of the contracts, the essential reason which
moves the contracting parties to enter into the contract. This definition illustrates that
the consideration contemplated to support an option contract need not be
monetary. Actual cash need not be exchanged for the option. However, by the very
nature of an option contract, as defined in Article 1479, the same is an onerous contract
for which the consideration must be something of value, although its kind may vary. [26]
We have painstakingly examined the Contract of Lease with Option to
Purchase, as well as the pleadings submitted by the parties, and their testimonies in
open court, for any direct evidence or evidence aliunde to prove the existence of
consideration for the option contract, but we have found none. The only consideration
agreed upon by the parties in the said Contract is the supposed purchase price for the
subject property in the amount not exceeding P1.5 Million, which could not be deemed
to be the same consideration for the option contract since the law and jurisprudence
explicitly dictate that for the option contract to be valid, it must be supported by a
consideration separate and distinct from the price.
In Bible Baptist Church v. Court of Appeals,[27] we stressed that an option
contract needs to be supported by a separate consideration. The consideration need
not be monetary but could consist of other things or undertakings. However, if the
consideration is not monetary, these must be things or undertakings of value, in view of
the onerous nature of the option contract. Furthermore, when a consideration for an
option contract is not monetary, said consideration must be clearly specified as such in
the option contract or clause.
In the present case, it is indubitable that no consideration was given by Enrico
to the spouses Apeles for the option contract. The absence of monetary or any material
consideration keeps this Court from enforcing the rights of the parties under said option
contract.
WHEREFORE, in view of the foregoing, the instant Petition
is DENIED. The Decision dated 20 December 2004 and Resolution dated 25 April
2005 of the Court of Appeals in CA-G.R. CV No. 76933 are hereby AFFIRMED. No
costs.
SO ORDERED.

SECOND DIVISION
G.R. No. 202050, July 25, 2016
PHILIPPINE NATIONAL OIL COMPANY AND PNOC DOCKYARD & ENGINEERING
CORPORATION, Petitioners, v. KEPPEL PHILIPPINES HOLDINGS,
INC., Respondent.
DECISION
BRION, J.:
Before the Court is a petition for review on certiorari filed under Rule 45 of the Rules of
Court, appealing the decision dated 19 December 20111 and resolution dated 14 May
20122 of the Court of Appeals (CA) in CA-G.R. CV No. 86830. These assailed CA
rulings affirmed in toto the decision dated 12 January 20063of the Regional Trial Court
(RTQ of Batangas City, Branch 84, in Civil Case No. 7364.
THE FACTS
The 1976 Lease Agreement and Option to Purchase
Almost 40 years ago or on 6 August 1976, the respondent Keppel Philippines
Holdings, Inc.4 (Keppel) entered into a lease agreement5 (the agreement) with Luzon
Stevedoring Corporation (Lusteveco) covering 11 hectares of land located in Bauan,
Batangas. The lease was for a period of 25 years for a consideration of P2.1
million.6 At the option of Lusteveco, the rental fee could be totally or partially converted
into equity shares in Keppel.7chanrobleslaw
At the end of the 25-year Jease period, Keppel was given the "firm and absolute
option to purchase8the land for P4.09 million, provided that it had acquired the
necessary qualification to own land under Philippine laws at the time the option
is exercised.9 Apparently, when the lease agreement was executed, less than 60% of
Keppel's shareholding was Filipino-owned, hence, it was not constitutionally qualified
to acquire private lands in the country.10chanrobleslaw
If, at the end of the 25-year lease period (or in 2001), Keppel remained unqualified to
own private lands, the agreement provided that the lease would be automatically
renewed for another 25 years.11 Keppel was further allowed to exercise the option to
purchase the land up to the 30th year of the lease (or in 2006), also on the condition
that, by then, it would have acquired the requisite qualification to own land in the
Philippines.12chanrobleslaw
Together with Keppel's lease rights and option to purchase, Lusteveco warranted not
to sell the land or assign its rights to the land for the duration of the lease unless with
the prior written consent of Keppel.13 Accordingly, when the petitioner Philippine
National Oil Corporation14 (PNOC) acquired the land from Lusteveco and took over the
rights and obligations under the agreement, Keppel did not object to the assignment
so long as the agreement was annotated on PNOC's title.15 With PNOC's consent and
cooperation, the agreement was recorded as Entry No. 65340 on PNOC's Transfer of
Certificate of Title No. T-50724.16chanrobleslaw
The Case and the Lower Court Rulings
On 8 December 2000, Keppel wrote PNOC informing the latter that at least 60% of its
shares were now owned by Filipinos17 Consequently, Keppel expressed its readiness
to exercise its option to purchase the land. Keppel reiterated its demand to purchase
the land several times, but on every occasion, PNOC did not favourably
respond.18chanrobleslaw
To compel PNOC to comply with the Agreement, Keppel instituted a complaint for
specific performance with the RTC on 26 September 2003 against PNOC.19 PNOC
countered Keppel's claims by contending that the agreement was illegal for
circumventing the constitutional prohibition against aliens holding lands in the
Philippines.20 It further asserted that the option contract was void, as it was
unsupported by a separate valuable consideration.21 It also claimed that it was not
privy to the agreement.22chanrobleslaw
After due proceedings, the RTC rendered a decision23in favour of Keppel and
ordered PNOC to execute a deed of absolute sale upon payment by Keppel of the
purchase price of P4.09 million.24chanrobleslaw
PNOC elevated the case to the CA to appeal the RTC decision.25cralawred Affirming
the RTC decision in toto, the CA upheld Keppel's right to acquire the land.26 It
found that since the option contract was embodied in the agreement - a reciprocal
contract - the consideration was the obligation that each of the contracting party
assumed.27 Since Keppel was already a Filipino-owned corporation, it satisfied the
condition that entitled it to purchase the land.28chanrobleslaw
Failing to secure a reconsideration of the CA decision,29 PNOC filed the present Rule
45 petition before this Court to assail the CA rulings.
THE PARTIES' ARGUMENTS and THE ISSUES
PNOC argues that the CA failed to resolve the constitutionality of the agreement. It
contends that the terms of the agreement amounted to a virtual sale of the land to
Keppel who, at the time of the agreement's enactment, was a foreign corporation and,
thus, violated the 1973 Constitution.
Specifically, PNOC refers to (a) the 25-year duration of the lease that was
automatically renewable for another 25 years30; (b) the option to purchase the land for
a nominal consideration of P100.00 if the option is exercised anytime between the
25th and the 30th year of the lease31; and (c) the prohibition imposed on Lusteveco to
sell the land or assign its rights therein during the lifetime of the lease. 32 Taken
together, PNOC submits that these provisions amounted to a virtual transfer of
ownership of the land to an alien which act the 1973 Constitution prohibited.
PNOC claims that the agreement is no different from the lease contract in Philippine
Banking Corporation v. Lui She,33 which the Court struck down as unconstitutional.
In Lui She, the lease contract allowed the gradual divestment of ownership rights by
the Filipino owner-lessor in favour of the foreigner-lessee.34The arrangement in Lui
She was declared as a scheme designed to enable the parties to circumvent the
constitutional prohibition.35 PNOC posits that a similar intent is apparent from the
terms of the agreement with Keppel and accordingly should also be
nullified.36chanrobleslaw
PNOC additionally contends the illegality of the option contract for lack of a separate
consideration, as required by Article 1479 of the Civil Code.37 It claims that the option
contract is distinct from the main contract of lease and must be supported by a
consideration other than the rental fees provided in the agreement.38chanrobleslaw
On the other hand, Keppel maintains the validity of both the agreement and the option
contract it contains. It opposes the claim that there was "virtual sale" of the land,
noting that the option is subject to the condition that Keppel becomes qualified to own
private lands in the Philippines.39 This condition ripened in 2000, when at least 60% of
Keppel's equity became Filipino-owned.
Keppel contends that the agreement is not a scheme designed to circumvent the
constitutional prohibition. Lusteveco was not proscribed from alienating its ownership
rights over the land but was simply required to secure Keppel's prior written
consent.40 Indeed, Lusteveco was able to transfer its interest to PNOC without any
objection from Keppel.41chanrobleslaw
Keppel also posits that the requirement of a separate consideration for an option to
purchase applies only when the option is granted in a separate contract. 42 In the
present case, the option is embodied in a reciprocal contract and, following the Court's
ruling in Vda. De Quirino v. Palarca,43 the option is supported by the same
consideration supporting the main contract.
From the parties' arguments, the following ISSUES emerge:
chanRoblesvirtualLawlibraryFirst, the constitutionality of the Agreement, i.e., whether
the terms of the Agreement amounted to a virtual sale of the land to Keppel that was
designed to circumvent the constitutional prohibition on aliens owning lands in the
Philippines.
Second, the validity of the option contract, i.e., whether the option to purchase the
land given to Keppel is supported by a separate valuable consideration.
If these issues are resolved in favour of Keppel, a third issue emerges - one that was
not considered by the lower courts, but is critical in terms of determining Keppel's right
to own and acquire full title to the land, i.e., whether Keppel's equity ownership meets
the 60% Filipino-owned capital requirement of trie Constitution, in accordance with the
Court's ruling in Gamboa v. Teves.44chanrobleslaw
THE COURT'S RULING
I. The constitutionality of the Agreement
The Court affirms the constitutionality of the Agreement.
Preserving the ownership of land, whether public or private, in Filipino hands is the
policy consistently adopted in all three of our constitutions.45 Under the
1935,46 1973,47 and 198748 Constitutions, no private land shall be transferred,
assigned, or conveyed except to individuals, corporations, or associations qualified to
acquire or hold lands of the public domain. Consequently, only Filipino citizens, or
corporations or associations whose capital is 60% owned by Filipinos citizens, are
constitutionally qualified to own private lands.
Upholding this nationalization policy, the Court has voided not only outright
conveyances of land to foreigners,49: but also arrangements where the rights of
ownership were gradually transferred to foreigners.50 In Lui Shui,51 we considered a
99-year lease agreement, which gave the foreigner-lessee the option to buy the land
and prohibited the Filipino owner-lessor from selling or otherwise disposing the land,
amounted to -
a virtual transfer of ownership whereby the owner divests himself in stages not only
of the right to enjoy the land (Jus possidendi, jus utendi, jus fruendi, and jus abutendi)
but also of the right to dispose of it (jus disponendi) � rights the sum total of which
make up ownership.52 [Emphasis supplied]
In the present case, PNOC submits that a similar scheme is apparent from the
agreement's terms, but a review of the overall circumstances leads us to reject
PNOC's claim.
The agreement was executed to enable Keppel to use the land for its shipbuilding
and ship repair business.53 The industrial/commercial purpose behind the
agreement differentiates the present case from Lui She where the leased property
was primarily devoted to residential use.54 Undoubtedly, the establishment and
operation of a shipyard business involve significant investments. Keppel's uncontested
testimony showed that it incurred P60 million costs solely for preliminary activities to
make the land suitable as a shipyard, and subsequently introduced improvements
worth P177 million.55 Taking these investments into account and the nature of the
business that Keppel conducts on the land, we find it reasonable that the agreement's
terms provided for an extended duration of the lease and a restriction on the rights of
Lusteveco.
We observe that, unlike in Lui She,56 Lusteveco was not completely denied its
ownership rights during the course of the lease. It could dispose of the lands or assign
its rights thereto, provided it secured Keppel's prior written consent.57 That Lusteveco
was able to convey the land in favour of PNOC during the pendency of the
lease58 should negate a finding that the agreement's terms amounted to a virtual
transfer of ownership of the land to Keppel.
II. The validity of the option contract
II.A An option contract must be supported by a separate consideration
that is either clearly specified as such in the contract or duly
proven by the offeree/promisee.
An option contract is defined in the second paragraph of Article 1479 of the Civil
Code:ChanRoblesVirtualawlibrary
Article 14791 x x x An accepted promise to buy or to sell a determinate thing for a
price certain is binding upon the promissor if the promise is supported by a
consideration distinct from the price.
An option contract is a contract where one person (the offeror/promissor) grants to
another person (the offeree/promisee) the right or privilege to buy (or to sell) a
determinate thing at a fixed price, if he or she chooses to do so within an agreed
period.59chanrobleslaw
As a contract, it must necessarily have the essential elements of subject matter,
consent, and consideration.60 Although an option contract is deemed a preparatory
contract to the principal contract of sale,61 it is separate and distinct therefrom,62 thus,
its essential elements should be distinguished from those of a sale. 63chanrobleslaw
In an option contract, the subject matter is the right or privilege to buy (or to sell) a
determinate thing for a price certain,64 while in a sales contract, the subject matter is
the determinate thing itself.65 The consent in an option contract is the acceptance by
the offeree of the offerer's promise to sell (or to buy)the determinate thing, i.e., the
offeree agrees to hold the right or privilege to buy (or to sell) within a specified period.
This acceptance is different from the acceptance of the offer itself whereby the offeree
asserts his or her right or privilege to buy (or to sell), which constitutes as his or her
consent to the sales contract. The consideration in an option contract may be
anything of value, unlike in a sale where the purchase price must be in money or its
equivalent.66 There is sufficient consideration for a promise if there is any benefit to the
offeree or any detriment to the offeror.67chanrobleslaw
In the present case, PNOC claims the option contract is void for want of consideration
distinct from the purchase price for the land.68 The option is incorporated as paragraph
5 of the Agreement and reads as
5. If within the period of the first [25] years [Keppel] becomes qualified to own land
under the laws of the Philippines, it has the firm and absolute option to purchase the
above property for a total price of [P-4,090,000.00] at the end of the 25th year,
discounted at 16% annual for every year before the end of the 25th year, which
amount may be converted into equity of [Keppel] at book value prevailing at the time
of sale, or paid in cash at Lusteveco's option.
However, if after the first [25] years, [Keppel] is still not qualified to own land under the
laws of the Republic of the Philippines, [Keppel's] lease of the above stated property
shall be automatically renewed for another [25] years, under the same terms and
conditions save for the rental price which shall be for the sum of P4,090,000.00... and
which sum may be totally converted into equity of [Keppel] at book value prevailing at
the time of conversion, or paid in cash at Lusteveco's option.
If anytime within the second [25] years up to the [30th] year from the date of this
agreement, [Keppel] becomes qualified to own land under the laws of the Republic of
the Philippines, [Keppel] has the firm and absolute option to buy and Lusteveco
hereby undertakes to sell the above stated property for the nominal consideration of
[P100.00.00]...69
Keppel counters that a separate consideration is not necessary to support its option to
buy because the option is one of the stipulations of the lease contract. It claims that a
separate consideration is required only when an option to buy is embodied in an
independent contract.70 It relies on Vda. de Quirino v. Palarca,71 where the Court
declared that the option to buy the leased property is supported by the same
consideration as that of the lease itself: "in reciprocal contracts [such as lease], the
obligation or promise of each party is the consideration for that of the
other.72chanrobleslaw
In considering Keppel's submission, we note that the Court's ruling in 1969 in Vda. de
Quirino v. Palarcahas been taken out of context and erroneously applied in
subsequent cases. In 2004, through Bible Baptist Church v. CA73 we revisited Vda. de
Quirino v. Palarca and observed that the option to buy given to the lessee Palarca by
the lessor Quirino was in fact supported by a separate consideration: Palarca paid a
higher amount of rent and, in the event that he does not exercise the option to buy the
leased property, gave Quirino the option to buy the improvements he introduced
thereon. These additional concessions were separate from the purchase price and
deemed by the Court as sufficient consideration to support the option contract.
Vda. de Quirino v. Palarca, therefore, should not be regarded as authority that the
mere inclusion of an option contract in a reciprocal lease contract provides it with the
requisite separate consideration for its validity. The reciprocal contract should be
closely scrutinized and assessed whether it contains additional concessions
that the parties intended to constitute as a consideration for the option contract,
separate from that of the purchase price.
In the present case, paragraph 5 of the agreement provided that should Keppel
exercise its option to buy, Lusteveco could opt to convert the purchase price into
equity in Keppel. May Lusteveco's option to convert the price for shares be deemed as
a sufficient separate consideration for Keppel's option to buy?
As earlier mentioned, the consideration for an option contract does not need to be
monetary and may be anything of value.74 However, when the consideration is not
monetary, the consideration must be clearly specified as such in the option
contract or clause.75chanrobleslaw
In Villamor v. CA,76 the parties executed a deed expressly acknowledging that the
purchase price of P70.00 per square meter "was greatly higher than the actual
reasonable prevailing value of lands in that place at that time."77 The difference
between the purchase price and the prevailing value constituted as the consideration
for the option contract. Although the actual amount of the consideration was not
stated, it was ascertainable from the contract whose terms evinced the parties' intent
to constitute this amount as consideration for the option contract. 78 Thus, the Court
upheld the validity of the option contract.79 In the light of the offeree's acceptance of
the option, the Court further declared that a bilateral contract to sell and buy was
created and that the parties' respective obligations became reciprocally
demandable.80chanrobleslaw
When the written agreement itself does not state the consideration for the
option contract, the offeree or promisee bears the burden of proving the
existence of a separate consideration for the option.81 The offeree cannot rely on
Article 1354 of the Civil Code,82 which presumes the existence of consideration, since
Article 1479 of the Civil Code is a specific provision on option contracts that explicitly
requires the existence of a consideration distinct from the purchase
price.83chanrobleslaw
In the present case, none of the above rules were observed. We find nothing in
paragraph 5 of the Agreement indicating that the grant to Lusteveco of the option to
convert the purchase price for Keppel shares was intended by the parties as the
consideration for Keppel's option to buy the land; Keppel itself as the offeree
presented no evidence to support this finding. On the contrary, the option to convert
the purchase price for shares should be deemed part of the consideration for the
contract of sale itself, since the shares are merely an alternative to the actual cash
price.
There are, however cases where, despite the absence of an express intent in the
parties' agreements, the Court considered the additional concessions stipulated in an
agreement to constitute a sufficient separate consideration for the option contract.
In Teodoro v. CA,84 the sub-lessee (Teodoro) who was given the option to buy the
land assumed .the obligation to pay not only her rent as sub-lessee, but also the rent
of the sub-lessor (Ariola) to the primary lessor (Manila Railroad Company).85 In other
words, Teodoro paid an amount over and above the amount due for her own
occupation of the property, and this amount was found by the Court as sufficient
consideration for the option contract.86chanrobleslaw
In Dijamco v. CA,87 the spouses Dijamco failed to pay their loan with the bank,
allowing the latter to foreclose the mortgage.88 Since the spouses Dijamco did not
exercise their right to redeem, the bank consolidated its ownership over the
mortgaged property.89 The spouses Dijamco later proposed to purchase the same
property by paying a purchase price of P622,095.00 (equivalent to their principal loan)
and a monthly amount of P13,478.00 payable for 12 months (equivalent to the interest
on their principal loan). They further stated that should they fail to make a monthly
payment, the proposal should be automatically revoked and all payments be treated
as rentals for their continued use of the property.90 The Court treated the spouses
Dijamco's proposal to purchase the property as an option contract, and the
consideration for which was the monthly interest payments. 91 Interestingly, this ruling
was made despite the categorical stipulation that the monthly interest payments
should be treated as rent for the spouses Dijamco's continued possession and use of
the foreclosed property.
At the other end of the jurisprudential spectrum are cases where the Court refused to
consider the additional concessions stipulated in agreements as separate
consideration for the option contract.
In Bible Baptist Church v. CA,92 the lessee (Bible Baptist Church) paid in advance
P84,000.00 to the lessor in order to free the property from an encumbrance. The
lessee claimed that the advance payment constituted as the separate consideration
for its option to buy the property.93 The Court, however, disagreed noting that the
P84,000.00 paid in advance was eventually offset against the rent due for the first
year of the lease, "such that for the entire year from 1985 to 1986 the [Bible Baptist
Church] did not pay monthly rent."94 Hence, the Court refused to recognize the
existence of a valid option contract.95chanrobleslaw
What Teodoro, Dijamco, and Bible Baptist Church show is that the determination of
whether the additional concessions in agreements are sufficient to support an option
contract, is fraught with danger; in ascertaining the parties' intent on this matter, a
court may read too much or too little from the facts before it.
For uniformity and consistency in contract interpretation, the better rule to follow is
that the consideration for the option contract should be clearly specified as
such in the option contract or clause. Otherwise, the offeree must bear the
burden of proving that a separate consideration for the option contract exists.
Given our finding that the Agreement did not categorically refer to any consideration to
support Keppel's option to buy and for Keppel's failure to present evidence in this
regard, we cannot uphold the existence of an option contract in this case.
II. An option, though unsupported by a separate consideration, remains
B. an offer that, if duly accepted, generates into a contract to sell where
the parties' respective obligations become reciprocally demandable
The absence of a consideration supporting the option contract, however, does not
invalidate an offer to buy (or to sell). An option unsupported by a separate
consideration stands as an unaccepted offer to buy (or to sell) which, when
properly accepted, ripens into a contract to sell. This is the rule established by the
Court en banc as early as 1958 in Atkins v. Cua Hian Tek,96 and upheld in 1972
in Sanchez v. Rigos.97chanrobleslaw
Sanchez v. Rigos reconciled the apparent conflict between Articles 1324 and 1479 of
the Civil Code, which are quoted below:ChanRoblesVirtualawlibrary
Article 1324. When the offerer has allowed the offeree a certain period to accept, the
offer may be withdrawn at any time before acceptance by communicating such
withdrawal, except when the option is founded upon a consideration, as
something paid or promised.
Article 1479. A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price
certain is binding upon the promissor if the promise is supported by a
consideration distinct from the price, [emphases supplied]
The Court en banc declared that there is no distinction between these two provisions
because the scenario contemplated in the second paragraph of
Article 1479 is the same as that in the last clause of Article 1324.98 Instead of finding a
conflict, Sanchez v. Rigos harmonised the two provisions, consistent with the
established rules of statutory construction.99chanrobleslaw
Thus, when an offer is supported by a separate consideration, a valid
option contract exists, i.e., there is a contracted offer100 which the offerer cannot
withdraw from without incurring liability in damages.
On the other hand, when the offer is not supported by a separate consideration, the
offer stands but, in the absence of a binding contract, the offeror may withdraw it any
time.101 In either case, once the acceptance of the offer is duly
communicated before the withdrawal of the offer, a bilateral contract to buy and sell is
generated which, in accordance with the first paragraph of Article 1479 of the Civil
Code, becomes reciprocally demandable.102chanrobleslaw
Sanchez v. Rigos expressly overturned the 1955 case of Southwestern Sugar v.
AGPC,103 which declared that
a unilateral promise to buy or to sell, even if accepted, is only binding if supported by a
consideration... In other words, an accepted unilateral promise can only have a
binding effect if supported by a consideration, which means that the option can
still be withdrawn, even if accepted, if the same is not supported by any
consideration.104 [Emphasis supplied]
The Southwestern Sugar doctrine was based on the reasoning that Article 1479 of the
Civil Code is distinct from Article 1324 of the Civil Code and is a provision that
specifically governs options to buy (or to sell).105 As mentioned, Sanchez v. Rigos
found no conflict between these two provisions and accordingly abandoned
the Southwestern Sugar doctrine.
Unfortunately, without expressly overturning or abandoning the Sanchez ruling,
subsequent cases reverted back to the Southwestern Sugar doctrine.106 In
2009, Eulogio v Apeles107 referred to Southwestern Sugar v. AGPC as the controlling
doctrine108 and, due to the lack of a separate consideration, refused to recognize the
option to buy as an offer that would have resulted in a sale given its timely acceptance
by the offeree. In 2010, Tuazon v. Del Rosario-Suarez109 referred to Sanchez v.
Rigos but erroneously cited as part of its ratio decidendi that portion of the
Southwestern Sugar doctrine that Sanchez had expressly
abandoned.110chanrobleslaw
Given that! the issue raised in the present case involves the application of Article 1324
and 1479 of the Civil Code, it becomes imperative for the Court [en banc] to clarify and
declare here which between Sanchez and Southwestern Sugar is the controlling
doctrine.
The Constitution itself declares that "no doctrine or principle of law laid down by the
court in a decision rendered en banc or in division may be modified or reversed except
by the court sitting en banc.111Sanchez v. Rigos was an en banc decision which was
affirmed in 1994 in Asuncion v. CA,112 also an en banc decision, while the decisions
citing the Southwestern Sugar doctrine are all division cases.113Based on the
constitutional rule (as well as the inherent logic in reconciling Civil Code provisions),
there should be no doubt that Sanchez v. Rigos remains as the controlling
doctrine.
Accordingly, when an option to buy or to sell is not supported by a consideration
separate from the purchase price, the option constitutes as an offer to buy or to sell,
which may be withdrawn by the offeror at any time prior to the communication of the
offeree's acceptance. When the offer is duly accepted, a mutual promise to buy and to
sell under the first paragraph of Article 1479 of the Civil Code ensues and the parties'
respective obligations become reciprocally demandable.
Applied to the present case, we find that the offer to buy the land was timely
accepted by Keppel.
As early as 1994, Keppel expressed its desire to exercise its option to buy the land.
Instead of rejecting outright Keppel's acceptance, PNOC referred the matter to the
Office of the Government Corporate Counsel (OGCC). In its Opinion No. 160, series
of 1994, the OGCC opined that Keppel "did not yet have the right to purchase the
Bauan lands."114 On account of the OGCC opinion, the PNOC did not agree with
Keppel's attempt to buy the land;115 nonetheless, the PNOC made no categorical
withdrawal of the offer to sell provided under the Agreement.
By 2000, Keppel had met the required Filipino equity proportion and duly
communicated its acceptance of the offer to buy to PNOC.116 Keppel met with the
board of directors and officials of PNOC who interposed no objection to the sale.117 It
was only when the amount of purchase price was raised that the conflict between the
parties arose,118 with PNOC backtracking in its position and questioning the validity of
the option.119chanrobleslaw
Thus, when Keppel communicated its acceptance, the offer to purchase the Bauan
land stood, not having been withdrawn by PNOC. The offer having been duly
accepted, a contract to sell the land ensued which Keppel can rightfully demand
PNOC to comply with.
III. Keppel's constitutional right to acquire full title to the land
Filipinization is the spirit that pervades the constitutional provisions on national
patrimony and economy. The Constitution has reserved the ownership of public and
private lands,120 the ownership and operation of public utilities,121 and certain areas of
investment122 to Filipino citizens, associations, and corporations. To qualify, sixty per
cent (60%) of the association or corporation's capital must be owned by Filipino
citizens. Although the 60% Filipino equity proportion has been adopted in our
Constitution since 1935, it was only in 2011 that the Court interpreted what the term
capital constituted.
In Gamboa v. Teves,123 the Court declared that the "legal and beneficial
ownership of 60 percent of the outstanding capital stock must rest in the hands of
Filipino nationals." 124 Clarifying the ruling, the Court decreed that the 60% Filipino
ownership requirement applies separately to each class of shares, whether with or
without voting rights,125 thus:ChanRoblesVirtualawlibrary
Applying uniformly the 60-40 ownership requirement in favour of Filipino citizens to
each class of shares, regardless of differences in voting rights, privileges and
restrictions, guarantees effective Filipino control of public utilities, as mandated by the
Constitution.126
Although the ruling was made in the context of ownership and operation of public
utilities, the same should be applied to the ownership of public and private lands, since
the same proportion of Filipino ownership is required and the same nationalist policy
pervades.

The uncontested fact is that, as of November 2000, Keppel's capital is 60% Filipino-
owned.127 However, there is nothing in the records showing the nature and
composition of Keppel's shareholdings, i.e.,whether its shareholdings are divided into
different classes, and 60% of each share class is legally and beneficially owned by
Filipinos - understandably because when Keppel exercised its option to buy the land in
2000, the Gamboa ruling had not yet been promulgated. The Court cannot deny
Keppel its option to buy the land by retroactively applying the Gamboa ruling without
violating Keppel's vested right. Thus, Keppel's failure to prove the nature and
composition of its shareholdings in 2000 could not prevent it from validly exercising its
option to buy the land.

Nonetheless, the Court cannot completely disregard the effect of the Gamboa ruling;
the 60% Filipino equity proportion is a continuing requirement to hold land in the
Philippines. Even in Gamboa, the Court prospectively applied its ruling, thus enabling
the public utilities to meet the nationality requirement before the Securities and
Exchange Commission commences administrative investigation and cases, and
imposes sanctions for noncompliance on erring corporations. 128 In this case, Keppel
must be allowed to prove whether it meets the required Filipino equity ownership and
proportion in accordance with the Gamboa ruling before it can acquire full title to the
land.

In view of the foregoing, the Court AFFIRMS the decision dated 19 December 2011
and the resolution dated 14 May 2012 of the CA in CA-G.R. CV No. 86830 insofar as
these rulings uphold the respondent Keppel Philippines Holdings, Inc.'s option to buy
the land, and REMANDS the case to the Regional Trial Court of Batangas City,
Branch 84, for the determination of whether the respondent Keppel Philippines
Holdings, Inc. meets the required Filipino equity ownership and proportion in
accordance with the Court's ruling in Gamboa v. Teves, to allow it to acquire full title to
the land.

SO ORDERED.chanRoblesvirtualLawlibrary

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 109125 December 2, 1994
ANG YU ASUNCION, ARTHUR GO AND KEH TIONG, petitioners,
vs.
THE HON. COURT OF APPEALS and BUEN REALTY DEVELOPMENT
CORPORATION, respondents.
Antonio M. Albano for petitioners.
Umali, Soriano & Associates for private respondent.
VITUG, J.:
Assailed, in this petition for review, is the decision of the Court of Appeals, dated 04
December 1991, in CA-G.R. SP No. 26345 setting aside and declaring without force
and effect the orders of execution of the trial court, dated 30 August 1991 and 27
September 1991, in Civil Case No. 87-41058.
The antecedents are recited in good detail by the appellate court thusly:
On July 29, 1987 a Second Amended Complaint for Specific
Performance was filed by Ang Yu Asuncion and Keh Tiong, et al.,
against Bobby Cu Unjieng, Rose Cu Unjieng and Jose Tan before
the Regional Trial Court, Branch 31, Manila in Civil Case No. 87-
41058, alleging, among others, that plaintiffs are tenants or
lessees of residential and commercial spaces owned by
defendants described as Nos. 630-638 Ongpin Street, Binondo,
Manila; that they have occupied said spaces since 1935 and have
been religiously paying the rental and complying with all the
conditions of the lease contract; that on several occasions before
October 9, 1986, defendants informed plaintiffs that they are
offering to sell the premises and are giving them priority to acquire
the same; that during the negotiations, Bobby Cu Unjieng offered
a price of P6-million while plaintiffs made a counter offer of P5-
million; that plaintiffs thereafter asked the defendants to put their
offer in writing to which request defendants acceded; that in reply
to defendant's letter, plaintiffs wrote them on October 24, 1986
asking that they specify the terms and conditions of the offer to
sell; that when plaintiffs did not receive any reply, they sent
another letter dated January 28, 1987 with the same request; that
since defendants failed to specify the terms and conditions of the
offer to sell and because of information received that defendants
were about to sell the property, plaintiffs were compelled to file
the complaint to compel defendants to sell the property to them.
Defendants filed their answer denying the material allegations of
the complaint and interposing a special defense of lack of cause
of action.
After the issues were joined, defendants filed a motion for
summary judgment which was granted by the lower court. The
trial court found that defendants' offer to sell was never accepted
by the plaintiffs for the reason that the parties did not agree upon
the terms and conditions of the proposed sale, hence, there was
no contract of sale at all. Nonetheless, the lower court ruled that
should the defendants subsequently offer their property for sale at
a price of P11-million or below, plaintiffs will have the right of first
refusal. Thus the dispositive portion of the decision states:
WHEREFORE, judgment is hereby rendered
in favor of the defendants and against the
plaintiffs summarily dismissing the complaint
subject to the aforementioned condition that if
the defendants subsequently decide to offer
their property for sale for a purchase price of
Eleven Million Pesos or lower, then the
plaintiffs has the option to purchase the
property or of first refusal, otherwise,
defendants need not offer the property to the
plaintiffs if the purchase price is higher than
Eleven Million Pesos.
SO ORDERED.
Aggrieved by the decision, plaintiffs appealed to this Court in
CA-G.R. CV No. 21123. In a decision promulgated on September
21, 1990 (penned by Justice Segundino G. Chua and concurred
in by Justices Vicente V. Mendoza and Fernando A. Santiago),
this Court affirmed with modification the lower court's judgment,
holding:
In resume, there was no meeting of the
minds between the parties concerning the
sale of the property. Absent such
requirement, the claim for specific
performance will not lie. Appellants' demand
for actual, moral and exemplary damages will
likewise fail as there exists no justifiable
ground for its award. Summary judgment for
defendants was properly granted. Courts may
render summary judgment when there is no
genuine issue as to any material fact and the
moving party is entitled to a judgment as a
matter of law (Garcia vs. Court of Appeals,
176 SCRA 815). All requisites obtaining, the
decision of the court a quo is legally
justifiable.
WHEREFORE, finding the appeal
unmeritorious, the judgment appealed from is
hereby AFFIRMED, but subject to the
following modification: The court a quo in the
aforestated decision gave the plaintiffs-
appellants the right of first refusal only if the
property is sold for a purchase price of
Eleven Million pesos or lower; however,
considering the mercurial and uncertain
forces in our market economy today. We find
no reason not to grant the same right of first
refusal to herein appellants in the event that
the subject property is sold for a price in
excess of Eleven Million pesos. No
pronouncement as to costs.
SO ORDERED.
The decision of this Court was brought to the Supreme Court by
petition for review on certiorari. The Supreme Court denied the
appeal on May 6, 1991 "for insufficiency in form and substances"
(Annex H, Petition).
On November 15, 1990, while CA-G.R. CV No. 21123 was
pending consideration by this Court, the Cu Unjieng spouses
executed a Deed of Sale (Annex D, Petition) transferring the
property in question to herein petitioner Buen Realty and
Development Corporation, subject to the following terms and
conditions:
1. That for and in consideration of the sum of
FIFTEEN MILLION PESOS
(P15,000,000.00), receipt of which in full is
hereby acknowledged, the VENDORS hereby
sells, transfers and conveys for and in favor
of the VENDEE, his heirs, executors,
administrators or assigns, the above-
described property with all the improvements
found therein including all the rights and
interest in the said property free from all liens
and encumbrances of whatever nature,
except the pending ejectment proceeding;
2. That the VENDEE shall pay the
Documentary Stamp Tax, registration fees for
the transfer of title in his favor and other
expenses incidental to the sale of above-
described property including capital gains tax
and accrued real estate taxes.
As a consequence of the sale, TCT No. 105254/T-881 in the
name of the Cu Unjieng spouses was cancelled and, in lieu
thereof, TCT No. 195816 was issued in the name of petitioner on
December 3, 1990.
On July 1, 1991, petitioner as the new owner of the subject
property wrote a letter to the lessees demanding that the latter
vacate the premises.
On July 16, 1991, the lessees wrote a reply to petitioner stating
that petitioner brought the property subject to the notice of lis
pendens regarding Civil Case No. 87-41058 annotated on TCT
No. 105254/T-881 in the name of the Cu Unjiengs.
The lessees filed a Motion for Execution dated August 27, 1991 of
the Decision in Civil Case No. 87-41058 as modified by the Court
of Appeals in CA-G.R. CV No. 21123.
On August 30, 1991, respondent Judge issued an order (Annex
A, Petition) quoted as follows:
Presented before the Court is a Motion for
Execution filed by plaintiff represented by
Atty. Antonio Albano. Both defendants Bobby
Cu Unjieng and Rose Cu Unjieng
represented by Atty. Vicente Sison and Atty.
Anacleto Magno respectively were duly
notified in today's consideration of the motion
as evidenced by the rubber stamp and
signatures upon the copy of the Motion for
Execution.
The gist of the motion is that the Decision of
the Court dated September 21, 1990 as
modified by the Court of Appeals in its
decision in CA G.R. CV-21123, and elevated
to the Supreme Court upon the petition for
review and that the same was denied by the
highest tribunal in its resolution dated May 6,
1991 in G.R. No.
L-97276, had now become final and
executory. As a consequence, there was an
Entry of Judgment by the Supreme Court as
of June 6, 1991, stating that the aforesaid
modified decision had already become final
and executory.
It is the observation of the Court that this
property in dispute was the subject of
the Notice of Lis Pendens and that the
modified decision of this Court promulgated
by the Court of Appeals which had become
final to the effect that should the defendants
decide to offer the property for sale for a price
of P11 Million or lower, and considering the
mercurial and uncertain forces in our market
economy today, the same right of first refusal
to herein plaintiffs/appellants in the event that
the subject property is sold for a price in
excess of Eleven Million pesos or more.
WHEREFORE, defendants are hereby
ordered to execute the necessary Deed of
Sale of the property in litigation in favor of
plaintiffs Ang Yu Asuncion, Keh Tiong and
Arthur Go for the consideration of P15 Million
pesos in recognition of plaintiffs' right of first
refusal and that a new Transfer Certificate of
Title be issued in favor of the buyer.
All previous transactions involving the same
property notwithstanding the issuance of
another title to Buen Realty Corporation, is
hereby set aside as having been executed in
bad faith.
SO ORDERED.
On September 22, 1991 respondent Judge issued another order,
the dispositive portion of which reads:
WHEREFORE, let there be Writ of Execution
issue in the above-entitled case directing the
Deputy Sheriff Ramon Enriquez of this Court
to implement said Writ of Execution ordering
the defendants among others to comply with
the aforesaid Order of this Court within a
period of one (1) week from receipt of this
Order and for defendants to execute the
necessary Deed of Sale of the property in
litigation in favor of the plaintiffs Ang Yu
Asuncion, Keh Tiong and Arthur Go for the
consideration of P15,000,000.00 and
ordering the Register of Deeds of the City of
Manila, to cancel and set aside the title
already issued in favor of Buen Realty
Corporation which was previously executed
between the latter and defendants and to
register the new title in favor of the aforesaid
plaintiffs Ang Yu Asuncion, Keh Tiong and
Arthur Go.
SO ORDERED.
On the same day, September 27, 1991 the corresponding writ of
execution (Annex C, Petition) was issued.1
On 04 December 1991, the appellate court, on appeal to it by private respondent, set
aside and declared without force and effect the above questioned orders of the court a
quo.
In this petition for review on certiorari, petitioners contend that Buen Realty can be
held bound by the writ of execution by virtue of the notice of lis pendens, carried over
on TCT No. 195816 issued in the name of Buen Realty, at the time of the latter's
purchase of the property on 15 November 1991 from the Cu Unjiengs.
We affirm the decision of the appellate court. When the sale is not absolute but conditional, such as in a "Contract to Sell" where
invariably the ownership of the thing sold is retained until the fulfillment of a positive
suspensive condition (normally, the full payment of the purchase price), the breach of
A not too recent development in real estate transactions is the adoption of such
the condition will prevent the obligation to convey title from acquiring an obligatory
arrangements as the right of first refusal, a purchase option and a contract to sell. For
force.2 In Dignos vs. Court of Appeals (158 SCRA 375), we have said that, although
ready reference, we might point out some fundamental precepts that may find some
denominated a "Deed of Conditional Sale," a sale is still absolute where the contract is
relevance to this discussion.
devoid of any proviso that title is reserved or the right to unilaterally rescind is
stipulated, e.g., until or unless the price is paid. Ownership will then be transferred to
An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). the buyer upon actual or constructive delivery (e.g., by the execution of a public
The obligation is constituted upon the concurrence of the essential elements document) of the property sold. Where the condition is imposed upon the perfection of
thereof, viz: (a) The vinculum juris or juridical tie which is the efficient cause the contract itself, the failure of the condition would prevent such perfection. 3 If the
established by the various sources of obligations (law, contracts, quasi-contracts, condition is imposed on the obligation of a party which is not fulfilled, the other party
delicts and quasi-delicts); (b) the object which is the prestation or conduct; required to may either waive the condition or refuse to proceed with the sale (Art. 1545, Civil
be observed (to give, to do or not to do); and (c) the subject-persons who, viewed from Code).4
the demandability of the obligation, are the active (obligee) and the passive (obligor)
subjects.
An unconditional mutual promise to buy and sell, as long as the object is made
determinate and the price is fixed, can be obligatory on the parties, and compliance
Among the sources of an obligation is a contract (Art. 1157, Civil Code), which is a therewith may accordingly be exacted.5
meeting of minds between two persons whereby one binds himself, with respect to the
other, to give something or to render some service (Art. 1305, Civil Code). A contract
An accepted unilateral promise which specifies the thing to be sold and the price to
undergoes various stages that include its negotiation or preparation, its perfection and,
be paid, when coupled with a valuable consideration distinct and separate from the
finally, its consummation. Negotiation covers the period from the time the prospective
price, is what may properly be termed a perfected contract of option. This contract is
contracting parties indicate interest in the contract to the time the contract is
legally binding, and in sales, it conforms with the second paragraph of Article 1479 of
concluded (perfected). The perfection of the contract takes place upon the
the Civil Code, viz:
concurrence of the essential elements thereof. A contract which is consensual as to
perfection is so established upon a mere meeting of minds, i.e., the concurrence of
offer and acceptance, on the object and on the cause thereof. A contract which Art. 1479. . . .
requires, in addition to the above, the delivery of the object of the agreement, as in a
pledge or commodatum, is commonly referred to as a real contract. In
An accepted unilateral promise to buy or to sell a determinate
a solemn contract, compliance with certain formalities prescribed by law, such as in a
thing for a price certain is binding upon the promissor if the
donation of real property, is essential in order to make the act valid, the prescribed
promise is supported by a consideration distinct from the price.
form being thereby an essential element thereof. The stage of consummation begins
(1451a)6
when the parties perform their respective undertakings under the contract culminating
in the extinguishment thereof.
Observe, however, that the option is not the contract of sale itself.7 The optionee has
the right, but not the obligation, to buy. Once the option is exercised timely, i.e., the
Until the contract is perfected, it cannot, as an independent source of obligation, serve
offer is accepted before a breach of the option, a bilateral promise to sell and to buy
as a binding juridical relation. In sales, particularly, to which the topic for discussion
ensues and both parties are then reciprocally bound to comply with their respective
about the case at bench belongs, the contract is perfected when a person, called the
undertakings.8
seller, obligates himself, for a price certain, to deliver and to transfer ownership of a
thing or right to another, called the buyer, over which the latter agrees. Article 1458 of
the Civil Code provides: Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect
promise (policitacion) is merely an offer. Public advertisements or solicitations and the
like are ordinarily construed as mere invitations to make offers or only as proposals.
Art. 1458. By the contract of sale one of the contracting parties
These relations, until a contract is perfected, are not considered binding commitments.
obligates himself to transfer the ownership of and to deliver a
Thus, at any time prior to the perfection of the contract, either negotiating party may
determinate thing, and the other to pay therefor a price certain in
stop the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is
money or its equivalent.
effective immediately after its manifestation, such as by its mailing and not necessarily
when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a
A contract of sale may be absolute or conditional.
period is given to the offeree within which to accept the offer, the following rules
generally govern:
(1) If the period is not itself founded upon or supported by a consideration, the offeror
is still free and has the right to withdraw the offer before its acceptance, or, if an
acceptance has been made, before the offeror's coming to know of such fact, by
communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see also
Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a
unilateral promise to sell under Art. 1479, modifying the previous decision in South
Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural
Bank of Parañaque, Inc., vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA
368). The right to withdraw, however, must not be exercised whimsically or arbitrarily;
otherwise, it could give rise to a damage claim under Article 19 of the Civil Code which
ordains that "every person must, in the exercise of his rights and in the performance of
his duties, act with justice, give everyone his due, and observe honesty and good
faith."
(2) If the period has a separate consideration, a contract of "option" is
deemed perfected, and it would be a breach of that contract to withdraw the offer
during the agreed period. The option, however, is an independent contract by itself,
and it is to be distinguished from the projected main agreement (subject matter of the
option) which is obviously yet to be concluded. If, in fact, the optioner-
offeror withdraws the offer before its acceptance (exercise of the option) by the
optionee-offeree, the latter may not sue for specific performance on the proposed
contract ("object" of the option) since it has failed to reach its own stage of perfection.
The optioner-offeror, however, renders himself liable for damages for breach of the
option. In these cases, care should be taken of the real nature of
the consideration given, for if, in fact, it has been intended to be part of the
consideration for the main contract with a right of withdrawal on the part of the
optionee, the main contract could be deemed perfected; a similar instance would be
an "earnest money" in a contract of sale that can evidence its perfection (Art. 1482,
Civil Code).
In the law on sales, the so-called "right of first refusal" is an innovative juridical
relation. Needless to point out, it cannot be deemed a perfected contract of sale under
Article 1458 of the Civil Code. Neither can the right of first refusal, understood in its
normal concept, per se be brought within the purview of an option under the second
paragraph of Article 1479, aforequoted, or possibly of an offer under Article 1319 9 of
the same Code. An option or an offer would require, among other things, 10 a clear
certainty on both the object and the cause or consideration of the envisioned contract.
In a right of first refusal, while the object might be made determinate, the exercise of
the right, however, would be dependent not only on the grantor's eventual intention to
enter into a binding juridical relation with another but also on terms, including the
price, that obviously are yet to be later firmed up. Prior thereto, it can at best be so
described as merely belonging to a class of preparatory juridical relations governed
not by contracts (since the essential elements to establish the vinculum juris would still
be indefinite and inconclusive) but by, among other laws of general application, the
pertinent scattered provisions of the Civil Code on human conduct.
Even on the premise that such right of first refusal has been decreed under a final
judgment, like here, its breach cannot justify correspondingly an issuance of a writ of
execution under a judgment that merely recognizes its existence, nor would it sanction
an action for specific performance without thereby negating the indispensable element
of consensuality in the perfection of contracts.11 It is not to say, however, that the right
of first refusal would be inconsequential for, such as already intimated above, an
unjustified disregard thereof, given, for instance, the circumstances expressed in
Article 1912 of the Civil Code, can warrant a recovery for damages.
The final judgment in Civil Case No. 87-41058, it must be stressed, has merely
accorded a "right of first refusal" in favor of petitioners. The consequence of such a
declaration entails no more than what has heretofore been said. In fine, if, as it is here
so conveyed to us, petitioners are aggrieved by the failure of private respondents to
honor the right of first refusal, the remedy is not a writ of execution on the judgment,
since there is none to execute, but an action for damages in a proper forum for the
purpose.
Furthermore, whether private respondent Buen Realty Development Corporation, the
alleged purchaser of the property, has acted in good faith or bad faith and whether or
not it should, in any case, be considered bound to respect the registration of the lis
pendens in Civil Case No. 87-41058 are matters that must be independently
addressed in appropriate proceedings. Buen Realty, not having been impleaded in
Civil Case No. 87-41058, cannot be held subject to the writ of execution issued by
respondent Judge, let alone ousted from the ownership and possession of the
property, without first being duly afforded its day in court.
We are also unable to agree with petitioners that the Court of Appeals has erred in
holding that the writ of execution varies the terms of the judgment in Civil Case No.
87-41058, later affirmed in CA-G.R. CV-21123. The Court of Appeals, in this regard,
has observed:
Finally, the questioned writ of execution is in variance with the
decision of the trial court as modified by this Court. As already
stated, there was nothing in said decision 13 that decreed the
execution of a deed of sale between the Cu Unjiengs and
respondent lessees, or the fixing of the price of the sale, or the
cancellation of title in the name of petitioner (Limpin vs. IAC, 147
SCRA 516; Pamantasan ng Lungsod ng Maynila vs. IAC, 143
SCRA 311; De Guzman vs. CA, 137 SCRA 730; Pastor vs. CA,
122 SCRA 885).
It is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not
have decreed at the time the execution of any deed of sale between the Cu Unjiengs
and petitioners.
WHEREFORE, we UPHOLD the Court of Appeals in ultimately setting aside the
questioned Orders, dated 30 August 1991 and 27 September 1991, of the court a quo.
Costs against petitioners. FIRST DIVISION

SO ORDERED.
SPOUSES GOMER and G.R. No. 145330
LEONOR RAMOS,
Petitioners, Present:
Davide, Jr., C.J.,
Chairman,
Quisumbing,
- versus - Ynares-Santiago,
Carpio, and
Azcuna, JJ.
SPOUSES SANTIAGO and
MINDA HERUELA, and Promulgated:
SPOUSES CHERRY and
RAYMOND PALLORI,
Respondents. October 14, 2005

x-- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CARPIO, J.:

The Case

Before the Court is a petition for review[1] assailing the Decision[2] dated 23 August 2000
and the Order dated 20 September 2000 of the Regional Trial Court (trial court) of
Misamis Oriental, Branch 21, in Civil Case No. 98-060. The trial court dismissed the
plaintiffs action for recovery of ownership with damages.

The Antecedent Facts

The spouses Gomer and Leonor Ramos (spouses Ramos) own a parcel of land,
consisting of 1,883 square meters, covered by Transfer Certificate of Title (TCT) No.
16535 of the Register of Deeds of Cagayan de Oro City. On 18 February 1980, the
spouses Ramos made an agreement with the spouses Santiago and Minda Heruela
(spouses Heruela)[3] covering 306 square meters of the land (land). According to the
spouses Ramos, the agreement is a contract of conditional sale. The spouses Heruela
allege that the contract is a sale on installment basis.

On 27 January 1998, the spouses Ramos filed a complaint for Recovery of Ownership
with Damages against the spouses Heruela. The case was docketed as Civil Case No.
98-060. The spouses Ramos allege that out of the P15,300[4] consideration for the sale
of the land, the spouses Heruela paid only P4,000. The last installment that the spouses
Heruela paid was on 18 December 1981. The spouses Ramos assert that the spouses
Heruelas unjust refusal to pay the balance of the purchase price caused the cancellation
of the Deed of Conditional Sale. In June 1982, the spouses Ramos discovered that the
spouses Heruela were already occupying a portion of the land. Cherry and Raymond
Pallori (spouses Pallori), daughter and son-in-law, respectively, of the spouses Heruela,
erected another house on the land. The spouses Heruela and the spouses Pallori
refused to vacate the land despite demand by the spouses Ramos.
The spouses Heruela allege that the contract is a sale on installment basis. They
paid P2,000 as down payment and made the following installment payments:
31 March 1980 P200
2 May 1980 P400 (for April and May 1980)
20 June 1980 P200 (for June 1980)
8 October 1980 P500 (for July, August and part of
September 1980)
5 March 1981 P400 (for October and November
1980)
18 December 1981 P300 (for December 1980 and
part of January 1981)
The spouses Heruela further allege that the 306 square meters specified in
the contract was reduced to 282 square meters because upon subdivision of the land,
24 square meters became part of the road. The spouses Heruela claim that in March
1982, they expressed their willingness to pay the balance of P11,300 but the spouses
Ramos refused their offer.
The Ruling of the Trial Court
In its Decision[5] dated 23 August 2000, the trial court ruled that the contract is a sale by
installment. The trial court ruled that the spouses Ramos failed to comply with Section
4 of Republic Act No. 6552 (RA 6552),[6] as follows:
SEC. 4. In case where less than two years of installments were paid, the seller
shall give the buyer a grace period of not less than sixty days from the date the
installment became due. If the buyer fails to pay the installments due at the expiration
of the grace period, the seller may cancel the contract after thirty days from receipt by
the buyer of the notice of cancellation or the demand for rescission of the contract by a
notarial act.
The dispositive portion of the Decision reads:
WHEREFORE, the complaint is hereby dismissed and plaintiff[s] are ordered to execute
the corresponding Deed of Sale in favor of defendants after the latter have paid the
remaining balance of Eleven Thousand and Three Hundred Pesos (P11,300.00).
Plaintiffs are further ordered to pay defendants the sum of P20,000.00, as Attorneys
fees and P10,000.00 as litigation expenses.
SO ORDERED.[7]
In an Order[8] dated 20 September 2000, the trial court denied the spouses Ramos
motion for reconsideration.
Hence, this petition.
The Issues
The spouses Ramos raise the following issues:
I. Whether RA 6552 is applicable to an absolute sale of land;
II. Whether Articles 1191 and 1592 of the Civil Code are applicable to the present case;
III. Whether the spouses Ramos have a right to cancel the sale;
IV. Whether the spouses Heruela have a right to damages.[9]
The Ruling of the Court
The petition is partly meritorious.
The Agreement is a Contract to Sell
In its Decision, the trial court ruled on whether the contract made by the
parties is a conditional sale or a sale on installment. The spouses Ramos premise is
that since the trial court ruled that the contract is a sale on installment, the trial court
also in effect declared that the sale is an absolute sale. The spouses Ramos allege that
RA 6552 is not applicable to an absolute sale.
Article 1458 of the Civil Code provides that a contract of sale may be absolute
or conditional. A contract of sale is absolute when title to the property passes to the
vendee upon delivery of the thing sold.[10] A deed of sale is absolute when there is no
stipulation in the contract that title to the property remains with the seller until full
payment of the purchase price.[11] The sale is also absolute if there is no stipulation
giving the vendor the right to cancel unilaterally the contract the moment the vendee
fails to pay within a fixed period.[12] In a conditional sale, as in a contract to sell,
ownership remains with the vendor and does not pass to the vendee until full payment
of the purchase price.[13] The full payment of the purchase price partakes of a
suspensive condition, and non-fulfillment of the condition prevents the obligation to sell
from arising.[14]
 In this case, the agreement of the parties is embodied in a one-page,
handwritten document.[15] The document does not contain the usual terms and
conditions of a formal deed of sale. The original document, elevated to this Court as
part of the Records, is torn in part. Only the words LMENT BASIS is legible on the title.
The names and addresses of the parties and the identity of the property cannot be
ascertained. The agreement only provides for the following terms of the sale:
TERM[S] OF SALE:
PRICE PER SQM P50.00 X 306 SQM P 15,300.00
DOWN PAYMENT (TWO THOUSAND PESOS) 2,000.00
BALANCE PAYABLE AT MINIMUM OF P200.00 P 13,300.00
PER MONTH UNTIL FULLY PAID =======
In Manuel v. Rodriguez, et al.,[16] the Court ruled that to be a written contract,
all the terms must be in writing, so that a contract partly in writing and partly oral is in
legal effect an oral contract. The Court reiterated the Manuel ruling in Alfonso v. Court
of Appeals:[17]
xxx In Manuel, only the price and the terms of payment were in writing, but
the most important matter in the controversy, the alleged transfer of title was never
reduced to any written document.[] It was held that the contract should not be
considered as a written but an oral one; not a sale but a promise to sell; and that the
absence of a formal deed of conveyance was a strong indication that the parties did not
intend immediate transfer of title, but only a transfer after full payment of the price. Under
these circumstances, the Court ruled Article 1504 of the Civil Code of 1889 (Art. 1592
of the present Code) to be inapplicable to the contract in controversy a contract to sell
or promise to sell where title remains with the vendor until fulfillment of a positive
suspensive condition, such as full payment of the price x x [x].
The records show that the spouses Heruela did not immediately take actual,
physical possession of the land. According to the spouses Ramos, in March 1981, they
allowed the niece of the spouses Heruela to occupy a portion of the land. Indeed, the
spouses Ramos alleged that they only discovered in June 1982 that the spouses
Heruela were already occupying the land. In their answer to the complaint, the spouses
Heruela and the spouses Pallori alleged that their occupation of the land is lawful
because having made partial payments of the purchase price, they already considered
themselves owners of the land.[18] Clearly, there was no transfer of title to the spouses
Heruela. The spouses Ramos retained their ownership of the land. This only shows that
the parties did not intend the transfer of ownership until full payment of the purchase
price.
RA 6552 is the Applicable Law
The trial court did not err in applying RA 6552 to the present case.
Articles 1191[19] and 1592[20] of the Civil Code are applicable to contracts of sale. In
contracts to sell, RA 6552 applies. In Rillo v. Court of Appeals,[21] the Court declared:
xxx Known as the Maceda Law, R.A. No. 6552 recognizes in conditional sales of all
kinds of real estate (industrial, commercial, residential) the right of the seller to cancel
the contract upon non-payment of an installment by the buyer, which is simply an event
that prevents the obligation of the vendor to convey title from acquiring binding force. It
also provides the right of the buyer on installments in case he defaults in the payment
of succeeding installments xxx.
Sections 3 and 4 of RA 6552 provide:
Sec. 3. In all transactions or contracts involving the sale or financing of real estate on
installment payments, including residential condominium apartments but excluding
industrial lots, commercial buildings and sales to tenants under Republic Act Numbered
Thirty-eight hundred forty-four as amended by Republic Act Numbered Sixty-three
hundred eighty-nine, where the buyer has paid at least two years of installments, the
buyer is entitled to the following rights in case he defaults in the payment of succeeding
installments:
(a) To pay, without additional interest, the unpaid installments due within the total grace
period earned by him, which is hereby fixed at the rate of one month grace period for
every one year of installment payments made: Provided, That this right shall be
exercised by the buyer only once in every five years of the life of the contract and its
extensions, if any.
(b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender value
of the payments on the property equivalent to fifty per cent of the total payments made
and, after five years of installments, an additional five per cent every year but not to
exceed ninety per cent of the total payments made: Provided, That the actual
cancellation of the contract shall take place after thirty days from receipt by the buyer of
the notice of cancellation or the demand for rescission of the contract by a notarial act
and upon full payment of the cash surrender value to the buyer.
Down payments, deposits or options on the contract shall be included in the
computation of the total number of installments made.
Sec. 4. In case where less than two years of installments were paid, the seller shall give
the buyer a grace period of not less than sixty days from the date the installment became
due. If the buyer fails to pay the installments due at the expiration of the grace period,
the seller may cancel the contract after thirty days from receipt by the buyer of the notice
of cancellation or the demand for rescission of the contract by a notarial act.
In this case, the spouses Heruela paid less than two years of installments.
Thus, Section 4 of RA 6552 applies. However, there was neither a notice of cancellation
nor demand for rescission by notarial act to the spouses Heruela. In Olympia Housing,
Inc. v. Panasiatic Travel Corp.,[22] the Court ruled that the vendor could go to court to
demand judicial rescission in lieu of a notarial act of rescission. However, an action for
reconveyance is not an action for rescission. The Court explained in Olympia:
 The action for reconveyance filed by petitioner was predicated on an
assumption that its contract to sell executed in favor of respondent buyer had been
validly cancelled or rescinded. The records would show that, indeed, no such
cancellation took place at any time prior to the institution of the action for reconveyance.
xxx
xxx
xxx Not only is an action for reconveyance conceptually different from an action for
rescission but that, also, the effects that flow from an affirmative judgment in either case
would be materially dissimilar in various respects. The judicial resolution of a contract
gives rise to mutual restitution which is not necessarily the situation that can arise in an
action for reconveyance. Additionally, in an action for rescission (also often termed as
resolution), unlike in an action for reconveyance predicated on an extrajudicial
rescission (rescission by notarial act), the Court, instead of decreeing rescission, may
authorize for a just cause the fixing of a period.[23]
In the present case, there being no valid rescission of the contract to sell, the action for
reconveyance is premature. Hence, the spouses Heruela have not lost the statutory
grace period within which to pay. The trial court should have fixed the grace period to
sixty days conformably with Section 4 of RA 6552.
The spouses Heruela are not entirely fault-free. They have been remiss in
performing their obligation. The trial court found that the spouses Heruela offered once
to pay the balance of the purchase price. However, the spouses Heruela did not consign
the payment during the pendency of the case. In the meanwhile, the spouses Heruela
enjoyed the use of the land.
The trial court ordered the spouses Ramos to pay the spouses Heruela and the spouses
Pallori the amount of P20,000 as attorneys fees and P10,000 as litigation expenses.
Article 2208[28] of the Civil Code provides that subject to certain exceptions, attorneys
fees and expenses of litigation, other than judicial costs, cannot be recovered in the
absence of stipulation. None of the enumerated exceptions applies to this case. Further,
the policy of the law is to put no premium on the right to litigate. [29] Hence, the award of
attorneys fees and litigation expenses should be deleted.
WHEREFORE, we AFFIRM the Decision dated 23 August 2000 of the
Regional Trial Court of Misamis Oriental, Branch 21, dismissing the complaint for
Recovery of Ownership with Damages, with the following MODIFICATION:
1. The spouses Heruela shall pay the spouses Ramos P11,300 as balance of the
purchase price plus interest at 6% per annum from 27 January 1998. The spouses
Heruela shall pay within 60 days from finality of this Decision;
2. Upon payment, the spouses Ramos shall execute a deed of absolute sale of the land
and deliver the certificate of title in favor of the spouses Heruela;
3. In case of failure to thus pay within 60 days from finality of this Decision, the spouses
Heruela and the spouses Pallori shall immediately vacate the premises without need of
further demand, and the down payment and installment payments of P4,000 paid by the
spouses Heruela shall constitute rental for the land;
4. The award of P20,000 as attorneys fees and P10,000 as litigation expenses in favor of
the spouses Heruela and the spouses Pallori is deleted.
SO ORDERED.

For the breach of obligation, the court, in its discretion, and applying Article
2209 of the Civil Code,[24] may award interest at the rate of 6% per annum on the amount
of damages.[25] The spouses Heruela have been enjoying the use of the land since 1982.
In 1995, they allowed their daughter and son-in-law, the spouses Pallori, to construct a
house on the land. Under the circumstances, the Court deems it proper to award interest
at 6% per annum on the balance of the purchase price.
The records do not show when the spouses Ramos made a demand from the
spouses Heruela for payment of the balance of the purchase price. The complaint only
alleged that the spouses Heruelas unjust refusal to pay in full the purchase price xxx
has caused the Deed of Conditional Sale to be rescinded, revoked and annulled.[26] The
complaint did not specify when the spouses Ramos made the demand for payment. For
purposes of computing the legal interest, the reckoning period should be the filing on 27
January 1998 of the complaint for reconveyance, which the spouses Ramos
erroneously considered an action for rescission of the contract.

The Court notes the reduction of the land area from 306 square meters to 282
square meters. Upon subdivision of the land, 24 square meters became part of the road.
However, Santiago Heruela expressed his willingness to pay for the 306 square meters
agreed upon despite the reduction of the land area.[27] Thus, there is no dispute on the
amount of the purchase price even with the reduction of the land area.

On the Award of Attorneys Fees and Litigation Expenses


SECOND DIVISION
[G.R. No. 158646. June 23, 2005]
HEIRS OF JESUS M. MASCUANA, represented by JOSE MA. R.
MASCUANA, petitioners, vs. COURT OF APPEALS, AQUILINO BARTE,
and SPOUSES RODOLFO and CORAZON LAYUMAS, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision[1] of the Court of Appeals
(CA) in CA-G.R. CV No. 53117 affirming the Decision[2] of the Regional Trial Court
(RTC) of San Carlos City, Negros Occidental, which ordered the dismissal of the
petitioners complaint for recovery of possession and damages.
The Antecedents
Gertrudis Wuthrich and her six other siblings were the co-owners of a parcel of
land identified as Lot No. 124 of the San Carlos City, Negros Occidental Cadastre, with
an area of 1,729 square meters and covered by Transfer Certificate of Title (TCT) No.
1453-R (T-29937)-38.[3] Over time, Gertrudis and two other co-owners sold each of their
one-seventh (1/7) shares, or a total area of 741 square meters, to Jesus Mascuana.
The latter then sold a portion of his 140-square-meter undivided share of the property
to Diosdado Sumilhig. Mascuana later sold an additional 160-square-meter portion to
Sumilhig on April 7, 1961. However, the parties agreed to revoke the said deed of sale
and, in lieu thereof, executed a Deed of Absolute Sale on August 12, 1961. In the said
deed, Mascuana, as vendor, sold an undivided 469-square-meter portion of the property
for P4,690.00, with P3,690.00 as down payment, and under the following terms of
payment:
That the balance of ONE THOUSAND PESOS (P1,000.00) shall be paid by the
VENDEE unto the VENDOR as soon as the above-portions of Lot 124 shall have been
surveyed in the name of the VENDEE and all papers pertinent and necessary to the
issuance of a separate Certificate of Title in the name of the VENDEE shall have been
prepared.[4]
On December 31, 1961, Mascuana and Jose G. Estabillo executed a Deed of
Exchange and Absolute Sale of Real Estate,[5] in which Estabillo deeded to Mascuana
a portion of his property abutting that of Sumilhig on the southeast.
In the meantime, a survey was conducted for the co-owners of Lot No. 124 on
July 9, 1962. The subdivision plan of the said lot was approved by the Director of Lands
on August 2, 1962. The portion of the property deeded to Sumilhig was identified in the
said plan as Lot No. 124-B.[6]
Meanwhile, Mascuana died intestate on April 20, 1965 and was survived by his
heirs, Eva M. Ellisin, Renee Hewlett, Carmen Vda. de Opea, Marilou Dy and Jose Ma.
R. Mascuana.
On April 24, 1968, Sumilhig executed a Deed of Sale of Real Property[7] on a
portion of Lot No. 124-B with an area of 469 square meters and the improvements
thereon, in favor of Corazon Layumas, the wife of Judge Rodolfo Layumas, for the price
of P11,000.00. The spouses Layumas then had the property subdivided into two lots:
Lot No. 124-B-2 with an area of 71 square meters under the name of Jesus Mascuana,
and Lot No. 124-B-1, with an area of 469 square meters under their names.[8] The
spouses Layumas took possession of the property and caused the cutting of tall grasses
thereon. Upon the plea of a religious organization, they allowed a chapel to be
constructed on a portion of the property.[9] In January 1985, the spouses Layumas
allowed Aquilino Barte to stay on a portion of the property to ward off squatters.[10] Barte
and his kin, Rostom Barte, then had their houses constructed on the property.
On October 1, 1985, the spouses Layumas received a Letter[11] from the counsel
of Renee Tedrew, offering to buy their share of the property for US$1,000.00. For her
part, Corazon Layumas wrote Pepito Mascuana, offering to pay the amount
of P1,000.00, the balance of the purchase price of the property under the deed of
absolute sale executed by Mascuana and Sumilhig on August 12, 1961. [12] However,
the addressee refused to receive the mail matter.[13]
Unknown to the spouses Layumas, TCT No. 8986[14] was issued over Lot No.
124-B in the name of Jesus Mascuana on March 17, 1986.
On November 17, 1986, the heirs of Mascuana filed a Complaint [15] for recovery
of possession of Lot No. 124-B and damages with a writ of preliminary injunction,
alleging that they owned the subject lot by virtue of successional rights from their
deceased father. They averred that Barte surreptitiously entered the premises, fenced
the area and constructed a house thereon without their consent. Attached as annexes
to the complaint were TCT No. 8986 and a certification[16] from the Office of the City
Treasurer, Land Tax Division, vouching that the property in question was owned by the
petitioners and that they had paid the taxes thereon until 1992.
In his answer to the complaint, Barte admitted having occupied a portion of Lot
No. 124-B, but claimed that he secured the permission of Rodolfo Layumas, the owner
of the subject property. He added that he did not fence the property, and that the
petitioners did not use the same as a passageway in going to Broce Street from their
house. Barte raised the following special defenses: (a) the petitioners were estopped
from asserting ownership over the lot in question because they did not object when he
occupied the said portion of the lot; (b) neither did the petitioners protest when a church
was built on the property, or when residential houses were constructed thereon; (c) the
petitioners still asked Barte and the other occupants whether they had notified Rodolfo
Layumas of the constructions on the property; and (d) the heirs of Mascuana, through
the lawyer of Mrs. Renee M. Tedrew, even wrote a letter[17] to Rodolfo Layumas on
October 1, 1985, expressing her willingness to buy the subject property for
US$1,000.00.
On April 8, 1991, the spouses Layumas filed a Motion for Leave to
Intervene,[18] alleging therein that they had a legal interest in Lot No. 124-B-1 as its
buyers from Sumilhig, who in turn purchased the same from Mascuana. In their answer
in intervention,[19] the spouses Layumas alleged that they were the true owners of the
subject property and that they had wanted to pay the taxes thereon, but the Land Tax
clerk refused to receive their payments on account that the petitioners had already made
such payment. The spouses Layumas further maintained that the petitioners had no
cause of action against Barte, as they had authorized him to occupy a portion of Lot No.
124-B-1. The spouses Layumas also averred that the petitioners were estopped from
denying their right of ownership and possession of the subject lot, as one of them had
even offered to repurchase a portion of Lot No. 124-B via letter. The said spouses
interposed a counterclaim for damages, claiming ownership over the property, and
prayed, thus:
WHEREFORE, it is most respectfully prayed that this HONORABLE COURT render
judgment in favor of the Intervenors and the defendant Aquilino Barte, ordering:
1. That the complaint against Aquilino Barte be dismissed with costs against
the plaintiff;
2. That the Intervenors spouses Judge Rodolfo S. Layumas and Corazon
A. Layumas be declared as the legal and true owners of Lot 124-B;
3. That the plaintiffs should deliver immediately to the Intervenors, TCT No.
8986 which is in their possession;
4. That the plaintiffs be made to pay to the Intervenors the sum of THIRTY
THOUSAND (P30,000.00) PESOS moral damages; TEN THOUSAND
(P10,000.00) PESOS attorneys fees plus THREE HUNDRED
(P300.00) PESOS as appearance fee per hearing.
Intervenors pray for such other relief and remedies as may be deemed by this
Honorable Court as just and equitable in the premises.
At the trial, intervenor Rodolfo Layumas testified that he and his wife bought the
subject property in 1968, and that nobody objected to their possession of the land,
including the petitioners. In 1970, a religious organization asked his permission to
construct a chapel on the disputed lot; he allowed the construction since the same would
be used for the fiesta. He further declared that part of the chapel still stood on the
property. In 1985, a fire razed the towns public market, thereby dislocating numerous
people. Barte was one of the fire victims, who also happened to be a good friend and
political supporter of Rodolfo. Out of goodwill, Barte was allowed to occupy a portion of
the said lot, along with some other fire victims. Rodolfo clarified that the others were to
stay there only on a temporary basis, but admitted that Bartes children also stayed in
the subject property.[20]
Rodolfo Layumas further narrated that in 1987, Corazon wrote one of the
petitioners-heirs, Pepito Mascuana, requesting that the title of the lot be transferred in
Sumilhigs name so that they could likewise arrange for the conveyance of the title in
their names. Pepito failed to claim the letter, and thereafter, filed a case of ejectment
against Barte and Rodolfo Layumas brother-in-law, Pepito Antonio. The case, the
witness added, was dismissed as against the two parties. Offered in evidence were the
following: a Sworn Statement on the Current and Fair Market Value of the Real Property
issued in 1973 as required by Presidential Decree No. 76, and tax receipts.[21]
Rodolfo Layumas admitted on cross-examination that at the time they bought the
property from Sumilhig, the title was still in the possession of the Wuthrich family. He
added that he filed an adverse claim before the Register of Deeds of San Carlos City,
Negros Occidental, on Lot No. 124-B in January 1986, or after the case had already
been filed in court. Lastly, the witness deposed that he did not fence the property after
buying the same, but that his brother-in-law constructed a coco-lumber yard thereon
upon his authority.[22]
On January 30, 1996, the trial court rendered judgment in favor of Barte and the
spouses Layumas. The fallo of the decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of
Intervenors-counterclaimants and defendant and against plaintiffs-counterclaim
defendants ordering as follows:
1. The dismissal of the plaintiffs complaint with costs against them;
2. The plaintiffs to jointly pay Intervenors-counterclaimants now RTC Judge
Rodolfo S. Layumas and Corazon A. Layumas:
(a) P10,000.00 for attorneys fees; and
(b) P30,000.00 as moral damages;
3. The plaintiffs, as counterclaim defendants, to comply with the above-
stated obligation of their late father, Mr. Jesus Mascuana, under the
Deed of Absolute Sale, Exh. 3, pp. 92-93, Exp., thru plaintiff Mr. Jose
Mascuana, including the desegragation (sic) survey to desegregate the
469-square-meter portion of said Lot No. 124-B, San Carlos Cadastre,
this province, sold to the late Diosdado Sumilhig, if the same has not
yet been done despite what has been said herein earlier to said effect,
and the execution of the Final Deed of Sale in their capacity as the heirs
and successors-in-interest of the late Mr. Jesus Mascuana, thru Mr.
Jose Mascuana, covering the 469-square-meter desegregated portion
of said Lot No. 124-B, within sixty (60) days counted from the finality of
this Decision, in favor of the Intervenors-spouses, after which the said
Intervenors-spouses shall pay them, thru Mr. Jose Mascuana,
the P1,000.00 balance due to them as successors-in-interest of the late
Mr. Jesus Mascuana;
 4. In case plaintiffs fail to comply with what are herein ordered for them to
do, the Clerk of Court V of this Court to do all that they were to do as
herein ordered in the text and dispositive portion hereof, at the expense
of Intervenors spouses to be later reimbursed by plaintiffs, including the
desegragation (sic) survey of said 469-square-meter portion of said Lot
[No.] 124-B, San Carlos Cadastre, Negros Occidental, if the same has
not yet been done and the execution of the Final Deed of Sale on behalf
of all the plaintiffs as heirs and successors-in-interest of the late Mr.
Jesus Mascuana covering the said desegregated portion of 469 square
meters of the aforesaid lot, in favor of Intervenors spouses, to the end
that separate title therefor may be issued in their names, after they shall
have paid the P1,000.00 balance due plaintiffs under said Deed of
Absolute Sale, Exh. 3.
SO ORDERED.[23]
Forthwith, the petitioners appealed the case to the CA, raising the following issues
of fact and law:
a. Whether or not the contract of alienation of Lot No. 124-B in favor of
Diosdado Sumilhig in 1961 was a contract to sell or a contract of sale;
b. Whether or not Diosdado Sumilhig had any right to sell Lot No. 124-B in
favor of intervenor Corazon Layumas in 1968.[24]
On May 5, 2003, the CA affirmed the decision of the trial court. It ruled that the
contract between the petitioners father and Sumilhig was one of sale. Foremost, the CA
explained, the contract was denominated as a Deed of Absolute Sale. The stipulations
in the contract likewise revealed the clear intention on the part of the vendor (Mascuana)
to alienate the property in favor of the vendee (Sumilhig). In three various documents,
the late Mascuana even made declarations that Sumilhig was already the owner of the
disputed land. The CA added that the admission may be given in evidence against
Mascuana and his predecessors-in-interest under Section 26, Rule 130 of the Revised
Rules on Evidence. As to the argument that the contract between Mascuana and
Sumilhig was not effective because it was subject to a suspensive condition that did not
occur, the CA ruled that the condition referred to by the petitioners refers only to the
payment of the balance of the purchase price and not to the effectivity of the contract.
As to the petitioners contention that even if the contract were one of sale,
ownership cannot be transferred to Sumilhig because Mascuana was not yet the owner
of the lot at the time of the alleged sale, the appellate court ruled that the registration of
the land to be sold is not a prerequisite to a contract of sale.
The Present Petition
Aggrieved, the petitioners filed the instant petition for review on certiorari with this
Court, where the following lone legal issue was raised:
WAS THE SALE OF LOT NO. 124-B MADE BY JESUS M. MASCUANA IN FAVOR
OF DIOSDADO SUMILHIG A CONTRACT TO SELL OR CONTRACT OF SALE?[25]
We note that the original action of the petitioners against Aquilino Barte was one
for recovery of possession of Lot No. 124-B. With the intervention of the respondents
Rodolfo and Corazon Layumas who claimed ownership over the property, and the
acquiescence of the parties, evidence was adduced to prove who, between the
petitioners (as plaintiffs) and the respondents (as defendants-intervenors) were the
lawful owners of the subject property and entitled to its possession.
The petitioners resolutely contend that the Deed of Absolute Sale dated August
12, 1961 between their father and Sumilhig was a mere contract to sell because at the
time of the said sale, the late Mascuana was not yet the registered owner of Lot No. 124
or any of its portions. They assert that Sumilhig could not have acquired any rights over
the lot due to the fact that a person can only sell what he owns or is authorized to sell,
and the buyer can acquire no more than what the seller can transfer legally. Finally, the
petitioners insist that the document in controversy was subject to a suspensive
condition, not a resolutory condition, which is a typical attribute of a contract of sale.
The petition is denied for lack of merit.
The issues raised by the petitioners in this case are factual, and under Rule 45 of
the Rules of Court, only questions of law may be raised in this Court, the reason being
that this Court is not a trier of facts. It is not to re-examine the evidence on record and
to calibrate the same. Moreover, the findings and conclusions of the trial court as
affirmed by the CA are conclusive on the Court, absent of any evidence that the trial
court, as well as the CA ignored, misinterpreted and misconstrued facts and
circumstances of substance which, if considered, would alter or reverse the outcome of
the case.[26]
We have reviewed the records and find no justification for a reversal or even a
modification of the assailed decision of the CA.
Even on the merits of the petition, the Court finds that the decision of the trial court
as well as the ruling of the CA are based on the evidence on record and the applicable
law.
The petitioners reiterated their pose that the deed of absolute sale over the
property executed by their father, Jesus Mascuana, as vendor, and Diosdado Sumilhig
as vendee, was a contract to sell and not a contract of sale. They assert that on its face,
the contract appears to be a contract to sell, because the payment of the P1,000.00
balance of the purchase price was subject to a suspensive condition: the survey of the
property, the segregation of the portion thereof subject of the sale, and the completion
of the documents necessary for the issuance of a Torrens title over the property to and
in the name of Sumilhig who was the vendee. The petitioners assert that Sumilhig never
paid the aforesaid amount to the vendor; hence, the obligation of the latter and his
predecessors-in-interest (herein petitioners) to execute a final deed of sale never arose.
As such, they aver, title to the property remained reserved in the vendor and his heirs
even after his death. There was no need for the vendor to rescind the deed or collect
the said amount of P1,000.00 under Article 1191 of the New Civil Code because such
a remedy applies only to contracts of sale. The petitioners insist that Sumilhig never
acquired title over the property; he could not have transferred any title to the
respondents. Sumilhig could not have transferred that which he did not own.
The petitioners contention has no factual and legal bases.
The deed of absolute sale executed by Jesus Mascuana and Sumilhig, provides,
thus:
That the VENDOR is the true and absolute owner of a parcel of land known as Lot No.
124 of the Cadastral Survey of San Carlos, situated at Broce Street and is free from
liens and encumbrances, and covered by O.C.T. No. T-299[3]7 (R-1453) of Reg. of
Deeds, Negros Occ.
That for and in consideration of the sum of FOUR THOUSAND SIX HUNDRED
NINETY PESOS (P4,690.00), Philippine Currency, to be paid by the VENDEE in the
manner hereinafter stated, the VENDOR does hereby sell, transfer, cede and convey,
a portion of the above-described property containing an area of 469 square meters,
the sketch of which can be found at the back of this document and having a frontage
at Broce Street of around 14 meters, and from the Broce Street to the interior on its
Southwest side with a length of 30.9 meters, with a length of 24.8 meters on its
Northeast side where it turned to the right with a length of 2.8 meters and continuing to
Northwest with a length of 6.72 meters, the backyard dimension is 17.5 meters to the
Northwest, unto the VENDEE, his heirs and assigns, by way of Absolute Sale, upon
the receipt of the down payment of THREE THOUSAND SIX HUNDRED NINETY
PESOS (P3,690.00), which is hereby acknowledged by the VENDOR as received by
him.
That the balance of ONE THOUSAND PESOS (P1,000.00) shall be paid by the
VENDEE unto the VENDOR as soon as the above-portions of Lot 124 shall have been
surveyed in the name of the VENDEE and all papers pertinent and necessary to the
issuance of a separate Certificate of Title in the name of the VENDEE shall have been
prepared.
The evidence on record shows that during the lifetime of vendor Jesus Mascuana,
and even after his death, his heirs, the petitioners herein, unequivocably declared that
Diosdado Sumilhig was the owner of the property subject of this case, and that the
respondents acquired title over the property, having purchased the same via a deed of
absolute sale from Diosdado Sumilhig. Thus, on December 31, 1961, Jesus Mascuana
and Jose Estabillo executed a Deed of Exchange and Absolute Sale of Real Estate, in
which both parties declared that they were co-owners of portions of Lot No. 124 abutted
by the property owned by Diosdado Sumilhig.[27]
In the subdivision plan of Lot No. 124, signed by Ricardo Quilop, Private Land
Surveyor, following his survey of Lot No. 124 on July 9, 1962 for and in behalf of Jesus
Mascuana, et al., it appears that Lot No. 124-B with an area of 540 square meters
belonged to Diosdado Sumilhig,[28] which is abutted by Lot No. 124-C, owned by Jesus
Mascuana.
On October 1, 1985, long after the death of Jesus Mascuana, one of his heirs,
petitioner Renee Tedrew, through counsel, wrote respondent Rodolfo Layumas offering
to buy the property occupied by his overseer Aquilino Barte for US$1,000.00:
ATTY. RODOLFO S. LAYUMAS
San Carlos City
Negros Occidental
Dear Atty. Layumas:
This has reference to the lot located at Broce Street, portions of which are presently
occupied by Mr. Barte.
Mrs. Renee Tedrew (nee Agapuyan), who is now in the United States, would like to
offer the amount of $1,000.00 to buy your share of the said lot.
If you are amenable, kindly inform the undersigned for him to communicate [with] Mrs.
Tedrew in California.
It was only after the respondents rejected the proposal of petitioner Renee Tedrew
that the petitioners secured title over the property on March 17, 1986 in the name of
Jesus Mascuana (already deceased at the time), canceling TCT No. 967 issued on July
6, 1962 under the name of Jesus Mascuana, who appears to be a co-owner of Lot No.
124 with an undivided two-seventh (2/7) portion thereof.[30]
While it is true that Jesus Mascuana executed the deed of absolute sale over the
property on August 12, 1961 in favor of Diosdado Sumilhig for P4,690.00, and that it
was only on July 6, 1962 that TCT No. 967 was issued in his name as one of the co-
owners of Lot No. 124, Diosdado Sumilhig and the respondents nevertheless acquired
ownership over the property. The deed of sale executed by Jesus Mascuana in favor of
Diosdado Sumilhig on August 12, 1961 was a perfected contract of sale over the
property. It is settled that a perfected contract of sale cannot be challenged on the
ground of the non-transfer of ownership of the property sold at that time of the perfection
of the contract, since it is consummated upon delivery of the property to the vendee. It
is through tradition or delivery that the buyer acquires ownership of the property sold.
As provided in Article 1458 of the New Civil Code, when the sale is made through a
public instrument, the execution thereof is equivalent to the delivery of the thing which
is the object of the contract, unless the contrary appears or can be inferred. The record
of the sale with the Register of Deeds and the issuance of the certificate of title in the
name of the buyer over the property merely bind third parties to the sale. As between
the seller and the buyer, the transfer of ownership takes effect upon the execution of a
public instrument covering the real property.[31] Long before the petitioners secured a
Torrens title over the property, the respondents had been in actual possession of the
property and had designated Barte as their overseer.
Article 1458 of the New Civil Code provides:
By the contract of sale, one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price
certain in money or its equivalent.
A contract of sale may be absolute or conditional.
Thus, there are three essential elements of sale, to wit:
a) Consent or meeting of the minds, that is, consent to transfer ownership
in exchange for the price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.[32]
In this case, there was a meeting of the minds between the vendor and the
vendee, when the vendor undertook to deliver and transfer ownership over the property
covered by the deed of absolute sale to the vendee for the price of P4,690.00 of
which P3,690.00 was paid by the vendee to the vendor as down payment. The vendor
undertook to have the property sold, surveyed and segregated and a separate title
therefor issued in the name of the vendee, upon which the latter would be obliged to
pay the balance of P1,000.00. There was no stipulation in the deed that the title to the
property remained with the vendor, or that the right to unilaterally resolve the contract
upon the buyers failure to pay within a fixed period was given to such vendor. Patently,
the contract executed by the parties is a deed of sale and not a contract to sell. As the
Court ruled in a recent case:
In Dignos v. Court of Appeals (158 SCRA 375), we have said that, although
denominated a Deed of Conditional Sale, a sale is still absolute where the contract is
devoid of any proviso that title is reserved or the right to unilaterally rescind is
stipulated, e.g., until or unless the price is paid. Ownership will then be transferred to
the buyer upon actual or constructive delivery (e.g. by the execution of a public
document) of the property sold. Where the condition is imposed upon the perfection of
the contract itself, the failure of the condition would prevent such perfection. If the
condition is imposed on the obligation of a party which is not fulfilled, the other party
may either waive the condition or refuse to proceed with the sale. (Art. 1545, Civil
Code)
Thus, in one case, when the sellers declared in a Receipt of Down Payment that they
received an amount as purchase price for a house and lot without any reservation of
title until full payment of the entire purchase price, the implication was that they sold
their property. In Peoples Industrial and Commercial Corporation v. Court of
Appeals, it was stated:
A deed of sale is considered absolute in nature where there is neither a stipulation in
the deed that title to the property sold is reserved in the seller until full payment of the
price, nor one giving the vendor the right to unilaterally resolve the contract the
moment the buyer fails to pay within a fixed period.
Applying these principles to this case, it cannot be gainsaid that the contract of sale
between the parties is absolute, not conditional. There is no reservation of ownership
nor a stipulation providing for a unilateral rescission by either party. In fact, the sale
was consummated upon the delivery of the lot to respondent. Thus, Art. 1477 provides
that the ownership of the thing sold shall be transferred to the vendee upon the actual
or constructive delivery thereof.[33]
The condition in the deed that the balance of P1,000.00 shall be paid to the
vendor by the vendee as soon as the property sold shall have been surveyed in the
name of the vendee and all papers pertinent and necessary to the issuance of a
separate certificate of title in the name of the vendee shall have been prepared is not a
condition which prevented the efficacy of the contract of sale. It merely provides the
manner by which the total purchase price of the property is to be paid. The condition did
not prevent the contract from being in full force and effect:
The stipulation that the payment of the full consideration based on a survey shall be
due and payable in five (5) years from the execution of a formal deed of sale is not a
condition which affects the efficacy of the contract of sale. It merely provides the
manner by which the full consideration is to be computed and the time within which
the same is to be paid. But it does not affect in any manner the effectivity of the
contract. [34]
In a contract to sell, ownership is retained by a seller and is not to be transferred
to the vendee until full payment of the price. Such payment is a positive suspensive
condition, the failure of which is not a breach of contract but simply an event that
prevented the obligation from acquiring binding force.[35]
It bears stressing that in a contract of sale, the non-payment of the price is a
resolutory condition which extinguishes the transaction that, for a time, existed and
discharges the obligation created under the transaction.[36] A seller cannot unilaterally
and extrajudicially rescind a contract of sale unless there is an express stipulation
authorizing it. In such case, the vendor may file an action for specific performance or
judicial rescission.[37]
Article 1169 of the New Civil Code provides that in reciprocal obligations, neither
party incurs in delay if the other does not comply or is not ready to comply in a proper
manner with what is incumbent upon him; from the moment one of the parties fulfills his
obligation, delay by the other begins. In this case, the vendor (Jesus Mascuana) failed
to comply with his obligation of segregating Lot No. 124-B and the issuance of a Torrens
title over the property in favor of the vendee, or the latters successors-in-interest, the
respondents herein. Worse, petitioner Jose Mascuana was able to secure title over the
property under the name of his deceased father.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit.
Costs against the petitioners.
SO ORDERED.

THIRD DIVISION
[G.R. No. 103577. October 7, 1996]
ROMULO A. CORONEL, ALARICO A. CORONEL, ANNETTE A. CORONEL,
ANNABELLE C. GONZALES (for herself and on behalf of Floraida C.
Tupper, as attorney-in-fact), CIELITO A. CORONEL, FLORAIDA A.
ALMONTE, and CATALINA BALAIS MABANAG, petitioners, vs. THE
COURT OF APPEALS, CONCEPCION D. ALCARAZ and RAMONA
PATRICIA ALCARAZ, assisted by GLORIA F. NOEL as attorney-in-
fact, respondents.
DECISION
MELO, J.:
The petition before us has its roots in a complaint for specific performance to
compel herein petitioners (except the last named, Catalina Balais Mabanag) to
consummate the sale of a parcel of land with its improvements located along Roosevelt
Avenue in Quezon City entered into by the parties sometime in January 1985 for the
price of P1,240,000.00.
The undisputed facts of the case were summarized by respondent court in this
wise:
On January 19, 1985, defendants-appellants Romulo Coronel, et. al. (hereinafter
referred to as Coronels) executed a document entitled Receipt of Down Payment
(Exh. A) in favor of plaintiff Ramona Patricia Alcaraz (hereinafter referred to as
Ramona) which is reproduced hereunder:
RECEIPT OF DOWN PAYMENT
P1,240,000.00 - Total amount
50,000.00 - Down payment
------------------------------------------
P1,190,000.00 - Balance
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of
Fifty Thousand Pesos purchase price of our inherited house and lot, covered by TCT
No. 119627 of the Registry of Deeds of Quezon City, in the total amount
of P1,240,000.00.
We bind ourselves to effect the transfer in our names from our deceased father,
Constancio P. Coronel, the transfer certificate of title immediately upon receipt of the
down payment above-stated.
On our presentation of the TCT already in or name, We will immediately execute the
deed of absolute sale of said property and Miss Ramona Patricia Alcaraz shall
immediately pay the balance of the P1,190,000.00.
Clearly, the conditions appurtenant to the sale are the following:
1. Ramona will make a down payment of Fifty Thousand (P50,000.00) pesos upon
execution of the document aforestated;
2. The Coronels will cause the transfer in their names of the title of the property
registered in the name of their deceased father upon receipt of the Fifty Thousand
(P50,000.00) Pesos down payment;
3. Upon the transfer in their names of the subject property, the Coronels will execute
the deed of absolute sale in favor of Ramona and the latter will pay the former the
whole balance of One Million One Hundred Ninety Thousand (P1,190,000.00) Pesos.
On the same date (January 15, 1985), plaintiff-appellee Concepcion D. Alcaraz
(hereinafter referred to as Concepcion), mother of Ramona, paid the down payment of
Fifty Thousand (P50,000.00) Pesos (Exh. B, Exh. 2).
On February 6, 1985, the property originally registered in the name of the Coronels
father was transferred in their names under TCT No. 327043 (Exh. D; Exh 4)
On February 18, 1985, the Coronels sold the property covered by TCT No. 327043 to
intervenor-appellant Catalina B. Mabanag (hereinafter referred to as Catalina) for One
Million Five Hundred Eighty Thousand (P1,580,000.00) Pesos after the latter has paid
Three Hundred Thousand (P300,000.00) Pesos (Exhs. F-3; Exh. 6-C)
For this reason, Coronels canceled and rescinded the contract (Exh. A) with Ramona
by depositing the down payment paid by Concepcion in the bank in trust for Ramona
Patricia Alcaraz.
On February 22, 1985, Concepcion, et. al., filed a complaint for a specific performance
against the Coronels and caused the annotation of a notice of lis pendens at the back
of TCT No. 327403 (Exh. E; Exh. 5).
On April 2, 1985, Catalina caused the annotation of a notice of adverse claim covering
the same property with the Registry of Deeds of Quezon City (Exh. F; Exh. 6).
On April 25, 1985, the Coronels executed a Deed of Absolute Sale over the subject
property in favor of Catalina (Exh. G; Exh. 7).
On June 5, 1985, a new title over the subject property was issued in the name of
Catalina under TCT No. 351582 (Exh. H; Exh. 8).
(Rollo, pp. 134-136)
In the course of the proceedings before the trial court (Branch 83, RTC, Quezon
City) the parties agreed to submit the case for decision solely on the basis of
documentary exhibits. Thus, plaintiffs therein (now private respondents) proffered their
documentary evidence accordingly marked as Exhibits A through J, inclusive of their
corresponding submarkings. Adopting these same exhibits as their own, then
defendants (now petitioners) accordingly offered and marked them as Exhibits 1 through
10, likewise inclusive of their corresponding submarkings. Upon motion of the parties,
the trial court gave them thirty (30) days within which to simultaneously submit their
respective memoranda, and an additional 15 days within which to submit their
corresponding comment or reply thereto, after which, the case would be deemed
submitted for resolution.
On April 14, 1988, the case was submitted for resolution before Judge Reynaldo
Roura, who was then temporarily detailed to preside over Branch 82 of the RTC of
Quezon City. On March 1, 1989, judgment was handed down by Judge Roura from his
regular bench at Macabebe, Pampanga for the Quezon City branch, disposing as
follows:
WHEREFORE, judgment for specific performance is hereby rendered ordering
defendant to execute in favor of plaintiffs a deed of absolute sale covering that parcel
of land embraced in and covered by Transfer Certificate of Title No. 327403 (now TCT
No. 331582) of the Registry of Deeds for Quezon City, together with all the
improvements existing thereon free from all liens and encumbrances, and once
accomplished, to immediately deliver the said document of sale to plaintiffs and upon
receipt thereof, the plaintiffs are ordered to pay defendants the whole balance of the
purchase price amounting to P1,190,000.00 in cash. Transfer Certificate of Title No.
331582 of the Registry of Deeds for Quezon City in the name of intervenor is hereby
canceled and declared to be without force and effect. Defendants and intervenor and
all other persons claiming under them are hereby ordered to vacate the subject
property and deliver possession thereof to plaintiffs. Plaintiffs claim for damages and
attorneys fees, as well as the counterclaims of defendants and intervenors are hereby
dismissed.
No pronouncement as to costs.
So Ordered.
Macabebe, Pampanga for Quezon City, March 1, 1989.
(Rollo, p. 106)
A motion for reconsideration was filed by petitioners before the new presiding
judge of the Quezon City RTC but the same was denied by Judge Estrella T. Estrada,
thusly:
The prayer contained in the instant motion, i.e., to annul the decision and to render
anew decision by the undersigned Presiding Judge should be denied for the following
reasons: (1) The instant case became submitted for decision as of April 14, 1988
when the parties terminated the presentation of their respective documentary
evidence and when the Presiding Judge at that time was Judge Reynaldo Roura. The
fact that they were allowed to file memoranda at some future date did not change the
fact that the hearing of the case was terminated before Judge Roura and therefore the
same should be submitted to him for decision; (2) When the defendants and
intervenor did not object to the authority of Judge Reynaldo Roura to decide the case
prior to the rendition of the decision, when they met for the first time before the
undersigned Presiding Judge at the hearing of a pending incident in Civil Case No. Q-
46145 on November 11, 1988, they were deemed to have acquiesced thereto and
they are now estopped from questioning said authority of Judge Roura after they
received the decision in question which happens to be adverse to them; (3) While it is
true that Judge Reynaldo Roura was merely a Judge-on-detail at this Branch of the
Court, he was in all respects the Presiding Judge with full authority to act on any
pending incident submitted before this Court during his incumbency. When he
returned to his Official Station at Macabebe, Pampanga, he did not lose his authority
to decide or resolve cases submitted to him for decision or resolution because he
continued as Judge of the Regional Trial Court and is of co-equal rank with the
undersigned Presiding Judge. The standing rule and supported by jurisprudence is
that a Judge to whom a case is submitted for decision has the authority to decide the
case notwithstanding his transfer to another branch or region of the same court (Sec.
9, Rule 135, Rule of Court).
Coming now to the twin prayer for reconsideration of the Decision dated March 1,
1989 rendered in the instant case, resolution of which now pertains to the undersigned
Presiding Judge, after a meticulous examination of the documentary evidence
presented by the parties, she is convinced that the Decision of March 1, 1989 is
supported by evidence and, therefore, should not be disturbed.
IN VIEW OF THE FOREGOING, the Motion for Reconsideration and/or to Annul
Decision and Render Anew Decision by the Incumbent Presiding Judge dated March
20, 1989 is hereby DENIED.
SO ORDERED.
Quezon City, Philippines, July 12, 1989.
 (Rollo, pp. 108-109)
Petitioners thereupon interposed an appeal, but on December 16, 1991, the Court
of Appeals (Buena, Gonzaga-Reyes, Abad-Santos (P), JJ.) rendered its decision fully
agreeing with the trial court.
Hence, the instant petition which was filed on March 5, 1992. The last pleading,
private respondents Reply Memorandum, was filed on September 15, 1993. The case
was, however, re-raffled to undersigned ponente only on August 28, 1996, due to the
voluntary inhibition of the Justice to whom the case was last assigned.
While we deem it necessary to introduce certain refinements in the disquisition of
respondent court in the affirmance of the trial courts decision, we definitely find the
instant petition bereft of merit.
The heart of the controversy which is the ultimate key in the resolution of the other
issues in the case at bar is the precise determination of the legal significance of the
document entitled Receipt of Down Payment which was offered in evidence by both
parties. There is no dispute as to the fact that the said document embodied the binding
contract between Ramona Patricia Alcaraz on the one hand, and the heirs of Constancio
P. Coronel on the other, pertaining to a particular house and lot covered by TCT No.
119627, as defined in Article 1305 of the Civil Code of the Philippines which reads as
follows:
Art. 1305. A contract is a meeting of minds between two persons whereby one binds
himself, with respect to the other, to give something or to render some service.
While, it is the position of private respondents that the Receipt of Down Payment
embodied a perfected contract of sale, which perforce, they seek to enforce by means
of an action for specific performance, petitioners on their part insist that what the
document signified was a mere executory contract to sell, subject to certain suspensive
conditions, and because of the absence of Ramona P. Alcaraz, who left for the United
States of America, said contract could not possibly ripen into a contract of absolute sale.
Plainly, such variance in the contending parties contention is brought about by
the way each interprets the terms and/or conditions set forth in said private
instrument. Withal, based on whatever relevant and admissible evidence may be
available on record, this Court, as were the courts below, is now called upon to adjudge
what the real intent of the parties was at the time the said document was executed.
The Civil Code defines a contract of sale, thus:
Art. 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent.
Sale, by its very nature, is a consensual contract because it is perfected by mere
consent. The essential elements of a contract of sale are the following:
a) Consent or meeting of the minds, that is, consent to transfer ownership in exchange
for the price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.
Under this definition, a Contract to Sell may not be considered as a
Contract of Sale because the first essential element is lacking. In a contract to sell, the
prospective seller explicitly reserves the transfer of title to the prospective buyer,
meaning, the prospective seller does not as yet agree or consent to transfer ownership
of the property subject of the contract to sell until the happening of an event, which for
present purposes we shall take as the full payment of the purchase price. What the
seller agrees or obliges himself to do is to fulfill his promise to sell the subject property
when the entire amount of the purchase price is delivered to him. In other words the full
payment of the purchase price partakes of a suspensive condition, the non-fulfillment of
which prevents the obligation to sell from arising and thus, ownership is retained by the
prospective seller without further remedies by the prospective buyer. In Roque vs.
Lapuz (96 SCRA 741 [1980]), this Court had occasion to rule:
Hence, We hold that the contract between the petitioner and the respondent was a
contract to sell where the ownership or title is retained by the seller and is not to pass
until the full payment of the price, such payment being a positive suspensive condition
and failure of which is not a breach, casual or serious, but simply an event that
prevented the obligation of the vendor to convey title from acquiring binding force.
Stated positively, upon the fulfillment of the suspensive condition which is the full
payment of the purchase price, the prospective sellers obligation to sell the subject
property by entering into a contract of sale with the prospective buyer becomes
demandable as provided in Article 1479 of the Civil Code which states:
Art. 1479. A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain
is binding upon the promissor of the promise is supported by a consideration distinct
from the price.
A contract to sell may thus be defined as a bilateral contract whereby the
prospective seller, while expressly reserving the ownership of the subject property
despite delivery thereof to the prospective buyer, binds himself to sell the said property
exclusively to the prospective buyer upon fulfillment of the condition agreed upon, that
is, full payment of the purchase price.
A contract to sell as defined hereinabove, may not even be considered as a
conditional contract of sale where the seller may likewise reserve title to the property
subject of the sale until the fulfillment of a suspensive condition, because in a conditional
contract of sale, the first element of consent is present, although it is conditioned upon
the happening of a contingent event which may or may not occur. If the suspensive
condition is not fulfilled, the perfection of the contract of sale is completely abated
(cf. Homesite and Housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984]).However,
if the suspensive condition is fulfilled, the contract of sale is thereby perfected, such that
if there had already been previous delivery of the property subject of the sale to the
buyer, ownership thereto automatically transfers to the buyer by operation of law without
any further act having to be performed by the seller.
In a contract to sell, upon the fulfillment of the suspensive condition which is the
full payment of the purchase price, ownership will not automatically transfer to the buyer
although the property may have been previously delivered to him. The prospective seller
still has to convey title to the prospective buyer by entering into a contract of absolute
sale.
It is essential to distinguish between a contract to sell and a conditional contract
of sale specially in cases where the subject property is sold by the owner not to the party
the seller contracted with, but to a third person, as in the case at bench. In a contract to
sell, there being no previous sale of the property, a third person buying such property
despite the fulfillment of the suspensive condition such as the full payment of the
purchase price, for instance, cannot be deemed a buyer in bad faith and the prospective
buyer cannot seek the relief of reconveyance of the property. There is no double sale in
such case. Title to the property will transfer to the buyer after registration because there
is no defect in the owner-sellers title per se, but the latter, of course, may be sued for
damages by the intending buyer.
In a conditional contract of sale, however, upon the fulfillment of the suspensive
condition, the sale becomes absolute and this will definitely affect the sellers title
thereto. In fact, if there had been previous delivery of the subject property, the sellers
ownership or title to the property is automatically transferred to the buyer such that, the
seller will no longer have any title to transfer to any third person. Applying Article 1544
of the Civil Code, such second buyer of the property who may have had actual or
constructive knowledge of such defect in the sellers title, or at least was charged with
the obligation to discover such defect, cannot be a registrant in good faith. Such second
buyer cannot defeat the first buyers title. In case a title is issued to the second buyer,
the first buyer may seek reconveyance of the property subject of the sale.
With the above postulates as guidelines, we now proceed to the task of
deciphering the real nature of the contract entered into by petitioners and private
respondents.
It is a canon in the interpretation of contracts that the words used therein should
be given their natural and ordinary meaning unless a technical meaning was intended
(Tan vs. Court of Appeals, 212 SCRA 586 [1992]). Thus, when petitioners declared in
the said Receipt of Down Payment that they --
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of
Fifty Thousand Pesos purchase price of our inherited house and lot, covered by
TCT No. 1199627 of the Registry of Deeds of Quezon City, in the total amount
of P1,240,000.00.
without any reservation of title until full payment of the entire purchase price, the natural
and ordinary idea conveyed is that they sold their property.
When the Receipt of Down payment is considered in its entirety, it becomes more
manifest that there was a clear intent on the part of petitioners to transfer title to the
buyer, but since the transfer certificate of title was still in the name of petitioners father,
they could not fully effect such transfer although the buyer was then willing and able to
immediately pay the purchase price. Therefore, petitioners-sellers undertook upon
receipt of the down payment from private respondent Ramona P. Alcaraz, to cause the
issuance of a new certificate of title in their names from that of their father, after which,
they promised to present said title, now in their names, to the latter and to execute the
deed of absolute sale whereupon, the latter shall, in turn, pay the entire balance of the
purchase price.
The agreement could not have been a contract to sell because the sellers herein
made no express reservation of ownership or title to the subject parcel of
land. Furthermore, the circumstance which prevented the parties from entering into an
absolute contract of sale pertained to the sellers themselves (the certificate of title was
not in their names) and not the full payment of the purchase price. Under the established
facts and circumstances of the case, the Court may safely presume that, had the
certificate of title been in the names of petitioners-sellers at that time, there would have
been no reason why an absolute contract of sale could not have been executed and
consummated right there and then.
Moreover, unlike in a contract to sell, petitioners in the case at bar did not merely
promise to sell the property to private respondent upon the fulfillment of the suspensive
condition. On the contrary, having already agreed to sell the subject property, they
undertook to have the certificate of title change to their names and immediately
thereafter, to execute the written deed of absolute sale.
Thus, the parties did not merely enter into a contract to sell where the sellers,
after compliance by the buyer with certain terms and conditions, promised to sell the
property to the latter. What may be perceived from the respective undertakings of the
parties to the contract is that petitioners had already agreed to sell the house and lot
they inherited from their father, completely willing to transfer ownership of the subject
house and lot to the buyer if the documents were then in order. It just so happened,
however, that the transfer certificate of title was then still in the name of their father. It
was more expedient to first effect the change in the certificate of title so as to bear their
names. That is why they undertook to cause the issuance of a new transfer of the
certificate of title in their names upon receipt of the down payment in the amount
of P50,000.00. As soon as the new certificate of title is issued in their names, petitioners
were committed to immediately execute the deed of absolute sale. Only then will the
obligation of the buyer to pay the remainder of the purchase price arise.
There is no doubt that unlike in a contract to sell which is most commonly entered
into so as to protect the seller against a buyer who intends to buy the property in
installment by withholding ownership over the property until the buyer effects full
payment therefor, in the contract entered into in the case at bar, the sellers were the
ones who were unable to enter into a contract of absolute sale by reason of the fact that
the certificate of title to the property was still in the name of their father. It was the sellers
in this case who, as it were, had the impediment which prevented, so to speak, the
execution of an contract of absolute sale.
What is clearly established by the plain language of the subject document is that
when the said Receipt of Down Payment was prepared and signed by petitioners
Romulo A. Coronel, et. al., the parties had agreed to a conditional contract of sale,
consummation of which is subject only to the successful transfer of the certificate of title
from the name of petitioners father, Constancio P. Coronel, to their names.
The Court significantly notes that this suspensive condition was, in fact, fulfilled
on February 6, 1985 (Exh. D; Exh. 4). Thus, on said date, the conditional contract of
sale between petitioners and private respondent Ramona P. Alcaraz became obligatory,
the only act required for the consummation thereof being the delivery of the property by
means of the execution of the deed of absolute sale in a public instrument, which
petitioners unequivocally committed themselves to do as evidenced by the Receipt of
Down Payment.
Article 1475, in correlation with Article 1181, both of the Civil Code, plainly applies
to the case at bench. Thus,
Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds
upon the thing which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance, subject to the
provisions of the law governing the form of contracts.
Art. 1181. In conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of
the event which constitutes the condition.
Since the condition contemplated by the parties which is the issuance of a
certificate of title in petitioners names was fulfilled on February 6, 1985, the respective
obligations of the parties under the contract of sale became mutually demandable, that
is, petitioners, as sellers, were obliged to present the transfer certificate of title already
in their names to private respondent Ramona P. Alcaraz, the buyer, and to immediately
execute the deed of absolute sale, while the buyer on her part, was obliged to forthwith
pay the balance of the purchase price amounting to P1,190,000.00.
It is also significant to note that in the first paragraph in page 9 of their petition,
petitioners conclusively admitted that:
3. The petitioners-sellers Coronel bound themselves to effect the transfer
in our names from our deceased father Constancio P. Coronel, the
transfer certificate of title immediately upon receipt of the downpayment
above-stated". The sale was still subject to this suspensive
condition. (Emphasis supplied.)
(Rollo, p. 16)
Petitioners themselves recognized that they entered into a contract of sale subject
to a suspensive condition. Only, they contend, continuing in the same paragraph, that:
. . . Had petitioners-sellers not complied with this condition of first transferring the title
to the property under their names, there could be no perfected contract of
sale. (Emphasis supplied.)
(Ibid.)
not aware that they have set their own trap for themselves, for Article 1186 of the Civil
Code expressly provides that:
Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily
prevents its fulfillment.
Besides, it should be stressed and emphasized that what is more controlling than
these mere hypothetical arguments is the fact that the condition herein referred to
was actually and indisputably fulfilled on February 6, 1985, when a new title was
issued in the names of petitioners as evidenced by TCT No. 327403 (Exh. D; Exh. 4).
The inevitable conclusion is that on January 19, 1985, as evidenced by the
document denominated as Receipt of Down Payment (Exh. A; Exh. 1), the parties
entered into a contract of sale subject to the suspensive condition that the sellers shall
effect the issuance of new certificate title from that of their fathers name to their names
and that, on February 6, 1985, this condition was fulfilled (Exh. D; Exh. 4).
We, therefore, hold that, in accordance with Article 1187 which pertinently
provides -
Art. 1187. The effects of conditional obligation to give, once the condition has been
fulfilled, shall retroact to the day of the constitution of the obligation . . .
In obligations to do or not to do, the courts shall determine, in each case, the
retroactive effect of the condition that has been complied with.
the rights and obligations of the parties with respect to the perfected contract of sale
became mutually due and demandable as of the time of fulfillment or occurrence of the
suspensive condition on February 6, 1985. As of that point in time, reciprocal obligations
of both seller and buyer arose.
Petitioners also argue there could been no perfected contract on January 19,
1985 because they were then not yet the absolute owners of the inherited property.
We cannot sustain this argument.
Article 774 of the Civil Code defines Succession as a mode of transferring
ownership as follows:
Art. 774. Succession is a mode of acquisition by virtue of which the property, rights
and obligations to the extent and value of the inheritance of a person are transmitted
through his death to another or others by his will or by operation of law.
Petitioners-sellers in the case at bar being the sons and daughters of the
decedent Constancio P. Coronel are compulsory heirs who were called to succession
by operation of law. Thus, at the point their father drew his last breath, petitioners
stepped into his shoes insofar as the subject property is concerned, such that any rights
or obligations pertaining thereto became binding and enforceable upon them. It is
expressly provided that rights to the succession are transmitted from the moment of
death of the decedent (Article 777, Civil Code; Cuison vs. Villanueva, 90 Phil. 850
[1952]).
Be it also noted that petitioners claim that succession may not be declared unless
the creditors have been paid is rendered moot by the fact that they were able to effect
the transfer of the title to the property from the decedents name to their names on
February 6, 1985.
Aside from this, petitioners are precluded from raising their supposed lack of
capacity to enter into an agreement at that time and they cannot be allowed to now take
a posture contrary to that which they took when they entered into the agreement with
private respondent Ramona P. Alcaraz. The Civil Code expressly states that:
Art. 1431. Through estoppel an admission or representation is rendered conclusive
upon the person making it, and cannot be denied or disproved as against the person
relying thereon.
Having represented themselves as the true owners of the subject property at the time
of sale, petitioners cannot claim now that they were not yet the absolute owners thereof
at that time.
Petitioners also contend that although there was in fact a perfected contract of
sale between them and Ramona P. Alcaraz, the latter breach her reciprocal obligation
when she rendered impossible the consummation thereof by going to the United States
of America, without leaving her address, telephone number, and Special Power of
Attorney (Paragraphs 14 and 15, Answer with Compulsory Counterclaim to the
Amended Complaint, p. 2; Rollo, p. 43), for which reason, so petitioners conclude, they
were correct in unilaterally rescinding the contract of sale.
We do not agree with petitioners that there was a valid rescission of the contract
of sale in the instant case. We note that these supposed grounds for petitioners
rescission, are mere allegations found only in their responsive pleadings, which by
express provision of the rules, are deemed controverted even if no reply is filed by the
plaintiffs (Sec. 11, Rule 6, Revised Rules of Court). The records are absolutely bereft of
any supporting evidence to substantiate petitioners allegations. We have stressed time
and again that allegations must be proven by sufficient evidence (Ng Cho Cio vs. Ng
Diong, 110 Phil. 882 [1961]; Recaro vs. Embisan, 2 SCRA 598 [1961]). Mere allegation
is not an evidence (Lagasca vs. De Vera, 79 Phil. 376 [1947]).
Even assuming arguendo that Ramona P. Alcaraz was in the United States of
America on February 6, 1985, we cannot justify petitioners-sellers act of unilaterally and
extrajudicially rescinding the contract of sale, there being no express stipulation
authorizing the sellers to extrajudicially rescind the contract of sale. (cf. Dignos vs. CA,
158 SCRA 375 [1988]; Taguba vs. Vda. De Leon, 132 SCRA 722 [1984])
Moreover, petitioners are estopped from raising the alleged absence of Ramona
P. Alcaraz because although the evidence on record shows that the sale was in the
name of Ramona P. Alcaraz as the buyer, the sellers had been dealing with Concepcion
D. Alcaraz, Ramonas mother, who had acted for and in behalf of her daughter, if not
also in her own behalf. Indeed, the down payment was made by Concepcion D. Alcaraz
with her own personal Check (Exh. B; Exh. 2) for and in behalf of Ramona P.
Alcaraz. There is no evidence showing that petitioners ever questioned Concepcions
authority to represent Ramona P. Alcaraz when they accepted her personal
check. Neither did they raise any objection as regards payment being effected by a third
person. Accordingly, as far as petitioners are concerned, the physical absence of
Ramona P. Alcaraz is not a ground to rescind the contract of sale.
Corollarily, Ramona P. Alcaraz cannot even be deemed to be in default, insofar
as her obligation to pay the full purchase price is concerned. Petitioners who are
precluded from setting up the defense of the physical absence of Ramona P. Alcaraz
as above-explained offered no proof whatsoever to show that they actually presented
the new transfer certificate of title in their names and signified their willingness and
readiness to execute the deed of absolute sale in accordance with their
agreement. Ramonas corresponding obligation to pay the balance of the purchase price
in the amount of P1,190,000.00 (as buyer) never became due and demandable and,
therefore, she cannot be deemed to have been in default.
Article 1169 of the Civil Code defines when a party in a contract involving
reciprocal obligations may be considered in default, to wit:
Art. 1169. Those obliged to deliver or to do something, incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their obligation.
xxx
In reciprocal obligations, neither party incurs in delay if the other does not comply or
is not ready to comply in a proper manner with what is incumbent upon
him. From the moment one of the parties fulfill his obligation, delay by the other
begins. (Emphasis supplied.)
There is thus neither factual nor legal basis to rescind the contract of sale between
petitioners and respondents.
With the foregoing conclusions, the sale to the other petitioner, Catalina B.
Mabanag, gave rise to a case of double sale where Article 1544 of the Civil Code will
apply, to wit:
Art. 1544. If the same thing should have been sold to different vendees, the
ownership shall be transferred to the person who may have first taken possession
thereof in good faith, if it should be movable property.
Should it be immovable property, the ownership shall belong to the person acquiring it
who in good faith first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good
faith was first in the possession; and, in the absence thereof to the person who
presents the oldest title, provided there is good faith.
The record of the case shows that the Deed of Absolute Sale dated April 25, 1985
as proof of the second contract of sale was registered with the Registry of Deeds of
Quezon City giving rise to the issuance of a new certificate of title in the name of Catalina
B. Mabanag on June 5, 1985. Thus, the second paragraph of Article 1544 shall apply.
The above-cited provision on double sale presumes title or ownership to pass to
the buyer, the exceptions being: (a) when the second buyer, in good faith, registers the
sale ahead of the first buyer, and (b) should there be no inscription by either of the two
buyers, when the second buyer, in good faith, acquires possession of the property
ahead of the first buyer. Unless, the second buyer satisfies these requirements, title or
ownership will not transfer to him to the prejudice of the first buyer.
In his commentaries on the Civil Code, an accepted authority on the subject, now
a distinguished member of the Court, Justice Jose C. Vitug, explains:
The governing principle is prius tempore, potior jure (first in time, stronger in
right). Knowledge by the first buyer of the second sale cannot defeat the first buyers
rights except when the second buyer first registers in good faith the second sale
(Olivares vs. Gonzales, 159 SCRA 33). Conversely, knowledge gained by the second
buyer of the first sale defeats his rights even if he is first to register, since knowledge
taints his registration with bad faith (see also Astorga vs. Court of Appeals, G.R. No.
58530, 26 December 1984). In Cruz vs. Cabana (G.R. No. 56232, 22 June 1984, 129
SCRA 656), it was held that it is essential, to merit the protection of Art. 1544, second
paragraph, that the second realty buyer must act in good faith in registering his deed
of sale (citing Carbonell vs. Court of Appeals, 69 SCRA 99, Crisostomo vs. CA, G.R.
No. 95843, 02 September 1992).
(J. Vitug, Compendium of Civil Law and Jurisprudence, 1993 Edition, p. 604).
Petitioners point out that the notice of lis pendens in the case at bar was
annotated on the title of the subject property only on February 22, 1985, whereas, the
second sale between petitioners Coronels and petitioner Mabanag was supposedly
perfected prior thereto or on February 18, 1985. The idea conveyed is that at the time
petitioner Mabanag, the second buyer, bought the property under a clean title, she was
unaware of any adverse claim or previous sale, for which reason she is a buyer in good
faith.
We are not persuaded by such argument.
In a case of double sale, what finds relevance and materiality is not whether or
not the second buyer in good faith but whether or not said second buyer registers such
second sale in good faith, that is, without knowledge of any defect in the title of the
property sold.
As clearly borne out by the evidence in this case, petitioner Mabanag could not
have in good faith, registered the sale entered into on February 18, 1985 because as
early as February 22, 1985, a notice of lis pendens had been annotated on the transfer
certificate of title in the names of petitioners, whereas petitioner Mabanag registered the
said sale sometime in April, 1985. At the time of registration, therefore, petitioner
Mabanag knew that the same property had already been previously sold to private
respondents, or, at least, she was charged with knowledge that a previous buyer is
claiming title to the same property. Petitioner Mabanag cannot close her eyes to the
defect in petitioners title to the property at the time of the registration of the property.
This Court had occasions to rule that:
If a vendee in a double sale registers the sale after he has acquired knowledge that
there was a previous sale of the same property to a third party or that another person
claims said property in a previous sale, the registration will constitute a registration in
bad faith and will not confer upon him any right. (Salvoro vs. Tanega, 87 SCRA 349
[1978]; citing Palarca vs. Director of Land, 43 Phil. 146; Cagaoan vs. Cagaoan, 43
Phil. 554; Fernandez vs. Mercader, 43 Phil. 581.)
Thus, the sale of the subject parcel of land between petitioners and Ramona P.
Alcaraz, perfected on February 6, 1985, prior to that between petitioners and Catalina
B. Mabanag on February 18, 1985, was correctly upheld by both the courts below.
Although there may be ample indications that there was in fact an agency
between Ramona as principal and Concepcion, her mother, as agent insofar as the
subject contract of sale is concerned, the issue of whether or not Concepcion was also
acting in her own behalf as a co-buyer is not squarely raised in the instant petition, nor
in such assumption disputed between mother and daughter.Thus, We will not touch this
issue and no longer disturb the lower courts ruling on this point.
WHEREFORE, premises considered, the instant petition is hereby DISMISSED
and the appealed judgment AFFIRMED.
SO ORDERED.
Narvasa, C.J. (Chairman), Davide, Jr., and Francisco, JJ., concur.
Panganiban, J., no part.

FIRST DIVISION
[G.R. No. 97347. July 6, 1999]
JAIME G. ONG, petitioner, vs. THE HONORABLE COURT OF APPEALS, SPOUSES
MIGUEL K. ROBLES and ALEJANDRO M. ROBLES, respondents.
DECISION
YNARES-SANTIAGO, J.:
Before us is a petition for review on certiorari from the judgment rendered by the
Court of Appeals which, except as to the award of exemplary damages, affirmed the
decision of the Regional Trial Court of Lucena City, Branch 60, setting aside the
Agreement of Purchase and Sale entered into by herein petitioner and private
respondent spouses in Civil Case No. 85-85.
On May 10, 1983, petitioner Jaime Ong, on the one hand, and respondent
spouses Miguel K. Robles and Alejandra Robles, on the other hand, executed an
Agreement of Purchase and Sale respecting two parcels of land situated at Barrio Puri,
San Antonio, Quezon. The terms and conditions of the contract read:
1. That for and in consideration of the agreed purchase price of TWO MILLION
PESOS (P2,000,000.00), Philippine currency, the mode and manner of payment is as
follows:
A. The initial payment of SIX HUNDRED THOUSAND PESOS (P600,000.00) as
verbally agreed by the parties, shall be broken down as follows:
1. P103,499.91 shall be paid, and as already paid by the BUYER to the SELLERS on
March 22, 1983, as stipulated under the Certification of undertaking dated March 22,
1983 and covered by a check voucher of even date.
2. That the sum of P496,500.09 shall be paid directly by the BUYER to the Bank of
Philippine Islands to answer for the loan of the SELLERS which as of March 15, 1983
amounted to P537,310.10, and for the interest that may accrued (sic) from March 15,
1983, up to the time said obligation of the SELLERS with the said bank has been
settled, provided however that the amount in excess of P496,500.09, shall be
chargeable from the time deposit of the SELLERS with the aforesaid bank.
B. That the balance of ONE MILLION FOUR HUNDRED THOUSAND (P1,400,000.00)
PESOS shall be paid by the BUYER to the SELLERS in four (4) equal quarterly
installments of THREE HUNDRED FIFTY THOUSAND PESOS (P350,000.00), the
first to be due and payable on June 15, 1983, and every quarter thereafter, until the
whole amount is fully paid, by these presents promise to sell to said BUYER the two
(2) parcels of agricultural land including the rice mill and the piggery which are the
most notable improvements thereon, situated at Barangay Puri, San Antonio Quezon,
x x x.
2. That upon the payment of the total purchase price by
the BUYER the SELLERS bind themselves to deliver to the former a good and
sufficient deed of sale and conveyance for the described two (2) parcels of land, free
and clear from all liens and encumbrances.
3. That immediately upon the execution of this document, the SELLERS shall deliver,
surrender and transfer possession of the said parcels of land including all the
improvements that may be found thereon, to the BUYER, and the latter shall take over
from the SELLER the possession, operation, control and management of the
RICEMILL and PIGGERY found on the aforesaid parcels of land.
4. That all payments due and payable under this contract shall be effected in the
residence of the SELLERS located at Barangay Puri, San Antonio, Quezon unless
another place shall have been subsequently designated by both parties in writing.
x x x x x x x x x.[1]
On May 15, 1983, petitioner Ong took possession of the subject parcels of land
together with the piggery, building, ricemill, residential house and other improvements
thereon.
Pursuant to the contract they executed, petitioner paid respondent spouses the
sum of P103,499.91[2] by depositing it with the United Coconut Planters
Bank. Subsequently, petitioner deposited sums of money with the Bank of Philippine
Islands (BPI),[3] in accordance with their stipulation that petitioner pay the loan of
respondents with BPI.
To answer for his balance of P1,400,000.00 petitioner issued four (4) post-dated
Metro Bank checks payable to respondent spouses in the amount of P350,0000.00
each, namely: Check No. 157708 dated June 15, 1983,[4] Check No. 157709 dated
September 15,1983,[5] Check No. 157710 dated December 15, 1983[6] and Check No.
157711 dated March 15, 1984.[7] When presented for payment, however, the checks
were dishonored due to insufficient funds. Petitioner promised to replace the checks but
failed to do so. To make matters worse, out of the P496,500.00 loan of respondent
spouses with the Bank of the Philippine Islands, which petitioner, as per agreement,
should have paid, petitioner only managed to dole out no more than P393,679.60. When
the bank threatened to foreclose the respondent spouses mortgage, they sold three
transformers of the rice mill worth P51,411.00 to pay off their outstanding obligation with
said bank, with the knowledge and conformity of petitioner. [8] Petitioner, in return,
voluntarily gave the spouses authority to operate the rice mill.[9] He, however, continued
to be in possession of the two parcels of land while private respondents were forced to
use the rice mill for residential purposes.
On August 2, 1985, respondent spouses, through counsel, sent petitioner a
demand letter asking for the return of the properties. Their demand was left unheeded,
so, on September 2, 1985, they filed with the Regional Trial Court of Lucena City,
Branch 60, a complaint for rescission of contract and recovery of properties with
damages. Later, while the case was still pending with the trial court, petitioner
introduced major improvements on the subject properties by constructing a complete
fence made of hollow blocks and expanding the piggery. These prompted the
respondent spouses to ask for a writ of preliminary injunction.[10] The trial court granted
the application and enjoined petitioner from introducing improvements on the properties
except for repairs.[11]
On June 1, 1989 the trial court rendered a decision, the dispositive portion of
which reads as follows:
IN VIEW OF THE FOREGOING, judgment is hereby rendered:
a) Ordering that the contract entered into by plaintiff spouses Miguel K. Robles and
Alejandra M. Robles and the defendant, Jaime Ong captioned Agreement of Purchase
and Sale, marked as Exhibit A set aside;
b) Ordering defendant, Jaime Ong to deliver the two (2) parcels of land which are the
subject matter of Exhibit A together with the improvements thereon to the spouses
Miguel K. Robles and Alejandro M. Robles;
c) Ordering plaintiff spouses, Miguel Robles and Alejandra Robles to return to Jaime
Ong the sum of P497,179.51;
d) Ordering defendant Jaime Ong to pay the plaintiffs the sum of P100,000.00 as
exemplary damages; and
e) Ordering defendant Jaime Ong to pay the plaintiffs spouses Miguel K. Robles and
Alejandra Robles the sum of P20,000.00 as attorneys fees and litigation expenses.
The motion of the plaintiff spouses Miguel K. Roles and Alejandra Robles for the
appointment of receivership is rendered moot and academic.
SO ORDERED.[12]
From this decision, petitioner appealed to the Court of Appeals, which affirmed
the decision of the Regional Trial Court but deleted the award of exemplary damages. In
affirming the decision of the trial court, the Court of Appeals noted that the failure of
petitioner to completely pay the purchase price is a substantial breach of his obligation
which entitles the private respondents to rescind their contract under Article 1191 of the
New Civil Code. Hence, the instant petition.
At the outset, it must be stated that the issues raised by the petitioner are
generally factual in nature and were already passed upon by the Court of Appeals and
the trial court. Time and again, we have stated that it is not the function of the Supreme
Court to assess and evaluate all over again the evidence, testimonial and documentary,
adduced by the parties to an appeal, particularly where, such as in the case at bench,
the findings of both the trial court and the appellate court on the matter coincide. There
is no cogent reason shown that would justify the court to discard the factual findings of
the two courts below and to superimpose its own.[13]
The only pertinent legal issues raised which are worthy of discussion are: (1)
whether the contract entered into by the parties may be validly rescinded under Article
1191 of the New Civil Code; and (2) whether the parties had novated their original
contract as to the time and manner of payment.
Petitioner contends that Article 1191 of the New Civil Code is not applicable since
he has already paid respondent spouses a considerable sum and has therefore
substantially complied with his obligation. He cites Article 1383 instead, to the effect that
where specific performance is available as a remedy, rescission may not be resorted
to.
A discussion of the aforesaid articles is in order.
Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a
remedy granted by law to the contracting parties and even to third persons, to secure
the reparation of damages caused to them by a contract, even if this should be valid, by
restoration of things to their condition at the moment prior to the celebration of the
contract.[14] It implies a contract, which even if initially valid, produces a lesion or a
pecuniary damage to someone.[15]
On the other hand, Article 1191 of the New Civil Code refers to rescission
applicable to reciprocal obligations. Reciprocal obligations are those which arise from
the same cause, and in which each party is a debtor and a creditor of the other, such
that the obligation of one is dependent upon the obligation of the other. [16] They are to
be performed simultaneously such that the performance of one is conditioned upon the
simultaneous fulfillment of the other. Rescission of reciprocal obligations under Article
1191 of the New Civil Code should be distinguished from rescission of contracts under
Article 1383. Although both presuppose contracts validly entered into and subsisting
and both require mutual restitution when proper, they are not entirely identical.
While Article 1191 uses the term rescission, the original term which was used in
the old Civil Code, from which the article was based, was resolution.[17] Resolution is a
principal action which is based on breach of a party, while rescission under Article 1383
is a subsidiary action limited to cases of rescission for lesion under Article 1381 of the
New Civil Code, which expressly enumerates the following rescissible contracts:
1. Those which are entered into by guardians whenever the wards whom
they represent suffer lesion by more than one fourth of the value of the
things which are the object thereof;
 2. Those agreed upon in representation of absentees, if the latter suffer the
lesion stated in the preceding number;
3. Those undertaken in fraud of creditors when the latter cannot in any
manner collect the claims due them;
4. Those which refer to things under litigation if they have been entered into
by the defendant without the knowledge and approval of the litigants or
of competent judicial authority;
5. All other contracts specially declared by law to be subject to rescission.
Obviously, the contract entered into by the parties in the case at bar does not fall
under any of those mentioned by Article 1381. Consequently, Article 1383 is
inapplicable.
May the contract entered into between the parties, however, be rescinded based
on Article 1191?
A careful reading of the parties Agreement of Purchase and Sale shows that it is
in the nature of a contract to sell, as distinguished from a contract of sale. In a contract
of sale, the title to the property passes to the vendee upon the delivery of the thing sold;
while in a contract to sell, ownership is, by agreement, reserved in the vendor and is not
to pass to the vendee until full payment of the purchase price. [18] In a contract to sell,
the payment of the purchase price is a positive suspensive condition, the failure of which
is not a breach, casual or serious, but a situation that prevents the obligation of the
vendor to convey title from acquiring an obligatory force.[19]
Respondents in the case at bar bound themselves to deliver a deed of absolute
sale and clean title covering the two parcels of land upon full payment by the buyer of
the purchase price of P2,000,000.00. This promise to sell was subject to the fulfillment
of the suspensive condition of full payment of the purchase price by the
petitioner. Petitioner, however, failed to complete payment of the purchase price. The
non-fulfillment of the condition of full payment rendered the contract to sell ineffective
and without force and effect. It must be stressed that the breach contemplated in Article
1191 of the New Civil Code is the obligors failure to comply with an obligation already
extant, not a failure of a condition to render binding that obligation.[20] Failure to pay, in
this instance, is not even a breach but merely an event which prevents the vendors
obligation to convey title from acquiring binding force.[21] Hence, the agreement of the
parties in the case at bench may be set aside, but not because of a breach on the part
of petitioner for failure to complete payment of the purchase price. Rather, his failure to
do so brought about a situation which prevented the obligation of respondent spouses
to convey title from acquiring an obligatory force.
Petitioner insists, however, that the contract was novated as to the manner and
time of payment.
We are not persuaded. Article 1292 of the New Civil Code states that, In order
that an obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other.
Novation is never presumed, it must be proven as a fact either by express
stipulation of the parties or by implication derived from an irreconcilable incompatibility
between the old and the new obligation.[22] Petitioner cites the following instances as
proof that the contract was novated: the retrieval of the transformers from petitioners
custody and their sale by the respondents to MERALCO on the condition that the
proceeds thereof be accounted for by the respondents and deducted from the price of
the contract; the take-over by the respondents of the custody and operation of the rice
mill; and the continuous and regular withdrawals by respondent Miguel Robles of
installment sums per vouchers (Exhs. 8 to 47) on the condition that these installments
be credited to petitioners account and deducted from the balance of the purchase price.
Contrary to petitioners claim, records show that the parties never even intended
to novate their previous agreement. It is true that petitioner paid respondents small
sums of money amounting to P48,680.00, in contravention of the manner of payment
stipulated in their contract. These installments were, however, objected to by
respondent spouses, and petitioner replied that these represented the interest of the
principal amount which he owed them.[23] Records further show that petitioner agreed to
the sale of MERALCO transformers by private respondents to pay for the balance of
their subsisting loan with the Bank of Philippine Islands.Petitioners letter of authorization
reads:
xxxxxxxxx
Under this authority, it is mutually understood that whatever payment received from
MERALCO as payment to the transformers will be considered as partial payment of
the undersigneds obligation to Mr. and Mrs. Miguel K. Robles.
The same will be utilized as partial payment to existing loan with the Bank of
Philippine Islands.
It is also mutually understood that this payment to the Bank of Philippine Islands will
be reimbursed to Mr. and Mrs. Miguel K. Robles by the undersigned. [Underscoring
supplied][24]
It should be noted that while it was agreed that part of the purchase price in the
sum of P496,500.00 would be directly deposited by petitioner to the Bank of Philippine
Islands to answer for the loan of respondent spouses, petitioner only managed to
deposit P393,679.60. When the bank threatened to foreclose the properties, petitioner
apparently could not even raise the sum needed to forestall any action on the part of
the bank.Consequently, he authorized respondent spouses to sell the three (3)
transformers. However, although the parties agreed to credit the proceeds from the sale
of the transformers to petitioners obligation, he was supposed to reimburse the same
later to respondent spouses. This can only mean that there was never an intention on
the part of either of the parties to novate petitioners manner of payment.
Petitioner contends that the parties verbally agreed to novate the manner of
payment when respondent spouses proposed to operate the rice mill on the condition
that they will account for its earnings. We find that this is unsubstantiated by the
evidence on record. The tenor of his letter dated August 12, 1984 to respondent
spouses, in fact, shows that petitioner had a little misunderstanding with respondent
spouses whom he was evidently trying to appease by authorizing them to continue
temporarily with the operation of the rice mill. Clearly, while petitioner might have
wanted to novate the original agreement as to his manner of payment, the records are
bereft of evidence that respondent spouses willingly agreed to modify their previous
arrangement.
In order for novation to take place, the concurrence of the following requisites is
indispensable: (1) there must be a previous valid obligation; (2) there must be an
agreement of the parties concerned to a new contract; (3) there must be the
extinguishment of the old contract; and (4) there must be the validity of the new
contract.[25] The aforesaid requisites are not found in the case at bench. The subsequent
acts of the parties hardly demonstrate their intent to dissolve the old obligation as a
consideration for the emergence of the new one. We repeat to the point of triteness,
novation is never presumed, there must be an express intention to novate.
As regards the improvements introduced by petitioner to the premises and for
which he claims reimbursement, we see no reason to depart from the ruling of the trial
court and the appellate court that petitioner is a builder in bad faith. He introduced the
improvements on the premises knowing fully well that he has not paid the consideration
of the contract in full and over the vigorous objections of respondent spouses. Moreover,
petitioner introduced major improvements on the premises even while the case against
him was pending before the trial court.
The award of exemplary damages was correctly deleted by the Court of Appeals
inasmuch as no moral, temperate, liquidated or compensatory damages in addition to
exemplary damages were awarded.
WHEREFORE, the decision rendered by the Court of Appeals is hereby
AFFIRMED with the MODIFICATION that respondent spouses are ordered to return to
petitioner the sum of P48,680.00 in addition to the amounts already awarded. Costs
against petitioner.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Melo, Kapunan, and Pardo, JJ., concur.
OLIVAREZ REALTY CORPORATION and DR. PABLO R. OLIVAREZ, Petitioner,
vs.
BENJAMIN CASTILLO, Respondent.
DECISION
LEONEN, J.:
Trial may be dispensed with and a summary judgment rendered if the case can be
resolved judiciously by plain resort to the pleadings, affidavits, depositions, and other
papers filed by the parties.
This is a petition for review on certiorari1 of the Court of Appeals' decision2 dated July
20, 2010 and resolution3dated March 18, 2011 in CAG.R. CV No. 91244.
The facts as established from the pleadings of the parties are as follows:
Benjamin Castillo was the registered owner of a 346,918-squaremeter parcel of land
located in Laurel, Batangas, covered by Transfer Certificate of Title No. T-19972.4 The
Philippine Tourism Authority allegedly claimed ownership of the sameparcel of land
based on Transfer Certificate of Title No. T-18493.5 On April 5, 2000, Castillo and
Olivarez Realty Corporation, represented by Dr. Pablo R. Olivarez, entered into a
contract of conditional sale6 over the property. Under the deed of conditional sale,
Castillo agreed to sell his property to Olivarez Realty Corporation for ₱19,080,490.00.
Olivarez Realty Corporation agreed toa down payment of ₱5,000,000.00, to be paid
according to the following schedule:
DATE AMOUNT
April 8, 2000 500,000.00
May 8, 2000 500,000.00

May 16, 2000 500,000.00

1,000,000.0
June 8, 2000
0
Republic of the Philippines
SUPREME COURT July 8, 2000 500,000.00
Manila
August 8, 2000 500,000.00
THIRD DIVISION
September 8, 2000 500,000.00
G.R. No. 196251 July 9, 2014

October 8, 2000 500,000.00
7
November 8, 2000 500,000.00
As to the balance of ₱14,080,490.00, Olivarez Realty Corporation agreed to pay in 30
equal monthly installments every eighth day of the month beginning in the month that
the parties would receive a decision voiding the Philippine Tourism Authority’s title to
the property.8 Under the deed of conditional sale, Olivarez RealtyCorporation shall file
the action against the Philippine Tourism Authority "with the full assistance of
[Castillo]."9 Paragraph C of the deed of conditional sale provides:
C. [Olivarez Realty Corporation] assumes the responsibility of taking necessary legal
action thru Court to have the claim/title TCT T-18493 of Philippine Tourism Authority
over the above-described property be nullified and voided; with the full assistance of
[Castillo][.]10
Should the action against the Philippine Tourism Authority be denied, Castillo agreed
to reimburse all the amounts paid by Olivarez Realty Corporation. Paragraph D of the
deed of conditional sale provides:
D. In the event that the Court denie[s] the petition against the Philippine Tourism
Authority, all sums received by [Castillo] shall be reimbursed to [Olivarez Realty
Corporation] without interest[.]11
As to the "legitimate tenants" occupying the property, Olivarez Realty Corporation
undertook to pay them "disturbance compensation," while Castillo undertook to clear
the land of the tenants within six months from the signing of the deed of conditional
sale. Should Castillo fail to clear the land within six months, Olivarez Realty
Corporation may suspend its monthly down payment until the tenants vacate the
property. Paragraphs E and F of the deed of conditional sale provide: E. That
[Olivarez Realty Corporation] shall pay the disturbance compensation to legitimate
agricultural tenants and fishermen occupants which in no case shall exceed ONE
MILLION FIVE HUNDRED THOUSAND (₱1,500,000.00) PESOS. Said amountshall
not form part of the purchase price. In excess of this amount, all claims shall be for the
account of [Castillo];
F. That [Castillo] shall clear the land of [the] legitimate tenants within a period of six (6)
months upon signing of this Contract, and in case [Castillo] fails, [Olivarez Realty
Corporation] shall have the right to suspend the monthly down payment until such time
that the tenants [move] out of the land[.]12
The parties agreed thatOlivarez Realty Corporation may immediately occupy the
property upon signing of the deed of conditional sale. Should the contract be
cancelled, Olivarez RealtyCorporation agreed to return the property’s possession to
Castillo and forfeit all the improvements it may have introduced on the property.
Paragraph I of the deed of conditional sale states:
I. Immediately upon signing thisContract, [Olivarez Realty Corporation] shall be
entitled to occupy, possess and develop the subject property. In case this Contract is
canceled [sic], any improvement introduced by [the corporation] on the property shall
be forfeited in favor of [Castillo][.]13
On September 2, 2004, Castillo filed a complaint14 against Olivarez Realty Corporation
and Dr. Olivarez with the Regional Trial Court of Tanauan City, Batangas.
Castillo alleged that Dr. Olivarez convinced him into selling his property to Olivarez
Realty Corporation on the representation that the corporation shall be responsible in
clearing the property of the tenants and in paying them disturbance compensation. He
further alleged that Dr. Olivarez solely prepared the deed of conditional sale and that
he was made to sign the contract with its terms "not adequately explained [to him] in
Tagalog."15
After the parties had signed the deed of conditional sale, Olivarez Realty Corporation
immediately took possession of the property. However, the corporation only paid
2,500,000.00 ofthe purchase price. Contrary to the agreement, the corporation did not
file any action against the Philippine Tourism Authority to void the latter’s title to the
property. The corporation neither cleared the land of the tenants nor paid them
disturbance compensation. Despite demand, Olivarez Realty Corporation refused to
fully pay the purchase price.16
Arguing that Olivarez Realty Corporation committed substantial breach of the contract
of conditional sale and that the deed of conditional sale was a contract of adhesion,
Castillo prayed for rescission of contract under Article 1191 of the Civil Code of the
Philippines. He further prayed that Olivarez Realty Corporation and Dr. Olivarez be
made solidarily liable for moral damages, exemplary damages, attorney’s fees, and
costs of suit.17
In their answer,18 Olivarez Realty Corporation and Dr. Olivarez admitted that the
corporation only paid ₱2,500,000.00 ofthe purchase price. In their defense,
defendants alleged that Castillo failed to "fully assist"19 the corporation in filing an
action against the Philippine Tourism Authority. Neither did Castillo clear the property
of the tenants within six months from the signing of the deed of conditional sale. Thus,
according to defendants, the corporation had "all the legal right to withhold the
subsequent payments to [fully pay] the purchase price."20
Olivarez Realty Corporation and Dr. Olivarez prayedthat Castillo’s complaint be
dismissed. By way of compulsory counterclaim, they prayed for ₱100,000.00 litigation
expenses and ₱50,000.00 attorney’s fees.21
Castillo replied to the counterclaim,22 arguing that Olivarez Realty Corporation and Dr.
Olivarez had no right to litigation expenses and attorney’s fees. According to Castillo,
the deed of conditional sale clearly states that the corporation "assume[d] the
responsibility of taking necessary legal action"23 against the Philippine Tourism
Authority, yet the corporation did not file any case. Also, the corporation did not pay
the tenants disturbance compensation. For the corporation’s failure to fully pay the
purchase price, Castillo claimed that hehad "all the right to pray for the rescission of
the [contract],"24 and he "should not be held liable . . . for any alleged damages by way
of litigation expenses and attorney’s fees."25
On January 10, 2005, Castillo filed a request for admission, 26 requesting Dr. Olivarez
to admit under oath the genuineness of the deed of conditional sale and Transfer
Certificate of Title No. T-19972. He likewise requested Dr. Olivarez to admit the truth
of the following factual allegations:
1. That Dr. Olivarez is the president of Olivarez Realty Corporation;
2. That Dr. Olivarez offered to purchase the parcel of land from Castillo and
that he undertook to clear the property of the tenants and file the court
action to void the Philippine Tourism Authority’s title to the property;
3. That Dr. Olivarez caused the preparation of the deed of conditional sale;
4. That Dr. Olivarez signed the deed of conditional sale for and on behalf of
Olivarez Realty Corporation;
5. That Dr. Olivarez and the corporation did not file any action against the
Philippine Tourism Authority;
6. That Dr. Olivarez and the corporation did not pay the tenants disturbance
compensation and failed to clear the property of the tenants; and
7. That Dr. Olivarez and the corporation only paid ₱2,500,000.00 of the
agreed purchase price.27
On January 25, 2005, Dr. Olivarez and Olivarez Realty Corporation filed their
objections to the request for admission,28 stating that they "reiterate[d] the allegations
[and denials] in their [answer]."29
The trial court conducted pre-trial conference on December 17, 2005.
On March 8, 2006, Castillo filed a motion for summary judgment and/or judgment on
the pleadings.30 He argued that Olivarez Realty Corporation and Dr. Olivarez
"substantially admitted the material allegations of [his] complaint," 31specifically:
1. That the corporation failed to fully pay the purchase price for his
property;32
2. That the corporation failed to file an action to void the Philippine Tourism
Authority’s title to his property;33and
3. That the corporation failed to clear the property of the tenants and pay
them disturbance compensation.34
Should judgment on the pleadings beimproper, Castillo argued that summary
judgment may still be rendered asthere is no genuine issue as to any material
fact.35 He cited Philippine National Bank v. Noah’s Ark Sugar Refinery36 as authority.
Castillo attached to his motion for summary judgment and/or judgment on the
pleadings his affidavit37 and the affidavit of a Marissa Magsino38 attesting to the truth
of the material allegations of his complaint.
Olivarez Realty Corporation and Dr. Olivarez opposed39 the motion for summary
judgment and/or judgment on the pleadings, arguing that the motion was "devoid of
merit."40 They reiterated their claim that the corporation withheld further payments of
the purchase price because "there ha[d] been no favorable decision voiding the title of
the Philippine Tourism Authority."41 They added that Castillo sold the property to
another person and that the sale was allegedly litigated in Quezon City. 42
Considering that a title adverse to that of Castillo’s existed, Olivarez Realty
Corporation and Dr. Olivarez argued that the case should proceed to trial and Castillo
be required to prove that his title to the property is "not spurious or fake and that he
had not sold his property to another person."43
In reply to the opposition to the motion for summary judgment and/or judgment on the
pleadings,44 Castillo maintained that Olivarez Realty Corporation was responsible for
the filing of an action against the Philippine Tourism Authority. Thus, the corporation
could not fault Castillo for not suing the PhilippineTourism Authority. 45 The corporation
illegally withheld payments of the purchase price.
As to the claim that the case should proceed to trial because a title adverse to his title
existed, Castillo argued that the Philippine Tourism Authority’s title covered another
lot, not his property.46
During the hearing on August 3, 2006, Olivarez Realty Corporation and Dr. Olivarez
prayed that they be given 30 days to file a supplemental memorandum on Castillo’s
motion for summary judgment and/or judgment on the pleadings.47
The trial court granted the motion. Itgave Castillo 20 days to reply to the memorandum
and the corporation and Dr. Olivarez 15 days to respond to Castillo’s reply.48
In their supplemental memorandum,49 Olivarez Realty Corporation and Dr. Olivarez
argued that there was "an obvious ambiguity"50 as to which should occur first — the
payment of disturbance compensation to the tenants or the clearing of the property of
the tenants.51 This ambiguity, according to defendants, is a genuine issue and
"oughtto be threshed out in a full blown trial."52
As to the alleged ambiguity of paragraphs E and F of the deed of conditional sale, the
trial court ruled that Castillo and his witness, Marissa Magsino, "clearly
established"63 in their affidavits that the deed of conditional sale was a contract of
adhesion. The true agreement between the parties was that the corporation would
both clear the land of the tenants and pay them disturbance compensation.

Olivarez Realty Corporation and Dr. Olivarez added that Castillo prayed for
irreconcilable reliefs of reformation of instrument and rescission of contract. 53 Thus,
Castillo’s complaint should be dismissed.
Castillo replied54 to the memorandum, arguing that there was no genuine issue
requiring trial of the case. According to Castillo, "common sense dictates . . . that the
legitimate tenants of the [property] shall not vacate the premises without being paid
any disturbance compensation . . ."55 Thus, the payment of disturbance compensation
should occur first before clearing the property of the tenants.
With respect to the other issuesraised in the supplemental memorandum, specifically,
that Castillo sold the property to another person, he argued that these issues should
not be entertained for not having been presented during pre-trial.56
With these findings, the trial court ruled that Olivarez Realty Corporation breached the
contract ofconditional sale.1âwphi1 In its decision64 dated April 23, 2007, the trial court
ordered the deed of conditional sale rescinded and the ₱2,500,000.00 forfeited in
favor of Castillo "as damages under Article 1191 of the Civil Code." 65
The trial court declared Olivarez Realty Corporation and Dr. Olivarez solidarily liable to
Castillo for 500,000.00 as moral damages, ₱50,000.00 as exemplary damages, and
₱50,000.00 as costs of suit.66
Ruling of the Court of Appeals
Olivarez Realty Corporation and Dr. Olivarez appealed to the Court of Appeals. 67

In its decision68 dated July 20, 2010, the Court of Appeals affirmed in totothe trial
In their comment on the reply memorandum,57 Olivarez Realty Corporation and Dr.
court’s decision. According to the appellate court, the trial court "did not err in its
Olivarez reiterated their arguments that certain provisions of the deed of conditional
finding that there is no genuine controversy as to the facts involved [in this
sale were ambiguous and that the complaint prayed for irreconcilable reliefs. 58
case]."69 The trial court, therefore, correctly rendered summary judgment. 70

As to the additional issues raised in the supplemental memorandum, defendants

argued that issues not raised and evidence not identified and premarked during pre-
trial may still be raised and presented during trial for good cause shown. Olivarez
Realty Corporation and Dr. Olivarez prayed that Castillo’s complaint be dismissed for
lack of merit.59
Ruling of the trial court
The trial court found that Olivarez Realty Corporation and Dr. Olivarez’s answer
"substantially [admitted the material allegations of Castillo’s] complaint and [did] not . .
. raise any genuine issue [as to any material fact]."60
As to the trial court’s award of damages, the appellatecourt ruled that a court may
award damages through summary judgment "if the parties’ contract categorically
[stipulates] the respective obligations of the parties in case of default."71 As found by
the trial court,paragraph I of the deed of conditional sale categorically states that "in
case [the deed of conditional sale] is cancelled, any improvementintroduced by
[Olivarez Realty Corporation] on the property shall be forfeited infavor of
[Castillo]."72 Considering that Olivarez Realty Corporation illegally retained possession
of the property, Castillo forewent rentto the property and "lost business
opportunities."73 The ₱2,500,000.00 down payment, according to the appellate court,
shouldbe forfeited in favor of Castillo. Moral and exemplary damages and costs ofsuit
were properly awarded.

On August 11, 2010, Olivarez RealtyCorporation and Dr. Olivarez filed their motion for
Defendants admitted that Castillo owned the parcel of land covered by Transfer
reconsideration,74 arguing that the trial court exceeded its authority in forfeiting the
Certificate of Title No. T-19972. They likewise admitted the genuineness of the deed
₱2,500,000.00 down payment and awarding ₱500,000.00 in moral damages to
of conditional sale and that the corporation only paid ₱2,500,000.00 of the agreed
Castillo. They argued that Castillo only prayed for a total of ₱500,000.00 as actual and
purchase price.61
moral damages in his complaint.75 Appellants prayed that the Court of Appeals "take a
second hard look"76 at the case and reconsider its decision.
According to the trial court, the corporation was responsible for suing the Philippine
Tourism Authority and for paying the tenants disturbance compensation. Since
In the resolution77 dated March 18, 2011, the Court of Appeals denied the motion for
defendant corporation neither filed any case nor paid the tenants disturbance
reconsideration.
compensation, the trial court ruled that defendant corporation had no right to withhold
payments from Castillo.62
 Proceedings before this court
Olivarez Realty Corporation and Dr. Olivarez filed their petition for review on
certiorari78 with this court. Petitionersargue that the trial court and the Court of Appeals
erred in awarding damages to Castillo. Under Section 3, Rule 35 of the 1997 Rules
ofCivil Procedure, summary judgment may be rendered except as to the amountof
damages. Thus, the Court of Appeals "violated the procedural steps in rendering
summary judgment."79
Petitioners reiterate that there are genuine issues ofmaterial fact to be resolved in this
case. Thus, a full-blown trial is required, and the trial court prematurely decided the
case through summary judgment. They cite Torres v. Olivarez Realty Corporation and
Dr. Pablo Olivarez,80 a case decided by the Ninth Division of the Court of Appeals.
In Torres, Rosario Torres was the registeredowner of a parcel of land covered by
Transfer Certificate of Title No. T-19971. Under a deed of conditional sale, she sold
her property to OlivarezRealty Corporation for ₱17,345,900.00. When the corporation
failed to fully pay the purchase price, she sued for rescission of contractwith damages.
In their answer, the corporation and Dr. Olivarez argued thatthey discontinued
payment because Rosario Torres failed to clear the land of the tenants.
Similar to Castillo, Torres filed a motion for summary judgment, which the trial court
granted. On appeal, the Court of Appeals set aside the trial court’s summary judgment
and remanded the case to the trial court for further proceedings. 81 The Court of
Appeals ruled that the material allegations of the complaint "were directly disputed by
[the corporation and Dr. Olivarez] in their answer"82 when they argued that they
refused to pay because Torres failed to clear the land of the tenants.
With the Court of Appeals’ decision in Torres,Olivarez Realty Corporation and Dr.
Olivarez argue that this case should likewise be remanded to the trial court for further
proceedings under the equipoise rule.
Petitioners maintain that Castillo availed himself of the irreconcilable reliefs of
reformation of instrument and rescission of contract.83 Thus, the trial court should have
dismissed the case outright.
Petitioners likewise argue that the trial court had no jurisdiction to decide the case as
Castillo failed topay the correct docket fees.84 Petitioners argue that Castillo should
have paid docket fees based on the property’s fair market value since Castillo’s
complaint is a real action.85
In his comment,86 Castillo maintains that there are no genuine issues as to any
material fact inthis case. The trial court, therefore, correctly rendered summary
judgment.
As to petitioners’ claim that the trial court had no jurisdiction to decide the case,
Castillo argues that he prayed for rescission of contract in his complaint. This action is
incapable of pecuniary estimation, and the Clerk of Court properly computed the
docket fees based on this prayer.87 Olivarez Realty Corporation and Dr. Olivarez
replied,88reiterating their arguments in the petition for review on certiorari.
The issues for our resolution are the following:
I. Whether the trial court erred in rendering summary judgment;
II. Whether proper docket fees were paid in this case.
The petition lacks merit.
I
The trial court correctly rendered
summary judgment, as there were no
genuine issues of material fact in this case
Trial "is the judicial examination and determination of the issues between the parties to
the action."89 During trial, parties "present their respective evidence of their claims and
defenses."90 Parties to an action have the right "to a plenary trial of the case"91 to
ensure that they were given a right to fully present evidence on their respective claims.
There are instances, however, whentrial may be dispensed with. Under Rule 35 of the
1997 Rules of Civil Procedure, a trial court may dispense with trial and proceed to
decide a case if from the pleadings, affidavits, depositions, and other papers on file,
there is no genuine issue as to any material fact. In such a case, the judgment issued
is called a summary judgment.
A motion for summary judgment is filed either by the claimant or the defending
party.92 The trial court then hears the motion for summary judgment. If indeed there
are no genuine issues of material fact, the trial court shall issue summary judgment.
Section 3, Rule 35 of the 1997 Rules of Civil Procedure provides:
SEC. 3. Motion and proceedings thereon. – The motion shall be served at least ten
(10) days beforethe time specified for the hearing. The adverse party may serve
opposing affidavits, depositions, or admission at least three (3) days before the
hearing. After the hearing, the judgment sought shall be rendered forthwith ifthe
pleadings, supporting affidavits, depositions, and admissions on file, showthat, except
as to the amount of damages, there is no genuine issue as to any material fact and
that the moving party is entitled to a judgment as a matter of law.
An issue of material fact exists if the answer or responsive pleading filed specifically
denies the material allegations of fact set forth in the complaint or pleading. If the
issue offact "requires the presentation of evidence, it is a genuine issue of
fact."93 However, if the issue "could be resolved judiciously by plain resort" 94 to the
pleadings, affidavits, depositions, and other paperson file, the issue of fact raised is
sham, and the trial court may resolve the action through summary judgment.
A summary judgment is usually distinguished from a judgment on the pleadings.
Under Rule 34 of the 1997 Rules of Civil Procedure, trial may likewise be dispensed
with and a case decided through judgment on the pleadings if the answer filed fails to
tender an issue or otherwise admits the material allegations of the claimant’s
pleading.95
Judgment on the pleadings is proper when the answer filed fails to tender any issue,
or otherwise admitsthe material allegations in the complaint. 96 On the other hand, in a
summary judgment, the answer filed tenders issues as specific denials and affirmative
defenses are pleaded, but the issues raised are sham, fictitious, or otherwise not
genuine.97
In this case, Olivarez Realty Corporation admitted that it did not fully pay the purchase
price as agreed upon inthe deed of conditional sale. As to why it withheld payments
from Castillo, it set up the following affirmative defenses: First, Castillo did not filea
case to void the Philippine Tourism Authority’s title to the property; second,Castillo did
not clear the land of the tenants; third, Castillo allegedly sold the property to a third
person, and the subsequent sale is currently being litigated beforea Quezon City
court.
Considering that Olivarez RealtyCorporation and Dr. Olivarez’s answer tendered an
issue, Castillo properly availed himself of a motion for summary judgment.
However, the issues tendered by Olivarez Realty Corporation and Dr. Olivarez’s
answer are not genuine issues of material fact. These are issues that can be resolved
judiciously by plain resort to the pleadings, affidavits, depositions, and other papers on
file; otherwise, these issues are sham, fictitious, or patently unsubstantial.
Petitioner corporation refused to fully pay the purchase price because no court case
was filed to void the Philippine Tourism Authority’s title on the property. However,
paragraph C of the deed of conditional sale is clear that petitioner Olivarez Realty
Corporation is responsible for initiating court action against the Philippine Tourism
Authority:
C. [Olivarez Realty Corporation] assumes the responsibility of taking necessary legal
action thru Court to have the claim/title TCT T-18493 of Philippine Tourism Authority
over the above-described property be nullified and voided; with the full assistance of
[Castillo].98
Castillo’s alleged failureto "fully assist"99 the corporation in filing the case is not a
defense. As the trial court said, "how can [Castillo] assist [the corporation] when [the
latter] did not file the action [in the first place?]"100
Neither can Olivarez Realty Corporation argue that it refused to fully pay the purchase
price due to the Philippine Tourism Authority’s adverse claim on the property. The
corporation knew of this adverse claim when it entered into a contract of conditional
sale. It even obligated itself under paragraph C of the deed of conditional sale to sue
the Philippine Tourism Authority. This defense, therefore, is sham.
Contrary to petitioners’ claim, there is no "obvious ambiguity"101 as to which should
occur first — the payment of the disturbance compensation or the clearing of the land
within six months from the signing of the deed of conditional sale. The obligations
must be performed simultaneously. In this case, the parties should have coordinated
to ensure that tenants on the property were paid disturbance compensation and were
made to vacate the property six months after the signingof the deed of conditional
sale.
On one hand, pure obligations, or obligations whose performance do not depend upon
a future or uncertainevent, or upon a past event unknown to the parties, are
demandable at once.102 On the other hand, obligations with a resolutory period also
take effect at once but terminate upon arrival of the day certain. 103
Olivarez Realty Corporation’s obligation to pay disturbance compensation is a pure
obligation. The performance of the obligation to pay disturbance compensation did not
depend on any condition. Moreover, the deed of conditional sale did not give the
corporation a period to perform the obligation. As such, the obligation to pay
disturbance compensation was demandable at once. Olivarez RealtyCorporation
should have paid the tenants disturbance compensation upon execution of the deed of
conditional sale.
With respect to Castillo’s obligation to clear the land of the tenants within six months
from the signing of the contract, his obligation was an obligation with a resolutory
period. The obligation to clear the land of the tenants took effect at once, specifically,
upon the parties’ signing of the deed of conditional sale. Castillo had until October 2,
2000, six months from April 5, 2000 when the parties signed the deed of conditional
sale, to clear the land of the tenants.
Olivarez Realty Corporation, therefore, had no right to withhold payments of the
purchase price. As the trial court ruled, Olivarez Realty Corporation "can only claim
non-compliance [of the obligation to clear the land of the tenants in] October
2000."104 It said:
. . . it is clear that defendant [Olivarez Realty Corporation] should have paid the
installments on the ₱5 million downpayment up to October 8, 2000, or a total of
₱4,500,000.00. That is the agreement because the only time that defendant
[corporation] can claim non-compliance of the condition is after October, 2000 and so
it has the clear obligation topay up to the October 2000 the agreed installments. Since
it paid only 2,500,000.00, then a violation of the contract has already been committed.
. . .105
The claim that Castillo sold the property to another is fictitious and was made in bad
faith to prevent the trial court from rendering summary judgment. Petitioners did not
elaborate on this defense and insisted on revealing the identity of the buyer only
during trial.106 Even in their petition for review on certiorari, petitioners never disclosed
the name of this alleged buyer. Thus, as the trial court ruled, this defense did not
tender a genuine issue of fact, with the defense "bereft of details." 107
Castillo’s alleged prayer for the irreconcilable reliefs of rescission of contract and
reformation of instrument is not a ground to dismiss his complaint. A plaintiff may
allege two or more claims in the complaint alternatively or hypothetically, either in one
cause of action or in separate causes of action per Section 2, Rule 8 of the 1997
Rules of Civil Procedure.108 It is the filing of two separatecases for each of the causes
of action that is prohibited since the subsequently filed case may be dismissed under
Section 4, Rule 2 of the 1997 Rules of Civil Procedure109 on splitting causes of action.
As demonstrated, there are no genuineissues of material fact in this case. These are
issues that can be resolved judiciously by plain resort to the pleadings, affidavits,
depositions, and other papers on file. As the trial court found, Olivarez Realty
Corporation illegally withheld payments of the purchase price. The trial court did not
err in rendering summary judgment.
II
Castillo is entitled to cancel the contract
of conditional sale
Since Olivarez Realty Corporation illegally withheld payments of the purchase price,
Castillo is entitled to cancel his contract with petitioner corporation. However, we
properly characterize the parties’ contract as a contract to sell, not a contract of
conditional sale.
In both contracts to sell and contracts of conditional sale, title to the property remains
with the seller until the buyer fully pays the purchase price. 110 Both contracts are
subject to the positive suspensive condition of the buyer’s full payment of the
purchase price.111
In a contract of conditional sale, the buyer automatically acquires title to the property
upon full payment of the purchase price.112 This transfer of title is "by operation of law
without any further act having to be performed by the seller." 113 In a contract to sell,
transfer of title to the prospective buyer is not automatic.114 "The prospective seller
[must] convey title to the property [through] a deed of conditional sale."115
The distinction is important to determine the applicable laws and remedies in case a
party does not fulfill his or her obligations under the contract. In contracts of
conditional sale, our laws on sales under the Civil Code of the Philippines apply. On
the other hand, contracts to sell are not governed by our law on sales 116 but by the
Civil Code provisions on conditional obligations.
Specifically, Article 1191 of the Civil Code on the right to rescind reciprocal obligations
does not apply to contracts to sell.117 As this court explained in Ong v. Court of
Appeals,118 failure to fully pay the purchase price in contracts to sell is not the breach
of contract under Article 1191.119 Failure to fully pay the purchase price is "merely an
event which prevents the [seller’s] obligation to convey title from acquiring binding
force."120 This is because "there can be no rescission of an obligation that is still
nonexistent, the suspensive condition not having [happened]."121
In this case, Castillo reserved his title to the property and undertook to execute a deed
of absolute sale upon Olivarez Realty Corporation’s full payment of the purchase
price.122 Since Castillo still has to execute a deed of absolute sale to Olivarez
RealtyCorporation upon full payment of the purchase price, the transfer of title is
notautomatic. The contract in this case is a contract to sell.
As this case involves a contract tosell, Article 1191 of the Civil Code of the Philippines
does not apply. The contract to sell is instead cancelled, and the parties shall stand as
if the obligation to sell never existed.123
Olivarez Realty Corporation shall return the possession of the property to Castillo. Any
improvement that Olivarez Realty Corporation may have introduced on the property
shall be forfeited in favor of Castillo per paragraph I of the deed of conditional sale:
I. Immediately upon signing thisContract, [Olivarez Realty Corporation] shall be
entitled to occupy, possess and develop the subject property. In case this Contract is
cancelled, any improvement introduced by [Olivarez Realty Corporation] on the
property shall be forfeited in favor of [Castillo.]124
As for prospective sellers, thiscourt generally orders the reimbursement of the
installments paidfor the property when setting aside contracts to sell.125 This is true
especially ifthe property’s possession has not been delivered to the prospective buyer
prior to the transfer of title.
In this case, however, Castillo delivered the possession of the property to Olivarez
Realty Corporation prior to the transfer of title. We cannot order the reimbursement of
the installments paid.
In Gomez v. Court of Appeals,126 the City of Manila and Luisa Gomez entered into a
contract to sell over a parcel of land. The city delivered the property’s possession to
Gomez. She fully paid the purchase price for the property but violated the terms of the
contract to sell by renting out the property to other persons. This court set aside the
contract to sell for her violation of the terms of the contract to sell. It ordered the
installments paid forfeited in favor of the City of Manila "as reasonable compensation
for [Gomez’s] use of the [property]"127 for eight years.
In this case, Olivarez Realty Corporation failed to fully pay the purchase price for the
property. It only paid ₱2,500,000.00 out of the ₱19,080,490.00 agreed purchase price.
Worse, petitioner corporation has been in possession of Castillo’s property for 14
years since May 5, 2000 and has not paid for its use of the property.
Similar to the ruling in Gomez, we order the ₱2,500,000.00 forfeited in favor of Castillo
as reasonable compensation for Olivarez Realty Corporation’s use of the property.
III
Olivarez Realty Corporation is liable for
moral and exemplary damages and
attorney’s fees
We note that the trial court erred in rendering summary judgment on the amount of
damages. Under Section 3, Rule 35 of the 1997 Rules of Civil Procedure, summary
judgment may be rendered, except as to the amount of damages.
In this case, the trial court erred in forfeiting the ₱2,500,000.00 in favor of Castillo as
damages under Article 1191 of the Civil Code of the Philippines. As discussed, there
is nobreach of contract under Article 1191 in this case.
The trial court likewise erred inrendering summary judgment on the amount of moral
and exemplary damages and attorney’s fees.
Nonetheless, we hold that Castillois entitled to moral damages, exemplary damages,
and attorney’s fees.
Moral damages may be awarded in case the claimant experienced physical suffering,
mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury.128
As for exemplary damages, they are awarded in addition to moral damages by way of
example or correction for the public good.129 Specifically in contracts, exemplary
damages may be awarded if the defendant acted in a wanton, fraudulent,reckless,
oppressive, or malevolent manner.130
Under the deed of conditional sale, Olivarez Realty Corporation may only suspend the
monthly down payment in case Castillo fails to clear the land of the tenants six months
from the signing of the instrument. Yet, even before the sixth month arrived, Olivarez
Realty Corporation withheld payments for Castillo’s property. It evenused as a
defense the fact that no case was filed against the PhilippineTourism Authority when,
under the deed of conditional sale, Olivarez Realty Corporation was clearly
responsible for initiating action against the Philippine Tourism Authority. These are
oppressive and malevolent acts, and we find Castillo entitled to ₱500,000.00 moral
damages and ₱50,000.00 exemplary damages:
Plaintiff Castillo is entitled to moral damages because of the evident bad faith
exhibited by defendants in dealing with him regarding the sale of his lot to defendant
[Olivarez Realty Corporation]. He suffered much prejudice due to the failure of
defendants to pay him the balance of purchase price which he expected touse for his
needs which caused him wounded feelings, sorrow, mental anxiety and sleepless
nights for which defendants should pay ₱500,000.00 as moral damages more than six
(6) years had elapsed and defendants illegally and unfairly failed and refused to pay
their legal obligations to plaintiff, unjustly taking advantage of a poor uneducated man
like plaintiff causing much sorrow and financial difficulties. Moral damages in favor of
plaintiff is clearly justified . . . [Castillo] is also entitled to ₱50,000.00 as exemplary
damages to serve as a deterrent to other parties to a contract to religiously comply
with their prestations under the contract.131
We likewise agree that Castillo is entitled to attorney’s fees in addition to the
exemplary damages.132 Considering that Olivarez Realty Corporation refused to
satisfy Castillo’splainly valid, just, and demandable claim,133 the award of ₱50,000.00
as attorney’s fees is in order. However, we find that Dr. Pablo R.Olivarez is not
solidarily liable with Olivarez Realty Corporation for the amount of damages.
Under Article 1207 of the Civil Code of the Philippines, there is solidary liability only
when the obligation states it or when the law or the nature of the obligation requires
solidarity.134 In case of corporations, they are solely liable for their obligations.135 The
directors or trustees and officers are not liable with the corporation even if it is through
their acts that the corporation incurred the obligation. This is because a corporation is
separate and distinct from the persons comprising it.136
As an exception to the rule, directors or trustees and corporate officers may be
solidarily liable with the corporation for corporate obligations if they acted "in bad faith
or with gross negligence in directing the corporate affairs."137
In this case, we find that Castillo failed to prove with preponderant evidence that it was
through Dr. Olivarez’s bad faith or gross negligence that Olivarez Realty Corporation
failed to fully pay the purchase price for the property. Dr. Olivarez’s alleged act of
making Castillo sign the deed of conditional sale without explaining to the latter the
deed’s terms in Tagalog is not reason to hold Dr. Olivarez solidarily liable with the
corporation. Castillo had a choice not to sign the deed of conditional sale. He could
have asked that the deed of conditional sale be written in Tagalog. Thus, Olivarez
Realty Corporation issolely liable for the moral and exemplary damages and attorney’s
fees to Castillo.
IV
The trial court acquired jurisdiction over
 Castillo’s action as he paid the correct rescission which is not susceptible of pecuniary estimation, the action should not be
docket fees confused and equated with the "value of the property" subject of the transaction; that
by the very nature of the case, the allegations, and specific prayer in the complaint,
sans any prayer for recovery of money and/or value of the transaction, or for actual or
Olivarez Realty Corporation and Dr. Olivarez claimed that the trial court had no
compensatory damages, the assessment and collection of the legal fees should not be
jurisdiction to take cognizance of the case. In the reply/motion to dismiss the
intertwined with the merits of the case and/or what may be its end result; and that to
complaint138 they filed with the Court of Appeals, petitioners argued that Castillo failed
sustain private respondents' [petitioners'] position on what the respondent court may
to pay the correct amount of docket fees. Stating that this action is a real action,
decide after all, then the assessment should be deferred and finally assessed only
petitioners argued that the docket fee Castillo paid should have been based on the fair
after the court had finally decided the case, which cannot be done because the rules
market value of the property. In this case, Castillo only paid 4,297.00, which is
require that filing fees should be based on what is alleged and prayed for in the face of
insufficient "if the real nature of the action was admitted and the fair market value of
the complaint and paid upon the filing of the complaint.142
the property was disclosed and made the basis of the amount of docket fees to be
paid to the court."139Thus, according to petitioners, the case should be dismissed for
lack of jurisdiction. Although we discussed that there isno rescission of contract to speak of in contracts of
conditional sale, we hold that an action to cancel a contract to sell, similar to an action
for rescission of contract of sale, is an action incapable of pecuniary estimation. Like
Castillo countered that his action for rescission is an action incapable of pecuniary
any action incapable of pecuniary estimation, an action to cancel a contract to sell
estimation. Thus, the Clerk of Court of the Regional Trial Court of Tanauan City did
"demands an inquiry into other factors"143 aside from the amount of money to be
not err in assessing the docket fees based on his prayer.
awarded to the claimant. Specifically in this case, the trial court principally determined
whether Olivarez Realty Corporation failed to pay installments of the property’s
We rule for Castillo. In De Leon v. Court of Appeals,140 this court held that an action for purchase price as the parties agreed upon in the deed of conditional sale. The
rescission of contract of sale of real property is an action incapable of pecuniary principal natureof Castillo’s action, therefore, is incapable of pecuniary estimation.
estimation. In De Leon, the action involved a real property. Nevertheless, this court
held that "it is the nature of the action as one for rescission of contract which is
All told, there is no issue that the parties in this case entered into a contract to sell a
controlling."141 Consequently, the docket fees to be paid shall be for actions
parcel of land and that Olivarez Realty Corporation failed to fully pay the installments
incapableof pecuniary estimation, regardless if the claimant may eventually recover
agreed upon.Consequently, Castillo is entitled to cancel the contract to sell.
the real property. This court said:

WHEREFORE, the petition for review on certiorari is DENIED. The Court of Appeals’
. . . the Court in Bautista v.Lim, held that an action for rescission of contract is one
decision dated July 20, 2010 and in CA-G.R. CV No. 91244 is AFFIRMEDwith
which cannot be estimated and therefore the docket fee for its filing should be the flat
MODIFICATION.
amount of ₱200.00 as then fixed in the former Rule 141, §141, §5(10). Said this Court:

The deed of conditional sale dated April 5, 2000 is declared CANCELLED. Petitioner
We hold that Judge Dalisay did not err in considering Civil Case No. V-144 as
Olivarez Realty Corporation shall RETURN to respondent Benjamin Castillo the
basically one for rescission or annulment of contract which is not susceptible of
possession of the property covered by Transfer Certificate of Title No. T-19972
pecuniary estimation (1 Moran's Comments on the Rules of Court, 1970 Ed, p. 55;
together with all the improvements that petitioner corporation introduced on the
Lapitan vs. Scandia, Inc., L-24668, July 31, 1968, 24 SCRA 479, 781-483).
property. The amount of ₱2,500,000.00 is FORFEITED in favor of respondent
Benjamin Castillo as reasonable compensation for the use of petitioner Olivarez
Consequently, the fee for docketing it is ₱200, an amount already paid by plaintiff, Realty Corporation of the property.
now respondent Matilda Lim.1âwphi1(She should pay also the two pesos legal
research fund fee, if she has not paid it, as required in Section 4 of Republic Act No.
Petitioner Olivarez Realty Corporation shall PAY respondent Benjamin Castillo
3870, the charter of the U.P. Law Center).
₱500,000.00 as moral damages, ₱50,000.00 as exemplary damages, and ₱50,000.00
as attorney's fees with interest at 6% per annum from the time this decision becomes
Thus, although eventually the result may be the recovery of land, it is the nature of the final and executory until petitioner
action as one for rescission of contract which is controlling. The Court of Appeals
correctly applied these cases to the present one. As it said:
corporation fully pays the amount of damages.144

We would like to add the observations that since the action of petitioners [private
SO ORDERED.
respondents] against private respondents [petitioners] is solely for annulment or