Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 118114 December 7, 1995

TEODORO ACAP, petitioner,

vs.
COURT OF APPEALS and EDY DE LOS REYES, respondents.

PADILLA, J.:

This is a petition for review on certiorari of the decision1 of the Court of Appeals, 2nd
Division, in CA-G.R. No. 36177, which affirmed the decision2 of the Regional Trial Court
of Himamaylan, Negros Occidental holding that private respondent Edy de los Reyes had
acquired ownership of Lot No. 1130 of the Cadastral Survey of Hinigaran, Negros
Occidental based on a document entitled "Declaration of Heirship and Waiver of Rights",
and ordering the dispossession of petitioner as leasehold tenant of the land for failure to
pay rentals.

The facts of the case are as follows:

The title to Lot No. 1130 of the Cadastral Survey of Hinigaran, Negros Occidental was
evidenced by OCT No. R-12179. The lot has an area of 13,720 sq. meters. The title was
issued and is registered in the name of spouses Santiago Vasquez and Lorenza Oruma.
After both spouses died, their only son Felixberto inherited the lot. In 1975, Felixberto
executed a duly notarized document entitled "Declaration of Heirship and Deed of
Absolute Sale" in favor of Cosme Pido.

The evidence before the court a quo established that since 1960, petitioner Teodoro
Acap had been the tenant of a portion of the said land, covering an area of nine thousand
five hundred (9,500) meters. When ownership was transferred in 1975 by Felixberto to
Cosme Pido, Acap continued to be the registered tenant thereof and religiously paid his
leasehold rentals to Pido and thereafter, upon Pido's death, to his widow Laurenciana.

The controversy began when Pido died intestate and on 27 November 1981, his
surviving heirs executed a notarized document denominated as "Declaration of Heirship
and Waiver of Rights of Lot No. 1130 Hinigaran Cadastre," wherein they declared; to
quote its pertinent portions, that:

. . . Cosme Pido died in the Municipality of Hinigaran, Negros Occidental,

he died intestate and without any known debts and obligations which the
said parcel of land is (sic) held liable.

That Cosme Pido was survived by his/her legitimate heirs, namely:

LAURENCIANA PIDO, wife, ELY, ERVIN, ELMER, and ELECHOR all
surnamed PIDO; children;
 That invoking the provision of Section 1, Rule 74 of the Rules of Court,
the above-mentioned heirs do hereby declare unto [sic] ourselves the
only heirs of the late Cosme Pido and that we hereby adjudicate unto
ourselves the above-mentioned parcel of land in equal shares.

Now, therefore, We LAURENCIANA3 , ELY, ELMER, ERVIN and

ELECHOR all surnamed PIDO, do hereby waive, quitclaim all our rights,
interests and participation over the said parcel of land in favor of EDY DE
LOS REYES, of legal age, (f)ilipino, married to VIRGINIA DE LOS
REYES, and resident of Hinigaran, Negros Occidental, Philippines. . .
.4 (Emphasis supplied)

The document was signed by all of Pido's heirs. Private respondent Edy de los Reyes did
not sign said document.

It will be noted that at the time of Cosme Pido's death, title to the property continued to be
registered in the name of the Vasquez spouses. Upon obtaining the Declaration of
Heirship with Waiver of Rights in his favor, private respondent Edy de los Reyes filed the
same with the Registry of Deeds as part of a notice of an adverse claim against the
original certificate of title.

Thereafter, private respondent sought for petitioner (Acap) to personally inform him that
he (Edy) had become the new owner of the land and that the lease rentals thereon
should be paid to him. Private respondent further alleged that he and petitioner entered
into an oral lease agreement wherein petitioner agreed to pay ten (10) cavans of
palay per annum as lease rental. In 1982, petitioner allegedly complied with said
obligation. In 1983, however, petitioner refused to pay any further lease rentals on the
land, prompting private respondent to seek the assistance of the then Ministry of Agrarian
Reform (MAR) in Hinigaran, Negros Occidental. The MAR invited petitioner to a
conference scheduled on 13 October 1983. Petitioner did not attend the conference but
sent his wife instead to the conference. During the meeting, an officer of the Ministry
informed Acap's wife about private respondent's ownership of the said land but she
stated that she and her husband (Teodoro) did not recognize private respondent's claim
of ownership over the land.

On 28 April 1988, after the lapse of four (4) years, private respondent filed a complaint for
recovery of possession and damages against petitioner, alleging in the main that as his
leasehold tenant, petitioner refused and failed to pay the agreed annual rental of ten (10)
cavans of palay despite repeated demands.

During the trial before the court a quo, petitioner reiterated his refusal to recognize
private respondent's ownership over the subject land. He averred that he continues to
recognize Cosme Pido as the owner of the said land, and having been a registered
tenant therein since 1960, he never reneged on his rental obligations. When Pido died,
he continued to pay rentals to Pido's widow. When the latter left for abroad, she
instructed him to stay in the landholding and to pay the accumulated rentals upon her
demand or return from abroad.

Petitioner further claimed before the trial court that he had no knowledge about any
transfer or sale of the lot to private respondent in 1981 and even the following year after
Laurenciana's departure for abroad. He denied having entered into a verbal lease
tenancy contract with private respondent and that assuming that the said lot was indeed
sold to private respondent without his knowledge, R.A. 3844, as amended, grants him the
right to redeem the same at a reasonable price. Petitioner also bewailed private
respondent's ejectment action as a violation of his right to security of tenure under P.D.
27.
On 20 August 1991, the lower court rendered a decision in favor of private respondent,
the dispositive part of which reads:

WHEREFORE, premises considered, the Court renders judgment in favor

of the plaintiff, Edy de los Reyes, and against the defendant, Teodoro
Acap, ordering the following, to wit:

1. Declaring forfeiture of defendant's preferred right to issuance of a

Certificate of Land Transfer under Presidential Decree No. 27 and his
farmholdings;

2. Ordering the defendant Teodoro Acap to deliver possession of said

farm to plaintiff, and;

3. Ordering the defendant to pay P5,000.00 as attorney's fees, the sum of

P1,000.00 as expenses of litigation and the amount of P10,000.00 as
actual damages.5

In arriving at the above-mentioned judgment, the trial court stated that the evidence had
established that the subject land was "sold" by the heirs of Cosme Pido to private
respondent. This is clear from the following disquisitions contained in the trial court's six
(6) page decision:

There is no doubt that defendant is a registered tenant of Cosme Pido.

However, when the latter died their tenancy relations changed since
ownership of said land was passed on to his heirs who, by executing
a Deed of Sale, which defendant admitted in his affidavit, likewise passed
on their ownership of Lot 1130 to herein plaintiff (private respondent). As
owner hereof, plaintiff has the right to demand payment of rental and the
tenant is obligated to pay rentals due from the time demand is made. . . .6

xxx xxx xxx

Certainly, the sale of the Pido family of Lot 1130 to herein plaintiff does
not of itself extinguish the relationship. There was only a change of the
personality of the lessor in the person of herein plaintiff Edy de los Reyes
who being the purchaser or transferee, assumes the rights and
obligations of the former landowner to the tenant Teodoro Acap, herein
defendant.7

Aggrieved, petitioner appealed to the Court of Appeals, imputing error to the lower court
when it ruled that private respondent acquired ownership of Lot No. 1130 and that he, as
tenant, should pay rentals to private respondent and that failing to pay the same from
1983 to 1987, his right to a certificate of land transfer under P.D. 27 was deemed
forfeited.

The Court of Appeals brushed aside petitioner's argument that the Declaration of
Heirship and Waiver of Rights (Exhibit "D"), the document relied upon by private
respondent to prove his ownership to the lot, was excluded by the lower court in its order
dated 27 August 1990. The order indeed noted that the document was not identified by
Cosme Pido's heirs and was not registered with the Registry of Deeds of Negros
Occidental. According to respondent court, however, since the Declaration of Heirship
and Waiver of Rights appears to have been duly notarized, no further proof of its due
execution was necessary. Like the trial court, respondent court was also convinced that
the said document stands as prima facie proof of appellee's (private
respondent's) ownership of the land in dispute.
With respect to its non-registration, respondent court noted that petitioner had actual
knowledge of the subject sale of the land in dispute to private respondent because as
early as 1983, he (petitioner) already knew of private respondent's claim over the said
land but which he thereafter denied, and that in 1982, he (petitioner) actually paid rent to
private respondent. Otherwise stated, respondent court considered this fact of rental
payment in 1982 as estoppel on petitioner's part to thereafter refute private respondent's
claim of ownership over the said land. Under these circumstances, respondent court
ruled that indeed there was deliberate refusal by petitioner to pay rent for a continued
period of five years that merited forfeiture of his otherwise preferred right to the issuance
of a certificate of land transfer.

In the present petition, petitioner impugns the decision of the Court of Appeals as not in
accord with the law and evidence when it rules that private respondent acquired
ownership of Lot No. 1130 through the aforementioned Declaration of Heirship and
Waiver of Rights.

Hence, the issues to be resolved presently are the following:

1. WHETHER OR NOT THE SUBJECT DECLARATION OF HEIRSHIP

AND WAIVER OF RIGHTS IS A RECOGNIZED MODE OF ACQUIRING
OWNERSHIP BY PRIVATE RESPONDENT OVER THE LOT IN
QUESTION.

2. WHETHER OR NOT THE SAID DOCUMENT CAN BE CONSIDERED

A DEED OF SALE IN FAVOR OF PRIVATE RESPONDENT OF THE
LOT IN QUESTION.

Petitioner argues that the Regional Trial Court, in its order dated 7 August 1990, explicitly
excluded the document marked as Exhibit "D" (Declaration of Heirship, etc.) as private
respondent's evidence because it was not registered with the Registry of Deeds and was
not identified by anyone of the heirs of Cosme Pido. The Court of Appeals, however, held
the same to be admissible, it being a notarized document, hence, a prima facie proof of
private respondents' ownership of the lot to which it refers.

Petitioner points out that the Declaration of Heirship and Waiver of Rights is not one of
the recognized modes of acquiring ownership under Article 712 of the Civil Code. Neither
can the same be considered a deed of sale so as to transfer ownership of the land to
private respondent because no consideration is stated in the contract (assuming it is a
contract or deed of sale).

Private respondent defends the decision of respondent Court of Appeals as in accord

with the evidence and the law. He posits that while it may indeed be true that the trial
court excluded his Exhibit "D" which is the Declaration of Heirship and Waiver of Rights
as part of his evidence, the trial court declared him nonetheless owner of the subject lot
based on other evidence adduced during the trial, namely, the notice of adverse claim
(Exhibit "E") duly registered by him with the Registry of Deeds, which contains the
questioned Declaration of Heirship and Waiver of Rights as an integral part thereof.

We find the petition impressed with merit.

In the first place, an asserted right or claim to ownership or a real right over a thing
arising from a juridical act, however justified, is not per se sufficient to give rise to
ownership over the res. That right or title must be completed by fulfilling certain
conditions imposed by law. Hence, ownership and real rights are acquired only pursuant
to a legal mode or process. While title is the juridical justification, mode is the actual
process of acquisition or transfer of ownership over a thing in question.8
Under Article 712 of the Civil Code, the modes of acquiring ownership are generally
classified into two (2) classes, namely, the original mode (i.e., through occupation,
acquisitive prescription, law or intellectual creation) and the derivative mode (i.e., through
succession mortis causa or tradition as a result of certain contracts, such as sale, barter,
donation, assignment or mutuum).

In the case at bench, the trial court was obviously confused as to the nature and effect of
the Declaration of Heirship and Waiver of Rights, equating the same with a contract
(deed) of sale. They are not the same.

In a Contract of Sale, one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other party to pay a price certain
in money or its equivalent.9

Upon the other hand, a declaration of heirship and waiver of rights operates as a public
instrument when filed with the Registry of Deeds whereby the intestate heirs adjudicate
and divide the estate left by the decedent among themselves as they see fit. It is in effect
an extrajudicial settlement between the heirs under Rule 74 of the Rules of Court.10

Hence, there is a marked difference between a sale of hereditary rights and a waiver of
hereditary rights. The first presumes the existence of a contract or deed of sale between
the parties.11 The second is, technically speaking, a mode of extinction of ownership
where there is an abdication or intentional relinquishment of a known right with
knowledge of its existence and intention to relinquish it, in favor of other persons who are
co-heirs in the succession.12 Private respondent, being then a stranger to the succession
of Cosme Pido, cannot conclusively claim ownership over the subject lot on the sole
basis of the waiver document which neither recites the elements of either a sale,13 or a
donation,14 or any other derivative mode of acquiring ownership.

Quite surprisingly, both the trial court and public respondent Court of Appeals concluded
that a "sale" transpired between Cosme Pido's heirs and private respondent and that
petitioner acquired actual knowledge of said sale when he was summoned by the
Ministry of Agrarian Reform to discuss private respondent's claim over the lot in question.
This conclusion has no basis both in fact and in law.

On record, Exhibit "D", which is the "Declaration of Heirship and Waiver of Rights"
was excluded by the trial court in its order dated 27 August 1990 because the document
was neither registered with the Registry of Deeds nor identified by the heirs of Cosme
Pido. There is no showing that private respondent had the same document attached to or
made part of the record. What the trial court admitted was Annex "E", a notice of adverse
claim filed with the Registry of Deeds which contained the Declaration of Heirship with
Waiver of rights and was annotated at the back of the Original Certificate of Title to the
land in question.

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

It is to be noted that while the existence of said adverse claim was duly proven, there is
no evidence whatsoever that a deed of sale was executed between Cosme Pido's heirs
and private respondent transferring the rights of Pido's heirs to the land in favor of private
respondent. Private respondent's right or interest therefore in the tenanted lot remains an
adverse claim which cannot by itself be sufficient to cancel the OCT to the land and title
the same in private respondent's name.
 Consequently, while the transaction between Pido's heirs and private respondent
may be binding on both parties, the right of petitioner as a registered tenant to the
land cannot be perfunctorily forfeited on a mere allegation of private respondent's
ownership without the corresponding proof thereof.

Petitioner had been a registered tenant in the subject land since 1960 and religiously
paid lease rentals thereon. In his mind, he continued to be the registered tenant of
Cosme Pido and his family (after Pido's death), even if in 1982, private respondent
allegedly informed petitioner that he had become the new owner of the land.

Under the circumstances, petitioner may have, in good faith, assumed such statement of
private respondent to be true and may have in fact delivered 10 cavans of palay as
annual rental for 1982 to private respondent. But in 1983, it is clear that petitioner had
misgivings over private respondent's claim of ownership over the said land because in
the October 1983 MAR conference, his wife Laurenciana categorically denied all of
private respondent's allegations. In fact, petitioner even secured a certificate from the
MAR dated 9 May 1988 to the effect that he continued to be the registered tenant of
Cosme Pido and not of private respondent. The reason is that private respondent never
registered the Declaration of Heirship with Waiver of Rights with the Registry of Deeds or
with the MAR. Instead, he (private respondent) sought to do indirectly what could not be
done directly, i.e., file a notice of adverse claim on the said lot to establish ownership
thereover.

It stands to reason, therefore, to hold that there was no unjustified or deliberate refusal by
petitioner to pay the lease rentals or amortizations to the landowner/agricultural lessor
which, in this case, private respondent failed to establish in his favor by clear and
convincing evidence.16

Consequently, the sanction of forfeiture of his preferred right to be issued a Certificate of

Land Transfer under P.D. 27 and to the possession of his farmholdings should not be
applied against petitioners, since private respondent has not established a cause of
action for recovery of possession against petitioner.

WHEREFORE, premises considered, the Court hereby GRANTS the petition and the
decision of the Court of Appeals dated 1 May 1994 which affirmed the decision of the
RTC of Himamaylan, Negros Occidental dated 20 August 1991 is hereby SET ASIDE.
The private respondent's complaint for recovery of possession and damages against
petitioner Acap is hereby DISMISSED for failure to properly state a cause of action,
without prejudice to private respondent taking the proper legal steps to establish the legal
mode by which he claims to have acquired ownership of the land in question.

SO ORDERED.

G.R. No. L-116650 May 23, 1995

TOYOTA SHAW, INC., petitioner,

vs.
COURT OF APPEALS and LUNA L. SOSA, respondents.

DAVIDE, JR., J.:

At the heart of the present controversy is the document marked Exhibit "A" 1 for the
private respondent, which was signed by a sales representative of Toyota Shaw, Inc.
named Popong Bernardo. The document reads as follows:

AGREEMENTS BETWEEN MR. SOSA

& POPONG BERNARDO OF TOYOTA
SHAW, INC.

1. all necessary documents will be submitted to TOYOTA SHAW, INC.

(POPONG BERNARDO) a week after, upon arrival of Mr. Sosa from the
Province (Marinduque) where the unit will be used on the 19th of June.

2. the downpayment of P100,000.00 will be paid by Mr. Sosa on June 15,

1989.

3. the TOYOTA SHAW, INC. LITE ACE yellow, will be pick-up [sic] and
released by TOYOTA SHAW, INC. on the 17th of June at 10 a.m.

(
S
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.
)
P
O
P
O
N
G
 B
E
R
N
A
R
D
O
.

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

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

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

The next day, 15 June 1989, Sosa and Gilbert went to Toyota to deliver the
downpayment of P100,000.00. They met Bernardo who then accomplished a printed
Vehicle Sales Proposal (VSP) No. 928,2 on which Gilbert signed under the subheading
CONFORME. This document shows that the customer's name is "MR. LUNA SOSA" with
home address at No. 2316 Guijo Street, United Parañaque II; that the model series of the
vehicle is a "Lite Ace 1500" described as "4 Dr minibus"; that payment is by "installment,"
to be financed by "B.A.," 3 with the initial cash outlay of P100,000.00 broken down as
follows:

a) downpayment — P 53,148.00
b) insurance — P 13,970.00
c) BLT registration fee — P 1,067.00
CHMO fee — P 2,715.00
service fee — P 500.00
accessories — P 29,000.00
and that the "BALANCE TO BE FINANCED" is "P274,137.00." The spaces provided for
"Delivery Terms" were not filled-up. It also contains the following pertinent provisions:

CONDITIONS OF SALES

1. This sale is subject to availability of unit.

2. Stated Price is subject to change without prior notice, Price prevailing

and in effect at time of selling will apply. . . .

Rodrigo Quirante, the Sales Supervisor of Bernardo, checked and approved the VSP.

On 17 June 1989, at around 9:30 a.m., Bernardo called Gilbert to inform him that the
vehicle would not be ready for pick up at 10:00 a.m. as previously agreed upon but at
2:00 p.m. that same day. At 2:00 p.m., Sosa and Gilbert met Bernardo at the latter's
office. According to Sosa, Bernardo informed them that the Lite Ace was being readied
for delivery. After waiting for about an hour, Bernardo told them that the car could not be
delivered because "nasulot ang unit ng ibang malakas."

Toyota contends, however, that the Lite Ace was not delivered to Sosa because of the
disapproval by B.A. Finance of the credit financing application of Sosa. It further alleged
that a particular unit had already been reserved and earmarked for Sosa but could not be
released due to the uncertainty of payment of the balance of the purchase price. Toyota
then gave Sosa the option to purchase the unit by paying the full purchase price in cash
but Sosa refused.

After it became clear that the Lite Ace would not be delivered to him, Sosa asked that his
downpayment be refunded. Toyota did so on the very same day by issuing a Far East
Bank check for the full amount of P100,000.00, 4 the receipt of which was shown by a
check voucher of Toyota,5 which Sosa signed with the reservation, "without prejudice to
our future claims for damages."

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

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

plaintiff, plaintiff suffered embarrassment, humiliation, ridicule, mental
anguish and sleepless nights because: (i) he and his family were
constrained to take the public transportation from Manila to Lucena City
on their way to Marinduque; (ii) his balikbayan-guest canceled his
scheduled first visit to Marinduque in order to avoid the inconvenience of
taking public transportation; and (iii) his relatives, friends, neighbors and
other provincemates, continuously irked him about "his Brand-New
Toyota Lite Ace — that never was." Under the circumstances, defendant
 should be made liable to the plaintiff for moral damages in the amount of
One Million Pesos (P1,000,000.00). 10

In its answer to the complaint, Toyota alleged that no sale was entered into between it
and Sosa, that Bernardo had no authority to sign Exhibit "A" for and in its behalf, and that
Bernardo signed Exhibit "A" in his personal capacity. As special and affirmative defenses,
it alleged that: the VSP did not state date of delivery; Sosa had not completed the
documents required by the financing company, and as a matter of policy, the vehicle
could not and would not be released prior to full compliance with financing requirements,
submission of all documents, and execution of the sales agreement/invoice; the
P100,000.00 was returned to and received by Sosa; the venue was improperly laid; and
Sosa did not have a sufficient cause of action against it. It also interposed compulsory
counterclaims.

After trial on the issues agreed upon during the pre-trial session, 11 the trial court rendered
on 18 February 1992 a decision in favor of Sosa. 12 It ruled that Exhibit "A," the
"AGREEMENTS BETWEEN MR. SOSA AND POPONG BERNARDO," was a valid
perfected contract of sale between Sosa and Toyota which bound Toyota to deliver the
vehicle to Sosa, and further agreed with Sosa that Toyota acted in bad faith in selling to
another the unit already reserved for him.

As to Toyota's contention that Bernardo had no authority to bind it through Exhibit "A,"
the trial court held that the extent of Bernardo's authority "was not made known to
plaintiff," for as testified to by Quirante, "they do not volunteer any information as to the
company's sales policy and guidelines because they are internal matters." 13 Moreover,
"[f]rom the beginning of the transaction up to its consummation when the downpayment
was made by the plaintiff, the defendants had made known to the plaintiff the impression
that Popong Bernardo is an authorized sales executive as it permitted the latter to do
acts within the scope of an apparent authority holding him out to the public as possessing
power to do these acts." 14 Bernardo then "was an agent of the defendant Toyota Shaw,
Inc. and hence bound the defendants." 15

The court further declared that "Luna Sosa proved his social standing in the community
and suffered besmirched reputation, wounded feelings and sleepless nights for which he
ought to be compensated." 16 Accordingly, it disposed as follows:

WHEREFORE, viewed from the above findings, judgment is hereby

rendered in favor of the plaintiff and against the defendant:

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

P75,000.00 for moral damages;

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

P10,000.00 for exemplary damages;

3. ordering the defendant to pay the sum of P30,000.00

attorney's fees plus P2,000.00 lawyer's transportation fare
per trip in attending to the hearing of this case;

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

P2,000.00 transportation fare per trip of the plaintiff in
attending the hearing of this case; and

5. ordering the defendant to pay the cost of suit.

SO ORDERED.
Dissatisfied with the trial court's judgment, Toyota appealed to the Court of Appeals. The
case was docketed as CA-G.R. CV No. 40043. In its decision promulgated on 29 July
1994,17 the Court of Appeals affirmed in toto the appealed decision.

Toyota now comes before this Court via this petition and raises the core issue stated at
the beginning of the ponencia and also the following related issues: (a) whether or not
the standard VSP was the true and documented understanding of the parties which
would have led to the ultimate contract of sale, (b) whether or not Sosa has any legal and
demandable right to the delivery of the vehicle despite the non-payment of the
consideration and the non-approval of his credit application by B.A. Finance, (c) whether
or not Toyota acted in good faith when it did not release the vehicle to Sosa, and (d)
whether or not Toyota may be held liable for damages.

We find merit in the petition.

Neither logic nor recourse to one's imagination can lead to the conclusion that Exhibit "A"
is a perfected contract of sale.

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

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.

A contract of sale may be absolute or conditional.

and Article 1475 specifically provides when it is deemed perfected:

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.

What is clear from Exhibit "A" is not what the trial court and the Court of Appeals appear
to see. It is not a contract of sale. No obligation on the part of Toyota to transfer
ownership of a determinate thing to Sosa and no correlative obligation on the part of the
latter to pay therefor a price certain appears therein. The provision on the downpayment
of P100,000.00 made no specific reference to a sale of a vehicle. If it was intended for a
contract of sale, it could only refer to a sale on installment basis, as the VSP executed
the following day confirmed. But nothing was mentioned about the full purchase price and
the manner the installments were to be paid.

This Court had already ruled that a definite agreement on the manner of payment of the
price is an essential element in the formation of a binding and enforceable contract of
sale. 18 This is so because the agreement as to the manner of payment goes into the
price such that a disagreement on the manner of payment is tantamount to a failure to
agree on the price. Definiteness as to the price is an essential element of a binding
agreement to sell personal property. 19

Moreover, Exhibit "A" shows the absence of a meeting of minds between Toyota and
Sosa. For one thing, Sosa did not even sign it. For another, Sosa was well aware from its
title, written in bold letters, viz.,
 AGREEMENTS BETWEEN MR. SOSA & POPONG
BERNARDO OF TOYOTA SHAW, INC.

that he was not dealing with Toyota but with Popong Bernardo and that the latter did not
misrepresent that he had the authority to sell any Toyota vehicle. He knew that Bernardo
was only a sales representative of Toyota and hence a mere agent of the latter. It was
incumbent upon Sosa to act with ordinary prudence and reasonable diligence to know
the extent of Bernardo's authority as an
agent20 in respect of contracts to sell Toyota's vehicles. A person dealing with an agent is
put upon inquiry and must discover upon his peril the authority of the agent.21

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

(a) preparation, conception, or generation, which is the period of

negotiation and bargaining, ending at the moment of agreement of the
parties;

(b) perfection or birth of the contract, which is the moment when the
parties come to agree on the terms of the contract; and

(c) consummation or death, which is the fulfillment or performance of the

terms agreed upon in the contract.22

The second phase of the generation or negotiation stage in this case was the execution
of the VSP. It must be emphasized that thereunder, the downpayment of the purchase
price was P53,148.00 while the balance to be paid on installment should be financed by
B.A. Finance Corporation. It is, of course, to be assumed that B.A. Finance Corp. was
acceptable to Toyota, otherwise it should not have mentioned B.A. Finance in the VSP.

Financing companies are defined in Section 3(a) of R.A. No. 5980, as amended by P.D.
No. 1454 and P.D. No. 1793, as "corporations or partnerships, except those regulated by
the Central Bank of the Philippines, the Insurance Commission and the Cooperatives
Administration Office, which are primarily organized for the purpose of extending credit
facilities to consumers and to industrial, commercial, or agricultural enterprises, either by
discounting or factoring commercial papers or accounts receivables, or by buying and
selling contracts, leases, chattel mortgages, or other evidence of indebtedness, or by
leasing of motor vehicles, heavy equipment and industrial machinery, business and office
machines and equipment, appliances and other movable property." 23

Accordingly, in a sale on installment basis which is financed by a financing company,

three parties are thus involved: the buyer who executes a note or notes for the unpaid
balance of the price of the thing purchased on installment, the seller who assigns the
notes or discounts them with a financing company, and the financing company which is
subrogated in the place of the seller, as the creditor of the installment buyer. 24 Since B.A.
Finance did not approve Sosa's application, there was then no meeting of minds on the
sale on installment basis.

We are inclined to believe Toyota's version that B.A. Finance disapproved Sosa's
application for which reason it suggested to Sosa that he pay the full purchase price.
When the latter refused, Toyota cancelled the VSP and returned to him his P100,000.00.
Sosa's version that the VSP was cancelled because, according to Bernardo, the vehicle
was delivered to another who was "mas malakas" does not inspire belief and was
obviously a delayed afterthought. It is claimed that Bernardo said, "Pasensiya kayo,
nasulot ang unit ng ibang malakas," while the Sosas had already been waiting for an
hour for the delivery of the vehicle in the afternoon of 17 June 1989. However, in
paragraph 7 of his complaint, Sosa solemnly states:

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

sales representative, Mr. Popong Bernardo, called plaintiff's house and
informed the plaintiff's son that the vehicle will not be ready for pick-up at
10:00 a.m. of June 17, 1989 but at 2:00 p.m. of that day instead. Plaintiff
and his son went to defendant's office on June 17 1989 at 2:00 p.m. in
order to pick-up the vehicle but the defendant for reasons known only to
its representatives, refused and/or failed to release the vehicle to the
plaintiff. Plaintiff demanded for an explanation, but nothing was given; . . .
(Emphasis supplied). 25

The VSP was a mere proposal which was aborted in lieu of subsequent events. It follows
that the VSP created no demandable right in favor of Sosa for the delivery of the vehicle
to him, and its non-delivery did not cause any legally indemnifiable injury.

The award then of moral and exemplary damages and attorney's fees and costs of suit is
without legal basis. Besides, the only ground upon which Sosa claimed moral damages is
that since it was known to his friends, townmates, and relatives that he was buying a
Toyota Lite Ace which they expected to see on his birthday, he suffered humiliation,
shame, and sleepless nights when the van was not delivered. The van became the
subject matter of talks during his celebration that he may not have paid for it, and this
created an impression against his business standing and reputation. At the bottom of this
claim is nothing but misplaced pride and ego. He should not have announced his plan to
buy a Toyota Lite Ace knowing that he might not be able to pay the full purchase price. It
was he who brought embarrassment upon himself by bragging about a thing which he did
not own yet.

Since Sosa is not entitled to moral damages and there being no award for temperate,
liquidated, or compensatory damages, he is likewise not entitled to exemplary damages.
Under Article 2229 of the Civil Code, exemplary or corrective damages are imposed by
way of example or correction for the public good, in addition to moral, temperate,
liquidated, or compensatory damages.

Also, it is settled that for attorney's fees to be granted, the court must explicitly state in
the body of the decision, and not only in the dispositive portion thereof, the legal reason
for the award of attorney's fees. 26 No such explicit determination thereon was made in
the body of the decision of the trial court. No reason thus exists for such an award.

WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of
Appeals in CA-G.R. CV NO. 40043 as well as that of Branch 38 of the Regional Trial
Court of Marinduque in Civil Case No. 89-14 are REVERSED and SET ASIDE and the
complaint in Civil Case No. 89-14 is DISMISSED. The counterclaim therein is likewise
DISMISSED.

No pronouncement as to costs.

SO ORDERED.

SECOND DIVISION

G.R. No. 143513 November 14, 2001

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and FIRESTONE CERAMICS, INC., respondents.

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

G.R. No. 143590 November 14, 2001

NATIONAL DEVELOPMENT CORPORATION, petitioner,

vs.
FIRESTONE CERAMICS, INC., respondents.

BELLOSILLO, J.:

A litigation is not simply a contest of litigants before the bar of public opinion; more than
that, it is a pursuit of justice through legal and equitable means. To prevent the search for
justice from evolving into a competition for public approval, society invests the judiciary
with complete independence thereby insulating it from demands expressed through any
medium, the press not excluded. Thus, if the court would merely reflect, and worse,
succumb to the great pressures of the day, the end result, it is feared, would be a
travesty of justice.

In the early sixties, petitioner National Development Corporation (NDC), a government

owned and controlled corporation created under CA 182 as amended by CA 311 and PD
No. 668, had in its disposal a ten (10)-hectare property located along Pureza St., Sta.
Mesa, Manila. The estate was popularly known as the NDC compound and covered by
Transfer Certificates of Title Nos. 92885, 110301 and 145470.

Sometime in May 1965 private respondent Firestone Ceramics Inc. (FIRESTONE)

manifested its desire to lease a portion of the property for its ceramic manufacturing
business. On 24 August 1965 NDC and FIRESTONE entered into a contract of lease
denominated as Contract No. C-30-65 covering a portion of the property measured at
2.90118 hectares for use as a manufacturing plant for a term of ten (10) years,
renewable for another ten (10) years under the same terms and conditions.1 In
consequence of the agreement, FIRESTONE constructed on the leased premises
several warehouses and other improvements needed for the fabrication of ceramic
products.

Three and a half (3-1/2) years later, or on 8 January 1969, FIRESTONE entered into a
second contract of lease with NDC over the latter's four (4)-unit pre-fabricated reparation
steel warehouse stored in Daliao, Davao. FIRESTONE agreed to ship the warehouse to
Manila for eventual assembly within the NDC compound. The second contract,
denominated as Contract No. C-26-68, was for similar use as a ceramic manufacturing
plant and was agreed expressly to be "co-extensive with the lease of LESSEE with
LESSOR on the 2.60 hectare-lot."2

On 31 July 1974 the parties signed a similar contract concerning a six (6)-unit pre-
fabricated steel warehouse which, as agreed upon by the parties, would expire on 2
December 1978.3 Prior to the expiration of the aforementioned contract, FIRESTONE
wrote NDC requesting for an extension of their lease agreement. Consequently on 29
November 1978 the Board of Directors of NDC adopted Resolution No. 11-78-117
extending the term of the lease, subject to several conditions among which was that in
the event NDC "with the approval of higher authorities, decide to dispose and sell these
properties including the lot, priority should be given to the LESSEE"4 (underscoring
supplied). On 22 December 1978, in pursuance of the resolution, the parties entered into
a new agreement for a ten-year lease of the property, renewable for another ten (10)
years, expressly granting FIRESTONE the first option to purchase the leased premises in
the event that it decided "to dispose and sell these properties including the lot . . . . "5

The contracts of lease conspicuously contain an identically worded provision requiring

FIRESTONE to construct buildings and other improvements within the leased premises
worth several hundred thousands of pesos.6

The parties' lessor-lessee relationship went smoothly until early 1988 when FIRESTONE,
cognizant of the impending expiration of their lease agreement with NDC, informed the
latter through several letters and telephone calls that it was renewing its lease over the
property. While its letter of 17 March 1988 was answered by Antonio A. Henson, General
Manager of NDC, who promised immediate action on the matter, the rest of its
communications remained unacknowledged.7 FIRESTONE's predicament worsened
when rumors of NDC's supposed plans to dispose of the subject property in favor of
petitioner Polytechnic University of the Philippines (PUP) came to its knowledge.
Forthwith, FIRESTONE served notice on NDC conveying its desire to purchase the
property in the exercise of its contractual right of first refusal.

Apprehensive that its interest in the property would be disregarded, FIRESTONE

instituted an action for specific performance to compel NDC to sell the leased property in
its favor. FIRESTONE averred that it was pre-empting the impending sale of the NDC
compound to petitioner PUP in violation of its leasehold rights over the 2.60-
hectare8 property and the warehouses thereon which would expire in 1999. FIRESTONE
likewise prayed for the issuance of a writ of preliminary injunction to enjoin NDC from
disposing of the property pending the settlement of the controversy.9

In support of its complaint, FIRESTONE adduced in evidence a letter of Antonio A.

Henson dated 15 July 1988 addressed to Mr. Jake C. Lagonera, Director and Special
Assistant to Executive Secretary Catalino Macaraeg, reviewing a proposed memorandum
order submitted to then President Corazon C. Aquino transferring the whole NDC
compound, including the leased property, in favor of petitioner PUP. Attached to the letter
was a draft of the proposed memorandum order as well as a summary of existing leases
on the subject property. The survey listed FIRESTONE as lessee of a portion of the
property, placed at 29,00010 square meters, whose contract with NDC was set to expire
on 31 December 198911 renewable for another ten (10) years at the option of the
lessee. The report expressly recognized FIRESTONE's right of first refusal to purchase
the leased property "should the lessor decide to sell the same."12

Meanwhile, on 21 February 1989 PUP moved to intervene and asserted its interest in the
subject property, arguing that a "purchaser pendente lite of property which is subject of a
litigation is entitled to intervene in the proceedings."13 PUP referred to Memorandum
Order No. 214 issued by then President Aquino ordering the transfer of the whole NDC
compound to the National Government, which in turn would convey the aforementioned
property in favor of PUP at acquisition cost. The issuance was supposedly made in
recognition of PUP's status as the "Poor Man's University" as well as its serious need to
extend its campus in order to accommodate the growing student population. The order of
conveyance of the 10.31-hectare property would automatically result in the cancellation
of NDC's total obligation in favor of the National Government in the amount
of P57,193,201.64.

Convinced that PUP was a necessary party to the controversy that ought to be joined as
party defendant in order to avoid multiplicity of suits, the trial court granted PUP's motion
to intervene. FIRESTONE moved for reconsideration but was denied. On certiorari, the
Court of Appeals affirmed the order of the trial court. FIRESTONE came to us on review
but in a Resolution dated 11 July 1990 we upheld PUP's inclusion as party-defendant in
the present controversy.
Following the denial of its petition, FIRESTONE amended its complaint to include PUP
and Executive Secretary Catalino Macaraeg, Jr., as party-defendants, and sought the
annulment of Memorandum Order No. 214. FIRESTONE alleged that
although Memorandum Order No. 214 was issued "subject to such liens/leases existing
[on the subject property]," PUP disregarded and violated its existing lease by increasing
the rental rate at P200,000.00 a month while demanding that it vacated the premises
immediately.14 FIRESTONE prayed that in the event Memorandum Order No. 214 was
not declared unconstitutional, the property should be sold in its favor at the price for
which it was sold to PUP - P554.74 per square meter or for a total purchase price
of P14,423,240.00.15

Petitioner PUP, in its answer to the amended complaint, argued in essence that the lease
contract covering the property had expired long before the institution of the complaint,
and that further, the right of first refusal invoked by FIRESTONE applied solely to the six-
unit pre-fabricated warehouse and not the lot upon which it stood.

After trial on the merits, judgment was rendered declaring the contracts of lease executed
between FIRESTONE and NDC covering the 2.60-hectare property and the warehouses
constructed thereon valid and existing until 2 June 1999. PUP was ordered and directed
to sell to FIRESTONE the "2.6 hectare leased premises or as may be determined by
actual verification and survey of the actual size of the leased properties where plaintiff's
fire brick factory is located" at P1,500.00 per square meter considering that, as admitted
by FIRESTONE, such was the prevailing market price thereof.

The trial court ruled that the contracts of lease executed between FIRESTONE and NDC
were interrelated and inseparable because "each of them forms part of the integral
system of plaintiff's brick manufacturing plant x x x if one of the leased premises will be
taken apart or otherwise detached from the two others, the purpose of the lease as well
as plaintiff's business operations would be rendered useless and inoperative."16 It thus
decreed that FIRESTONE could exercise its option to purchase the property until 2 June
1999 inasmuch as the 22 December 1978 contract embodied a covenant to renew the
lease for another ten (10) years at the option of the lessee as well as an agreement
giving the lessee the right of first refusal.

The trial court also sustained the constitutionality of Memorandum Order No. 214 which
was not per se hostile to FIRESTONE's property rights, but deplored as prejudicial
thereto the "very manner with which defendants NDC and PUP interpreted and applied
the same, ignoring in the process that plaintiff has existing contracts of lease protectable
by express provisions in the Memorandum No. 214 itself."17 It further explained that the
questioned memorandum was issued "subject to such liens/leases existing
thereon"18 and petitioner PUP was under express instructions "to enter, occupy and take
possession of the transferred property subject to such leases or liens and encumbrances
that may be existing thereon"19 (italics supplied).

Petitioners PUP, NDC and the Executive Secretary separately filed their Notice of
Appeal, but a few days thereafter, or on 3 September 1996, perhaps realizing the
groundlessness and the futility of it all, the Executive Secretary withdrew his appeal.20

Subsequently, the Court of Appeals affirmed the decision of the trial court ordering the
sale of the property in favor of FIRESTONE but deleted the award of attorney's fees in
the amount of Three Hundred Thousand Pesos (P300,000.00). Accordingly, FIRESTONE
was given a grace period of six (6) months from finality of the court's judgment within
which to purchase the property in questioned in the exercise of its right of first refusal.
The Court of Appeals observed that as there was a sale of the subject property, NDC
could not excuse itself from its obligation TO OFFER THE PROPERTY FOR SALE
FIRST TO FIRESTONE BEFORE IT COULD TO OTHER PARTIES. The Court of
Appeals held: "NDC cannot look to Memorandum Order No. 214 to excuse or shield it
from its contractual obligations to FIRESTONE. There is nothing therein that allows NDC
to disavow or repudiate the solemn engagement that it freely and voluntarily undertook,
or agreed to undertake."21

PUP moved for reconsideration asserting that in ordering the sale of the property in favor
of FIRESTONE the courts a quo unfairly created a contract to sell between the parties. It
argued that the "court cannot substitute or decree its mind or consent for that of the
parties in determining whether or not a contract (has been) perfected between PUP and
NDC."22 PUP further contended that since "a real property located in Sta. Mesa can
readily command a sum of P10,000.00 per square (meter)," the lower court gravely erred
in ordering the sale of the property at only P1,500.00 per square meter. PUP also
advanced the theory that the enactment of Memorandum Order No. 214 amounted to a
withdrawal of the option to purchase the property granted to FIRESTONE. NDC, for its
part, vigorously contended that the contracts of lease executed between the parties had
expired without being renewed by FIRESTONE; consequently, FIRESTONE was no
longer entitled to any preferential right in the sale or disposition of the leased property.

We do not see it the way PUP and NDC did. It is elementary that a party to a contract
cannot unilaterally withdraw a right of first refusal that stands upon valuable
consideration. That principle was clearly upheld by the Court of Appeals when it denied
on 6 June 2000 the twin motions for reconsideration filed by PUP and NDC on the
ground that the appellants failed to advance new arguments substantial enough to
warrant a reversal of the Decision sought to be reconsidered.23 On 28 June 2000 PUP
filed an urgent motion for an additional period of fifteen (15) days from 29 June 2000 or
until 14 July 2000 within which to file a Petition for Review on Certiorari of the Decision of
the Court of Appeals.

On the last day of the extended period PUP filed its Petition for Review on
Certiorari assailing the Decision of the Court of Appeals of 6 December 1999 as well as
the Resolution of 6 June 2000 denying reconsideration thereof. PUP raised two issues:
(a) whether the courts a quo erred when they "conjectured" that the transfer of the leased
property from NDC to PUP amounted to a sale; and, (b) whether FIRESTONE can
rightfully invoke its right of first refusal. Petitioner posited that if we were to place
our imprimatur on the decisions of the courts a quo, "public welfare or specifically the
constitutional priority accorded to education" would greatly be prejudiced.24

Paradoxically, our paramount interest in education does not license us, or any party for
that matter, to destroy the sanctity of binding obligations. Education may be prioritized for
legislative or budgetary purposes, but we doubt if such importance can be used to
confiscate private property such as FIRESTONE's right of first refusal.

On 17 July 2000 we denied PUP's motion for extension of fifteen (15) days within which
to appeal inasmuch as the aforesaid pleading lacked an affidavit of service of copies
thereof on the Court of Appeals and the adverse party, as well as written explanation for
not filing and serving the pleading personally.25

Accordingly, on 26 July 2000 we issued a Resolution dismissing PUP's Petition for

Review for having been filed out of time. PUP moved for reconsideration imploring a
resolution or decision on the merits of its petition. Strangely, about the same time,
several articles came out in the newspapers assailing the denial of the petition. The daily
papers reported that we unreasonably dismissed PUP's petition on technical grounds,
affirming in the process the decision of the trial court to sell the disputed property to the
prejudice of the government in the amount of P1,000,000,000.00.26 Counsel for petitioner
PUP, alleged that the trial court and the Court of Appeals "have decided a question of
substance in a way definitely not in accord with law or jurisprudence."27
At the outset, let it be noted that the amount of P1,000,000,000.00 as reported in the
papers was way too exaggerated, if not fantastic. We stress that NDC itself sold the
whole 10.31-hectare property to PUP at only P57,193,201.64 which represents NDC's
obligation to the national government that was, in exchange, written off. The price offered
per square meter of the property was pegged at P554.74. FIRESTONE's leased
premises would therefore be worth only P14,423,240.00. From any angle, this amount is
certainly far below the ballyhooed price of P1,000,000,000.00.

On 4 October 2000 we granted PUP's Motion for Reconsideration to give it a chance to

ventilate its right, if any it still had in the leased premises, thereby paving the way for a
reinstatement of its Petition for Review.28 In its appeal, PUP took to task the courts a
quo for supposedly "substituting or decreeing its mind or consent for that of the parties
(referring to NDC and PUP) in determining whether or not a contract of sale was
perfected." PUP also argued that inasmuch as "it is the parties alone whose minds must
meet in reference to the subject matter and cause," it concluded that it was error for the
lower courts to have decreed the existence of a sale of the NDC compound thus allowing
FIRESTONE to exercise its right of first refusal.

On the other hand, NDC separately filed its own Petition for Review and advanced
arguments which, in fine, centered on whether or not the transaction between petitioners
NDC and PUP amounted to a sale considering that "ownership of the property remained
with the government."29 Petitioner NDC introduced the novel proposition that if the parties
involved are both government entities the transaction cannot be legally called a sale.

In due course both petitions were consolidated.30

We believe that the courts a quo did not hypothesize, much less conjure, the sale of the
disputed property by NDC in favor of petitioner PUP. Aside from the fact that the intention
of NDC and PUP to enter into a contract of sale was clearly expressed in
the Memorandum Order No. 214,31 a close perusal of the circumstances of this case
strengthens the theory that the conveyance of the property from NDC to PUP was one of
absolute sale, for a valuable consideration, and not a mere paper transfer as argued by
petitioners.

A contract of sale, as defined in the Civil Code, is a contract where one of the parties
obligates himself to transfer the ownership of and to deliver a determinate thing to the
other or others who shall pay therefore a sum certain in money or its equivalent.32 It is
therefore a general requisite for the existence of a valid and enforceable contract of sale
that it be mutually obligatory, i.e., there should be a concurrence of the promise of the
vendor to sell a determinate thing and the promise of the vendee to receive and pay for
the property so delivered and transferred. The Civil Code provision is, in effect, a "catch-
all" provision which effectively brings within its grasp a whole gamut of transfers whereby
ownership of a thing is ceded for a consideration.

Contrary to what petitioners PUP and NDC propose, there is not just one party involved
in the questioned transaction. Petitioners NDC and PUP have their respective charters
and therefore each possesses a separate and distinct individual personality.33 The
inherent weakness of NDC's proposition that there was no sale as it was only the
government which was involved in the transaction thus reveals itself. Tersely put, it is not
necessary to write an extended dissertation on government owned and controlled
corporations and their legal personalities. Beyond cavil, a government owned and
controlled corporation has a personality of its own, distinct and separate from that of the
government.34 The intervention in the transaction of the Office of the President through
the Executive Secretary did not change the independent existence of these entities. The
involvement of the Office of the President was limited to brokering the consequent
relationship between NDC and PUP. But the withdrawal of the appeal by the Executive
Secretary is considered significant as he knew, after a review of the records, that the
transaction was subject to existing liens and encumbrances, particularly the priority to
purchase the leased premises in favor of FIRESTONE.

True that there may be instances when a particular deed does not disclose the real
intentions of the parties, but their action may nevertheless indicate that a binding
obligation has been undertaken. Since the conduct of the parties to a contract may be
sufficient to establish the existence of an agreement and the terms thereof, it becomes
necessary for the courts to examine the contemporaneous behavior of the parties in
establishing the existence of their contract.

The preponderance of evidence shows that NDC sold to PUP the whole NDC compound,
including the leased premises, without the knowledge much less consent of private
respondent FIRESTONE which had a valid and existing right of first refusal.

All three (3) essential elements of a valid sale, without which there can be no sale, were
attendant in the "disposition" and "transfer" of the property from NDC to PUP - consent of
the parties, determinate subject matter, and consideration therefor.

Consent to the sale is obvious from the prefatory clauses of Memorandum Order No.
214 which explicitly states the acquiescence of the parties to the sale of the property -

WHEREAS, PUP has expressed its willingness to acquire said NDC properties
and NDC has expressed its willingness to sell the properties to
PUP (underscoring supplied).35

Furthermore, the cancellation of NDC's liabilities in favor of the National Government in

the amount of P57,193,201.64 constituted the "consideration" for the sale. As correctly
observed by the Court of Appeals-

The defendants-appellants' interpretation that there was a mere transfer, and not
a sale, apart from being specious sophistry and a mere play of words, is too
strained and hairsplitting. For it is axiomatic that every sale imposes upon the
vendor the obligation to transfer ownership as an essential element of the
contract. Transfer of title or an agreement to transfer title for a price paid, or
promised to be paid, is the very essence of sale (Kerr & Co. v. Lingad, 38 SCRA
524; Schmid & Oberly, Inc., v. RJL Martinez Fishing Corp., 166 SCRA 493). At
whatever legal angle we view it, therefore, the inescapable fact remains that all
the requisites of a valid sale were attendant in the transaction between co-
defendants-appellants NDC and PUP concerning the realities subject of the
present suit.36

What is more, the conduct of petitioner PUP immediately after the transaction is in itself
an admission that there was a sale of the NDC compound in its favor. Thus, after the
issuance of Memorandum Order No. 214 petitioner PUP asserted its ownership over the
property by posting notices within the compound advising residents and occupants to
vacate the premises.37 In its Motion for Intervention petitioner PUP also admitted that its
interest as a "purchaser pendente lite" would be better protected if it was joined as party-
defendant in the controversy thereby confessing that it indeed purchased the property.

In light of the foregoing disquisition, we now proceed to determine whether FIRESTONE

should be allowed to exercise its right of first refusal over the property. Such right was
expressly stated by NDC and FIRESTONE in par. XV of their third contract denominated
as A-10-78 executed on 22 December 1978 which, as found by the courts a quo, was
interrelated to and inseparable from their first contract denominated as C-30-65 executed
on 24 August 1965 and their second contract denominated as C-26-68 executed on 8
January 1969. Thus -

Should the LESSOR desire to sell the leased premises during the term of this
Agreement, or any extension thereof, the LESSOR shall first give to the LESSEE, which
shall have the right of first option to purchase the leased premises subject to mutual
agreement of both parties.38

In the instant case, the right of first refusal is an integral and indivisible part of the
contract of lease and is inseparable from the whole contract. The consideration for the
right is built into the reciprocal obligations of the parties. Thus, it is not correct for
petitioners to insist that there was no consideration paid by FIRESTONE to entitle it to
the exercise of the right, inasmuch as the stipulation is part and parcel of the contract of
lease making the consideration for the lease the same as that for the option.

It is a settled principle in civil law that when a lease contract contains a right of first
refusal, the lessor is under a legal duty to the lessee not to sell to anybody at any price
until after he has made an offer to sell to the latter at a certain price and the lessee has
failed to accept it.39 The lessee has a right that the lessor's first offer shall be in his favor.

The option in this case was incorporated in the contracts of lease by NDC for the benefit
of FIRESTONE which, in view of the total amount of its investments in the property,
wanted to be assured that it would be given the first opportunity to buy the property at a
price for which it would be offered. Consistent with their agreement, it was then implicit
for NDC to have first offered the leased premises of 2.60 hectares to FIRESTONE prior
to the sale in favor of PUP. Only if FIRESTONE failed to exercise its right of first priority
could NDC lawfully sell the property to petitioner PUP.

It now becomes apropos to ask whether the courts a quo were correct in fixing the proper
consideration of the sale at P1,500.00 per square meter. In contracts of sale, the basis of
the right of first refusal must be the current offer of the seller to sell or the offer to
purchase of the prospective buyer. Only after the lessee-grantee fails to exercise its right
under the same terms and within the period contemplated can the owner validly offer to
sell the property to a third person, again, under the same terms as offered to the
grantee.40 It appearing that the whole NDC compound was sold to PUP for P554.74 per
square meter, it would have been more proper for the courts below to have ordered the
sale of the property also at the same price. However, since FIRESTONE never raised
this as an issue, while on the other hand it admitted that the value of the property stood
at P1,500.00 per square meter, then we see no compelling reason to modify the holdings
of the courts a quo that the leased premises be sold at that price.

Our attention is invited by petitioners to Ang Yu Asuncion v. CA41 in concluding that if our
holding in Ang Yu would be applied to the facts of this case then FIRESTONE's "option, if
still subsisting, is not enforceable," the option being merely a preparatory contract which
cannot be enforced.

The contention has no merit. At the heels of Ang Yu came Equatorial Realty
Development, Inc., v. Mayfair Theater, Inc.,42 where after much deliberation we declared,
and so we hold, that a right of first refusal is neither "amorphous nor merely preparatory"
and can be enforced and executed according to its terms. Thus, in Equatorial we ordered
the rescission of the sale which was made in violation of the lessee's right of first refusal
and further ordered the sale of the leased property in favor of Mayfair Theater, as grantee
of the right. Emphatically, we held that "(a right of first priority) should be enforced
according to the law on contracts instead of the panoramic and indefinite rule on human
relations." We then concluded that the execution of the right of first refusal consists in
directing the grantor to comply with his obligation according to the terms at which he
should have offered the property in favor of the grantee and at that price when the offer
should have been made.

One final word. Petitioner PUP should be cautioned against bidding for public sympathy
by bewailing the dismissal of its petition before the press. Such advocacy is not likely to
elicit the compassion of this Court or of any court for that matter. An entreaty for a
favorable disposition of a case not made directly through pleadings and oral arguments
before the courts do not persuade us, for as judges, we are ruled only by our forsworn
duty to give justice where justice is due.

WHEREFORE, the petitions in G.R. No. 143513 and G.R. No. 143590 are DENIED.
Inasmuch as the first contract of lease fixed the area of the leased premises at 2.90118
hectares while the second contract placed it at 2.60 hectares, let a ground survey of the
leased premises be immediately conducted by a duly licensed, registered surveyor at the
expense of private respondent FIRESTONE CERAMICS, INC., within two (2) months
from finality of the judgment in this case. Thereafter, private respondent FIRESTONE
CERAMICS, INC., shall have six (6) months from receipt of the approved survey within
which to exercise its right to purchase the leased property at P1,500.00 per square
meter, and petitioner Polytechnic University of the Philippines is ordered to reconvey the
property to FIRESTONE CERAMICS, INC., in the exercise of its right of first refusal upon
payment of the purchase price thereof.

SO ORDERED.

G.R. No. 166862 December 20, 2006

MANILA METAL CONTAINER CORPORATION, petitioner,

REYNALDO C. TOLENTINO, intervenor,
vs.
PHILIPPINE NATIONAL BANK, respondent,
DMCI-PROJECT DEVELOPERS, INC., intervenor.

DECISION

CALLEJO, SR., J.:

Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals
(CA) in CA-G.R. No. 46153 which affirmed the decision2 of the Regional Trial Court
(RTC), Branch 71, Pasig City, in Civil Case No. 58551, and its Resolution3 denying the
motion for reconsideration filed by petitioner Manila Metal Container Corporation
(MMCC).

The Antecedents

Petitioner was the owner of a 8,015 square meter parcel of land located in Mandaluyong
(now a City), Metro Manila. The property was covered by Transfer Certificate of Title
(TCT) No. 332098 of the Registry of Deeds of Rizal. To secure a P900,000.00 loan it had
obtained from respondent Philippine National Bank (PNB), petitioner executed a real
estate mortgage over the lot. Respondent PNB later granted petitioner a new credit
accommodation of P1,000,000.00; and, on November 16, 1973, petitioner executed an
Amendment4 of Real Estate Mortgage over its property. On March 31, 1981, petitioner
secured another loan of P653,000.00 from respondent PNB, payable in quarterly
installments of P32,650.00, plus interests and other charges.5

On August 5, 1982, respondent PNB filed a petition for extrajudicial foreclosure of the
real estate mortgage and sought to have the property sold at public auction
for P911,532.21, petitioner's outstanding obligation to respondent PNB as of June 30,
1982,6 plus interests and attorney's fees.

After due notice and publication, the property was sold at public auction on September
28, 1982 where respondent PNB was declared the winning bidder for P1,000,000.00.
The Certificate of Sale7 issued in its favor was registered with the Office of the Register of
Deeds of Rizal, and was annotated at the dorsal portion of the title on February 17, 1983.
Thus, the period to redeem the property was to expire on February 17, 1984.

Petitioner sent a letter dated August 25, 1983 to respondent PNB, requesting that it be
granted an extension of time to redeem/repurchase the property.8 In its reply dated
August 30, 1983, respondent PNB informed petitioner that the request had been referred
to its Pasay City Branch for appropriate action and recommendation.9

In a letter10 dated February 10, 1984, petitioner reiterated its request for a one year
extension from February 17, 1984 within which to redeem/repurchase the property on
installment basis. It reiterated its request to repurchase the property on
installment.11 Meanwhile, some PNB Pasay City Branch personnel informed petitioner
that as a matter of policy, the bank does not accept "partial redemption."12

Since petitioner failed to redeem the property, the Register of Deeds cancelled TCT No.
32098 on June 1, 1984, and issued a new title in favor of respondent PNB.13 Petitioner's
offers had not yet been acted upon by respondent PNB.

Meanwhile, the Special Assets Management Department (SAMD) had prepared a

statement of account, and as of June 25, 1984 petitioner's obligation amounted
to P1,574,560.47. This included the bid price of P1,056,924.50, interest, advances of
insurance premiums, advances on realty taxes, registration expenses, miscellaneous
expenses and publication cost.14 When apprised of the statement of account, petitioner
remitted P725,000.00 to respondent PNB as "deposit to repurchase," and Official Receipt
No. 978191 was issued to it.15

In the meantime, the SAMD recommended to the management of respondent PNB that
petitioner be allowed to repurchase the property for P1,574,560.00. In a letter dated
November 14, 1984, the PNB management informed petitioner that it was rejecting the
offer and the recommendation of the SAMD. It was suggested that petitioner purchase
the property for P2,660,000.00, its minimum market value. Respondent PNB gave
petitioner until December 15, 1984 to act on the proposal; otherwise, its P725,000.00
deposit would be returned and the property would be sold to other interested buyers.16

Petitioner, however, did not agree to respondent PNB's proposal. Instead, it wrote
another letter dated December 12, 1984 requesting for a reconsideration. Respondent
PNB replied in a letter dated December 28, 1984, wherein it reiterated its proposal that
petitioner purchase the property for P2,660,000.00. PNB again informed petitioner that it
would return the deposit should petitioner desire to withdraw its offer to purchase the
property.17 On February 25, 1985, petitioner, through counsel, requested that PNB
reconsider its letter dated December 28, 1984. Petitioner declared that it had already
agreed to the SAMD's offer to purchase the property for P1,574,560.47, and that was
why it had paid P725,000.00. Petitioner warned respondent PNB that it would seek
judicial recourse should PNB insist on the position.18

On June 4, 1985, respondent PNB informed petitioner that the PNB Board of Directors
had accepted petitioner's offer to purchase the property, but for P1,931,389.53 in cash
less the P725,000.00 already deposited with it.19 On page two of the letter was a space
above the typewritten name of petitioner's President, Pablo Gabriel, where he was to affix
his signature. However, Pablo Gabriel did not conform to the letter but merely indicated
therein that he had received it.20 Petitioner did not respond, so PNB requested petitioner
in a letter dated June 30, 1988 to submit an amended offer to repurchase.

Petitioner rejected respondent's proposal in a letter dated July 14, 1988. It maintained
that respondent PNB had agreed to sell the property for P1,574,560.47, and that since
its P725,000.00 downpayment had been accepted, respondent PNB was proscribed from
increasing the purchase price of the property.21 Petitioner averred that it had a net
balance payable in the amount of P643,452.34. Respondent PNB, however, rejected
petitioner's offer to pay the balance of P643,452.34 in a letter dated August 1, 1989.22

On August 28, 1989, petitioner filed a complaint against respondent PNB for "Annulment
of Mortgage and Mortgage Foreclosure, Delivery of Title, or Specific Performance with
Damages." To support its cause of action for specific performance, it alleged the
following:

34. As early as June 25, 1984, PNB had accepted the down payment from Manila
Metal in the substantial amount of P725,000.00 for the redemption/repurchase
price of P1,574,560.47 as approved by its SMAD and considering the reliance
made by Manila Metal and the long time that has elapsed, the approval of the
higher management of the Bank to confirm the agreement of its SMAD is clearly
a potestative condition which cannot legally prejudice Manila Metal which has
acted and relied on the approval of SMAD. The Bank cannot take advantage of a
condition which is entirely dependent upon its own will after accepting and
benefiting from the substantial payment made by Manila Metal.

35. PNB approved the repurchase price of P1,574,560.47 for which it

accepted P725,000.00 from Manila Metal. PNB cannot take advantage of its own
delay and long inaction in demanding a higher amount based on unilateral
computation of interest rate without the consent of Manila Metal.

Petitioner later filed an amended complaint and supported its claim for damages with the
following arguments:

36. That in order to protect itself against the wrongful and malicious acts of the
defendant Bank, plaintiff is constrained to engage the services of counsel at an
agreed fee of P50,000.00 and to incur litigation expenses of at least P30,000.00,
which the defendant PNB should be condemned to pay the plaintiff Manila Metal.

37. That by reason of the wrongful and malicious actuations of defendant PNB,
plaintiff Manila Metal suffered besmirched reputation for which defendant PNB is
liable for moral damages of at least P50,000.00.

38. That for the wrongful and malicious act of defendant PNB which are highly
reprehensible, exemplary damages should be awarded in favor of the plaintiff by
way of example or correction for the public good of at least P30,000.00.23

Petitioner prayed that, after due proceedings, judgment be rendered in its favor, thus:
 a) Declaring the Amended Real Estate Mortgage (Annex "A") null and void and
without any legal force and effect.

b) Declaring defendant's acts of extra-judicially foreclosing the mortgage over

plaintiff's property and setting it for auction sale null and void.

c) Ordering the defendant Register of Deeds to cancel the new title issued in the
name of PNB (TCT NO. 43792) covering the property described in paragraph 4 of
the Complaint, to reinstate TCT No. 37025 in the name of Manila Metal and to
cancel the annotation of the mortgage in question at the back of the TCT
No. 37025 described in paragraph 4 of this Complaint.

d) Ordering the defendant PNB to return and/or deliver physical possession of the
TCT No. 37025 described in paragraph 4 of this Complaint to the plaintiff Manila
Metal.

e) Ordering the defendant PNB to pay the plaintiff Manila Metal's actual
damages, moral and exemplary damages in the aggregate amount of not less
than P80,000.00 as may be warranted by the evidence and fixed by this
Honorable Court in the exercise of its sound discretion, and attorney's fees
of P50,000.00 and litigation expenses of at least P30,000.00 as may be proved
during the trial, and costs of suit.

Plaintiff likewise prays for such further reliefs which may be deemed just and
equitable in the premises.24

In its Answer to the complaint, respondent PNB averred, as a special and affirmative
defense, that it had acquired ownership over the property after the period to redeem had
elapsed. It claimed that no contract of sale was perfected between it and petitioner after
the period to redeem the property had expired.

During pre-trial, the parties agreed to submit the case for decision, based on their
stipulation of facts.25 The parties agreed to limit the issues to the following:

1. Whether or not the June 4, 1985 letter of the defendant approving/accepting

plaintiff's offer to purchase the property is still valid and legally enforceable.

2. Whether or not the plaintiff has waived its right to purchase the property when
it failed to conform with the conditions set forth by the defendant in its letter dated
June 4, 1985.

3. Whether or not there is a perfected contract of sale between the parties.26

While the case was pending, respondent PNB demanded, on September 20, 1989, that
petitioner vacate the property within 15 days from notice,27 but petitioners refused to do
so.

On March 18, 1993, petitioner offered to repurchase the property

for P3,500,000.00.28 The offer was however rejected by respondent PNB, in a letter dated
April 13, 1993. According to it, the prevailing market value of the property was
approximately P30,000,000.00, and as a matter of policy, it could not sell the property for
less than its market value.29 On June 21, 1993, petitioner offered to purchase the
property for P4,250,000.00 in cash.30 The offer was again rejected by respondent PNB on
September 13, 1993.31
On May 31, 1994, the trial court rendered judgment dismissing the amended complaint
and respondent PNB's counterclaim. It ordered respondent PNB to refund
the P725,000.00 deposit petitioner had made.32 The trial court ruled that there was no
perfected contract of sale between the parties; hence, petitioner had no cause of action
for specific performance against respondent. The trial court declared that respondent had
rejected petitioner's offer to repurchase the property. Petitioner, in turn, rejected the
terms and conditions contained in the June 4, 1985 letter of the SAMD. While petitioner
had offered to repurchase the property per its letter of July 14, 1988, the amount
of P643,422.34 was way below the P1,206,389.53 which respondent PNB had
demanded. It further declared that the P725,000.00 remitted by petitioner to respondent
PNB on June 4, 1985 was a "deposit," and not a downpayment or earnest money.

On appeal to the CA, petitioner made the following allegations:

THE LOWER COURT ERRED IN RULING THAT DEFENDANT-APPELLEE'S

LETTER DATED 4 JUNE 1985 APPROVING/ACCEPTING PLAINTIFF-
APPELLANT'S OFFER TO PURCHASE THE SUBJECT PROPERTY IS NOT
VALID AND ENFORCEABLE.

II

THE LOWER COURT ERRED IN RULING THAT THERE WAS NO PERFECTED

CONTRACT OF SALE BETWEEN PLAINTIFF-APPELLANT AND DEFENDANT-
APPELLEE.

III

THE LOWER COURT ERRED IN RULING THAT PLAINTIFF-APPELLLANT

WAIVED ITS RIGHT TO PURCHASE THE SUBJECT PROPERTY WHEN IT
FAILED TO CONFORM WITH CONDITIONS SET FORTH BY DEFENDANT-
APPELLEE IN ITS LETTER DATED 4 JUNE 1985.

IV

THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT IT WAS

THE DEFENDANT-APPELLEE WHICH RENDERED IT DIFFICULT IF NOT
IMPOSSIBLE FOR PLAINTIFF-APPELLANT TO COMPLETE THE BALANCE
OF THEIR PURCHASE PRICE.

THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT THERE

WAS NO VALID RESCISSION OR CANCELLATION OF SUBJECT CONTRACT
OF REPURCHASE.

VI

THE LOWER COURT ERRED IN DECLARING THAT PLAINTIFF FAILED AND

REFUSED TO SUBMIT THE AMENDED REPURCHASE OFFER.

VII
 THE LOWER COURT ERRED IN DISMISSING THE AMENDED COMPLAINT
OF PLAINTIFF-APPELLANT.

VIII

THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF-APPELLANT

ACTUAL, MORAL AND EXEMPLARY DAMAGES, ATTOTRNEY'S FEES AND
LITIGATION EXPENSES.33

Meanwhile, on June 17, 1993, petitioner's Board of Directors approved Resolution No. 3-
004, where it waived, assigned and transferred its rights over the property covered by
TCT No. 33099 and TCT No. 37025 in favor of Bayani Gabriel, one of its
Directors.34 Thereafter, Bayani Gabriel executed a Deed of Assignment over 51% of the
ownership and management of the property in favor of Reynaldo Tolentino, who later
moved for leave to intervene as plaintiff-appellant. On July 14, 1993, the CA issued a
resolution granting the motion,35 and likewise granted the motion of Reynaldo Tolentino
substituting petitioner MMCC, as plaintiff-appellant, and his motion to withdraw as
intervenor.36

The CA rendered judgment on May 11, 2000 affirming the decision of the RTC.37 It
declared that petitioner obviously never agreed to the selling price proposed by
respondent PNB (P1,931,389.53) since petitioner had kept on insisting that the selling
price should be lowered to P1,574,560.47. Clearly therefore, there was no meeting of the
minds between the parties as to the price or consideration of the sale.

The CA ratiocinated that petitioner's original offer to purchase the subject property had
not been accepted by respondent PNB. In fact, it made a counter-offer through its June
4, 1985 letter specifically on the selling price; petitioner did not agree to the counter-offer;
and the negotiations did not prosper. Moreover, petitioner did not pay the balance of the
purchase price within the sixty-day period set in the June 4, 1985 letter of respondent
PNB. Consequently, there was no perfected contract of sale, and as such, there was no
contract to rescind.

According to the appellate court, the claim for damages and the counterclaim were
correctly dismissed by the court a quo for no evidence was presented to support it.
Respondent PNB's letter dated June 30, 1988 cannot revive the failed negotiations
between the parties. Respondent PNB merely asked petitioner to submit an amended
offer to repurchase. While petitioner reiterated its request for a lower selling price and
that the balance of the repurchase be reduced, however, respondent rejected the
proposal in a letter dated August 1, 1989.

Petitioner filed a motion for reconsideration, which the CA likewise denied.

Thus, petitioner filed the instant petition for review on certiorari, alleging that:

I. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT

RULED THAT THERE IS NO PERFECTED CONTRACT OF SALE BETWEEN
THE PETITIONER AND RESPONDENT.

II. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT

RULED THAT THE AMOUNT OF PHP725,000.00 PAID BY THE PETITIONER
IS NOT AN EARNEST MONEY.

III. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT

RULED THAT THE FAILURE OF THE PETITIONER-APPELLANT TO SIGNIFY
ITS CONFORMITY TO THE TERMS CONTAINED IN PNB'S JUNE 4, 1985
 LETTER MEANS THAT THERE WAS NO VALID AND LEGALLY
ENFORCEABLE CONTRACT OF SALE BETWEEN THE PARTIES.

IV. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW THAT NON-

PAYMENT OF THE PETITIONER-APPELLANT OF THE BALANCE OF THE
OFFERED PRICE IN THE LETTER OF PNB DATED JUNE 4, 1985, WITHIN
SIXTY (60) DAYS FROM NOTICE OF APPROVAL CONSTITUTES NO VALID
AND LEGALLY ENFORCEABLE CONTRACT OF SALE BETWEEN THE
PARTIES.

V. THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT HELD THAT THE

LETTERS OF PETITIONER-APPELLANT DATED MARCH 18, 1993 AND JUNE
21, 1993, OFFERING TO BUY THE SUBJECT PROPERTY AT DIFFERENT
AMOUNT WERE PROOF THAT THERE IS NO PERFECTED CONTRACT OF
SALE.38

The threshold issue is whether or not petitioner and respondent PNB had entered into a
perfected contract for petitioner to repurchase the property from respondent.

Petitioner maintains that it had accepted respondent's offer made through the SAMD, to
sell the property for P1,574,560.00. When the acceptance was made in its letter dated
June 25, 1984; it then deposited P725,000.00 with the SAMD as partial payment,
evidenced by Receipt No. 978194 which respondent had issued. Petitioner avers that the
SAMD's acceptance of the deposit amounted to an acceptance of its offer to repurchase.
Moreover, as gleaned from the letter of SAMD dated June 4, 1985, the PNB Board of
Directors had approved petitioner's offer to purchase the property. It claims that this was
the suspensive condition, the fulfillment of which gave rise to the contract. Respondent
could no longer unilaterally withdraw its offer to sell the property for P1,574,560.47, since
the acceptance of the offer resulted in a perfected contract of sale; it was obliged to remit
to respondent the balance of the original purchase price of P1,574,560.47, while
respondent was obliged to transfer ownership and deliver the property to petitioner,
conformably with Article 1159 of the New Civil Code.

Petitioner posits that respondent was proscribed from increasing the interest rate after it
had accepted respondent's offer to sell the property for P1,574,560.00. Consequently,
respondent could no longer validly make a counter-offer of P1,931,789.88 for the
purchase of the property. It likewise maintains that, although the P725,000.00 was
considered as "deposit for the repurchase of the property" in the receipt issued by the
SAMD, the amount constitutes earnest money as contemplated in Article 1482 of the
New Civil Code. Petitioner cites the rulings of this Court in Villonco v.
Bormaheco39 and Topacio v. Court of Appeals.40

Petitioner avers that its failure to append its conformity to the June 4, 1984 letter of
respondent and its failure to pay the balance of the price as fixed by respondent within
the 60-day period from notice was to protest respondent's breach of its obligation to
petitioner. It did not amount to a rejection of respondent's offer to sell the property since
respondent was merely seeking to enforce its right to pay the balance of P1,570,564.47.
In any event, respondent had the option either to accept the balance of the offered price
or to cause the rescission of the contract.

Petitioner's letters dated March 18, 1993 and June 21, 1993 to respondent during the
pendency of the case in the RTC were merely to compromise the pending lawsuit, they
did not constitute separate offers to repurchase the property. Such offer to compromise
should not be taken against it, in accordance with Section 27, Rule 130 of the Revised
Rules of Court.
For its part, respondent contends that the parties never graduated from the "negotiation
stage" as they could not agree on the amount of the repurchase price of the property. All
that transpired was an exchange of proposals and counter-proposals, nothing more. It
insists that a definite agreement on the amount and manner of payment of the price are
essential elements in the formation of a binding and enforceable contract of sale. There
was no such agreement in this case. Primarily, the concept of "suspensive condition"
signifies a future and uncertain event upon the fulfillment of which the obligation becomes
effective. It clearly presupposes the existence of a valid and binding agreement, the
effectivity of which is subordinated to its fulfillment. Since there is no perfected contract in
the first place, there is no basis for the application of the principles governing "suspensive
conditions."

According to respondent, the Statement of Account prepared by SAMD as of June 25,

1984 cannot be classified as a counter-offer; it is simply a recital of its total monetary
claims against petitioner. Moreover, the amount stated therein could not likewise be
considered as the counter-offer since as admitted by petitioner, it was only
recommendation which was subject to approval of the PNB Board of Directors.

Neither can the receipt by the SAMD of P725,000.00 be regarded as evidence of a

perfected sale contract. As gleaned from the parties' Stipulation of Facts during the
proceedings in the court a quo, the amount is merely an acknowledgment of the receipt
of P725,000.00 as deposit to repurchase the property. The deposit of P725,000.00 was
accepted by respondent on the condition that the purchase price would still be approved
by its Board of Directors. Respondent maintains that its acceptance of the amount was
qualified by that condition, thus not absolute. Pending such approval, it cannot be legally
claimed that respondent is already bound by any contract of sale with petitioner.

According to respondent, petitioner knew that the SAMD has no capacity to bind
respondent and that its authority is limited to administering, managing and preserving the
properties and other special assets of PNB. The SAMD does not have the power to sell,
encumber, dispose of, or otherwise alienate the assets, since the power to do so must
emanate from its Board of Directors. The SAMD was not authorized by respondent's
Board to enter into contracts of sale with third persons involving corporate assets. There
is absolutely nothing on record that respondent authorized the SAMD, or made it appear
to petitioner that it represented itself as having such authority.

Respondent reiterates that SAMD had informed petitioner that its offer to repurchase had
been approved by the Board subject to the condition, among others, "that the selling
price shall be the total bank's claim as of documentation date x x x payable in cash
(P725,000.00 already deposited)

within 60 days from notice of approval." A new Statement of Account was attached
therein indicating the total bank's claim to be P1,931,389.53 less deposit of P725,000.00,
or P1,206,389.00. Furthermore, while respondent's Board of Directors accepted
petitioner's offer to repurchase the property, the acceptance was qualified, in that it
required a higher sale price and subject to specified terms and conditions enumerated
therein. This qualified acceptance was in effect a counter-offer, necessitating petitioner's
acceptance in return.

The Ruling of the Court

The ruling of the appellate court that there was no perfected contract of sale between the
parties on June 4, 1985 is correct.
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.41 Under Article 1318 of
the New Civil Code, there is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

Contracts are perfected by mere consent which is manifested by the meeting of the offer
and the acceptance upon the thing and the cause which are to constitute the
contract.42 Once perfected, they bind other contracting parties and the obligations arising
therefrom have the form of law between the parties and should be complied with in good
faith. The parties are bound not only to the fulfillment of what has been expressly
stipulated but also to the consequences which, according to their nature, may be in
keeping with good faith, usage and law.43

By the contract of sale, one of the contracting parties obligates himself to transfer the
ownership of and deliver a determinate thing, and the other to pay therefor a price certain
in money or its equivalent.44 The absence of any of the essential elements will negate the
existence of a perfected contract of sale. As the Court ruled in Boston Bank of the
Philippines v. Manalo:45

A definite agreement as to the price is an essential element of a binding

agreement to sell personal or real property because it seriously affects the rights
and obligations of the parties. Price is an essential element in the formation of a
binding and enforceable contract of sale. The fixing of the price can never be left
to the decision of one of the contracting parties. But a price fixed by one of the
contracting parties, if accepted by the other, gives rise to a perfected sale.46

A contract of sale is consensual in nature and is perfected upon mere meeting of the
minds. When there is merely an offer by one party without acceptance of the other, there
is no contract.47 When the contract of sale is not perfected, it cannot, as an independent
source of obligation, serve as a binding juridical relation between the parties.48

In San Miguel Properties Philippines, Inc. v. Huang,49 the Court ruled that the stages of a
contract of sale are as follows: (1) negotiation, covering the period from the time the
prospective contracting parties indicate interest in the contract to the time the contract is
perfected; (2) perfection, which takes place upon the concurrence of the essential
elements of the sale which are the meeting of the minds of the parties as to the object of
the contract and upon the price; and (3) consummation, which begins when the parties
perform their respective undertakings under the contract of sale, culminating in the
extinguishment thereof.

A negotiation is formally initiated by an offer, which, however, must be certain.50 At any

time prior to the perfection of the contract, either negotiating party may stop the
negotiation. At this stage, the offer may be withdrawn; the withdrawal is effective
immediately after its manifestation. To convert the offer into a contract, the acceptance
must be absolute and must not qualify the terms of the offer; it must be plain,
unequivocal, unconditional and without variance of any sort from the proposal. In Adelfa
Properties, Inc. v. Court of Appeals,51 the Court ruled that:

x x x The rule is that except where a formal acceptance is so required, although

the acceptance must be affirmatively and clearly made and must be evidenced by
some acts or conduct communicated to the offeror, it may be shown by acts,
 conduct, or words of the accepting party that clearly manifest a present intention
or determination to accept the offer to buy or sell. Thus, acceptance may be
shown by the acts, conduct, or words of a party recognizing the existence of the
contract of sale.52

A qualified acceptance or one that involves a new proposal constitutes a counter-offer

and a rejection of the original offer. A counter-offer is considered in law, a rejection of the
original offer and an attempt to end the negotiation between the parties on a different
basis.53 Consequently, when something is desired which is not exactly what is proposed
in the offer, such acceptance is not sufficient to guarantee consent because any
modification or variation from the terms of the offer annuls the offer.54 The acceptance
must be identical in all respects with that of the offer so as to produce consent or meeting
of the minds.

In this case, petitioner had until February 17, 1984 within which to redeem the property.
However, since it lacked the resources, it requested for more time to redeem/repurchase
the property under such terms and conditions agreed upon by the parties.55 The request,
which was made through a letter dated August 25, 1983, was referred to the
respondent's main branch for appropriate action.56 Before respondent could act on the
request, petitioner again wrote respondent as follows:

1. Upon approval of our request, we will pay your goodselves ONE HUNDRED &
FIFTY THOUSAND PESOS (P150,000.00);

2. Within six months from date of approval of our request, we will pay another
FOUR HUNDRED FIFTY THOUSAND PESOS (P450,000.00); and

3. The remaining balance together with the interest and other expenses that will
be incurred will be paid within the last six months of the one year grave period
requested for.57

When the petitioner was told that respondent did not allow "partial redemption,"58 it sent
a letter to respondent's President reiterating its offer to purchase the property.59 There
was no response to petitioner's letters dated February 10 and 15, 1984.

The statement of account prepared by the SAMD stating that the net claim of respondent
as of June 25, 1984 was P1,574,560.47 cannot be considered an unqualified acceptance
to petitioner's offer to purchase the property. The statement is but a computation of the
amount which petitioner was obliged to pay in case respondent would later agree to sell
the property, including interests, advances on insurance premium, advances on realty
taxes, publication cost, registration expenses and miscellaneous expenses.

There is no evidence that the SAMD was authorized by respondent's Board of Directors
to accept petitioner's offer and sell the property for P1,574,560.47. Any acceptance by
the SAMD of petitioner's offer would not bind respondent. As this Court ruled in AF Realty
Development, Inc. vs. Diesehuan Freight Services, Inc.:60

Section 23 of the Corporation Code expressly provides that the corporate powers
of all corporations shall be exercised by the board of directors. Just as a natural
person may authorize another to do certain acts in his behalf, so may the board
of directors of a corporation validly delegate some of its functions to individual
officers or agents appointed by it. Thus, contracts or acts of a corporation must
be made either by the board of directors or by a corporate agent duly authorized
by the board. Absent such valid delegation/authorization, the rule is that the
declarations of an individual director relating to the affairs of the corporation, but
 not in the course of, or connected with the performance of authorized duties of
such director, are held not binding on the corporation.

Thus, a corporation can only execute its powers and transact its business through its
Board of Directors and through its officers and agents when authorized by a board
resolution or its by-laws.61

It appears that the SAMD had prepared a recommendation for respondent to accept
petitioner's offer to repurchase the property even beyond the one-year period; it
recommended that petitioner be allowed to redeem the property and pay P1,574,560.00
as the purchase price. Respondent later approved the recommendation that the property
be sold to petitioner. But instead of the P1,574,560.47 recommended by the SAMD and
to which petitioner had previously conformed, respondent set the purchase price
at P2,660,000.00. In fine, respondent's acceptance of petitioner's offer was qualified,
hence can be at most considered as a counter-offer. If petitioner had accepted this
counter-offer, a perfected contract of sale would have arisen; as it turns out, however,
petitioner merely sought to have the counter-offer reconsidered. This request for
reconsideration would later be rejected by respondent.

We do not agree with petitioner's contention that the P725,000.00 it had remitted to
respondent was "earnest money" which could be considered as proof of the perfection of
a contract of sale under Article 1482 of the New Civil Code. The provision reads:

ART. 1482. Whenever earnest money is given in a contract of sale, it shall be

considered as part of the price and as proof of the perfection of the contract.

This contention is likewise negated by the stipulation of facts which the parties entered
into in the trial court:

8. On June 8, 1984, the Special Assets Management Department (SAMD) of

PNB prepared an updated Statement of Account showing MMCC's total liability to
PNB as of June 25, 1984 to be P1,574,560.47 and recommended this amount as
the repurchase price of the subject property.

9. On June 25, 1984, MMCC paid P725,000.00 to PNB as deposit to repurchase

the property. The deposit of P725,000 was accepted by PNB on the condition
that the purchase price is still subject to the approval of the PNB Board.62

Thus, the P725,000.00 was merely a deposit to be applied as part of the purchase price
of the property, in the event that respondent would approve the recommendation of
SAMD for respondent to accept petitioner's offer to purchase the property
for P1,574,560.47. Unless and until the respondent accepted the offer on these terms, no
perfected contract of sale would arise. Absent proof of the concurrence of all the
essential elements of a contract of sale, the giving of earnest money cannot establish the
existence of a perfected contract of sale.63

It appears that, per its letter to petitioner dated June 4, 1985, the respondent had decided
to accept the offer to purchase the property for P1,931,389.53. However, this amounted
to an amendment of respondent's qualified acceptance, or an amended counter-offer,
because while the respondent lowered the purchase price, it still declared that its
acceptance was subject to the following terms and conditions:

1. That the selling price shall be the total Bank's claim as of documentation date
(pls. see attached statement of account as of 5-31-85), payable in cash
(P725,000.00 already deposited) within sixty (60) days from notice of approval;
 2. The Bank sells only whatever rights, interests and participation it may have in
the property and you are charged with full knowledge of the nature and extent of
said rights, interests and participation and waive your right to warranty against
eviction.

3. All taxes and other government imposts due or to become due on the property,
as well as expenses including costs of documents and science stamps, transfer
fees, etc., to be incurred in connection with the execution and registration of all
covering documents shall be borne by you;

4. That you shall undertake at your own expense and account the ejectment of
the occupants of the property subject of the sale, if there are any;

5. That upon your failure to pay the balance of the purchase price within sixty (60)
days from receipt of advice accepting your offer, your deposit shall be forfeited
and the Bank is thenceforth authorized to sell the property to other interested
parties.

6. That the sale shall be subject to such other terms and conditions that the Legal
Department may impose to protect the interest of the Bank.64

It appears that although respondent requested petitioner to conform to its amended

counter-offer, petitioner refused and instead requested respondent to reconsider its
amended counter-offer. Petitioner's request was ultimately rejected and respondent
offered to refund its P725,000.00 deposit.

In sum, then, there was no perfected contract of sale between petitioner and respondent
over the subject property.

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

The assailed decision is AFFIRMED. Costs against petitioner Manila Metal Container
Corporation.

SO ORDERED.

THIRD DIVISION

[G.R. No. 108346. July 11, 2001]

Spouses MARIANO Z. VELARDE and AVELINA D.

VELARDE, petitioners, vs. COURT OF APPEALS, DAVID A. RAYMUNDO
and GEORGE RAYMUNDO, respondents.

DECISION
PANGANIBAN, J.:
 A substantial breach of a reciprocal obligation, like failure to pay the price in the
manner prescribed by the contract, entitles the injured party to rescind the
obligation. Rescission abrogates the contract from its inception and requires a mutual
restitution of benefits received.

The Case

Before us is a Petition for Review on Certiorari[1] questioning the Decision[2] of the

Court of Appeals (CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its
Resolution[3] dated December 29, 1992 denying petitioners motion for
reconsideration.[4]
The dispositive portion of the assailed Decision reads:

WHEREFORE, the Order dated May 15, 1991 is hereby ANNULLED and SET
ASIDE and the Decision dated November 14, 1990 dismissing the [C]omplaint is
REINSTATED. The bonds posted by plaintiffs-appellees and defendants-appellants
are hereby RELEASED.[5]

The Facts

The factual antecedents of the case, as found by the CA, are as follows:

x x x. David Raymundo [herein private respondent] is the absolute and registered

owner of a parcel of land, together with the house and other improvements thereon,
located at 1918 Kamias St., Dasmarias Village, Makati and covered by TCT No.
142177. Defendant George Raymundo [herein private respondent] is Davids father
who negotiated with plaintiffs Avelina and Mariano Velarde [herein petitioners] for the
sale of said property, which was, however, under lease (Exh. 6, p. 232, Record of
Civil Case No. 15952).

On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. A; Exh. 1, pp.
11-12, Record) was executed by defendant David Raymundo, as vendor, in favor of
plaintiff Avelina Velarde, as vendee, with the following terms and conditions:

xxxxxxxxx

That for and in consideration of the amount of EIGHT HUNDRED THOUSAND

PESOS (P800,000.00), Philippine currency, receipt of which in full is hereby
acknowledged by the VENDOR from the VENDEE, to his entire and complete
satisfaction, by these presents the VENDOR hereby SELLS, CEDES, TRANSFERS,
CONVEYS AND DELIVERS, freely and voluntarily, with full warranty of a legal and
valid title as provided by law, unto the VENDEE, her heirs, successors and assigns,
the parcel of land mentioned and described above, together with the house and other
improvements thereon.

That the aforesaid parcel of land, together with the house and other improvements
thereon, were mortgaged by the VENDOR to the BANK OF THE PHILIPPINE
ISLANDS, Makati, Metro Manila, to secure the payment of a loan of ONE MILLION
EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, as
evidenced by a Real Estate Mortgage signed and executed by the VENDOR in favor
of the said Bank of the Philippine Islands, on______ and which Real Estate Mortgage
was ratified before Notary Public for Makati, _______, as Doc. No. ____, Page No.
___, Book No. ___, Series of 1986 of his Notarial Register.

That as part of the consideration of this sale, the VENDEE hereby assumes to pay
the mortgage obligations on the property herein sold in the amount of ONE MILLION
EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in
favor of Bank of the Philippine Islands, in the name of the VENDOR, and further
agrees to strictly and faithfully comply with all the terms and conditions appearing in
the Real Estate Mortgage signed and executed by the VENDOR in favor of BPI,
including interests and other charges for late payment levied by the Bank, as if the
same were originally signed and executed by the VENDEE.

It is further agreed and understood by the parties herein that the capital gains tax and
documentary stamps on the sale shall be for the account of the VENDOR; whereas,
the registration fees and transfer tax thereon shall be for the account of the VENDEE.
(Exh. A, pp. 11-12, Record).

On the same date, and as part of the above-document, plaintiff Avelina Velarde, with
the consent of her husband, Mariano, executed an Undertaking (Exh. C, pp. 13-14,
Record), the pertinent portions of which read, as follows:

xxxxxxxxx

Whereas, as per Deed of Sale with Assumption of Mortgage, I paid Mr. David A.
Raymundo the sum of EIGHT HUNDRED THOUSAND PESOS (P800,000.00),
Philippine currency, and assume the mortgage obligations on the property with the
Bank of the Philippine Islands in the amount of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, in accordance with the
terms and conditions of the Deed of Real Estate Mortgage dated _________, signed
and executed by Mr. David A. Raymundo with the said Bank, acknowledged before
Notary Public for Makati, _____, as Doc. No. ___, Page No. ___, Book No. __,
Series of 1986 of his Notarial Register.

WHEREAS, while my application for the assumption of the mortgage obligations on

the property is not yet approved by the mortgagee Bank, I have agreed to pay the
mortgage obligations on the property with the Bank in the name of Mr. David A.
Raymundo, in accordance with the terms and conditions of the said Deed of Real
Estate Mortgage, including all interests and other charges for late payment.

WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo,

for purposes of attesting and confirming our private understanding concerning the
said mortgage obligations to be assumed.

NOW, THEREFORE, for and in consideration of the foregoing premises, and the
assumption of the mortgage obligations of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, with the Bank of the
Philippine islands, I, Mrs. Avelina D. Velarde, with the consent of my husband,
Mariano Z. Velarde, do hereby bind and obligate myself, my heirs, successors and
assigns, to strictly and faithfully comply with the following terms and conditions:

1. That until such time as my assumption of the mortgage obligations on the property
purchased is approved by the mortgagee bank, the Bank of the PhilippineIslands, I
shall continue to pay the said loan in accordance with the terms and conditions of the
Deed of Real Estate Mortgage in the name of Mr. David A. Raymundo, the original
Mortgagor.

2. That, in the event I violate any of the terms and conditions of the said Deed of Real
Estate Mortgage, I hereby agree that my downpayment of P800,000.00, plus all
payments made with the Bank of the Philippine Islands on the mortgage loan, shall
be forfeited in favor of Mr. David A. Raymundo, as and by way of liquidated
damages, without necessity of notice or any judicial declaration to that effect, and Mr.
David A Raymundo shall resume total and complete ownership and possession of
the property sold by way of Deed of Sale with Assumption of Mortgage, and the
same shall be deemed automatically cancelled and be of no further force or effect, in
the same manner as if (the) same had never been executed or entered into.

3. That I am executing this Undertaking for purposes of binding myself, my heirs,

successors and assigns, to strictly and faithfully comply with the terms and conditions
of the mortgage obligations with the Bank of the Philippine Islands, and the
covenants, stipulations and provisions of this Undertaking.

That, David A. Raymundo, the vendor of the property mentioned and identified
above, [does] hereby confirm and agree to the undertakings of the Vendee pertinent
to the assumption of the mortgage obligations by the Vendee with the Bank of the
Philippine Islands. (Exh. C, pp. 13-14, Record).

This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.

It appears that the negotiated terms for the payment of the balance of P1.8 million
was from the proceeds of a loan that plaintiffs were to secure from a bank with
defendants help. Defendants had a standing approved credit line with the Bank of the
Philippine Islands (BPI). The parties agreed to avail of this, subject to BPIs approval
of an application for assumption of mortgage by plaintiffs. Pending BPIs approval o[f]
the application, plaintiffs were to continue paying the monthly interests of the loan
secured by a real estate mortgage.

Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan
secured by the aforementioned mortgage for three (3) months as follows: September
19, 1986 at P27,225.00; October 20, 1986 at P23,000.00; and November 19, 1986
at P23,925.00 (Exh. E, H & J, pp. 15, 17 and 18, Record).

On December 15, 1986, plaintiffs were advised that the Application for Assumption of
Mortgage with BPI was not approved (Exh. J, p. 133, Record). This prompted
plaintiffs not to make any further payment.

On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that
their non-payment to the mortgage bank constitute[d] non-performance of their
obligation (Exh. 3, p. 220, Record).

In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:

This is to advise you, therefore, that our client is willing to pay the balance in cash not
later than January 21, 1987 provided: (a) you deliver actual possession of the
property to her not later than January 15, 1987 for her immediate occupancy; (b) you
cause the release of title and mortgage from the Bank of P.I. and make the title
available and free from any liens and encumbrances; and (c) you execute an
absolute deed of sale in her favor free from any liens or encumbrances not later than
January 21, 1987. (Exhs. K, 4, p. 223, Record).

On January 8, 1987, defendants sent plaintiffs a notarial notice of

cancellation/rescission of the intended sale of the subject property allegedly due to
the latters failure to comply with the terms and conditions of the Deed of Sale with
Assumption of Mortgage and the Undertaking (Exh. 5, pp. 225-226, Record).[6]

Consequently, petitioners filed on February 9, 1987 a Complaint against private

respondents for specific performance, nullity of cancellation, writ of possession and
damages. This was docketed as Civil Case No. 15952 at the Regional Trial Court of
Makati, Branch 149. The case was tried and heard by then Judge Consuelo Ynares-
Santiago (now an associate justice of this Court), who dismissed the Complaint in a
Decision dated November 14, 1990.[7] Thereafter, petitioners filed a Motion for
Reconsideration.[8]
Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals
and Judge Salvador S. A. Abad Santos was assigned to the sala she vacated.In an
Order dated May 15, 1991,[9] Judge Abad Santos granted petitioners Motion for
Reconsideration and directed the parties to proceed with the sale. He instructed
petitioners to pay the balance of P1.8 million to private respondents who, in turn, were
ordered to execute a deed of absolute sale and to surrender possession of the disputed
property to petitioners.
Private respondents appealed to the CA.

Ruling of the Court of Appeals

The CA set aside the Order of Judge Abad Santos and reinstated then Judge
Ynares-Santiagos earlier Decision dismissing petitioners Complaint. Upholding the
validity of the rescission made by private respondents, the CA explained its ruling in
this wise:

In the Deed of Sale with Assumption of Mortgage, it was stipulated that as part of the
consideration of this sale, the VENDEE (Velarde) would assume to pay the mortgage
obligation on the subject property in the amount of P1.8 million in favor of BPI in the
name of the Vendor (Raymundo). Since the price to be paid by the Vendee Velarde
includes the downpayment of P800,000.00 and the balance of P1.8 million, and the
balance of P1.8 million cannot be paid in cash, Vendee Velarde, as part of the
consideration of the sale, had to assume the mortgage obligation on the subject
property. In other words, the assumption of the mortgage obligation is part of the
obligation of Velarde, as vendee, under the contract. Velarde further agreed to strictly
and faithfully comply with all the terms and conditions appearing in the Real Estate
Mortgage signed and executed by the VENDOR in favor of BPI x x x as if the same
were originally signed and executed by the Vendee. (p.2, thereof, p.12, Record). This
was reiterated by Velarde in the document entitled Undertaking wherein the latter
agreed to continue paying said loan in accordance with the terms and conditions of
the Deed of Real Estate Mortgage in the name of Raymundo. Moreover, it was
stipulated that in the event of violation by Velarde of any terms and conditions of said
deed of real estate mortgage, the downpayment of P800,000.00 plus all payments
made with BPI or the mortgage loan would be forfeited and the [D]eed of [S]ale with
[A]ssumption of [M]ortgage would thereby be cancelled automatically and of no force
and effect (pars. 2 & 3, thereof, pp. 13-14, Record).
From these 2 documents, it is therefore clear that part of the consideration of the sale
was the assumption by Velarde of the mortgage obligation of Raymundo in the
amount of P1.8 million. This would mean that Velarde had to make payments to BPI
under the [D]eed of [R]eal [E]state [M]ortgage in the name of Raymundo. The
application with BPI for the approval of the assumption of mortgage would mean that,
in case of approval, payment of the mortgage obligation will now be in the name of
Velarde. And in the event said application is disapproved, Velarde had to pay in
full. This is alleged and admitted in Paragraph 5 of the Complaint. Mariano Velarde
likewise admitted this fact during the hearing on September 15, 1997 (p. 47, t.s.n.,
September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This being the
case, the non-payment of the mortgage obligation would result in a violation of the
contract. And, upon Velardes failure to pay the agreed price, the[n] Raymundo may
choose either of two (2) actions - (1) demand fulfillment of the contract, or (2)
demand its rescission (Article 1191, Civil Code).

The disapproval by BPI of the application for assumption of mortgage cannot be used
as an excuse for Velardes non-payment of the balance of the purchase price.As
borne out by the evidence, Velarde had to pay in full in case of BPIs disapproval of
the application for assumption of mortgage. What Velarde should have done was to
pay the balance of P1.8 million. Instead, Velarde sent Raymundo a letter dated
January 7, 1987 (Exh. K, 4) which was strongly given weight by the lower court in
reversing the decision rendered by then Judge Ynares-Santiago. In said letter,
Velarde registered their willingness to pay the balance in cash but enumerated 3 new
conditions which, to the mind of this Court, would constitute a new undertaking or
new agreement which is subject to the consent or approval of Raymundo.These 3
conditions were not among those previously agreed upon by Velarde and
Raymundo. These are mere offers or, at most, an attempt to novate. But then again,
there can be no novation because there was no agreement of all the parties to the
new contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).

It was likewise agreed that in case of violation of the mortgage obligation, the Deed
of Sale with Assumption of Mortgage would be deemed automatically cancelled and
of no further force and effect, as if the same had never been executed or entered
into. While it is true that even if the contract expressly provided for automatic
rescission upon failure to pay the price, the vendee may still pay, he may do so only
for as long as no demand for rescission of the contract has been made upon him
either judicially or by a notarial act (Article 1592, Civil Code). In the case at bar,
Raymundo sent Velarde a notarial notice dated January 8, 1987 of
cancellation/rescission of the contract due to the latters failure to comply with their
obligation. The rescission was justified in view of Velardes failure to pay the price
(balance) which is substantial and fundamental as to defeat the object of the parties
in making the agreement. As adverted to above, the agreement of the parties
involved a reciprocal obligation wherein the obligation of one is a resolutory condition
of the obligation of the other, the non-fulfillment of which entitles the other party to
rescind the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of
the mortgage obligation by appellees Velarde would create a right to demand
payment or to rescind the contract, or to criminal prosecution (Edca Publishing &
Distribution Corporation vs. Santos, 184 SCRA 614). Upon appellees failure,
therefore, to pay the balance, the contract was properly rescinded (Ruiz vs. IAC, 184
SCRA 720). Consequently, appellees Velarde having violated the contract, they have
lost their right to its enforcement and hence, cannot avail of the action for specific
performance (Voysaw vs. Interphil Promotions, Inc., 148 SCRA 635).[10]

Hence, this appeal.[11]

 The Issues

Petitioners, in their Memorandum,[12] interpose the following assignment of errors:

I.

The Court of Appeals erred in holding that the non-payment of the mortgage
obligation resulted in a breach of the contract.

II.

The Court of Appeals erred in holding that the rescission (resolution) of the
contract by private respondents was justified.

III.

The Court of Appeals erred in holding that petitioners January 7, 1987 letter
gave three new conditions constituting mere offers or an attempt to novate
necessitating a new agreement between the parties.

The Courts Ruling

The Petition is partially meritorious.

First Issue:
Breach of Contract

Petitioners aver that their nonpayment of private respondents mortgage obligation

did not constitute a breach of contract, considering that their request to assume the
obligation had been disapproved by the mortgagee bank. Accordingly, payment of the
monthly amortizations ceased to be their obligation and, instead, it devolved upon
private respondents again.
However, petitioners did not merely stop paying the mortgage obligations; they
also failed to pay the balance of the purchase price. As admitted by both parties, their
agreement mandated that petitioners should pay the purchase price balance of P1.8
million to private respondents in case the request to assume the mortgage would be
disapproved. Thus, on December 15, 1986, when petitioners received notice of the
banks disapproval of their application to assume respondents mortgage, they should
have paid the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering to
make such payment only upon the fulfillment of certain conditions not originally agreed
upon in the contract of sale. Such conditional offer to pay cannot take the place of
actual payment as would discharge the obligation of a buyer under a contract of sale.
In a contract of sale, the seller obligates itself to transfer the ownership of and
deliver a determinate thing, and the buyer to pay therefor a price certain in money or
its equivalent.[13] Private respondents had already performed their obligation through
the execution of the Deed of Sale, which effectively transferred ownership of the
property to petitioner through constructive delivery. Prior physical delivery or
possession is not legally required, and the execution of the Deed of Sale is deemed
equivalent to delivery.[14]
Petitioners, on the other hand, did not perform their correlative obligation of paying
the contract price in the manner agreed upon. Worse, they wanted private respondents
to perform obligations beyond those stipulated in the contract before fulfilling their own
obligation to pay the full purchase price.

Second Issue
Validity of the Rescission

Petitioners likewise claim that the rescission of the contract by private respondents
was not justified, inasmuch as the former had signified their willingness to pay the
balance of the purchase price only a little over a month from the time they were notified
of the disapproval of their application for assumption of mortgage.Petitioners also aver
that the breach of the contract was not substantial as would warrant a rescission. They
cite several cases[15] in which this Court declared that rescission of a contract would
not be permitted for a slight or casual breach. Finally, they argue that they have
substantially performed their obligation in good faith, considering that they have
already made the initial payment of P800,000 and three (3) monthly mortgage
payments.
As pointed out earlier, the breach committed by petitioners was not so much their
nonpayment of the mortgage obligations, as their nonperformance of their reciprocal
obligation to pay the purchase price under the contract of sale. Private respondents
right to rescind the contract finds basis in Article 1191 of the Civil Code, which explicitly
provides as follows:

Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission even after
he has chosen fulfillment, if the latter should become impossible.

The right of rescission of a party to an obligation under Article 1191 of the Civil
Code is predicated on a breach of faith by the other party who violates the reciprocity
between them.[16] The breach contemplated in the said provision is the obligors failure
to comply with an existing obligation.[17] When the obligor cannot comply with what is
incumbent upon it, the obligee may seek rescission and, in the absence of any just
cause for the court to determine the period of compliance, the court shall decree the
rescission.[18]
In the present case, private respondents validly exercised their right to rescind the
contract, because of the failure of petitioners to comply with their obligation to pay the
balance of the purchase price. Indubitably, the latter violated the very essence of
reciprocity in the contract of sale, a violation that consequently gave rise to private
respondents right to rescind the same in accordance with law.
True, petitioners expressed their willingness to pay the balance of the purchase
price one month after it became due; however, this was not equivalent to actual
payment as would constitute a faithful compliance of their reciprocal
obligation. Moreover, the offer to pay was conditioned on the performance by private
respondents of additional burdens that had not been agreed upon in the original
contract. Thus, it cannot be said that the breach committed by petitioners was merely
slight or casual as would preclude the exercise of the right to rescind.
Misplaced is petitioners reliance on the cases[19] they cited because the factual
circumstances in those cases are not analogous to those in the present one. InSong
Fo there was, on the part of the buyer, only a delay of twenty (20) days to pay for the
goods delivered. Moreover, the buyers offer to pay was unconditional and was
accepted by the seller. In Zepeda, the breach involved a mere one-week delay in
paying the balance of P1,000, which was actually paid. In Tan, the alleged breach was
private respondents delay of only a few days, which was for the purpose of clearing
the title to the property; there was no reference whatsoever to the nonpayment of the
contract price.
In the instant case, the breach committed did not merely consist of a slight delay
in payment or an irregularity; such breach would not normally defeat the intention of
the parties to the contract. Here, petitioners not only failed to pay the P1.8 million
balance, but they also imposed upon private respondents new obligations as
preconditions to the performance of their own obligation. In effect, the qualified offer to
pay was a repudiation of an existing obligation, which was legally due and demandable
under the contract of sale. Hence, private respondents were left with the legal option
of seeking rescission to protect their own interest.

Mutual Restitution
Required in Rescission

As discussed earlier, the breach committed by petitioners was the

nonperformance of a reciprocal obligation, not a violation of the terms and conditions
of the mortgage contract. Therefore, the automatic rescission and forfeiture of payment
clauses stipulated in the contract does not apply. Instead, Civil Code provisions shall
govern and regulate the resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil
Code, mutual restitution is required to bring back the parties to their original situation
prior to the inception of the contract. Accordingly, the initial payment of P800,000 and
the corresponding mortgage payments in the amounts of P27,225,P23,000
and P23,925 (totaling P874,150.00) advanced by petitioners should be returned by
private respondents, lest the latter unjustly enrich themselves at the expense of the
former.
Rescission creates the obligation to return the object of the contract. It can be
carried out only when the one who demands rescission can return whatever he may
be obliged to restore.[20] To rescind is to declare a contract void at its inception and to
put an end to it as though it never was. It is not merely to terminate it and release the
parties from further obligations to each other, but to abrogate it from the beginning and
restore the parties to their relative positions as if no contract has been made.[21]

Third Issue
Attempt to Novate

In view of the foregoing discussion, the Court finds it no longer necessary to

discuss the third issue raised by petitioners. Suffice it to say that the three conditions
appearing on the January 7, 1987 letter of petitioners to private respondents were not
part of the original contract. By that time, it was already incumbent upon the former to
pay the balance of the sale price. They had no right to demand preconditions to the
fulfillment of their obligation, which had become due.
WHEREFORE, the assailed Decision is hereby AFFIRMED with
the MODIFICATION that private respondents are ordered to return to petitioners the
amount of P874,150, which the latter paid as a consequence of the rescinded contract,
with legal interest thereon from January 8, 1987, the date of rescission. No
pronouncement as to costs.
SO ORDERED.
 SECOND DIVISION

[G.R. No. 137290. July 31, 2000]

SAN MIGUEL PROPERTIES PHILIPPINES, INC., petitioner,

vs. SPOUSES ALFREDO HUANG and GRACE
HUANG,respondents.

DECISION

MENDOZA, J.:

This is a petition for review of the decision, dated April 8, 1997, of

[1]

the Court of Appeals which reversed the decision of the Regional

Trial Court, Branch 153, Pasig City dismissing the complaint brought
by respondents against petitioner for enforcement of a contract of
sale.

The facts are not in dispute.

Petitioner San Miguel Properties Philippines, Inc. is a domestic

corporation engaged in the purchase and sale of real properties. Part
of its inventory are two parcels of land totalling 1, 738 square meters
at the corner of Meralco Avenue and General Capinpin Street, Barrio
Oranbo, Pasig City, which are covered by TCT Nos. PT-82395 and
PT-82396 of the Register of Deeds of Pasig City.

On February 21, 1994, the properties were offered for sale

for P52,140,000.00 in cash. The offer was made to Atty. Helena M.
Dauz who was acting for respondent spouses as undisclosed
principals. In a letter dated March 24, 1994, Atty. Dauz signified her
[2]

clients interest in purchasing the properties for the amount for which
they were offered by petitioner, under the following terms: the sum
of P500,000.00 would be given as earnest money and the balance
would be paid in eight equal monthly installments from May to
December, 1994. However, petitioner refused the counter-offer.

On March 29, 1994, Atty. Dauz wrote another letter proposing the
[3]

following terms for the purchase of the properties, viz:

This is to express our interest to buy your-above-

mentioned property with an area of 1, 738 sq. meters.
For this purpose, we are enclosing herewith the sum
of P1,000,000.00 representing earnest-deposit
money, subject to the following conditions.
 1. We will be given the exclusive option to purchase
the property within the 30 days from date of your
acceptance of this offer.

2. During said period, we will negotiate on the terms

and conditions of the purchase; SMPPI will secure
the necessary Management and Board approvals;
and we initiate the documentation if there is mutual
agreement between us.

3. In the event that we do not come to an agreement

on this transaction, the said amount of P1,000,000.00
shall be refundable to us in full upon demand. . . .

Isidro A. Sobrecarey, petitioners vice-president and operations

manager for corporate real estate, indicated his conformity to the
offer by affixing his signature to the letter and accepted the "earnest-
deposit" of P1 million. Upon request of respondent spouses,
Sobrecarey ordered the removal of the "FOR SALE" sign from the
properties.

Atty. Dauz and Sobrecarey then commenced negotiations. During

their meeting on April 8, 1994, Sobrecarey informed Atty. Dauz that
petitioner was willing to sell the subject properties on a 90-day term.
Atty. Dauz countered with an offer of six months within which to pay.

On April 14, 1994, the parties again met during which Sobrecarey
informed Atty. Dauz that petitioner had not yet acted on her counter-
offer. This prompted Atty. Dauz to propose a four-month period of
amortization.

On April 25, 1994, Atty. Dauz asked for an extension of 45 days from
April 29, 1994 to June 13,1994 within which to exercise her option to
purchase the property, ad ding that within that period, "[we] hope to
finalize [our] agreement on the matter." Her request was granted.
[4]

On July 7, 1994, petitioner, through its president and chief executive

officer, Federico Gonzales, wrote Atty. Dauz informing her that
because the parties failed to agree on the terms and conditions of the
sale despite the extension granted by petitioner, the latter was
returning the amount ofP1 million given as "earnest-deposit." [5]

On July 20, 1994, respondent spouses, through counsel, wrote

petitioner demanding the execution within five days of a deed of sale
covering the properties. Respondents attempted to return the
"earnest-deposit" but petitioner refused on the ground that
respondents option to purchase had already expired.

On August 16, 1994, respondent spouses filed a complaint for

specific performance against petitioner before the Regional Trial
Court, Branch 133, Pasig City where it was docketed as Civil Case
No. 64660.

Within the period for filing a responsive pleading, petitioner filed a

motion to dismiss the complaint alleging that (1) the alleged
"exclusive option" of respondent spouses lacked a consideration
separate and distinct from the purchase price and was thus
unenforceable and (2) the complaint did not allege a cause of action
because there was no "meeting of the minds" between the parties
and, therefore, no perfected contract of sale. The motion was
opposed by respondents.

On December 12, 1994, the trial court granted petitioners motion and
dismissed the action. Respondents filed a motion for reconsideration,
but it was denied by the trial court. They then appealed to the Court
of Appeals which, on April 8, 1997, rendered a decision reversing
[6]

the judgment of the trial court. The appellate court held that all the
requisites of a perfected contract of sale had been complied with as
the offer made on March 29, 1994, in connection with which the
earnest money in the amount of P1 million was tendered by
respondents, had already been accepted by petitioner. The court
cited Art. 1482 of the Civil Code which provides that "[w]henever
earnest money is given in a contract of sale, it shall be considered as
part of the price and as proof of the perfection of the contract." The
fact the parties had not agreed on the mode of payment did not affect
the contract as such is not an essential element for its validity. In
addition, the court found that Sobrecarey had authority to act in
behalf of petitioner for the sale of the properties.
[7]

Petitioner moved for reconsideration of the trial courts decision, but

its motion was denied. Hence, this petition.

Petitioner contends that the Court of Appeals erred in finding that

there was a perfected contract of sale between the parties because
the March 29, 1994 letter of respondents, which petitioner accepted,
merely resulted in an option contract, albeit it was unenforceable for
lack of a distinct consideration. Petitioner argues that the absence of
agreement as to the mode of payment was fatal to the perfection of
the contract of sale. Petitioner also disputes the appellate courts
ruling that Isidro A. Sobrecarey had authority to sell the subject real
properties.[8]

Respondents were required to comment within ten (10) days from

notice. However, despite 13 extensions totalling 142 days which the
Court had given to them, respondents failed to file their comment.
They were thus considered to have waived the filing of a comment.

The petition is meritorious.

In holding that there is a perfected contract of sale, the Court of

Appeals relied on the following findings: (1) earnest money was
allegedly given by respondents and accepted by petitioner through its
vice-president and operations manager, Isidro A. Sobrecarey; and (2)
the documentary evidence in the records show that there was a
perfected contract of sale.

With regard to the alleged payment and acceptance of earnest

money, the Court holds that respondents did not give the P1 million
as "earnest money" as provided by Art. 1482 of the Civil Code. They
presented the amount merely as a deposit of what would eventually
become the earnest money or downpayment should a contract of
sale be made by them. The amount was thus given not as a part of
the purchase price and as proof of the perfection of the contract of
sale but only as a guarantee that respondents would not back out of
the sale. Respondents in fact described the amount as an "earnest-
deposit." In Spouses Doromal, Sr. v. Court of Appeals, it was held:
[9]

. . . While the P5,000 might have indeed been paid to

Carlos in October, 1967, there is nothing to show that the
same was in the concept of the earnest money
contemplated in Art. 1482 of the Civil Code, invoked by
petitioner, as signifying perfection of the sale. Viewed in
the backdrop of the factual milieu thereof extant in the
record, We are more inclined to believe that the
saidP5,000.00 were paid in the concept of earnest
money as the term was understood under the Old Civil
Code, that is, as a guarantee that the buyer would not
back out, considering that it is not clear that there was
already a definite agreement as to the price then and that
petitioners were decided to buy 6/7 only of the property
should respondent Javellana refuse to agree to part with
her 1/7 share.[10]
In the present case, the P1 million "earnest-deposit" could not have
been given as earnest money as contemplated in Art. 1482 because,
at the time when petitioner accepted the terms of respondents offer
of March 29, 1994, their contract had not yet been perfected. This is
evident from the following conditions attached by respondents to their
letter, to wit: (1) that they be given the exclusive option to purchase
the property within 30 days from acceptance of the offer; (2) that
during the option period, the parties would negotiate the terms and
conditions of the purchase; and (3) petitioner would secure the
necessary approvals while respondents would handle the
documentation.

The first condition for an option period of 30 days sufficiently shows

that a sale was never perfected. As petitioner correctly points out,
acceptance of this condition did not give rise to a perfected sale but
merely to an option or an accepted unilateral promise on the part of
respondents to buy the subject properties within 30 days from the
date of acceptance of the offer. Such option giving respondents the
exclusive right to buy the properties within the period agreed upon is
separate and distinct from the contract of sale which the parties may
enter. All that respondents had was just the option to buy the
[11]

properties which privilege was not, however, exercised by them

because there was a failure to agree on the terms of payment. No
contract of sale may thus be enforced by respondents.

Furthermore, even the option secured by respondents from petitioner

was fatally defective. Under the second paragraph of Art. 1479, an
accepted unilateral promise to buy or sell a determinate thing for a
price certain is binding upon the promisor only if the promise is
supported by a distinct consideration. Consideration in an option
contract may be anything of value, unlike in sale where it must be the
price certain in money or its equivalent. There is no showing here of
any consideration for the option. Lacking any proof of such
consideration, the option is unenforceable.

Equally compelling as proof of the absence of a perfected sale is the

second condition that, during the option period, the parties would
negotiate the terms and conditions of the purchase. The stages of a
contract of sale are as follows: (1) negotiation, covering the period
from the time the prospective contracting parties indicate interest in
the contract to the time the contract is perfected; (2) perfection, which
takes place upon the concurrence of the essential elements of the
sale which are the meeting of the minds of the parties as to the object
of the contract and upon the price; and (3) consummation, which
begins when the parties perform their respective undertakings under
the contract of sale, culminating in the extinguishment thereof. In [12]

the present case, the parties never got past the negotiation stage.
The alleged "indubitable evidence" of a perfected sale cited by the
[13]

appellate court was nothing more than offers and counter-offers

which did not amount to any final arrangement containing the
essential elements of a contract of sale. While the parties already
agreed on the real properties which were the objects of the sale and
on the purchase price, the fact remains that they failed to arrive at
mutually acceptable terms of payment, despite the 45-day extension
given by petitioner.

The appellate court opined that the failure to agree on the terms of
payment was no bar to the perfection of the sale because Art. 1475
only requires agreement by the parties as to the price of the object.
This is error. In Navarro v. Sugar Producers Cooperative Marketing
Association, Inc., we laid down the rule that the manner of payment
[14]

of the purchase price is an essential element before a valid and

binding contract of sale can exist. Although the Civil Code does not
expressly state that the minds of the parties must also meet on the
terms or manner of payment of the price, the same is needed,
otherwise there is no sale. As held in Toyota Shaw, Inc. v. Court of
Appeals, agreement on the manner of payment goes into the price
[15]

such that a disagreement on the manner of payment is tantamount to

a failure to agree on the price. In Velasco v. Court of Appeals, the
[16] [17]

parties to a proposed sale had already agreed on the object of sale

and on the purchase price. By the buyers own admission, however,
the parties still had to agree on how and when the downpayment and
the installments were to be paid. It was held:

. . . Such being the situation, it can not, therefore, be said

that a definite and firm sales agreement between the
parties had been perfected over the lot in
question. Indeed, this Court has already ruled before that
a definite agreement on the manner of payment of the
purchase price is an essential element in the formation of
a binding and enforceable contract of sale. The fact,
therefore, that the petitioners delivered to the respondent
the sum of P10,000 as part of the down-payment that
they had to pay cannot be considered as sufficient proof
of the perfection of any purchase and sale agreement
between the parties herein under Art. 1482 of the new
Civil Code, as the petitioners themselves admit that
some essential matter - the terms of the payment - still
had to be mutually covenanted. [18]
Thus, it is not the giving of earnest money, but the proof of the
concurrence of all the essential elements of the contract of sale
which establishes the existence of a perfected sale.

In the absence of a perfected contract of sale, it is immaterial

whether Isidro A. Sobrecarey had the authority to enter into a
contract of sale in behalf of petitioner. This issue, therefore, needs no
further discussion.

WHEREFORE, the decision of the Court of Appeals is REVERSED

and respondents complaint is DISMISSED.

SO ORDERED.
 FIRST DIVISION

G.R. No. 154493 December 6, 2006

REYNALDO VILLANUEVA, petitioner,

vs.
PHILIPPINE NATIONAL BANK (PNB), respondent.

 DECISION

AUSTRIA-MARTINEZ, J.:

The Petition for Review on Certiorari under Rule 45 before this Court assails the January
29, 2002 Decision1 and June 27, 2002 Resolution2 of the Court of Appeals (CA) in CA-G.R.
CV No. 520083 which reversed and set aside the September 14, 1995 Decision4 of the
Regional Trial Court, Branch 22, General Santos City (RTC) in Civil Case No. 4553.

As culled from the records, the facts are as follows:

The Special Assets Management Department (SAMD) of the Philippine National Bank
(PNB) issued an advertisement for the sale thru bidding of certain PNB properties in
Calumpang, General Santos City, including Lot No. 17, covered by TCT No. T-15042,
consisting of 22,780 square meters, with an advertised floor price of P1,409,000.00, and
Lot No. 19, covered by TCT No. T-15036, consisting of 41,190 square meters, with an
advertised floor price of P2,268,000.00.5 Bidding was subject to the following conditions: 1)
that cash bids be submitted not later than April 27, 1989; 2) that said bids be accompanied
by a 10% deposit in manager’s or cashier’s check; and 3) that all acceptable bids be subject
to approval by PNB authorities.

In a June 28, 1990 letter6 to the Manager, PNB-General Santos Branch, Reynaldo
Villanueva (Villanueva) offered to purchase Lot Nos. 17 and 19 for P3,677,000.00. He also
manifested that he was depositing P400,000.00 to show his good faith but with the
understanding that said amount may be treated as part of the payment of the purchase
price only when his offer is accepted by PNB. At the bottom of said letter there appears an
unsigned marginal note stating that P400,000.00 was deposited into Villanueva’s account
(Savings Account No. 43612) with PNB-General Santos Branch. 7

PNB-General Santos Branch forwarded the June 28, 1990 letter of Villanueva to Ramon
Guevara (Guevara), Vice President, SAMD.8 On July 6, 1990, Guevara informed
Villanueva that only Lot No. 19 is available and that the asking price therefor
is P2,883,300.00.9 Guevara further wrote:

If our quoted price is acceptable to you, please submit a revised offer to purchase. Sale
shall be subject to our Board of Director’s approval and to other terms and conditions
imposed by the Bank on sale of acquired assets. 10(Emphasis ours)

Instead of submitting a revised offer, Villanueva merely inserted at the bottom of Guevara’s
letter a July 11, 1990 marginal note, which reads:

C O N F O R M E:

PRICE OF P2,883,300.00 (downpayment of P600,000.00 and the balance payable in

two (2) years at quarterly amortizations.) 11

Villanueva paid P200,000.00 to PNB which issued O.R. No. 16997 to acknowledge receipt
of the "partial payment deposit on offer to purchase."12 On the dorsal portion of Official
Receipt No. 16997, Villanueva signed a typewritten note, stating:

This is a deposit made to show the sincerity of my purchase offer with the understanding
that it shall be returned without interest if my offer is not favorably considered or be forfeited
if my offer is approved but I fail/refuse to push through the purchase.13
Also, on July 24, 1990, P380,000.00 was debited from Villanueva’s Savings Account No.
43612 and credited to SAMD.14

On October 11, 1990, however, Guevara wrote Villanueva that, upon orders of the PNB
Board of Directors to conduct another appraisal and public bidding of Lot No. 19, SAMD is
deferring negotiations with him over said property and returning his deposit
of P580,000.00.15 Undaunted, Villanueva attempted to deliver postdated checks covering
the balance of the purchase price but PNB refused the same.

Hence, Villanueva filed with the RTC a Complaint16 for specific performance and damages
against PNB. In its September 14, 1995 Decision, the RTC granted the Complaint, thus:

WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendant
directing it to do the following:

1. To execute a deed of sale in favor of the plaintiff over Lot 19 comprising 41,190 square
meters situated at Calumpang, General Santos City covered by TCT No. T-15036 after
payment of the balance in cash in the amount of P2,303,300.00;

2. To pay the plaintiff P1,000,000.00 as moral damages; P500,000.00 as attorney’s fees,

plus litigation expenses and costs of the suit.

SO ORDERED.17

The RTC anchored its judgment on the finding that there existed a perfected contract of
sale between PNB and Villanueva. It found:

The following facts are either admitted or undisputed:

xxx

The defendant through Vice-President Guevara negotiated with the plaintiff in connection
with the offer of the plaintiff to buy Lots 17 & 19. The offer of plaintiff to buy, however, was
accepted by the defendant only insofar as Lot 19 is concerned as exemplified by its letter
dated July 6, 1990 where the plaintiff signified his concurrence after conferring with the
defendant’s vice-president. The conformity of the plaintiff was typewritten by the
defendant’s own people where the plaintiff accepted the price of P2,883,300.00. The
defendant also issued a receipt to the plaintiff on the same day when the plaintiff paid the
amount of P200,000.00 to complete the downpayment of P600,000.00 (Exhibit "F" &
Exhibit "I"). With this development, the plaintiff was also given the go signal by the
defendant to improve Lot 19 because it was already in effect sold to him and because of
that the defendant fenced the lot and completed his two houses on the property.18

The RTC also pointed out that Villanueva’s P580,000.00 downpayment was actually in the
nature of earnest money acceptance of which by PNB signified that there was already a
sale.19 The RTC further cited contemporaneous acts of PNB purportedly indicating that, as
early as July 25, 1990, it considered Lot 19 already sold, as shown by Guevara’s July 25,
1990 letter (Exh. "H")20 to another interested buyer.

PNB appealed to the CA which reversed and set aside the September 14, 1995 RTC
Decision, thus:

WHEREFORE, the appealed decision is REVERSED and SET ASIDE and another
rendered DISMISSING the complaint.
SO ORDERED.21

According to the CA, there was no perfected contract of sale because the July 6, 1990
letter of Guevara constituted a qualified acceptance of the June 28, 1990 offer of Villanueva,
and to which Villanueva replied on July 11, 1990 with a modified offer. The CA held:

In the case at bench, consent, in respect to the price and manner of its payment, is lacking.
The record shows that appellant, thru Guevara’s July 6, 1990 letter, made a qualified
acceptance of appellee’s letter-offer dated June 28, 1990 by imposing an asking price
of P2,883,300.00 in cash for Lot 19. The letter dated July 6, 1990 constituted a counter-
offer (Art. 1319, Civil Code), to which appellee made a new proposal, i.e., to pay the
amount ofP2,883,300.00 in staggered amounts, that is, P600,000.00 as downpayment and
the balance within two years in quarterly amortizations.

A qualified acceptance, or one that involves a new proposal, constitutes a counter-offer

and a rejection of the original offer (Art. 1319, id.). Consequently, when something is
desired which is not exactly what is proposed in the offer, such acceptance is not sufficient
to generate consent because any modification or variation from the terms of the offer
annuls the offer (Tolentino, Commentaries and Jurisprudence on the Civil Code of the
Philippines, 6th ed., 1996, p. 450, cited in ABS-CBN Broadcasting Corporation v. Court of
Appeals, et al., 301 SCRA 572).

Appellee’s new proposal, which constitutes a counter-offer, was not accepted by appellant,
its board having decided to have Lot 19 reappraised and sold thru public bidding.

Moreover, it was clearly stated in Guevara’s July 6, 1990 letter that "the sale shall be
subject to our Board of Director’s approval and to other terms and conditions imposed by
the Bank on sale of acquired assets."22

Villanueva’s Motion for Reconsideration23 was denied by the CA in its Resolution of June
27, 2002.

Petitioner Villanueva now assails before this Court the January 29, 2002 Decision and
June 27, 2002 Resolution of the CA. He assigns five issues which may be condensed into
two: first, whether a perfected contract of sale exists between petitioner and respondent
PNB; and second, whether the conduct and actuation of respondent constitutes bad faith
as to entitle petitioner to moral and exemplary damages and attorney’s fees.

The Court sustains the CA on both issues.

Contracts of sale are perfected by mutual consent whereby the seller obligates himself, for
a price certain, to deliver and transfer ownership of a specified thing or right to the buyer
over which the latter agrees.24 Mutual consent being a state of mind, its existence may only
be inferred from the confluence of two acts of the parties: an offer certain as to the object
of the contract and its consideration, and an acceptance of the offer which is absolute in
that it refers to the exact object and consideration embodied in said offer.25 While it is
impossible to expect the acceptance to echo every nuance of the offer, it is imperative that
it assents to those points in the offer which, under the operative facts of each contract, are
not only material but motivating as well. Anything short of that level of mutuality produces
not a contract but a mere counter-offer awaiting acceptance.26 More particularly on the
matter of the consideration of the contract, the offer and its acceptance must be unanimous
both on the rate of the payment and on its term. An acceptance of an offer which agrees
to the rate but varies the term is ineffective. 27

To determine whether there was mutual consent between the parties herein, it is necessary
to retrace each offer and acceptance they made.
Respondent began with an invitation to bid issued in April 1989 covering several of its
acquired assets in Calumpang, General Santos City, including Lot No. 19 for which the
floor price was P2,268,000.00. The offer was subject to the condition that sealed bids,
accompanied by a 10% deposit in manager’s or cashier’s check, be submitted not later
than 10 o’clock in the morning of April 27, 1989.

On June 28, 1990, petitioner made an offer to buy Lot No. 17 and Lot No. 19 for an
aggregate price of P3,677,000.00. It is noted that this offer exactly corresponded to the
April 1989 invitation to bid issued by respondent in that the proposed aggregate purchase
price for Lot Nos. 17 and 19 matched the advertised floor prices for the same properties.
However, it cannot be said that the June 28, 1990 letter of petitioner was an effective
acceptance of the April 1989 invitation to bid for, by its express terms, said invitation lapsed
on April 27, 1989.28 More than that, the April 1989 invitation was subject to the condition
that all sealed bids submitted and accepted be approved by respondent’s higher authorities.

Thus, the June 28, 1990 letter of petitioner was an offer to buy independent of the April
1989 invitation to bid. It was a definite offer as it identified with certainty the properties
sought to be purchased and fixed the contract price.

However, respondent replied to the June 28, 1990 offer with a July 6, 1990 letter that only
Lot No. 19 is available and that the price therefor is now P2,883,300.00. As the CA pointed
out, this reply was certainly not an acceptance of the June 28, 1990 offer but a mere
counter-offer. It deviated from the original offer on three material points: first, the object of
the proposed sale is now only Lot No. 19 rather than Lot Nos. 17 and 19; second, the area
of the property to be sold is still 41,190 sq. m but an 8,797-sq. m portion is now part of a
public road; and third, the consideration is P2,883,300 for one lot rather
than P3,677,000.00 for two lots. More important, this July 6, 1990 counter-offer imposed
two conditions: one, that petitioner submit a revised offer to purchase based on the quoted
price; and two, that the sale of the property be approved by the Board of Directors and
subjected to other terms and conditions imposed by the Bank on the sale of acquired
assets.

In reply to the July 6, 1990 counter-offer, petitioner signed his July 11, 1990 conformity to
the quoted price of P2,883,300.00 but inserted the term "downpayment of P600,000.00
and the balance payable in two years at quarterly amortization." The CA viewed this July
11, 1990 conformity not as an acceptance of the July 6, 1990 counter-offer but a further
counter-offer for, while petitioner accepted the P2,883,300.00 price for Lot No. 19, he
qualified his acceptance by proposing a two-year payment term.

Petitioner does not directly impugn such reasoning of the CA. He merely questions it for
taking up the issue of whether his July 11, 1990 conformity modified the July 6, 1990
counter-offer as this was allegedly never raised during the trial nor on appeal.29

Such argument is not well taken. From beginning to end, respondent denied that a contract
of sale with petitioner was ever perfected.30 Its defense was broad enough to encompass
every issue relating to the concurrence of the elements of contract, specifically on whether
it consented to the object of the sale and its consideration. There was nothing to prevent
the CA from inquiring into the offers and counter-offers of the parties to determine whether
there was indeed a perfected contract between them.

Moreover, there is merit in the ruling of the CA that the July 11, 1990 marginal note was a
further counter-offer which did not lead to the perfection of a contract of sale between the
parties. Petitioner’s own June 28, 1990 offer quoted the price ofP3,677,000.00 for two lots
but was silent on the term of payment. Respondent’s July 6, 1990 counter-offer quoted the
price of P2,833,300.00 and was also silent on the term of payment. Up to that point, the
term or schedule of payment was not on the negotiation table. Thus, when petitioner
suddenly introduced a term of payment in his July 11, 1990 counter-offer, he interjected
into the negotiations a new substantial matter on which the parties had no prior discussion
and over which they must yet agree.31 Petitioner’s July 11, 1990 counter-offer, therefore,
did not usher the parties beyond the negotiation stage of contract making towards its
perfection. He made a counter-offer that required acceptance by respondent.

As it were, respondent, through its Board of Directors, did not accept this last counter-offer.
As stated in its October 11, 1990 letter to petitioner, respondent ordered the reappraisal of
the property, in clear repudiation not only of the proposed price but also the term of
payment thereof.

Petitioner insists, however, that the October 11, 1990 repudiation was belated as
respondent had already agreed to his July 11, 1990 counter-offer when it accepted his
"downpayment" or "earnest money" of P580,000.00.32 He cites Article 1482 of the Civil
Code where it says that acceptance of "downpayment" or "earnest money" presupposes
the perfection of a contract.

Not so. Acceptance of petitioner’s payments did not amount to an implied acceptance of
his last counter-offer.

To begin with, PNB-General Santos Branch, which accepted petitioner’s P380,000.00

payment, and PNB-SAMD, which accepted his P200,000.00 payment, had no authority to
bind respondent to a contract of sale with petitioner.33 Petitioner is well aware of this. To
recall, petitioner sent his June 28, 1990 offer to PNB-General Santos Branch. Said branch
did not act on his offer except to endorse it to Guevarra. Thereafter, petitioner transacted
directly with Guevarra. Petitioner then cannot pretend that PNB-General Santos Branch
had authority to accept his July 11, 1990 counter-offer by merely accepting hisP380,000.00
payment.

Neither did SAMD have authority to bind PNB. In its April 1989 invitation to bid, as well as
its July 6, 1990 counter-offer, SAMD was always careful to emphasize that whatever offer
is made and entertained will be subject to the approval of respondent’s higher authorities.
This is a reasonable disclaimer considering the corporate nature of respondent. 34

Moreover, petitioner’s payment of P200,000.00 was with the clear understanding that his
July 11, 1990 counter-offer was still subject to approval by respondent. This is borne out
by respondent’s Exhibits "2-a" and "2-b", which petitioner never controverted, where it
appears on the dorsal portion of O.R. No. 16997 that petitioner acceded that the amount
he paid was a mere "x x x deposit made to show the sincerity of [his] purchase offer with
the understanding that it shall be returned without interest if [his] offer is not favorably
considered x x x."35 This was a clear acknowledgment on his part that there was yet no
perfected contract with respondent and that even with the payments he had advanced, his
July 11, 1990 counter-offer was still subject to consideration by respondent.

Not only that, in the same Exh. "2-a" as well as in his June 28, 1990 offer, petitioner referred
to his payments as mere "deposits." Even O.R. No. 16997 refers to petitioner’s payment
as mere deposit. It is only in the debit notice issued by PNB-General Santos Branch where
petitioner’s payment is referred to as "downpayment". But then, as we said, PNB-General
Santos Branch has no authority to bind respondent by its interpretation of the nature of the
payment made by petitioner.

In sum, the amounts paid by petitioner were not in the nature of downpayment or earnest
money but were mere deposits or proof of his interest in the purchase of Lot No. 19.
Acceptance of said amounts by respondent does not presuppose perfection of any
contract.36
It must be noted that petitioner has expressly admitted that he had withdrawn the entire
amount of P580,000.00 deposit from PNB-General Santos Branch.37

With the foregoing disquisition, the Court foregoes resolution of the second issue as it is
evident that respondent acted well within its rights when it rejected the last counter-offer of
petitioner.

In fine, petitioner’s petition lacks merit.

WHEREFORE, the petition is DENIED. The Decision dated January 29, 2002 and
Resolution dated June 27, 2002 of the Court of Appeals are AFFIRMED.

No costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 126444 December 4, 1998

ALFONSO QUIJADA, CRESENTE QUIJADA, REYNELDA QUIJADA, DEMETRIO
QUIJADA, ELIUTERIA QUIJADA, EULALIO QUIJADA, and WARLITO
QUIJADA, petitioners,
vs.
COURT OF APPEALS, REGALADO MONDEJAR, RODULFO GOLORAN, ALBERTO
ASIS, SEGUNDINO RAS, ERNESTO GOLORAN, CELSO ABISO, FERNANDO
BAUTISTA, ANTONIO MACASERO, and NESTOR MAGUINSAY, respondents.

MARTINEZ, J.:

Petitioners, as heirs of the late Trinidad Quijada, filed a complaint against private
respondents for quieting of title, recovery of possession and ownership of parcels of land
with claim for attorney's fees and damages. The suit was premised on the following facts
found by the court of Appeals which is materially the same as that found by the trial court:

Plaintiffs-appellees (petitioners) are the children of the late Trinidad Corvera Vda, de
Quijada. Trinidad was one of the heirs of the late Pedro Corvera and inherited from the
latter the two-hectare parcel of land subject of the case, situated in the barrio of San
Agustin, Talacogon, Agusan del Sur. On April 5, 1956, Trinidad Quijada together with her
sisters Leonila Corvera Vda. de Sequeña and Paz Corvera Cabiltes and brother Epapiadito
Corvera executed a conditional deed of donation (Exh. C) of the two-hectare parcel of land
subject of the case in favor of the Municipality of Talacogon, the condition being that the
parcel of land shall be used solely and exclusively as part of the campus of the proposed
provincial high school in Talacogon. Apparently, Trinidad remained in possession of the
parcel of land despite the donation. On July 29, 1962, Trinidad sold one (1) hectare of the
subject parcel of land to defendant-appellant Regalado Mondejar (Exh. 1). Subsequently,
Trinidad verbally sold the remaining one (1) hectare to defendant-appellant (respondent)
Regalado Mondejar without the benefit of a written deed of sale and evidenced solely by
receipts of payment. In 1980, the heirs of Trinidad, who at that time was already dead, filed
a complaint for forcible entry (Exh. E) against defendant-appellant (respondent) Regalado
Mondejar, which complaint was, however, dismissed for failure to prosecute (Exh. F). In
1987, the proposed provincial high school having failed to materialize, the Sangguniang
Bayan of the municipality of Talacogon enacted a resolution reverting the two (2) hectares
of land donated back to the donors (Exh. D). In the meantime, defendant-appellant
(respondent) Regalado Mondejar sold portions of the land to defendants-appellants
(respondents) Fernando Bautista (Exh. 5), Rodolfo Goloran (Exh. 6), Efren Guden (Exh. 7)
and Ernesto Goloran (Exh. 8).

On July 5, 1988, plaintiffs-appellees (petitioners) filed this action against defendants-

appellants (respondents). In the complaint, plaintiffs-appellees (petitioners) alleged that
their deceased mother never sold, conveyed, transferred or disposed of the property in
question to any person or entity much less to Regalado Mondejar save the donation made
to the Municipality of Talacogon in 1956; that at the time of the alleged sale to Regalado
Mondejar by Trinidad Quijada, the land still belongs to the Municipality of Talacogon, hence,
the supposed sale is null and void.

Defendants-appellants (respondents), on the other hand, in their answer claimed that the
land in dispute was sold to Regalado Mondejar, the one (1) hectare on July 29, 1962, and
the remaining one (1) hectare on installment basis until fully paid. As affirmative and/or
special defense, defendants-appellants (respondents) alleged that plaintiffs action is
barred by laches or has prescribed.

The court a quo rendered judgment in favor of plaintiffs-appellees (petitioners): firstly

because "Trinidad Quijada had no legal title or right to sell the land to defendant Mondejar
in 1962, 1966, 1967 and 1968, the same not being hers to dispose of because ownership
belongs to the Municipality of Talacogon (Decision, p. 4; Rollo, p. 39) and, secondly, that
the deed of sale executed by Trinidad Quijada in favor of Mondejar did not carry with it the
conformity and acquiescence of her children, more so that she was already 63 years old
at the time, and a widow (Decision, p. 6; Rollo, p. 41)."1

The dispositive portion of the trial court's decision reads:

WHEREFORE, viewed from the above perceptions, the scale of justice having tilted in
favor of the plaintiffs, judgment is, as it is hereby rendered:

1) ordering the Defendants to return and vacate the two (2) hectares of land to Plaintiffs as
described in Tax Declaration No. 1209 in the name of Trinidad Quijada;

2) ordering any person acting in Defendants' behalf to vacate and restore the peaceful
possession of the land in question to Plaintiffs;

3) ordering the cancellation of the Deed of Sale executed by the late Trinidad Quijada in
favor of Defendant Regalado Mondejar as well as the Deeds of Sale/Relinquishments
executed by Mondejar in favor of the other Defendants;

4) ordering Defendants to remove their improvements constructed on the questioned lot;

5) ordering the Defendants to pay Plaintiffs, jointly and severally, the amount of P10,000.00
representing attorney's fees;

6) ordering Defendants to pays the amount of P8,000.00 as expenses of litigation; and

7) ordering Defendants to pay the sum of P30,000.00 representing moral damages.

SO ORDERED. 2

On appeal, the Court of Appeals reversed and set aside the judgment a quo ruling that
3

the sale made by Trinidad Quijada to respondent Mondejar was valid as the former
retained an inchoate interest on the lots by virtue of the automatic reversion clause
in the deed of donation. Thereafter, petitioners filed a motion for reconsideration.
4

When the CA denied their motion, petitioners instituted a petition for review to this
5

Court arguing principally that the sale of the subject property made by Trinidad
Quijada to respondent Mondejar is void, considering that at that time, ownership
was already transferred to the Municipality of Talacogon. On the contrary, private
respondents contend that the sale was valid, that they are buyers in good faith, and
that petitioners' case is barred by laches. 6

We affirm the decision of the respondent court.

The donation made on April 5, 1956 by Trinidad Quijada and her brother and
sisters was subject to the condition that the donated property shall be "used solely
7

and exclusively as a part of the campus of the proposed Provincial High School in
Talacogon." The donation further provides that should "the proposed Provincial
8

High School be discontinued or if the same shall be opened but for some reason or
another, the same may in the future be closed" the donated property shall
automatically revert to the donor. Such condition, not being contrary to law, morals,
9

good customs, public order or public policy was validly imposed in the donation. 10
When the Municipality's acceptance of the donation was made known to the donor,
the former became the new owner of the donated property — donation being a mode
of acquiring and transmitting ownership — notwithstanding the condition imposed
11

by the donee. The donation is perfected once the acceptance by the donee is made
known to the donor. According, ownership is immediately transferred to the latter
12

and that ownership will only revert to the donor if the resolutory condition is not
fulfilled.

In this case, that resolutory condition is the construction of the school. It has been
ruled that when a person donates land to another on the condition that the latter
would build upon the land a school, the condition imposed is not a condition
precedent or a suspensive condition but a resolutory one. Thus, at the time of the
13

sales made in 1962 towards 1968, the alleged seller (Trinidad) could not have sold
the lots since she had earlier transferred ownership thereof by virtue of the deed of
donation. So long as the resolutory condition subsists and is capable of fulfillment,
the donation remains effective and the donee continues to be the owner subject only
to the rights of the donor or his successors-in-interest under the deed of donation.
Since no period was imposed by the donor on when must the donee comply with
the condition, the latter remains the owner so long as he has tried to comply with
the condition within a reasonable period. Such period, however, became irrelevant
herein when the donee-Municipality manifested through a resolution that it cannot
comply with the condition of building a school and the same was made known to
the donor. Only then — when the non-fulfillment of the resolutory condition was
brought to the donor's knowledge — that ownership of the donated property
reverted to the donor as provided in the automatic reversion clause of the deed of
donation.

The donor may have an inchoate interest in the donated property during the time
that ownership of the land has not reverted to her. Such inchoate interest may be
the subject of contracts including a contract of sale. In this case, however, what the
donor sold was the land itself which she no longer owns. It would have been
different if the donor-seller sold her interests over the property under the deed of
donation which is subject to the possibility of reversion of ownership arising from
the non-fulfillment of the resolutory condition.

As to laches, petitioners' action is not yet barred thereby. Laches presupposes

failure or neglect for an unreasonable and unexplained length of time, to do that
which, by exercising due diligence, could or should have been done earlier; "it is
14

negligence or omission to assert a right within a reasonable time, thus, giving rise
to a presumption that the party entitled to assert it either has abandoned or declined
to assert it." Its essential elements of:
15

a) Conduct on the part of the defendant, or of one under whom he claims, giving rise
to the situation complained of;

b) Delay in asserting complainant's right after he had knowledge of the defendant's

conduct and after he has an opportunity to sue;

c) Lack of knowledge or notice on the part of the defendant that the complainant
would assert the right on which he bases his suit; and,

d) Injury or prejudice to the defendant in the event relief is accorded to the

complainant. 16

are absent in this case. Petioners' cause of action to quiet title commenced only
when the property reverted to the donor and/or his successors-in-interest in 1987.
Certainly, when the suit was initiated the following year, it cannot be said that
petioners had slept on their rights for a long time. The 1960's sales made by Trinidad
Quijada cannot be the reckoning point as to when petitioners' cause of action arose.
They had no interest over the property at that time except under the deed of donation
to which private respondents were not privy. Moreover, petitioners had previously
filed an ejectment suit against private respondents only that it did not prosper on a
technicality.

Be that at it may, there is one thing which militates against the claim of petitioners.
Sale, being a consensual contract, is perfected by mere consent, which is
manifested the moment there is a meeting of the minds as to the offer and
17

acceptance thereof on three (3) elements: subject matter, price and terms of
payment of the price. Ownership by the seller on the thing sold at the time of the
18

perfection of the contract of sale is not an element for its perfection. What the law
requires is that the seller has the right to transfer ownership at the time the thing
sold is delivered. Perfection per sedoes not transfer ownership which occurs upon
19

the actual or constructive delivery of the thing sold. A perfected contract of sale
20

cannot be challenged on the ground of non-ownership on the part of the seller at the
time of its perfection; hence, the sale is still valid.

The consummation, however, of the perfected contract is another matter. It occurs

upon the constructive or actual delivery of the subject matter to the buyer when the
seller or her successors-in-interest subsequently acquires ownership thereof. Such
circumstance happened in this case when petitioners — who are Trinidad Quijada's
heirs and successors-in-interest — became the owners of the subject property upon
the reversion of the ownership of the land to them. Consequently, ownership is
transferred to respondent Mondejar and those who claim their right from him. Article
1434 of the New Civil Code supports the ruling that the seller's "title passes by
operation of law to the buyer." This rule applies not only when the subject matter
21

of the contract of sale is goods, but also to other kinds of property, including real
22

property. 23

There is also no merit in petitioners' contention that since the lots were owned by
the municipality at the time of the sale, they were outside the commerce of men
under Article 1409 (4) of the NCC; thus, the contract involving the same is inexistent
24

and void from the beginning. However, nowhere in Article 1409 (4) is it provided that
the properties of a municipality, whether it be those for public use or its patrimonial
property are outside the commerce of men. Besides, the lots in this case were
25

conditionally owned by the municipality. To rule that the donated properties are
outside the commerce of men would render nugatory the unchallenged
reasonableness and justness of the condition which the donor has the right to
impose as owner thereof. Moreover, the objects referred to as outsides the
commerce of man are those which cannot be appropriated, such as the open seas
and the heavenly bodies.

With respect to the trial court's award of attorney's fees, litigation expenses and
moral damages, there is neither factual nor legal basis thereof. Attorney's fees and
expenses of litigation cannot, following the general rule in Article 2208 of the New
Civil Code, be recovered in this case, there being no stipulation to that effect and
the case does not fall under any of the
exceptions. It cannot be said that private respondents had compelled petitioners
26

to litigate with third persons. Neither can it be ruled that the former acted in "gross
and evident bad faith" in refusing to satisfy the latter's claims considering that
private respondents were under an honest belief that they have a legal right over the
property by virtue of the deed of sale. Moral damages cannot likewise be justified as
none of the circumstances enumerated under Articles 2219. and 2220 of the New
27 28

Civil Code concur in this case

WHEREFORE, by virtue of the foregoing, the assailed decision of the Court of
Appeals is AFFIRMED.

SO ORDERED
G.R. No. 137552 June 16, 2000

ROBERTO Z. LAFORTEZA, GONZALO Z. LAFORTEZA, MICHAEL Z. LAFORTEZA,

DENNIS Z. LAFORTEZA, and LEA Z. LAFORTEZA, petitioners,
vs.
ALONZO MACHUCA, respondent.

GONZAGA-REYES, J.:

This Petition for Review on Certiorari seeks the reversal of the Decision of the Court of
Appeals in CA G.R. CV No. 147457 entitled "ALONZO MACHUCA versus ROBERTO Z.
1

LAFORTEZA, GONZALO Z. LAFORTEZA, LEA ZULUETA-LAFORTEZA, MICHAEL Z.

LAFORTEZA, and DENNIS Z. LAFORTEZA".

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

The property involved consists of a house and lot located at No. 7757 Sherwood Street,
Marcelo Green Village, Parañaque, Metro Manila, covered by Transfer Certificate of Title
(TCT) No. (220656) 8941 of the Registered of Deeds of Parañaque (Exhibit "D", Plaintiff,
record, pp. 331-332). The subject property is registered in the name of the late Francisco
Q. Laforteza, although it is conjugal in nature (Exhibit "8", Defendants, record pp. 331-
386).On August 2, 1988, defendant Lea Zulueta-Laforteza executed a Special Power of
Attorney in favor of defendants Roberto Z. Laforteza and Gonzalo Z. Laforteza, Jr.,
appointing both as her Attorney-in-fact authorizing them jointly to sell the subject property
and sign any document for the settlement of the estate of the late Francisco Q. Laforteza
(Exh. "A", Plaintiff, record, pp. 323-325).

Likewise on the same day, defendant Michael Z. Laforteza executed a Special Power of
Attorney in favor of defendants Roberto Z. Laforteza and Gonzalo Laforteza, Jr., likewise,
granting the same authority (Exh. "B", record, pp. 326-328) Both agency instruments
contained a provision that in any document or paper to exercise authority granted, the
signature of both attorneys- in-fact must be affixed.

On October 27, 1988, defendant Dennis Z. Laforteza executed a Special Power of Attorney
in favor of defendant Roberto Z. Laforteza for the purpose of selling the subject property
(Exh. "C", Plaintiff, record, pp. 329-330). A year later, on October 30, 1989, Dennis Z.
Laforteza executed another Special Power of Attorney in favor of defendants Roberto Z.
Laforteza and Gonzalo Laforteza, Jr. naming both attorneys-in-fact for the purpose of
selling the subject property and signing any document for the settlement of the estate of
the late Francisco Q. Laforteza. The subsequent agency instrument (Exh, "2", record, pp.
371-373) contained similar provisions that both attorneys-in-fact should sign any document
or paper executed in the exercise of their authority. 1âwphi1.nêt

In the exercise of the above authority, on January 20, 1989, the heirs of the late Francisco
Q. Laforteza represented by Roberto Z. Laforteza and Gonzalo Z. Laforteza, Jr. entered
into a Memorandum of Agreement (Contract to Sell) with the plaintiff over the subject
2

property for the sum of SIX HUNDRED THIRTY THOUSAND PESOS (P630,000.00)
payable as follows:

(a) P30,000.00 as earnest money, to be forfeited in favor of the defendants if the sale is
not effected due to the fault of the plaintiff;

(b) P600,000.00 upon issuance of the new certificate of title in the name of the late
Francisco Q. Laforteza and upon execution of an extra-judicial settlement of the decedent's
estate with sale in favor of the plaintiff (Par. 2, Exh. "E", record, pp. 335-336).

Significantly, the fourth paragraph of the Memorandum of Agreement (Contract to Sell)

dated January 20, 1989 (Exh. "E", supra.) contained a provision as follows:

. . . . Upon issuance by the proper Court of the new title, the BUYER-LESSEE shall be
notified in writing and said BUYER-LESSEE shall have thirty (30) days to produce the
balance of P600,000.00 which shall be paid to the SELLER-LESSORS upon the execution
of the Extrajudicial Settlement with sale.

On January 20, 1989, plaintiff paid the earnest money of THIRTY THOUSAND PESOS
(P30,000.00), plus rentals for the subject property (Exh. "F", Plaintiff, record, p. 339).

On September 18, 1998 , defendant heirs, through their counsel wrote a letter (Exh. 1,
3

Defendants, record, p. 370) to the plaintiff furnishing the latter a copy of the reconstituted
title to the subject property, advising him that he had thirty (3) days to produce the balance
of SIX HUNDRED PESOS (sic) (P600,000.00) under the Memorandum of Agreement
which plaintiff received on the same date.

On October 18, 1989, plaintiff sent the defendant heirs a letter requesting for an extension
of the THIRTY (30) DAYS deadline up to November 15, 1989 within which to produce the
balance of SIX HUNDRED THOUSAND PESOS (P600,000.00) (Exh. "G", Plaintiff, record,
pp. 341-342). Defendant Roberto Z. Laforteza, assisted by his counsel Atty. Romeo L.
Gutierrez, signed his conformity to the plaintiff's letter request (Exh. "G-1 and "G-2", Plaintiff,
record, p. 342). The extension, however, does not appear to have been approved by
Gonzalo Z. Laforteza, the second attorney-in-fact as his conformity does not appear to
have been secured.

On November 15, 1989, plaintiff informed the defendant heirs, through defendant Roberto
Z. Laforteza, that he already had the balance of SIX HUNDRED THOUSAND PESOS
(P600,000.00) covered by United Coconut Planters Bank Manager's Check No. 000814
dated November 15, 1989 (TSN, August 25, 1992, p. 11; Exhs. "H", record, pp. 343-344;
"M", records p. 350; and "N", record, p. 351). However, the defendants, refused to accept
the balance (TSN, August 24, 1992, p. 14; Exhs. "M-1", Plaintiff, record, p. 350; and "N-1",
Plaintiff, record, p. 351). Defendant Roberto Z. Laforteza had told him that the subject
property was no longer for sale (TSN, October 20, 1992, p. 19; Exh. "J", record, p. 347).

On November 20, 1998 , defendants informed plaintiff that they were canceling the
4

Memorandum of Agreement (Contract to Sell) in view of the plaintiff's failure to comply with
his contractual obligations (Exh. "3").
Thereafter, plaintiff reiterated his request to tender payment of the balance of SIX
HUNDRED THOUSAND PESOS (P600,000.00). Defendants, however, insisted on the
rescission of the Memorandum of Agreement. Thereafter, plaintiff filed the instant action
for specific performance. The lower court rendered judgment on July 6, 1994 in favor of
the plaintiff, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff Alonzo Machuca and

against the defendant heirs of the late Francisco Q. Laforteza, ordering the said defendants.

(a) To accept the balance of P600,000.00 as full payment of the consideration for the
purchase of the house and lot located at No. 7757 Sherwood Street, Marcelo Green Village,
Parañaque, Metro Manila, covered by Transfer Certificate of Title No. (220656) 8941 of the
Registry of Deeds of Rizal Parañaque, Branch;

(b) To execute a registrable deed of absolute sale over the subject property in favor of the
plaintiff;

(c) Jointly and severally to pay the plaintiff the sum of P20,000.00 as attorney's fees plus
cost of suit.

SO ORDERED. (Rollo, pp. 74-75). 5

Petitioners appealed to the Court of Appeals, which affirmed with modification the decision
of the lower court; the dispositive portion of the Decision reads:

WHEREFORE, the questioned decision of the lower court is hereby AFFIRMED with the
MODIFICATION that defendant heirs Lea Zulueta-Laforteza, Michael Z. Laforteza, Dennis
Z. Laforteza and Roberto Z. Laforteza including Gonzalo Z. Laforteza, Jr. are hereby
ordered to pay jointly and severally the sum of FIFTY THOUSAND PESOS (P50,000.00)
as moral damages.

SO ORDERED. 6

Motion for Reconsideration was denied but the Decision was modified so as to absolve
Gonzalo Z. Laforteza, Jr. from liability for the payment of moral damages. Hence this
7

petition wherein the petitioners raise the following issues:

I. WHETHER THE TRIAL AND APPELLATE COURTS CORRECTLY CONSTRUED THE

MEMORANDUM OF AGREEMENT AS IMPOSING RECIPROCAL OBLIGATIONS.

II. WHETHER THE COURTS A QUO CORRECTLY RULED THAT RESCISSION WILL
NOT LIE IN THE INSTANT CASE.

III. WHETHER THE RESPONDENT IS UNDER ESTOPPEL FROM RAISING THE

ALLEGED DEFECT IN THE SPECIAL POWER OF ATTORNEY DATED 30 OCTOBER
1989 EXECUTED BY DENNIS LAFORTEZA.

IV. SUPPOSING EX GRATIA ARGUMENTI THE MEMORANDUM OF AGREEMENT

IMPOSES RECIPROCAL OBLIGATIONS, WHETHER THE PETITIONERS MAY BE
COMPELLED TO SELL THE SUBJECT PROPERTY WHEN THE RESPONDENT FAILED
TO MAKE A JUDICIAL CONSIGNATION OF THE PURCHASE PRICE?

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

FOR MORAL DAMAGES? 8
The petitioners contend that the Memorandum of Agreement is merely a lease agreement
with "option to purchase". As it was merely an option, it only gave the respondent a right
to purchase the subject property within a limited period without imposing upon them any
obligation to purchase it. Since the respondent's tender of payment was made after the
lapse of the option agreement, his tender did not give rise to the perfection of a contract of
sale.

It is further maintained by the petitioners that the Court of Appeals erred in ruling that
rescission of the contract was already out of the question. Rescission implies that a
contract of sale was perfected unlike the Memorandum of Agreement in question which as
previously stated is allegedly only an option contract.

Petitioner adds that at most, the Memorandum of Agreement (Contract to Sell) is a mere
contract to sell, as indicated in its title. The obligation of the petitioners to sell the property
to the respondent was conditioned upon the issuance of a new certificate of title and the
execution of the extrajudicial partition with sale and payment of the P600,000.00. This is
why possession of the subject property was not delivered to the respondent as the owner
of the property but only as the lessee thereof. And the failure of the respondent to pay the
purchase price in full prevented the petitioners' obligation to convey title from acquiring
obligatory force.

Petitioners also allege that assuming for the sake of argument that a contract of sale was
indeed perfected, the Court of Appeals still erred in holding that respondent's failure to pay
the purchase price of P600,000.00 was only a "slight or casual breach".

The petitioners also claim that the Court of Appeals erred in ruling that they were not ready
to comply with their obligation to execute the extrajudicial settlement. The Power of
Attorney to execute a Deed of Sale made by Dennis Z. Laforteza was sufficient and
necessarily included the power to execute an extrajudicial settlement. At any rate, the
respondent is estopped from claiming that the petitioners were not ready to comply with
their obligation for he acknowledged the petitioners' ability to do so when he requested for
an extension of time within which to pay the purchase price. Had he truly believed that the
petitioners were not ready, he would not have needed to ask for said extension.

Finally, the petitioners allege that the respondent's uncorroborated testimony that third
persons offered a higher price for the property is hearsay and should not be given any
evidentiary weight. Thus, the order of the lower court awarding moral damages was without
any legal basis.

The appeal is bereft of merit.

A perusal of the Memorandum Agreement shows that the transaction between the
petitioners and the respondent was one of sale and lease. The terms of the agreement
read:

1. For and in consideration of the sum of PESOS: SIX HUNDRED THIRTY THOUSAND
(P630,000.00) payable in a manner herein below indicated, SELLER-LESSOR hereby
agree to sell unto BUYER-LESSEE the property described in the first WHEREAS of this
Agreement within six (6) months from the execution date hereof, or upon issuance by the
Court of a new owner's certificate of title and the execution of extrajudicial partition with
sale of the estate of Francisco Laforteza, whichever is earlier;

2. The above-mentioned sum of PESOS: SIX HUNDRED THIRTY THOUSAND

(P630,000.00) shall be paid in the following manner:
P30,000.00 — as earnest money and as consideration for this Agreement, which amount
shall be forfeited in favor of SELLER-LESSORS if the sale is not effected because of the
fault or option of BUYER-LESSEE;

P600,000.00 — upon the issuance of the new certificate of title in the name of the late
Francisco Laforteza and upon the execution of an Extrajudicial Settlement of his estate
with sale in favor of BUYER-LESSEE free from lien or any encumbrances.

3. Parties reasonably estimate that the issuance of a new title in place of the lost one, as
well as the execution of extrajudicial settlement of estate with sale to herein BUYER-
LESSEE will be completed within six (6) months from the execution of this Agreement. It
is therefore agreed that during the six months period, BUYER-LESSEE will be leasing the
subject property for six months period at the monthly rate of PESOS: THREE THOUSAND
FIVE HUNDRED (P3,500.00). Provided however, that if the issuance of new title and the
execution of Extrajudicial Partition is completed prior to the expiration of the six months
period, BUYER-LESSEE shall only be liable for rentals for the corresponding period
commencing from his occupancy of the premises to the execution and completion of the
Extrajudicial Settlement of the estate, provided further that if after the expiration of six (6)
months, the lost title is not yet replaced and the extra judicial partition is not executed,
BUYER-LESSEE shall no longer be required to pay rentals and shall continue to occupy,
and use the premises until subject condition is complied by SELLER-LESSOR;

4. It is hereby agreed that within reasonable time from the execution of this Agreement and
the payment by BUYER-LESSEE of the amount of P30,000.00 as herein above provided,
SELLER-LESSORS shall immediately file the corresponding petition for the issuance of a
new title in lieu of the lost one in the proper Courts. Upon issuance by the proper Courts of
the new title, the BUYER-LESSEE shall have thirty (30) days to produce the balance of
P600,000.00 which shall be paid to the SELLER-LESSORS upon the execution of the
Extrajudicial Settlement with sale. 9

A contract of sale is a consensual contract and is perfected at the moment there is a

meeting of the minds upon the thing which is the object of the contract and upon the price. 10

From that moment the parties may reciprocally demand performance subject to the
provisions of the law governing the form of contracts. The elements of a valid contract of
11

sale under Article 1458 of the Civil Code are (1) consent or meeting of the minds; (2)
determinate subject matter and (3) price certain money or its equivalent. 12

In the case at bench, there was a perfected agreement between the petitioners and the
respondent whereby the petitioners obligated themselves to transfer the ownership of and
deliver the house and lot located at 7757 Sherwood St., Marcelo Green Village, Parañaque
and the respondent to pay the price amounting to six hundred thousand pesos
(P600,000.00). All the elements of a contract of sale were thus present. However, the
balance of the purchase price was to be paid only upon the issuance of the new certificate
of title in lieu of the one in the name of the late Francisco Laforteza and upon the execution
of an extrajudicial settlement of his estate. Prior to the issuance of the "reconstituted" title,
the respondent was already placed in possession of the house and lot as lessee thereof
for six months at a monthly rate of three thousand five hundred pesos (P3,500.00). It was
stipulated that should the issuance of the new title and the execution of the extrajudicial
settlement be completed prior to expiration of the six-month period, the respondent would
be liable only for the rentals pertaining to the period commencing from the date of the
execution of the agreement up to the execution of the extrajudicial settlement. It was also
expressly stipulated that if after the expiration of the six month period, the lost title was not
yet replaced and the extrajudicial partition was not yet executed, the respondent would no
longer be required to pay rentals and would continue to occupy and use the premises until
the subject condition was complied with the petitioners.
The six-month period during which the respondent would be in possession of the property
as lessee, was clearly not a period within which to exercise an option. An option is a
contract granting a privilege to buy or sell within an agreed time and at a determined price.
An option contract is a separate and distinct contract from that which the parties may enter
into upon the consummation of the option. An option must be supported by
13

consideration. An option contract is governed by the second paragraph of Article 1479 of

14

the Civil Code , which reads:

15

Art. 1479. . . .

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.

In the present case, the six-month period merely delayed the demandability of the contract
of sale and did not determine its perfection for after the expiration of the six-month period,
there was an absolute obligation on the part of the petitioners and the respondent to comply
with the terms of the sale. The parties made a "reasonable estimate" that the reconstitution
the lost title of the house and lot would take approximately six months and thus presumed
that after six months, both parties would be able to comply with what was reciprocally
incumbent upon them. The fact that after the expiration of the six-month period, the
respondent would retain possession of the house and lot without need of paying rentals for
the use therefor, clearly indicated that the parties contemplated that ownership over the
property would already be transferred by that time.

The issuance of the new certificate of title in the name of the late Francisco Laforteza and
the execution of an extrajudicial settlement of his estate was not a condition which
determined the perfection of the contract of sale. Petitioners' contention that since the
condition was not met, they no longer had an obligation to proceed with the sale of the
house and lot is unconvincing. The petitioners fail to distinguish between a condition
imposed upon the perfection of the contract and a condition imposed on the performance
of an obligation. Failure to comply with the first condition results in the failure of a contract,
while the failure to comply with the second condition only gives the other party the option
either to refuse to proceed with the sale or to waive the condition. Thus, Art. 1545 of the
Civil Code states:

Art. 1545. Where the obligation of either party to a contract of sale is subject to any
condition which is not performed, such party may refuse to proceed with the contract or he
may waive performance of the condition. If the other party has promised that the condition
should happen or be performed, such first mentioned party may also treat the
nonperformance of the condition as a breach of warranty.

Where the ownership in the things has not passed, the buyer may treat the fulfillment by
the seller of his obligation to deliver the same as described and as warranted expressly or
by implication in the contract of sale as a condition of the obligation of the buyer to perform
his promise to accept and pay for the thing. 16

In the case at bar, there was already a perfected contract. The condition was imposed only
on the performance of the obligations contained therein. Considering however that the title
was eventually "reconstituted" and that the petitioners admit their ability to execute the
extrajudicial settlement of their father's estate, the respondent had a right to demand
fulfillment of the petitioners' obligation to deliver and transfer ownership of the house and
lot.

What further militates against petitioners' argument that they did not enter into a contract
or sale is the fact that the respondent paid thirty thousand pesos (P30,000.00) as earnest
money. Earnest money is something of value to show that the buyer was really in earnest,
and given to the seller to bind the bargain. Whenever earnest money is given in a contract
17

of sale, it is considered as part of the purchase price and proof of the perfection of the
contract.18

We do not subscribe to the petitioners' view that the Memorandum Agreement was a
contract to sell. There is nothing contained in the Memorandum Agreement from which it
can reasonably be deduced that the parties intended to enter into a contract to sell, i.e.
one whereby the prospective seller would explicitly reserve the transfer of title to the
prospective buyer, meaning, the prospective seller does not as yet agree or consent to
transfer ownership of the property subject of the contract to sell until the full payment of
the price, such payment being a positive suspensive condition, the failure of which is not
considered a breach, casual or serious, but simply an event which prevented the obligation
from acquiring any obligatory force. There is clearly no express reservation of title made
19

by the petitioners over the property, or any provision which would impose non-payment of
the price as a condition for the contract's entering into force. Although the memorandum
agreement was also denominated as a "Contract to Sell", we hold that the parties
contemplated a contract of sale. A deed of sale is absolute in nature although denominated
a conditional sale in the absence of a stipulation reserving title in the petitioners until full
payment of the purchase price. In such cases, ownership of the thing sold passes to the
20

vendee upon actual or constructive delivery thereof. The mere fact that the obligation of
21

the respondent to pay the balance of the purchase price was made subject to the condition
that the petitioners first deliver the reconstituted title of the house and lot does not make
the contract a contract to sell for such condition is not inconsistent with a contract of sale.
22

The next issue to be addressed is whether the failure of the respondent to pay the balance
of the purchase price within the period allowed is fatal to his right to enforce the agreement.

We rule in the negative.

Admittedly, the failure of the respondent to pay the balance of the purchase price was a
breach of the contract and was a ground for rescission thereof. The extension of thirty (30)
days allegedly granted to the respondent by Roberto Z. Laforteza (assisted by his counsel
Attorney Romeo Gutierrez) was correctly found by the Court of Appeals to be ineffective
inasmuch as the signature of Gonzalo Z. Laforteza did not appear thereon as required by
the Special Powers of Attorney. However, the evidence reveals that after the expiration
23

of the six-month period provided for in the contract, the petitioners were not ready to comply
with what was incumbent upon them, i.e. the delivery of the reconstituted title of the house
and lot. It was only on September 18, 1989 or nearly eight months after the execution of
the Memorandum of Agreement when the petitioners informed the respondent that they
already had a copy of the reconstituted title and demanded the payment of the balance of
the purchase price. The respondent could not therefore be considered in delay for in
reciprocal obligations, neither party incurs in delay if the other party does not comply or is
not ready to comply in a proper manner with what was incumbent upon him. 24

Even assuming for the sake of argument that the petitioners were ready to comply with
their obligation, we find that rescission of the contract will still not prosper. The rescission
of a sale of an immovable property is specifically governed by Article 1592 of the New Civil
Code, which reads:

In the sale of immovable property, even though it may have been stipulated that upon
failure to pay the price at the time agreed upon the rescission of the contract shall of right
take place, the vendee may pay, even after the expiration of the period, as long as no
demand for rescission of the contract has been made upon him either judicially or by a
notarial act. After the demand, the court may not grant him a new term. 25
It is not disputed that the petitioners did not make a judicial or notarial demand for
rescission. The November 20, 1989 letter of the petitioners informing the respondent of
1avvphi1

the automatic rescission of the agreement did not amount to a demand for rescission, as
it was not notarized. It was also made five days after the respondent's attempt to make
26

the payment of the purchase price. This offer to pay prior to the demand for rescission is
sufficient to defeat the petitioners' right under article 1592 of the Civil Code. Besides, the
27

Memorandum Agreement between the parties did not contain a clause expressly
authorizing the automatic cancellation of the contract without court intervention in the event
that the terms thereof were violated. A seller cannot unilaterally and extrajudicially rescind
a contract or sale where there is no express stipulation authorizing him to extrajudicially
rescind. Neither was there a judicial demand for the rescission thereof. Thus, when the
28

respondent filed his complaint for specific performance, the agreement was still in force
inasmuch as the contract was not yet rescinded. At any rate, considering that the six-month
period was merely an approximation of the time if would take to reconstitute the lost title
and was not a condition imposed on the perfection of the contract and considering further
that the delay in payment was only thirty days which was caused by the respondents
justified but mistaken belief that an extension to pay was granted to him, we agree with the
Court of Appeals that the delay of one month in payment was a mere casual breach that
would not entitle the respondents to rescind the contract. Rescission of a contract will not
be permitted for a slight or casual breach, but only such substantial and fundamental
breach as would defeat the very object of the parties in making the agreemant. 29

Petitioners' insistence that the respondent should have consignated the amount is not
determinative of whether respondent's action for specific performance will lie. Petitioners
themselves point out that the effect of cansignation is to extinguish the obligation. It
releases the debtor from responsibility therefor. The failure of the respondent to
30

consignate the P600,000.00 is not tantamount to a breach of the contract for by the fact of
tendering payment, he was willing and able to comply with his obligation.

The Court of Appeals correctly found the petitioners guilty of bad faith and awarded moral
damages to the respondent. As found by the said Court, the petitioners refused to comply
with, their obligation for the reason that they were offered a higher price therefor and the
respondent was even offered P100,000.00 by the petitioners' lawyer, Attorney Gutierrez,
to relinquish his rights over the property. The award of moral damages is in accordance
with Article 1191 of the Civil Code pursuant to Article 2220 which provides that moral
31

damages may be awarded in case of breach of contract where the defendant acted in bad
faith. The amount awarded depends on the discretion of the court based on the
circumstances of each
case. Under the circumstances, the award given by the Court of Appeals amounting to
32

P50,000.00 appears to us to be fair and reasonable.

ACCORDINGLY, the decision of the Court of Appeals in CA G.R. CV No. 47457 is

AFFIRMED and the instant petition is hereby DENIED.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 126083 July 12, 2006

ANTONIO R. CORTES (in his capacity as Administrator of the estate of Claro S.

Cortes), petitioner,
vs.
HON. COURT OF APPEALS and VILLA ESPERANZA DEVELOPMENT
CORPORATION, respondents.

DECISION

YNARES-SANTIAGO, J.:

The instant petition for review seeks the reversal of the June 13, 1996 Decision1 of the
Court of Appeals in CA-G.R. CV No. 47856, setting aside the June 24, 1993 Decision2 of
the Regional Trial Court of Makati, Branch 138, which rescinded the contract of sale
entered into by petitioner Antonio Cortes (Cortes) and private respondent Villa Esperanza
Development Corporation (Corporation).

The antecedents show that for the purchase price of P3,700,000.00, the Corporation as
buyer, and Cortes as seller, entered into a contract of sale over the lots covered by Transfer
Certificate of Title (TCT) No. 31113-A, TCT No. 31913-A and TCT No. 32013-A, located at
Baclaran, Parañaque, Metro Manila. On various dates in 1983, the Corporation advanced
to Cortes the total sum of P1,213,000.00. Sometime in September 1983, the parties
executed a deed of absolute sale containing the following terms:3

1. Upon execution of this instrument, the Vendee shall pay unto the Vendor sum of TWO
MILLION AND TWO HUNDRED THOUSAND (P2,200,000.00) PESOS, Philippine
Currency, less all advances paid by the Vendee to the Vendor in connection with the sale;

2. The balance of ONE MILLION AND FIVE HUNDRED THOUSAND [P1,500,000.00]

PESOS, Phil. Currency shall be payable within ONE (1) YEAR from date of execution of
this instrument, payment of which shall be secured by an irrevocable standby letter of credit
to be issued by any reputable local banking institution acceptable to the Vendor.

xxxx
4. All expense for the registration of this document with the Register of Deeds concerned,
including the transfer tax, shall be divided equally between the Vendor and the Vendee.
Payment of the capital gains shall be exclusively for the account of the Vendor; 5%
commission of Marcosa Sanchez to be deducted upon signing of sale.4

Said Deed was retained by Cortes for notarization.

On January 14, 1985, the Corporation filed the instant case5 for specific performance
seeking to compel Cortes to deliver the TCTs and the original copy of the Deed of Absolute
Sale. According to the Corporation, despite its readiness and ability to pay the purchase
price, Cortes refused delivery of the sought documents. It thus prayed for the award of
damages, attorney's fees and litigation expenses arising from Cortes' refusal to deliver the
same documents.

In his Answer with counterclaim,6 Cortes claimed that the owner's duplicate copy of the
three TCTs were surrendered to the Corporation and it is the latter which refused to pay in
full the agreed down payment. He added that portion of the subject property is occupied
by his lessee who agreed to vacate the premises upon payment of disturbance fee.
However, due to the Corporation's failure to pay in full the sum of P2,200,000.00, he in turn
failed to fully pay the disturbance fee of the lessee who now refused to pay monthly rentals.
He thus prayed that the Corporation be ordered to pay the outstanding balance plus
interest and in the alternative, to cancel the sale and forfeit the P1,213,000.00 partial down
payment, with damages in either case.

On June 24, 1993, the trial court rendered a decision rescinding the sale and directed
Cortes to return to the Corporation the amount of P1,213,000.00, plus interest. It ruled that
pursuant to the contract of the parties, the Corporation should have fully paid the amount
of P2,200,000.00 upon the execution of the contract. It stressed that such is the law
between the parties because the Corporation failed to present evidence that there was
another agreement that modified the terms of payment as stated in the contract. And,
having failed to pay in full the amount of P2,200,000.00 despite Cortes' delivery of the
Deed of Absolute Sale and the TCTs, rescission of the contract is proper.

In its motion for reconsideration, the Corporation contended that the trial court failed to
consider their agreement that it would pay the balance of the down payment when Cortes
delivers the TCTs. The motion was, however, denied by the trial court holding that the
rescission should stand because the Corporation did not act on the offer of Cortes' counsel
to deliver the TCTs upon payment of the balance of the down payment. Thus:

The Court finds no merit in the [Corporation's] Motion for Reconsideration. As stated in the
decision sought to be reconsidered, [Cortes'] counsel at the pre-trial of this case, proposed
that if [the Corporation] completes the down payment agreed upon and make arrangement
for the payment of the balances of the purchase price, [Cortes] would sign the Deed of
Sale and turn over the certificate of title to the [Corporation]. [The Corporation] did nothing
to comply with its undertaking under the agreement between the parties.

WHEREFORE, in view of the foregoing considerations, the Motion for Reconsideration is

hereby DENIED.

SO ORDERED.7

On appeal, the Court of Appeals reversed the decision of the trial court and directed Cortes
to execute a Deed of Absolute Sale conveying the properties and to deliver the same to
the Corporation together with the TCTs, simultaneous with the Corporation's payment of
the balance of the purchase price of P2,487,000.00. It found that the parties agreed that
the Corporation will fully pay the balance of the down payment upon Cortes' delivery of the
three TCTs to the Corporation. The records show that no such delivery was made, hence,
the Corporation was not remiss in the performance of its obligation and therefore justified
in not paying the balance. The decretal portion thereof, provides:

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

decision appealed from is hereby REVERSED and SET ASIDE and a new judgment
rendered ordering [Cortes] to execute a deed of absolute sale conveying to [the
Corporation] the parcels of land subject of and described in the deed of absolute sale,
Exhibit D. Simultaneously with the execution of the deed of absolute sale and the delivery
of the corresponding owner's duplicate copies of TCT Nos. 31113-A, 31931-A and 32013-
A of the Registry of Deeds for the Province of Rizal, Metro Manila, District IV, [the
Corporation] shall pay [Cortes] the balance of the purchase price of P2,487,000.00. As
agreed upon in paragraph 4 of the Deed of Absolute Sale, Exhibit D, under terms and
conditions, "All expenses for the registration of this document (the deed of sale) with the
Register of Deeds concerned, including the transfer tax, shall be divided equally between
[Cortes and the Corporation]. Payment of the capital gains shall be exclusively for the
account of the Vendor; 5% commission of Marcosa Sanchez to be deducted upon signing
of sale." There is no pronouncement as to costs.

SO ORDERED.8

Cortes filed the instant petition praying that the decision of the trial court rescinding the
sale be reinstated.

There is no doubt that the contract of sale in question gave rise to a reciprocal obligation
of the parties. Reciprocal obligations are those which arise from the same cause, and 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. They are to be performed simultaneously, so
that the performance of one is conditioned upon the simultaneous fulfillment of the other.9

Article 1191 of the Civil Code, states:

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

xxxx

As to when said failure or delay in performance arise, Article 1169 of the same Code
provides that –

ART. 1169

xxxx

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. (Emphasis supplied)

The issue therefore is whether there is delay in the performance of the parties' obligation
that would justify the rescission of the contract of sale. To resolve this issue, we must first
determine the true agreement of the parties.

The settled rule is that the decisive factor in evaluating an agreement is the intention of the
parties, as shown not necessarily by the terminology used in the contract but by their
conduct, words, actions and deeds prior to, during and immediately after executing the
agreement. As such, therefore, documentary and parol evidence may be submitted and
admitted to prove such intention.10

In the case at bar, the stipulation in the Deed of Absolute Sale was that the Corporation
shall pay in full the P2,200,000.00 down payment upon execution of the contract. However,
as correctly noted by the Court of Appeals, the transcript of stenographic notes reveal
Cortes' admission that he agreed that the Corporation's full payment of the sum of
P2,200,000.00 would depend upon his delivery of the TCTs of the three lots. In fact, his
main defense in the Answer is that, he performed what is incumbent upon him by delivering
to the Corporation the TCTs and the carbon duplicate of the Deed of Absolute Sale, but
the latter refused to pay in full the down payment.11 Pertinent portion of the transcript, reads:

[Q] Now, why did you deliver these three titles to the plaintiff despite the fact that it has not
been paid in full the agreed down payment?

A Well, the broker told me that the down payment will be given if I surrender the titles.

Q Do you mean to say that the plaintiff agreed to pay in full the down payment of
P2,200,000.00 provided you surrender or entrust to the plaintiff the titles?

A Yes, sir.12

What further confirmed the agreement to deliver the TCTs is the testimony of Cortes that
the title of the lots will be transferred in the name of the Corporation upon full payment of
the P2,200,000.00 down payment. Thus –

ATTY. ANTARAN

Q Of course, you have it transferred in the name of the plaintiff, the title?

A Upon full payment.

xxxx

ATTY. SARTE

Q When you said upon full payment, are you referring to the agreed down payment of
P2,200,000.00?

A Yes, sir.13

By agreeing to transfer title upon full payment of P2,200,000.00, Cortes' impliedly agreed
to deliver the TCTs to the Corporation in order to effect said transfer. Hence, the phrase
"execution of this instrument" 14 as appearing in the Deed of Absolute Sale, and which
event would give rise to the Corporation's obligation to pay in full the amount of
P2,200,000.00, can not be construed as referring solely to the signing of the deed. The
meaning of "execution" in the instant case is not limited to the signing of a contract but
includes as well the performance or implementation or accomplishment of the parties'
agreement.15 With the transfer of titles as the corresponding reciprocal obligation of
payment, Cortes' obligation is not only to affix his signature in the Deed, but to set into
motion the process that would facilitate the transfer of title of the lots, i.e., to have the Deed
notarized and to surrender the original copy thereof to the Corporation together with the
TCTs.
Having established the true agreement of the parties, the Court must now determine
whether Cortes delivered the TCTs and the original Deed to the Corporation. The Court of
Appeals found that Cortes never surrendered said documents to the Corporation. Cortes
testified that he delivered the same to Manny Sanchez, the son of the broker, and that
Manny told him that her mother, Marcosa Sanchez, delivered the same to the Corporation.

Q Do you have any proof to show that you have indeed surrendered these titles to the
plaintiff?

A Yes, sir.

Q I am showing to you a receipt dated October 29, 1983, what relation has this receipt with
that receipt that you have mentioned?

A That is the receipt of the real estate broker when she received the titles.

Q On top of the printed name is Manny Sanchez, there is a signature, do you know who is
that Manny Sanchez?

A That is the son of the broker.

xxxx

Q May we know the full name of the real estate broker?

A Marcosa Sanchez

xxxx

Q Do you know if the broker or Marcosa Sanchez indeed delivered the titles to the plaintiff?

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

x x x x.16

ATTY. ANTARAN

Q Are you really sure that the title is in the hands of the plaintiff?

xxxx

Q It is in the hands of the broker but there is no showing that it is in the hands of the plaintiff?

A Yes, sir.

COURT

Q How do you know that it was delivered to the plaintiff by the son of the broker?

A The broker told me that she delivered the title to the plaintiff.

ATTY. ANTARAN
Q Did she not show you any receipt that she delivered to [Mr.] Dragon17 the title without
any receipt?

A I have not seen any receipt.

Q So, therefore, you are not sure whether the title has been delivered to the plaintiff or not.
It is only upon the allegation of the broker?

A Yes, sir.18

However, Marcosa Sanchez's unrebutted testimony is that, she did not receive the TCTs.
She also denied knowledge of delivery thereof to her son, Manny, thus:

Q The defendant, Antonio Cortes testified during the hearing on March 11, 1986 that he
allegedly gave you the title to the property in question, is it true?

A I did not receive the title.

Q He likewise said that the title was delivered to your son, do you know about that?

A I do not know anything about that.19

What further strengthened the findings of the Court of Appeals that Cortes did not surrender
the subject documents was the offer of Cortes' counsel at the pre-trial to deliver the TCTs
and the Deed of Absolute Sale if the Corporation will pay the balance of the down payment.
Indeed, if the said documents were already in the hands of the Corporation, there was no
need for Cortes' counsel to make such offer.

Since Cortes did not perform his obligation to have the Deed notarized and to surrender
the same together with the TCTs, the trial court erred in concluding that he performed his
part in the contract of sale and that it is the Corporation alone that was remiss in the
performance of its obligation. Actually, both parties were in delay. Considering that their
obligation was reciprocal, performance thereof must be simultaneous. The mutual inaction
of Cortes and the Corporation therefore gave rise to a compensation morae or default on
the part of both parties because neither has completed their part in their reciprocal
obligation.20 Cortes is yet to deliver the original copy of the notarized Deed and the TCTs,
while the Corporation is yet to pay in full the agreed down payment of P2,200,000.00. This
mutual delay of the parties cancels out the effects of default,21 such that it is as if no one is
guilty of delay.22

We find no merit in Cortes' contention that the failure of the Corporation to act on the
proposed settlement at the pre-trial must be construed against the latter. Cortes argued
that with his counsel's offer to surrender the original Deed and the TCTs, the Corporation
should have consigned the balance of the down payment. This argument would have been
correct if Cortes actually surrendered the Deed and the TCTs to the Corporation. With such
delivery, the Corporation would have been placed in default if it chose not to pay in full the
required down payment. Under Article 1169 of the Civil Code, from the moment one of the
parties fulfills his obligation, delay by the other begins. Since Cortes did not perform his
part, the provision of the contract requiring the Corporation to pay in full the down payment
never acquired obligatory force. Moreover, the Corporation could not be faulted for not
automatically heeding to the offer of Cortes. For one, its complaint has a prayer for
damages which it may not want to waive by agreeing to the offer of Cortes' counsel. For
another, the previous representation of Cortes that the TCTs were already delivered to the
Corporation when no such delivery was in fact made, is enough reason for the Corporation
to be more cautious in dealing with him.
The Court of Appeals therefore correctly ordered the parties to perform their respective
obligation in the contract of sale, i.e., for Cortes to, among others, deliver the necessary
documents to the Corporation and for the latter to pay in full, not only the down payment,
but the entire purchase price. And since the Corporation did not question the Court of
Appeal's decision and even prayed for its affirmance, its payment should rightfully consist
not only of the amount of P987,000.00, representing the balance of the P2,200,000.00
down payment, but the total amount of P2,487,000.00, the remaining balance in the
P3,700,000.00 purchase price.

WHEREFORE, the petition is DENIED and the June 13, 1996 Decision of the Court of
Appeals in CA-G.R. CV No. 47856, is AFFIRMED.

SO ORDERED

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

FERNANDO A. GAITE, plaintiff-appellee,

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

Alejo Mabanag for plaintiff-appellee.

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

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

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

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

By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier constituted

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The main issues presented by appellants in this appeal are:

(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay
appellee Gaite the P65,000.00 (balance of the price of the iron ore in question)is one with
a period or term and not one with a suspensive condition, and that the term expired on
December 8, 1955; and
(2) that the lower court erred in not holding that there were only 10,954.5 tons in the
stockpiles of iron ore sold by appellee Gaite to appellant Fonacier.

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

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

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

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

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

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

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

3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or shipment
of the ore as a condition precedent, would be tantamount to leaving the payment at the
discretion of the debtor, for the sale or shipment could not be made unless the appellants
took steps to sell the ore. Appellants would thus be able to postpone payment indefinitely.
The desireability of avoiding such a construction of the contract Exhibit "A" needs no
stressing.
4) Assuming that there could be doubt whether by the wording of the contract the parties
indented a suspensive condition or a suspensive period (dies ad quem) for the payment of
the P65,000.00, the rules of interpretation would incline the scales in favor of "the greater
reciprocity of interests", since sale is essentially onerous. The Civil Code of the Philippines,
Article 1378, paragraph 1, in fine, provides:

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

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

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

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

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

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

(1) . . .

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

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

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

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

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

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

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

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

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

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

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

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

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

WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same,
with costs against appellants.
SPOUSES BERNARDO BUENAVENTURA and CONSOLACION
JOAQUIN, SPOUSES JUANITO EDRA and NORA
JOAQUIN, SPOUSES RUFINO VALDOZ and EMMA
JOAQUIN, and NATIVIDAD JOAQUIN,petitioners,
vs. COURT OF APPEALS, SPOUSES LEONARDO
JOAQUIN and FELICIANA LANDRITO, SPOUSES FIDEL
JOAQUIN and CONCHITA BERNARDO, SPOUSES
TOMAS JOAQUIN and SOLEDAD ALCORAN, SPOUSES
ARTEMIO JOAQUIN and SOCORRO ANGELES,
 SPOUSES ALEXANDER MENDOZA and CLARITA
JOAQUIN, SPOUSES TELESFORO CARREON and
FELICITAS JOAQUIN, SPOUSES DANILO VALDOZ and FE
JOAQUIN, and SPOUSES GAVINO JOAQUIN and LEA
ASIS,respondents.

DECISION
CARPIO, J.:

The Case

This is a petition for review on certiorari to annul the [1]

Decision dated 26 June 1996 of the Court of Appeals in CA-G.R. CV

[2]

No. 41996.The Court of Appeals affirmed the Decision dated 18 [3]

February 1993 rendered by Branch 65 of the Regional Trial Court of

Makati (trial court) in Civil Case No. 89-5174. The trial court dismissed
the case after it found that the parties executed the Deeds of Sale for
valid consideration and that the plaintiffs did not have a cause of action
against the defendants.

The Facts

The Court of Appeals summarized the facts of the case as follows:

Defendant spouses Leonardo Joaquin and Feliciana Landrito are the parents
of plaintiffs Consolacion, Nora, Emma and Natividad as well as of
defendants Fidel, Tomas, Artemio, Clarita, Felicitas, Fe, and Gavino, all
surnamed JOAQUIN. The married Joaquin children are joined in this action
by their respective spouses.

Sought to be declared null and void ab initio are certain deeds of sale of real
property executed by defendant parents Leonardo Joaquin and Feliciana
Landrito in favor of their co-defendant children and the corresponding
certificates of title issued in their names, to wit:

1. Deed of Absolute Sale covering Lot 168-C-7 of subdivision plan (LRC) Psd-
256395 executed on 11 July 1978, in favor of defendant Felicitas Joaquin,
for a consideration of P6,000.00 (Exh. C), pursuant to which TCT No.
[36113/T-172] was issued in her name (Exh. C-1);
2. Deed of Absolute Sale covering Lot 168-I-3 of subdivision plan (LRC) Psd-
256394 executed on 7 June 1979, in favor of defendant Clarita Joaquin,
for a consideration of P1[2],000.00 (Exh. D), pursuant to which TCT No. S-
109772 was issued in her name (Exh. D-1);
 3 Deed of Absolute Sale covering Lot 168-I-1 of subdivision plan (LRC) Psd-
256394 executed on 12 May 1988, in favor of defendant spouses Fidel
Joaquin and Conchita Bernardo, for a consideration of P54,[3]00.00 (Exh.
E), pursuant to which TCT No. 155329 was issued to them (Exh. E-1);
4. Deed of Absolute Sale covering Lot 168-I-2 of subdivision plan (LRC) Psd-
256394 executed on 12 May 1988, in favor of defendant spouses Artemio
Joaquin and Socorro Angeles, for a consideration of P[54,3]00.00 (Exh. F),
pursuant to which TCT No. 155330 was issued to them (Exh. F-1); and
5. Absolute Sale of Real Property covering Lot 168-C-4 of subdivision plan
(LRC) Psd-256395 executed on 9 September 1988, in favor of Tomas
Joaquin, for a consideration of P20,000.00 (Exh. G), pursuant to which
TCT No. 157203 was issued in her name (Exh. G-1).
[6. Deed of Absolute Sale covering Lot 168-C-1 of subdivision plan (LRC)
Psd-256395 executed on 7 October 1988, in favor of Gavino Joaquin, for
a consideration of P25,000.00 (Exh. K), pursuant to which TCT No.
157779 was issued in his name (Exh. K-1).]

In seeking the declaration of nullity of the aforesaid deeds of sale and

certificates of title, plaintiffs, in their complaint, aver:

- XX-

The deeds of sale, Annexes C, D, E, F, and G, [and K] are simulated as they

are, are NULL AND VOID AB INITIO because

a) Firstly, there was no actual valid consideration for the deeds of

sale xxx over the properties in litis;

b) Secondly, assuming that there was consideration in the sums

reflected in the questioned deeds, the properties are more than
three-fold times more valuable than the measly sums appearing
therein;

c) Thirdly, the deeds of sale do not reflect and express the true intent
of the parties (vendors and vendees); and

d) Fourthly, the purported sale of the properties in litis was the result
of a deliberate conspiracy designed to unjustly deprive the rest
of the compulsory heirs (plaintiffs herein) of their legitime.

- XXI -

Necessarily, and as an inevitable consequence, Transfer Certificates of Title

Nos. 36113/T-172, S-109772, 155329, 155330, 157203 [and 157779] issued
by the Registrar of Deeds over the properties in litis xxx are NULL AND
VOID AB INITIO.
Defendants, on the other hand aver (1) that plaintiffs do not have a cause of
action against them as well as the requisite standing and interest to assail
their titles over the properties in litis; (2) that the sales were with sufficient
considerations and made by defendants parents voluntarily, in good faith,
and with full knowledge of the consequences of their deeds of sale; and (3)
that the certificates of title were issued with sufficient factual and legal
basis. (Emphasis in the original)
[4]

The Ruling of the Trial Court

Before the trial, the trial court ordered the dismissal of the case
against defendant spouses Gavino Joaquin and Lea Asis. Instead of [5]

filing an Answer with their co-defendants, Gavino Joaquin and Lea

Asis filed a Motion to Dismiss. In granting the dismissal to Gavino
[6]

Joaquin and Lea Asis, the trial court noted that compulsory heirs have
the right to a legitime but such right is contingent since said right
commences only from the moment of death of the decedent pursuant
to Article 777 of the Civil Code of the Philippines. [7]

After trial, the trial court ruled in favor of the defendants and
dismissed the complaint. The trial court stated:

In the first place, the testimony of the defendants, particularly that of the xxx
father will show that the Deeds of Sale were all executed for valuable
consideration. This assertion must prevail over the negative allegation of
plaintiffs.

And then there is the argument that plaintiffs do not have a valid cause of
action against defendants since there can be no legitime to speak of prior to
the death of their parents. The court finds this contention tenable. In
determining the legitime, the value of the property left at the death of the
testator shall be considered (Art. 908 of the New Civil Code). Hence, the
legitime of a compulsory heir is computed as of the time of the death of the
decedent. Plaintiffs therefore cannot claim an impairment of their legitime
while their parents live.

All the foregoing considered, this case is DISMISSED.

In order to preserve whatever is left of the ties that should bind families
together, the counterclaim is likewise DISMISSED.

No costs.

SO ORDERED. [8]
 The Ruling of the Court of Appeals

The Court of Appeals affirmed the decision of the trial court. The
appellate court ruled:

To the mind of the Court, appellants are skirting the real and decisive issue
in this case, which is, whether xxx they have a cause of action against
appellees.

Upon this point, there is no question that plaintiffs-appellants, like their

defendant brothers and sisters, are compulsory heirs of defendant spouses,
Leonardo Joaquin and Feliciana Landrito, who are their parents. However,
their right to the properties of their defendant parents, as compulsory heirs,
is merely inchoate and vests only upon the latters death. While still alive,
defendant parents are free to dispose of their properties, provided that such
dispositions are not made in fraud of creditors.

Plaintiffs-appellants are definitely not parties to the deeds of sale in

question. Neither do they claim to be creditors of their defendant
parents. Consequently, they cannot be considered as real parties in interest
to assail the validity of said deeds either for gross inadequacy or lack of
consideration or for failure to express the true intent of the parties. In point
is the ruling of the Supreme Court in Velarde, et al. vs. Paez, et al., 101
SCRA 376, thus:

The plaintiffs are not parties to the alleged deed of sale and are not
principally or subsidiarily bound thereby; hence, they have no legal capacity
to challenge their validity.

Plaintiffs-appellants anchor their action on the supposed impairment of their

legitime by the dispositions made by their defendant parents in favor of their
defendant brothers and sisters. But, as correctly held by the court a quo, the
legitime of a compulsory heir is computed as of the time of the death of the
decedent. Plaintiffs therefore cannot claim an impairment of their legitime
while their parents live.

With this posture taken by the Court, consideration of the errors assigned by
plaintiffs-appellants is inconsequential.

WHEREFORE, the decision appealed from is hereby AFFIRMED, with

costs against plaintiffs-appellants.

SO ORDERED. [9]

Hence, the instant petition.

 Issues

Petitioners assign the following as errors of the Court of Appeals:

1. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
CONVEYANCE IN QUESTION HAD NO VALID CONSIDERATION.
2. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT EVEN
ASSUMING THAT THERE WAS A CONSIDERATION, THE SAME IS
GROSSLY INADEQUATE.
3. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
DEEDS OF SALE DO NOT EXPRESS THE TRUE INTENT OF THE
PARTIES.
4. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
CONVEYANCE WAS PART AND PARCEL OF A CONSPIRACY AIMED
AT UNJUSTLY DEPRIVING THE REST OF THE CHILDREN OF THE
SPOUSES LEONARDO JOAQUIN AND FELICIANA LANDRITO OF
THEIR INTEREST OVER THE SUBJECT PROPERTIES.
5. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
PETITIONERS HAVE A GOOD, SUFFICIENT AND VALID CAUSE OF
ACTION AGAINST THE PRIVATE RESPONDENTS.[10]

The Ruling of the Court

We find the petition without merit.

We will discuss petitioners legal interest over the properties subject
of the Deeds of Sale before discussing the issues on the purported
lack of consideration and gross inadequacy of the prices of the Deeds
of Sale.

Whether Petitioners have a legal interest

over the properties subject of the Deeds of Sale

Petitioners Complaint betrays their motive for filing this case. In

their Complaint, petitioners asserted that the purported sale of the
propertiesin litis was the result of a deliberate conspiracy designed to
unjustly deprive the rest of the compulsory heirs (plaintiffs herein) of
their legitime. Petitioners strategy was to have the Deeds of Sale
declared void so that ownership of the lots would eventually revert to
their respondent parents. If their parents die still owning the lots,
petitioners and their respondent siblings will then co-own their parents
estate by hereditary succession. [11]
 It is evident from the records that petitioners are interested in the
properties subject of the Deeds of Sale, but they have failed to show
any legal right to the properties. The trial and appellate courts should
have dismissed the action for this reason alone. An action must be
prosecuted in the name of the real party-in-interest. [12]

[T]he question as to real party-in-interest is whether he is the party who

would be benefitted or injured by the judgment, or the party entitled to the
avails of the suit.

xxx

In actions for the annulment of contracts, such as this action, the real parties
are those who are parties to the agreement or are bound either principally or
subsidiarily or are prejudiced in their rights with respect to one of the
contracting parties and can show the detriment which would positively
result to them from the contract even though they did not intervene in it
(Ibaez v. Hongkong & Shanghai Bank, 22 Phil. 572 [1912]) xxx.

These are parties with a present substantial interest, as distinguished from a

mere expectancy or future, contingent, subordinate, or consequential
interest. The phrase present substantial interest more concretely is meant
such interest of a party in the subject matter of the action as will entitle him,
under the substantive law, to recover if the evidence is sufficient, or that he
has the legal title to demand and the defendant will be protected in a
payment to or recovery by him. [13]

Petitioners do not have any legal interest over the properties

subject of the Deeds of Sale. As the appellate court stated, petitioners
right to their parents properties is merely inchoate and vests only upon
their parents death. While still living, the parents of petitioners are free
to dispose of their properties. In their overzealousness to safeguard
their future legitime, petitioners forget that theoretically, the sale of the
lots to their siblings does not affect the value of their parents
estate. While the sale of the lots reduced the estate, cash of equivalent
value replaced the lots taken from the estate.

Whether the Deeds of Sale are void

for lack of consideration

Petitioners assert that their respondent siblings did not actually pay
the prices stated in the Deeds of Sale to their respondent father. Thus,
petitioners ask the court to declare the Deeds of Sale void.
 A contract of sale is not a real contract, but a consensual
contract. As a consensual contract, a contract of sale becomes a
binding and valid contract upon the meeting of the minds as to price. If
there is a meeting of the minds of the parties as to the price, the
contract of sale is valid, despite the manner of payment, or even the
breach of that manner of payment. If the real price is not stated in the
contract, then the contract of sale is valid but subject to reformation. If
there is no meeting of the minds of the parties as to the price, because
the price stipulated in the contract is simulated, then the contract is
void. Article 1471 of the Civil Code states that if the price in a contract
[14]

of sale is simulated, the sale is void.

It is not the act of payment of price that determines the validity of a
contract of sale. Payment of the price has nothing to do with the
perfection of the contract. Payment of the price goes into the
performance of the contract. Failure to pay the consideration is
different from lack of consideration. The former results in a right to
demand the fulfillment or cancellation of the obligation under an
existing valid contract while the latter prevents the existence of a valid
contract. [15]

Petitioners failed to show that the prices in the Deeds of Sale were
absolutely simulated. To prove simulation, petitioners presented
Emma Joaquin Valdozs testimony stating that their father, respondent
Leonardo Joaquin, told her that he would transfer a lot to her through
a deed of sale without need for her payment of the purchase
price. The trial court did not find the allegation of absolute simulation
[16]

of price credible.Petitioners failure to prove absolute simulation of price

is magnified by their lack of knowledge of their respondent siblings
financial capacity to buy the questioned lots. On the other hand, the
[17]

Deeds of Sale which petitioners presented as evidence plainly showed

the cost of each lot sold. Not only did respondents minds meet as to
the purchase price, but the real price was also stated in the Deeds of
Sale. As of the filing of the complaint, respondent siblings have also
fully paid the price to their respondent father.[18]

Whether the Deeds of Sale are void

for gross inadequacy of price

Petitioners ask that assuming that there is consideration, the same

is grossly inadequate as to invalidate the Deeds of Sale.
Articles 1355 of the Civil Code states:
Art. 1355. Except in cases specified by law, lesion or inadequacy of cause
shall not invalidate a contract, unless there has been fraud, mistake or
undue influence. (Emphasis supplied)

Article 1470 of the Civil Code further provides:

Art. 1470. Gross inadequacy of price does not affect a contract of

sale, except as may indicate a defect in the consent, or that the parties really
intended a donation or some other act or contract. (Emphasis supplied)

Petitioners failed to prove any of the instances mentioned in

Articles 1355 and 1470 of the Civil Code which would invalidate, or
even affect, the Deeds of Sale. Indeed, there is no requirement that
the price be equal to the exact value of the subject matter of sale. All
the respondents believed that they received the commutative value of
what they gave. As we stated in Vales v. Villa: [19]

Courts cannot follow one every step of his life and extricate him from bad
bargains, protect him from unwise investments, relieve him from one-sided
contracts, or annul the effects of foolish acts. Courts cannot constitute
themselves guardians of persons who are not legally incompetent. Courts
operate not because one person has been defeated or overcome by another,
but because he has been defeated or overcome illegally. Men may do foolish
things, make ridiculous contracts, use miserable judgment, and lose money
by them indeed, all they have in the world; but not for that alone can the law
intervene and restore. There must be, in addition, aviolation of the law, the
commission of what the law knows as an actionable wrong, before the
courts are authorized to lay hold of the situation and remedy it. (Emphasis in
the original)

Moreover, the factual findings of the appellate court are conclusive

on the parties and carry greater weight when they coincide with the
factual findings of the trial court. This Court will not weigh the evidence
all over again unless there has been a showing that the findings of the
lower court are totally devoid of support or are clearly erroneous so as
to constitute serious abuse of discretion. In the instant case, the trial
[20]

court found that the lots were sold for a valid consideration, and that
the defendant children actually paid the purchase price stipulated in
their respective Deeds of Sale. Actual payment of the purchase price
by the buyer to the seller is a factual finding that is now conclusive
upon us.
WHEREFORE, we AFFIRM the decision of the Court of Appeals in
toto.
SO ORDERED.
G.R. No. 124242 January 21, 2005

SAN LORENZO DEVELOPMENT CORPORATION, petitioner,

vs.
COURT OF APPEALS, PABLO S. BABASANTA, SPS. MIGUEL LU and PACITA
ZAVALLA LU, respondents.

DECISION

TINGA, J.:

From a coaptation of the records of this case, it appears that respondents Miguel Lu and
Pacita Zavalla, (hereinafter, the Spouses Lu) owned two (2) parcels of land situated in Sta.
Rosa, Laguna covered by TCT No. T-39022 and TCT No. T-39023 both measuring 15,808
square meters or a total of 3.1616 hectares.

On 20 August 1986, the Spouses Lu purportedly sold the two parcels of land to respondent
Pablo Babasanta, (hereinafter, Babasanta) for the price of fifteen pesos (₱15.00) per
square meter. Babasanta made a downpayment of fifty thousand pesos (₱50,000.00) as
evidenced by a memorandum receipt issued by Pacita Lu of the same date. Several other
payments totaling two hundred thousand pesos (₱200,000.00) were made by Babasanta.

Sometime in May 1989, Babasanta wrote a letter to Pacita Lu to demand the execution of
a final deed of sale in his favor so that he could effect full payment of the purchase price.
In the same letter, Babasanta notified the spouses about having received information that
the spouses sold the same property to another without his knowledge and consent. He
demanded that the second sale be cancelled and that a final deed of sale be issued in his
favor.

In response, Pacita Lu wrote a letter to Babasanta wherein she acknowledged having

agreed to sell the property to him at fifteen pesos (₱15.00) per square meter. She, however,
reminded Babasanta that when the balance of the purchase price became due, he
requested for a reduction of the price and when she refused, Babasanta backed out of the
sale. Pacita added that she returned the sum of fifty thousand pesos (₱50,000.00) to
Babasanta through Eugenio Oya.

On 2 June 1989, respondent Babasanta, as plaintiff, filed before the Regional Trial Court
(RTC), Branch 31, of San Pedro, Laguna, a Complaint for Specific Performance and
Damages1 against his co-respondents herein, the Spouses Lu. Babasanta alleged that the
lands covered by TCT No. T- 39022 and T-39023 had been sold to him by the spouses at
fifteen pesos (₱15.00) per square meter. Despite his repeated demands for the execution
of a final deed of sale in his favor, respondents allegedly refused.

In their Answer,2 the Spouses Lu alleged that Pacita Lu obtained loans from Babasanta
and when the total advances of Pacita reached fifty thousand pesos (₱50,000.00), the
latter and Babasanta, without the knowledge and consent of Miguel Lu, had verbally
agreed to transform the transaction into a contract to sell the two parcels of land to
Babasanta with the fifty thousand pesos (₱50,000.00) to be considered as the
downpayment for the property and the balance to be paid on or before 31 December 1987.
Respondents Lu added that as of November 1987, total payments made by Babasanta
amounted to only two hundred thousand pesos (₱200,000.00) and the latter allegedly
failed to pay the balance of two hundred sixty thousand pesos (₱260,000.00) despite
repeated demands. Babasanta had purportedly asked Pacita for a reduction of the price
from fifteen pesos (₱15.00) to twelve pesos (₱12.00) per square meter and when the
Spouses Lu refused to grant Babasanta’s request, the latter rescinded the contract to sell
and declared that the original loan transaction just be carried out in that the spouses would
be indebted to him in the amount of two hundred thousand pesos (₱200,000.00).
Accordingly, on 6 July 1989, they purchased Interbank Manager’s Check No. 05020269 in
the amount of two hundred thousand pesos (₱200,000.00) in the name of Babasanta to
show that she was able and willing to pay the balance of her loan obligation.

Babasanta later filed an Amended Complaint dated 17 January 19903 wherein he prayed
for the issuance of a writ of preliminary injunction with temporary restraining order and the
inclusion of the Register of Deeds of Calamba, Laguna as party defendant. He contended
that the issuance of a preliminary injunction was necessary to restrain the transfer or
conveyance by the Spouses Lu of the subject property to other persons.

The Spouses Lu filed their Opposition4 to the amended complaint contending that it raised
new matters which seriously affect their substantive rights under the original complaint.
However, the trial court in its Order dated 17 January 19905 admitted the amended
complaint.

On 19 January 1990, herein petitioner San Lorenzo Development Corporation (SLDC) filed
a Motion for Intervention6 before the trial court. SLDC alleged that it had legal interest in
the subject matter under litigation because on 3 May 1989, the two parcels of land involved,
namely Lot 1764-A and 1764-B, had been sold to it in a Deed of Absolute Sale with
Mortgage.7 It alleged that it was a buyer in good faith and for value and therefore it had a
better right over the property in litigation.

In his Opposition to SLDC’s motion for intervention,8 respondent Babasanta demurred and
argued that the latter had no legal interest in the case because the two parcels of land
involved herein had already been conveyed to him by the Spouses Lu and hence, the
vendors were without legal capacity to transfer or dispose of the two parcels of land to the
intervenor.

Meanwhile, the trial court in its Order dated 21 March 1990 allowed SLDC to intervene.
SLDC filed its Complaint-in-Intervention on 19 April 1990.9 Respondent Babasanta’s
motion for the issuance of a preliminary injunction was likewise granted by the trial court in
its Order dated 11 January 199110 conditioned upon his filing of a bond in the amount of
fifty thousand pesos (₱50,000.00).

SLDC in its Complaint-in-Intervention alleged that on 11 February 1989, the Spouses Lu

executed in its favor anOption to Buy the lots subject of the complaint. Accordingly, it paid
an option money in the amount of three hundred sixteen thousand one hundred sixty pesos
(₱316,160.00) out of the total consideration for the purchase of the two lots of one million
two hundred sixty-four thousand six hundred forty pesos (₱1,264,640.00). After the
Spouses Lu received a total amount of six hundred thirty-two thousand three hundred
twenty pesos (₱632,320.00) they executed on 3 May 1989 a Deed of Absolute Sale with
Mortgage in its favor. SLDC added that the certificates of title over the property were
delivered to it by the spouses clean and free from any adverse claims and/or notice of lis
pendens. SLDC further alleged that it only learned of the filing of the complaint sometime
in the early part of January 1990 which prompted it to file the motion to intervene without
delay. Claiming that it was a buyer in good faith, SLDC argued that it had no obligation to
look beyond the titles submitted to it by the Spouses Lu particularly because Babasanta’s
claims were not annotated on the certificates of title at the time the lands were sold to it.

After a protracted trial, the RTC rendered its Decision on 30 July 1993 upholding the sale
of the property to SLDC. It ordered the Spouses Lu to pay Babasanta the sum of two
hundred thousand pesos (₱200,000.00) with legal interest plus the further sum of fifty
thousand pesos (₱50,000.00) as and for attorney’s fees. On the complaint-in-intervention,
the trial court ordered the Register of Deeds of Laguna, Calamba Branch to cancel the
notice of lis pendens annotated on the original of the TCT No. T-39022 (T-7218) and No.
T-39023 (T-7219).

Applying Article 1544 of the Civil Code, the trial court ruled that since both Babasanta and
SLDC did not register the respective sales in their favor, ownership of the property should
pertain to the buyer who first acquired possession of the property. The trial court equated
the execution of a public instrument in favor of SLDC as sufficient delivery of the property
to the latter. It concluded that symbolic possession could be considered to have been first
transferred to SLDC and consequently ownership of the property pertained to SLDC who
purchased the property in good faith.

Respondent Babasanta appealed the trial court’s decision to the Court of Appeals alleging
in the main that the trial court erred in concluding that SLDC is a purchaser in good faith
and in upholding the validity of the sale made by the Spouses Lu in favor of SLDC.

Respondent spouses likewise filed an appeal to the Court of Appeals. They contended that
the trial court erred in failing to consider that the contract to sell between them and
Babasanta had been novated when the latter abandoned the verbal contract of sale and
declared that the original loan transaction just be carried out. The Spouses Lu argued that
since the properties involved were conjugal, the trial court should have declared the verbal
contract to sell between Pacita Lu and Pablo Babasanta null and void ab initio for lack of
knowledge and consent of Miguel Lu. They further averred that the trial court erred in not
dismissing the complaint filed by Babasanta; in awarding damages in his favor and in
refusing to grant the reliefs prayed for in their answer.

On 4 October 1995, the Court of Appeals rendered its Decision11 which set aside the
judgment of the trial court. It declared that the sale between Babasanta and the Spouses
Lu was valid and subsisting and ordered the spouses to execute the necessary deed of
conveyance in favor of Babasanta, and the latter to pay the balance of the purchase price
in the amount of two hundred sixty thousand pesos (₱260,000.00). The appellate court
ruled that the Absolute Deed of Sale with Mortgage in favor of SLDC was null and void on
the ground that SLDC was a purchaser in bad faith. The Spouses Lu were further ordered
to return all payments made by SLDC with legal interest and to pay attorney’s fees to
Babasanta.

SLDC and the Spouses Lu filed separate motions for reconsideration with the appellate
court.12 However, in aManifestation dated 20 December 1995,13 the Spouses Lu informed
the appellate court that they are no longer contesting the decision dated 4 October 1995.

In its Resolution dated 11 March 1996,14 the appellate court considered as withdrawn the
motion for reconsideration filed by the Spouses Lu in view of their manifestation of 20
December 1995. The appellate court denied SLDC’s motion for reconsideration on the
ground that no new or substantial arguments were raised therein which would warrant
modification or reversal of the court’s decision dated 4 October 1995.

Hence, this petition.

SLDC assigns the following errors allegedly committed by the appellate court:

THE COURT OF APPEALS ERRED IN HOLDING THAT SAN LORENZO

WAS NOT A BUYER IN GOOD FAITH BECAUSE WHEN THE SELLER
PACITA ZAVALLA LU OBTAINED FROM IT THE CASH ADVANCE OF
₱200,000.00, SAN LORENZO WAS PUT ON INQUIRY OF A PRIOR
TRANSACTION ON THE PROPERTY.
 THE COURT OF APPEALS ERRED IN FAILING TO APPRECIATE THE
ESTABLISHED FACT THAT THE ALLEGED FIRST BUYER,
RESPONDENT BABASANTA, WAS NOT IN POSSESSION OF THE
DISPUTED PROPERTY WHEN SAN LORENZO BOUGHT AND TOOK
POSSESSION OF THE PROPERTY AND NO ADVERSE CLAIM, LIEN,
ENCUMBRANCE OR LIS PENDENS WAS ANNOTATED ON THE TITLES.

THE COURT OF APPEALS ERRED IN FAILING TO APPRECIATE THE

FACT THAT RESPONDENT BABASANTA HAS SUBMITTED NO
EVIDENCE SHOWING THAT SAN LORENZO WAS AWARE OF HIS
RIGHTS OR INTERESTS IN THE DISPUTED PROPERTY.

THE COURT OF APPEALS ERRED IN HOLDING THAT

NOTWITHSTANDING ITS FULL CONCURRENCE ON THE FINDINGS
OF FACT OF THE TRIAL COURT, IT REVERSED AND SET ASIDE THE
DECISION OF THE TRIAL COURT UPHOLDING THE TITLE OF SAN
LORENZO AS A BUYER AND FIRST POSSESSOR IN GOOD FAITH. 15

SLDC contended that the appellate court erred in concluding that it had prior notice of
Babasanta’s claim over the property merely on the basis of its having advanced the amount
of two hundred thousand pesos (₱200,000.00) to Pacita Lu upon the latter’s representation
that she needed the money to pay her obligation to Babasanta. It argued that it had no
reason to suspect that Pacita was not telling the truth that the money would be used to pay
her indebtedness to Babasanta. At any rate, SLDC averred that the amount of two hundred
thousand pesos (₱200,000.00) which it advanced to Pacita Lu would be deducted from the
balance of the purchase price still due from it and should not be construed as notice of the
prior sale of the land to Babasanta. It added that at no instance did Pacita Lu inform it that
the lands had been previously sold to Babasanta.

Moreover, SLDC stressed that after the execution of the sale in its favor it immediately took
possession of the property and asserted its rights as new owner as opposed to Babasanta
who has never exercised acts of ownership. Since the titles bore no adverse claim,
encumbrance, or lien at the time it was sold to it, SLDC argued that it had every reason to
rely on the correctness of the certificate of title and it was not obliged to go beyond the
certificate to determine the condition of the property. Invoking the presumption of good
faith, it added that the burden rests on Babasanta to prove that it was aware of the prior
sale to him but the latter failed to do so. SLDC pointed out that the notice of lis pendens was
annotated only on 2 June 1989 long after the sale of the property to it was consummated
on 3 May 1989. 1awphi1.nét

Meanwhile, in an Urgent Ex-Parte Manifestation dated 27 August 1999, the Spouses Lu

informed the Court that due to financial constraints they have no more interest to pursue
their rights in the instant case and submit themselves to the decision of the Court of
Appeals.16

On the other hand, respondent Babasanta argued that SLDC could not have acquired
ownership of the property because it failed to comply with the requirement of registration
of the sale in good faith. He emphasized that at the time SLDC registered the sale in its
favor on 30 June 1990, there was already a notice of lis pendens annotated on the titles of
the property made as early as 2 June 1989. Hence, petitioner’s registration of the sale did
not confer upon it any right. Babasanta further asserted that petitioner’s bad faith in the
acquisition of the property is evident from the fact that it failed to make necessary inquiry
regarding the purpose of the issuance of the two hundred thousand pesos (₱200,000.00)
manager’s check in his favor.
The core issue presented for resolution in the instant petition is who between SLDC and
Babasanta has a better right over the two parcels of land subject of the instant case in view
of the successive transactions executed by the Spouses Lu.

To prove the perfection of the contract of sale in his favor, Babasanta presented a
document signed by Pacita Lu acknowledging receipt of the sum of fifty thousand pesos
(₱50,000.00) as partial payment for 3.6 hectares of farm lot situated at Barangay Pulong,
Sta. Cruz, Sta. Rosa, Laguna.17 While the receipt signed by Pacita did not mention the
price for which the property was being sold, this deficiency was supplied by Pacita Lu’s
letter dated 29 May 198918 wherein she admitted that she agreed to sell the 3.6 hectares
of land to Babasanta for fifteen pesos (₱15.00) per square meter.

An analysis of the facts obtaining in this case, as well as the evidence presented by the
parties, irresistibly leads to the conclusion that the agreement between Babasanta and the
Spouses Lu is a contract to sell and not a contract of sale.

Contracts, in general, are perfected by mere consent,19 which is manifested by the meeting
of the offer and the acceptance upon the thing which are to constitute the contract. The
offer must be certain and the acceptance absolute.20 Moreover, contracts shall be
obligatory in whatever form they may have been entered into, provided all the essential
requisites for their validity are present.21

The receipt signed by Pacita Lu merely states that she accepted the sum of fifty thousand
pesos (₱50,000.00) from Babasanta as partial payment of 3.6 hectares of farm lot situated
in Sta. Rosa, Laguna. While there is no stipulation that the seller reserves the ownership
of the property until full payment of the price which is a distinguishing feature of a contract
to sell, the subsequent acts of the parties convince us that the Spouses Lu never intended
to transfer ownership to Babasanta except upon full payment of the purchase price.

Babasanta’s letter dated 22 May 1989 was quite telling. He stated therein that despite his
repeated requests for the execution of the final deed of sale in his favor so that he could
effect full payment of the price, Pacita Lu allegedly refused to do so. In effect, Babasanta
himself recognized that ownership of the property would not be transferred to him until
such time as he shall have effected full payment of the price. Moreover, had the sellers
intended to transfer title, they could have easily executed the document of sale in its
required form simultaneously with their acceptance of the partial payment, but they did not.
Doubtlessly, the receipt signed by Pacita Lu should legally be considered as a perfected
contract to sell.

The distinction between a contract to sell and a contract of sale is quite germane. In a
contract of sale, title passes to the vendee upon the delivery of the thing sold; whereas in
a contract to sell, by agreement the ownership is reserved in the vendor and is not to pass
until the full payment of the price.22 In a contract of sale, the vendor has lost and cannot
recover ownership until and unless the contract is resolved or rescinded; whereas in a
contract to sell, title is retained by the vendor until the full payment of the price, such
payment being a positive suspensive condition and failure of which is not a breach but an
event that prevents the obligation of the vendor to convey title from becoming effective.23

The perfected contract to sell imposed upon Babasanta the obligation to pay the balance
of the purchase price. There being an obligation to pay the price, Babasanta should have
made the proper tender of payment and consignation of the price in court as required by
law. Mere sending of a letter by the vendee expressing the intention to pay without the
accompanying payment is not considered a valid tender of payment.24 Consignation of the
amounts due in court is essential in order to extinguish Babasanta’s obligation to pay the
balance of the purchase price. Glaringly absent from the records is any indication that
Babasanta even attempted to make the proper consignation of the amounts due, thus, the
obligation on the part of the sellers to convey title never acquired obligatory force.

On the assumption that the transaction between the parties is a contract of sale and not a
contract to sell, Babasanta’s claim of ownership should nevertheless fail.

Sale, being a consensual contract, is perfected by mere consent25 and from that moment,
the parties may reciprocally demand performance.26 The essential elements of a contract
of sale, to wit: (1) consent or meeting of the minds, that is, to transfer ownership in
exchange for the price; (2) object certain which is the subject matter of the contract; (3)
cause of the obligation which is established.27

The perfection of a contract of sale should not, however, be confused with its
consummation. In relation to the acquisition and transfer of ownership, it should be noted
that sale is not a mode, but merely a title. A mode is the legal means by which dominion
or ownership is created, transferred or destroyed, but title is only the legal basis by which
to affect dominion or ownership.28 Under Article 712 of the Civil Code, "ownership and other
real rights over property are acquired and transmitted by law, by donation, by testate and
intestate succession, and in consequence of certain contracts, by tradition." Contracts only
constitute titles or rights to the transfer or acquisition of ownership, while delivery or
tradition is the mode of accomplishing the same.29 Therefore, sale by itself does not
transfer or affect ownership; the most that sale does is to create the obligation to transfer
ownership. It is tradition or delivery, as a consequence of sale, that actually transfers
ownership.

Explicitly, the law provides that the ownership of the thing sold is acquired by the vendee
from the moment it is delivered to him in any of the ways specified in Article 1497 to
1501.30 The word "delivered" should not be taken restrictively to mean transfer of actual
physical possession of the property. The law recognizes two principal modes of delivery,
to wit: (1) actual delivery; and (2) legal or constructive delivery.

Actual delivery consists in placing the thing sold in the control and possession of the
vendee.31 Legal or constructive delivery, on the other hand, may be had through any of the
following ways: the execution of a public instrument evidencing the sale;32 symbolical
tradition such as the delivery of the keys of the place where the movable sold is being
kept;33 traditio longa manu or by mere consent or agreement if the movable sold cannot
yet be transferred to the possession of the buyer at the time of the sale;34 traditio brevi
manu if the buyer already had possession of the object even before the sale;35 and traditio
constitutum possessorium, where the seller remains in possession of the property in a
different capacity.36

Following the above disquisition, respondent Babasanta did not acquire ownership by the
mere execution of the receipt by Pacita Lu acknowledging receipt of partial payment for
the property. For one, the agreement between Babasanta and the Spouses Lu, though
valid, was not embodied in a public instrument. Hence, no constructive delivery of the lands
could have been effected. For another, Babasanta had not taken possession of the
property at any time after the perfection of the sale in his favor or exercised acts of
dominion over it despite his assertions that he was the rightful owner of the lands. Simply
stated, there was no delivery to Babasanta, whether actual or constructive, which is
essential to transfer ownership of the property. Thus, even on the assumption that the
perfected contract between the parties was a sale, ownership could not have passed to
Babasanta in the absence of delivery, since in a contract of sale ownership is transferred
to the vendee only upon the delivery of the thing sold.37
However, it must be stressed that the juridical relationship between the parties in a double
sale is primarily governed by Article 1544 which lays down the rules of preference between
the two purchasers of the same property. It provides:

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 principle of primus tempore, potior jure (first in time, stronger in right) gains greater
significance in case of double sale of immovable property. When the thing sold twice is an
immovable, the one who acquires it and first records it in the Registry of Property, both
made in good faith, shall be deemed the owner.38 Verily, the act of registration must be
coupled with good faith— that is, the registrant must have no knowledge of the defect or
lack of title of his vendor or must not have been aware of facts which should have put him
upon such inquiry and investigation as might be necessary to acquaint him with the defects
in the title of his vendor.39

Admittedly, SLDC registered the sale with the Registry of Deeds after it had acquired
knowledge of Babasanta’s claim. Babasanta, however, strongly argues that the registration
of the sale by SLDC was not sufficient to confer upon the latter any title to the property
since the registration was attended by bad faith. Specifically, he points out that at the time
SLDC registered the sale on 30 June 1990, there was already a notice of lis pendens on
the file with the Register of Deeds, the same having been filed one year before on 2 June
1989.

Did the registration of the sale after the annotation of the notice of lis pendens obliterate
the effects of delivery and possession in good faith which admittedly had occurred prior to
SLDC’s knowledge of the transaction in favor of Babasanta?

We do not hold so.

It must be stressed that as early as 11 February 1989, the Spouses Lu executed the Option
to Buy in favor of SLDC upon receiving ₱316,160.00 as option money from SLDC. After
SLDC had paid more than one half of the agreed purchase price of ₱1,264,640.00, the
Spouses Lu subsequently executed on 3 May 1989 a Deed of Absolute Sale in favor or
SLDC. At the time both deeds were executed, SLDC had no knowledge of the prior
transaction of the Spouses Lu with Babasanta. Simply stated, from the time of execution
of the first deed up to the moment of transfer and delivery of possession of the lands to
SLDC, it had acted in good faith and the subsequent annotation of lis pendens has no
effect at all on the consummated sale between SLDC and the Spouses Lu.

A purchaser in good faith is one who buys property of another without notice that some
other person has a right to, or interest in, such property and pays a full and fair price for
the same at the time of such purchase, or beforehe has notice of the claim or interest of
some other person in the property.40 Following the foregoing definition, we rule that SLDC
qualifies as a buyer in good faith since there is no evidence extant in the records that it had
knowledge of the prior transaction in favor of Babasanta. At the time of the sale of the
property to SLDC, the vendors were still the registered owners of the property and were in
fact in possession of the lands. Time and again, this Court has ruled that a person dealing
l^vvphi1.net
with the owner of registered land is not bound to go beyond the certificate of title as he is
charged with notice of burdens on the property which are noted on the face of the register
or on the certificate of title.41 In assailing knowledge of the transaction between him and
the Spouses Lu, Babasanta apparently relies on the principle of constructive notice
incorporated in Section 52 of the Property Registration Decree (P.D. No. 1529) which reads,
thus:

Sec. 52. Constructive notice upon registration. – Every conveyance, mortgage, lease, lien,
attachment, order, judgment, instrument or entry affecting registered land shall, if
registered, filed, or entered in the office of the Register of Deeds for the province or city
where the land to which it relates lies, be constructive notice to all persons from the time
of such registering, filing, or entering.

However, the constructive notice operates as such¾by the express wording of Section
52¾from the time of the registration of the notice of lis pendens which in this case was
effected only on 2 June 1989, at which time the sale in favor of SLDC had long been
consummated insofar as the obligation of the Spouses Lu to transfer ownership over the
property to SLDC is concerned.

More fundamentally, given the superiority of the right of SLDC to the claim of Babasanta
the annotation of the notice of lis pendens cannot help Babasanta’s position a bit and it is
irrelevant to the good or bad faith characterization of SLDC as a purchaser. A notice of lis
pendens, as the Court held in Nataño v. Esteban,42serves as a warning to a prospective
purchaser or incumbrancer that the particular property is in litigation; and that he should
keep his hands off the same, unless he intends to gamble on the results of the litigation."
Precisely, in this case SLDC has intervened in the pending litigation to protect its rights.
Obviously, SLDC’s faith in the merit of its cause has been vindicated with the Court’s
present decision which is the ultimate denouement on the controversy.

The Court of Appeals has made capital43 of SLDC’s averment in its Complaint-in-
Intervention44 that at the instance of Pacita Lu it issued a check for ₱200,000.00 payable
to Babasanta and the confirmatory testimony of Pacita Lu herself on cross-
examination.45 However, there is nothing in the said pleading and the testimony which
explicitly relates the amount to the transaction between the Spouses Lu and Babasanta for
what they attest to is that the amount was supposed to pay off the advances made by
Babasanta to Pacita Lu. In any event, the incident took place after the Spouses Lu had
already executed the Deed of Absolute Sale with Mortgage in favor of SLDC and therefore,
as previously explained, it has no effect on the legal position of SLDC.

Assuming ex gratia argumenti that SLDC’s registration of the sale had been tainted by the
prior notice of lis pendens and assuming further for the same nonce that this is a case of
double sale, still Babasanta’s claim could not prevail over that of SLDC’s. In Abarquez v.
Court of Appeals,46 this Court had the occasion to rule that if a vendee in a double sale
registers the sale after he has acquired knowledge of a previous sale, the registration
constitutes a registration in bad faith and does not confer upon him any right. If the
registration is done in bad faith, it is as if there is no registration at all, and the buyer who
has taken possession first of the property in good faith shall be preferred.

In Abarquez, the first sale to the spouses Israel was notarized and registered only after the
second vendee, Abarquez, registered their deed of sale with the Registry of Deeds, but the
Israels were first in possession. This Court awarded the property to the Israels because
registration of the property by Abarquez lacked the element of good faith. While the facts
in the instant case substantially differ from that in Abarquez, we would not hesitate to rule
in favor of SLDC on the basis of its prior possession of the property in good faith. Be it
noted that delivery of the property to SLDC was immediately effected after the execution
of the deed in its favor, at which time SLDC had no knowledge at all of the prior transaction
by the Spouses Lu in favor of Babasanta. 1a\^/phi1.net

The law speaks not only of one criterion. The first criterion is priority of entry in the registry
of property; there being no priority of such entry, the second is priority of possession; and,
in the absence of the two priorities, the third priority is of the date of title, with good faith as
the common critical element. Since SLDC acquired possession of the property in good faith
in contrast to Babasanta, who neither registered nor possessed the property at any time,
SLDC’s right is definitely superior to that of Babasanta’s.

At any rate, the above discussion on the rules on double sale would be purely academic
for as earlier stated in this decision, the contract between Babasanta and the Spouses Lu
is not a contract of sale but merely a contract to sell. In Dichoso v. Roxas,47 we had the
occasion to rule that Article 1544 does not apply to a case where there was a sale to one
party of the land itself while the other contract was a mere promise to sell the land or at
most an actual assignment of the right to repurchase the same land. Accordingly, there
was no double sale of the same land in that case.

WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of
Appeals appealed from is REVERSED and SET ASIDE and the decision of the Regional
Trial Court, Branch 31, of San Pedro, Laguna is REINSTATED. No costs.

SO ORDERED.

Puno, (Chairma
G.R. No. 133879 November 21, 2001

EQUATORIAL REALTY DEVELOPMENT, INC., petitioner,

vs.
MAYFAIR THEATER, INC., respondent.

PANGANIBAN, J.:

General propositions do not decide specific cases. Rather, laws are interpreted in the
context of the peculiar factual situation of each proceeding. Each case has its own flesh
and blood and cannot be ruled upon on the basis of isolated clinical classroom principles.

While we agree with the general proposition that a contract of sale is valid until rescinded,
it is equally true that ownership of the thing sold is not acquired by mere agreement, but
by tradition or delivery. The peculiar facts of the present controversy as found by this Court
in an earlier relevant Decision show that delivery was not actually effected; in fact, it was
prevented by a legally effective impediment. Not having been the owner, petitioner cannot
be entitled to the civil fruits of ownership like rentals of the thing sold. Furthermore,
petitioner's bad faith, as again demonstrated by the specific factual milieu of said Decision,
bars the grant of such benefits. Otherwise, bad faith would be rewarded instead of
punished.

The Case

Filed before this Court is a Petition for Review1 under Rule 45 of the Rules of Court,
challenging the March 11, 1998 Order2 of the Regional Trial Court of Manila (RTC), Branch
8, in Civil Case No. 97-85141. The dispositive portion of the assailed Order reads as follows:

"WHEREFORE, the motion to dismiss filed by defendant Mayfair is hereby GRANTED,

and the complaint filed by plaintiff Equatorial is hereby DISMISSED."3

Also questioned is the May 29, 1998 RTC Order4 denying petitioner's Motion for
Reconsideration.
 The Facts

The main factual antecedents of the present Petition are matters of record, because it
arose out of an earlier case decided by this Court on November 21, 1996,
entitled Equatorial Realty Development, Inc. v. Mayfair Theater, Inc.5 (henceforth referred
to as the "mother case"), docketed as G.R No. 106063.

Carmelo & Bauermann, Inc. ("Camelo" ) used to own a parcel of land, together with two 2-
storey buildings constructed thereon, located at Claro M. Recto Avenue, Manila, and
covered by TCT No. 18529 issued in its name by the Register of Deeds of Manila.

On June 1, 1967, Carmelo entered into a Contract of Lease with Mayfair Theater Inc.
("Mayfair") for a period of 20 years. The lease covered a portion of the second floor and
mezzanine of a two-storey building with about 1,610 square meters of floor area, which
respondent used as a movie house known as Maxim Theater.

Two years later, on March 31, 1969, Mayfair entered into a second Contract of Lease with
Carmelo for the lease of another portion of the latter's property — namely, a part of the
second floor of the two-storey building, with a floor area of about 1,064 square meters; and
two store spaces on the ground floor and the mezzanine, with a combined floor area of
about 300 square meters. In that space, Mayfair put up another movie house known as
Miramar Theater. The Contract of Lease was likewise for a period of 20 years.

Both leases contained a provision granting Mayfair a right of first refusal to purchase the
subject properties. However, on July 30, 1978 — within the 20-year-lease term — the
subject properties were sold by Carmelo to Equatorial Realty Development, Inc.
("Equatorial") for the total sum of P11,300,000, without their first being offered to Mayfair.

As a result of the sale of the subject properties to Equatorial, Mayfair filed a Complaint
before the Regional Trial Court of Manila (Branch 7) for (a) the annulment of the Deed of
Absolute Sale between Carmelo and Equatorial, (b) specific performance, and (c)
damages. After trial on the merits, the lower court rendered a Decision in favor of Carmelo
and Equatorial. This case, entitled "Mayfair" Theater, Inc. v. Carmelo and Bauermann, Inc.,
et al.," was docketed as Civil Case No. 118019.

On appeal (docketed as CA-GR CV No. 32918), the Court of Appeals (CA) completely
reversed and set aside the judgment of the lower court.

The controversy reached this Court via G.R No. 106063. In this mother case, it denied the
Petition for Review in this wise:

"WHEREFORE, the petition for review of the decision of the Court of Appeals, dated June
23, 1992, in CA-G.R. CV No. 32918, is HEREBY DENIED. The Deed of Absolute Sale
between petitioners Equatorial Realty Development, Inc. and Carmelo & Bauermann, Inc.
is hereby deemed rescinded; Carmelo & Bauermann is ordered to return to petitioner
Equatorial Realty Development the purchase price. The latter is directed to execute the
deeds and documents necessary to return ownership to Carmelo & Bauermann of the
disputed lots. Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to buy the
aforesaid lots for P11,300,000.00."6

The foregoing Decision of this Court became final and executory on March 17, 1997. On
April 25, 1997, Mayfair filed a Motion for Execution, which the trial court granted.

However, Carmelo could no longer be located. Thus, following the order of execution of
the trial court, Mayfair deposited with the clerk of court a quo its payment to Carmelo in the
sum of P11,300,000 less; P847,000 as withholding tax. The lower court issued a Deed of
Reconveyance in favor of Carmelo and a Deed of Sale in favor of Mayfair. On the basis of
these documents, the Registry of Deeds of Manila canceled Equatorial's titles and issued
new Certificates of Title7 in the name of Mayfair.

Ruling on Equatorial's Petition for Certiorari and Petition contesting the foregoing manner
of execution, the CA in its Resolution of November 20, 1998, explained that Mayfair had
no right to deduct the P847,000 as withholding tax. Since Carmelo could no longer be
located, the appellate court ordered Mayfair to deposit the said sum with the Office of the
Clerk of Court, Manila, to complete the full amount of P11,300,000 to be turned over to
Equatorial.

Equatorial questioned the legality of the above CA ruling before this Court in G.R No.
136221 entitled "Equatorial Realty Development, Inc. v. Mayfair Theater, Inc." In a Decision
promulgated on May 12, 2000,8 this Court directed the trial court to follow strictly the
Decision in GR. No. 106063, the mother case. It explained its ruling in these words:

"We agree that Carmelo and Bauermann is obliged to return the entire amount of eleven
million three hundred thousand pesos (P11,300,000.00) to Equatorial. On the other hand,
Mayfair may not deduct from the purchase price the amount of eight hundred forty-seven
thousand pesos (P847,000.00) as withholding tax. The duty to withhold taxes due, if any,
is imposed on the seller Carmelo and Bauermann, Inc."9

Meanwhile, on September 18, 1997 — barely five months after Mayfair had submitted its
Motion for Execution before the RTC of Manila, Branch 7 — Equatorial filed with the
Regional Trial Court of Manila, Branch 8, an action for the collection of a sum of money
against Mayfair, claiming payment of rentals or reasonable compensation for the
defendant's use of the subject premises after its lease contracts had expired. This action
was the progenitor of the present case.

In its Complaint, Equatorial alleged among other things that the Lease Contract covering
the premises occupied by Maxim Theater expired on May 31, 1987, while the Lease
Contract covering the premises occupied by Miramar Theater lapsed on March 31,
1989.10 Representing itself as the owner of the subject premises by reason of the Contract
of Sale on July 30, 1978, it claimed rentals arising from Mayfair's occupation thereof.

Ruling of the RTC Manila, Branch 8

As earlier stated, the trial court dismissed the Complaint via the herein assailed Order and
denied the Motion for Reconsideration filed by Equatorial.11

The lower court debunked the claim of petitioner for unpaid back rentals, holding that the
rescission of the Deed of Absolute Sale in the mother case did not confer on Equatorial
any vested or residual proprietary rights, even in expectancy.

In granting the Motion to Dismiss, the court a quo held that the critical issue was whether
Equatorial was the owner of the subject property and could thus enjoy the fruits or rentals
therefrom. It declared the rescinded Deed of Absolute Sale as avoid at its inception as
though it did not happen."

The trial court ratiocinated as follows:

"The meaning of rescind in the aforequoted decision is to set aside. In the case of Ocampo
v. Court of Appeals, G.R. No. 97442, June 30, 1994, the Supreme Court held that, 'to
rescind is to declare a contract void in its inception and to put an end as though it never
were. It is not merely to terminate it and release parties from further obligations to each
other but to abrogate it from the beginning and restore parties to relative positions which
they would have occupied had no contract ever been made.'

"Relative to the foregoing definition, the Deed of Absolute Sale between Equatorial and
Carmelo dated July 31, 1978 is void at its inception as though it did not happen.

"The argument of Equatorial that this complaint for back rentals as 'reasonable
compensation for use of the subject property after expiration of the lease
contracts presumes that the Deed of Absolute Sale dated July 30, 1978 from whence the
fountain of Equatorial's all rights flows is still valid and existing.

xxx xxx xxx

"The subject Deed of Absolute Sale having been rescinded by the Supreme Court,
Equatorial is not the owner and does not have any right to demand backrentals from the
subject property. . .12

The trial court added: "The Supreme Court in the Equatorial case, G.R No. 106063, has
categorically stated that the Deed of Absolute Sale dated July 31, 1978 has been rescinded
subjecting the present complaint to res judicata."13

Hence, the present recourse.14

Issues

Petitioner submits, for the consideration of this Court, the following issues:15

"A

The basis of the dismissal of the Complaint by the Regional Trial Court not only disregards
basic concepts and principles in the law on contracts and in civil law, especially those on
rescission and its corresponding legal effects, but also ignores the dispositive portion of
the Decision of the Supreme Court in G.R. No. 106063 entitled 'Equatorial Realty
Development, Inc. & Carmelo & Bauermann, Inc. vs. Mayfair Theater, Inc.'

"B.

The Regional Trial Court erred in holding that the Deed of Absolute Sale in favor of
petitioner by Carmelo & Bauermann, Inc., dated July 31, 1978, over the premises used
and occupied by respondent, having been 'deemed rescinded' by the Supreme Court in
G.R. No. 106063, is 'void at its inception as though it did not happen.'

"C.

The Regional Trial Court likewise erred in holding that the aforesaid Deed of Absolute Sale,
dated July 31, 1978, having been 'deemed rescinded' by the Supreme Court in G.R. No.
106063, petitioner 'is not the owner and does not have any right to demand backrentals
from the subject property,' and that the rescission of the Deed of Absolute Sale by the
Supreme Court does not confer to petitioner 'any vested right nor any residual proprietary
rights even in expectancy.'

"D.

The issue upon which the Regional Trial Court dismissed the civil case, as stated in its
Order of March 11, 1998, was not raised by respondent in its Motion to Dismiss.
 "E.

The sole ground upon which the Regional Trial Court dismissed Civil Case No. 97-85141
is not one of the grounds of a Motion to Dismiss under Sec. 1 of Rule 16 of the 1997 Rules
of Civil Procedure."

Basically, the issues can be summarized into two: (1) the substantive issue of whether
Equatorial is entitled to back rentals; and (2) the procedural issue of whether the court a
quo's dismissal of Civil Case No. 97-85141 was based on one of the grounds raised by
respondent in its Motion to Dismiss and covered by Rule 16 of the Rules of Court.

This Court's Ruling

The Petition is not meritorious.

First Issue:
Ownership of Subject Properties

We hold that under the peculiar facts and circumstances of the case at bar, as found by
this Court en banc in its Decision promulgated in 1996 in the mother case, no right of
ownership was transferred from Carmelo to Equatorial in view of a patent failure to deliver
the property to the buyer.

Rental — a Civil
Fruit of Ownership

To better understand the peculiarity of the instant case, let us begin with some basic
parameters. Rent is a civil fruit16 that belongs to the owner of the property producing it17 by
right of accession.18 Consequently and ordinarily, the rentals that fell due from the time of
the perfection of the sale to petitioner until its rescission by final judgment should belong
to the owner of the property during that period.

By a contract of sale, "one of the contracting parties obligates himself to transfer ownership
of and to deliver a determinate thing and the other to pay therefor a price certain in money
or its equivalent."19

Ownership of the thing sold is a real right,20 which the buyer acquires only upon delivery of
the thing to him "in any of the ways specified in articles 1497 to 1501, or in any other
manner signifying an agreement that the possession is transferred from the vendor to the
vendee."21 This right is transferred, not merely by contract, but also by tradition or
delivery.22 Non nudis pactis sed traditione dominia rerum transferantur. And there is said
to be delivery if and when the thing sold "is placed in the control and possession of the
vendee."23 Thus, it has been held that while the execution of a public instrument of sale is
recognized by law as equivalent to the delivery of the thing sold,24 such constructive or
symbolic delivery, being merely presumptive, is deemed negated by the failure of the
vendee to take actual possession of the land sold.25

Delivery has been described as a composite act, a thing in which both parties must join
and the minds of both parties concur. It is an act by which one party parts with the title to
and the possession of the property, and the other acquires the right to and the possession
of the same. In its natural sense, delivery means something in addition to the delivery of
property or title; it means transfer of possession.26 In the Law on Sales, delivery may be
either actual or constructive, but both forms of delivery contemplate "the absolute giving
up of the control and custody of the property on the part of the vendor, and the assumption
of the same by the vendee."27
Possession Never
Acquired by Petitioner

Let us now apply the foregoing discussion to the present issue. From the peculiar facts of
this case, it is clear that petitioner never took actual control and possession of the property
sold, in view of respondent's timely objection to the sale and the continued actual
possession of the property. The objection took the form of a court action impugning the
sale which, as we know, was rescinded by a judgment rendered by this Court in the mother
case. It has been held that the execution of a contract of sale as a form of constructive
delivery is a legal fiction. It holds true only when there is no impediment that may prevent
the passing of the property from the hands of the vendor into those of the vendee.28 When
there is such impediment, "fiction yields to reality — the delivery has not been effected."29

Hence, respondent's opposition to the transfer of the property by way of sale to Equatorial
was a legally sufficient impediment that effectively prevented the passing of the property
into the latter's hands.

This was the same impediment contemplated in Vda. de Sarmiento v. Lesaca,30 in which
the Court held as follows:

"The question that now arises is: Is there any stipulation in the sale in question from which
we can infer that the vendor did not intend to deliver outright the possession of the lands
to the vendee? We find none. On the contrary, it can be clearly seen therein that the vendor
intended to place the vendee in actual possession of the lands immediately as can be
inferred from the stipulation that the vendee 'takes actual possession thereof . . . with full
rights to dispose, enjoy and make use thereof in such manner and form as would be most
advantageous to herself.' The possession referred to in the contract evidently refers to
actual possession and not merely symbolical inferable from the mere execution of the
document.

"Has the vendor complied with this express commitment? she did not. As provided in Article
1462, the thing sold shall be deemed delivered when the vendee is placed in
the control and possession thereof, which situation does not here obtain because from the
execution of the sale up to the present the vendee was never able to take possession of
the lands due to the insistent refusal of Martin Deloso to surrender them claiming ownership
thereof. And although it is postulated in the same article that the execution of a public
document is equivalent to delivery, this legal fiction only holds true when there is no
impediment that may prevent the passing of the property from the hands of the vendor into
those of the vendee. x x x."31

The execution of a public instrument gives rise, therefore, only to a prima facie presumption
of delivery. Such presumption is destroyed when the instrument itself expresses or implies
that delivery was not intended; or when by other means it is shown that such delivery was
not effected, because a third person was actually in possession of the thing. In the latter
case, the sale cannot be considered consummated.

However, the point may be raised that under Article 1164 of the Civil Code, Equatorial as
buyer acquired a right to the fruits of the thing sold from the time the obligation to deliver
the property to petitioner arose.32 That time arose upon the perfection of the Contract of
Sale on July 30, 1978, from which moment the laws provide that the parties to a sale may
reciprocally demand performance.33 Does this mean that despite the judgment rescinding
the sale, the right to the fruits34 belonged to, and remained enforceable by, Equatorial?

Article 1385 of the Civil Code answers this question in the negative, because "[r]escission
creates the obligation to return the things which were the object of the contract, together
with their fruits, and the price with its interest; x x x" Not only the land and building sold,
but also the rental payments paid, if any, had to be returned by the buyer.

Another point. The Decision in the mother case stated that "Equatorial x x x has received
rents" from Mayfair "during all the years that this controversy has been litigated." The
Separate Opinion of Justice Teodoro Padilla in the mother case also said that Equatorial
was "deriving rental income" from the disputed property. Even hereinponente's Separate
Concurring Opinion in the mother case recognized these rentals. The question now is: Do
all these statements concede actual delivery?

The answer is "No." The fact that Mayfair paid rentals to Equatorial during the litigation
should not be interpreted to mean either actual delivery or ipso facto recognition of
Equatorial's title.

The CA Records of the mother case 35 show that Equatorial — as alleged buyer of the
disputed properties and as alleged successor-in-interest of Carmelo's rights as lessor —
submitted two ejectment suits against Mayfair. Filed in the Metropolitan Trial Court of
Manila, the first was docketed as Civil Case No. 121570 on July 9, 1987; and thesecond,
as Civil Case No. 131944 on May 28, 1990. Mayfair eventually won them both. However,
to be able to maintain physical possession of the premises while awaiting the outcome of
the mother case, it had no choice but to pay the rentals.

The rental payments made by Mayfair should not be construed as a recognition of

Equatorial as the new owner. They were made merely to avoid imminent eviction. It is in
this context that one should understand the aforequoted factual statements in
the ponencia in the mother case, as well as the Separate Opinion of Mr. Justice Padilla
and the Separate Concurring Opinion of the herein ponente.

At bottom, it may be conceded that, theoretically, a rescissible contract is valid until

rescinded. However, thisgeneral principle is not decisive to the issue of whether Equatorial
ever acquired the right to collect rentals. What is decisive is the civil law rule that ownership
is acquired, not by mere agreement, but by tradition or delivery. Under the factual
environment of this controversy as found by this Court in the mother case, Equatorial was
never put in actual and effective control or possession of the property because of Mayfair's
timely objection.

As pointed out by Justice Holmes, general propositions do not decide specific cases.
Rather, "laws are interpreted in the context of the peculiar factual situation of each case.
Each case has its own flesh and blood and cannot be decided on the basis of isolated
clinical classroom principles."36

In short, the sale to Equatorial may have been valid from inception, but it was judicially
rescinded before it could be consummated. Petitioner never acquired ownership, not
because the sale was void, as erroneously claimed by the trial court, but because the sale
was not consummated by a legally effective delivery of the property sold.

Benefits Precluded by
Petitioner's Bad Faith

Furthermore, assuming for the sake of argument that there was valid delivery, petitioner is
not entitled to any benefits from the "rescinded" Deed of Absolute Sale because of its bad
faith. This being the law of the mother case decided in 1996, it may no longer be changed
because it has long become final and executory. Petitioner's bad faith is set forth in the
following pertinent portions of the mother case:

"First and foremost is that the petitioners acted in bad faith to render Paragraph 8 'inutile.'
xxx xxx xxx

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

xxx xxx xxx

"As also earlier emphasized, the contract of sale between Equatorial and Carmelo is
characterized by bad faith, since it was knowingly entered into in violation of the rights of
and to the prejudice of Mayfair. In fact, as correctly observed by the Court of Appeals,
Equatorial admitted that its lawyers had studied the contract of lease prior to the sale.
Equatorial's knowledge of the stipulations therein should have cautioned it to look further
into the agreement to determine if it involved stipulations that would prejudice its own
interests.

xxx xxx xxx

"On the part of Equatorial, it cannot be a buyer in good faith because it bought the property
with notice and full knowledge that Mayfair had a right to or interest in the property superior
to its own. Carmelo and Equatorial took unconscientious advantage of Mayfair."37 (Italics
supplied)

Thus, petitioner was and still is entitled solely to he return of the purchase price it paid to
Carmelo; no more, no less. This Court has firmly ruled in the mother case that neither of
them is entitled to any consideration of equity, as both "took unconscientious advantage of
Mayfair."38

In the mother case, this Court categorically denied the payment of interest, a fruit of
ownership. By the same token, rentals, another fruit of ownership, cannot be granted
without mocking this Court's en banc Decision, which has long become final.

Petitioner's claim of reasonable compensation for respondent's use and occupation of the
subject property from the time the lease expired cannot be countenanced. If it suffered any
loss, petitioner must bear it in silence, since it had wrought that loss upon itself. Otherwise,
bad faith would be rewarded instead of punished. @lawphil.net

We uphold the trial court's disposition, not for the reason it gave, but for (a) the patent
failure to deliver the property and (b) petitioner's bad faith, as above discussed.

Second Issue: itc-alf

Ground in Motion to Dismiss

Procedurally, petitioner claims that the trial court deviated from the accepted and usual
course of judicial proceedings when it dismissed Civil Case No. 97-85141 on a ground not
raised in respondent's Motion to Dismiss. Worse, it allegedly based its dismissal on a
ground not provided for in a motion to dismiss as enunciated in the Rules of Court. @lawphil.net

We are not convinced A review of respondent's Motion to Dismiss Civil Case No. 97-85141
shows that there were two grounds invoked, as follows:

"(A)
Plaintiff is guilty of forum-shopping.itc-alf

"(B)

Plaintiff's cause of action, if any, is barred by prior judgment."39

The court a quo ruled, inter alia, that the cause of action of petitioner plaintiff in the case
below) had been barred by a prior judgment of this Court in G.R No. 106063, the mother
case.

Although it erred in its interpretation of the said Decision when it argued that the rescinded
Deed of Absolute Sale was avoid," we hold, nonetheless, that petitioner's cause of action
is indeed barred by a prior judgment of this Court. As already discussed, our Decision in
G.R No. 106063 shows that petitioner is not entitled to back rentals, because it never
became the owner of the disputed properties due to a failure of delivery. And even
assuming arguendo that there was a valid delivery, petitioner's bad faith negates its
entitlement to the civil fruits of ownership, like interest and rentals.

Under the doctrine of res judicata or bar by prior judgment, a matter that has been
adjudicated by a court of competent jurisdiction must be deemed to have been finally and
conclusively settled if it arises in any subsequent litigation between the same parties and
for the same cause.40 Thus, "[a] final judgment on the merits rendered by a court of
competent jurisdiction is conclusive as to the rights of the parties and their privies and
constitutes an absolute bar to subsequent actions involving the same claim, demand, or
cause of action."41 Res judicata is based on the ground that the "party to be affected, or
some other with whom he is in privity, has litigated the same matter in a former action in a
court of competent jurisdiction, and should not be permitted to litigate it again.42

It frees the parties from undergoing all over again the rigors of unnecessary suits and
repetitive trials. At the same time, it prevents the clogging of court dockets. Equally
important, it stabilizes rights and promotes the rule of law. @lawphil.net

We find no need to repeat the foregoing disquisitions on the first issue to show satisfaction
of the elements of res judicata. Suffice it to say that, clearly, our ruling in the mother case
bars petitioner from claiming back rentals from respondent. Although the court a quo erred
when it declared "void from inception" the Deed of Absolute Sale between Carmelo and
petitioner, our foregoing discussion supports the grant of the Motion to Dismiss on the
ground that our prior judgment in G.R No. 106063 has already resolved the issue of back
rentals.

On the basis of the evidence presented during the hearing of Mayfair's Motion to Dismiss,
the trial court found that the issue of ownership of the subject property has been decided
by this Court in favor of Mayfair. We quote the RTC:

"The Supreme Court in the Equatorial case, G.R. No. 106063 has categorically stated that
the Deed of Absolute Sale dated July 31, 1978 has been rescinded subjecting the present
complaint to res judicata."43(Emphasis in the original)

Hence, the trial court decided the Motion to Dismiss on the basis of res judicata, even if it
erred in interpreting the meaning of "rescinded" as equivalent to "void" In short, it ruled on
the ground raised; namely, bar by prior judgment. By granting the Motion, it disposed
correctly, even if its legal reason for nullifying the sale was wrong. The correct reasons are
given in this Decision.

WHEREFORE, the Petition is hereby DENIED. Costs against petitioner. itc-alf

SO ORDERED.

G.R. No. L-6584 October 16, 1911

INCHAUSTI AND CO., plaintiff-appellant,

vs.
ELLIS CROMWELL, Collector of Internal Revenue, defendant-appellee.

Haussermann, Cohn & Fisher, for appellant.

Acting Attorney-General Harvey, for appellee.

MORELAND, J.:

This is an appeal by the plaintiff from a judgment of the Court of First Instance of the city
of Manila, the Hon. Simplicio del Rosario presiding, dismissing the complaint upon the
merits after trial, without costs.

The facts presented to this court are agreed upon by both parties, consisting, in so far as
they are material to a decision of the case, in the following:

III. That the plaintiff firm for many years past has been and now is engaged in the business
of buying and selling at wholesale hemp, both for its own account and on commission.

IV. That it is customary to sell hemp in bales which are made by compressing the loose
fiber by means of presses, covering two sides of the bale with matting, and fastening it by
means of strips of rattan; that the operation of bailing hemp is designated among
merchants by the word "prensaje."

V. That in all sales of hemp by the plaintiff firm, whether for its own account or on
commission for others, the price is quoted to the buyer at so much per picul, no mention
being made of bailing; but with the tacit understanding, unless otherwise expressly agreed,
that the hemp will be delivered in bales and that, according to the custom prevailing among
hemp merchants and dealers in the Philippine Islands, a charge, the amount of which
depends upon the then prevailing rate, is to be made against the buyer under the
denomination of "prensaje." That this charge is made in the same manner in all cases,
even when the operation of bailing was performed by the plaintiff or by its principal long
before the contract of sale was made. Two specimens of the ordinary form of account used
in these operations are hereunto appended, marked Exhibits A and B, respectively, and
made a part hereof.

VI. That the amount of the charge made against hemp buyers by the plaintiff firm and other
sellers of hemp under the denomination of "prensaje" during the period involved in this
litigation was P1.75 per bale; that the average cost of the rattan and matting used on each
bale of hemp is fifteen (15) centavos and that the average total cost of bailing hemp is one
(1) peso per bale.

VII. That insurance companies in the Philippine Islands, in estimating the insurable value
of hemp always add to the quoted price of same the charge made by the seller under the
denomination of "prensaje."

VII. That the average weight of a bale of hemp is two (2) piculs (126.5 kilograms).

IX. That between the first day of January, 1905, and the 31st day of March, 1910, the
plaintiff firm, in accordance with the custom mentioned in paragraph V hereof, collected
and received, under the denomination of "prensaje," from purchasers of hemp sold by the
said firm for its own account, in addition to the price expressly agreed upon for the said
hemp, sums aggregating P380,124.35; and between the 1st day of October, 1908, and the
1st day of March, 1910, collected for the account of the owners of hemp sold by the plaintiff
firm in Manila on commission, and under the said denomination of "prensaje," in addition
to the price expressly agreed upon the said hemp, sums aggregating P31,080.

X. That the plaintiff firm in estimating the amount due it as commissions on sales of hemp
made by it for its principals has always based the said amount on the total sum collected
from the purchasers of the hemp, including the charge made in each case under the
denomination of "prensaje."

XI. That the plaintiff has always paid to the defendant or to his predecessor in the office of
the Collector of Internal Revenue the tax collectible under the provisions of section 139 of
Act No. 1189 upon the selling price expressly agreed upon for all hemp sold by the plaintiff
firm both for its own account and on commission, but has not, until compelled to do so as
hereinafter stated, paid the said tax upon sums received from the purchaser of such hemp
under the denomination of "prensaje."

XII. That of the 29th day of April, 1910, the defendant, acting in his official capacity as
Collector of Internal Revenue of the Philippine Islands, made demand in writing upon the
plaintiff firm for the payment within the period of five (5) days of the sum of P1,370.68 as a
tax of one third of one per cent on the sums of money mentioned in Paragraph IX hereof,
and which the said defendant claimed to be entitled to receive, under the provisions of the
said section 139 of Act No. 1189, upon the said sums of money so collected from
purchasers of hemp under the denomination of "prensaje."

XIII. That on the 4th day of May, 1910, the plaintiff firm paid to the defendant under protest
the said sum of P1,370.69, and on the same date appealed to the defendant as Collector
of Internal Revenue, against the ruling by which the plaintiff firm was required to make said
payment, but defendant overruled said protest and adversely decided said appeal, and
refused and still refuses to return to plaintiff the said sum of P1,370.68 or any part thereof.
1awphil.net

XIV. Upon the facts above set forth t is contended by the plaintiff that the tax of P1,370.68
assessed by the defendant upon the aggregate sum of said charges made against said
purchasers of hemp by the plaintiff during the period in question, under the denomination
of "prensaje" as aforesaid, namely, P411,204.35, is illegal upon the ground that the said
charge does not constitute a part of the selling price of the hemp, but is a charge made for
the service of baling the hemp, and that the plaintiff firm is therefore entitled to recover of
the defendant the said sum of P1,370.68 paid to him under protest, together with all interest
thereon at the legal rate since payment, and the costs of this action.

Upon the facts above stated it is the contention of the defendant that the said charge made
under the denomination of "prensaje" is in truth and in fact a part of the gross value of the
hemp sold and of its actual selling price, and that therefore the tax imposed by section 139
of Act No. 1189 lawfully accrued on said sums, that the collection thereof was lawfully and
properly made and that therefore the plaintiff is not entitled to recover back said sum or
any part thereof; and that the defendant should have judgment against plaintiff for his costs.

Under these facts we are of the opinion that the judgment of the court below was right. It
is one of the stipulations in the statement of facts that it is customary to sell hemp in bales,
and that the price quoted in the market for hemp per picul is the price for the hemp baled.
The fact is that among large dealers like the plaintiff in this case it is practically impossible
to handle hemp without its being baled, and it is admitted by the statement of facts, as well
as demonstrated by the documentary proof introduced in the case, that if the plaintiff sold
a quality of hemp it would be the under standing, without words, that such hemp would be
delivered in bales, and that the purchase price would include the cost and expense of
baling. In other words, it is the fact as stipulated, as well as it would be the fact of necessity,
that in all dealings in hemp in the general market the selling price consists of the value of
the hemp loose plus the cost and expense of putting it into marketable form. In the sales
made by the plaintiff, which are the basis of the controversy here, there were n services
performed by him for his vendee. There was agreement that services should be performed.
Indeed, at the time of such sales it was not known by the vendee whether the hemp was
then actually baled or not. All that he knew and all that concerned him was that the hemp
should be delivered to him baled. He did not ask the plaintiff to perform services for him,
nor did the plaintiff agree to do so. The contract was single and consisted solely in the sale
and purchase of hemp. The purchaser contracted for nothing else and the vendor agreed
to deliver nothing else.

The word "price" signifies the sum stipulated as the equivalent of the thing sold and also
every incident taken into consideration for the fixing of the price, put to the debit of the
vendee and agreed to by him. It is quite possible that the plaintiff, in this case in connection
with the hemp which he sold, had himself already paid the additional expense of baling as
a part of the purchase price which he paid and that he himself had received the hemp baled
from his vendor. It is quite possible also that such vendor of the plaintiff may have received
the same hemp from his vendor in baled form, that he paid the additions cost of baling as
a part of the purchase price which he paid. In such case the plaintiff performed no service
whatever for his vendee, nor did the plaintiff's vendor perform any service for him.

The distinction between a contract of sale and one for work, labor, and materials is tested
by the inquiry whether the thing transferred is one no in existence and which never would
have existed but for the order of the party desiring to acquire it, or a thing which would
have existed and been the subject of sale to some other person, even if the order had not
been given. (Groves vs. Buck, 3 Maule & S., 178; Towers vs. Osborne, 1 Strange, 506;
Benjamin on Sales, 90.) It is clear that in the case at bar the hemp was in existence in
baled form before the agreements of sale were made, or, at least, would have been in
existence even if none of the individual sales here in question had been consummated. It
would have been baled, nevertheless, for sale to someone else, since, according to the
agreed statement of facts, it is customary to sell hemp in bales. When a person stipulates
for the future sale of articles which he is habitually making, and which at the time are not
made or finished, it is essentially a contract of sale and not a contract for labor. It is
otherwise when the article is made pursuant to agreement. (Lamb vs. Crafts, 12 Met., 353;
Smith vs. N.Y.C. Ry. Co., 4 Keyes, 180; Benjamin on Sales, 98.) Where labor is employed
on the materials of the seller he can not maintain an action for work and labor.
(Atkinson vs. Bell, 8 Barn. & C., 277; Lee vs. Griffin, 30 L.J.N. S.Q.B., 252;
Prescott vs. Locke, 51 N.H., 94.) If the article ordered by the purchaser is exactly such as
the plaintiff makes and keeps on hand for sale to anyone, and no change or modification
of it is made at the defendant's request, it is a contract of sale, even though it may be
entirely made after, and in consequence of, the defendant's order for it. (Garbutt s. Watson,
5 Barn. & Ald., 613; Gardner vs.Joy, 9 Met., 177; Lamb vs. Crafts, 12 Met., 353;
Waterman vs. Meigs, 4 Cush., 497., Clark vs. Nichols, 107 Mass., 547; May vs. Ward, 134
Mass., 127; Abbott vs. Gilchrist, 38 Me., 260; Crocket vs. Scribner, 64 Me., 105;
Pitkin vs.Noyes, 48 N. H., 294; Prescott vs. Locke, 51 N. H., 94; Ellison vs. Brigham, 38
Vt., 64.) It has been held in Massachusetts that a contract to make is a contract of sale if
the article ordered is already substantially in existence at the time of the order and merely
requires some alteration, modification, or adoption to the buyer's wishes or purposes.
(Mixer vs. Howarth, 21 Pick., 205.) It is also held in that state that a contract for the sale of
an article which the vendor in the ordinary course of his business manufactures or procures
for the general market, whether the same is on hand at the time or not, is a contract for the
sale of goods to which the statute of frauds applies. But if the goods are to be manufactured
especially for the purchaser and upon his special order, and not for the general market,
the case is not within the statute. (Goddard vs. Binney, 115 Mass., 450.)

It is clear to our minds that in the case at bar the baling was performed for the general
market and was not something done by plaintiff which was a result of any peculiar wording
of the particular contract between him and his vendee. It is undoubted that the plaintiff
prepared his hemp for the general market. This would be necessary. One whose exposes
goods for sale in the market must have them in marketable form. The hemp in question
would not have been in that condition if it had not been baled. the baling, therefore, was
nothing peculiar to the contract between the plaintiff and his vendee. It was precisely the
same contract that was made by every other seller of hemp, engaged as was the plaintiff,
and resulted simply in the transfer of title to goods already prepared for the general market.
The method of bookkeeping and form of the account rendered is not controlling as to the
nature of the contract made. It is conceded in the case tat a separate entry and charge
would have been made for the baling even if the plaintiff had not been the one who baled
the hemp but, instead, had received it already baled from his vendor. This indicates of
necessity tat the mere fact of entering a separate item for the baling of the hemp is formal
rather than essential and in no sense indicates in this case the real transaction between
the parties. It is undisputable that, if the plaintiff had brought the hemp in question already
baled, and that was the hemp the sale which formed the subject of this controversy, then
the plaintiff would have performed no service for his vendee and could not, therefore,
lawfully charge for the rendition of such service. It is, nevertheless, admitted that in spite
of that fact he would still have made the double entry in his invoice of sale to such vendee.
This demonstrates the nature of the transaction and discloses, as we have already said,
that the entry of a separate charge for baling does not accurately describe the transaction
between the parties.

Section 139 [Act No. 1189] of the Internal Revenue Law provides that:

There shall be paid by each merchant and manufacturer a tax at the rate of one-third of
one per centum on the gross value in money of all goods, wares and merchandise sold,
bartered or exchanged in the Philippine Islands, and that this tax shall be assessed on the
actual selling price at which every such merchant or manufacturer disposes of his
commodities.

The operation of baling undoubtedly augments the value of the goods. We agree that there
can be no question that, if the value of the hemp were not augmented to the amount of
P1.75 per bale by said operation, the purchaser would not pay that sum. If one buys a bale
of hemp at a stipulated price of P20, well knowing that there is an agreement on his part,
express or implied, to pay an additional amount of P1.75 for that bale, he considers the
bale of hemp worth P21. 75. It is agreed, as we have before stated, that hemp is sold in
bales. Therefore, baling is performed before the sale. The purchaser of hemp owes to the
seller nothing whatever by reason of their contract except the value of the hemp delivered.
That value, that sum which the purchaser pays to the vendee, is the true selling price of
the hemp, and every item which enters into such price is a part of such selling price. By
force of the custom prevailing among hemp dealers in the Philippine Islands, a purchaser
of hemp in the market, unless he expressly stipulates that it shall be delivered to him in
loose form, obligates himself to purchase and pay for baled hemp. Wheher or not such
agreement is express or implied, whether it is actual or tacit, it has the same force. After
such an agreement has once been made by the purchaser, he has no right to insists
thereafter that the seller shall furnish him with unbaled hemp. It is undoubted that the
vendees, in the sales referred to in the case at bar, would have no right, after having made
their contracts, to insists on the delivery of loose hemp with the purpose in view themselves
to perform the baling and thus save 75 centavos per bale. It is unquestioned that the seller,
the plaintiff, would have stood upon his original contract of sale, that is, the obligation to
deliver baled hemp, and would have forced his vendees to accept baled hemp, he himself
retaining among his own profits those which accrued from the proceed of baling.

We are of the opinion that the judgment appealed from must be affirmed, without special
finding as to costs, and it is so ordered.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-8506 August 31, 1956

CELESTINO CO & COMPANY, petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE, respondent.

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

BENGZON, J.:

Appeal from a decision of the Court of Tax Appeals.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The thought occurs to us that if, as alleged-all the work of appellant is only to fill orders previously made, such orders
should not be called special work, but regular work. Would a factory do business performing only special, extraordinary
or peculiar merchandise?

Anyway, supposing for the moment that the transactions were not sales, they were neither lease of services nor contract
jobs by a contractor. But as the doors and windows had been admittedly "manufactured" by the Oriental Sash Factory,
such transactions could be, and should be taxed as "transfers" thereof under section 186 of the National Revenue
Code.

The appealed decision is consequently affirmed. So ordered.

[G.R. No. 113564. June 20, 2001]

INOCENCIA YU DINO and her HUSBAND doing business under the

trade name "CANDY CLAIRE FASHION
GARMENTS", petitioners, vs. COURT OF APPEALS and
ROMAN SIO, doing business under the name "UNIVERSAL
TOY MASTER MANUFACTURING", respondents.

D E C I S I O N*
PUNO, J.:

Though people say, "better late than never", the law frowns upon those
who assert their rights past the eleventh hour. For failing to timely institute
their action, the petitioners are forever barred from claiming a sum of money
from the respondent.
This is a petition for review on certiorari to annul and set aside the
amended decision of the respondent court dated January 24, 1994 reversing
its April 30, 1993 decision and dismissing the plaintiff-petitioners' Complaint
on the ground of prescription.
The following undisputed facts gave rise to the case at bar:
Petitioners spouses Dino, doing business under the trade name "Candy
Claire Fashion Garment" are engaged in the business of manufacturing and
selling shirts.[1] Respondent Sio is part owner and general manager of a
manufacturing corporation doing business under the trade name "Universal
Toy Master Manufacturing."[2]
Petitioners and respondent Sio entered into a contract whereby the latter
would manufacture for the petitioners 20,000 pieces of vinyl frogs and 20,000
pieces of vinyl mooseheads at P7.00 per piece in accordance with the sample
approved by the petitioners. These frogs and mooseheads were to be attached
to the shirts petitioners would manufacture and sell.[3]
Respondent Sio delivered in several installments the 40,000 pieces of
frogs and mooseheads. The last delivery was made on September 28,
1988. Petitioner fully paid the agreed price.[4] Subsequently, petitioners
returned to respondent 29,772 pieces of frogs and mooseheads for failing to
comply with the approved sample.[5] The return was made on different dates:
the initial one on December 12, 1988 consisting of 1,720 pieces,[6] the second
on January 11, 1989,[7] and the last on January 17, 1989.[8]
Petitioners then demanded from the respondent a refund of the purchase
price of the returned goods in the amount of P208,404.00. As respondent Sio
refused to pay,[9] petitioners filed on July 24, 1989 an action for collection of
a sum of money in the Regional Trial Court of Manila, Branch 38.
The trial court ruled in favor of the petitioners, viz:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs

Vicente and Inocencia Dino and against defendant Toy Master
Manufacturing, Inc. ordering the latter to pay the former:

1. The amount of Two Hundred Eight Thousand Four Hundred Four

(P208,404.00) Pesos with legal interest thereon from July 5, 1989, until fully
paid; and

2. The amount of Twenty Thousand (P20,000.00) Pesos as attorney's fees

and the costs of this suit.
The counterclaim on the other hand is hereby dismissed for lack of
merit."[10]

Respondent Sio sought recourse in the Court of Appeals. In its April 30,
1993 decision, the appellate court affirmed the trial court
decision. Respondent then filed a Motion for Reconsideration and a
Supplemental Motion for Reconsideration alleging therein that the petitioners'
action for collection of sum of money based on a breach of warranty had
already prescribed. On January 24, 1994, the respondent court reversed its
decision and dismissed petitioners' Complaint for having been filed beyond
the prescriptive period. The amended decision read in part, viz:

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

motion to dismiss or in an appropriate pleading (answer, amended or
supplemental answer) and an amendment would no longer be feasible, still
prescription, if apparent on the face of the complaint may be favorably
considered (Spouses Matias B. Aznar, III, et al. vs. Hon. Juanito A. Bernad,
etc., supra, G.R. 81190, May 9, 1988). The rule in Gicano vs. Gegato
(supra) was reiterated in Severo v. Court of Appeals, (G.R. No. 84051, May
19, 1989).

WHEREFORE the Motion For Reconsideration is granted. The judgment of

this Court is set aside and judgment is hereby rendered REVERSING the
judgment of the trial court and dismissing plaintiff's complaint."[11]

Hence, this petition with the following assignment of errors:

I.

The respondent Court of Appeals seriously erred in dismissing the

complaint of the Petitioners on the ground that the action had
prescribed.
II.

The respondent Court of Appeals seriously erred in holding that the

defense of prescription would still be considered despite the fact that it
was not raised in the answer, if apparent on the face of the complaint.

We first determine the nature of the action filed in the trial court to resolve
the issue of prescription. Petitioners claim that the Complaint they filed in the
trial court on July 24, 1989 was one for the collection of a sum of
money. Respondent contends that it was an action for breach of warranty as
the sum of money petitioners sought to collect was actually a refund of the
purchase price they paid for the alleged defective goods they bought from the
respondent.
 We uphold the respondent's contention.
The following provisions of the New Civil Code are apropos:

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

"Art. 1713. By the contract for a piece of work the contractor binds himself
to execute a piece of work for the employer, in consideration of a certain
price or compensation. The contractor may either employ only his labor or
skill, or also furnish the material."

As this Court ruled in Engineering & Machinery Corporation v. Court

of Appeals, et al.,[12] "a contract for a piece of work, labor and materials may
be distinguished from a contract of sale by the inquiry as to whether the thing
transferred is one not in existence and which would never have existed but for
the order of the person desiring it. In such case, the contract is one for a piece
of work, not a sale. On the other hand, if the thing subject of the contract
would have existed and been the subject of a sale to some other person even
if the order had not been given then the contract is one of sale."[13] The contract
between the petitioners and respondent stipulated that respondent would
manufacture upon order of the petitioners 20,000 pieces of vinyl frogs and
20,000 pieces of vinyl mooseheads according to the samples specified and
approved by the petitioners. Respondent Sio did not ordinarily manufacture
these products, but only upon order of the petitioners and at the price agreed
upon.[14] Clearly, the contract executed by and between the petitioners and the
respondent was a contract for a piece of work. At any rate, whether the
agreement between the parties was one of a contract of sale or a piece of work,
the provisions on warranty of title against hidden defects in a contract of sale
apply to the case at bar, viz:

"Art. 1714. If the contractor agrees to produce the work from material
furnished by him, he shall deliver the thing produced to the employer and
transfer dominion over the thing. This contract shall be governed by the
following articles as well as by the pertinent provisions on warranty of title
and against hidden defects and the payment of price in a contract of sale."

"Art. 1561. The vendor shall be responsible for warranty against the hidden
defects which the thing sold may have, should they render it unfit for the use
for which it is intended, or should they diminish its fitness for such use to
such an extent that, had the vendee been aware thereof, he would not have
acquired it or would have given a lower price for it; but said vendor shall not
be answerable for patent defects or those which may be visible, or for those
which are not visible if the vendee is an expert who, by reason of his trade
or profession, should have known them."

Petitioners aver that they discovered the defects in respondent's products

when customers in their (petitioners') shirt business came back to them
complaining that the frog and moosehead figures attached to the shirts they
bought were torn. Petitioners allege that they did not readily see these hidden
defects upon their acceptance. A hidden defect is one which is unknown or
could not have been known to the vendee.[15] Petitioners then returned to the
respondent 29,772 defective pieces of vinyl products and demanded a refund
of their purchase price in the amount of P208,404.00. Having failed to collect
this amount, they filed an action for collection of a sum of money.
Article 1567 provides for the remedies available to the vendee in case of
hidden defects, viz:

"Art. 1567. In the cases of Articles 1561, 1562, 1564, 1565 and 1566, the
vendee may elect between withdrawing from the contract and demanding a
proportionate reduction of the price, with damages in either case."

By returning the 29,772 pieces of vinyl products to respondent and asking

for a return of their purchase price, petitioners were in effect "withdrawing
from the contract" as provided in Art. 1567. The prescriptive period for this
kind of action is provided in Art. 1571 of the New Civil Code, viz:

"Art. 1571. Actions arising from the provisions of the preceding ten articles
shall be barred after six months from the delivery of the thing sold."
(Emphasis supplied)

There is no dispute that respondent made the last delivery of the vinyl
products to petitioners on September 28, 1988. It is also settled that the action
to recover the purchase price of the goods petitioners returned to the
respondent was filed on July 24, 1989,[16] more than nine months from the date
of last delivery. Petitioners having filed the action three months after the six-
month period for filing actions for breach of warranty against hidden defects
stated in Art. 1571,[17] the appellate court dismissed the action.
Petitioners fault the ruling on the ground that it was too late in the day for
respondent to raise the defense of prescription. The law then applicable to the
case at bar, Rule 9, Sec. 2 of the Rules of Court, provides:

"Defenses and objections not pleaded either in a motion to dismiss or in

the answer are deemed waived; except the failure to state a cause of
action . . . "
Thus, they claim that since the respondent failed to raise the defense of
prescription in a motion to dismiss or in its answer, it is deemed waived and
cannot be raised for the first time on appeal in a motion for reconsideration of
the appellate court's decision.
As a rule, the defense of prescription cannot be raised for the first time on
appeal. Thus, we held in Ramos v. Osorio,[18] viz:

"It is settled law in this jurisdiction that the defense of prescription is

waivable, and that if it was not raised as a defense in the trial court, it cannot
be considered on appeal, the general rule being that the appellate court is not
authorized to consider and resolve any question not properly raised in the
lower court (Subido vs. Lacson, 55 O.G. 8281, 8285; Moran, Comments on
the Rules of Court, Vol. I, p. 784, 1947 Edition)."

However, this is not a hard and fast rule. In Gicano v. Gegato,[19] we held:

". . .(T)rial courts have authority and discretion to dimiss an action on the
ground of prescription when the parties' pleadings or other facts on record
show it to be indeed time-barred; (Francisco v. Robles, Feb, 15, 1954; Sison
v. McQuaid, 50 O.G. 97; Bambao v. Lednicky, Jan. 28, 1961; Cordova v.
Cordova, Jan. 14, 1958; Convets, Inc. v. NDC, Feb. 28, 1958; 32 SCRA
529; Sinaon v. Sorongan, 136 SCRA 408); and it may do so on the basis of a
motion to dismiss (Sec. 1,f, Rule 16, Rules of Court), or an answer which
sets up such ground as an affirmative defense (Sec. 5, Rule 16), or even if
the ground is alleged after judgment on the merits, as in a motion for
reconsideration (Ferrer v. Ericta, 84 SCRA 705); or even if the defense
has not been asserted at all, as where no statement thereof is found in
the pleadings (Garcia v. Mathis, 100 SCRA 250; PNB v. Pacific
Commission House, 27 SCRA 766; Chua Lamco v. Dioso, et al., 97 Phil.
821); or where a defendant has been declared in default (PNB v. Perez, 16
SCRA 270). What is essential only, to repeat, is that the facts
demonstrating the lapse of the prescriptive period be otherwise
sufficiently and satisfactorily apparent on the record; either in the
averments of the plaintiff's complaint, or otherwise established by the
evidence." (emphasis supplied)

In Aldovino, et al. v. Alunan, et al.,[20] the Court en banc reiterated

the Garcia v. Mathis doctrine cited in the Gicano case that when the
plaintiff's own complaint shows clearly that the action has prescribed, the
action may be dismissed even if the defense of prescription was not invoked
by the defendant.
It is apparent in the records that respondent made the last delivery of vinyl
products to the petitioners on September 28, 1988. Petitioners admit this in
their Memorandum submitted to the trial court and reiterate it in their Petition
for Review.[21] It is also apparent in the Complaint that petitioners instituted
their action on July 24, 1989. The issue for resolution is whether or not the
respondent Court of Appeals could dismiss the petitioners' action if the
defense of prescription was raised for the first time on appeal but is apparent
in the records.
Following the Gicano doctrine that allows dismissal of an action on the
ground of prescription even after judgment on the merits, or even if the
defense was not raised at all so long as the relevant dates are clear on the
record, we rule that the action filed by the petitioners has prescribed. The
dates of delivery and institution of the action are undisputed. There are no
new issues of fact arising in connection with the question of prescription, thus
carving out the case at bar as an exception from the general rule that
prescription if not impleaded in the answer is deemed waived.[22]
Even if the defense of prescription was raised for the first time on appeal
in respondent's Supplemental Motion for Reconsideration of the appellate
court's decision, this does not militate against the due process right of the
petitioners. On appeal, there was no new issue of fact that arose in connection
with the question of prescription, thus it cannot be said that petitioners were
not given the opportunity to present evidence in the trial court to meet a
factual issue. Equally important, petitioners had the opportunity to oppose the
defense of prescription in their Opposition to the Supplemental Motion for
Reconsideration filed in the appellate court and in their Petition for Review
in this Court.
This Court's application of the Osorio and Gicano doctrines to the case at
bar is confirmed and now enshrined in Rule 9, Sec. 1 of the 1997 Rules of
Civil Procedure, viz:

"Section 1. Defense and objections not pleaded. - Defenses and objections

not pleaded whether in a motion to dismiss or in the answer are deemed
waived.However, when it appears from the pleadings that the court has no
jurisdiction over the subject matter, that there is another action pending
between the same parties for the same cause, or that the action is barred by a
prior judgment or by statute of limitations, the court shall dismiss the
claim." (Emphasis supplied)

WHEREFORE, the petition is DENIED and the impugned decision of

the Court of Appeals dated January 24, 1994 is AFFIRMED. No costs.
SO ORDERED.
 [G.R. No. 115349. April 18, 1997]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE

COURT OF APPEALS, THE COURT OF TAX APPEALS and
ATENEO DE MANILA UNIVERSITY, respondents.

DECISION
PANGANIBAN, J.:

In conducting researches and studies of social organizations and

cultural values thru its Institute of Philippine Culture, is the Ateneo de
Manila University performing the work of an independent contractor
and thus taxable within the purview of then Section 205 of the National
Internal Revenue Code levying a three percent contractors tax? This
question is answered by the Court in the negative as it resolves this
petition assailing the Decision of the Respondent Court of Appeals in
[1] [2]

CA-G.R. SP No. 31790 promulgated on April 27, 1994 affirming that of

the Court of Tax Appeals. [3]
 The Antecedent Facts

The antecedents as found by the Court of Appeals are reproduced

hereinbelow, the same being largely undisputed by the parties.
Private respondent is a non-stock, non-profit educational institution
with auxiliary units and branches all over the Philippines. One such
auxiliary unit is the Institute of Philippine Culture (IPC), which has
no legal personality separate and distinct from that of private
respondent. The IPC is a Philippine unit engaged in social science
studies of Philippine society and culture. Occasionally, it accepts
sponsorships for its research activities from international
organizations, private foundations and government agencies.
On July 8, 1983, private respondent received from petitioner
Commissioner of Internal Revenue a demand letter dated June 3,
1983, assessing private respondent the sum of P174,043.97 for
alleged deficiency contractors tax, and an assessment dated June 27,
1983 in the sum of P1,141,837 for alleged deficiency income tax,
both for the fiscal year ended March 31, 1978. Denying said tax
liabilities, private respondent sent petitioner a letter-protest and
subsequently filed with the latter a memorandum contesting the
validity of the assessments.
On March 17, 1988, petitioner rendered a letter-decision canceling
the assessment for deficiency income tax but modifying the
assessment for deficiency contractors tax by increasing the amount
due to P193,475.55. Unsatisfied, private respondent requested for a
reconsideration or reinvestigation of the modified assessment. At the
same time, it filed in the respondent court a petition for review of the
said letter-decision of the petitioner. While the petition was pending
before the respondent court, petitioner issued a final decision dated
August 3, 1988 reducing the assessment for deficiency contractors
tax fromP193,475.55 to P46,516.41, exclusive of surcharge and
interest.
On July 12, 1993, the respondent court rendered the questioned
decision which dispositively reads:
WHEREFORE, in view of the foregoing, respondents
decision is SET ASIDE. The deficiency contractors tax
assessment in the amount ofP46,516.41 exclusive of
surcharge and interest for the fiscal year ended March 31,
1978 is hereby CANCELED. No pronouncement as to cost.
SO ORDERED.
Not in accord with said decision, petitioner has come to this
Court via the present petition for review raising the following issues:
1)WHETHER OR NOT PRIVATE RESPONDENT
FALLS UNDER THE PURVIEW OF
INDEPENDENT CONTRACTOR PURSUANT TO
SECTION 205 OF THE TAX CODE; and
2) WHETHER OR NOT PRIVATE RESPONDENT IS
SUBJECT TO 3% CONTRACTORS TAX UNDER
SECTION 205 OF THE TAX CODE.
The pertinent portions of Section 205 of the National Internal
Revenue Code, as amended, provide:
Sec. 205. Contractor, proprietors or operators of dockyards,
and others. - A contractors tax of three per centum of the
gross receipts is hereby imposed on the following:
xxxxxxxxx

(16) Business agents and other independent contractors except

persons, associations and corporations under contract for
embroidery and apparel for export, as well as their agents and
contractors and except gross receipts of or from a pioneer industry
registered with the Board of Investments under Republic Act No.
5186:

xxxxxxxxx

The term independent contractors include persons (juridical or

natural) not enumerated above (but not including individuals subject
to the occupation tax under Section 12 of the Local Tax Code)
whose activity consists essentially of the sale of all kinds of services
for a fee regardless of whether or not the performance of the service
calls for the exercise or use of the physical or mental faculties of
such contractors or their employees.

xxxxxxxxx
Petitioner contends that the respondent court erred in holding that
private respondent is not an independent contractor within the
purview of Section 205 of the Tax Code. To petitioner, the term
independent contractor, as defined by the Code, encompasses all
kinds of services rendered for a fee and that the only exceptions are
the following:
a. Persons, association and corporations under contract for
embroidery and apparel for export and gross receipts of or
 from pioneer industry registered with the Board of
Investment under R.A. No. 5186;
b. Individuals occupation tax under Section 12 of the Local
Tax Code (under the old Section 182 [b] of the Tax Code);
and
c. Regional or area headquarters established in the
Philippines by multinational corporations, including their
alien executives, and which headquarters do not earn or
derive income from the Philippines and which act as
supervisory, communication and coordinating centers for
their affiliates, subsidiaries or branches in the Asia Pacific
Region (Section 205 of the Tax Code).
Petitioner thus submits that since private respondent falls under the
definition of an independent contractor and is not among the
aforementioned exceptions, private respondent is therefore subject to
the 3% contractors tax imposed under the same Code. [4]

The Court of Appeals disagreed with the Petitioner Commissioner

of Internal Revenue and affirmed the assailed decision of the Court of
Tax Appeals. Unfazed, petitioner now asks us to reverse the CA
through this petition for review.

The Issues

Petitioner submits before us the following issues:

1) Whether or not private respondent falls under the purview of
independent contractor pursuant to Section 205 of the Tax
Code
2) Whether or not private respondent is subject to 3% contractors
tax under Section 205 of the Tax Code. [5]

In fine, these may be reduced to a single issue: Is Ateneo de

Manila University, through its auxiliary unit or branch -- the Institute of
Philippine Culture -- performing the work of an independent contractor
and, thus, subject to the three percent contractors tax levied by then
Section 205 of the National Internal Revenue Code?

The Courts Ruling

The petition is unmeritorious.

 Interpretation of Tax Laws

The parts of then Section 205 of the National Internal Revenue

Code germane to the case before us read:
SEC. 205. Contractors, proprietors or operators of dockyards, and
others. -- A contractors tax of three per centum of the gross receipts
is hereby imposed on the following:
xxxxxxxxx
(16) Business agents and other independent contractors,
except persons, associations and corporations under contract
for embroidery and apparel for export, as well as their
agents and contractors, and except gross receipts of or from
a pioneer industry registered with the Board of Investments
under the provisions of Republic Act No. 5186;
xxxxxxxxx
The term independent contractors include persons (juridical
or natural) not enumerated above (but not including
individuals subject to the occupation tax under Section 12 of
the Local Tax Code) whose activity consists essentially of
the sale of all kinds of services for a fee regardless of
whether or not the performance of the service calls for the
exercise or use of the physical or mental faculties of such
contractors or their employees.
The term independent contractor shall not include regional
or area headquarters established in the Philippines by
multinational corporations, including their alien executives,
and which headquarters do not earn or derive income from
the Philippines and which act as supervisory,
communications and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific Region.
The term gross receipts means all amounts received by the
prime or principal contractor as the total contract price,
undiminished by amount paid to the subcontractor, shall be
excluded from the taxable gross receipts of the
subcontractor.
Petitioner Commissioner of Internal Revenue contends that Private
Respondent Ateneo de Manila University falls within the definition of
an independent contractor and is not one of those mentioned as
excepted; hence, it is properly a subject of the three percent
contractors tax levied by the foregoing provision of law. Petitioner
[6]
states that the term independent contractor is not specifically defined
so as to delimit the scope thereof, so much so that any person who x
x x renders physical and mental service for a fee, is now indubitably
considered an independent contractor liable to 3% contractors
tax. according to petitioner, Ateneo has the burden of proof to show
[7]

its exemption from the coverage of the law.

We disagree. Petitioner Commissioner of Internal Revenue erred
in applying the principles of tax exemption without first applying the
well-settled doctrine of strict interpretation in the imposition of taxes. It
is obviously both illogical and impractical to determine who are
exempted without first determining who are covered by the aforesaid
provision. The Commissioner should have determined first if private
respondent was covered by Section 205, applying the rule of strict
interpretation of laws imposing taxes and other burdens on the
populace, before asking Ateneo to prove its exemption therefrom. The
Court takes this occasion to reiterate the hornbook doctrine in the
interpretation of tax laws that (a) statute will not be construed as
imposing a tax unless it does so clearly, expressly,
and unambiguously. x x x (A) tax cannot be imposed without clear and
express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with
peculiar strictness to tax laws and the provisions of a taxing act are not
to be extended by implication. Parenthetically, in answering the
[8]

question of who is subject to tax statutes, it is basic that in case of

doubt, such statutes are to be construed most strongly against the
government and in favor of the subjects or citizens because burdens
are not to be imposed nor presumed to be imposed beyond what
statutes expressly and clearly import. [9]

To fall under its coverage, Section 205 of the National Internal

Revenue Code requires that the independent contractor be engaged
in the business of selling its services. Hence, to impose the three
percent contractors tax on Ateneos Institute of Philippine Culture, it
should be sufficiently proven that the private respondent is indeed
selling its services for a fee in pursuit of an independent business. And
it is only after private respondent has been found clearly to be subject
to the provisions of Sec. 205 that the question of exemption therefrom
would arise. Only after such coverage is shown does the rule of
construction -- that tax exemptions are to be strictly construed against
the taxpayer -- come into play, contrary to petitioners position. This is
the main line of reasoning of the Court of Tax Appeals in its
decision, which was affirmed by the CA.
[10]

The Ateneo de Manila University Did Not Contract

 for the Sale of the Services of its Institute of Philippine Culture

After reviewing the records of this case, we find no evidence that

Ateneos Institute of Philippine Culture ever sold its services for a fee
to anyone or was ever engaged in a business apart from and
independently of the academic purposes of the university.
Stressing that it is not the Ateneo de Manila University per se which
is being taxed, Petitioner Commissioner of Internal Revenue contends
that the tax is due on its activity of conducting researches for a
fee. The tax is due on the gross receipts made in favor of IPC pursuant
to the contracts the latter entered to conduct researches for the benefit
primarily of its clients. The tax is imposed on the exercise of a taxable
activity. x x x [T]he sale of services of private respondent is made
under a contract and the various contracts entered into between
private respondent and its clients are almost of the same terms,
showing, among others, the compensation and terms of
payment. (Underscoring supplied.)
[11]

In theory, the Commissioner of Internal Revenue may be

correct. However, the records do not show that Ateneos IPC in fact
contracted to sell its research services for a fee. Clearly then, as found
by the Court of Appeals and the Court of Tax Appeals, petitioners
theory is inapplicable to the established factual milieu obtaining in the
instant case.
In the first place, the petitioner has presented no evidence to prove
its bare contention that, indeed, contracts for sale of services were
ever entered into by the private respondent. As appropriately pointed
out by the latter:
An examination of the Commissioners Written Formal Offer of
Evidence in the Court of Tax Appeals shows that only the following
documentary evidence was presented:
Exhibit 1 BIR letter of authority no. 331844
2 Examiners Field Audit Report
3 Adjustments to Sales/Receipts
4 Letter-decision of BIR Commissioner
Bienvenido A. Tan Jr.

None of the foregoing evidence even comes close to purport to be contracts

between private respondent and third parties.
[12]

Moreover, the Court of Tax Appeals accurately and correctly

declared that the funds received by the Ateneo de Manila University
are technically not a fee. They may however fall as gifts or donations
which are tax-exempt as shown by private respondents compliance
with the requirement of Section 123 of the National Internal Revenue
Code providing for the exemption of such gifts to an educational
institution.
[13]

Respondent Court of Appeals elucidated on the ruling of the Court

of Tax Appeals:
To our mind, private respondent hardly fits into the definition of an
independent contractor.
For one, the established facts show that IPC, as a unit of the private
respondent, is not engaged in business. Undisputedly, private
respondent is mandated by law to undertake research activities to
maintain its university status. In fact, the research activities being
carried out by the IPC is focused not on business or profit but on
social sciences studies of Philippine society and culture. Since it can
only finance a limited number of IPCs research projects, private
respondent occasionally accepts sponsorship for unfunded IPC
research projects from international organizations, private
foundations and governmental agencies. However, such
sponsorships are subject to private respondents terms and conditions,
among which are, that the research is confined to topics consistent
with the private respondents academic agenda; that no proprietary or
commercial purpose research is done; and that private respondent
retains not only the absolute right to publish but also the ownership
of the results of the research conducted by the IPC. Quite clearly, the
aforementioned terms and conditions belie the allegation that private
respondent is a contractor or is engaged in business.
For another, it bears stressing that private respondent is a non-stock,
non-profit educational corporation. The fact that it accepted
sponsorship for IPCs unfunded projects is merely incidental. For, the
main function of the IPC is to undertake research projects under the
academic agenda of the private respondent. Moreover, the records do
not show that in accepting sponsorship of research work, IPC
realized profits from such work. On the contrary, the evidence shows
that for about 30 years, IPC had continuously operated at a loss,
which means that sponsored funds are less than actual expenses for
its research projects. That IPC has been operating at a loss loudly
bespeaks of the fact that education and not profit is the motive for
undertaking the research projects.
Then, too, granting arguendo that IPC made profits from the
sponsored research projects, the fact still remains that there is no
proof that part of such earnings or profits was ever distributed as
dividends to any stockholder, as in fact none was so distributed
 because they accrued to the benefit of the private respondent which
is a non-profit educational institution. [14]

Therefore, it is clear that the funds received by Ateneos Institute of

Philippine Culture are not given in the concept of a fee or price in
exchange for the performance of a service or delivery of an
object. Rather, the amounts are in the nature of an endowment or
donation given by IPCs benefactors solely for the purpose of
sponsoring or funding the research with no strings attached. As found
by the two courts below, such sponsorships are subject to IPCs terms
and conditions. No proprietary or commercial research is done, and
IPC retains the ownership of the results of the research, including the
absolute right to publish the same. The copyrights over the results of
the research are owned by Ateneo and, consequently, no portion
thereof may be reproduced without its permission. The amounts [15]

given to IPC, therefore, may not be deemed, it bears stressing, as fees

or gross receipts that can be subjected to the three percent contractors
tax.
It is also well to stress that the questioned transactions of Ateneos
Institute of Philippine Culture cannot be deemed either as a contract
of sale or a contract for a piece of work. By the contract of sale, one of
the contracting parties obligates himself to transfer the ownership of
and to deliver a determinate thing, and the other to pay therefor a price
certain in money or its equivalent. By its very nature, a contract of
[16]

sale requires a transfer of ownership. Thus, Article 1458 of the Civil

Code expressly makes the obligation to transfer ownership as an
essential element of the contract of sale, following modern codes, such
as the German and the Swiss. Even in the absence of this express
requirement, however, most writers, including Sanchez Roman,
Gayoso, Valverde, Ruggiero, Colin and Capitant, have considered
such transfer of ownership as the primary purpose of sale. Perez and
Alguer follow the same view, stating that the delivery of the thing does
not mean a mere physical transfer, but is a means of transmitting
ownership. Transfer of title or an agreement to transfer it for a price
paid or promised to be paid is the essence of sale. In the case of a
[17]

contract for a piece of work, the contractor binds himself to execute a

piece of work for the employer, in consideration of a certain price or
compensation. x x x If the contractor agrees to produce the work from
materials furnished by him, he shall deliver the thing produced to the
employer and transfer dominion over the thing. x x x. Ineludably, [18]

whether the contract be one of sale or one for a piece of work, a

transfer of ownership is involved and a party necessarily walks away
with an object. In the case at bench, it is clear from the evidence on
[19]

record that there was no sale either of objects or services because, as

adverted to earlier, there was no transfer of ownership over the
research data obtained or the results of research projects undertaken
by the Institute of Philippine Culture.
Furthermore, it is clear that the research activity of the Institute of
Philippine Culture is done in pursuance of maintaining Ateneos
university status and not in the course of an independent business of
selling such research with profit in mind. This is clear from a reading
of the regulations governing universities:
31.In addition to the legal requisites an institution must meet, among
others, the following requirements before an application for
university status shall be considered:
xxxxxxxxx
(e) The institution must undertake research and operate with
a competent qualified staff at least three graduate
departments in accordance with the rules and standards for
graduate education. One of the departments shall be science
and technology. The competence of the staff shall be judged
by their effective teaching, scholarly publications and
research activities published in its school journal as well as
their leadership activities in the profession.
(f) The institution must show evidence of adequate and
stable financial resources and support, a reasonable portion
of which should be devoted to institutional development and
research. (underscoring supplied)
xxxxxxxxx
32. University status may be withdrawn, after due notice and
hearing, for failure to maintain satisfactorily the standards and
requirements therefor. [20]

Petitioners contention that it is the Institute of Philippine Culture

that is being taxed and not the Ateneo is patently erroneous because
the former is not an independent juridical entity that is separate and
distinct from the latter.

Factual Findings and Conclusions of the Court of Tax Appeals

Affirmed by the Court of Appeals Generally Conclusive

In addition, we reiterate that the Court of Tax Appeals is a highly

specialized body specifically created for the purpose of reviewing tax
cases. Through its expertise, it is undeniably competent to determine
the issue of whether Ateneo de Manila University may be deemed a
[21]

subject of the three percent contractors tax through the evidence

presented before it. Consequently, as a matter of principle, this Court
will not set aside the conclusion reached by x x x the Court of Tax
Appeals which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless there has
been an abuse or improvident exercise of authority x x x. This point [22]

becomes more evident in the case before us where the findings and
conclusions of both the Court of Tax Appeals and the Court of Appeals
appear untainted by any abuse of authority, much less grave abuse of
discretion. Thus, we find the decision of the latter affirming that of the
former free from any palpable error.

Public Service, Not Profit, is the Motive

The records show that the Institute of Philippine Culture conducted

its research activities at a huge deficit of P1,624,014.00 as shown in
its statements of fund and disbursements for the period 1972 to
1985. In fact, it was Ateneo de Manila University itself that had funded
[23]

the research projects of the institute, and it was only when Ateneo
could no longer produce the needed funds that the institute sought
funding from outside. The testimony of Ateneos Director for
Accounting Services, Ms. Leonor Wijangco, provides significant insight
on the academic and nonprofit nature of the institutes research
activities done in furtherance of the universitys purposes, as follows:
Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of
the Institute of Philippine Culture) that as far as grants from sponsored
research it is possible that the grant sometimes is less than the actual
cost. Will you please tell us in this case when the actual cost is a lot less
than the grant who shoulders the additional cost?
A The University.
Q Now, why is this done by the University?
A Because of our faculty development program as a university, because a
university has to have its own research institute.[24]
So, why is it that Ateneo continues to operate and conduct
researches through its Institute of Philippine Culture when it
undisputedly loses not an insignificant amount in the process? The
plain and simple answer is that private respondent is not a contractor
selling its services for a fee but an academic institution conducting
these researches pursuant to its commitments to education and,
ultimately, to public service. For the institute to have tenaciously
continued operating for so long despite its accumulation of significant
losses, we can only agree with both the Court of Tax Appeals and the
Court of Appeals that education and not profit is [IPCs] motive for
undertaking the research projects. [25]

WHEREFORE, premises considered, the petition is DENIED and

the assailed Decision of the Court of Appeals is hereby AFFIRMED in
full.
SO ORDERED.

G.R. No. L-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.

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

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

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

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

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

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

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

Of the three causes of action alleged by the plaintiff in his complaint, only two of them
constitute the subject matter of this appeal and both substantially amount to the averment
that the defendant violated the following obligations: not to sell the beds at higher prices
than those of the invoices; to have an open establishment in Iloilo; itself to conduct the
agency; to keep the beds on public exhibition, and to pay for the advertisement expenses
for the same; and to order the beds by the dozen and in no other manner. As may be seen,
with the exception of the obligation on the part of the defendant to order the beds by the
dozen and in no other manner, none of the obligations imputed to the defendant in the two
causes of action are expressly set forth in the contract. But the plaintiff alleged that the
defendant was his agent for the sale of his beds in Iloilo, and that said obligations are
implied in a contract of commercial agency. The whole question, therefore, reduced itself
to a determination as to whether the defendant, by reason of the contract hereinbefore
transcribed, was a purchaser or an agent of the plaintiff for the sale of his beds.

In order to classify a contract, due regard must be given to its essential clauses. In the
contract in question, what was essential, as constituting its cause and subject matter, is
that the plaintiff was to furnish the defendant with the beds which the latter might order, at
the price stipulated, and that the defendant was to pay the price in the manner stipulated.
The price agreed upon was the one determined by the plaintiff for the sale of these beds
in Manila, with a discount of from 20 to 25 per cent, according to their class. Payment was
to be made at the end of sixty days, or before, at the plaintiff's request, or in cash, if the
defendant so preferred, and in these last two cases an additional discount was to be
allowed for prompt payment. These are precisely the essential features of a contract of
purchase and sale. There was the obligation on the part of the plaintiff to supply the beds,
and, on the part of the defendant, to pay their price. These features exclude the legal
conception of an agency or order to sell whereby the mandatory or agent received the thing
to sell it, and does not pay its price, but delivers to the principal the price he obtains from
the sale of the thing to a third person, and if he does not succeed in selling it, he returns it.
By virtue of the contract between the plaintiff and the defendant, the latter, on receiving the
beds, was necessarily obliged to pay their price within the term fixed, without any other
consideration and regardless as to whether he had or had not sold the beds.

It would be enough to hold, as we do, that the contract by and between the defendant and
the plaintiff is one of purchase and sale, in order to show that it was not one made on the
basis of a commission on sales, as the plaintiff claims it was, for these contracts are
incompatible with each other. But, besides, examining the clauses of this contract, none of
them is found that substantially supports the plaintiff's contention. Not a single one of these
clauses necessarily conveys the idea of an agency. The words commission on sales used
in clause (A) of article 1 mean nothing else, as stated in the contract itself, than a mere
discount on the invoice price. The word agency, also used in articles 2 and 3, only
expresses that the defendant was the only one that could sell the plaintiff's beds in the
Visayan Islands. With regard to the remaining clauses, the least that can be said is that
they are not incompatible with the contract of purchase and sale.

The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-president of the
defendant corporation and who established and managed the latter's business in Iloilo. It
appears that this witness, prior to the time of his testimony, had serious trouble with the
defendant, had maintained a civil suit against it, and had even accused one of its partners,
Guillermo Parsons, of falsification. He testified that it was he who drafted the contract
Exhibit A, and, when questioned as to what was his purpose in contracting with the plaintiff,
replied that it was to be an agent for his beds and to collect a commission on sales.
However, according to the defendant's evidence, it was Mariano Lopez Santos, a director
of the corporation, who prepared Exhibit A. But, even supposing that Ernesto Vidal has
stated the truth, his statement as to what was his idea in contracting with the plaintiff is of
no importance, inasmuch as the agreements contained in Exhibit A which he claims to
have drafted, constitute, as we have said, a contract of purchase and sale, and not one of
commercial agency. This only means that Ernesto Vidal was mistaken in his classification
of the contract. But it must be understood that a contract is what the law defines it to be,
and not what it is called by the contracting parties.

The plaintiff also endeavored to prove that the defendant had returned beds that it could
not sell; that, without previous notice, it forwarded to the defendant the beds that it wanted;
and that the defendant received its commission for the beds sold by the plaintiff directly to
persons in Iloilo. But all this, at the most only shows that, on the part of both of them, there
was mutual tolerance in the performance of the contract in disregard of its terms; and it
gives no right to have the contract considered, not as the parties stipulated it, but as they
performed it. Only the acts of the contracting parties, subsequent to, and in connection
with, the execution of the contract, must be considered for the purpose of interpreting the
contract, when such interpretation is necessary, but not when, as in the instant case, its
essential agreements are clearly set forth and plainly show that the contract belongs to a
certain kind and not to another. Furthermore, the return made was of certain brass beds,
and was not effected in exchange for the price paid for them, but was for other beds of
another kind; and for the letter Exhibit L-1, requested the plaintiff's prior consent with
respect to said beds, which shows that it was not considered that the defendant had a right,
by virtue of the contract, to make this return. As regards the shipment of beds without
previous notice, it is insinuated in the record that these brass beds were precisely the ones
so shipped, and that, for this very reason, the plaintiff agreed to their return. And with
respect to the so-called commissions, we have said that they merely constituted a discount
on the invoice price, and the reason for applying this benefit to the beds sold directly by
the plaintiff to persons in Iloilo was because, as the defendant obligated itself in the contract
to incur the expenses of advertisement of the plaintiff's beds, such sales were to be
considered as a result of that advertisement.

In respect to the defendant's obligation to order by the dozen, the only one expressly
imposed by the contract, the effect of its breach would only entitle the plaintiff to disregard
the orders which the defendant might place under other conditions; but if the plaintiff
consents to fill them, he waives his right and cannot complain for having acted thus at his
own free will.

For the foregoing reasons, we are of opinion that the contract by and between the plaintiff
and the defendant was one of purchase and sale, and that the obligations the breach of
which is alleged as a cause of action are not imposed upon the defendant, either by
agreement or by law.

The judgment appealed from is affirmed, with costs against the appellant. So ordered.

G.R. No. L-47538 June 20, 1941

GONZALO PUYAT & SONS, INC., petitioner,

vs.
ARCO AMUSEMENT COMPANY (formerly known as Teatro Arco), respondent.

Feria & Lao for petitioner.

J. W. Ferrier and Daniel Me. Gomez for respondent.

LAUREL, J.:

This is a petition for the issuance of a writ of certiorari to the Court of Appeals for the
purpose of reviewing its Amusement Company (formerly known as Teatro Arco), plaintiff-
appellant, vs. Gonzalo Puyat and Sons. Inc., defendant-appellee."

It appears that the respondent herein brought an action against the herein petitioner in the
Court of First Instance of Manila to secure a reimbursement of certain amounts allegedly
overpaid by it on account of the purchase price of sound reproducing equipment and
machinery ordered by the petitioner from the Starr Piano Company of Richmond, Indiana,
U.S.A. The facts of the case as found by the trial court and confirmed by the appellate
court, which are admitted by the respondent, are as follows:

In the year 1929, the "Teatro Arco", a corporation duly organized under the laws of the
Philippine Islands, with its office in Manila, was engaged in the business of operating
cinematographs. In 1930, its name was changed to Arco Amusement Company. C. S.
Salmon was the president, while A. B. Coulette was the business manager. About the
same time, Gonzalo Puyat & Sons, Inc., another corporation doing business in the
Philippine Islands, with office in Manila, in addition to its other business, was acting as
exclusive agents in the Philippines for the Starr Piano Company of Richmond, Indiana, U.S.
A. It would seem that this last company dealt in cinematographer equipment and machinery,
and the Arco Amusement Company desiring to equipt its cinematograph with sound
reproducing devices, approached Gonzalo Puyat & Sons, Inc., thru its then president and
acting manager, Gil Puyat, and an employee named Santos. After some negotiations, it
was agreed between the parties, that is to say, Salmon and Coulette on one side,
representing the plaintiff, and Gil Puyat on the other, representing the defendant, that the
latter would, on behalf of the plaintiff, order sound reproducing equipment from the Starr
Piano Company and that the plaintiff would pay the defendant, in addition to the price of
the equipment, a 10 per cent commission, plus all expenses, such as, freight, insurance,
banking charges, cables, etc. At the expense of the plaintiff, the defendant sent a cable,
Exhibit "3", to the Starr Piano Company, inquiring about the equipment desired and making
the said company to quote its price without discount. A reply was received by Gonzalo
Puyat & Sons, Inc., with the price, evidently the list price of $1,700 f.o.b. factory Richmond,
Indiana. The defendant did not show the plaintiff the cable of inquiry nor the reply but
merely informed the plaintiff of the price of $1,700. Being agreeable to this price, the plaintiff,
by means of Exhibit "1", which is a letter signed by C. S. Salmon dated November 19, 1929,
formally authorized the order. The equipment arrived about the end of the year 1929, and
upon delivery of the same to the plaintiff and the presentation of necessary papers, the
price of $1.700, plus the 10 per cent commission agreed upon and plus all the expenses
and charges, was duly paid by the plaintiff to the defendant.

Sometime the following year, and after some negotiations between the same parties,
plaintiff and defendants, another order for sound reproducing equipment was placed by the
plaintiff with the defendant, on the same terms as the first order. This agreement or order
was confirmed by the plaintiff by its letter Exhibit "2", without date, that is to say, that the
plaintiff would pay for the equipment the amount of $1,600, which was supposed to be the
price quoted by the Starr Piano Company, plus 10 per cent commission, plus all expenses
incurred. The equipment under the second order arrived in due time, and the defendant
was duly paid the price of $1,600 with its 10 per cent commission, and $160, for all
expenses and charges. This amount of $160 does not represent actual out-of-pocket
expenses paid by the defendant, but a mere flat charge and rough estimate made by the
defendant equivalent to 10 per cent of the price of $1,600 of the equipment.

About three years later, in connection with a civil case in Vigan, filed by one Fidel Reyes
against the defendant herein Gonzalo Puyat & Sons, Inc., the officials of the Arco
Amusement Company discovered that the price quoted to them by the defendant with
regard to their two orders mentioned was not the net price but rather the list price, and that
the defendants had obtained a discount from the Starr Piano Company. Moreover, by
reading reviews and literature on prices of machinery and cinematograph equipment, said
officials of the plaintiff were convinced that the prices charged them by the defendant were
much too high including the charges for out-of-pocket expense. For these reasons, they
sought to obtain a reduction from the defendant or rather a reimbursement, and failing in
this they brought the present action.

The trial court held that the contract between the petitioner and the respondent was one of
outright purchase and sale, and absolved that petitioner from the complaint. The appellate
court, however, — by a division of four, with one justice dissenting — held that the relation
between petitioner and respondent was that of agent and principal, the petitioner acting as
agent of the respondent in the purchase of the equipment in question, and sentenced the
petitioner to pay the respondent alleged overpayments in the total sum of $1,335.52 or
P2,671.04, together with legal interest thereon from the date of the filing of the complaint
until said amount is fully paid, as well as to pay the costs of the suit in both instances. The
appellate court further argued that even if the contract between the petitioner and the
respondent was one of purchase and sale, the petitioner was guilty of fraud in concealing
the true price and hence would still be liable to reimburse the respondent for the
overpayments made by the latter.
The petitioner now claims that the following errors have been incurred by the appellate
court:

I. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, segun hechos,

entre la recurrente y la recurrida existia una relacion implicita de mandataria a mandante
en la transaccion de que se trata, en vez de la de vendedora a compradora como ha
declarado el Juzgado de Primera Instncia de Manila, presidido entonces por el hoy
Magistrado Honorable Marcelino Montemayor.

II. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, suponiendo que
dicha relacion fuerra de vendedora a compradora, la recurrente obtuvo, mediante dolo, el
consentimiento de la recurrida en cuanto al precio de $1,700 y $1,600 de las maquinarias
y equipos en cuestion, y condenar a la recurrente ha obtenido de la Starr Piano Company
of Richmond, Indiana.

We sustain the theory of the trial court that the contract between the petitioner and the
respondent was one of purchase and sale, and not one of agency, for the reasons now to
be stated.

In the first place, the contract is the law between the parties and should include all the
things they are supposed to have been agreed upon. What does not appear on the face of
the contract should be regarded merely as "dealer's" or "trader's talk", which can not bind
either party. (Nolbrook v. Conner, 56 So., 576, 11 Am. Rep., 212; Bank v. Brosscell, 120
III., 161; Bank v. Palmer, 47 III., 92; Hosser v. Copper, 8 Allen, 334; Doles v. Merrill, 173
Mass., 411.) The letters, Exhibits 1 and 2, by which the respondent accepted the prices of
$1,700 and $1,600, respectively, for the sound reproducing equipment subject of its
contract with the petitioner, are clear in their terms and admit no other interpretation that
the respondent in question at the prices indicated which are fixed and determinate. The
respondent admitted in its complaint filed with the Court of First Instance of Manila that the
petitioner agreed to sell to it the first sound reproducing equipment and machinery. The
third paragraph of the respondent's cause of action states:

3. That on or about November 19, 1929, the herein plaintiff (respondent) and defendant
(petitioner) entered into an agreement, under and by virtue of which the herein defendant
was to secure from the United States, and sell and deliver to the herein plaintiff, certain
sound reproducing equipment and machinery, for which the said defendant, under and by
virtue of said agreement, was to receive the actual cost price plus ten per cent (10%), and
was also to be reimbursed for all out of pocket expenses in connection with the purchase
and delivery of such equipment, such as costs of telegrams, freight, and similar expenses.
(Emphasis ours.)

We agree with the trial judge that "whatever unforseen events might have taken place
unfavorable to the defendant (petitioner), such as change in prices, mistake in their
quotation, loss of the goods not covered by insurance or failure of the Starr Piano Company
to properly fill the orders as per specifications, the plaintiff (respondent) might still legally
hold the defendant (petitioner) to the prices fixed of $1,700 and $1,600." This is
incompatible with the pretended relation of agency between the petitioner and the
respondent, because in agency, the agent is exempted from all liability in the discharge of
his commission provided he acts in accordance with the instructions received from his
principal (section 254, Code of Commerce), and the principal must indemnify the agent for
all damages which the latter may incur in carrying out the agency without fault or
imprudence on his part (article 1729, Civil Code).

While the latters, Exhibits 1 and 2, state that the petitioner was to receive ten per cent (10%)
commission, this does not necessarily make the petitioner an agent of the respondent, as
this provision is only an additional price which the respondent bound itself to pay, and
which stipulation is not incompatible with the contract of purchase and sale.
(See Quiroga vs. Parsons Hardware Co., 38 Phil., 501.)

In the second place, to hold the petitioner an agent of the respondent in the purchase of
equipment and machinery from the Starr Piano Company of Richmond, Indiana, is
incompatible with the admitted fact that the petitioner is the exclusive agent of the same
company in the Philippines. It is out of the ordinary for one to be the agent of both the
vendor and the purchaser. The facts and circumstances indicated do not point to anything
but plain ordinary transaction where the respondent enters into a contract of purchase and
sale with the petitioner, the latter as exclusive agent of the Starr Piano Company in the
United States.

It follows that the petitioner as vendor is not bound to reimburse the respondent as vendee
for any difference between the cost price and the sales price which represents the profit
realized by the vendor out of the transaction. This is the very essence of commerce without
which merchants or middleman would not exist.

The respondents contends that it merely agreed to pay the cost price as distinguished from
the list price, plus ten per cent (10%) commission and all out-of-pocket expenses incurred
by the petitioner. The distinction which the respondents seeks to draw between the cost
price and the list price we consider to be spacious. It is to be observed that the twenty-five
per cent (25%) discount granted by the Starr piano Company to the petitioner is available
only to the latter as the former's exclusive agent in the Philippines. The respondent could
not have secured this discount from the Starr Piano Company and neither was the
petitioner willing to waive that discount in favor of the respondent. As a matter of fact, no
reason is advanced by the respondent why the petitioner should waive the 25 per cent
discount granted it by the Starr Piano Company in exchange for the 10 percent commission
offered by the respondent. Moreover, the petitioner was not duty bound to reveal the
private arrangement it had with the Starr Piano Company relative to such discount to its
prospective customers, and the respondent was not even aware of such an arrangement.
The respondent, therefore, could not have offered to pay a 10 per cent commission to the
petitioner provided it was given the benefit of the 25 per cent discount enjoyed by the
petitioner. It is well known that local dealers acting as agents of foreign manufacturers,
aside from obtaining a discount from the home office, sometimes add to the list price when
they resell to local purchasers. It was apparently to guard against an exhorbitant additional
price that the respondent sought to limit it to 10 per cent, and the respondent is estopped
from questioning that additional price. If the respondent later on discovers itself at the short
end of a bad bargain, it alone must bear the blame, and it cannot rescind the contract,
much less compel a reimbursement of the excess price, on that ground alone. The
respondent could not secure equipment and machinery manufactured by the Starr Piano
Company except from the petitioner alone; it willingly paid the price quoted; it received the
equipment and machinery as represented; and that was the end of the matter as far as the
respondent was concerned. The fact that the petitioner obtained more or less profit than
the respondent calculated before entering into the contract or reducing the price agreed
upon between the petitioner and the respondent. Not every concealment is fraud; and short
of fraud, it were better that, within certain limits, business acumen permit of the loosening
of the sleeves and of the sharpening of the intellect of men and women in the business
world.

The writ of certiorari should be, as it is hereby, granted. The decision of the appellate court
is accordingly reversed and the petitioner is absolved from the respondent's complaint in
G. R. No. 1023, entitled "Arco Amusement Company (formerly known as Teatro Arco),
plaintiff-appellant, vs. Gonzalo Puyat & Sons, Inc., defendants-appellee," without
pronouncement regarding costs. So ordered.
G.R. No. 75198 October 18, 1988

SCHMID & OBERLY, INC., petitioner,

vs.
RJL MARTINEZ FISHING CORPORATION, respondent.

Sycip Salazar Hernandez & Gatmaitan Law Office for petitioner.

Siguion Reyna, Montecillo & Ongsiako Law Office for respondent.

CORTES, J.:

Petitioner seeks reversal of the decision and the resolution of the Court of Appeals, ordering Schmid & Oberly Inc. (hereafter
to be referred to simply as "SCHMID") to refund the purchase price paid by RJL Martinez Fishing Corporation (hereafter to be
referred to simply as "RJL MARTINEZ") to D. Nagata Co., Ltd. of Japan (hereafter to be referred to simply as NAGATA CO.")
for twelve (12) defective "Nagata"-brand generators, plus consequential damages, and attorneys fees.

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

The findings of facts by the trial court (Decision, pp. 21-28, Record on Appeal) shows: that
the plaintiff RJL Martinez Fishing Corporation is engaged in deep-sea fishing, and in the
course of its business, needed electrical generators for the operation of its business; that
the defendant sells electrical generators with the brand of "Nagata", a Japanese product;
that the supplier is the manufacturer, the D. Nagata Co. Ltd., of Japan, that the defendant
Schmid & Oberly Inc. advertised the 12 Nagata generators for sale; that the plaintiff
purchased 12 brand new Nagata generators, as advertised by herein defendant; that
through an irrevocable line of credit, the D. Nagata Co., Ltd., shipped to the plaintiff 12
electric generators, and the latter paid the amount of the purchase price; that the 12
generators were found to be factory defective; that the plaintiff informed the defendant
herein that it shall return the 12 generators as in fact three of the 12 were actually returned
to the defendant; that the plaintiff sued the defendant on the warranty; asking for rescission
of the contract; that the defendant be ordered to accept the generators and be ordered to
pay back the purchase money; and that the plaintiff asked for damages. (Record on Appeal,
pp. 27-28) [CA Decision, pp. 34; Rollo, pp. 47-48.]

On the basis thereof, the Court of Appeals affirmed the decision of the trial court ordering
petitioner to refund to private respondent the purchase price for the twelve (12) generators
and to accept delivery of the same and to pay s and attorney's fees, with a slight
modification as to the amount to be refunded. In its resolution of the motion for
reconsideration, the Court of Appeals further modified the trial courts decision as to the
award of consequential damages.

Ordinarily, the Court will not disturb the findings of fact of the Court of Appeals in petitions
to review the latter's decisions under Rule 45 of the Revised Rules of Court, the scope of
the Court's inquiry being limited to a review of the imputed errors of law [Chan v. Court of
Appeals, G.R. No. L-27488, June 30, 1970, 33 SCRA 77; Tiongco v. De la Merced, G.R.
No. L-24426, July 25, 1974, 58 SCRA 89; Corona v. Court of Appeals, G.R. No. 62482,
April 28, 1983, 121 SCRA 865; Baniqued v. Court of Appeals, G.R. No.
L-47531, January 30, 1984, 127 SCRA 596.] However, when, as in this case, it is the
petitioner's position that the appealed judgment is premised on a misapprehension of
facts, * the Court is compelled to review the Court of Appeal's factual findings [De la Cruz v. Sosing, 94 Phil. 26 (1953);
Castillo v. Court of Appeals, G.R. No. I,48290, September 29, 1983, 124 SCRA 808.]

Considering the sketchiness of the respondent court's narration of facts, whether or not the
Court of Appeals indeed misapprehended the facts could not be determined without a
thorough review of the records.

Thus, after a careful scrutiny of the records, the Court has found the appellate court's
narration of facts incomplete. It failed to include certain material facts.

The facts are actually as follows:

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

needed electric generators for some of its boats and SCHMIID sold electric generators of
different brands, negotiations between them for the acquisition thereof took place. The
parties had two separate transactions over "Nagata"-brand generators.

The first transaction was the sale of three (3) generators. In this transaction, it is not
disputed that SCHMID was the vendor of the generators. The company supplied the
generators from its stockroom; it was also SCHMID which invoiced the sale.

The second transaction, which gave rise to the present controversy, involves twelve (12)
"Nagata"-brand generators. 'These are the facts surrounding this particular transaction:

As RJL MARTINEZ was canvassing for generators, SC gave RJL MARTINEZ its Quotation
dated August 19, 1975 [Exhibit 'A"] for twelve (12) "Nagata'-brand generators with the
following specifications:

"NAGATA" Single phase AC Alternators, 110/220 V, 60 cycles, 1800 rpm, unity power
factor, rectifier type and radio suppressor,, 5KVA (5KW) $546.75 @

It was stipulated that payment would be made by confirming an irrevocable letter of credit
in favor of NAGATA CO. Furthermore, among the General Conditions of Sale appearing
on the dorsal side of the Quotation is the following:
Buyer will, upon request, promptly open irrevocable Letter of Credit in favor of seller, in the
amount stated on the face of this memorandum, specifying shipment from any Foreign port
to Manila or any safe Philippine port, permitting partial shipments and providing that in the
event the shippers are unable to ship within the specified period due to strikes, lack of
shipping space or other circumstances beyond their reasonable control, Buyer agrees to
extend the said Letter of Credit for later shipment. The Letter of Credit shall otherwise be
subject to the conditions stated in this memorandum of contract. [Emphasis supplied.]

Agreeing with the terms of the Quotation, RJL MARTINEZ opened a letter of credit in favor
of NAGATA CO. Accordingly, on November 20,1975, SCHMID transmitted to NAGATA
CO. an order [Exhibit "4"] for the twelve (12) generators to be shipped directly to RJL
MARTINEZ. NAGATA CO. thereafter sent RJL MARTINEZ the bill of lading and its own
invoice (Exhibit "B") and, in accordance with the order, shipped the generators directly to
RJL MARTINEZ. The invoice states that "one (1) case of 'NAGATA' AC Generators"
consisting of twelve sets was—bought by order and for account risk of Messrs. RJL
Martinez Fishing Corporation.

For its efforts, SCHMID received from NAGATA CO. a commission of $1,752.00 for the
sale of the twelve generators to RJL MARTINEZ. [Exhibits "9", "9-A", "9-B" and "9-C".]

All fifteen (15) generators subject of the two transactions burned out after continuous use.
RJL MARTINEZ informed SCHMID about this development. In turn, SCHMID brought the
matter to the attention of NAGATA CO. In July 1976, NAGATA CO. sent two technical
representatives who made an ocular inspection and conducted tests on some of the burned
out generators, which by then had been delivered to the premises of SCHMID.

The tests revealed that the generators were overrated. As indicated both in the quotation
and in the invoice, the capacity of a generator was supposed to be 5 KVA (kilovolt amperes).
However, it turned out that the actual capacity was only 4 KVA.

SCHMID replaced the three (3) generators subject of the first sale with generators of a
different brand.

As for the twelve (12) generators subject of the second transaction, the Japanese
technicians advised RJL MARTINEZ to ship three (3) generators to Japan, which the
company did. These three (3) generators were repaired by NAGATA CO. itself and
thereafter returned to RJL MARTINEZ; the remaining nine (9) were neither repaired nor
replaced. NAGATA CO., however, wrote SCHMID suggesting that the latter check the
generators, request for spare parts for replacement free of charge, and send to NAGATA
CO. SCHMID's warranty claim including the labor cost for repairs [Exhibit "I".] In its reply
letter, SCHMID indicated that it was not agreeable to these terms [Exhibit "10".]

As not all of the generators were replaced or repaired, RJL MARTINEZ formally demanded
that it be refunded the cost of the generators and paid damages. SCHMID in its reply
maintained that it was not the seller of the twelve (12) generators and thus refused to refund
the purchase price therefor. Hence, on February 14, 1977, RJL MARTINEZ brought suit
against SCHMID on the theory that the latter was the vendor of the twelve (12) generators
and, as such vendor, was liable under its warranty against hidden defects.

Both the trial court and the Court of Appeals upheld the contention of RJL MARTINEZ that
SCHMID was the vendor in the second transaction and was liable under its warranty.
Accordingly, the courts a quo rendered judgment in favor of RJL MARTINEZ. Hence, the
instant recourse to this Court.

In this petition for review, SCHMID seeks reversal on the following grounds:
(i) Schmid was merely the indentor in the sale [of the twelve (12) generators] between
Nagata Co., the exporter and RJL Martinez, the importer;

(ii) as mere indentor, Schmid is not liable for the seller's implied warranty against hidden
defects, Schmid not having personally assumed any such warranty.

(iii) in any event, conformably with Article 1563 of the Civil Code, there was no implied
warranty against hidden defects in the sale of these twelve (12) generators because these
were sold under their trade name "Nagata"; and

(iv) Schmid, accordingly, is not liable for the reimbursement claimed by RJL Martinez nor
for the latter's unsubstantiated claim of PI 10.33 operational losses a day nor for exemplary
damages, attorney's fees and costs. [Petition, p. 6.]

1. As may be expected, the basic issue confronting this Court is whether the second
transaction between the parties was a sale or an indent transaction. SCHMID maintains
that it was the latter; RJL MARTINEZ claims that it was a sale.

At the outset, it must be understood that a contract is what the law defines it to be,
considering its essential elements, and not what it is caged by the contracting parties
[Quiroga v. Parsons Hardware Co., 38 Phil. 501 (1918).]

The Civil Code defines a contract of sale, thus:

ART. 458. By the contract of sale one of the contracting parties obligates himself to transfer
the ownership of and to deliver a determinate thing, and the other to pay therefor a price
certain in money or its equivalent.

It has been said that the essence of the contract of sale is transfer of title or agreement to
transfer it for a price paid or promised [Commissioner of Internal Revenue v. Constantino,
G.R. No. L-25926, February 27, 1970, 31 SCRA 779, 785, citing Salisbury v. Brooks, 94
SE 117,118-19.] "If such transfer puts the transferee in the attitude or position of an owner
and makes him liable to the transferor as a debtor for the agreed price, and not merely as
an agent who must account for the proceeds of a resale, the transaction is, a sale." [Ibid.]

On the other hand, there is no statutory definition of "indent" in this jurisdiction. However,
the Rules and Regulations to Implement Presidential Decree No. 1789 (the Omnibus
Investments Code) lumps "indentors" together with "commercial brokers" and "commission
merchants" in this manner:

... A foreign firm which does business through the middlemen acting in their own names,
such asindentors, commercial brokers or commission merchants, shall not be deemed
doing business in the Philippines. But such indentors, commercial brokers or commission
merchants shall be the ones deemed to be doing business in the Philippines [Part I, Rule
I, Section 1, par. g (1).]

Therefore, an indentor is a middlemen in the same class as commercial brokers and

commission merchants. To get an Idea of what an indentor is, a look at the definition of
those in his class may prove helpful.

A broker is generally defined as one who is engaged, for others, on a commission,

negotiating contracts relative to property with the custody of which he has no concern; the
negotiator between other parties, never acting in his own name but in the name of those
who employed him; he is strictly a middleman and for some purpose the agent of both
parties. (1 9 Cyc 186; Henderson vs. The State, 50 Ind., 234; Black's Law Dictionary.) A
broker is one whose occupation it is to bring parties together to bargain, or to bargain for
them, in matters of trade, commerce or navigation. Mechem on Agency, sec. 13; Wharton
on Agency, sec. 695.) Judge Storey, in his work on Agency, defines a broker as an agent
employed to make bargains and contracts between other persons, in matters of trade,
commerce or navigation, for compensation commonly called brokerage. (Storey on Agency,
sec. 28.) [Behn Meyer and Co., Ltd. v. Nolting and Garcia, 35 Phil. 274, 279-80 (1916).]

A commission merchant is one engaged in the purchase or sale for another of personal
property which, for this purpose, is placed in his possession and at his disposal. He
maintains a relation not only with his principal and the purchasers or vendors, but also with
the property which is subject matter of the transaction. [Pacific Commercial Co. v. Yatco,
68 Phil. 398, 401 (1939).]

Thus, the chief feature of a commercial broker and a commercial merchant is that in
effecting a sale, they are merely intermediaries or middle-men, and act in a certain sense
as the agent of both parties to the transaction.

Webster defines an indent as "a purchase order for goods especially when sent from a
foreign country." [Webster's Ninth New Collegiate Dictionary 612 (1986).] It would appear
that there are three parties to an indent transaction, namely, the buyer, the indentor, and
the supplier who is usually a non-resident manufacturer residing in the country where the
goods are to be bought [Commissioner of Internal Revenue v. Cadwallader Pacific
Company, G.R. No. L-20343, September 29, 1976, 73 SCRA 59.] An indentor may
therefore be best described as one who, for compensation, acts as a middleman in bringing
about a purchase and sale of goods between a foreign supplier and a local purchaser.

Coming now to the case at bar, the admissions of the parties and the facts appearing on
record more than suffice to warrant the conclusion that SCHMID was not a vendor, but was
merely an indentor, in the second transaction.

In its complaint, RJL MARTINEZ admitted that the generators were purchased "through
indent order" [Record on Appeal, p. 6.] In the same vein, it admitted in its demand letter
previously sent to SCHMID that twelve (12) of en (15) Nagata-brand generators "were
purchased through your company (SCHMID), by indent order and three (3) by direct
purchase." [Exhibit "D".] The evidence also show that RJL MARTINEZ paid directly
NAGATA CO, for the generators, and that the latter company itself invoiced the sale
[Exhibit "B"], and shipped the generators directly to the former. The only participation of
SCHMID was to act as an intermediary or middleman between NAGATA CO. and RJL
MARTINEZ, by procuring an order from RJL MARTINEZ and forwarding the same to
NAGATA CO. for which the company received a commission from NAGATA CO. [Exhibits
"9", "9-A", "9-B" and "9-C".]

The above transaction is significantly different from the first transaction wherein SCHMID
delivered the goods from its own stock (which it had itself imported from NAGATA CO.),
issued its own invoice, and collected payment directly from the purchaser.

These facts notwithstanding, RJL MARTINEZ insists that SCHMID was the vendor of the
twelve generators on the following grounds:

First, it is contended that the Quotation and the General Conditions of Sale on the dorsal
side thereof do not necessarily lead to the conclusion that NAGATA CO., and not SCHMID,
was the real seller in the case of the twelve (12) generators in that:

(i) the signing of the quotation, which was under SCHMID's letter-head, perfected the
contract of sale (impliedly, as between the signatories thereto—i.e., RJL MARTINEZ and
SCHMID);
(ii) the qualification that the letter of credit shall be in favor of NAGATA CO. constituted
simply the manner of payment requested by SCHMID (implying that SCHMID, as seller,
merely chose to waive direct payment, stipulating delivery of payment instead to NAGATA
CO. as supplier);

Second, it is asserted that the acts of SCHMID after it was informed of the defect in the
generators were indicative of its awareness that it was the vendor and acknowledgment of
its liability as such vendor. Attention is called to these facts: When RJL MARTINEZ
complained to SCHMID that the generators were defective, SCHMID immediately asked
RJL MARTINEZ to send the defective generators to its shop to determine what was wrong.
SCHMID likewise informed NAGATA CO. about the complaint of RJL MARTINEZ. When
the Japanese technicians arrived, SCHMID made available its technicians, its shop and its
testing equipment. After the generators were found to have factory defects, SCHMID
facilitated the shipment of three (3) generators to Japan and, after their repair, back to the
Philippines [Memorandum for the Respondent, p. 8.]

Third, it is argued that the contents of the letter from NAGATA CO. to SCHMID regarding
the repair of the generators indicated that the latter was "within the purview of a seller."
[Ibid.]

Fourth, it is argued that if SCHMID is considered as a mere agent of NAGATA CO., a

foreign corporation not licensed to do business in the Philippines, then the officers and
employees of the former may be penalized for violation of the old Corporation Law which
provided:

Sec. 69 ... Any officer or agent of the corporation or any person transacting business for
any foreign corporation not having the license prescribed shall be punished by
imprisonment for not less than six months nor more than two years or by a fine 'of not less
than two hundred pesos nor more than one thousand pesos or both such imprisonment
and fine, in the discretion of the Court.

The facts do not bear out these contentions.

The first contention disregards the circumstances surrounding the second transaction as
distinguished from those surrounding the first transaction, as noted above.

Neither does the solicitous manner by which SCHMID responded to RJL MARTINEZ's
complaint prove that the former was the seller of the generators. As aptly stated by counsel,
no indentor will just fold its hands when a client complains about the goods it has bought
upon the indentor's mediation. In its desire to promote the product of the seller and to retain
the goodwill of the buyer, a prudent indentor desirous of maintaining his business would
have to act considerably. towards his clients.

Note that in contrast to its act of replacing the three (3) generators subject of the first
transaction, SCHMID did not replace any of the twelve (12) generators, but merely
rendered assistance to both RJL TINES and NAGATA CO. so that the latter could repair
the defective generators.

The proposal of NAGATA CO. rejected by SCHMID that the latter undertake the repair of
the nine (9) other defective generators, with the former supplying the replacement parts
free of charge and subsequently reimbursing the latter for labor costs [Exhibit "I"], cannot
support the conclusion that SCHMID is vendor of the generators of the second transaction
or was acting "within the purview of a seller."

Finally, the afore-quoted penal provision in the Corporation Law finds no application to
SCHMID and its officers and employees relative to the transactions in the instant case.
What the law seeks to prevent, through said provision, is the circumvention by foreign
corporations of licensing requirements through the device of employing local
representatives. An indentor, acting in his own name, is not, however, covered by the
above-quoted provision. In fact, the provision of the Rules and Regulations implementing
the Omnibus Investments Code quoted above, which was copied from the Rules
implementing Republic Act No. 5455, recognizes the distinct role of an indentor, such that
when a foreign corporation does business through such indentor, the foreign corporation
is not deemed doing business in the Philippines.

In view of the above considerations, this Court rules that SCHMID was merely acting as
an indentor in the purchase and sale of the twelve (12) generators subject of the second
transaction. Not being the vendor, SCHMID cannot be held liable for the implied warranty
for hidden defects under the Civil Code [Art. 1561, et seq.]

2. However, even as SCHMID was merely an indentor, there was nothing to prevent it from
voluntarily warranting that twelve (12) generators subject of the second transaction are free
from any hidden defects. In other words, SCHMID may be held answerable for some other
contractual obligation, if indeed it had so bound itself. As stated above, an indentor is to
some extent an agent of both the vendor and the vendee. As such agent, therefore, he
may expressly obligate himself to undertake the obligations of his principal (See Art. 1897,
Civil Code.)

The Court's inquiry, therefore, shifts to a determination of whether or not SCHMID

expressly bound itself to warrant that the twelve (12) generators are free of any hidden
defects.

Again, we consider the facts.

The Quotation (Exhibit A is in writing. It is the repository of the contract between RJL
MARTINEZ and SCHMID. Notably, nowhere is it stated therein that SCHMID did bind itself
to answer for the defects of the things sold. There being no allegation nor any proof that
the Quotation does not express the true intent and agreement of the contracting parties,
extrinsic parol evidence of warranty will be to no avail [See Rule 123, Sec. 22.]

The trial court, however, relied on the testimony of Patrocinio Balagtas, the head of the
Electrical Department of RJL MARTINEZ, to support the finding that SCHMID did warrant
the twelve (12) generators against defects.

Upon careful examination of Balagtas' testimony, what is at once apparent is that Balagtas
failed to disclose the nature or terms and conditions of the warranty allegedly given by SC
Was it a warranty that the generators would be fit for the fishing business of the buyer?
Was it a warranty that the generators to be delivered would meet the specifications
indicated in the Quotation? Considering the different kinds of warranties that may be
contracted, unless the nature or terms and conditions of the warranty are known, it would
not be possible to determine whether there has been a breach thereof.

Moreover, a closer examination of the statements allegedly made by the representative of

SCHMID reveals that they merely constituted an expression of opinion which cannot by
any means be construed as a warranty [See Art. 1546, Civil Code.]

We quote from Balagtas' testimony:

Atty. CATRAL:
Q Did you not say at the start of your cross examination, Mr. Balagtas, that the only
participation you had in the acquisition of those twelve (12) units [of] generators was your
having issued a purchase order to your own company for the purchase of the units?

ATTY. AQUINO:

Misleading, your Honor.

Atty. CATRAL:

I am asking the witness.

COURT:

He has the right to ask that question because he is on cross. Moreover, if I remember, he
mentioned something like that. Witness may answer.

A Yes, sir. Before I submitted that, we negotiated with Schmid and Oberly the beat
generators they can recommend because we are looking for generators. The
representative of Schmid and Oberly said that Nagata is very good. That is why I
recommended that to the management. [t.s.n., October 14, 1977, pp. 23-25.]

At any rate, when asked where SCHMID's warranty was contained, Balagtas testified
initially that it was in the receipts covering the sale. (At this point, it may be stated that the
invoice [Exhibit "B-l"] was issued by NAGATA CO. and nowhere is it stated therein that
SCHMID warranted the generators against defects.) When confronted with a copy of the
invoice issued by NAGATA CO., he changed his assertion and claimed that what he meant
was that the date of the commencement of the period of SCHMID's warranty would be
based on the date of the invoice. On further examination, he again changed his mind and
asserted that the warranty was given verbally [TSN, October 14, 1977, pp. 19-22.] But then
again, as stated earlier, the witness failed to disclose the nature or terms and conditions of
the warranty allegedly given by SCHMID.

On the other hand, Hernan Adad SCHMID's General Manager, was categorical that the
company does not warrant goods bought on indent and that the company warrants only
the goods bought directly from it, like the three generators earlier bought by RJL
MARTINEZ itself [TSN, December 19, 1977, pp. 63-64.] It must be recalled that SCHMID
readily replaced the three generators from its own stock. In the face of these conflicting
testimonies, this Court is of the view that RJL has failed to prove that SCHMID had given
a warranty on the twelve (12) generators subject of the second transaction. Even assuming
that a warranty was given, there is no way to determine whether there has been a breach
thereof, considering that its nature or terms and conditions have not been shown.

3. In view of the foregoing, it becomes unnecessary to pass upon the other issues.

WHEREFORE, finding the Court of Appeals to have committed a reversible error, the
petition is GRANTED and the appealed Decision and Resolution of the Court of Appeals
are REVERSED. The complaint of RJL Martinez Fishing Corporation is hereby
DISMISSED. No costs.

SO ORDERED.
 [G.R. No. 117356. June 19, 2000]

VICTORIAS MILLING CO., INC., petitioner, vs. COURT OF

APPEALS and CONSOLIDATED SUGAR
CORPORATION, respondents.

DECISION

QUISUMBING, J.:

Before us is a petition for review on certiorari under Rule 45 of

the Rules of Court assailing the decision of the Court of
Appeals dated February 24, 1994, in CA-G.R. CV No. 31717,
as well as the respondent court's resolution of September 30,
1994 modifying said decision. Both decision and resolution
amended the judgment dated February 13, 1991, of the
Regional Trial Court of Makati City, Branch 147, in Civil Case
No. 90-118.

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

St. Therese Merchandising (hereafter STM) regularly bought

sugar from petitioner Victorias Milling Co., Inc., (VMC). In the
course of their dealings, petitioner issued several Shipping
List/Delivery Receipts (SLDRs) to STM as proof of purchases.
Among these was SLDR No. 1214M, which gave rise to the
instant case. Dated October 16, 1989, SLDR No. 1214M
covers 25,000 bags of sugar. Each bag contained 50 kilograms
and priced at P638.00 per bag as "per sales order VMC
Marketing No. 042 dated October 16, 1989." The transaction it
[1]

covered was a "direct sale." The SLDR also contains an

[2]

additional note which reads: "subject for (sic) availability of a

(sic) stock at NAWACO (warehouse)." [3]

On October 25, 1989, STM sold to private respondent

Consolidated Sugar Corporation (CSC) its rights in SLDR No.
1214M for P 14,750,000.00. CSC issued one check dated
October 25, 1989 and three checks postdated November 13,
1989 in payment. That same day, CSC wrote petitioner that it
had been authorized by STM to withdraw the sugar covered by
SLDR No. 1214M. Enclosed in the letter were a copy of SLDR
No. 1214M and a letter of authority from STM authorizing CSC
"to withdraw for and in our behalf the refined sugar covered by
Shipping List/Delivery Receipt-Refined Sugar (SDR) No. 1214
dated October 16, 1989 in the total quantity of 25,000 bags." [4]

On October 27, 1989, STM issued 16 checks in the total

amount of P31,900,000.00 with petitioner as payee. The latter,
in turn, issued Official Receipt No. 33743 dated October 27,
1989 acknowledging receipt of the said checks in payment of
50,000 bags. Aside from SLDR No. 1214M, said checks also
covered SLDR No. 1213.

Private respondent CSC surrendered SLDR No. 1214M to the

petitioner's NAWACO warehouse and was allowed to withdraw
sugar. However, after 2,000 bags had been released, petitioner
refused to allow further withdrawals of sugar against SLDR No.
1214M. CSC then sent petitioner a letter dated January 23,
1990 informing it that SLDR No. 1214M had been "sold and
endorsed" to it but that it had been refused further withdrawals
of sugar from petitioner's warehouse despite the fact that only
2,000 bags had been withdrawn. CSC thus inquired when it
[5]

would be allowed to withdraw the remaining 23,000 bags.

On January 31, 1990, petitioner replied that it could not allow

any further withdrawals of sugar against SLDR No. 1214M
because STM had already dwithdrawn all the sugar covered by
the cleared checks. [6]

On March 2, 1990, CSC sent petitioner a letter demanding the

release of the balance of 23,000 bags.
Seven days later, petitioner reiterated that all the sugar
corresponding to the amount of STM's cleared checks had
been fully withdrawn and hence, there would be no more
deliveries of the commodity to STM's account. Petitioner also
noted that CSC had represented itself to be STM's agent as it
had withdrawn the 2,000 bags against SLDR No. 1214M "for
and in behalf" of STM.

On April 27, 1990, CSC filed a complaint for specific

performance, docketed as Civil Case No. 90-1118. Defendants
were Teresita Ng Sy (doing business under the name of St.
Therese Merchandising) and herein petitioner. Since the former
could not be served with summons, the case proceeded only
against the latter. During the trial, it was discovered that
Teresita Ng Go who testified for CSC was the same Teresita
Ng Sy who could not be reached through summons. CSC, [7]

however, did not bother to pursue its case against her, but
instead used her as its witness.

CSC's complaint alleged that STM had fully paid petitioner for
the sugar covered by SLDR No. 1214M. Therefore, the latter
had no justification for refusing delivery of the sugar. CSC
prayed that petitioner be ordered to deliver the 23,000 bags
covered by SLDR No. 1214M and sought the award of
P1,104,000.00 in unrealized profits, P3,000,000.00 as
exemplary damages, P2,200,000.00 as attorney's fees and
litigation expenses.

Petitioner's primary defense a quo was that it was an unpaid

seller for the 23,000 bags. Since STM had already drawn in
[8]

full all the sugar corresponding to the amount of its cleared

checks, it could no longer authorize further delivery of sugar to
CSC. Petitioner also contended that it had no privity of contract
with CSC.

Petitioner explained that the SLDRs, which it had issued, were

not documents of title, but mere delivery receipts issued
pursuant to a series of transactions entered into between it and
STM. The SLDRs prescribed delivery of the sugar to the party
specified therein and did not authorize the transfer of said
party's rights and interests.

Petitioner also alleged that CSC did not pay for the SLDR and
was actually STM's co-conspirator to defraud it through a
misrepresentation that CSC was an innocent purchaser for
value and in good faith. Petitioner then prayed that CSC be
ordered to pay it the following sums: P10,000,000.00 as moral
damages; P10,000,000.00 as exemplary damages; and
P1,500,000.00 as attorney's fees. Petitioner also prayed that
cross-defendant STM be ordered to pay it P10,000,000.00 in
exemplary damages, and P1,500,000.00 as attorney's fees.

Since no settlement was reached at pre-trial, the trial court

heard the case on the merits.

As earlier stated, the trial court rendered its judgment favoring

private respondent CSC, as follows:

"WHEREFORE, in view of the foregoing, the Court

hereby renders judgment in favor of the plaintiff and
against defendant Victorias Milling Company:

"1) Ordering defendant Victorias Milling Company to

deliver to the plaintiff 23,000 bags of refined sugar due
under SLDR No. 1214;

"2) Ordering defendant Victorias Milling Company to pay

the amount of P920,000.00 as unrealized profits, the
amount of P800,000.00 as exemplary damages and the
amount of P1,357,000.00, which is 10% of the acquisition
value of the undelivered bags of refined sugar in the
amount of P13,570,000.00, as attorney's fees, plus the
costs.

"SO ORDERED." [9]

It made the following observations:

"[T]he testimony of plaintiff's witness Teresita Ng Go, that

she had fully paid the purchase price of P15,950,000.00
of the 25,000 bags of sugar bought by her covered by
SLDR No. 1214 as well as the purchase price of
P15,950,000.00 for the 25,000 bags of sugar bought by
her covered by SLDR No. 1213 on the same date,
October 16, 1989 (date of the two SLDRs) is duly
supported by Exhibits C to C-15 inclusive which are post-
dated checks dated October 27, 1989 issued by St.
Therese Merchandising in favor of Victorias Milling
Company at the time it purchased the 50,000 bags of
sugar covered by SLDR No. 1213 and 1214. Said checks
 appear to have been honored and duly credited to the
account of Victorias Milling Company because on
October 27, 1989 Victorias Milling Company issued
official receipt no. 34734 in favor of St. Therese
Merchandising for the amount of P31,900,000.00
(Exhibits B and B-1). The testimony of Teresita Ng Go is
further supported by Exhibit F, which is a computer
printout of defendant Victorias Milling Company showing
the quantity and value of the purchases made by St.
Therese Merchandising, the SLDR no. issued to cover
the purchase, the official reciept no. and the status of
payment. It is clear in Exhibit 'F' that with respect to the
sugar covered by SLDR No. 1214 the same has been
fully paid as indicated by the word 'cleared' appearing
under the column of 'status of payment.'

"On the other hand, the claim of defendant Victorias

Milling Company that the purchase price of the 25,000
bags of sugar purchased by St. Therese Merchandising
covered by SLDR No. 1214 has not been fully paid is
supported only by the testimony of Arnulfo Caintic,
witness for defendant Victorias Milling Company. The
Court notes that the testimony of Arnulfo Caintic is
merely a sweeping barren assertion that the purchase
price has not been fully paid and is not corroborated by
any positive evidence. There is an insinuation by Arnulfo
Caintic in his testimony that the postdated checks issued
by the buyer in payment of the purchased price were
dishonored. However, said witness failed to present in
Court any dishonored check or any replacement check.
Said witness likewise failed to present any bank record
showing that the checks issued by the buyer, Teresita Ng
Go, in payment of the purchase price of the sugar
covered by SLDR No. 1214 were dishonored." [10]

Petitioner appealed the trial courts decision to the Court of

Appeals.

On appeal, petitioner averred that the dealings between it and

STM were part of a series of transactions involving only one
account or one general contract of sale. Pursuant to this
contract, STM or any of its authorized agents could withdraw
bags of sugar only against cleared checks of STM. SLDR No.
21214M was only one of 22 SLDRs issued to STM and since
the latter had already withdrawn its full quota of sugar under
the said SLDR, CSC was already precluded from seeking
delivery of the 23,000 bags of sugar.

Private respondent CSC countered that the sugar purchases

involving SLDR No. 1214M were separate and independent
transactions and that the details of the series of purchases
were contained in a single statement with a consolidated
summary of cleared check payments and sugar stock
withdrawals because this a more convenient system than
issuing separate statements for each purchase.

The appellate court considered the following issues: (a)

Whether or not the transaction between petitioner and STM
involving SLDR No. 1214M was a separate, independent, and
single transaction; (b) Whether or not CSC had the capacity to
sue on its own on SLDR No. 1214M; and (c) Whether or not
CSC as buyer from STM of the rights to 25,000 bags of sugar
covered by SLDR No. 1214M could compel petitioner to deliver
23,000 bags allegedly unwithdrawn.

On February 24, 1994, the Court of Appeals rendered its

decision modifying the trial court's judgment, to wit:

"WHEREFORE, the Court hereby MODIFIES the

assailed judgment and orders defendant-appellant to:

"1) Deliver to plaintiff-appellee 12,586 bags of sugar

covered by SLDR No. 1214M;

" 2) Pay to plaintiff-appellee P792,918.00 which is 10% of

the value of the undelivered bags of refined sugar, as
attorneys fees;

"3) Pay the costs of suit.

"SO ORDERED." [11]

Both parties then seasonably filed separate motions for

reconsideration.

In its resolution dated September 30, 1994, the appellate court

modified its decision to read:

"WHEREFORE, the Court hereby modifies the assailed

judgment and orders defendant-appellant to:
 "(1) Deliver to plaintiff-appellee 23,000 bags of refined
sugar under SLDR No. 1214M;

"(2) Pay costs of suit.

"SO ORDERED." [12]

The appellate court explained the rationale for the modification

as follows:

"There is merit in plaintiff-appellee's position.

"Exhibit F' We relied upon in fixing the number of bags of

sugar which remained undelivered as 12,586 cannot be
made the basis for such a finding. The rule is explicit that
courts should consider the evidence only for the purpose
for which it was offered. (People v. Abalos, et al, 1
CA Rep 783). The rationale for this is to afford the party
against whom the evidence is presented to object thereto
if he deems it necessary. Plaintiff-appellee is, therefore,
correct in its argument that Exhibit F' which was offered
to prove that checks in the total amount of
P15,950,000.00 had been cleared. (Formal Offer of
Evidence for Plaintiff, Records p. 58)cannot be used to
prove the proposition that 12,586 bags of sugar remained
undelivered.

"Testimonial evidence (Testimonies of Teresita Ng [TSN,

10 October 1990, p. 33] and Marianito L. Santos [TSN,
17 October 1990, pp. 16, 18, and 36]) presented by
plaintiff-appellee was to the effect that it had withdrawn
only 2,000 bags of sugar from SLDR after which it was
not allowed to withdraw anymore. Documentary evidence
(Exhibit I, Id., p. 78, Exhibit K, Id., p. 80) show that
plaintiff-appellee had sent demand letters to defendant-
appellant asking the latter to allow it to withdraw the
remaining 23,000 bags of sugar from SLDR 1214M.
Defendant-appellant, on the other hand, alleged that
sugar delivery to the STM corresponded only to the value
of cleared checks; and that all sugar corresponded to
cleared checks had been withdrawn. Defendant-
appellant did not rebut plaintiff-appellee's assertions. It
did not present evidence to show how many bags of
sugar had been withdrawn against SLDR No. 1214M,
precisely because of its theory that all sales in question
 were a series of one single transaction and withdrawal of
sugar depended on the clearing of checks paid therefor.

"After a second look at the evidence, We see no reason

to overturn the findings of the trial court on this point."
[13]

Hence, the instant petition, positing the following errors as

grounds for review:

"1. The Court of Appeals erred in not holding that STM's

and private respondent's specially informing petitioner
that respondent was authorized by buyer STM to
withdraw sugar against SLDR No. 1214M "for and in our
(STM) behalf," (emphasis in the original) private
respondent's withdrawing 2,000 bags of sugar for STM,
and STM's empowering other persons as its agents to
withdraw sugar against the same SLDR No. 1214M,
rendered respondent like the other persons, an agent of
STM as held in Rallos v. Felix Go Chan & Realty
Corp., 81 SCRA 252, and precluded it from subsequently
claiming and proving being an assignee of SLDR No.
1214M and from suing by itself for its enforcement
because it was conclusively presumed to be an agent
(Sec. 2, Rule 131, Rules of Court) and estopped from
doing so. (Art. 1431, Civil Code).

" 2. The Court of Appeals erred in manifestly and

arbitrarily ignoring and disregarding certain relevant and
undisputed facts which, had they been considered, would
have shown that petitioner was not liable, except for 69
bags of sugar, and which would justify review of its
conclusion of facts by this Honorable Court.

" 3. The Court of Appeals misapplied the law on

compensation under Arts. 1279, 1285 and 1626 of the
Civil Code when it ruled that compensation applied only
to credits from one SLDR or contract and not to those
from two or more distinct contracts between the same
parties; and erred in denying petitioner's right to setoff all
its credits arising prior to notice of assignment from other
sales or SLDRs against private respondent's claim as
assignee under SLDR No. 1214M, so as to extinguish or
reduce its liability to 69 bags, because the law on
compensation applies precisely to two or more distinct
 contracts between the same parties (emphasis in the
original).

"4. The Court of Appeals erred in concluding that the

settlement or liquidation of accounts in Exh. F between
petitioner and STM, respondent's admission of its
balance, and STM's acquiescence thereto by silence for
almost one year did not render Exh. `F' an account stated
and its balance binding.

"5. The Court of Appeals erred in not holding that the

conditions of the assigned SLDR No. 1214, namely, (a)
its subject matter being generic, and (b) the sale of sugar
being subject to its availability at the Nawaco warehouse,
made the sale conditional and prevented STM or private
respondent from acquiring title to the sugar; and the non-
availability of sugar freed petitioner from further
obligation.

"6. The Court of Appeals erred in not holding that the

"clean hands" doctrine precluded respondent from
seeking judicial reliefs (sic) from petitioner, its only
remedy being against its assignor." [14]

Simply stated, the issues now to be resolved are:

(1)....Whether or not the Court of Appeals erred in not

ruling that CSC was an agent of STM and hence,
estopped to sue upon SLDR No. 1214M as an assignee.

(2)....Whether or not the Court of Appeals erred in

applying the law on compensation to the transaction
under SLDR No. 1214M so as to preclude petitioner from
offsetting its credits on the other SLDRs.

(3)....Whether or not the Court of Appeals erred in not

ruling that the sale of sugar under SLDR No. 1214M was
a conditional sale or a contract to sell and hence freed
petitioner from further obligations.

(4)....Whether or not the Court of Appeals committed an

error of law in not applying the "clean hands doctrine" to
preclude CSC from seeking judicial relief.

The issues will be discussed in seriatim.

Anent the first issue, we find from the records that petitioner
raised this issue for the first time on appeal. It is settled that an
issue which was not raised during the trial in the court below
could not be raised for the first time on appeal as to do so
would be offensive to the basic rules of fair play, justice, and
due process. Nonetheless, the Court of Appeals opted to
[15]

address this issue, hence, now a matter for our consideration.

Petitioner heavily relies upon STM's letter of authority allowing

CSC to withdraw sugar against SLDR No. 1214M to show that
the latter was STM's agent. The pertinent portion of said letter
reads:

"This is to authorize Consolidated Sugar Corporation or

its representative to withdraw for and in our behalf (stress
supplied) the refined sugar covered by Shipping
List/Delivery Receipt = Refined Sugar (SDR) No. 1214
dated October 16, 1989 in the total quantity of 25, 000
bags." [16]

The Civil Code defines a contract of agency as follows:

"Art. 1868. By the contract of agency a person binds

himself to render some service or to do something in
representation or on behalf of another, with the consent
or authority of the latter."

It is clear from Article 1868 that the basis of agency is

representation. On the part of the principal, there must be an
[17]

actual intention to appoint or an intention naturally inferable

[18]

from his words or actions; and on the part of the agent, there
[19]

must be an intention to accept the appointment and act on

it, and in the absence of such intent, there is generally no
[20]

agency. One factor which most clearly distinguishes agency

[21]

from other legal concepts is control; one person - the agent -

agrees to act under the control or direction of another - the
principal. Indeed, the very word "agency" has come to connote
control by the principal. The control factor, more than any
[22]

other, has caused the courts to put contracts between principal

and agent in a separate category. The Court of Appeals, in
[23]

finding that CSC, was not an agent of STM, opined:

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

dependent upon the acts of the parties, the law makes no
presumption of agency, and it is always a fact to be
 proved, with the burden of proof resting upon the persons
alleging the agency, to show not only the fact of its
existence, but also its nature and extent (Antonio vs.
Enriquez [CA], 51 O.G. 3536]. Here, defendant-appellant
failed to sufficiently establish the existence of an agency
relation between plaintiff-appellee and STM. The fact
alone that it (STM) had authorized withdrawal of sugar by
plaintiff-appellee "for and in our (STM's) behalf" should
not be eyed as pointing to the existence of an agency
relation ...It should be viewed in the context of all the
circumstances obtaining. Although it would seem STM
represented plaintiff-appellee as being its agent by the
use of the phrase "for and in our (STM's) behalf" the
matter was cleared when on 23 January 1990, plaintiff-
appellee informed defendant-appellant that SLDFR No.
1214M had been "sold and endorsed" to it by STM
(Exhibit I, Records, p. 78). Further, plaintiff-appellee has
shown that the 25, 000 bags of sugar covered by the
SLDR No. 1214M were sold and transferred by STM to
it ...A conclusion that there was a valid sale and transfer
to plaintiff-appellee may, therefore, be made thus
capacitating plaintiff-appellee to sue in its own name,
without need of joining its imputed principal STM as co-
plaintiff." [24]

In the instant case, it appears plain to us that private

respondent CSC was a buyer of the SLDFR form, and not an
agent of STM. Private respondent CSC was not subject to
STM's control. The question of whether a contract is one of
sale or agency depends on the intention of the parties as
gathered from the whole scope and effect of the language
employed. That the authorization given to CSC contained the
[25]

phrase "for and in our (STM's) behalf" did not establish an

agency. Ultimately, what is decisive is the intention of the
parties. That no agency was meant to be established by the
[26]

CSC and STM is clearly shown by CSC's communication to

petitioner that SLDR No. 1214M had been "sold and endorsed"
to it. The use of the words "sold and endorsed" means that
[27]

STM and CSC intended a contract of sale, and not an agency.

Hence, on this score, no error was committed by the
respondent appellate court when it held that CSC was not
STM's agent and could independently sue petitioner.

On the second issue, proceeding from the theory that the

transactions entered into between petitioner and STM are but
serial parts of one account, petitioner insists that its debt has
been offset by its claim for STM's unpaid purchases, pursuant
to Article 1279 of the Civil Code. However, the trial court
[28]

found, and the Court of Appeals concurred, that the purchase

of sugar covered by SLDR No. 1214M was a separate and
independent transaction; it was not a serial part of a single
transaction or of one account contrary to petitioner's insistence.
Evidence on record shows, without being rebutted, that
petitioner had been paid for the sugar purchased under SLDR
No. 1214M. Petitioner clearly had the obligation to deliver said
commodity to STM or its assignee. Since said sugar had been
fully paid for, petitioner and CSC, as assignee of STM, were
not mutually creditors and debtors of each other. No reversible
error could thereby be imputed to respondent appellate court
when, it refused to apply Article 1279 of the Civil Code to the
present case.

Regarding the third issue, petitioner contends that the sale of

sugar under SLDR No. 1214M is a conditional sale or a
contract to sell, with title to the sugar still remaining with the
vendor. Noteworthy, SLDR No. 1214M contains the following
terms and conditions:

"It is understood and agreed that by payment by

buyer/trader of refined sugar and/or receipt of this
document by the buyer/trader personally or through a
representative, title to refined sugar is transferred to
buyer/trader and delivery to him/it is deemed effected
and completed (stress supplied) and buyer/trader
assumes full responsibility therefore" [29]

The aforequoted terms and conditions clearly show that

petitioner transferred title to the sugar to the buyer or his
assignee upon payment of the purchase price. Said terms
clearly establish a contract of sale, not a contract to sell.
Petitioner is now estopped from alleging the contrary. The
contract is the law between the contracting parties. And [30]

where the terms and conditions so stipulated are not contrary

to law, morals, good customs, public policy or public order, the
contract is valid and must be upheld. Having transferred title
[31]

to the sugar in question, petitioner is now obliged to deliver it to

the purchaser or its assignee.
As to the fourth issue, petitioner submits that STM and private
respondent CSC have entered into a conspiracy to defraud it of its
 sugar. This conspiracy is allegedly evidenced by: (a) the fact that
STM's selling price to CSC was below its purchasing price; (b) CSC's
refusal to pursue its case against Teresita Ng Go; and (c) the authority
given by the latter to other persons to withdraw sugar against SLDR
No. 1214M after she had sold her rights under said SLDR to CSC.
Petitioner prays that the doctrine of "clean hands" should be applied to
preclude CSC from seeking judicial relief. However, despite careful
scrutiny, we find here the records bare of convincing evidence
whatsoever to support the petitioner's allegations of fraud. We are now
constrained to deem this matter purely speculative, bereft of concrete
proof.

WHEREFORE, the instant petition is DENIED for lack of merit. Costs

against petitioner.

SO ORDERED.

G.R. No. L-46658 May 13, 1991

PHILIPPINE NATIONAL BANK, petitioner,

vs.
HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of the Court of
First Instance of Rizal, Branch XXI and TAYABAS CEMENT COMPANY,
INC., respondents.

The Chief Legal Counsel for petitioner.

Ortille Law Office for private respondent.

FERNAN, C.J.:

In this petition for certiorari, petitioner Philippine National Bank (PNB) seeks to annul and
set aside the orders dated March 4, 1977 and May 31, 1977 rendered in Civil Case No.
24422 of the Court of First Instance of Rizal, Branch XXI, respectively granting private
1

respondent Tayabas Cement Company, Inc.'s application for a writ of preliminary injunction
to enjoin the foreclosure sale of certain properties in Quezon City and Negros Occidental
and denying petitioner's motion for reconsideration thereof.

In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo Spouses), obtained
a loan of P580,000.00 from petitioner bank to purchase 60% of the subscribed capital stock,
and thereby acquire the controlling interest of private respondent Tayabas Cement
Company, Inc. (TCC). As security for said loan, the spouses Arroyo executed a real estate
2

mortgage over a parcel of land covered by Transfer Certificate of Title No. 55323 of the
Register of Deeds of Quezon City known as the La Vista property.

Thereafter, TCC filed with petitioner bank an application and agreement for the
establishment of an eight (8) year deferred letter of credit (L/C) for $7,000,000.00 in favor
of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to cover the importation of a cement plant
machinery and equipment.

Upon approval of said application and opening of an L/C by PNB in favor of Toyo Menka
Kaisha, Ltd. for the account of TCC, the Arroyo spouses executed the following documents
to secure this loan accommodation: Surety Agreement dated August 5, 1964 and 3

Covenant dated August 6, 1964. 4

The imported cement plant machinery and equipment arrived from Japan and were
released to TCC under a trust receipt agreement. Subsequently, Toyo Menka Kaisha, Ltd.
made the corresponding drawings against the L/C as scheduled. TCC, however, failed to
remit and/or pay the corresponding amount covered by the drawings. Thus, on May 19,
1968, pursuant to the trust receipt agreement, PNB notified TCC of its intention to
repossess, as it later did, the imported machinery and equipment for failure of TCC to settle
its obligations under the L/C.5

In the meantime, the personal accounts of the spouses Arroyo, which included another
loan of P160,000.00 secured by a real estate mortgage over parcels of agricultural land
known as Hacienda Bacon located in Isabela, Negros Occidental, had likewise become
due. The spouses Arroyo having failed to satisfy their obligations with PNB, the latter
decided to foreclose the real estate mortgages executed by the spouses Arroyo in its favor.

On July 18, 1975, PNB filed with the City Sheriff of Quezon City a petition for extra-judicial
foreclosure under Act 3138, as amended by Act 4118 and under Presidential Decree No.
385 of the real estate mortgage over the properties known as the La Vista property covered
by TCT No. 55323. PNB likewise filed a similar petition with the City Sheriff of Bacolod,
6

Negros Occidental with respect to the mortgaged properties located at Isabela, Negros
Occidental and covered by OCT No. RT 1615.

The foreclosure sale of the La Vista property was scheduled on August 11, 1975. At the
auction sale, PNB was the highest bidder with a bid price of P1,000,001.00. However,
when said property was about to be awarded to PNB, the representative of the mortgagor-
spouses objected and demanded from the PNB the difference between the bid price of
P1,000,001.00 and the indebtedness of P499,060.25 of the Arroyo spouses on their
personal account. It was the contention of the spouses Arroyo's representative that the
foreclosure proceedings referred only to the personal account of the mortgagor spouses
without reference to the account of TCC.

To remedy the situation, PNB filed a supplemental petition on August 13, 1975 requesting
the Sheriff's Office to proceed with the sale of the subject real properties to satisfy not only
the amount of P499,060.25 owed by the spouses Arroyos on their personal account but
also the amount of P35,019,901.49 exclusive of interest, commission charges and other
expenses owed by said spouses as sureties of TCC. Said petition was opposed by the
7

spouses Arroyo and the other bidder, Jose L. Araneta.

On September 12, 1975, Acting Clerk of Court and Ex-Officio Sheriff Diana L. Dungca
issued a resolution finding that the questions raised by the parties required the reception
and evaluation of evidence, hence, proper for adjudication by the courts of law. Since said
questions were prejudicial to the holding of the foreclosure sale, she ruled that her "Office,
therefore, cannot properly proceed with the foreclosure sale unless and until there be a
court ruling on the aforementioned issues." 8

Thus, in May, 1976, PNB filed with the Court of First Instance of Quezon City, Branch V a
petition for mandamus against said Diana Dungca in her capacity as City Sheriff of
9

Quezon City to compel her to proceed with the foreclosure sale of the mortgaged properties
covered by TCT No. 55323 in order to satisfy both the personal obligation of the spouses
Arroyo as well as their liabilities as sureties of TCC.10

On September 6, 1976, the petition was granted and Dungca was directed to proceed with
the foreclosure sale of the mortgaged properties covered by TCT No. 55323 pursuant to
Act No. 3135 and to issue the corresponding Sheriff's Certificate of Sale. 11
Before the decision could attain finality, TCC filed on September 14, 1976 before the Court
of First Instance of Rizal, Pasig, Branch XXI a complaint against PNB, Dungca, and the
12

Provincial Sheriff of Negros Occidental and Ex-Officio Sheriff of Bacolod City seeking, inter
alia, the issuance of a writ of preliminary injunction to restrain the foreclosure of the
mortgages over the La Vista property and Hacienda Bacon as well as a declaration that its
obligation with PNB had been fully paid by reason of the latter's repossession of the
imported machinery and equipment. 13

On October 5, 1976, the CFI, thru respondent Judge Gregorio Pineda, issued a restraining
order and on March 4, 1977, granted a writ of preliminary injunction. PNB's motion for
14 15

reconsideration was denied, hence this petition.

Petitioner PNB advances four grounds for the setting aside of the writ of preliminary
injunction, namely: a) that it contravenes P.D. No. 385 which prohibits the issuance of a
restraining order against a government financial institution in any action taken by such
institution in compliance with the mandatory foreclosure provided in Section 1 thereof; b)
that the writ countermands a final decision of a co-equal and coordinate court; c) that the
writ seeks to prohibit the performance of acts beyond the court's territorial jurisdiction; and,
d) private respondent TCC has not shown any clear legal right or necessity to the relief of
preliminary injunction.

Private respondent TCC counters with the argument that P.D. No. 385 does not apply to
the case at bar, firstly because no foreclosure proceedings have been instituted against it
by PNB and secondly, because its account under the L/C has been fully satisfied with the
repossession of the imported machinery and equipment by PNB.

The resolution of the instant controversy lies primarily on the question of whether or not
TCC's liability has been extinguished by the repossession of PNB of the imported cement
plant machinery and equipment.

We rule for the petitioner PNB. It must be remembered that PNB took possession of the
imported cement plant machinery and equipment pursuant to the trust receipt agreement
executed by and between PNB and TCC giving the former the unqualified right to the
possession and disposal of all property shipped under the Letter of Credit until such time
as all the liabilities and obligations under said letter had been discharged. In the case
16

of Vintola vs. Insular Bank of Asia and America wherein the same argument was
17

advanced by the Vintolas as entrustees of imported seashells under a trust receipt

transaction, we said:

Further, the VINTOLAS take the position that their obligation to IBAA has been
extinguished inasmuch as, through no fault of their own, they were unable to dispose of
the seashells, and that they have relinquished possession thereof to the IBAA, as owner
of the goods, by depositing them with the Court.

The foregoing submission overlooks the nature and mercantile usage of the transaction
involved. A letter of credit-trust receipt arrangement is endowed with its own distinctive
features and characteristics. Under that set-up, a bank extends a loan covered by the Letter
of Credit, with the trust receipt as a security for the loan. In other words, the transaction
involves a loan feature represented by the letter of credit, and a security feature which is
in the covering trust receipt.

xxx xxx xxx

A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a

"security interest" in the goods. It secures an indebtedness and there can be no such thing
1âwphi1

as security interest that secures no obligation. As defined in our laws:

(h) "Security interest" means a property interest in goods, documents or instruments to
secure performance of some obligations of the entrustee or of some third persons to the
entruster and includes title, whether or not expressed to be absolute, whenever such title
is in substance taken or retained for security only.

xxx xxx xxx

Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the
goods. It was merely the holder of a security title for the advances it had made to the
VINTOLAS. The goods the VINTOLAS had purchased through IBAA financing remain their
own property and they hold it at their own risk. The trust receipt arrangement did not
convert the IBAA into an investor; the latter remained a lender and creditor.

xxx xxx xxx

Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably
claim that because they have surrendered the goods to IBAA and subsequently deposited
them in the custody of the court, they are absolutely relieved of their obligation to pay their
loan because of their inability to dispose of the goods. The fact that they were unable to
sell the seashells in question does not affect IBAA's right to recover the advances it had
made under the Letter of Credit.

PNB's possession of the subject machinery and equipment being precisely as a form of
security for the advances given to TCC under the Letter of Credit, said possession by itself
cannot be considered payment of the loan secured thereby. Payment would legally result
only after PNB had foreclosed on said securities, sold the same and applied the proceeds
thereof to TCC's loan obligation. Mere possession does not amount to foreclosure for
foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the
mortgagor on the property and includes the sale itself. 18

Neither can said repossession amount to dacion en pago. Dation in payment takes place
when property is alienated to the creditor in satisfaction of a debt in money and the same
is governed by sales. Dation in payment is the delivery and transmission of ownership of
19

a thing by the debtor to the creditor as an accepted equivalent of the performance of the
obligation. As aforesaid, the repossession of the machinery and equipment in question
20

was merely to secure the payment of TCC's loan obligation and not for the purpose of
transferring ownership thereof to PNB in satisfaction of said loan. Thus, no dacion en
pago was ever accomplished.

Proceeding from this finding, PNB has the right to foreclose the mortgages executed by
the spouses Arroyo as sureties of TCC. A surety is considered in law as being the same
party as the debtor in relation to whatever is adjudged touching the obligation of the latter,
and their liabilities are interwoven as to be inseparable. As sureties, the Arroyo spouses
21

are primarily liable as original promissors and are bound immediately to pay the creditor
the amount outstanding. 22

Under Presidential Decree No. 385 which took effect on January 31, 1974, government
financial institutions like herein petitioner PNB are required to foreclose on the collaterals
and/or securities for any loan, credit or accommodation whenever the arrearages on such
account amount to at least twenty percent (20%) of the total outstanding obligations,
including interests and charges, as appearing in the books of account of the financial
institution concerned. It is further provided therein that "no restraining order, temporary or
23

permanent injunction shall be issued by the court against any government financial
institution in any action taken by such institution in compliance with the mandatory
foreclosure provided in Section 1 hereof, whether such restraining order, temporary or
permanent injunction is sought by the borrower(s) or any third party or parties . . ."24
It is not disputed that the foreclosure proceedings instituted by PNB against the Arroyo
spouses were in compliance with the mandate of P.D. 385. This being the case, the
respondent judge acted in excess of his jurisdiction in issuing the injunction specifically
proscribed under said decree.

Another reason for striking down the writ of preliminary injunction complained of is that it
interfered with the order of a co-equal and coordinate court. Since Branch V of the CFI of
Rizal had already acquired jurisdiction over the question of foreclosure of mortgage over
the La Vista property and rendered judgment in relation thereto, then it retained jurisdiction
to the exclusion of all other coordinate courts over its judgment, including all incidents
relative to the control and conduct of its ministerial officers, namely the sheriff thereof. The
25

foreclosure sale having been ordered by Branch V of the CFI of Rizal, TCC should not
have filed injunction proceedings with Branch XXI of the same CFI, but instead should
have first sought relief by proper motion and application from the former court which had
exclusive jurisdiction over the foreclosure proceeding. 26

This doctrine of non-interference is premised on the principle that a judgment of a court of

competent jurisdiction may not be opened, modified or vacated by any court of concurrent
jurisdiction.
27

Furthermore, we find the issuance of the preliminary injunction directed against the
Provincial Sheriff of Negros Occidental and ex-officio Sheriff of Bacolod City a
jurisdictional faux pas as the Courts of First Instance, now Regional Trial Courts, can only
enforce their writs of injunction within their respective designated territories.
28

WHEREFORE, the instant petition is hereby granted. The assailed orders are hereby set
aside. Costs against private respondent.
 [G.R. No. 149420. October 8, 2003]

SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM

PHIL., INC., respondent.

DECISION
YNARES-SANTIAGO, J.:

Respondent KJS ECO-FORMWORK System Phil., Inc. is a

corporation engaged in the sale of steel scaffoldings, while petitioner
Sonny L. Lo, doing business under the name and style Sans
Enterprises, is a building contractor. On February 22, 1990, petitioner
ordered scaffolding equipments from respondent worth
P540,425.80. He paid a downpayment in the amount of
[1]

P150,000.00. The balance was made payable in ten monthly

installments.
Respondent delivered the scaffoldings to petitioner. Petitioner
[2]

was able to pay the first two monthly installments. His business,
however, encountered financial difficulties and he was unable to settle
his obligation to respondent despite oral and written demands made
against him.[3]

On October 11, 1990, petitioner and respondent executed a Deed

of Assignment, whereby petitioner assigned to respondent his
[4]

receivables in the amount of P335,462.14 from Jomero Realty

Corporation. Pertinent portions of the Deed provide:
WHEREAS, the ASSIGNOR is the contractor for the construction of a
residential house located at Greenmeadow Avenue, Quezon City owned by
Jomero Realty Corporation;

WHEREAS, in the construction of the aforementioned residential house, the

ASSIGNOR purchased on account scaffolding equipments from the
ASSIGNEE payable to the latter;

WHEREAS, up to the present the ASSIGNOR has an obligation to the

ASSIGNEE for the purchase of the aforementioned scaffoldings now in the
amount of Three Hundred Thirty Five Thousand Four Hundred Sixty Two
and 14/100 Pesos (P335,462.14);

NOW, THEREFORE, for and in consideration of the sum of Three Hundred

Thirty Five Thousand Four Hundred Sixty Two and 14/100 Pesos
(P335,462.14), Philippine Currency which represents part of the
ASSIGNORs collectible from Jomero Realty Corp., said ASSIGNOR
hereby assigns, transfers and sets over unto the ASSIGNEE all collectibles
amounting to the said amount of P335, 462.14;

And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and
assigns, the full power and authority to demand, collect, receive, compound,
compromise and give acquittance for the same or any part thereof, and in the
name and stead of the said ASSIGNOR;

And the ASSIGNOR does hereby agree and stipulate to and with said
ASSIGNEE, its successors and assigns that said debt is justly owing and due
to the ASSIGNOR for Jomero Realty Corporation and that said ASSIGNOR
has not done and will not cause anything to be done to diminish or discharge
said debt, or delay or to prevent the ASSIGNEE, its successors or assigns,
from collecting the same;

And the ASSIGNOR further agrees and stipulates as aforesaid that the said
ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at
times hereafter, at the request of said ASSIGNEE, its successors or assigns,
at his cost and expense, execute and do all such further acts and deeds as
shall be reasonably necessary to effectually enable said ASSIGNEE to
recover whatever collectibles said ASSIGNOR has in accordance with the
true intent and meaning of these presents. xxx (Italics supplied)
[5]

However, when respondent tried to collect the said credit from

Jomero Realty Corporation, the latter refused to honor the Deed of
Assignment because it claimed that petitioner was also indebted to
it. On November 26, 1990, respondent sent a letter to petitioner
[6] [7]

demanding payment of his obligation, but petitioner refused to pay

claiming that his obligation had been extinguished when they executed
the Deed of Assignment.
Consequently, on January 10, 1991, respondent filed an action for
recovery of a sum of money against the petitioner before the Regional
Trial Court of Makati, Branch 147, which was docketed as Civil Case
No. 91-074. [8]

During the trial, petitioner argued that his obligation was

extinguished with the execution of the Deed of Assignment of
credit. Respondent, for its part, presented the testimony of its
employee, Almeda Baaga, who testified that Jomero Realty refused to
honor the assignment of credit because it claimed that petitioner had
an outstanding indebtedness to it.
On August 25, 1994, the trial court rendered a decision dismissing
[9]

the complaint on the ground that the assignment of credit extinguished

the obligation. The decretal portion thereof provides:

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

in favor of the defendant and against the plaintiff, dismissing the complaint
and ordering the plaintiff to pay the defendant attorneys fees in the amount
of P25,000.00.

Respondent appealed the decision to the Court of

Appeals. On April 19, 2001, the appellate court rendered a
decision, the dispositive portion of which reads:
[10]

WHEREFORE, finding merit in this appeal, the court REVERSES the

appealed Decision and enters judgment ordering defendant-appellee Sonny
Lo to pay the plaintiff-appellant KJS ECO-FORMWORK SYSTEM
PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four Hundred
Sixty-Two and 14/100 (P335,462.14) with legal interest of 6% per annum
from January 10, 1991 (filing of the Complaint) until fully paid and
attorneys fees equivalent to 10% of the amount due and costs of the suit.

SO ORDERED. [11]

In finding that the Deed of Assignment did not extinguish the

obligation of the petitioner to the respondent, the Court of Appeals held
that (1) petitioner failed to comply with his warranty under the Deed;
(2) the object of the Deed did not exist at the time of the transaction,
rendering it void pursuant to Article 1409 of the Civil Code; and (3)
petitioner violated the terms of the Deed of Assignment when he failed
to execute and do all acts and deeds as shall be necessary to
effectually enable the respondent to recover the collectibles. [12]
 Petitioner filed a motion for reconsideration of the said decision,
which was denied by the Court of Appeals. [13]

In this petition for review, petitioner assigns the following errors:

I

THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE

ERROR IN DECLARING THE DEED OF ASSIGNMENT (EXH. 4)
AS NULL AND VOID FOR LACK OF OBJECT ON THE BASIS OF
A MERE HEARSAY CLAIM.

II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE
DEED OF ASSIGNMENT (EXH. 4) DID NOT EXTINGUISH PETITIONERS
OBLIGATION ON THE WRONG NOTION THAT PETITIONER FAILED TO
COMPLY WITH HIS WARRANTY THEREUNDER.
III
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE
DECISION OF THE TRIAL COURT AND IN ORDERING PAYMENT OF
INTERESTS AND ATTORNEYS FEES.[14]
The petition is without merit.
An assignment of credit is an agreement by virtue of which the
owner of a credit, known as the assignor, by a legal cause, such as
sale,dacion en pago, exchange or donation, and without the consent
of the debtor, transfers his credit and accessory rights to another,
known as the assignee, who acquires the power to enforce it to the
same extent as the assignor could enforce it against the debtor. [15]

Corollary thereto, in dacion en pago, as a special mode of payment,

the debtor offers another thing to the creditor who accepts it as
equivalent of payment of an outstanding debt. In order that there be
[16]

a valid dation in payment, the following are the requisites: (1) There
must be the performance of the prestation in lieu of payment
(animo solvendi) which may consist in the delivery of a corporeal thing
or a real right or a credit against the third person; (2) There must be
some difference between the prestation due and that which is given in
substitution (aliud proalio); (3) There must be an agreement between
the creditor and debtor that the obligation is immediately extinguished
by reason of the performance of a prestation different from that
due. The undertaking really partakes in one sense of the nature of
[17]

sale, that is, the creditor is really buying the thing or property of the
debtor, payment for which is to be charged against the debtors
debt. As such, the vendor in good faith shall be responsible, for the
existence and legality of the credit at the time of the sale but not for
the solvency of the debtor, in specified circumstances. [18]
 Hence, it may well be that the assignment of credit, which is in the
nature of a sale of personal property, produced the effects of
[19]

a dation in payment which may extinguish the obligation. However,[20]

as in any other contract of sale, the vendor or assignor is bound by

certain warranties.More specifically, the first paragraph of Article 1628
of the Civil Code provides:

The vendor in good faith shall be responsible for the existence and legality
of the credit at the time of the sale, unless it should have been sold as
doubtful; but not for the solvency of the debtor, unless it has been so
expressly stipulated or unless the insolvency was prior to the sale and of
common knowledge.

From the above provision, petitioner, as vendor or assignor, is

bound to warrant the existence and legality of the credit at the time of
the sale or assignment. When Jomero claimed that it was no longer
indebted to petitioner since the latter also had an unpaid obligation to
it, it essentially meant that its obligation to petitioner has been
extinguished by compensation. In other words, respondent alleged
[21]

the non-existence of the credit and asserted its claim to petitioners

warranty under the assignment. Therefore, it behooved on petitioner
to make good its warranty and paid the obligation.
Furthermore, we find that petitioner breached his obligation under
the Deed of Assignment, to wit:

And the ASSIGNOR further agrees and stipulates as aforesaid that the said
ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at
times hereafter, at the request of said ASSIGNEE, its successors or assigns,
at his cost and expense, execute and do all such further acts and deeds as
shall be reasonably necessary to effectually enable said ASSIGNEE to
recover whatever collectibles said ASSIGNOR has in accordance with the
true intent and meaning of these presents. (underscoring ours)
[22]

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

be deemed to have ensured the performance thereof in case the same
is later found to be inexistent. He should be held liable to pay to
respondent the amount of his indebtedness.
Hence, we affirm the decision of the Court of Appeals ordering
petitioner to pay respondent the sum of P335,462.14 with legal interest
thereon. However, we find that the award by the Court of Appeals of
attorneys fees is without factual basis. No evidence or testimony was
presented to substantiate this claim. Attorneys fees, being in the
nature of actual damages, must be duly substantiated by competent
proof.
 WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals
dated April 19, 2001 in CA-G.R. CV No. 47713, ordering petitioner to pay respondent the
sum of P335,462.14 with legal interest of 6% per annum from January 10, 1991 until fully
paid is AFFIRMED with MODIFICATION. Upon finality of this Decision, the rate of legal
interest shall be 12% per annum, inasmuch as the obligation shall thereafter become
equivalent to a forbearance of credit. The award of attorneys fees is DELETED for lack
[23]

of evidentiary basis.
SO ORDERED.

G.R. No. 166704 December 20, 2006

AGRIFINA AQUINTEY, petitioner,

vs.
SPOUSES FELICIDAD AND RICO TIBONG, respondents.

DECISION

CALLEJO, SR., J.:

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

The Antecedents

On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC of Baguio City, a
complaint for sum of money and damages against the respondents, spouses Felicidad and
Rico Tibong. Agrifina alleged that Felicidad had secured loans from her on several
occasions, at monthly interest rates of 6% to 7%. Despite demands, the spouses Tibong
failed to pay their outstanding loan, amounting to P773,000.00 exclusive of interests. The
complaint contained the following prayer:

WHEREFORE, premises considered, it is most respectfully prayed of this Honorable Court,

after due notice and hearing, to render judgment ordering defendants to pay plaintiff the
following:

a). SEVEN HUNDRED SEVENTY-THREE THOUSAND PESOS (P773,000.00)

representing the principal obligation of the defendants with the stipulated interests of six
(6%) percent per month from May 11, 1999 to date and or those that are stipulated on the
contracts as mentioned from paragraph two (2) of the complaint.

b). FIFTEEN PERCENT (15%) of the total accumulated obligations as attorney's fees.

c). Actual expenses representing the filing fee and other charges and expenses to be
incurred during the prosecution of this case.

Further prays for such other relief and remedies just and equitable under the premises.4
Agrifina appended a copy of the Counter-Affidavit executed by Felicidad in I.S. No. 93-334,
as well as copies of the promissory notes and acknowledgment receipts executed by
Felicidad covering the loaned amounts.5

In their Answer with Counterclaim,6 spouses Tibong admitted that they had secured loans
from Agrifina. The proceeds of the loan were then re-lent to other borrowers at higher
interest rates. They, likewise, alleged that they had executed deeds of assignment in favor
of Agrifina, and that their debtors had executed promissory notes in Agrifina's favor.
According to the spouses Tibong, this resulted in a novation of the original obligation to
Agrifina. They insisted that by virtue of these documents, Agrifina became the new collector
of their debtors; and the obligation to pay the balance of their loans had been extinguished.

The spouses Tibong specifically denied the material averments in paragraphs 2 and 2.1 of
the complaint. While they did not state the total amount of their loans, they declared that
they did not receive anything from Agrifina without any written receipt.7 They prayed for
that the complaint be dismissed.

In their Pre-Trial Brief, the spouses Tibong maintained that they have never obtained any
loan from Agrifina without the benefit of a written document.8

On August 17, 2000, the trial court issued a Pre-Trial Order where the following issues of
the case were defined:

Whether or not plaintiff is entitled to her claim of P773,000.00;

Whether or not plaintiff is entitled to stipulated interests in the promissory notes; and

Whether or not the parties are entitled to their claim for damages.9

The Case for Petitioner

Agrifina and Felicidad were classmates at the University of Pangasinan. Felicidad's

husband, Rico, also happened to be a distant relative of Agrifina. Upon Felicidad's prodding,
Agrifina agreed to lend money to Felicidad. According to Felicidad, Agrifina would be
earning interests higher than those given by the bank for her money. Felicidad told Agrifina
that since she (Felicidad) was engaged in the sale of dry goods at the GP Shopping Arcade,
she would use the money to buy bonnels and thread.10 Thus, Agrifina lent a total sum
of P773,000.00 to Felicidad, and each loan transaction was covered by either a promissory
note or an acknowledgment receipt.11Agrifina stated that she had lost the receipts signed
by Felicidad for the following amounts: P100,000.00,P34,000.00 and P2,000.00.12 The
particulars of the transactions are as follows:

Amount Date Obtained Interest Per Due Date

Mo.
P 100,000.00 May 11, 1989 6% August 11, 1989
4,000.00 June 8, 1989 - -
50,000.00 June 13, 1989 6% On demand
60,000.00 Aug. 16, 1989 7% January 1990
205,000.00 Oct. 13, 1989 7% January 1990
128,000.00 Oct. 19, 1989 7% January 1990
2,000.00 Nov. 12, 1989 6% April 28, 1990
10,000.00 June 13, 1990 - -
80,000.00 Jan. 4, 1990 - -
34,000.00 - 6% October 19, 1989
100,000.00 July 14, 1989 5% October 198913

According to Agrifina, Felicidad was able to pay only her loans amounting
to P122,600.00.14

In July 1990, Felicidad gave to Agrifina City Trust Bank Check No. 126804 dated August
25, 1990 in the amount ofP50,000.00 as partial payment.15 However, the check was
dishonored for having been drawn against insufficient funds.16 Agrifina then filed a criminal
case against Felicidad in the Office of the City Prosecutor. An Information for violation
of Batas Pambansa Bilang 22 was filed against Felicidad, docketed as Criminal Case No.
11181-R. After trial, the court ordered Felicidad to pay P50,000.00. Felicidad complied and
paid the face value of the check.17

In the meantime, Agrifina learned that Felicidad had re-loaned the amounts to other
borrowers.18 Agrifina sought the assistance of Atty. Torres G. A-ayo who advised her to
require Felicidad to execute deeds of assignment over Felicidad's debtors. The lawyer also
suggested that Felicidad's debtors execute promissory notes in Agrifina's favor, to "turn
over" their loans from Felicidad. This arrangement would facilitate collection of Felicidad's
account. Agrifina agreed to the proposal.19 Agrifina, Felicidad, and the latter's debtors had
a conference20 where Atty. A-ayo explained that Agrifina could apply her collections as
payments of Felicidad's account.21

From August 7, 1990 to October, 1990, Felicidad executed deeds of assignment of credits
(obligations)22 duly notarized by Atty. A-ayo, in which Felicidad transferred and assigned
to Agrifina the total amount of P546,459.00 due from her debtors.23 In the said deeds,
Felicidad confirmed that her debtors were no longer indebted to her for their respective
loans. For her part, Agrifina conformed to the deeds of assignment relative to the loans of
Virginia Morada and Corazon Dalisay.24 She was furnished copies of the deeds as well as
the promissory notes.25

The following debtors of Felicidad executed promissory notes where they obliged
themselves to pay directly to Agrifina:

Debtors Account Date of Instrument Date Payable

Juliet & Tommy Tibong
Corazon Dalisay
Rita Chomacog
Antoinette Manuel
Rosemarie Bandas
Fely Cirilo
Virginia Morada
Carmelita Casuga
Merlinda Gelacio
Total
P50,000.00 August 7, 1990 November 4, 1990 and February
4, 1991
8,000.00 August 7, 1990 No date
4,480.00 August 8, 1990 September 23, 1990
12,000.00 October 19, 1990 March 30, 1991
8,000.00 August 8, 1990 February 3, 1991
63,600.00 September 13, 1990 No date
62,379.00 August 9, 1990 February 9, 1991
59,000.00 August 28, 1990 February 28, 1991
17,200.00 August 29, 1990 November 29, 199026
P284,659.00

Agrifina narrated that Felicidad showed to her the way to the debtors' houses to enable her
to collect from them. One of the debtors, Helen Cabang, did not execute any promissory
note but conformed to the Deed of Assignment of Credit which Felicidad executed in favor
of Agrifina.27 Eliza Abance conformed to the deed of assignment for and in behalf of her
sister, Fely Cirilo.28 Edna Papat-iw was not able to affix her signature on the deed of
assignment nor sign the promissory note because she was in Taipei, Taiwan.29

Following the execution of the deeds of assignment and promissory notes, Agrifina was
able to collect the total amount of P301,000.00 from Felicidad's debtors.30 In April 1990,
she tried to collect the balance of Felicidad's account, but the latter told her to wait until her
debtors had money.31 When Felicidad reneged on her promise, Agrifina filed a complaint
in the Office of the Barangay Captain for the collection of P773,000.00. However, no
settlement was arrived at.32

The Case for Respondents

Felicidad testified that she and her friend Agrifina had been engaged in the money-lending
business.33 Agrifina would lend her money with monthly interest,34 and she, in turn, would
re-lend the money to borrowers at a higher interest rate. Their business relationship turned
sour when Agrifina started complaining that she (Felicidad) was actually earning more than
Agrifina.35 Before the respective maturity dates of her debtors' loans, Agrifina asked her to
pay her account since Agrifina needed money to buy a house and lot in Manila. However,
she told Agrifina that she could not pay yet, as her debtors' loan payments were not yet
due.36 Agrifina then came to her store every afternoon to collect from her, and persuaded
her to go to Atty. Torres G. A-ayo for legal advice.37 The lawyer suggested that she indorse
the accounts of her debtors to Agrifina so that the latter would be the one to collect from
her debtors and she would no longer have any obligation to Agrifina.38 She then executed
deeds of assignment in favor of Agrifina covering the sums of money due from her debtors.
She signed the deeds prepared by Atty. A-ayo in the presence of Agrifina.39 Some of the
debtors signed the promissory notes which were likewise prepared by the lawyer.
Thereafter, Agrifina personally collected from Felicidad's debtors.40 Felicidad further
narrated that she received P250,000.00 from one of her debtors, Rey Rivera, and remitted
the payment to Agrifina.41

Agrifina testified, on rebuttal, that she did not enter into a re-lending business with Felicidad.
When she asked Felicidad to consolidate her loans in one document, the latter told her to
seek the assistance of Atty. A-ayo.42 The lawyer suggested that Felicidad assign her credits
in order to help her collect her loans.43 She agreed to the deeds of assignment to help
Felicidad collect from the debtors.44

On January 20, 2003, the trial court rendered its Decision45 in favor of Agrifina. The fallo of
the decision reads:

WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendants
ordering the latter to pay the plaintiffs (sic) the following amounts:

1. P472,000 as actual obligation with the stipulated interest of 6% per month from May 11,
1999 until the said obligation is fully paid. However, the amount of P50,000 shall be
deducted from the total accumulated interest for the same was already paid by the
defendant as admitted by the plaintiff in her complaint,

2. P25,000 as attorney's fees,

3. [T]o pay the costs.

SO ORDERED.46

The trial court ruled that Felicidad's obligation had not been novated by the deeds of
assignment and the promissory notes executed by Felicidad's borrowers. It explained that
the documents did not contain any express agreement to novate and extinguish Felicidad's
obligation. It declared that the deeds and notes were separate contracts which could stand
alone from the original indebtedness of Felicidad. Considering, however, Agrifina's
admission that she was able to collect from Felicidad's debtors the total amount
of P301,000.00, this should be deducted from the latter's accountability.47 Hence, the
balance, exclusive of interests, amounted to P472,000.00.

On appeal, the CA affirmed with modification the decision of the RTC and stated that,
based on the promissory notes and acknowledgment receipts signed by Felicidad, the
appellants secured loans from the appellee in the total principal amount of
only P637,000.00, not P773,000.00 as declared by the trial court. The CA found that, other
than Agrifina's bare testimony that she had lost the promissory notes and acknowledgment
receipts, she failed to present competent documentary evidence to substantiate her claim
that Felicidad had, likewise, borrowed the amounts of P100,000.00, P34,000.00,
and P2,000.00. Of the P637,000.00 total account, P585,659.00 was covered by the deeds
of assignment and promissory notes; hence, the balance of Felicidad's account amounted
to only P51,341.00. The fallo of the decision reads:

WHEREFORE, in view of the foregoing, the decision dated January 20, 2003 of the RTC,
Baguio City, Branch 61 in Civil Case No. 4370-R is hereby MODIFIED. Defendants-
appellants are hereby ordered to pay the balance of the total indebtedness in the amount
of P51,341.00 plus the stipulated interest of 6% per month from May 11, 1999 until the
finality of this decision.

SO ORDERED.48

The appellate court sustained the trial court's ruling that Felicidad's obligation to Agrifina
had not been novated by the deeds of assignment and promissory notes executed in the
latter's favor. Although Agrifina was subrogated as a new creditor in lieu of Felicidad,
Felicidad's obligation to Agrifina under the loan transaction remained; there was no
intention on their part to novate the original obligation. Nonetheless, the appellate court
held that the legal effects of the deeds of assignment could not be totally disregarded. The
assignments of credits were onerous, hence, had the effect of payment, pro tanto, of the
outstanding obligation. The fact that Agrifina never repudiated or rescinded such
assignments only shows that she had accepted and conformed to it. Consequently, she
cannot collect both from Felicidad and her individual debtors without running afoul to the
principle of unjust enrichment. Agrifina's primary recourse then is against Felicidad's
individual debtors on the basis of the deeds of assignment and promissory notes.

The CA further declared that the deeds of assignment executed by Felicidad had the effect
of payment of her outstanding obligation to Agrifina in the amount of P585,659.00. It ruled
that, since an assignment of credit is in the nature of a sale, the assignors remained liable
for the warranties as they are responsible for the existence and legality of the credit at the
time of the assignment.

Both parties moved to have the decision reconsidered,49 but the appellate court denied
both motions on December 21, 2004.50

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

1. The Honorable Court of Appeals erred in ruling that the deeds of assignment in favor of
petitioner has the effect of payment of the original obligation even as it ruled out that the
original obligation and the assigned credit are distinct and separate and can stand
independently from each other;
2. The Honorable Court of Appeals erred in passing upon issues raised for the first time on
appeal; and

3. The Honorable Court of Appeals erred in resolving fact not in issue.51

Petitioner avers that the appellate court erred in ruling that respondents' original obligation
amounted to onlyP637,000.00 (instead of P773,000.00) simply because she lost the
promissory notes/receipts which evidenced the loans executed by respondent Felicidad
Tibong. She insists that the issue of whether Felicidad owed her less thanP773,000.00
was not raised by respondents during pre-trial and in their appellate brief; the appellate
court was thus proscribed from taking cognizance of the issue.

Petitioner avers that respondents failed to deny, in their verified answer, that they had
secured the P773,000.00 loan; hence, respondents are deemed to have admitted the
allegation in the complaint that the loans secured by respondent from her amounted
to P773,000.00. As gleaned from the trial court's pre-trial order, the main issue is whether
or not she should be made to pay this amount.

Petitioner further maintains that the CA erred in deducting the total amount of P585,659.00
covered by the deeds of assignment executed by Felicidad and the promissory notes
executed by the latter's debtors, and that the balance of respondents' account was
only P51,341.00. Moreover, the appellate court's ruling that there was no novation runs
counter to its holding that the primary recourse was against Felicidad's debtors. Petitioner
avers that of the 11 deeds of assignment and promissory notes, only two bore her
signature.52 She insists that she is not bound by the deeds which she did not sign. By
assigning the obligation to pay petitioner their loan accounts, Felicidad's debtors merely
assumed the latter's obligation and became co-debtors to petitioner. Respondents were
not released from their obligation under their loan transactions, and she had the option to
demand payment from them or their debtors. Citing the ruling of this Court in Magdalena
Estates, Inc. v. Rodriguez,53 petitioner insists that the first debtor is not released from
responsibility upon reaching an agreement with the creditor. The payment by a third person
of the first debtor's obligation does not constitute novation, and the creditor can still enforce
the obligation against the original debtor. Petitioner also cites the ruling of this Court
in Guerrero v. Court of Appeals.54

In their Comment on the petition, respondents aver that by virtue of respondent Felicidad's
execution of the deeds of assignment, and the original debtors' execution of the promissory
notes (along with their conformity to the deeds of assignment with petitioner's consent),
their loan accounts with petitioner amounting to P585,659.00 had been effectively
extinguished. Respondents point out that this is in accordance with Article 1291, paragraph
2, of the Civil Code. Thus, the original debtors of respondents had been substituted as
petitioner's new debtors.

Respondents counter that petitioner had been subrogated to their right to collect the loan
accounts of their debtors. In fact, petitioner, as the new creditor of respondents' former
debtors had been able to collect the latter's loan accounts which amounted to P301,000.00.
The sums received by respondents' debtors were the same loans which they obliged to
pay to petitioner under the promissory notes executed in petitioner's favor.

Respondents aver that their obligation to petitioner cannot stand or exist separately from
the original debtors' obligation to petitioner as the new creditor. If allowed to collect from
them as well as from their original debtors, petitioner would be enriching herself at the
expense of respondents. Thus, despite the fact that petitioner had collected P172,600.00
from respondents and P301,000.00 from the original debtors, petitioner still sought to
collect P773,000.00 from them in the RTC. Under the deeds of assignment executed by
Felicidad and the original debtors' promissory notes, the original debtors' accounts were
assigned to petitioner who would be the new creditor. In fine, respondents are no longer
liable to petitioner for the balance of their loan account inclusive of interests. Respondents
also insist that petitioner failed to prove that she (petitioner) was merely authorized to
collect the accounts of the original debtors so as to to facilitate the payment of respondents'
loan obligation.

The Issues

The threshold issues are: (1) whether respondent Felicidad Tibong borrowed P773,000.00
from petitioner; and (2) whether the obligation of respondents to pay the balance of their
loans, including interest, was partially extinguished by the execution of the deeds of
assignment in favor of petitioner, relative to the loans of Edna Papat-iw, Helen Cabang,
Antoinette Manuel, and Fely Cirilo in the total amount of P371,000.00.

The Ruling of the Court

We have carefully reviewed the brief of respondents as appellants in the CA, and find that,
indeed, they had raised the issue of whether they received P773,000.00 by way of loans
from petitioner. They averred that, as gleaned from the documentary evidence of petitioner
in the RTC, the total amount they borrowed was onlyP673,000.00. They asserted that
petitioner failed to adduce concrete evidence that they received P773,000.00 from her.55

We agree, however, with petitioner that the appellate court erred in reversing the finding of
the RTC simply because petitioner failed to present any document or receipt signed by
Felicidad.

Section 10, Rule 8 of the Rules of Civil Procedure requires a defendant to "specify each
material allegation of fact the truth of which he does not admit and, whenever practicable,
x x x set forth the substance of the matters upon which he relies to support his denial.56

Section 11, Rule 8 of the same Rules provides that allegations of the complaint not
specifically denied are deemed admitted.57

The purpose of requiring the defendant to make a specific denial is to make him disclose
the matters alleged in the complaint which he succinctly intends to disprove at the trial,
together with the matter which he relied upon to support the denial. The parties are
compelled to lay their cards on the table.58

A denial is not made specific simply because it is so qualified by the defendant. A general
denial does not become specific by the use of the word "specifically." When matters of
whether the defendant alleges having no knowledge or information sufficient to form a
belief are plainly and necessarily within the defendant's knowledge, an alleged "ignorance
or lack of information" will not be considered as a specific denial. Section 11, Rule 8 of the
Rules also provides that material averments in the complaint other than those as to the
amount of unliquidated damages shall be deemed admitted when not specifically
denied.59 Thus, the answer should be so definite and certain in its allegations that the
pleader's adversary should not be left in doubt as to what is admitted, what is denied, and
what is covered by denials of knowledge as sufficient to form a belief.60

In the present case, petitioner alleged the following in her complaint:

2. That defendants are indebted to the plaintiff in the principal amount of SEVEN
HUNDRED SEVENTY-THREE THOUSAND PESOS (P773,000.00) Philippine Currency
with a stipulated interest which are broken down as follows. The said principal amounts
was admitted by the defendants in their counter-affidavit submitted before the court. Such
affidavit is hereby attached as Annex "A;"61
 xxxx

H) The sum of THIRTY FOUR THOUSAND PESOS (P34,000.00) with interest at six (6%)
per cent per month and payable on October 19, 1989, however[,] the receipt for the
meantime cannot be recovered as it was misplaced by the plaintiff but the letter of
defendant FELICIDAD TIBONG is hereby attached as Annex "H" for the appreciation of
the Honorable court;

I) The sum of ONE HUNDRED THOUSAND PESOS (P100,000.00) with interest at five
(5%) percent per month, obtained on July 14, 1989 and payable on October 14, 1989.
Such receipt was lost but admitted by the defendants in their counter-affidavit as attached
[to] this complaint and marked as Annex "A" mentioned in paragraph one (1); x x x62

In their Answer, respondents admitted that they had secured loans from petitioner. While
the allegations in paragraph 2 of the complaint were specifically denied, respondents
merely averred that petitioner and respondent Felicidad entered into an agreement for the
lending of money to interested borrowers at a higher interest rate. Respondents failed to
declare the exact amount of the loans they had secured from petitioner. They also failed
to deny the allegation in paragraph 2 of the complaint that respondent Felicidad signed
and submitted a counter-affidavit in I.S. No. 93-334 where she admitted having secured
loans from petitioner in the amount of P773,000.00. Respondents, likewise, failed to deny
the allegation in paragraph 2(h) of the complaint that respondents had secured
a P34,000.00 loan payable on October 19, 1989, evidenced by a receipt which petitioner
had misplaced. Although respondents specifically denied in paragraph 2.11 of their Answer
the allegations in paragraph 2(I) of the complaint, they merely alleged that "they have not
received sums of money from the plaintiff without any receipt therefor."

Respondents, likewise, failed to specifically deny another allegation in the complaint that
they had secured aP100,000.00 loan from petitioner on July 14, 1989; that the loan was
payable on October 14, 1989; and evidenced by a receipt which petitioner claimed to have
lost. Neither did respondents deny the allegation that respondents admitted their loan
of P100,000.00 in the counter-affidavit of respondent Felicidad, which was appended to
the complaint as Annex "A." In fine, respondents had admitted the existence of
their P773,000.00 loan from petitioner.

We agree with the finding of the CA that petitioner had no right to collect from respondents
the total amount ofP301,000.00, which includes more than P178,980.00 which respondent
Felicidad collected from Tibong, Dalisay, Morada, Chomacog, Cabang, Casuga, Gelacio,
and Manuel. Petitioner cannot again collect the same amount from respondents; otherwise,
she would be enriching herself at their expense. Neither can petitioner collect from
respondents more than P103,500.00 which she had already collected from Nimo, Cantas,
Rivera, Donguis, Fernandez and Ramirez.

There is no longer a need for the Court to still resolve the issue of whether respondents'
obligation to pay the balance of their loan account to petitioner was partially extinguished
by the promissory notes executed by Juliet Tibong, Corazon Dalisay, Rita Chomacog,
Carmelita Casuga, Merlinda Gelacio and Antoinette Manuel because, as admitted by
petitioner, she was able to collect the amounts under the notes from said debtors and
applied them to respondents' accounts.

Under Article 1231(b) of the New Civil Code, novation is enumerated as one of the ways
by which obligations are extinguished. Obligations may be modified by changing their
object or principal creditor or by substituting the person of the debtor.63 The burden to prove
the defense that an obligation has been extinguished by novation falls on the debtor.64 The
nature of novation was extensively explained in Iloilo Traders Finance, Inc. v. Heirs of Sps.
Oscar Soriano, Jr.,65 as follows:
Novation may either be extinctive or modificatory, much being dependent on the nature of
the change and the intention of the parties. Extinctive novation is never presumed; there
must be an express intention to novate; in cases where it is implied, the acts of the parties
must clearly demonstrate their intent to dissolve the old obligation as the moving
consideration for the emergence of the new one. Implied novation necessitates that the
incompatibility between the old and new obligation be total on every point such that the old
obligation is completely superseded by the new one. The test of incompatibility is whether
they can stand together, each one having an independent existence; if they cannot and
are irreconciliable, the subsequent obligation would also extinguish the first.

An extinctive novation would thus have the twin effects of, first, extinguishing an existing
obligation and, second, creating a new one in its stead. This kind of novation presupposes
a confluence of four essential requisites: (1) a previous valid obligation; (2) an agreement
of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and
(4) the birth of a valid new obligation. Novation is merely modificatory where the change
brought about by any subsequent agreement is merely incidental to the main obligation
(e.g., a change in interest rates or an extension of time to pay); in this instance, the new
agreement will not have the effect of extinguishing the first but would merely supplement it
or supplant some but not all of its provisions.66 (Citations Omitted)

Novation which consists in substituting a new debtor (delegado) in the place of the original
one (delegante) may be made even without the knowledge or against the will of the latter
but not without the consent of the creditor. Substitution of the person of the debtor may be
effected by delegacion, meaning, the debtor offers, and the creditor (delegatario), accepts
a third person who consents to the substitution and assumes the obligation. Thus, the
consent of those three persons is necessary.67 In this kind of novation, it is not enough to
extend the juridical relation to a third person; it is necessary that the old debtor be released
from the obligation, and the third person or new debtor take his place in the
relation.68 Without such release, there is no novation; the third person who has assumed
the obligation of the debtor merely becomes a co-debtor or a surety. If there is no
agreement as to solidarity, the first and the new debtor are considered obligated jointly.69

In Di Franco v. Steinbaum,70 the appellate court ruled that as to the consideration

necessary to support a contract of novation, the rule is the same as in other contracts. The
consideration need not be pecuniary or even beneficial to the person promising. It is
sufficient if it be a loss of an inconvenience, such as the relinquishment of a right or the
discharge of a debt, the postponement of a remedy, the discontinuance of a suit, or
forbearance to sue.

In City National Bank of Huron, S.D. v. Fuller,71 the Circuit Court of Appeals ruled that the
theory of novation is that the new debtor contracts with the old debtor that he will
pay the debt, and also to the same effect with the creditor, while the latter agrees to
accept the new debtor for the old. A novation is not made by showing that the substituted
debtor agreed to pay the debt; it must appear that he agreed with the creditor to do
so. Moreover, the agreement must be based on the consideration of the creditor's
agreement to look to the new debtor instead of the old. It is not essential that
acceptance of the terms of the novation and release of the debtor be shown by express
agreement. Facts and circumstances surrounding the transaction and the subsequent
conduct of the parties may show acceptance as clearly as an express agreement, albeit
implied.72

We find in this case that the CA correctly found that respondents' obligation to pay the
balance of their account with petitioner was extinguished, pro tanto, by the deeds of
assignment of credit executed by respondent Felicidad in favor of petitioner.
An assignment of credit is an agreement by virtue of which the owner of a credit, known
as the assignor, by a legal cause, such as sale, dation in payment, exchange or donation,
and without the consent of the debtor, transfers his credit and accessory rights to another,
known as the assignee, who acquires the power to enforce it to the same extent as the
assignor could enforce it against the debtor.73 It may be in the form of sale, but at times it
may constitute a dation in payment, such as when a debtor, in order to obtain a release
from his debt, assigns to his creditor a credit he has against a third person.74

In Vda. de Jayme v. Court of Appeals,75 the Court held that dacion en pago is the delivery
and transmission of ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation. It is a special mode of payment where the
debtor offers another thing to the creditor who accepts it as equivalent of payment of an
outstanding debt. The undertaking really partakes in one sense of the nature of sale, that
is, the creditor is really buying the thing or property of the debtor, payment for which is to
be charged against the debtor's obligation. As such, the essential elements of a contract
of sale, namely, consent, object certain, and cause or consideration must be present. In its
modern concept, what actually takes place in dacion en pago is an objective novation of
the obligation where the thing offered as an accepted equivalent of the performance of an
obligation is considered as the object of the contract of sale, while the debt is considered
as the purchase price. In any case, common consent is an essential prerequisite, be it sale
or novation, to have the effect of totally extinguishing the debt or obligation.76

The requisites for dacion en pago are: (1) there must be a performance of the prestation
in lieu of payment (animo solvendi) which may consist in the delivery of a corporeal thing
or a real right or a credit against the third person; (2) there must be some difference
between the prestation due and that which is given in substitution (aliud pro alio); and (3)
there must be an agreement between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance of a prestation different from that
due.77

All the requisites for a valid dation in payment are present in this case. As gleaned from
the deeds, respondent Felicidad assigned to petitioner her credits "to make good" the
balance of her obligation. Felicidad testified that she executed the deeds to enable her to
make partial payments of her account, since she could not comply with petitioner's frenetic
demands to pay the account in cash. Petitioner and respondent Felicidad agreed to relieve
the latter of her obligation to pay the balance of her account, and for petitioner to collect
the same from respondent's debtors.

Admittedly, some of respondents' debtors, like Edna Papat-iw, were not able to affix their
conformity to the deeds. In an assignment of credit, however, the consent of the debtor is
not essential for its perfection; the knowledge thereof or lack of it affecting only the
efficaciousness or inefficaciousness of any payment that might have been made. The
assignment binds the debtor upon acquiring knowledge of the assignment but he is entitled,
even then, to raise against the assignee the same defenses he could set up against the
assignor78 necessary in order that assignment may fully produce legal effects. Thus, the
duty to pay does not depend on the consent of the debtor. The purpose of the notice is
only to inform that debtor from the date of the assignment. Payment should be made to the
assignee and not to the original creditor.

The transfer of rights takes place upon perfection of the contract, and ownership of the
right, including all appurtenant accessory rights, is acquired by the assignee79 who steps
into the shoes of the original creditor as subrogee of the latter80 from that amount, the
ownership of the right is acquired by the assignee. The law does not require any formal
notice to bind the debtor to the assignee, all that the law requires is knowledge of the
assignment. Even if the debtor had not been notified, but came to know of the assignment
by whatever means, the debtor is bound by it. If the document of assignment is public, it is
evidence even against a third person of the facts which gave rise to its execution and of
the date of the latter. The transfer of the credit must therefore be held valid and effective
from the moment it is made to appear in such instrument, and third persons must recognize
it as such, in view of the authenticity of the document, which precludes all suspicion of
fraud with respect to the date of the transfer or assignment of the credit.81

As gleaned from the deeds executed by respondent Felicidad relative to the accounts of
her other debtors, petitioner was authorized to collect the amounts of P6,000.00 from
Cabang, and P63,600.00 from Cirilo. They obliged themselves to pay petitioner.
Respondent Felicidad, likewise, unequivocably declared that Cabang and Cirilo no longer
had any obligation to her.

Equally significant is the fact that, since 1990, when respondent Felicidad executed the
deeds, petitioner no longer attempted to collect from respondents the balance of their
accounts. It was only in 1999, or after nine (9) years had elapsed that petitioner attempted
to collect from respondents. In the meantime, petitioner had collected from respondents'
debtors the amount of P301,000.00.

While it is true that respondent Felicidad likewise authorized petitioner in the deeds to
collect the debtors' accounts, and for the latter to pay the same directly, it cannot thereby
be considered that respondent merely authorized petitioner to collect the accounts of
respondents' debtors and for her to apply her collections in partial payments of their
accounts. It bears stressing that petitioner, as assignee, acquired all the rights and
remedies passed by Felicidad, as assignee, at the time of the assignment.82 Such rights
and remedies include the right to collect her debtors' obligations to her.

Petitioner cannot find solace in the Court's ruling in Magdalena Estates. In that case, the
Court ruled that the mere fact that novation does not follow as a matter of course when the
creditor receives a guaranty or accepts payments from a third person who has agreed to
assume the obligation when there is no agreement that the first debtor would be released
from responsibility. Thus, the creditor can still enforce the obligation against the original
debtor.

In the present case, petitioner and respondent Felicidad agreed that the amounts due from
respondents' debtors were intended to "make good in part" the account of respondents.
Case law is that, an assignment will, ordinarily, be interpreted or construed in accordance
with the rules of construction governing contracts generally, the primary object being
always to ascertain and carry out the intention of the parties. This intention is to be derived
from a consideration of the whole instrument, all parts of which should be given effect, and
is to be sought in the words and language employed.83

Indeed, the Court must not go beyond the rational scope of the words used in construing
an assignment, words should be construed according to their ordinary meaning, unless
something in the assignment indicates that they are being used in a special sense. So, if
the words are free from ambiguity and expressed plainly the purpose of the instrument,
there is no occasion for interpretation; but where necessary, words must be interpreted in
the light of the particular subject matter.84 And surrounding circumstances may be
considered in order to understand more perfectly the intention of the parties. Thus, the
object to be accomplished through the assignment, and the relations and conduct of the
parties may be considered in construing the document.

Although it has been said that an ambiguous or uncertain assignment should be construed
most strictly against the assignor, the general rule is that any ambiguity or uncertainty in
the meaning of an assignment will be resolved against the party who prepared it; hence, if
the assignment was prepared by the assignee, it will be construed most strictly against him
or her.85 One who chooses the words by which a right is given ought to be held to the strict
interpretation of them, rather than the other who only accepts them.86
Considering all the foregoing, we find that respondents still have a balance on their account
to petitioner in the principal amount of P33,841.00, the difference between their loan
of P773,000.00 less P585,659.00, the payment of respondents' other debtors amounting
to P103,500.00, and the P50,000.00 payment made by respondents.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The Decision and
Resolution of the Court of Appeals are AFFIRMED with MODIFICATION in that the
balance of the principal account of the respondents to the petitioner is P33,841.00. No
costs.

SO ORDERED.

Austria-Martine
 EN BANC

A.C. No. 6955 July 27, 2006

MAR YUSON, complainant,

vs.
ATTY. JEREMIAS R. VITAN, respondent.

DECISION

PANGANIBAN, C.J.:

Once again this Court exhorts members of the bar to live up to the strictures of the Lawyers'
Oath, the Code of Professional Responsibility, and the Canons of Professional Ethics.
Otherwise, they shall be sanctioned by this Court.

The Case

Before us is a Letter-Complaint1 for the disbarment of Atty. Jeremias R. Vitan, filed by Mar
Yuson with the Commission on Bar Discipline (CBD) of the Integrated Bar of the Philippines
(IBP). Respondent was accused of taking advantage of complainant's generosity and
credulity.

On August 5, 2004, IBP-CBD directed Atty. Vitan to submit his Answer within 15 days from
receipt of the Order;2otherwise, he would be considered in default and the case heard ex
parte.

Because respondent failed to submit his Answer within the given period, the CBD
considered his failure and non-appearance as a waiver of his right to participate in the
proceedings.3 Thus, the hearing scheduled for August 11, 2005, pushed through, with the
original copies of the checks he had issued presented by complainant as evidence.
Afterwards, the CBD issued an Order submitting the case for Resolution.4 On August 23,
2005, Commissioner Milagros V. San Juan rendered her Report and Recommendation.5

Respondent denied having received a copy of the Complaint against him and alleged that
it was only on August 24, 2005, that he received the Order submitting the case for
resolution. Thus, he filed an Urgent Motion to Revive/Re-open and with Leave to Admit
Attached Answer.6

In its Resolution No. XVII-2005-101 dated October 22, 2005, the IBP Board of Directors
adopted and approved, with modification, the investigating commissioner's Report and
Recommendation. Upon respondent was imposed the penalty of suspension from the
practice of law for two years, after the board found that he had taken advantage of
complainant through deceit and dishonesty. The lawyer was further ordered to give back
the money he had received from complainant.

The Facts

Complainant Mar Yuson was a taxi driver with eight children. In October 2002, he received
a sum of money by way of inheritance. According to him, he and his wife intended to use
the money to purchase a taxi, repair their dilapidated house, and hold a debut party for
their daughter.7
They were able to purchase a secondhand taxi, and Atty. Vitan helped him with all the legal
matters concerning this purchase. Regrettably, their other plans were put on hold, because
the lawyer borrowed P100,000 from them in December 2002. It was agreed that the loan
would be repaid before the end of the following year,8 in time for the debut on November
24, 2003.9

To guarantee payment, respondent executed in favor of complainant several postdated

checks to cover the loaned amount. Those checks, however, turned out to be worthless,
because they had been drawn against the lawyer's closed account in the Bank of
Commerce in Escolta, Manila. The six dishonored checks were presented during the
hearing before the IBP commissioner.10

Complainant maintained that he had repeatedly tried to recover the debt, only to be turned
away empty-handed each time. He conceded, though, that respondent had given an
undisclosed amount covered by the checks dated January and February 2003.11 The
amounts covered by the dishonored checks remained unpaid.

This development prompted complainant to seek the aid of the IBP National Committee on
Legal Aid (NCLA) in obtaining payment. On November 14, 2003, the IBP-NCLA, through
Deputy Director Rosalie J. de la Cruz, sent him a letter.12 It informed him of the impending
administrative case and advised him to confer with complainant, presumably to settle the
matter. Upon receipt13 of the letter, he again gave assurances that he would pay the loan
in time for the debut.14

When the date passed without any payment, complainant demanded a collateral to secure
the loan. Thus, in his favor, Atty. Vitan executed a document denominated as a Deed of
Absolute Sale, covering the latter's parcel of land located in Sta. Maria, Bulacan. According
to complainant, their intention was to transfer the title of the property to him temporarily, so
that he could either sell or mortgage15 it. It was further agreed that, if it was mortgaged,
respondent would redeem it as partial or full payment of the loan.16

Curiously, however, the parties executed a second Deed of Absolute Sale,17 this time in
favor of Atty. Vitan, with complainant as vendor. The purpose of this particular document
was not explained by either party.

On April 12, 2004, complainant was able to mortgage18 the property

for P30,000.19 Contrary to their earlier agreement, respondent did not redeem it from the
mortgagee and, instead, simply sent complainant a letter20 dated July 7, 2004, promising
to pay on or before July 12, 2004. As this promise was not fulfilled, the mortgagee
demanded payment from complainant and thereby allegedly exposed the latter to shame
and ridicule.21

On July 19, 2004, IBP-NCLA sent another letter22 on behalf of complainant. Respondent
was informed that an administrative case would be filed against him, unless he settled his
obligations by July 30, 2004, the date given by complainant.

On August 30, 2004, the IBP-NCLA received the reply23 dated July 30, 2004, submitted by
Atty. Vitan who explained that he had already settled his obligation. He maintained that he
had in fact executed, in complainant's favor, a Deed of Absolute Sale over his 203-square-
meter residential property in Sta. Maria, Bulacan. He clarified that "[their] understanding
was that [complainant] ha[d] the option to use, mortgage or sell [the property] and return
to me the excess of the proceeds after obtaining his money represented by my six (6)
dishonored checks."24 Interestingly, respondent attached the Deed of Absolute Sale in
which he was the vendee and complainant the vendor.25 It appears that this was the second
Deed of Absolute Sale, also referred to in the Complaint.26
Only after the IBP investigating commissioner had rendered her Report and
Recommendation27 did Atty. Vitan submit his Answer to the Letter-Complaint. He called
the second document a "Counter Deed of Sale," executed as a "sort of collateral/security
for the account of [his] liaison officer [Evelyn Estur]."28 He admitted having given several
postdated checks amounting to P100,000, supposedly to guarantee the indebtedness of
Estur to complainant. Atty. Vitan argued for the first time that it was she who had incurred
the debts, and that he had acted only as a "character reference and/or guarantor."29 He
maintained that he had given in to the one-sided transactions, because he was "completely
spellbound by complainant's seeming sincerity and kindness."30 To corroborate his
statements, he attached Estur's Affidavit.31

Report of the Investigating Commissioner

In her Report and Recommendation, Commissioner San Juan recommended that Atty.
Vitan be suspended until his restitution of the amount he had borrowed. She held that
respondent, having taken advantage of complainant and thus shown dishonesty and
untrustworthiness, did not deserve to retain his membership in the bar.

On November 24, 2005, the Supreme Court received the IBP Resolution adopting, with
modification, the Report and Recommendation of the investigating commissioner.

The Court's Ruling

We agree with the findings of the IBP Board of Governors, but reduce the period of
suspension to six months.

Respondent's Administrative Liability

Lawyers are instruments for the administration of justice. They are expected to maintain
not only legal proficiency but also a high standard of ethics, honesty, integrity and fair
dealing. In this way, the people's faith and confidence in the judicial system is ensured.32

In the present case, Atty. Vitan undoubtedly owed money to complainant. In a letter33 to
IBP Deputy Director de la Cruz, respondent admitted having incurred the P100,000 loan.
It was only in his Answer34 that the lawyer suddenly denied that he had personally incurred
this obligation. This time, he pointed to his employee, Estur, as the true debtor. We find his
version of the facts implausible.

First, the story involving a certain Evelyn Estur was clearly a mere afterthought, conjured
simply to escape his liability. If it were true that it was she who owed the money, he should
have mentioned this alleged fact in his letter to the IBP NCLA deputy director. Instead,
respondent was completely silent about Estur and merely asserted that he had already
settled his debt with complainant.

Second, the promise of Atty. Vitan to settle his obligations on particular dates is contained
in two handwritten notes signed by him and worded as follows:

"I undertake to settle the financial obligations of P100,000 – plus before the end of the
year."35

"Mar:

"We will settle on July 12, 2004, on or before said date."36

The wordings of these promissory notes disclose that he had a personal obligation to
complainant, without any mention of Estur at all. If it were true that Atty. Vitan had executed
those notes for the account of his liaison officer, he should have used words to that effect.
As a lawyer, he was aware that the preparation of promissory notes was not a "mere
formality;" it had legal consequences. It is quite far-fetched for a lawyer to assume the role
of guarantor, without saying so in the notes.

A lawyer may be disciplined for evading the payment of a debt validly incurred.37 In this
case, the failure of Atty. Vitan to pay his debt for over three years despite repeated
demands puts in question his standing as a member of the bar. Worse, he made several
promises to pay his debt promptly, but reneged on all of them. He even started to hide from
complainant according to the latter .38

Failure to honor just debts, particularly from clients, constitutes dishonest conduct that
does not speak well of a member of the bar.39 It is vital that a lawyer's conduct be kept
beyond reproach and above suspicion at all times. Rule 1.01 of the Code of Professional
Responsibility clearly provides that lawyers must not engage in unlawful, immoral or
deceitful conduct. They must comport themselves in a manner that will secure and
preserve the respect and confidence of the public for the legal profession.40

Atty. Vitan contends that his obligation was already extinguished, because he had allegedly
sold his Bulacan property to complainant.41 Basically, respondent is asserting that what
had transpired was a dation in payment. Governed by the law on sales, it is a transaction
that takes place when a piece of property is alienated to the creditor in satisfaction of a
debt in money.42 It involves delivery and transmission of ownership of a thing -- by the
debtor to the creditor -- as an accepted equivalent of the performance of the obligation.43

Going over the records of this case, we find the contention of Atty. Vitan undeserving of
credence. The records reveal that he did not really intend to sell and relinquish ownership
over his property in Sta. Maria, Bulacan, notwithstanding the execution of a Deed of
Absolute Sale in favor of complainant. The second Deed of Absolute Sale, which
reconveyed the property to respondent, is proof that he had no such intention. This second
Deed, which he referred to as his "safety net,"44 betrays his intention to counteract the
effects of the first one .

In a manner of speaking, Atty. Vitan was taking back with his right hand what he had given
with his left. The second Deed of Absolute Sale returned the parties right back where they
started, as if there were no sale in favor of complainant to begin with. In effect, on the basis
of the second Deed of Sale, respondent took back and asserted his ownership over the
property despite having allegedly sold it. Thus, he fails to convince us that there was a
bona fide dation in payment or sale that took place between the parties; that is, that there
was an extinguishment of obligation.

It appears that the true intention of the parties was to use the Bulacan property
to facilitate payment. They only made it appear that the title had been transferred to
complainant to authorize him to sell or mortgage the property.45 Atty. Vitan himself
admitted in his letter dated July 30, 2004, that their intention was to convert the property
into cash, so that payment could be obtained by complainant and the excess returned to
respondent.46 The records, however, do not show that the proceeds derived were sufficient
to discharge the obligation of the lawyer fully; thus, he is still liable to the extent of the
deficiency.

We hasten to add, however, that this administrative case is not the proper venue for us to
determine the extent of the remaining liability. This Court will not act as a collection agency
from faltering debtors, when the amount of the indebtedness is indefinite and disputed.47
Nevertheless, the records satisfactorily reveal the failure of respondent to live up to his
duties as a lawyer in consonance with the strictures of the Lawyer's Oath, the Code of
Professional Responsibility, and the Canons of Professional Ethics, thereby degrading not
only his person but his profession as well. So far, we find that his lack of sincerity in fulfilling
his obligations is revealed by his acts of issuing promissory notes and reneging on them;
executing a simulated Deed of Absolute Sale; and breaking his promise to redeem the
property from the mortgagee.

The repeated failure of Atty. Vitan to fulfill his promise puts in question his integrity and
character. Indeed, not only his integrity as an individual but, more important, his stature as
a member of the bar is affected by his acts of welching on his promises and misleading
complainant. Canon 1 and Rule 1.01 of the Code of Professional Responsibility explicitly
state thus:

"CANON 1 — A lawyer shall uphold the constitution, obey the laws of the land and promote
respect for law and legal processes.

"Rule 1.01 — A lawyer shall not engage in unlawful, dishonest, immoral or deceitful
conduct."

Any wrongdoing, whether professional or nonprofessional, indicating unfitness for the

profession justifies disciplinary action.48

There is yet another reason to find Atty. Vitan administratively liable. In his letter of July 30,
2004, was an admission that the personal checks he issued in favor of complainant had all
been dishonored.49 Whether those checks were issued for the account of respondent or of
Estur is not important. The fact remains that the lawyer knowingly issued worthless checks
and thus revealed his disposition to defraud complainant.

The act of a lawyer in issuing a check without sufficient funds to cover them -- or, worse,
drawn against a closed account --constitutes such willful dishonesty and unethical conduct
as to undermine the public confidence in the law and in lawyers.50 The act also manifests
a low regard for the Oath taken by the lawyer upon joining the profession, whose image
should be held in high esteem, not seriously and irreparably tarnished.51

Moreover, the inimical effect of the issuance of worthless checks has been recognized by
this Court in an earlier case, from which we quote:

"[T]he effect [of issuance of worthless checks] transcends the private interests of the
parties directly involved in the transaction and touches the interests of the community at
large. The mischief it creates is not only a wrong to the payee or holder, but also an injury
to the public since the circulation of valueless commercial papers can very well pollute the
channels of trade and commerce, injure the banking system and eventually hurt the welfare
of society and the public interest."52

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

In the instant case, complainant himself admits that respondent had already paid the
amounts covered by the January and February checks.56 Thus, there has been a partial
payment that justifies a modification of IBP's recommended penalty.

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

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

Let a copy of this Decision be entered in respondent's record as a member of the Bar, and
notice served on the Integrated Bar of the Philippines and on the Office of the Court
Administrator for circulation to all courts in the country.

SO ORDERED.