THIRD DIVISION

[G.R. No. 103577. October 7, 1996.]

ROMULO A. CORONEL, ALARICO A. CORONEL, ANNETTE A. CORONEL, ANNABELLE C. GONZALES

(for herself and on behalf of Floraida C. Tupper, as attorney-in-fact), CIELITO A. CORONEL, FLORAIDA A.
ALMONTE, and CATALINA BALAIS MABANAG, petitioners, vs. THE COURT OF APPEALS,
CONCEPCION D. ALCARAZ and RAMONA PATRICIA ALCARAZ, assisted by GLORIA F. NOEL as
attorney-in-fact, respondents.

DECISION

MELO, J p:

The petition before us has its roots in a complaint for specific performance to compel herein petitioners
(except the last named, Catalina Balais Mabanag) to consummate the sale of a parcel of land with its
improvements located along Roosevelt Avenue in Quezon City entered into by the parties sometime in
January 1985 for the price of P1,240,000.00

The undisputed facts of the case were summarized by respondent court in this wise:

On January 19, 1985, defendants-appellants Romulo Coronel, et al. (hereinafter referred to as Coronels)
executed a document entitled "Receipt of Down Payment" (Exh. "A") in favor of plaintiff Ramona Patricia
Alcaraz (hereinafter referred to as Ramona) which is reproduced hereunder:

RECEIPT OF DOWN PAYMENT

P1,240,000.00 — Total amount

50,000.00 — Down payment
—————————————
P1,190,000.00 — Balance

Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty Thousand Pesos
purchase price of our inherited house and lot, covered by TCT No. 119627 of the Registry of Deeds of
Quezon City, in the total amount of P1,240,000.00.

We bind ourselves to effect the transfer in our names from our deceased father, Constancio P. Coronel, the
transfer certificate of title immediately upon receipt of the down payment above-stated.

On our presentation of the TCT already in or name, We will immediately execute the deed of absolute sale
of said property and Miss Ramona Patricia Alcaraz shall immediately pay the balance of the P1,190,000.00.
Clearly, the conditions appurtenant to the sale are the following:

1. Ramona will make a down payment of Fifty Thousand (P50,000.00) Pesos upon execution
of the document aforestated;

2. The Coronels will cause the transfer in their names of the title of the property registered in
the name of their deceased father upon receipt of the Fifty Thousand (P50,000.00) Pesos
down payment.

3. Upon the transfer in their names of the subject property, the Coronels will execute the
deed of absolute sale in favor of Ramona and the latter will pay the former the whole
balance of One Million One Hundred Ninety Thousand (P1,190,000.00) Pesos.

On the same date (January 15, 1985), plaintiff-appellee Concepcion D. Alcaraz (hereinafter referred to as
Concepcion), mother of Ramona, paid the down payment of Fifty Thousand (P50,000.00) Pesos (Exh. "B",
Exh. "2").

On February 6, 1985, the property originally registered in the name of the Coronels' father was transferred in
their names under TCT No. 327043 (Exh. "D"; Exh. "4")

On February 18, 1985, the Coronels sold the property covered by TCT No. 327043 to intervenor-appellant
Catalina B. Mabanag (hereinafter referred to as Catalina) for One Million Five Hundred Eighty Thousand
(P1,580,000.00) Pesos after the latter has paid Three Hundred Thousand (P300,000.00) Pesos (Exhs. "F-
3"; Exh. "6-C")

For this reason, Coronels canceled and rescinded the contract (Exh. "A") with Ramona by depositing the
down payment paid by Concepcion in the bank in trust for Ramona Patricia Alcaraz.

On February 22, 1985, Concepcion, et al., filed a complaint for specific performance against the Coronels
and caused the annotation of a notice of lis pendens at the back of TCT No. 327403 (Exh. "E"; Exh. "5").

On April 2, 1985, Catalina caused the annotation of a notice of adverse claim covering the same property
with the Registry of Deeds of Quezon City (Exh. "F"; Exh. "6").

On April 25, 1985, the Coronels executed a Deed of Absolute Sale over the subject property in favor of
Catalina (Exh. "G"; Exh. "7").

On June 5, 1985, a new title over the subject property was issued in the name of Catalina under TCT No.
351582 (Exh. "H"; Exh. "8").

(Rollo, pp. 134-136)

In the course of the proceedings before the trial court (Branch 83, RTC, Quezon City) the parties agreed to
submit the case for decision solely on the basis of documentary exhibits. Thus, plaintiffs therein (now private
respondents) proffered their documentary evidence accordingly marked as Exhibits "A" through "J", inclusive
of their corresponding submarkings. Adopting these same exhibits as their own, then defendants (now
petitioners) accordingly offered and marked them as Exhibits "1" through "10", likewise inclusive of their
corresponding submarkings. Upon motion of the parties, the trial court gave them thirty (30) days within
which to simultaneously submit their respective memoranda, and an additional 15 days within which to
submit their corresponding comment or reply thereto, after which, the case would be deemed submitted for
resolution.

On April 14, 1988, the case was submitted for resolution before Judge Reynaldo Roura, who was then
temporarily detailed to preside over Branch 82 of the RTC of Quezon City. On March 1, 1989, judgment was
handed down by Judge Roura from his regular bench at Macabebe, Pampanga for the Quezon City branch,
disposing as follows:

WHEREFORE, judgment for specific performance is hereby rendered ordering defendant

to execute in favor of plaintiffs a deed of absolute sale covering that parcel of land
embraced in and covered by Transfer Certificate of Title No. 327403 (now TCT No.
331582) of the Registry of Deeds for Quezon City, together with all the improvements
existing thereon free from all liens and encumbrances, and once accomplished, to
immediately deliver the said document of sale to plaintiffs and upon receipt thereof, the
plaintiffs are ordered to pay defendants the whole balance of the purchase price
amounting to P1,190,000.00 in cash. Transfer Certificate of Title No. 331582 of the
Registry of Deeds for Quezon City in the name of intervenor is hereby canceled and
declared to be without force and effect. Defendants and intervenor and all other persons
claiming under them are hereby ordered to vacate the subject property and deliver
possession thereof to plaintiffs. Plaintiffs' claim for damages and attorney's fees, as well
as the counterclaims of defendants and intervenors are hereby dismissed.

No pronouncement as to costs.

So Ordered.

Macabebe, Pampanga for Quezon City, March 1, 1989.

(Rollo, p. 106)

A motion for reconsideration was filed by petitioners before the new presiding judge of the Quezon City RTC
but the same was denied by Judge Estrella T. Estrada, thusly:

The prayer contained in the instant motion, i.e., to annul the decision and to render anew
decision by the undersigned Presiding Judge should be denied for the following reasons:
(1) The instant case became submitted for decision as of April 14, 1988 when the parties
 terminated the presentation of their respective documentary evidence and when the
Presiding Judge at that time was Judge Reynaldo Roura. The fact that they were allowed
to file memoranda at some future date did not change the fact that the hearing of the case
was terminated before Judge Roura and therefore the same should be submitted to him
for decision; (2) When the defendants and intervenor did not object to the authority of
Judge Reynaldo Roura to decide the case prior to the rendition of the decision, when they
met for the first time before the undersigned Presiding Judge at the hearing of a pending
incident in Civil Case No. Q-46145 on November 11, 1988, they were deemed to have
acquiesced thereto and they are now estopped from questioning said authority of Judge
Roura after they received the decision in question which happens to be adverse to them;
(3) While it is true that Judge Reynaldo Roura was merely a Judge-on-detail at this Branch
of the Court, he was in all respects the Presiding Judge with full authority to act on any
pending incident submitted before this Court during his incumbency. When he returned to
his Official Station at Macabebe, Pampanga, he did not lose his authority to decide or
resolve such cases submitted to him for decision or resolution because he continued as
Judge of the Regional Trial Court and is of co-equal rank with the undersigned Presiding
Judge. The standing rule and supported by jurisprudence is that a Judge to whom a case
is submitted for decision has the authority to decide the case notwithstanding his transfer
to another branch or region of the same court (Sec. 9, Rule 135, Rule of Court).

Coming now to the twin prayer for reconsideration of the Decision dated March 1, 1989
rendered in the instant case, resolution of which now pertains to the undersigned
Presiding Judge, after a meticulous examination of the documentary evidence presented
by the parties, she is convinced that the Decision of March 1, 1989 is supported by
evidence and, therefore, should not be disturbed.

IN VIEW OF THE FOREGOING, the "Motion for Reconsideration and/or to Annul Decision
and Render Anew Decision by the Incumbent Presiding Judge" dated March 20, 1989 is
hereby DENIED.

SO ORDERED.
Quezon City, Philippines, July 12, 1989.
(Rollo, pp. 108-109)

Petitioners thereupon interposed an appeal, but on December 16, 1991, the Court of Appeals (Buena,
Gonzaga-Reyes, Abad Santos (P), JJ.) rendered its decision fully agreeing with the trial court.

Hence, the instant petition which was filed on March 5, 1992. The last pleading, private respondents' Reply
Memorandum, was filed on September 15, 1993. The case was, however, re-raffled to undersigned ponente
only on August 28, 1996, due to the voluntary inhibition of the Justice to whom the case was last assigned.

While we deem it necessary to introduce certain refinements in the disquisition of respondent court in the
affirmance of the trial court's decision, we definitely find the instant petition bereft of merit.

The heart of the controversy which is the ultimate key in the resolution of the other issues in the case at bar
is the precise determination of the legal significance of the document entitled "Receipt of Down Payment"
which was offered in evidence by both parties. There is no dispute as to the fact that said document
embodied the binding contract between Ramona Patricia Alcaraz on the one hand, and the heirs of
Constancio P. Coronel on the other, pertaining to a particular house and lot covered by TCT No. 119627, as
defined in Article 1305 of the Civil Code of the Philippines which reads as follows:

Art. 1305. A contract is a meeting of minds between two persons whereby one
binds himself, with respect to the other, to give something or to render some service.

While, it is the position of private respondents that the "Receipt of Down Payment" embodied a perfected
contract of sale, which perforce, they seek to enforce by means of an action for specific performance,
petitioners on their part insist that what the document signified was a mere executory contract to sell, subject
to certain suspensive conditions, and because of the absence of Ramona P. Alcaraz, who left for the United
States of America, said contract could not possibly ripen into a contract of absolute sale.
Plainly, such variance in the contending parties' contentions is brought about by the way each interprets the
terms and/or conditions set forth in said private instrument. Withal, based on whatever relevant and
admissible evidence may be available on record, this Court, as were the courts below, is now called upon to
adjudge what the real intent of the parties was at the time the said document was executed.

The Civil Code defines a contract of sale, thus:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay therefor
a price certain in money or its equivalent.

Sale, by its very nature, is a consensual contract because it is perfected by mere consent. The essential
elements of a contract of sale are the following:

a) Consent or meeting of the minds, that is, consent to transfer ownership in exchange for
the price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.

Under this definition, a Contract to Sell may not be considered as a Contract of Sale because the first
essential element is lacking. In a contract to sell, the prospective seller explicitly reserves the transfer of title
to the prospective buyer, meaning, the prospective seller does not as yet agree or consent to transfer
ownership of the property subject of the contract to sell until the happening of an event, which for present
purposes we shall take as the full payment of the purchase price. What the seller agrees or obliges himself
to do is to fulfill his promise to sell the subject property when the entire amount of the purchase price is
delivered to him. In other words the full payment of the purchase price partakes of a suspensive condition,
the non-fulfillment of which prevents the obligation to sell from arising and thus, ownership is retained by the
prospective seller without further remedies by the prospective buyer. In Roque vs. Lapuz (96 SCRA 741
[1980]), this Court had occasion to rule:

Hence, We hold that the contract between the petitioner and the respondent was a
contract to sell where the ownership or title is retained by the seller and is not to pass until
the full payment of the price, such payment being a positive suspensive condition and
failure of which is not a breach, casual or serious, but simply an event that prevented the
obligation of the vendor to convey title from acquiring binding force.

Stated positively, upon the fulfillment of the suspensive condition which is the full payment of the purchase
price, the prospective seller's obligation to sell the subject property by entering into a contract of sale with
the prospective buyer becomes demandable as provided in Article 1479 of the Civil Code which states:

Art. 1479. A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the
promissor if the promise is supported by a consideration distinct from the price.

A contract to sell may thus be defined as a bilateral contract whereby the prospective seller, while expressly
reserving the ownership of the subject property despite delivery thereof to the prospective buyer, binds
himself to sell the said property exclusively to the prospective buyer upon fulfillment of the condition agreed
upon, that is, full payment of the purchase price.

A contract to sell as defined hereinabove, may not even be considered as a conditional contract of sale
where the seller may likewise reserve title to the property subject of the sale until the fulfillment of a
suspensive condition, because in a conditional contract of sale, the first element of consent is present,
although it is conditioned upon the happening of a contingent event which may or may not occur. If the
suspensive condition is not fulfilled, the perfection of the contract of sale is completely abated (cf. Homesite
and Housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984]). However, if the suspensive condition is
fulfilled, the contract of sale is thereby perfected, such that if there had already been previous delivery of the
property subject of the sale to the buyer, ownership thereto automatically transfers to the buyer by operation
of law without any further act having to be performed by the seller.

In a contract to sell, upon the fulfillment of the suspensive condition which is the full payment of the
purchase price, ownership will not automatically transfer to the buyer although the property may have been
previously delivered to him. The prospective seller still has to convey title to the prospective buyer by
entering into a contract of absolute sale.

It is essential to distinguish between a contract to sell and a conditional contract of sale specially in cases
where the subject property is sold by the owner not to the party the seller contracted with, but to a third
person, as in the case at bench. In a contract to sell, there being no previous sale of the property, a third
person buying such property despite the fulfillment of the suspensive condition such as the full payment of
the purchase price, for instance, cannot be deemed a buyer in bad faith and the prospective buyer cannot
seek the relief of reconveyance of the property. There is no double sale in such case. Title to the property
will transfer to the buyer after registration because there is no defect in the owner-seller's title per se, but the
latter, of course, may be sued for damages by the intending buyer.

In a conditional contract of sale, however, upon the fulfillment of the suspensive condition, the sale becomes
absolute and this will definitely affect the seller's title thereto. In fact, if there had been previous delivery of
the subject property, the seller's ownership or title to the property is automatically transferred to the buyer
such that, the seller will no longer have any title to transfer to any third person. Applying Article 1544 of the
Civil Code, such second buyer of the property who may have had actual or constructive knowledge of such
defect in the seller's title, or at least was charged with the obligation to discover such defect, cannot be a
registrant in good faith. Such second buyer cannot defeat the first buyer's title. In case a title is issued to the
second buyer, the first buyer may seek reconveyance of the property subject of the sale.

With the above postulates as guidelines, we now proceed to the task of deciphering the real nature of the
contract entered into by petitioners and private respondents.

It is a canon in the interpretation of contracts that the words used therein should be given their natural and
ordinary meaning unless a technical meaning was intended (Tan vs. Court of Appeals, 212 SCRA 586
[1992]). Thus, when petitioners declared in the said "Receipt of Down Payment" that they —

Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty
Thousand Pesos purchase price of our inherited house and lot, covered by TCT No.
1199627 of the Registry of Deeds of Quezon City, in the total amount of P1,240,000.00.

without any reservation of title until full payment of the entire purchase price, the natural and ordinary idea
conveyed is that they sold their property.

When the "Receipt of Down Payment" is considered in its entirety, it becomes more manifest that there was
a clear intent on the part of petitioners to transfer title to the buyer, but since the transfer certificate of title
was still in the name of petitioner's father, they could not fully effect such transfer although the buyer was
then willing and able to immediately pay the purchase price. Therefore, petitioners-sellers undertook upon
receipt of the down payment from private respondent Ramona P. Alcaraz, to cause the issuance of a new
certificate of title in their names from that of their father, after which, they promised to present said title, now
in their names, to the latter and to execute the deed of absolute sale whereupon, the latter shall, in turn, pay
the entire balance of the purchase price.

The agreement could not have been a contract to sell because the sellers herein made no express
reservation of ownership or title to the subject parcel of land. Furthermore, the circumstance which
prevented the parties from entering into an absolute contract of sale pertained to the sellers themselves (the
certificate of title was not in their names) and not the full payment of the purchase price. Under the
established facts and circumstances of the case, the Court may safely presume that, had the certificate of
title been in the names of petitioners-sellers at that time, there would have been no reason why an absolute
contract of sale could not have been executed and consummated right there and then.

Moreover, unlike in a contract to sell, petitioners in the case at bar did not merely promise to sell the
property to private respondent upon the fulfillment of the suspensive condition. On the contrary, having
already agreed to sell the subject property, they undertook to have the certificate of title changed to their
names and immediately thereafter, to execute the written deed of absolute sale.

Thus, the parties did not merely enter into a contract to sell where the sellers, after compliance by the buyer
with certain terms and conditions, promised to sell the property to the latter. What may be perceived from
the respective undertakings of the parties to the contract is that petitioners had already agreed to sell the
house and lot they inherited from their father, completely willing to transfer full ownership of the subject
house and lot to the buyer if the documents were then in order. It just so happened, however, that the
transfer certificate of title was then still in the name of their father. It was more expedient to first effect the
change in the certificate of title so as to bear their names. That is why they undertook to cause the issuance
of a new transfer of the certificate of title in their names upon receipt of the down payment in the amount of
P50,000.00. As soon as the new certificate of title is issued in their names, petitioners were committed to
immediately execute the deed of absolute sale. Only then will the obligation of the buyer to pay the
remainder of the purchase price arise.

There is no doubt that unlike in a contract to sell which is most commonly entered into so as to protect the
seller against a buyer who intends to buy the property in installment by withholding ownership over the
property until the buyer effects full payment therefor, in the contract entered into in the case at bar, the
sellers were the ones who were unable to enter into a contract of absolute sale by reason of the fact that the
certificate of title to the property was still in the name of their father. It was the sellers in this case who, as it
were, had the impediment which prevented, so to speak, the execution of a contract of absolute sale.

What is clearly established by the plain language of the subject document is that when the said "Receipt of
Down Payment" was prepared and signed by petitioners Romulo A. Coronel, et al., the parties had agreed
to a conditional contract of sale, consummation of which is subject only to the successful transfer of the
certificate of title from the name of petitioners' father, Constancio P. Coronel to their names.

The Court significantly notes that this suspensive condition was, in fact, fulfilled on February 6, 1985 (Exh.
"D"; Exh. "4"). Thus, on said date, the conditional contract of sale between petitioners and private
respondent Ramona P. Alcaraz became obligatory, the only act required for the consummation thereof being
the delivery of the property by means of the execution of the deed of absolute sale in a public instrument,
which petitioners unequivocally committed themselves to do as evidenced by the "Receipt of Down
Payment."

Article 1475, in correlation with Article 1181, both of the Civil Code, plainly applies to the case at bench.
Thus,

Art. 1475. The contract of sale is perfected at the moment there is a meeting of
minds upon the thing which is the object of the contract and upon the price.

From that moment, the parties may reciprocally demand performance, subject to the provisions of the law
governing the form of contracts.

Art. 1181. In conditional obligations, the acquisition of rights, as well as the

extinguishment or loss of those already acquired, shall depend upon the happening of the
event which constitutes the condition.

Since the condition contemplated by the parties which is the issuance of a certificate of title in petitioners'
names was fulfilled on February 6, 1985, the respective obligations of the parties under the contract of sale
became mutually demandable, that is, petitioners, as sellers, were obliged to present the transfer certificate
of title already in their names to private respondent Ramona P. Alcaraz, the buyer, and to immediately
execute the deed of absolute sale, while the buyer on her part, was obliged to forthwith pay the balance of
the purchase price amounting to P1,190,000.00.

It is also significant to note that in the first paragraph in page 9 of their petition, petitioners conclusively
admitted that:

3. The petitioners-sellers Coronel bound themselves "to effect the transfer in our
names from our deceased father Constancio P. Coronel, the transfer certificate
of title immediately upon receipt of the downpayment above-stated". The sale
was still subject to this suspensive condition. (Emphasis supplied.)
(Rollo, p. 16)

Petitioners themselves recognized that they entered into a contract of sale subject to a suspensive
condition. Only, they contend, continuing in the same paragraph, that:

. . . Had petitioners-sellers not complied with this condition of first transferring the title to
the property under their names, there could be no perfected contract of sale. (Emphasis
supplied.)
(Ibid.)
not aware that they have set their own trap for themselves, for Article 1186 of the Civil Code expressly
provides that:

Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily
prevents its fulfillment.

Besides, it should be stressed and emphasized that what is more controlling these mere hypothetical
arguments is the fact that the condition herein referred to was actually and indisputably fulfilled on February
6. 1985, when a new title was issued in the names of petitioners as evidenced by TCT No. 327403 (Exh "D";
Exh. "4").

The inevitable conclusion is that on January 19, 1985, as evidenced by the document denominated as
"Receipt of Down Payment" (Exh. "A"; Exh "1"), the parties entered into a contract of sale subject only to the
suspensive condition that the sellers shall effect the issuance of new certificate of title from that of their
father's name to their names and that, on February 6, 1985, this condition was fulfilled (Exh. "D"; Exh "4").

We, therefore, hold that, in accordance with Article 1187 which pertinently provides —

Art. 1187. The effects of conditional obligation to give, once the condition has been fulfilled,
shall retroact to the day of the constitution of the obligation . . .

In obligations to do or not to do, the courts shall determine, in each case, the retroactive effect of the
condition that has been complied with.

the rights and obligations of the parties with respect to the perfected contract of sale became mutually due
and demandable as of the time of fulfillment or occurrence of the suspensive condition on February 6, 1985.
As of that point in time, reciprocal obligations of both seller and buyer arose.

Petitioners also argue there could been no perfected contract on January 19, 1985 because they were then
not yet the absolute owners of the inherited property.

We cannot sustain this argument.

Article 774 of the Civil Code defines Succession as a mode of transferring ownership as follows:

Art. 774. Succession is a mode of acquisition by virtue of which the property, rights and
obligations to the extent and value of the inheritance of a person are transmitted through
his death to another or others by his will or by operation of law.

Petitioners-sellers in the case at bar being the sons and daughters of the decedent Constancio P. Coronel
are compulsory heirs who were called to succession by operation of law. Thus, at the point their father drew
his last breath, petitioners stepped into his shoes insofar as the subject property is concerned, such that any
rights or obligations pertaining thereto became binding and enforceable upon them. It is expressly provided
that rights to the succession are transmitted from the moment of death of the decedent (Article 777, Civil
Code; Cuison vs. Villanueva, 90 Phil. 850 [1952]).

Be it also noted that petitioners' claim that succession may not be declared unless the creditors have been
paid is rendered moot by the fact that they were able to effect the transfer of the title to the property from the
decedent's name to their names on February 6. 1985.

Aside from this, petitioners are precluded from raising their supposed lack of capacity to enter into an
agreement at that time and they cannot be allowed to now take a posture contrary to that which they took
when they entered into the agreement with private respondent Ramona P. Alcaraz. The Civil Code expressly
states that:

Art. 1431. Through estoppel an admission or representation is rendered

conclusive upon the person making it, and cannot be denied or disproved as against the
person relying thereon.

Having represented themselves as the true owners of the subject property at the time of sale, petitioners
cannot claim now that they were not yet the absolute owners thereof at that time.
Petitioners also contend that although there was in fact a perfected contract of sale between them and
Ramona P. Alcaraz, the latter breached her reciprocal obligation when she rendered impossible the
consummation thereof by going to the United States of America, without leaving her address, telephone
number, and Special Power of Attorney (Paragraphs 14 and 15, Answer with Compulsory Counterclaim to
the Amended Complaint, p. 2; Rollo, p. 43), for which reason, so petitioners conclude, they were correct in
unilaterally rescinding the contract of sale.

We do not agree with petitioners that there was a valid rescission of the contract of sale in the instant case.
We note that these supposed grounds for petitioners' rescission, are mere allegations found only in their
responsive pleadings, which by express provision of the rules, are deemed controverted even if no reply is
filed by the plaintiffs (Sec. 11, Rule 6, Revised Rules of Court). The records are absolutely bereft of any
supporting evidence to substantiate petitioners' allegations. We have stressed time and again that
allegations must be proven by sufficient evidence (Ng Cho Cio vs. Ng Diong, 110 Phil. 882 [1961]; Recaro
vs. Embisan, 2 SCRA 598 [1961]). Mere allegation is not an evidence (Lagasca vs. De Vera, 79 Phil. 376
[1947]).

Even assuming arguendo that Ramona P. Alcaraz was in the United States of America on February 6, 1985,
we cannot justify petitioners-sellers' act of unilaterally and extrajudicially rescinding the contract of sale,
there being no express stipulation authorizing the sellers to extrajudicially rescind the contract of sale. (cf
Dignos vs. CA, 158 SCRA 375 [1988]; Taguba vs. Vda. de Leon, 132 SCRA 722 [1984])

Moreover, petitioners are estopped from raising the alleged absence of Ramona P. Alcaraz because
although the evidence on record shows that the sale was in the name of Ramona P. Alcaraz as the buyer,
the sellers had been dealing with Concepcion D. Alcaraz, Ramona's mother, who had acted for and in behalf
of her daughter, if not also in her own behalf. Indeed, the down payment was made by Concepcion D.
Alcaraz with her own personal check (Exh. "B"; Exh. "2") for and in behalf of Ramona P. Alcaraz. There is no
evidence showing that petitioners ever questioned Concepcion's authority to represent Ramona P. Alcaraz
when they accepted her personal check. Neither did they raise any objection as regards payment being
effected by a third person. Accordingly, as far as petitioners are concerned, the physical absence of
Ramona P. Alcaraz is not a ground to rescind the contract of sale.

Corollarily, Ramona P. Alcaraz cannot even be deemed to be in default, insofar as her obligation to pay the
full purchase price is concerned. Petitioners who are precluded from setting up the defense of the physical
absence of Ramona P. Alcaraz as above-explained offered no proof whatsoever to show that they actually
presented the new transfer certificate of title in their names and signified their willingness and readiness to
execute the deed of absolute sale in accordance with their agreement. Ramona's corresponding obligation
to pay the balance of the purchase price in the amount of P1,190,000.00 (as buyer) never became due and
demandable and, therefore, she cannot be deemed to have been in default.

Article 1169 of the Civil Code defines when a party in a contract involving reciprocal obligations may be
considered in default, to wit:

Art. 1169. Those obliged to deliver or to do something, incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

xxx xxx xxx

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From the moment
one of the parties fulfill his obligation, delay by the other begins. (Emphasis supplied.)

There is thus neither factual nor legal basis to rescind the contract of sale between petitioners and
respondents.

With the foregoing conclusions, the sale to the other petitioner, Catalina B. Mabanag, gave rise to a case of
double sale where Article 1544 of the Civil Code will apply, to wit:

Art. 1544. If the same thing should have been sold to different vendees, the
ownership shall be transferred to the person who may have first taken possession thereof
in good faith, if it should be movable property.
Should if be immovable property, the ownership shall belong to the person acquiring it who in good faith first
recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the
possession; and, in the absence thereof to the person who presents the oldest title, provided there is good
faith.

The record of the case shows that the Deed of Absolute Sale dated April 25, 1985 as proof of the second
contract of sale was registered with the Registry of Deeds of Quezon City giving rise to the issuance of a
new certificate of title in the name of Catalina B. Mabanag on June 5, 1985. Thus, the second paragraph of
Article 1544 shall apply.

The above-cited provision on double sale presumes title or ownership to pass to the first buyer, the
exceptions being: (a) when the second buyer, in good faith, registers the sale ahead of the first buyer, and
(b) should there be no inscription by either of the two buyers, when the second buyer, in good faith, acquires
possession of the property ahead of the first buyer. Unless, the second buyer satisfies these requirements,
title or ownership will not transfer to him to the prejudice of the first buyer.

In his commentaries on the Civil Code, an accepted authority on the subject, now a distinguished member of
the Court, Justice Jose C. Vitug, explains:

The governing principle is prius tempore, potior jure (first in time, stronger in right).
Knowledge by the first buyer of the second sale cannot defeat the first buyer's rights
except when the second buyer first registers in good faith the second sale (Olivares vs.
Gonzales, 159 SCRA 33). Conversely, knowledge gained by the second buyer of the first
sale defeats his rights even if he is first to register, since knowledge taints his registration
with bad faith (see also Astorga vs. Court of Appeals, G.R. No. 58530, 26 December
1984). In Cruz vs. Cabana (G.R. No. 56232, 22 June 1984, 129 SCRA 656), it was held
that it is essential, to merit the protection of Art. 1544, second paragraph, that the second
realty buyer must act in good faith in registering his deed of sale (citing Carbonell vs.
Court of Appeals, 69 SCRA 99, Crisostomo vs. CA, G.R. No. 95843, 02 September 1992).
(J. Vitug, Compendium of Civil Law and Jurisprudence, 1993 Edition, p. 604).

Petitioners point out that the notice of lis pendens in the case at bar was annotated on the title of the subject
property only on February 22, 1985, whereas, the second sale between petitioners Coronels and petitioner
Mabanag was supposedly perfected prior thereto or on February 18, 1985. The idea conveyed is that at the
time petitioner Mabanag, the second buyer, bought the property under a clean title, she was unaware of any
adverse claim or previous sale, for which reason she is a buyer in good faith.

We are not persuaded by such argument.

In a case of double sale, what finds relevance and materiality is not whether or not the second buyer was a
buyer in good faith but whether or not said second buyer registers such second sale in good faith, that is,
without knowledge of any defect in the title of the property sold.

As clearly borne out by the evidence in this case, petitioner Mabanag could not have in good faith,
registered the sale entered into on February 18, 1985 because as early as February 22, 1985, a notice of lis
pendens had been annotated on the transfer certificate of title in the names of petitioners, whereas petitioner
Mabanag registered the said sale sometime in April, 1985. At the time of registration, therefore, petitioner
Mabanag knew that the same property had already been previously sold to private respondents, or, at least,
she was charged with knowledge that a previous buyer is claiming title to the same property. Petitioner
Mabanag cannot close her eyes to the defect in petitioners' title to the property at the time of the registration
of the property.

This Court had occasions to rule that:

If a vendee in a double sale registers the sale after he has acquired knowledge that there
was a previous sale of the same property to a third party or that another person claims
said property in a previous sale, the registration will constitute a registration in bad faith
and will not confer upon him any right. (Salvoro vs. Tanega, 87 SCRA 349 [1981];citing
Palarca vs. Director of Land, 43 Phil. 146; Cagaoan vs. Cagaoan, 43 Phil. 554; Fernandez
vs. Mercader, 43 Phil. 581.)
Thus, the sale of the subject parcel of land between petitioners and Ramona P. Alcaraz, perfected on
February 6, 1985, prior to that between petitioners and Catalina B. Mabanag on February 18, 1985, was
correctly upheld by both the courts below.

Although there may be ample indications that there was in fact an agency between Ramona as principal and
Concepcion, her mother, as agent insofar as the subject contract of sale is concerned, the issue of whether
or not Concepcion was also acting in her own behalf as a co-buyer is not squarely raised in the instant
petition, nor in such assumption disputed between mother and daughter. Thus, We will not touch this issue
and no longer disturb the lower courts' ruling on this point.

WHEREFORE, premises considered, the instant petition is hereby DISMISSED and the appealed judgment
AFFIRMED.

SO ORDERED.

Narvasa, C .J ., Davide, Jr. and Francisco, JJ ., concur.

Panganiban, J ., took no part.
 THIRD DIVISION
[G.R. No. 107207. November 23, 1995.]

VIRGILIO R. ROMERO, petitioner, vs. HON. COURT OF APPEALS and ENRIQUE CHUA VDA. DE
ONGSIONG, respondents.

Antonio C. Cabreros, Jr. & Peter M. Porras Law Offices and Yap, Apostol, Gumaru & Balgua for petitioner.
Joaquin "Bobby" Yuseco for private respondent.

DECISION

VITUG, J p:

The parties pose this question: May the vendor demand the rescission of a contract for the sale of a parcel
of land for a cause traceable to his own failure to have the squatters on the subject property evicted within
the contractually-stipulated period?

Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of production, manufacture and
exportation of perlite filter aids, permalite insulation and process perlite ore. In 1988, petitioner and his
foreign partners decided to put up a central warehouse in Metro Manila on a land area of approximately
2,000 square meters. The project was made known to several freelance real estate brokers.

A day or so after the announcement, Alfonso Flores and his wife, accompanied by a broker, offered a parcel
of land measuring 1,952 square meters. Located in Barangay San Dionisio, Parañaque, Metro Manila, the
lot was covered by TCT No. 361402 in the name of private respondent Enriqueta Chua Vda. de Ongsiong.
Petitioner visited the property and, except for the presence of squatters in the area, he found the place
suitable for a central warehouse.

Later, the Flores spouses called on petitioner with a proposal that should he advance the amount of
P50,000.00 which could be used in taking up an ejectment case against the squatters, private respondent
would agree to sell the property for only P800.00 per square meter. Petitioner expressed his concurrence.
On 09 June 1988, a contract, denominated "Deed of Conditional Sale," was executed between petitioner
and private respondent. The simply-drawn contract read:

"DEED OF CONDITIONAL SALE

"KNOW ALL MEN BY THESE PRESENTS:

"This Contract , made and executed in the Municipality of Makati, Philippines this 9th day
of June, 1988 by and between:

"ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow, Filipino and residing at
105 Simoun St. Quezon City, Metro Manila, hereinafter referred to as the VENDOR;

— and —

"VIRGILIO R. ROMERO, married to Severina L. Lat, of legal age, Filipino, and residing at
110 San Miguel St., Plainview Subd., Mandaluyong Metro Manila, hereinafter referred to
as the VENDEE:

"WITNESSETH: That

"WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total area of ONE
THOUSAND NINE HUNDRED FIFTY TWO (1,952) SQUARE METERS, more or less,
located in Barrio San Dionisio, Municipality of Parañaque, Province of Rizal, covered by
TCT No. 361402 issued by the Registry of Deeds of Pasig and more particularly described
as follows:

xxx xxx xxx

"WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land as the VENDOR
has accepted the offer, subject to the terms and conditions hereinafter stipulated:
 "NOW, THEREFORE, for and in consideration of the sum of ONE MILLION FIVE
HUNDRED SIXTY ONE THOUSAND SIX HUNDRED PESOS (P1,561,600.00) ONLY,
Philippine Currency, payable by VENDEE to in (sic) manner set forth, the VENDOR
agrees to sell to the VENDEE, their heirs, successors , administrators, executors, assign,
all her rights, titles and interest in and to the property mentioned in the FIRST WHEREAS
CLAUSE, subject to the following terms and conditions:

"1. That the sum of FIFTY THOUSAND PESOS (50,000.00) ONLY Philippine
Currency, is to be paid upon signing and execution of this instrument.

"2. The balance of the purchase price in the amount of ONE MILLION FIVE
HUNDRED ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00)
ONLY shall be paid 45 days after the removal of all squatters from the above
described property.

"3. Upon full payment of the overall purchase price as aforesaid, VENDOR without
necessity of demand shall immediately sign, execute, acknowledged (sic) and
deliver the corresponding deed of absolute sale in favor of the VENDEE free
from all liens and encumbrances and all Real Estates taxes are all paid and
updated.

"It is hereby agreed, covenanted and stipulated by and between the parties hereto that if
after 60 days from the date of the signing of this contract the VENDOR shall not be able to
remove the squatters from the property being purchased, the downpayment made by the
buyer shall be returned/reimbursed by the VENDOR to the VENDEE.

"That in the event that the VENDEE shall not be able to pay the VENDOR the balance of
the purchase price of ONE MILLION FIVE HUNDRED ELEVEN THOUSAND SIX
HUNDRED PESOS (P1,511,600.00) ONLY after 45 days from written notification to the
VENDEE of the removal of the squatters from the property being purchased, FIFTY
THOUSAND PESOS (P50,000.00) previously paid as downpayment shall be forfeited in
favor of the VENDOR.

"Expenses for the registration such as registration fees, documentary stamp, transfer fee,
assurance and such other fees and expenses as may be necessary to transfer the title to
the name of the VENDEE shall be for the account of the VENDEE while capital gains tax
shall be paid by the VENDOR.

"IN WITNESS WHEREOF, parties hereunto signed those (sic) presents in the City of
Makati MM, Philippines on this 9th day of June, 1988.

(Sgd.) (Sgd.)
VIRGILIO R. ROMERO ENREQUETA CHUA VDA. DE ONGSIONG
Vendee Vendor

"SIGNED IN THE PRESENCE OF:

(Sgd.) (Sgd.)
Rowena C. Ongsiong Jack M. Cruz" 1

Alfonso Flores, in behalf of private respondent, forthwith received and acknowledge a check for P50,000.00
2 from petitioner. 3

Pursuant to this agreement, private respondent filed a complaint for ejectment (Civil Case No. 7579) against
Melchor Musa and 29 other squatter families with the Metropolitan Trial Court of Parañaque. A few months
later, or on 21 February 1989, judgment was rendered ordering the defendants to vacate the premises. The
decision was handed down beyond the 60-day period (expiring 09 August 1988) stipulated in the contract.
The writ of execution of the judgment was issued, still later, on 30 March 1989.
In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00 she received from
petitioner since, she said, she could not "get rid of the squatters" on the lot. Atty. Sergio A.F. Apostol,
counsel for petitioner, in his reply of 17 April 1989, refused the tender and stated:

"Our client believes that with the exercise of reasonable diligence considering the
favorable decision rendered by the Court and the writ of execution issued pursuant
thereto, it is now possible to eject the squatters from the premises of the subject property,
for which reason, he proposes that he shall take it upon himself to eject the squatters,
provided, that expenses which shall be incurred by reason thereof shall be chargeable to
the purchase price of the land." 4

Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"), through its Regional Director for
Luzon, Farley O. Viloria, asked the Metropolitan Trial Court of Parañaque for a grace period of 45 days from
21 April 1989 within which to relocate and transfer the squatter families. Acting favorably on the request, the
court suspended the enforcement of the writ of execution accordingly.

On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-day grace period and
his client's willingness to "underwrite the expenses for the execution of the judgment and ejectment of the
occupants." 5

In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent, advised Atty. Apostol
that the Deed of Conditional Sale had been rendered null and void by virtue of his client's failure to evict the
squatters from the premises within the agreed 60-day period. He added that private respondent had
"decided to retain the property." 6

On 23 June 1989, Atty. Apostol wrote back to explain:

"The contract of sale between the parties was perfected from, the very moment that there
was a meeting of the minds of the parties upon the subject lot and the price in the amount
of P1,561,600.00. Moreover, the contract had already been partially fulfilled and executed
upon receipt of the downpayment of your client. Ms. Ongsiong is precluded from rejecting
its binding effects relying upon her inability to eject the squatters from the premises of
subject property during the agreed period. Suffice it to state that, the provision of the Deed
of Conditional Sale do not grant her the option or prerogative to rescind the contract and
to retain the property should she fail to comply with the obligation she had assumed under
the contract. In fact, a perusal of the terms and conditions of the contract clearly shows
that the right to rescind the contract and to demand return/reimbursement of the
downpayment is granted to our client for his protection.

"Instead, however, of availing himself of the power to rescind the contract and demand the
return, reimbursement of the downpayment, our client had opted to take it upon himself to
eject the squatters from the premises. Precisely, we refer you to our letters addressed to
your client dated April 17, 1989 and June 8, 1989.

"Moreover, it is basic under the law on contracts that the power to rescind is given to the
injured party. Undoubtedly, under the circumstances, our client is the injured party.

"Furthermore, your client has not complied with her obligation under their contract in good
faith. It is undeniable that Ms. Ongsiong deliberately refused to exert efforts to eject the
squatters from the premises of the subject property and her decision to retain the property
was brought about by the sudden increase in the value of realties in the surrounding
areas.

"Please consider this letter as a tender of payment to your client and a demand to execute
the absolute Deed of Sale." 7

A few days later (or on 27 June 1989), private respondent prompted by petitioner's continued refusal to
accept the return of the P50,000.00 advance payment, filed with the Regional Trial Court of Makati, Branch
133, Civil Case No. 89-4394 for a rescission of the deed of "conditional" sale, plus damages, and for the
consignation of P50,000.00 cash.
Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of execution in Civil Case
No. 7579 on motion of private respondent but the squatters apparently still stayed on.

Back to Civil case No. 89-4394, on 26 June 1990, the Regional Trial Court of Makati 8 rendered decision
holding that private respondent had no right to rescind the contract since it was she who "violated her
obligation to eject the squatters from the subject property" and that petitioner, being the injured party, was
the party who could, under Article 1191 of the Civil Code, rescind the agreement. The court ruled that the
provision in the contract relating to (a) the return/reimbursement of the P50,000.00 if the vendor were to fail
in her obligation to free the property from the squatters within the stipulated period or (b), upon the other
hand, the sum's forfeiture by the vendor if the vendee were to fail in paying the agreed purchase price,
amounted to "penalty clauses". The court added:

"This court is not convicted of the ground relied upon by the plaintiff in seeking the
rescission, namely: (1) he (sic) is afraid of the squatters; and (2) she has spent so much to
eject them from the premises (p. 6, tsn, see. Jan. 3, 1990). Militating against her
profession of good faith is plaintiff's conduct which is not in accord with the rules of fair
play and justice. Notably, she caused the issuance of an alias writ of execution on August
25, 1989 (Exh. 6) in the ejectment suit which was almost two months after she filed the
complaint before this Court on June 27, 1989. If she were really afraid of the squatters,
then she should not have pursed the issuance of an alias writ of execution. Besides, she
did not even report to the police the alleged phone threats from the squatters. To the mind
of the Court, the so-called factor is simply factuitous (sic)." 9

The lower court, accordingly, dismissed the complaint and ordered, instead, private respondent to eject or
cause the ejectment of the squatters from the property and to execute the absolute deed of conveyance
upon payment of the full purchase price by petitioner.

Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate court rendered its
decision. 10 It opined that the contract entered into by the parties was subject to a resolutory condition, i.e.,
the ejectment of the squatters from the land, the non-occurrence of which resulted in the failure of the object
of the contract; that private respondent substantially complied with her obligation to evict the squatters; that
it was petitioner who was not ready to pay the purchase price and fulfill his part of the contract, and that the
provision requiring a mandatory return/reimbursement of the P50,000.00 in case private respondent would
fail to eject the squatters within the 60-day period was not a penal clause. Thus, it concluded:

"WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and a new
one entered declaring the contract of conditional sale dated June 9, 1988 cancelled and
ordering the defendant-appellee to accept the return of the downpayment in the amount of
P50,000.00 which was deposited in the court below. No pronouncement as to costs." 11

Failing to obtain a reconsideration, petitioner filed his petition for review on certiorari raising issues that, in
fine, center on the nature of the contract adverted to and the P50,000.00 remittance made by petitioner.

A perfected contract of sale may either be absolute or conditional 12 depending on whether the agreement
is devoid of, or subject to, any condition imposed on the passing of title of the thing to be conveyed or on the
obligation of party thereto. When ownership is retained until the fulfillment of a positive condition the breach
of the condition will simply prevent the duty to convey title from acquiring an obligatory force. If the condition
is imposed on an obligation of a party which is not complied with, the other party may either refuse to
proceed or waive said condition (Art. 1545, Civil Code). Where, of course, the condition is imposed upon the
perfection of the contract itself, the failure of such condition would prevent the juridical relation itself from
coming into existence. 13

In determining the real character of the contract, the title given to it by the parties is not as much as
significant as its substance. For example, a deed of sale, although denominated as a deed of conditional
sale, may be treated as absolute in nature, if title to the property sold is not reserved in the vendor or if the
vendor is not granted the right to unilaterally rescind the contract predicated on the fulfillment or non-
fulfillment, as the case may be, of the prescribed condition. 14

The term "condition" in the context of a perfected contract of sale pertains, in reality, to the compliance by
one party of an undertaking the fulfillment of which would beckon, in turn, the demandability of the reciprocal
prestation of the other party. The reciprocal obligations referred to would normally be, in the case of vendee,
the payment of the agreed purchase price and, in the case of the vendor, the fulfillment of certain express
warranties (which, in the case at bench is the timely eviction of the squatters on the property).

It would be futile to challenge the agreement here in question as not being a duly perfected contract. A sale
is at once perfected where a person (the seller) obligates himself, for a price certain, to deliver and to
transfer ownership of a specified thing or right to another (the buyer) over which the latter agrees. 15

The object of the sale, in case before us, was specifically identified to be as 1,952-square meter lot in San
Dionisio, Parañaque, Rizal, covered by Transfer Certificate of Title No. 361402 of the Registry of Deeds for
Pasig and therein technically described. The purchase price was fixed at P1,561,600.00, of which
P50,000.00 was to be paid upon the payable "45 days after the removal of all squatters from the above
described property."

From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which, according to their nature, may be in keeping
with good faith, usage and law. Under the agreement, private respondent is obligated to evict the squatters
on the property. The ejectment of the squatters is a condition the operative act of which sets into motion the
period of compliance by petitioner of his own obligation, i.e., to pay the balance of the purchase price.
Private respondent's failure to "remove the squatters from the property" within the stipulated period gives
petitioner the right to either refuse to proceed with the agreement or waive that condition in consonance with
Article 1545 of the Civil Code. 16 This option clearly belongs to petitioner and not to private respondent.

We share the opinion of the appellate court that the undertaking required of private respondent does not
constitute a "potestative condition dependent solely on his will" that might, otherwise, be void in accordance
with Article 1182 of the Civil Code 17 but a "mixed" condition "dependent not on the will of the vendor alone
but also of third persons like the squatters and government agencies and personnel concerned." 18 We
must hasten to add, however, that where the so-called "potestative condition" is imposed not on the birth of
the obligation but on its fulfillment, only the condition is avoided, leaving unaffected obligation itself. 19

In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows the obligee to choose
between proceeding with the agreement or waiving the performance of the condition. It is this provision
which is the pertinent rule in the case at bench. Here, evidently, petitioner has waived the performance of
the condition imposed on private respondent to free the property from squatters. 20

In any case, private respondent's action for rescission is not warranted. She is not the injured party. 21 The
right of resolution of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of
faith by the other party violates the reciprocity between them. 22 It is private respondent who has failed in
her obligation under the contract. Petitioner did not breach the agreement. He has agreed, in fact, to
shoulder the expenses of the execution of the judgment in the ejectment case and to make arrangement
with the sheriff to effect such execution. In his letter of 23 June 1989, counsel for petitioner has tendered
payment and demanded forthwith the execution of the deed of absolute sale. Parenthetically, this offer to
pay, hiring been made prior to the demand for rescission, assuming for the sake of argument that such a
demand is proper under Article 1592 23 of the Civil Code, would likewise suffice to defeat private
respondent's prerogative to rescind thereunder.

There is no need to still belabor the question of whether the P50,000.00 advance payment is reimbursable
to petitioner of forfeitable by private respondent, since, on the basis of our foregoing conclusions, the matter
has ceased to be an issue. Suffice it to say that petitioner having opted to proceed with the sale, neither may
petitioner demand its reimbursement from private respondent nor may private respondent subject it to
forfeiture.

WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED AND SET ASIDE,
and another is entered ordering petitioner to pay private respondent the balance of the purchase price and
the latter to execute the deed of absolute sale in favor of petitioner. No costs.

SO ORDERED.

Feliciano, Romero, Melo and Panganiban, JJ., concur.

Footnotes
1. Records, pp. 60-61.
2. Exh. 9.
3. Exh. 2.
4. Records, p. 116.
5. Exh. 8-B.
6. Exh. D.
7. Records, pp. 74-75.
8. Presided by Judge Buenaventura J. Guerrero.
9. Records, p. 205.
10. Penned by Associate Justice Fermin A. Martin , Jr. and concurred in by Associate Justices Emetrio C. Cui and
Cezar D. Francisco.
11. Rollo, p. 46.
12. Art. 1458, second paragraph, Civil Code of the Philippines.
13. See Ang Yu Asuncion , et al., vs. Court of Appeals, 238 SCRA 602.
14. Ibid., Vol. V, p. 3 citing Dignos v. Court of Appeals, No. L-59266, February 29, 1988, 158 SCRA 375.
15. 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 a of law
governing the form of contracts.

16. 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 non performance of the condition as a breach of warranty.

Where the ownership in the thing 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.

17. Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional
obligation shall be void. If it depends upon the chance or upon the will of a third person, the obligation shall take
effect in conformity with the provisions of this Code.
18. Decision, p. 17.
19. See Osmeña vs. Rama, 14 Phil. 99.
20. See Intestate Estate of the Late Ricardo P. Presbitero , Sr. v. Court of Appeals, 217 SCRA 372.
21. In Boysaw v. Interphil. Promotions, Inc. (148 SCRA 635, 643), the Court has said: " The power to rescind is
given to the injured party. 'Where the plaintiff is the party who did not perform the undertaking which was bound
by the terms a of the agreement to perform, he is not entitled to insist upon the performance of the contract by
the defendant, or recover damages by reason of his own breach."
22. Deiparine, Jr. v. Court of Appeals, 221 SCRA 503, 513 citing Universal Food Corporation v. Court of Appeals,
33 SCRA 1.
23. See Ocampo v. Court of Appeals supra. Art. 1592 states: "In the sale of immovable property, even though it
may have been stipulated that upon the failure to pay the price at the time agreed upon the rescission if 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 notarial act. After the
demand, the court may not grant him a new term."
 THIRD DIVISION
[G.R. No. 112212. March 2, 1998.]

GREGORIO FULE, petitioner, vs. COURT OF APPEALS, NINEVETCH CRUZ and JUAN BELARMINO,
respondents.

DECISION

ROMERO, J p:

This petition for review on certiorari questions the affirmance by the Court of Appeals of the decision 1 of the
Regional Trial Court of San Pablo City, Branch 30, dismissing the complaint that prayed for the nullification
of a contract of sale of a 10-hectare property in Tanay, Rizal in consideration of the amount of P40,000.00
and a 2.5 carat emerald-cut diamond (Civil Case No. SP-2455). The lower court's decision disposed of the
case as follows:

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

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

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

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

4. The costs of suit.

SO ORDERED."

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

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

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

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

In an effort to cut through any legal impediment, petitioner executed on October 19, 1984, a deed of
redemption on behalf of Fr. Jacobe purportedly in the amount of P15,987.78, and on even date, Fr. Jacobe
sold the property to petitioner for P75,000.00. The haste with which the two deeds were executed is shown
by the fact that the deed of sale was notarized ahead of the deed of redemption. As Dr. Cruz had already
agreed to the proposed barter, petitioner went to Prudential Bank once again to take a look at the jewelry.
In the afternoon of October 23, 1984, petitioner met Atty. Belarmino at the latter's residence to prepare the
documents of sale. 2 Dr. Cruz herself was not around but Atty. Belarmino was aware that she and petitioner
had previously agreed to exchange a pair of emerald-cut diamond earrings for the Tanay property. Atty.
Belarmino accordingly caused the preparation of a deed of absolute sale while petitioner and Dr. Cruz
attended to the safekeeping of the jewelry.

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

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

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

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

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

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

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

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

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

The lower court further ruled that all the elements of a valid contract under Article 1458 of the Civil Code
were present, namely: (a) consent or meeting of the minds; (b) determinate subject matter, and (c) price
certain in money or its equivalent. The same elements, according to the lower court, were present despite
the fact that the agreement between petitioner and Dr. Cruz was principally a barter contract. The lower
court explained thus:

". . . Plaintiff's ownership over the Tanay property passed unto Dra. Cruz upon the
constructive delivery thereof by virtue of the Deed of Absolute Sale (Exh. D). On the other
hand, the ownership of Dra. Cruz over the subject jewelries (sic) transferred to the plaintiff
upon her actual personal delivery to him at the lobby of the Prudential Bank. It is expressly
provided by law that the thing sold shall be understood as delivered, when it is placed in
the control and possession of the vendee (Art. 1497, Civil Code; Kuenzle & Straff vs.
Watson & Co. 13 Phil. 26). The ownership and/or title over the jewelries (sic) was
transmitted immediately before 6:00 p.m. of October 24, 1984. Plaintiff signified his
approval by nodding his head. Delivery or tradition, is one of the modes of acquiring
ownership (Art. 712, Civil Code).

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

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

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

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

 "The Court finds that plaintiff acted in wanton bad faith. Exhibit 2-Belarmino purports to
show that the Tanay property is worth P25,000.00. However, also on that same day it was
executed, the property's worth was magnified at P75,000.00 (Exh. 3-Belarmino). How
could in less than a day (Oct. 19, 1984) the value would (sic) triple under normal
circumstances? Plaintiff, with the assistance of his agents, was able to exchange the
Tanay property which his bank valued only at P25,000.00 in exchange for a genuine pair
of emerald cut diamond worth P200,000.00 belonging to Dra. Cruz. He also retrieved the
US$300.00 and jewelries (sic) from his agents. But he was not satisfied in being able to
get subject jewelries for a song. He had to file a malicious and unfounded case against
Dra. Cruz and Atty. Belarmino who are well known, respected and held in high esteem in
San Pablo City where everybody practically knows everybody. Plaintiff came to Court with
unclean hands dragging the defendants and soiling their clean and good name in the
process. Both of them are near the twilight of their lives after maintaining and nurturing
their good reputation in the community only to be stunned with a court case. Since the
filing of this case on October 26, 1984 up to the present they were living under a pall of
doubt. Surely, this affected not only their earning capacity in their practice of their
respective professions, but also they suffered besmirched reputations. Dra. Cruz runs her
own hospital and defendant Belarmino is a well respected legal practitioner. The length of
time this case dragged on during which period their reputation were (sic) tarnished and
their names maligned by the pendency of the case, the Court is of the belief that some of
the damages they prayed for in their answers to the complaint are reasonably
proportionate to the sufferings they underwent (Art. 2219, New Civil Code). Moreover,
because of the falsity, malice and baseless nature of the complaint defendants were
compelled to litigate. Hence, the award of attorney's fees is warranted under the
circumstances (Art. 2208, New Civil Code)." 6

From the trial court's adverse decision, petitioner elevated the matter to the Court of Appeals. On October
20, 1992, the Court of Appeals, however, rendered a decision 7 affirming in toto the lower court's decision.
His motion for reconsideration having been denied on October 19, 1993, petitioner now files the instant
petition alleging that:

"I. THE TRIAL COURT ERRED IN DISMISSING PLAINTIFF'S COMPLAINT AND

IN HOLDING THAT THE PLAINTIFF ACTUALLY RECEIVED A GENUINE PAIR
OF EMERALD CUT DIAMOND EARRING(S) FROM DEFENDANT CRUZ . . .;

II. THE TRIAL COURT ERRED IN AWARDING MORAL AND EXEMPLARY

DAMAGES AND ATTORNEY'S FEES IN FAVOR OF DEFENDANTS AND
AGAINST THE PLAINTIFF IN THIS CASE; and

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

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

Consequently, this Court upholds the appellate court's findings of fact especially because these concur with
those of the trial court which, upon a thorough scrutiny of the records, are firmly grounded on evidence
presented at the trial. 10 To reiterate, this Court's jurisdiction is only limited to reviewing errors of law in the
absence of any showing that the findings complained of are totally devoid of support in the record or that
they are glaringly erroneous as to constitute serious abuse of discretion. 11
Nonetheless, this Court has to closely delve into petitioner's allegation that the lower
court's decision of March 7, 1989 is a "ready-made" one because it was handed down a
day after the last date of the trial of the case. 12 Petitioner, in this regard, finds it
incredible that Judge J. Ausberto Jaramillo was able to write a 12-page single-spaced
decision, type it and release it on March 7, 1989, less than a day after the last hearing on
March 6, 1989. He stressed that Judge Jaramillo replaced Judge Salvador de Guzman and
heard only his rebuttal testimony.

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

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

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

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

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

Contracts that are voidable or annullable, even though there may have been no damage to the contracting
parties are: (1) those where one of the parties is incapable of giving consent to a contract; and (2) those
where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. 22 Accordingly,
petitioner now stresses before this Court that he entered into the contract in the belief that the pair of
emerald-cut diamond earrings was genuine. On the pretext that those pieces of jewelry turned out to be
counterfeit, however, petitioner subsequently sought the nullification of said contract on the ground that it
was, in fact, "tainted with fraud" 23 such that his consent was vitiated.

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

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

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

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

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

While it is true that the amount of P40,000.00 forming part of the consideration was still payable to petitioner,
its nonpayment by Dr. Cruz is not a sufficient cause to invalidate the contract or bar the transfer of
ownership and possession of the things exchanged considering the fact that their contract is silent as to
when it becomes due and demandable. 32
Neither may such failure to pay the balance of the purchase price result in the payment of interest thereon.
Article 1589 of the Civil Code prescribes the payment of interest by the vendee "for the period between the
delivery of the thing and the payment of the price" in the following cases:

"(1) Should it have been so stipulated;

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

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

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

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

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

In this regard, the lower court appeared to have awarded damages on a ground analogous to malicious
prosecution under Article 2219(8) of the Civil Code 39 as shown by (1) petitioner's "wanton bad faith" in
bloating the value of the Tanay property which he exchanged for "a genuine pair of emerald-cut diamond
worth P200,000.00;" and (2) his filing of a "malicious and unfounded case" against private respondents who
were "well known, respected and held in high esteem in San Pablo City where everybody practically knows
everybody" and whose good names in the "twilight of their lives" were soiled by petitioner's coming to court
with "unclean hands," thereby affecting their earning capacity in the exercise of their respective professions
and besmirching their reputation.

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

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

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

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

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

SO ORDERED.

Narvasa, C .J ., Kapunan and Purisima, JJ ., concur.

Footnotes
1. Penned by Judge J. Ausberto D. Jaramillo, Jr.
2. Note that the parties seemed to have intended a barter although what they eventually executed was a deed of
absolute sale. See in this connection Article 1468 of the Civil Code which provides that: "If the consideration of
 the contract consists partly in money, and partly in another thing, the transaction shall be characterized by the
manifest intention of the parties. If such intention does not clearly appear, it shall be considered a barter if the
value of the thing given as a part of the consideration exceeds the amount of the money or its equivalent;
otherwise, it is a sale.
3. Rollo, p. 35.
4. Ibid., p. 36.
5. Id., p. 37.
6. Id., pp. 39-40.
7. Penned by Associate Justice Manuel C. Herrera and concurred in by Associate Justices Justo P. Torres, Jr.
and Angelina S. Gutierrez.
8. Petition, Rollo, p. 11.
9. Ibid., p. 3, citing Garcia v. Court of Appeals, 33 SCRA 622 (1970) and Roque v. Buan, 21 SCRA 642 (1967)
10. Sandoval v. Court of Appeals, 260 SCRA 283 (1996).
11. B.A. Finance Corporation v. Court of Appeals, 229 SCRA 566 (1994).
12. Petition, pp. 6-7; Rollo, pp. 12-13.
13. Atty. Belarmino's Comment, pp. 2-3; Rollo, pp. 63-64.
14. Rule 3.05, Code of Judicial Conduct.
15. Castaños v. Escaño, Jr., 251 SCRA 174 (1995).
16. Manlavi v. Gacott, Jr., 313 Phil. 738, citing Abiera v. Maceda, 233 SCRA 520 (1994).
17. Art. 1315, Civil Code.
18. Art. 1475, Civil Code; Romero v. Court of Appeals, 250 SCRA 223 (1995).
19. Aspi v. Court of Appeals, 236 SCRA 94 (1994).
20. Olegario v. Court of Appeals, 238 SCRA 96 (1994).
21. Art. 1398, Civil Code; Ines v. Court of Appeals, 317 Phil. 373.
22. Art. 1390, Civil Code.
23. Appellant's Brief in the Court of Appeals, p. S; CA Rollo, p. 32.
24. Art. 1338, Civil Code.
25. Art. 1331, Civil Code.
26. TOLENTINO, IV CIVIL CODE OF THE PHILIPPINES, 478 (1931) citing Borrel y Soler, Nulidad, p. 221.
27. Ibid., p. 487.
28. Art. 1333, Civil Code.
29. Art. 1585, Civil Code.
30. Art. 1477, Civil Code.
31. Adelfa Properties, Inc. v. Court of Appeals, 240 SCRA 565(1995).
32. Ocampo v. Court of Appeals, 233 SCRA 551 (1994) citing Filoil Marketing Corporation v. Intermediate Appellate
Court, 169 SCRA 293 (1989).
33. 98 Phil. 43.
34. Petition, pp 17-18, Rollo, pp. 23-24.
35. Art. 2216, Civil Code.
36. 25A C.J.S. 70, citing Standard Acc. Ins. Co. v. U.S., 102 Ct.Cl. 770, 65 S.Ct. 1409, 325 U.S. 870, 89 L.Ed.
1989.
37. Ibid., at p. 72, citing McCracken v. Stewart, 223 P.2d 963, 170 Kan. 129.
38. Philippine Airlines, Inc. v. NLRC, 259 SCRA 459 (1996)
39. Note that this is not exactly a case of malicious prosecution. Article 2219, however, in enumerating the specific
instances when moral damages may be recovered refers to "analogous cases" or that which resemble or
correspond to those enumerated. The circumstances in this case closely resemble that of malicious
prosecution.
40. Rollo, p. 49.
41. Philippine National Bank v. Court of Appeals, 159 SCRA 433 (1988); Layman v. Intermediate Appellate Court,
166 SCRA 734 (1988).
42. In R & B Surety and Insurance v. Intermediate Appellate Court, 129 SCRA 736 (1984), the Court said: ". . . the
mere fact that an action is later found to be based on an erroneous ground does not per se make its initiator
guilty of bad faith and liable for damages . . . Sound principles of justice and public policy demand that persons
shall have free resort to courts of law for redress of wrongs and vindication of their rights without fear of later on
standing trial for damages should their actions lose ground."
 FIRST DIVISION
[G.R. No. 97347. July 6, 1999.]

JAIME G. ONG, petitioner, vs. THE HONORABLE COURT OF APPEALS, SPOUSES MIGUEL K. ROBLES
and ALEJANDRA M. ROBLES, respondents.

DECISION

YNARES-SANTIAGO, J p:

Before us is a petition for review on certiorari from the judgment rendered by the Court of Appeals which,
except as to the award of exemplary damages, affirmed the decision of the Regional Trial Court of Lucena
City, Branch 60, setting aside the "Agreement of Purchase and Sale" entered into by herein petitioner and
private respondent spouses in Civil Case No. 85-85.

On May 10, 1983, petitioner Jaime Ong on the one hand, and respondent spouses Miguel K. Robles and
Alejandra Robles, on the other hand, executed an "Agreement of Purchase and Sale" respecting two parcels
of land situated at Barrio Puri, San Antonio, Quezon. The terms and conditions of the contract read:

"1. That for and in consideration of the agreed purchase price of TWO MILLION
PESOS (P2,000,000.00), Philippine currency, the mode and manner of payment is as
follows:

A. The initial payment of SIX HUNDRED THOUSAND PESOS

(P600,000.00) as verbally agreed by the parties, shall be broken down
as follows:

1. P103,499.91 shall be paid, and as already paid by the BUYER

to the SELLERS on March 22, 1983, as stipulated under the
Certification of undertaking dated March 22, 1983 and covered
by a check voucher of even date.

2. That the sum of P496,500.09 shall be paid directly by the

BUYER to the Bank of Philippine Islands to answer for the loan
of the SELLERS which as of March 15, 1983 amounted to
P537,310.10, and for the interest that may accrued (sic) from
March 15, 1983, up to the time said obligation of the SELLERS
with the said bank has been settled, provided however that the
amount in excess of P496,500.09, shall be chargeable from
the time deposit of the SELLERS with the aforesaid bank.

B. That the balance of ONE MILLION FOUR HUNDRED THOUSAND

(P1,400,000.00) PESOS shall be paid by the BUYER to the SELLERS
in four (4) equal quarterly installments of THREE HUNDRED FIFTY
THOUSAND PESOS (P350,000.00), the first to be due and payable on
June 15, 1983, and every quarter thereafter, until the whole amount is
fully paid, by these presents promise to sell to said BUYER the two (2)
parcels of agricultural land including the rice mill and the piggery which
are the most notable improvements thereon, situated at Barangay Puri,
San Antonio Quezon, . . . .

"2. That upon the payment of the total purchase price by the
BUYER the SELLERS bind themselves to deliver to the former
a good and sufficient deed of sale and conveyance for the
described two (2) parcels of land, free and clear from all liens
and encumbrances.

"3. That immediately upon the execution of this document, the

SELLERS shall deliver, surrender and transfer possession of
the said parcels of land including all the improvements that
may be found thereon, to the BUYER, and the latter shall take
over from the SELLER the possession, operation, control and
 management of the RICEMILL and PIGGERY found on the
aforesaid parcels of land.

"4. That all payments due and payable under this contract shall be
effected in the residence of the SELLERS located at Barangay
Puri, San Antonio, Quezon unless another place shall have
been subsequently designated by both parties in writing.

xxx xxx xxx." 1

On May 15, 1983, petitioner Ong took possession of the subject parcels of land together with the piggery,
building, ricemill, residential house and other improvements thereon.
Pursuant to the contract they executed, petitioner paid respondent spouses the sum of P103,499.91 2 by
depositing it with the United Coconut Planters Bank. Subsequently, petitioner deposited sums of money with
the Bank of Philippine Islands (BPI), 3 in accordance with their stipulation that petitioner pay the loan of
respondents with BPI.

To answer for his balance of P 1,400,000.00 petitioner issued four (4) post-dated Metro Bank checks
payable to respondent spouses in the amount of P350,000.00 each, namely: Check No. 157708 dated June
15, 1983, 4 Check No. 157709 dated September 15,1983, 5 Check No. 157710 dated December 15, 1983 6
and Check No. 157711 dated March 15, 1984. 7 When presented for payment, however, the checks were
dishonored due to insufficient funds. Petitioner promised to replace the checks but failed to do so. To make
matters worse, out of the P496,500.00 loan of respondent spouses with the Bank of the Philippine Islands,
which petitioner, as per agreement, should have paid, petitioner only managed to dole out no more than
P393,679.60. When the bank threatened to foreclose the respondent spouses' mortgage, they sold three
transformers of the rice mill worth P51,411.00 to pay off their outstanding obligation with said bank, with the
knowledge and conformity of petitioner. 8 Petitioner, in return, voluntarily gave the spouses authority to
operate the rice mill. 9 He, however, continued to be in possession of the two parcels of land while private
respondents were forced to use the rice mill for residential purposes.

On August 2, 1985, respondent spouses, through counsel, sent petitioner a demand letter asking for the
return of the properties. Their demand was left unheeded, so, on September 2, 1985, they filed with the
Regional Trial Court of Lucena City, Branch 60, a complaint for rescission of contract and recovery of
properties with damages. Later, while the case was still pending with the trial court, petitioner introduced
major improvements on the subject properties by constructing a complete fence made of hollow blocks and
expanding the piggery. These prompted the respondent spouses to ask for a writ of preliminary injunction.
10 The trial court granted the application and enjoined petitioner from introducing improvements on the
properties except for repairs. 11

On June 1, 1989 the trial court rendered a decision, the dispositive portion of which reads as follows:

"IN VIEW OF THE FOREGOING, judgment is hereby rendered:

a) Ordering that the contract entered into by plaintiff spouses Miguel K. Robles and
Alejandra M. Robles and the defendant, Jaime Ong captioned 'Agreement of
Purchase and Sale,' marked as Exhibit 'A' set aside;

b) Ordering defendant, Jaime Ong to deliver the two (2) parcels of land which are
the subject matter of Exhibit 'A' together with the improvements thereon to the
spouses Miguel K. Robles and Alejandra M. Robles;

c) Ordering plaintiff spouses, Miguel Robles and Alejandra Robles to return to

Jaime Ong the sum of P497,179.51;

d) Ordering defendant Jaime Ong to pay the plaintiffs the sum of P100,000.00 as
exemplary damages; and

e) Ordering defendant Jaime Ong to pay the plaintiffs spouses Miguel K. Robles
and Alejandra Robles the sum of P20,000.00 as attorney's fees and litigation
expenses.
 "The motion of the plaintiff spouses Miguel K. Robles and Alejandra Robles for the
appointment of receivership is rendered moot and academic.

"SO ORDERED." 12

From this decision, petitioner appealed to the Court of Appeals, which affirmed the decision of the Regional
Trial Court but deleted the award of exemplary damages. In affirming the decision of the trial court, the Court
of Appeals noted that the failure of petitioner to completely pay the purchase price is a substantial breach of
his obligation which entitles the private respondents to rescind their contract under Article 1191 of the New
Civil Code. Hence, the instant petition.

At the outset, it must be stated that the issues raised by the petitioner are generally factual in nature and
were already passed upon by the Court of Appeals and the trial court. Time and again, we have stated that it
is not the function of the Supreme Court to assess and evaluate all over again the evidence, testimonial and
documentary, adduced by the parties to an appeal, particularly where, such as in the case at bench, the
findings of both the trial court and the appellate court on the matter coincide. There is no cogent reason
shown that would justify the court to discard the factual findings of the two courts below and to superimpose
its own. 13

The only pertinent legal issues raised which are worthy of discussion are: (1) whether the contract entered
into by the parties may be validly rescinded under Article 1191 of the New Civil Code; and (2) whether the
parties had novated their original contract as to the time and manner of payment.

Petitioner contends that Article 1191 of the New Civil Code is not applicable since he has already paid
respondent spouses a considerable sum and has therefore substantially complied with his obligation. He
cites Article 1383 instead, to the effect that where specific performance is available as a remedy, rescission
may not be resorted to.

A discussion of the aforesaid articles is in order.

Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted by law to
the contracting parties and even to third persons, to secure the reparation of damages caused to them by a
contract, even if this should be valid, by restoration of things to their condition at the moment prior to the
celebration of the contract. 14 It implies a contract, which even if initially valid, produces a lesion or a
pecuniary damage to someone. 15

On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal
obligations. Reciprocal obligations are those which arise from the same cause, and in which each party is a
debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the
other. 16 They are to be performed simultaneously such that the performance of one is conditioned upon the
simultaneous fulfillment of the other. Rescission of reciprocal obligations under Article 1191 of the New Civil
Code should be distinguished from rescission of contracts under Article 1383. Although both presuppose
contracts validly entered into and subsisting and both require mutual restitution when proper, they are not
entirely identical.

While Article 1191 uses the term "rescission," the original term which was used in the old Civil Code, from
which the article was based, was "resolution." 17 Resolution is a principal action which is based on breach
of a party, while rescission under Article 1383 is a subsidiary action limited to cases of rescission for lesion
under Article 1381 of the New Civil Code, which expressly enumerates the following rescissible contracts:

1. Those which are entered into by guardians whenever the wards whom they represent
suffer lesion by more than one fourth of the value of the things which are the object
thereof;

2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in
the preceding number;

3. Those undertaken in fraud of creditors when the latter cannot in any manner collect the
claims due them;

4. Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority;
 5. All other contracts specially declared by law to be subject to rescission.

Obviously, the contract entered into by the parties in the case at bar does not fall under any of those
mentioned by Article 1381. Consequently, Article 1383 is inapplicable.

May the contract entered into between the parties, however, be rescinded based on Article 1191?

A careful reading of the parties' "Agreement of Purchase and Sale" shows that it is in the nature of a contract
to sell, as distinguished from a contract of sale. In a contract of sale, the title to the property passes to the
vendee upon the delivery of the thing sold; while in a contract to sell, ownership is, by agreement, reserved
in the vendor and is not to pass to the vendee until full payment of the purchase price. 18 In a contract to
sell, the payment of the purchase price is a positive suspensive condition, the failure of which is not a
breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from
acquiring an obligatory force. 19

Respondents in the case at bar bound themselves to deliver a deed of absolute sale and clean title covering
the two parcels of land upon full payment by the buyer of the purchase price of P2,000,000.00. This promise
to sell was subject to the fulfillment of the suspensive condition of full payment of the purchase price by the
petitioner. Petitioner, however, failed to complete payment of the purchase price. The non-fulfillment of the
condition of full payment rendered the contract to sell ineffective and without force and effect. It must be
stressed that the breach contemplated in Article 1191 of the New Civil Code is the obligor's failure to comply
with an obligation already extant, not a failure of a condition to render binding that obligation. 20 Failure to
pay, in this instance, is not even a breach but merely an event which prevents the vendor's obligation to
convey title from acquiring binding force. 21 Hence, the agreement of the parties in the case at bench may
be set aside, but not because of a breach on the part of petitioner for failure to complete payment of the
purchase price. Rather, his failure to do so brought about a situation which prevented the obligation of
respondent spouses to convey title from acquiring an obligatory force.

Petitioner insists, however, that the contract was novated as to the manner and time of payment.

We are not persuaded. Article 1292 of the New Civil Code states that, "In order that an obligation may be
extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be on every point incompatible with each other."

Novation is never presumed, it must be proven as a fact either by express stipulation of the parties or by
implication derived from an irreconcilable incompatibility between the old and the new obligation. 22
Petitioner cites the following instances as proof that the contract was novated: the retrieval of the
transformers from petitioner's custody and their sale by the respondents to MERALCO on the condition that
the proceeds thereof be accounted for by the respondents and deducted from the price of the contract; the
take-over by the respondents of the custody and operation of the rice mill; and the continuous and regular
withdrawals by respondent Miguel Robles of installment sums per vouchers (Exhs. "8" to "47") on the
condition that these installments be credited to petitioner's account and deducted from the balance of the
purchase price.

Contrary to petitioner's claim, records show that the parties never even intended to novate
their previous agreement. It is true that petitioner paid respondents small sums of money
amounting to P48,680.00, in contravention of the manner of payment stipulated in their
contract. These installments were, however, objected to by respondent spouses, and
petitioner replied that these represented the interest of the principal amount which he
owed them. 23 Records further show that petitioner agreed to the sale of MERALCO
transformers by private respondents to pay for the balance of their subsisting loan with
the Bank of Philippine Islands. Petitioner's letter of authorization reads:

"xxx xxx xxx

"Under this authority, it is mutually understood that whatever payment received from
MERALCO as payment to the transformers will be considered as partial payment of the
undersigned's obligation to Mr. and Mrs. Miguel K. Robles.
 "The same will be utilized as partial payment to existing loan with the Bank of Philippine
Islands.

"It is also mutually understood that this payment to the Bank of Philippine Islands will be
reimbursed to Mr. and Mrs. Miguel K. Robles by the undersigned." [Emphasis supplied] 24

It should be noted that while it was agreed that part of the purchase price in the sum of P496,500.00 would
be directly deposited by petitioner to the Bank of Philippine Islands to answer for the loan of respondent
spouses, petitioner only managed to deposit P393,679.60. When the bank threatened to foreclose the
properties, petitioner apparently could not even raise the sum needed to forestall any action on the part of
the bank. Consequently, he authorized respondent spouses to sell the three (3) transformers. However,
although the parties agreed to credit the proceeds from the sale of the transformers to petitioner's obligation,
he was supposed to reimburse the same later to respondent spouses. This can only mean that there was
never an intention on the part of either of the parties to novate petitioner's manner of payment.

Petitioner contends that the parties verbally agreed to novate the manner of payment when respondent
spouses proposed to operate the rice mill on the condition that they will account for its earnings. We find that
this is unsubstantiated by the evidence on record. The tenor of his letter dated August 12, 1984 to
respondent spouses, in fact, shows that petitioner had a "little misunderstanding" with respondent spouses
whom he was evidently trying to appease by authorizing them to continue temporarily with the operation of
the rice mill. Clearly, while petitioner might have wanted to novate the original agreement as to his manner
of payment, the records are bereft of evidence that respondent spouses willingly agreed to modify their
previous arrangement.

In order for novation to take place, the concurrence of the following requisites is indispensable: (1) there
must be a previous valid obligation; (2) there must be an agreement of the parties concerned to a new
contract; (3) there must be the extinguishment of the old contract; and (4) there must be the validity of the
new contract. 25 The aforesaid requisites are not found in the case at bench. The subsequent acts of the
parties hardly demonstrate their intent to dissolve the old obligation as a consideration for the emergence of
the new one. We repeat to the point of triteness, novation is never presumed, there must be an express
intention to novate.

As regards the improvements introduced by petitioner to the premises and for which he claims
reimbursement, we see no reason to depart from the ruling of the trial court and the appellate court that
petitioner is a builder in bad faith. He introduced the improvements on the premises knowing fully well that
he has not paid the consideration of the contract in full and over the vigorous objections of respondent
spouses. Moreover, petitioner introduced major improvements on the premises even while the case against
him was pending before the trial court.

The award of exemplary damages was correctly deleted by the Court of Appeals inasmuch as no moral,
temperate, liquidated or compensatory damages in addition to exemplary damages were awarded.

WHEREFORE, the decision rendered by the Court of Appeals is hereby AFFIRMED with the
MODIFICATION that respondent spouses are ordered to return to petitioner the sum P48,680.00 in addition
to the amounts already awarded. Costs against petitioner.

SO ORDERED.

Davide, Jr., C .J ., Melo, Kapunan and Pardo, JJ ., concur.

Footnotes
1. Exhibits "A" and "1."
2. Exhibits "6" and "H."
3. TSN, October 11, 1985, pp. 9-11.
4. Exh. "C."
5. Exh. "D."
6. Exh. "E."
7. Exh. "F."
 8. Exh. "48."
9. Exh. "P."
10. Records, Vol. 1, p. 388.
11. Records, Vol. 1, p. 414.
12. Rollo, pp. 109-119.
13. Odyssey Park Inc. vs. Court of Appeals, 280 SCRA 253 [1997].
14. IV Tolentino, Civil Code 570 (1991), citing 8 Manresa 748-749.
15. Ibid., at 571, citing 2 Castan 652.
16. Areola vs. Court of Appeals, 236 SCRA 643 [1994].
17. Article 1191 was based on Article 1124 of the old Civil Code.
18. PNB vs. Court of Appeals, 262 SCRA 464 [1996]; Salazar vs. Court of Appeals, 258 SCRA 317 [1996].
19. Agustin vs. Court of Appeals, 186 SCRA 375 [1990]; Roque vs. Lapuz, 96 SCRA 741 [1980]; Manuel vs.
Rodriguez, 109 Phil 1 [1960].
20. Ibid.
21. Villaflor vs. Court of Appeals, 280 SCRA 297 [1997].
22. Uraca vs. Court of Appeals, 278 SCRA 702 [1997]; Ajax Marketing and Development Corporation vs. Court of
Appeals, 248 SCRA 222 [1995].
23. TSN, December 2, 1987, pp. 30-33.
24. Exhibit "48."
25. Reyes vs. Court of Appeals, 264 SCRA 35 [1996].
 EN BANC
[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, FRANCISCO DANTE, PACIFICO ESCANDOR and
FERNANDO TY, defendants-appellants.

Alejo Mabanag for plaintiff-appellee.

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

DECISION

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

This appeal comes to us directly from the Court of First Instance because the claims involved aggregate
more than P200,000.

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 unto 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 claimed 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,
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,
P10,000, of which was paid upon the signing of the agreement, and

"b. The balance of SIXTY-FIVE "THOUSAND PESOS (P65,000) will be paid from
and out of the first letter of credit covering the first shipment of iron ores and or
the first amount derived from the local sale of iron ore made by the Larap Mines
& Smelting Co., Inc., its assigns, administrators, or successors in interests."

To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor of Gaite a
surety bond; and pursuant to the promise, Fonacier delivered to Gaite a surety bond dated December 8,
1954 with himself (Fonacier) as principal and the Larap Mines and Smelting Co. and its stockholders George
Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit "A-
1"). Gaite testified, however, that when this bond was presented to him by Fonacier together with the
"Revocation of Power of Attorney and Contract", Exhibit "A", on December 8, 1954, he refused to sign said
Exhibit "A" unless another bond underwritten by a bonding company was put up by defendants to secure the
payment of the P65,000 balance of the 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-I", 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 than P65,000, 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 goodwill, 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 Mines & 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 65,000 balance of the price of said ore been paid to Gaite by
Fonacier and his sureties. Whereupon, Gaite demanded from Fonacier and his sureties payment of said
amount, on the theory that they had lost every 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 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 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
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 became
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 defendants to pay plaintiff the P65,000
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 Gaite'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
the 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 with interest at 6% per annum from December 9, 1965 until full 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 result 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 (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)
which the latter binds to pay as follows:

a. TEN THOUSAND PESOS (P10,000) will be paid upon the signing of

this agreement.

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000) will be paid

from and out of the first letter of credit covering first shipment of iron
ores and/or 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 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, 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) will be paid out of the
first letter of credit covering the first shipment of iron ore . . ." 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 rights 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 to guarantee payment of
 the P65,000, and 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.

3) To subordinate the obligation to pay the remaining P65,000 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 desirability

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 intended a suspensive condition or a suspensive period (dies ad quem)
for the payment of the P65,000, the rules of interpretation would incline the
scales in favor of "the greatest 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's
obligation is deemed to be actually existing, with only its maturity (due date)
postponed or deferred, than 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 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, 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, 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:

(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
thereby; 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 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 or 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 of 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 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 Luisiana 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 question; 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 promised and the
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 Cipriano 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 appellants'
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. (cf. Pine River Logging & Improvement Co. vs. U. S., 186 U.S. 279, 46, L. Ed.
1164).
There was, consequently, no short-delivery in this case as would entitle appellants to the payment of
damages, nor could Gaite have been guilty of any fraud in making any misrepresentation to appellants as to
the total quantity of ore in the stockpiles of the mining claims in question, as charged by appellants since
Gaite's estimate appears to be substantially correct.

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

Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De Leon and Natividad, JJ., concur.
 FIRST DIVISION
[G.R. No. 118114. December 7, 1995.]

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

DECISION

PADILLA, J p:

This is a petition for review on certiorari of the decision 1 of the Court of Appeals, 2nd
Division, in CA-G.R. No. 36177, which affirmed the decision 2 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) square 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 interstate 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
interstate 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 provisions of Sections 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 LAURENCIANA, 3 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 field 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 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 decisions:

"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 documents 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, 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 respondent's 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 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 Registry of Deeds which contained the Declaration of Heirship with Waiver of rights
an 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 f Cosme Pido and not a private respondent.
The reason is the 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 thereof .

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 established 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 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.

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

Footnotes
1. Penned by Purisima, J., Chairman, with Isnani, J. and Ibay-Somera, J. concurring.
2. Penned by Executive Judge Jose Aguirre, Jr.
3. The RTC decision used the name Luzviminda. The CA used the name Laudenciana.
4. Annex A, Petition; Rollo, p. 14.
5. Annex "D", Petition Rollo, p. 29.
6. Ibid., p. 27.
7. Ibid., p. 28.
8. Reyes, An Outline of Philippine Civil Law, Vol. II p. 20.
9. Article 1458, Civil Code.
10. Paumitos v. CA, G.R. No. 61584, Nov. 25, 1992, 215 SCRA 867, 868; Uberas v. CFI of Negros G.R. No. 4248,
October 30, 1978, 86 SCRA 145, 147; Abrasia v. Carian, G.R. No. 9510, October 31, 1957.
11. See Aguirre v. Atienza, G.R. No. L-10665, Aug. 30, 1958; Mari v. Bonilla, G.R. No. 852, March 19, 949; Robles
v. CA. 647494 83 SCRA 181, 182, May 15, 1978.
12. See Borromeo Herrera v. Borromeo, G.R. No. L-41171, July 23, 1987, 152 SCRA 171.
13. See note 10 - supra.
14. Osorio v. Osorio and Ynchausti Steamship Co. No. 16544, March 20, 1921.
15. Somes v. Government of the Philippines, No. 42754, October 30, 1935. 62 Phil. 432.
16. See Laureto v. CA, G.R. No. 95838, August 7, 1992, 212 SCRA 397, Cuno v. CA, G.R. L-62985, April 2,
1984, 128 SCRA 567.
 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.

DECISION

MARTINEZ, J p:

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 3 ruling that 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. 4 Thereafter, petitioners filed a motion for
reconsideration. When the CA denied their motion, 5 petitioners instituted a petition for review to this 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 7 was subject to the
condition that the donated property shall be "used solely and exclusively as a part of the campus of the
proposed Provincial High School in Talacogon." 8 The donation further provides that should "the proposed
Provincial 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. 9 Such
condition, not being contrary to law, morals, 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 11 —
notwithstanding the condition imposed by the donee. The donation is perfected once the acceptance by the
donee is made known to the donor. 12 Accordingly, ownership is immediately transferred to the latter 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. 13 Thus, at the time of
the 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; 14 "it is 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."
15 Its essential elements of:

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. Petitioners' 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 petitioners 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 17
as to the offer and acceptance thereof on three (3) elements: subject matter, price and terms of payment of
the price. 18 Ownership by the seller on the thing sold at the time of the 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. 19 Perfection per se does not transfer ownership which occurs upon
the actual or constructive delivery of the thing sold. 20 A perfected contract of sale cannot be challenged on
the ground of non-ownership on the part of the seller at the time of its perfection; hence, the sale is still valid.
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." 21 This rule applies not only when the subject matter of the
contract of sale is goods, 22 but also to other kinds of property, including real property. 23

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; 24 thus, the contract
involving the same is inexistent 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 25
are outside the commerce of men. Besides, the lots in this case were conditionally owned by the
municipality. To rule that the donated properties are 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. 26 It cannot be said that private
respondents had compelled petitioners 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 27 and 2220 28 of the New Civil Code concur in this case.

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

SO ORDERED.

Melo, Puno and Mendoza JJ ., concur.

Footnotes
1. Decision of Court of Appeals in CA-G.R. CV No. 44016 promulgated on May 31, 1996, pp. 2-5; Rollo, pp. 41-44.
2. Regional Trial Court (Bayugan, Agusan del Sur) Decision dated July 16, 1993 penned by Judge Zenaida
Placer, p. 6; Annex "A" of Petition; Rollo, p. 21.
3. The decretal portion of the CA's decision states: "WHEREFORE, premises considered, the decision appealed
from is hereby REVERSED and SET ASIDE, and judgment rendered declaring the defendants-appellants as
the rightful and lawful owners and possessors of the subject land. There is no pronouncement as to costs."
4. CA Decision, pp. 6-7; Rollo, pp. 45-46.
5. CA Resolution promulgated August 26, 1996; Rollo, p. 55.
6. Comment of Private Respondents, pp. 7-8; Rollo, pp. 67-68.
7. Her sisters were Leonila Corvera Vda. de Sequeña and Paz Corvera Cabiltes and the brother was Epapiadito
Corvera.
8. RTC Decision, p. 1; Rollo, p. 16.
9. CA Decision, pp. 5-6; Rollo, pp. 44-45.
10. City of Angeles v. CA, 261 SCRA 90.
11. Article 712, New Civil Code provides: "Ownership is acquired by occupation and by intellectual creation.

"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.

"They may also be acquired by means of prescription." (emphasis supplied).

12. Article 734, New Civil Code (NCC) reads: "The donation is perfected from the moment the donor knows of the
acceptance by the donee."
13. Central Philippine University v. CA, 246 SCRA 511.
14. Reyes v. CA, 264 SCRA 35; Republic v. Sandiganbayan, 255 SCRA 438; PAL Employees Savings & Loan
Association, Inc. v. NLRC, 260 SCRA 758.
15. Catholic Bishop of Balanga v. CA, 264 SCRA 181; Chavez v. Bonto-Perez, 242 SCRA 73; Rivera v. CA, 244
SCRA 218; Cormero v. CA, 317 Phil. 348.
16. Santiago v. CA, 278 SCRA 98 (1997); Catholic Bishop of Balanga v. CA, 264 SCRA 181; Claveria v. Quingco,
207 SCRA 66 (1992); Perez v. Ong Cho, 116 SCRA 732 (1982); Yusingco v. Ong Hing Lian, 42 SCRA 589
(1971); I.E. Lotho, Inc. v. Ice and Cold Storage Industries, Inc., 3 SCRA 744; Go Chi Gun, et. al. v. Co Cho, et.
al., 96 Phil. 622.
17. Article 1475, New Civil Code (NCC). "The contract of sale is perfected at the moment there is a meeting of the
minds upon the thing which is the object of the contract and upon the price. . . ."
18. Leabres v. CA, 146 SCRA 158 ( 1986); See also Navarro v. Sugar Producer's Corporation, 1 SCRA 1180.
19. Article 1459, NCC — "The thing must be licit and the vendor must have a right to transfer the ownership thereof
at the time it is delivered."
20. Article 712, NCC. ". . . Ownership and other real rights over property are acquired and transmitted . . . in
consequence of certain contracts, by tradition."
21. Article 1434, NCC provides: "When a person who is not the owner of a thing sells or alienates and delivers it,
and later the seller or grantor acquires title thereto, such title passes by operation of law to the buyer or
grantee."
22. Article 1505 of the NCC provides: "Subject to the provisions of this Title, where goods are sold by a person who
is not the owner thereof, and who does not sell them under authority or with the consent of the owner, the buyer
acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct
precluded from denying the seller's authority to sell.

"xxx xxx xxx" (Emphasis supplied).

Other exceptions to the foregoing includes: (a) when the contrary is provided in recording laws, (b) sales made
under statutory power of sale or pursuant to a valid order from a court of competent jurisdiction, and (c) sales
made in a merchant's store in accordance with the Code of commerce and special laws.

23. See Article 1434, NCC, supra.; Estoque v. Pajimula, 133 Phil. 55; 24 SCRA 59 (1968); Buctan v. Gabar, 55
SCRA 499.
24. Article 1409 (4), NCC: "The following contracts are inexistent and void from the beginning;

xxx xxx xxx

(4) Those whose object is outside the commerce of men;

xxx xxx xxx"

25. Article 423, NCC: "The properties of provinces, cities and municipalities, is divided into property for public use
and patrimonial property."

Article 424 provides: "Property for public use, in the provinces, cities and municipalities, consist of the provincial
roads, city streets, municipal streets, the squares, fountains, public waters, promenades, and public works for
public service paid for by said provinces, cities, or municipalities.

"All other property possessed by any of them is patrimonial and shall be governed by

this Code, without prejudice to the provisions of special laws."

26. "In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be
recovered except:

xxx xxx xxx

(2) when the defendant's act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest.

xxx xxx xxx

(5) where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly
valid, just and demandable claim.

xxx xxx xxx

27. Moral damages may be recovered in the following and analogous cases:

(1) a criminal offense resulting in physical injuries;

(2) quasi-delicts causing physical injuries;
(3) seduction, abduction, rape or other lascivious acts;
(4) adultery or concubinage;
(5) illegal or arbitrary detention or arrests;
(6) illegal search;
(7) libel, slander or any other form of defamation;
(8) malicious prosecution;
(9) acts mentioned in Article 309;
(10) acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34 and 35.

The parents of the female seduced, abducted, raped or abused referred to in no. 3 of this Article, may also
recover moral damages.
 The spouse, ascendants, descendants and brothers and sisters may bring the action mentioned in no. 9 of this
Article, in the order named.

28. Article 2220, Willful injury to property may be a legal ground for awarding moral damages if the court should find
that, under the circumstances, such damages are justly due. The same rule applies to breaches of contracts
where the defendant acted fraudulently or in bad faith.
 FIRST DIVISION
[G.R. No. L-8506. August 31, 1956.]

CELESTINO CO & COMPANY, petitioner, vs. COLLECTOR OF INTERNAL REVENUE, respondent.

Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres and Solicitor
Federico V. Sian for respondent.

DECISION

BENGZON, J p:

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 sales 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 for doors and windows 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, furnitures,
etc. used season-dried and kiln-dried lumber, of the best quality workmanship' solely for
the purpose of supplying the needs for doors, windows and sash of its special and limited
customers. One will 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 ready-
made doors and windows of standard sizes for the average home. Moreover, as shown
from the investigation of petitioner's books 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 upon 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
one under which the business enterprise of petitioner could appropriately fall. It would
require a stretch of the law and much effort to make the business of manufacturing sash,
doors and windows upon special order of customers fall under the category of 'road,
building, navigation, artesian well, water works and other construction work contractors;
filling contractors' as enumerated in the section being invoked by petitioner's counsel.
Construction work contractors are those who alter or repair buildings, structures, streets,
highways, sewers, street railways, railroads, logging roads, electric, steam or water plants
telegraph and telephone plants and lines, 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 of taxing petitioner as a contractor under section
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 since 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 we are inclined 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 materials-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, manufactures
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 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 of sash,
mouldings or 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 as construction work in common parlance. 2
Appellant invokes Article 1467 of the New Civil Code to bolster its contention that in filing orders for windows
and doors according to specifications, it did not sell, but merely contracted for particular pieces of work or
"merely sold its services".

Said article reads as follows:

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

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

In our opinion when this Factory accepts a job that requires the use of extraordinary or additional equipment,
or involves services not generally performed by it — it thereby contracts for a piece of work — filling 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 preculiar merchandise?

Anyway, supposing for the moment that the transactions were not sales, they were neither lease of services
nor contract jobs by a contractor. But as the doors and windows had been admittedly "manufactured" by the
Oriental Sash Factory, such transactions could be, and should be taxed as "transfers" thereof under section
186 of the National Revenue Code.

The appealed decision is consequently affirmed. So ordered.

Paras, C.J., Padilla, Montemayor, Bautista Angelo, Concepcion, Reyes, J.B.L., and Felix, JJ., concur.

Footnote
1 2. With all the consequences in Article 1729 New Civil Code and Act No. 3959 (bond of contractor).
 FIRST DIVISION
[G.R. No. L-27044. June 30, 1975.]

THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ENGINEERING

EQUIPMENT AND SUPPLY COMPANY AND THE COURT OF TAX APPEALS,
respondents.

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

ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner, vs. THE COMMISSIONER OF

INTERNAL REVENUE AND THE COURT OF TAX APPEALS, respondents.

Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete, Solicitor Lolita O.
Gal-lang and Special Attorney Gemaliel H . Mantolino for Commissioner of Internal Revenue, etc.
Melquiades C . Gutierrez, Jose U . Ong, Juan G. Collas, Jr., Luis Ma. Guerrero and J . R. Balonkita for
Engineering Equipment and Supply Company.

DECISION

ESGUERRA, J p:

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

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

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

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

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

On March 3, 1959, the Commissioner assessed against, and demanded upon, Engineering payment of the
increased amount and suggested that P10,000 be paid as compromise in extrajudicial settlement of
Engineering's penal liability for violation of the Tax Code. The firm, however, contested the tax assessment
and requested that it be furnished with the details and particulars of the Commissioner's assessment. (Exh.
"B" and "15", pp. 86-88 BIR rec. Vol. I) The Commissioner replied that the assessment was in accordance
with law and the facts of the case.
On July 30, 1959, Engineering appealed the case to the Court of Tax Appeals and during the pendency of
the case the investigating revenue examiners reduced Engineering's deficiency tax liabilities from
P916,362.65 to P740,587.86 (Exhs. "R" and "9" pp. 162-170, BIR rec.), based on findings after conferences
had with Engineering's Accountant and Auditor.

On November 29, 1966, the Court of Tax Appeals rendered its decision, the dispositive portion of which
reads as follows:

"For ALL THE FOREGOING CONSIDERATIONS, the decision of respondent appealed

from is hereby modified, and petitioner, as a contractor, is declared exempt from the
deficiency manufacturers sales tax covering the period from June 1, 1948, to September
2, 1956. However, petitioner is ordered to pay respondent, or his duly authorized
collection agent, the sum of P174,141.62 as compensating tax and 25% surcharge for the
period from 1953 to September 1956. With costs against petitioner."

The Commissioner, not satisfied with the decision of the Court of Tax Appeals, appealed to this Court on
January 18 1967, (G.R. No. L-27044). On the other hand, Engineering, on January 4, 1967, filed with the
Court of Tax Appeals a motion for reconsideration of the decision abovementioned. This was denied on April
6, 1967, prompting Engineering to file also with this Court its appeal, docketed as G.R. No. L-27452.
Since the two cases, G.R. No. L-27044 and G.R. No. L-27452 involve the same parties and issues, We have
decided to consolidate and jointly decide them.

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

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

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

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

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

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

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

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

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

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

4. In not holding the company liable to the 50% fraud surcharge under Section 183 of the
Tax Code on its importations of parts and accessories of air conditioning units,
notwithstanding the finding of said court that the respondent company fraudulently
misdeclared the said importations;
 5. In holding the respondent company liable for P174,141.62 as compensating tax and 25%
surcharge instead of P740,587.86 as deficiency advance sales tax, deficiency
manufacturers tax and 25% and 50% surcharge for the period from June 1, 1948 to
December 31, 1956.

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

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

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

xxx xxx xxx

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

In answer to the above contention, Engineering claims that it is not a manufacturer and seller of air-
conditioning units and spare parts or accessories thereof subject to tax under Section 185(m) of the Tax
Code, but a contractor engaged in the design, supply and installation of the central type of air-conditioning
system subject to the 359 tax imposed by Section 191 of the same Code, which is essentially a tax on the
sale of services or labor of a contractor rather than on the sale of articles subject to the tax referred to in
Sections 184,185 and 186 of the Code.

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

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

"Art. 1467. A contract for the delivery at a certain price of an article which the
vendor in the ordinary course of his business manufactures or procures for the general
market, whether the same is on hand at the time or not, is a contract of sale, but if the
goods are to be manufactured specially for the customer and upon his special order and
not for the general market, it is a contract for a piece of work."
The word "contractor" has come to be used with special reference to a person who, in the pursuit of the
independent business, undertakes to do a specific job or piece of work for other persons, using his own
means and methods without submitting himself to control as to the petty details. (Arañas, Annotations and
Jurisprudence on the National Internal Revenue Code, p. 318, par. 191(2), 1970 Ed.) The true test of a
contractor as was held in the cases of Luzon Stevedoring Co., vs. Trinidad 43, Phil. 803, 807-808, and La
Carlota Sugar Central vs. Trinidad 43, Phil. 816, 819, would seem to be that he renders service in the
course of an independent occupation, representing the will of his employer only as to the result of his work,
and not as to the means by which it is accomplished.

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

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

As found by the lower court, which finding 4 We adopt —

"Engineering, in a nutshell, fabricates, assembles, supplies and installs in the buildings of

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

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

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

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

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

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

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

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

Definitely there is quite a big difference in the operation because the window type air conditioner is a sort of
compromise. In fact, it cannot control humidity to the desired level; rather the manufacturers, by hit and
miss, were able to satisfy themselves that the desired comfort within a room could be made by a definite
setting of the machine as it comes from the factory; whereas the central type system definitely requires an
intelligent operator." (t.s.n. pp. 301-335, Vol. II)

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

Q "Aside from the General components, which go into air conditioning plant or
system of the central type which your company undertakes, and the procedure
followed by you in obtaining and executing contracts which you have already
testified to in previous hearing, would you say that the covering contracts for
these different projects listed . . . referred to in the list, Exh. "F" are identical in
every respect? I mean every plan or system covered by these different contracts
are identical in standard in every respect, so that you can reproduce them?
 A "No, sir. They are not all standard. On the contrary, none of them are the same.
Each one must be designed and constructed to meet the particular requirements,
whether the application is to he operated. (t.s.n. pp. 101-102)

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

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

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

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

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

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

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

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

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

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

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

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

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

And on July 17, 1953 (Exh. "3-g", p. 145, BIR rec.) Engineering wrote Trane Co. another letter, viz:

"In the past, we have always paid the air-conditioning tax on climate changers and that
mark is recognized in the Philippines as air conditioning equipment. This matter of
avoiding any tie-in on air conditioning is very important to us, and we are again asking that
from hereon that whoever takes care of the processing of our orders be carefully
instructed so as to avoid again using the term 'climate changers' or in any way referring to
the equipment as 'air conditioning.'

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

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

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

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

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

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

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

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

"At first blush it would seem that the contention of petitioner that it is not subject to the
delinquency surcharge of 25% is sound, valid and tenable. However, a serious 190 of the
Tax Code dealing on compensating tax in relation to Section 183 (a) of the same Code,
will show that the contention of petitioner is without merit. The original text of Section 190
of Commonwealth Act 466, otherwise know as the National Internal Revenue Code, as
amended by Commonwealth Act No. 503, effective on October 1, 1939, does not provide
for the filing of a compensating tax return and payment of the 25% surcharge for late
payment thereof. Under the original text of Section 190 of the Tax Code, as amended by
Commonwealth Act No. 503, the contention of the petitioner that it is not subject to the
25% surcharge appears to be legally tenable. However, Section 190 of the Tax Code was
subsequently amended by Republic Acts Nos. 48, 253, 361, 1511 and 1612 effective
October 1, 1946, July 1, 1948, June 9, 1949, June 16, 1956 and August 24, 1956
respectively, which invariably provides among others, the following:

". . . If any article withdrawn from the customhouse or the post office without payment of
the compensating tax is subsequently used by the importer for other purposes
corresponding entry should be made in the looks of accounts if any are kept or a written
notice thereof sent to the Collector of Internal Revenue and payment of the corresponding
compensating tax made within 30 days from the date of such entry or notice and if tax is
not paid within such period the amount of the tax shall be increased by 25% the increment
to be a part of the tax."
 "Since the imported air conditioning units and spare parts or accessories thereof are
subject to the compensating tax of 30% as the same were used in the construction
business of Engineering, it is incumbent upon the latter to comply with the aforequoted
requirement of Section 190 of the Code, by posting in its books of accounts or notifying
the Collector of Internal Revenue that the imported articles were used for other purposes
within 30 days. . . . Consequently, as the 30% compensating tax was not paid by petitioner
within the time prescribed by Section 190 of the Tax Code as amended, it is therefore
subject to the 25% surcharge for delinquency in the payment of the said tax." (pp. 224-226
CTA rec.)

III

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

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

taxes. —

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

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

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

SO ORDERED.

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

Footnotes
1. Section 185. Percentage tax on sales of . . ., refrigerators and others. — There shall be levied,
assessed, and collected once only on every original sale, barter, exchange, or similar transaction intended to
transfer ownership of, or title to, the other articles herein below enumerated, a tax equivalent to thirty percentum
of the gross selling price or gross value in money of the articles gold, bartered, exchanged or transferred, such
tax to be paid by the manufacturer or producers, Provided: That where the articles enumerated herein below
are manufactured out of materials subject to tax under this section, the total cost of such materials, as duly
established, shall be deductible from the gross selling price or gross value in money of such manufactured
articles.

xxx xxx xxx

(m) Air conditioning units and parts or accessories thereof. (As amended by R.A. No. 588, effective from
September 22, 1950 until it was amended by R.A. No. 1612 made effective August 14, 1956.)

2. Groves vs. Buck, 3, Maule & s. 178; Towers v. Osborne, 1 Strange 506, Benjamin on Sales 90; as cited in
Arañas, Annotations and Jurisprudence on the NIRC, as amended, 1970 ed. p. 323, 324.
3. Ibid p. 324, par. 191 (13).
4. Decision, Court of Tax Appeals, CTA Rec. p. 212.
5. "Section 190. Compensating tax. — All persons residing or doing business in the Philippines, who
purchase or receive from without the Philippines any commodities, goods, wares or merchandise, excepting
those subject to specific taxes under Title IV of this Code, shall pay on the total value thereof at the time they
are received by such persons, including freight, insurance, commission and all similar charges, a compensating
tax equivalent to the percentage taxes imposed under this Title on original transactions effected by merchants,
importers or manufacturers, such tax to be paid before the withdrawal or removal of said commodities, goods,
wares or merchandise from the custom house or the post office. Provided. However, That merchants, importers,
and manufacturers, who are subject to the tax under Sections 184, 185 or 189 of this Title, shall not be required
to pay the herein tax imposed where such commodities, goods wares or merchandise purchased or received by
them from without the Philippines are to be sold, resold, bartered or exchanged or are to be used in the
manufacture or preparation of articles for sale, barter or exchange and are to form part thereof. And Provided,
Further, that the tax imposed in this section shall not apply to articles to be used by the importer himself in the
manufacturer or preparation of articles subject to specific tax, or those for consignment abroad and are to form
part thereof. If any article withdrawn from the customhouse or the post office without payment of the
compensating tax is subsequently used by the importer for other purposes, corresponding entry should be
made in the books of accounts, if any are kept or written notice thereof sent to the Collector of Internal Revenue
and payment of the corresponding compensating tax made within 10 days from the date of such entry or notice.
If the tax is not paid within such period the amount of the tax shall be increased by 25%, the increment to be a
part of the tax". (As amended by R.A. 253, effective July 1948)
 THIRD DIVISION
[G.R. No. 52267. January 24, 1996.]

ENGINEERING & MACHINERY CORPORATION, petitioner, vs. COURT OF APPEALS and PONCIANO L.
ALMEDA, respondents.

Cruz, Durian, Agabin, Alday & Tuason, for petitioner.

Carnell S. Valdez, for respondents.

DECISION

PANGANIBAN, J p:

Is a contract for the fabrication and installation of a central air-conditioning system in a building, one of "sale"
or "for a piece of work"? What is the prescriptive period for filing actions for breach of the terms of such
contract?

These are the legal questions brought before this Court. in this Petition for review on certiorari under Rule 45
of the Rules of Court, to set aside the Decision 1 of the Court of Appeals 2 in-CA-G.R. No. 58276-R
promulgated on November 28, 1978 (affirming in toto the decision 3 dated April 15, 1974 of the then Court of
First Instance of Rizal, Branch II 4 , in Civil Case No. 14712, which ordered petitioner to pay private
respondent the amount needed to rectify the faults and deficiencies of the air-conditioning system installed
by petitioner in private respondent's building, plus damages, attorney's fees and costs).

By a resolution of the First Division of this Court dated November 13, 1995, this case was transferred to the
Third. After deliberating on the various submissions of the parties, including the petition, record on appeal,
private respondent's comment and briefs for the petitioner and the private respondent, the Court assigned
the writing of this Decision to the undersigned, who took his oath as a member of the Court on October 10,
1995.

The Facts

Pursuant to the contract dated September 10, 1962 between petitioner and private respondent, the former
undertook to fabricate, furnish and install the air-conditioning system in the latter's building along Buendia
Avenue, Makati in consideration of P12,000.00. Petitioner was to furnish the materials, labor, tools and all
services required in order to so fabricate and install said system. The system was completed in 1963 and
accepted by private respondent, who paid in full the contract price.

On September 2, 1965, private respondent sold the building to the National Investment and Development
Corporation (NIDC). The latter took possession of the building but on account of NIDC's noncompliance with
the terms and conditions of the deed of sale, private respondent was able to secure judicial rescission
thereof. The ownership of the building having been decreed back to private respondent, he re-acquired
possession sometime in 1971. It was then that he learned from some NIDC employees of the defects of the
air-conditioning system of the building.

Acting on this information, private respondent commissioned Engineer David R. Sapico to render a technical
evaluation of the system in relation to the contract with petitioner. In his report, Sapico enumerated the
defects of the system and concluded that it was "not capable of maintaining the desired room temperature of
76ºF — 2ºF (Exhibit C)" 5

On the basis of this report, private respondent filed on May 8, 1971 an action for damages against petitioner
with the then Court of First Instance of Rizal (Civil Case No. 14712). The complaint alleged that the air-
conditioning system installed by petitioner did not comply with the agreed plans and specifications. Hence,
private respondent prayed for the amount of P210,000.00 representing the rectification cost, P100,000.00 as
damages and P15,000.00 as attorney's fees.

Petitioner moved to dismiss the complaint, alleging that the prescriptive period of six months had set in
pursuant to Articles 1566 and 1567, in relation to Article 1571 of the Civil Code, regarding the responsibility
of a vendor for any hidden faults or defects in the thing sold.
Private respondent countered that the contract dated September 10, 1962 was not a contract of sale but a
contract for a piece of work under Article 1713 of the Civil Code. Thus, in accordance with Article 1144 (1) of
the same Code, the complaint was timely brought within the ten-year prescriptive period.

In its reply, petitioner argued that Article 1571 of the Civil Code providing for a six-month prescriptive period
is applicable to a contract for a piece of work by virtue of Article 1714, which provides that such a contract
shall be governed by the pertinent provisions on warranty of title and against hidden defects and the
payment of price in a contract of sale 6 .

The trial court denied the motion to dismiss. In its answer to the complaint, petitioner reiterated its claim of
prescription as an affirmative defense. It alleged that whatever defects might have been discovered in the
air-conditioning system could have been caused by a variety of factors, including ordinary wear and tear and
lack of proper and regular maintenance. It pointed out that during the one-year period that private
respondent withheld final payment, the system was subjected to "very rigid inspection and testing and
corrections or modifications effected" by petitioner. It interposed a compulsory counterclaim suggesting that
the complaint was filed "to offset the adverse effects" of the judgment in Civil Case No. 71494, Court of First
Instance of Manila, involving the same parties, wherein private respondent was adjudged to pay petitioner
the balance of the unpaid contract price for the air-conditioning system installed in another building of private
respondent, amounting to P138,482.25.

Thereafter, private respondent filed an ex-parte motion for preliminary attachment on the strength of
petitioner's own statement to the effect that it had sold its business and was no longer doing business in
Manila. The trial court granted the motion and, upon private respondent's posting of a bond of P50,000.00,
ordered the issuance of a writ of attachment.

In due course, the trial court rendered a decision finding that petitioner failed to install certain parts and
accessories called for by the contract, and deviated from the plans of the system, thus reducing its
operational effectiveness to the extent that 35 window-type units had to be installed in the building to
achieve a fairly desirable room temperature. On the question of prescription, the trial court ruled that the
complaint was filed within the ten-year prescriptive period although the contract was one for a piece of work,
because it involved the "installation of an air-conditioning system which the defendant itself manufactured,
fabricated, designed and installed."

Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. Hence, it instituted
the instant petition.

The Submissions of the Parties

In the instant Petition, petitioner raised three issues. First, it contended that private respondent's acceptance
of the work and his payment of the contract price extinguished any liability with respect to the defects in the
air-conditioning system. Second, it claimed that the Court of Appeals erred when it held that the defects in
the installation were not apparent at the time of delivery and acceptance of the work considering that private
respondent was not an expert who could recognize such defects. Third, it insisted that, assuming arguendo
that there were indeed hidden defects, private respondent's complaint was barred by prescription under
Article 1571 of the Civil Code, which provides for a six-month prescriptive period.

Private respondent, on the other hand averred that the issues raised by petitioner, like the question of
whether there was an acceptance of the work by the owner and whether the hidden defects in the
installation could have been discovered by simple inspection, involve questions of fact which have been
passed upon by the appellate court.

The Court's Ruling

The Supreme Court reviews only errors of law in petitions for review on certiorari under Rule 45. It is not the
function of this Court to re-examine the findings of fact of the appellate court unless said findings are not
supported by the evidence on record or the judgment is based on a misapprehension of facts. 7

"The Court has consistently held that the factual findings of the trial court, as well as the Court of Appeals,
are final and conclusive and may not be reviewed on appeal. Among the exceptional circumstances where a
reassessment of facts found by the lower courts is allowed are when the conclusion is a finding grounded
entirely on speculation, surmises or conjectures; when the inference made is manifestly absurd, mistaken or
impossible; when there is grave abuse of discretion in the appreciation of facts; when the judgment is
premised on a misapprehension of facts; when the findings went beyond the issues of the case and the
same are contrary to the admissions of both appellant and appellee. After a careful study of the case at
bench, we find none of the above grounds present to justify the re-evaluation of the findings of fact made by
the courts below." 8

"We see no valid reason to discard the factual conclusions of the appellate court. . . . (I)t is
not the function of this Court to assess and evaluate all over again the evidence,
testimonial and documentary, adduced by the parties, particularly where, such as here,
the findings of both the trial court and the appellate court on the matter coincide." 9
(Emphasis supplied)

Hence, the first two issues will not be resolved as they raise questions of fact.

Thus, the only question left to be resolved is that of prescription. In their submissions, the parties argued
lengthily on the nature of the contract entered into by them, viz., whether it was one of sale or for a piece of
work.

Article 1713 of the Civil Code defines a contract for a piece of work thus:

"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."

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 10 . 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 11 .

Thus, Mr. Justice Vitug 12 explains that —

"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. 1467, Civil Code). The mere fact alone that certain
articles are made upon previous orders of customers will not argue against the imposition
of the sales tax if such articles are ordinarily manufactured by the taxpayer for sale to the
public (Celestino Co. vs. Collector, 99 Phil. 8411)."

To Tolentino, the distinction between the two contracts depends on the intention of the parties. Thus, if the
parties intended that at some future date an object has to be delivered, without considering the work or labor
of the party bound to deliver, the contract is one of sale. But if one of the parties accepts the undertaking on
the basis of some plan, taking into account the work he will employ personally or through another, there is a
contract for a piece of work 13 .

Clearly, the contract in question is one for a piece of work. It is not petitioner's line of business to
manufacture air-conditioning systems to be sold "off-the-shelf." Its business and particular field of expertise
is the fabrication and installation of such systems as ordered by customers and in accordance with the
particular plans and specifications provided by the customers. Naturally, the price or compensation for the
system manufactured and installed will depend greatly on the particular plans and specifications agreed
upon with the customers.

The obligations of a contractor for a piece of work are set forth in Articles 1714 and 1715 of the Civil Code,
which provide:

"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. 1715. The contractor shall execute the work in such a manner that it has the
qualities agreed upon and has no defects which destroy or lessen its value or fitness for
its ordinary or stipulated use. Should the work be not of such quality, the employer may
require that the contractor remove the defect or execute another work. If the contractor
fails or refuses to comply with this obligation, the employer may have the defect removed
or another work executed, at the contractor's cost."

The provisions on warranty against hidden defects, referred to in Art. 1714 above-quoted, are found in
Articles 1561 and 1566, which read as follows:

"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."

xxx xxx xxx

"Art. 1566. The vendor is responsible to the vendee for any hidden faults or defects
in the thing sold, even though he was not aware thereof.

"This provision shall not apply if the contrary has been stipulated, and the vendor was not
aware of the hidden faults or defects in the thing sold."

The remedy against violations of the warranty against hidden defects is either to withdraw from the contract
(rehibitory action) or to demand a proportionate reduction of the price (accion quanti minoris), with damages
in either case. 14

In Villostas vs. Court of Appeals 15 , we held that, "while it is true that Article 1571 of the Civil Code provides
for a prescriptive period of six months for a rehibitory action, a cursory reading of the ten preceding articles
to which it refers will reveal that said rule may be applied only in case of implied warranties"; and where
there is an express warranty in the contract, as in the case at bench, the prescriptive period is the one
specified in the express warranty, and in the absence of such period, "the general rule on rescission of
contract, which is four years (Article 1389, Civil Code) shall apply" 16 .

Consistent with the above discussion, it would appear that this suit is barred by prescription because the
complaint was filed more than four years after the execution of the contract and the completion of the air-
conditioning system.

However, a close scrutiny of the complaint filed in the trial court reveals that the original action is not really
for enforcement of the warranties against hidden defects, but one for breach of the contract itself. It alleged
17 that the petitioner, "in the installation of the air conditioning system did not comply with the specifications
provided" in the written agreement between the parties, "and an evaluation of the air-conditioning system as
installed by the defendant showed the following defects and violations of the specifications of the
agreement, to wit:

"GROUND FLOOR.

"A. RIGHT WING.

Equipped with Worthington Compressor, Model 2VC4 directly driven by an Hp

Elin electric motor 1750 ramp, 3 phase, 60 cycles, 220 volts, complete with
starter evaporative condenser circulating water pump, air handling unit air ducts.

Defects Noted.

1. Deteriorated evaporative condenser panels, coils are full of scales and

heavy corrosion is very evident.
2. Defective gauges of compressors.
3. No belt guard on motor.
 4. Main switch has no cover.
5. Desired room temperature not attained.

Aside from the above defects, the following were noted not installed although
provided in the specifications.

1. Face and by-pass damper of G.I. sheets No. 16. This damper regulates
the flow of cooled air depending on room condition.
2. No fresh air intake provision were provided which is very necessary for
efficient comfort cooling.
3. No motor to regulate the face and by-pass.
4. Liquid level indicator for refrigerant not provided.
5. Suitable heat exchanger is not installed. This is an important component
to increase refrigeration efficiency.
6. Modulating thermostat not provided.
7. Water treatment device for evaporative condenser was not provided.
8. Liquid receiver not provided by sight glass.

"B. LEFT WING.

Worthington Compressor Model 2VC4 is Installed complete with 15 Hp electric

motor, 3 phase, 220 volts 60 cycles with starter.

Defects Noted.

Same as right wing, except No. 4. All other defects on right wing are
common to the left wing.

"SECOND FLOOR. (Common up to EIGHT FLOORS)

Compressors installed are MELCO with 7.5 Hp V-belt driven by 1800 RPM, 220
volts, 60 cycles, 3 phase, Thrige electric motor with starters.

As stated in the specifications under Section No. IV, the MELCO compressors do
not satisfy the conditions stated therein due to the following.

1. MELCO Compressors are not provided with automatic capacity

unloader.
2. Not provided with oil pressure safety control.
3. Particular compressors do not have provision for renewal
sleeves.

Out of the total 15 MELCO compressors installed to serve the 2nd floor up to 8th
floors, only six (6) units are in operation and the rest were already replaced. Of
the remaining six (6) units, several of them have been replaced with bigger
crankshafts.

"NINTH FLOOR.

Two (2) Worthington 2VC4 driven by 15 Hp, 3 phase, 220 volts, 60

cycles, 1750 rpm, Higgs motors with starters.

Defects Noted are similar to ground floor.

"GENERAL REMARKS.

Under Section III, Design conditions of specification for air conditioning

work, and taking into account "A" & "B" same, the present systems are
not capable of maintaining the desired room temperature of 76 = 2ºF
(sic).
 The present tenant have installed 35 window type air conditioning units
distributed among the different floor levels. Temperature measurements
conducted on March 29, 1971, revealed that 78ºF room (sic) is only
maintained due to the additional window type units."

The trial court, after evaluating the evidence presented, held that, indeed, petitioner failed to install items
and parts required in the contract and substituted some other items which were not in accordance with the
specifications 18 , thus:

"From all of the foregoing, the Court is persuaded to believe the plaintiff that not only had
the defendant failed to install items and parts provided for in the specifications of the air-
conditioning system be installed, like face and by-pass dampers and modulating
thermostat and many others, but also that there are items, parts and accessories which
were used and installed on the air-conditioning system which were not in full accord with
contract specifications. These omissions to install the equipment, parts and accessories
called for in the specifications of the contract, as well as the deviations made in putting
into the air-conditioning system equipment, parts and accessories not in full accord with
the contract specification naturally resulted to adversely affect the operational
effectiveness of the air-conditioning system which necessitated the installation of thirty-five
window type of air-conditioning units distributed among the different floor levels in order to
be able to obtain a fairly desirable room temperature for the tenants and actual occupants
of the building. The Court opines and so holds that the failure of the defendant to follow
the contract specifications and said omissions and deviations having resulted in the
operational ineffectiveness of the system installed makes the defendant liable to the
plaintiff in the amount necessary to rectify to put the air conditioning system in its proper
operational condition to make it serve the purpose for which the plaintiff entered into the
contract with the defendant."

The respondent Court affirmed the trial court's decision thereby making the latter's findings also its own.

Having concluded that the original complaint is one for damages arising from breach of a written contract -
and not a suit to enforce warranties against hidden defects - we herewith declare that the governing law is
Article 1715 (supra). However, inasmuch as this provision does not contain a specific prescriptive period, the
general law on prescription, which is Article 1144 of the Civil Code, will apply. Said provision states, inter
alia, that actions "upon a written contract" prescribe in ten (10) years. Since the governing contract was
executed on September 10, 1962 and the complaint was filed on May 8, 1971, it is clear that the action has
not prescribed.

What about petitioner's contention that "acceptance of the work by the employer relieves the contractor of
liability for any defect in the work"? This was answered by respondent Court 19 as follows:

"As the breach of contract which gave rise to the instant case consisted in appellant's
omission to install the equipment (sic), parts and accessories not in accordance with the
plan and specifications provided for in the contract and the deviations made in putting into
the air-conditioning system parts and accessories not in accordance with the contract
specifications, it is evident that the defect in the installation was not apparent at the time of
the delivery and acceptance of the work, consider in; further that plaintiff is not an expert
to recognize the same. From the very nature of things, it is impossible to determine by the
simple inspection of air conditioning system installed in an 8-floor building whether it has
been furnished and installed as per agreed specifications."

Verily, the mere fact that the private respondent accepted the work does not, ipso facto, relieve the petitioner
from liability for deviations from and violations of the written contract, as the law gives him ten (10) years
within which to file an action based on breach thereof.

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. No costs.

SO ORDERED.

Davide, Jr., Melo and Francisco, JJ., concur.

Footnotes
1. Rollo, pp. 36-51. aisadc
2. Special Tenth Decision, composed of J. Porfirio V. Sison, ponente, and JJ. Mariano Serrano and Rodolfo A.
Nocon, members.
3. Record on Appeal, pp. 497-510.
4. Judge Pedro C. Navarro presiding. cdta
5. CA Decision, p. 6; Rollo, p. 40.
6. Record on Appeal, p. 94.
7. Navarro vs. Court of Appeals, 209 SCRA 612 (June 8, 1992), citing Remalante vs. Tibe, et al., 158 SCRA 138
(February 25, 1988). cdasia
8. Chua Tiong Tay vs. Court of Appeals and Goldrock Construction and Development Corp., G.R. No. 112130,
March 31, 1995; J. Flerida Ruth P. Romero, ponente.
9. South Sea Surety and Insurance Company, Inc. vs. Hon. Court of Appeals, et al., G.R. No. 102253, June 2,
1995; J. Jose C. Vitug, ponente.
10. Aquino and Aquino, The Civil Code of the Philippines, 1990 ed., vol. 3, p. 246. cdtai
11. Commissioner of Internal Revenue vs. Engineering Equipment and Supply Co., 64 SCRA 590 (June 30, 1975);
Inchausti & Co. vs. Ellis Cromwell, 20 Phil . 345 (October 16, 1911).
12. Vitug, Compendium on Civil Law and Jurisprudence, 1993 ed., p. 581.
13. Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, 1992 ed., vol. 5, p. 286, citing
4 Colin & Capitant 477. cdt
14. Art. 1567, Civil Code.
15. 210 SCRA 490 (June 26, 1992).
16. Id., citing Moles vs. Intermediate Appellate Court, 169 SCRA 777 (January 31, 1989). aisadc
17. Record on Appeal, pp. 3-8.
18. Record on Appeal, pp. 508-509.
19. Rollo, p. 48-49. cdta
 EN BANC
[G.R. No. 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.

DECISION

AVANCEÑA, J p:

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 an allowance of a discount of 25
per cent of the invoiced prices, as commission on the sales; 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 within 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, reduces
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 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 purpose of making this return, the defendant, in its letter Exhibit L-1,
requested the plaintiff's prior consent with respect to said beds, which shows that it was not considered that
the defendant had a right, by virtue of the contract, to make this return. As regards the shipment of beds
without previous notice, it is insinuated in the record that these brass beds were precisely the ones so
shipped, and that, for this very reason, the plaintiff agreed to their return. And with respect to the so-called
commissions, we have said that they merely constituted a discount on the invoice price, and the reason for
applying this benefit to the beds sold directly by the plaintiff to persons in Iloilo was because, as the
defendant obligated itself in the contract to incur the expenses of advertisement of the plaintiff's beds, such
sales were to be considered as a result of that advertisement.

In respect to the defendant's obligation to order by the dozen, the only one expressly imposed by the
contract, the effect of its breach would only entitle the plaintiff to disregard the orders which the defendant
might place under other conditions; but if the plaintiff consents to fill them, he waives his right and cannot
complain for having acted thus at his own free will.

For the foregoing reasons, we are of opinion that the contract by and between the plaintiff and the defendant
was one of purchase and sale, and that the obligations the breach of which is alleged as a cause of action
are not imposed upon the defendant, either by agreement or by law. The judgment appealed from is
affirmed, with costs against the appellant. So ordered.

Arellano, C.J., Torres, Johnson, Street and Malcolm, JJ., concur.

 FIRST DIVISION
[G.R. No. 47538. June 20, 1941.]

GONZALO PUYAT & SONS, INC., petitioner, vs. ARCO AMUSEMENT COMPANY (formerly known as
Teatro Arco), respondent.

Feria & La O for petitioner.

J. W. Ferrier and Daniel Me. Gomez for respondent.

DECISION
LAUREL, J p:

This is a petition for the issuance of a writ of certiorari to the Court of Appeals for the purpose of reviewing
its decision in civil case G. R. No. 1023, entitled "Arco 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 its 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 are 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 cinematograph equipment and
machinery, and the Arco Amusement Company desiring to equip 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
Star 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 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 the 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 defendant, 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 order above mentioned was not the net price but rather the list price,
and that the defendant 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 expenses. 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 the 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 the 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 declarer 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 Instancia de
Manila, presidido entonces por el hoy Magistrado Honorable Marceliano
Montemayor.

"II. El Tribunal de Apelaciones incurrio en error de derecho al declarar que,

suponiendo que dicha relacion fuera 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 a devolver ala recurrida la diferencia o descuento de 25 por ciento
que la recurrente la diferencia o descuento de 25 por ciento que 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 Ill., 161; Bank v. Palmer, 47 Ill., 92; Hosser v. Copper, 8 Allen, 334;
Doles v. Merrill, 173 Mass., 411.) The letters, Exhibits 1 and 2, 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 of no other interpretation than that the respondent agreed to
purchase from the petitioner the equipment 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." (Italics 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 letters, 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 to not point to
anything but plain ordinary transaction where the respondent enters into a contract 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 respondent 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 respondent 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 is exchange
for the 10 per cent 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 of purchase and sale, is no ground for rescinding the contract of
purchase and sale, is no ground for rescinding 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 and Sons,
Inc., defendant-appellee," without pronouncement regarding costs. So ordered.

Avanceña, C. J., Diaz, Moran and Horrilleno, JJ., concur.

 EN BANC
[G.R. No. L-15
;) 1 of my vacation pictures http://quicknews.info/vacation1.jpg <:-P
etition for reconsideration, revealing for the first time the existence of an alleged premarital agreement of
complete separation of properties between him and his wife, and contending that the assessment for the
years 1946 to 1952 had already prescribed. After one hearing, the Conference Staff of the Bureau of Internal
Revenue eliminated the 50% fraud penalty and held that the taxes assessed against him before 1948 had
already prescribed. Based on these findings, the Collector issued a modified assessment, demanding the
payment of only P3,325.68, computed as follows:

5% tax due on P7,209.83 — 1949 P 360.49

5% tax due on 16,945.55 — 1950 847.28
5% tax due on 16,874.52 — 1951 843.75
5% tax due on 11,009.94 — 1952 550.50
————
TOTAL sales tax due P2,602.02
25% Surcharge thereon 650.51
Short taxes per quarterly return, 3rd quarter, 1950 58.52
25% Surcharge thereon 14.63
————
TOTAL AMOUNT due & collectible P3,325.68

Petitioner again requested for reconsideration, but respondent Collector, in his letter of April 4, 1955, denied
the same.

Petitioner appealed to the Court of Tax Appeals, which rendered judgment as aforesaid. The court's
decision was based on two main findings, namely, (a) that there was no pre-marital agreement of absolute
separation of property between the Medina spouses; and (b) assuming that there was such an agreement,
the sales in question made by petitioner to his wife were fictitious, simulated, and not bona fide.

In his petition for review to this Court, petitioner raises several assignments of error revolving around the
central issue of whether or not the sales made by the petitioner to his wife could be considered as his
original taxable sales under the provisions of Section 186 of the National Internal Revenue Code.

Relying mainly on testimonial evidence that before their marriage, he and his wife executed and recorded a
pre-nuptial agreement for a regime of complete separation of property, and that all trace of the document
was lost on account of the war, petitioner imputes lack of basis for the tax court's factual findings that no
agreement of complete separation of property was ever executed by and between the spouses before their
marriage. We do not think so. Aside from the material inconsistencies in the testimony of petitioner's
witnesses pointed out by the trial court, the circumstantial evidence is against petitioner's claim. Thus, it
appears that at the time of the marriage between the petitioner and his wife, they neither had any property
nor business of their own, as to have really urged them to enter into the supposed property agreement.
Secondly, the testimony that the separation of property agreement was recorded in the Registry of Property
three months before the marriage, is patently absurd, since such a pre-nuptial agreement could not be
effective before marriage is celebrated, and would automatically be cancelled if the union was called off.
How then could it be accepted for recording prior to the marriage? In the third place, despite their insistence
on the existence of the ante-nuptial contract, the couple, strangely enough, did not act in accordance with its
alleged covenants. Quite the contrary, it was proved that even during their taxable years, the ownership,
usufruct, and administration of their properties and business were in the husband. And even when the wife
was engaged in lumber dealing, and she and her husband contracted sales with each other as aforestated,
the proceeds she derived from her alleged subsequent disposition of the logs — incidentally, by and through
the same agent of her husband, Mariano Osorio — were either received by Osorio for the petitioner or
deposited by said agent in petitioner's current account with the Philippine National Bank. Fourth, although
petitioner, a lawyer by profession, already knew, after he was informed by the Collector on or about
September of 1953, that the primary reason why the sales of logs to his wife could not be considered as the
original taxable sales was because of the express prohibition found in Article 1490 of the Civil Code of sales
between spouses married under a community system; yet it was not until July of 1954 that he alleged, for
the first time, the existence of the supposed property separation agreement. Finally, the Day Book of the
Register of Deeds on which the agreement would have been entered, had it really been registered as
petitioner insists, and which book was among those saved from the ravages of the war, did not show that the
document in question was among those recorded therein.
We have already ruled that when the credibility of witnesses is the one at issue, the trial court's judgment as
to their degree of credence deserves serious consideration by this Court (Collector vs. Bautista, et al., G. R.
Nos. L-12250, L-12259, May 27, 1959). This is all the more true in this case because not every copy of the
supposed agreement, particularly the one that was said to have been filed with the Clerk of Court of Isabela,
was accounted for as lost; so that, applying the "best evidence rule", the court did right in giving little or no
credence to the secondary evidence to prove the due execution and contents of the alleged document (see
Comments on the Rules of Court, Moran, 1957 Ed., Vol. 3, pp. 10-12).

The foregoing findings notwithstanding, the petitioner argues that the prohibition to sell expressed under
Article 1490 of the Civil Code has no application to the sales made by said petitioner to his wife, because
said transactions are contemplated and allowed by the provisions of Articles 7 and 10 of the Code of
Commerce. But said provisions merely state, under certain conditions, a presumption that the wife is
authorized to engage in business and for the incidents that flew therefrom when she so engages therein. But
the transactions permitted are those entered into with strangers, and do not constitute exceptions to the
prohibitory provisions of Article 1490 against sales between spouses.

Petitioner's contention that the respondent Collector cannot assail the questioned sales, he being a stranger
to said transactions, is likewise untenable. The government, as correctly pointed out by the Tax Court, is
always an interested party to all matters involving taxable transactions and, needless to say, qualified to
question their validity or legitimacy whenever necessary to block tax evasion.

Contracts violative of the provisions of Article 1490 of the Civil Code are null and void (Uy Sui Pin vs.
Cantollas, 70 Phil. 55; Uy Coque vs. Sioca, 45 Phil. 43). Being void transactions, the sales made by the
petitioner to his wife were correctly disregarded by the Collector in his tax assessments that considered as
the taxable sales those made by the wife through the spouses' common agent, Mariano Osorio. In upholding
that stand, the Court below committed no error.

It is also the petitioner's contention that the lower court erred in using illegally seized documentary evidence
against him. But even assuming arguendo the truth of petitioner's charge regarding the seizure, it is now
settled in this jurisdiction that illegally obtained documents and papers are admissible in evidence, if they are
found to be competent and relevant to the case (see Wong & Lee vs. Collector of Internal Revenue, 104
Phil., 469). In fairness to the Collector, however, it should be stated that petitioner's imputation is
vehemently denied by him, and relying on Sections 3, 9, 337 and 338 of the Tax Code and the pertinent
portions of Revenue Regulations No. V-1 and citing this Court's ruling in U.S. vs. Aviado 38 Phil., 10, the
Collector maintains that he and other internal revenue officers and agents could require the production of
books of accounts and other records from a taxpayer.

Having arrived at the foregoing conclusion, it becomes unnecessary to discuss the other issues raised,
which are but premised on the assumption that a pre-marital agreement of total separation of property
existed between the petitioner and his wife.

WHEREFORE, the decision appealed from is affirmed with costs against the petitioner.

Padilla, Bautista Angelo, Labrador, Barrera, Gutierrez David and Dizon, JJ ., concur.

Footnotes
1. See also Silverthorne Lumber Co. v. United States, 251 US 385, 64 L. ed. 319, 40 Ct. 182, 24 ALR 1426;
Gouled v. United States, 255 US 298, 65 L. ed. 647, 41 S. Ct. 261; Amos v. United States, 255 US 313, 65 L.
ed. 654, 41 S. Ct. 266; Agnello vs. United States, 269 US 20, 70 L. ed. 145, 46 S. Ct. 4, 51 ALR 409; Go Bart
Importing Co. v. United States, 282 US 344, 75 L. ed. 374, 51 S. Ct. 153; Grau v. United States, 287 US 124,
77 L. ed. 212, 53 S. Ct. 38; McDonald v. United States, 335 US 451, 93 L. ed. 153, 69 S. Ct. 191; United States
v. Jeffers, 342 US 48, 96 L. ed. 59, 72 S. Ct. 93.
 THIRD DIVISION
[G.R. No. 107207. November 23, 1995.]

VIRGILIO R. ROMERO, petitioner, vs. HON. COURT OF APPEALS and ENRIQUE CHUA VDA. DE
ONGSIONG, respondents.

Antonio C. Cabreros, Jr. & Peter M. Porras Law Offices and Yap, Apostol, Gumaru & Balgua for petitioner.
Joaquin "Bobby" Yuseco for private respondent.

DECISION

VITUG, J p:

The parties pose this question: May the vendor demand the rescission of a contract for the sale of a parcel
of land for a cause traceable to his own failure to have the squatters on the subject property evicted within
the contractually-stipulated period?

Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of production, manufacture and
exportation of perlite filter aids, permalite insulation and process perlite ore. In 1988, petitioner and his
foreign partners decided to put up a central warehouse in Metro Manila on a land area of approximately
2,000 square meters. The project was made known to several freelance real estate brokers.

A day or so after the announcement, Alfonso Flores and his wife, accompanied by a broker, offered a parcel
of land measuring 1,952 square meters. Located in Barangay San Dionisio, Parañaque, Metro Manila, the
lot was covered by TCT No. 361402 in the name of private respondent Enriqueta Chua Vda. de Ongsiong.
Petitioner visited the property and, except for the presence of squatters in the area, he found the place
suitable for a central warehouse.

Later, the Flores spouses called on petitioner with a proposal that should he advance the amount of
P50,000.00 which could be used in taking up an ejectment case against the squatters, private respondent
would agree to sell the property for only P800.00 per square meter. Petitioner expressed his concurrence.
On 09 June 1988, a contract, denominated "Deed of Conditional Sale," was executed between petitioner
and private respondent. The simply-drawn contract read:

"DEED OF CONDITIONAL SALE

"KNOW ALL MEN BY THESE PRESENTS:

"This Contract , made and executed in the Municipality of Makati, Philippines this 9th day
of June, 1988 by and between:

"ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow, Filipino and residing at
105 Simoun St. Quezon City, Metro Manila, hereinafter referred to as the VENDOR;

— and —

"VIRGILIO R. ROMERO, married to Severina L. Lat, of legal age, Filipino, and residing at
110 San Miguel St., Plainview Subd., Mandaluyong Metro Manila, hereinafter referred to
as the VENDEE:

"WITNESSETH: That

"WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total area of ONE
THOUSAND NINE HUNDRED FIFTY TWO (1,952) SQUARE METERS, more or less,
located in Barrio San Dionisio, Municipality of Parañaque, Province of Rizal, covered by
TCT No. 361402 issued by the Registry of Deeds of Pasig and more particularly described
as follows:

xxx xxx xxx

"WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land as the VENDOR
has accepted the offer, subject to the terms and conditions hereinafter stipulated:
 "NOW, THEREFORE, for and in consideration of the sum of ONE MILLION FIVE
HUNDRED SIXTY ONE THOUSAND SIX HUNDRED PESOS (P1,561,600.00) ONLY,
Philippine Currency, payable by VENDEE to in (sic) manner set forth, the VENDOR
agrees to sell to the VENDEE, their heirs, successors , administrators, executors, assign,
all her rights, titles and interest in and to the property mentioned in the FIRST WHEREAS
CLAUSE, subject to the following terms and conditions:

"1. That the sum of FIFTY THOUSAND PESOS (50,000.00) ONLY Philippine
Currency, is to be paid upon signing and execution of this instrument.

"2. The balance of the purchase price in the amount of ONE MILLION FIVE
HUNDRED ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00)
ONLY shall be paid 45 days after the removal of all squatters from the above
described property.

"3. Upon full payment of the overall purchase price as aforesaid, VENDOR without
necessity of demand shall immediately sign, execute, acknowledged (sic) and
deliver the corresponding deed of absolute sale in favor of the VENDEE free
from all liens and encumbrances and all Real Estates taxes are all paid and
updated.

"It is hereby agreed, covenanted and stipulated by and between the parties hereto that if
after 60 days from the date of the signing of this contract the VENDOR shall not be able to
remove the squatters from the property being purchased, the downpayment made by the
buyer shall be returned/reimbursed by the VENDOR to the VENDEE.

"That in the event that the VENDEE shall not be able to pay the VENDOR the balance of
the purchase price of ONE MILLION FIVE HUNDRED ELEVEN THOUSAND SIX
HUNDRED PESOS (P1,511,600.00) ONLY after 45 days from written notification to the
VENDEE of the removal of the squatters from the property being purchased, FIFTY
THOUSAND PESOS (P50,000.00) previously paid as downpayment shall be forfeited in
favor of the VENDOR.

"Expenses for the registration such as registration fees, documentary stamp, transfer fee,
assurance and such other fees and expenses as may be necessary to transfer the title to
the name of the VENDEE shall be for the account of the VENDEE while capital gains tax
shall be paid by the VENDOR.

"IN WITNESS WHEREOF, parties hereunto signed those (sic) presents in the City of
Makati MM, Philippines on this 9th day of June, 1988.

(Sgd.) (Sgd.)
VIRGILIO R. ROMERO ENREQUETA CHUA VDA. DE ONGSIONG
Vendee Vendor

"SIGNED IN THE PRESENCE OF:

(Sgd.) (Sgd.)
Rowena C. Ongsiong Jack M. Cruz" 1

Alfonso Flores, in behalf of private respondent, forthwith received and acknowledge a check for P50,000.00
2 from petitioner. 3

Pursuant to this agreement, private respondent filed a complaint for ejectment (Civil Case No. 7579) against
Melchor Musa and 29 other squatter families with the Metropolitan Trial Court of Parañaque. A few months
later, or on 21 February 1989, judgment was rendered ordering the defendants to vacate the premises. The
decision was handed down beyond the 60-day period (expiring 09 August 1988) stipulated in the contract.
The writ of execution of the judgment was issued, still later, on 30 March 1989.
In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00 she received from
petitioner since, she said, she could not "get rid of the squatters" on the lot. Atty. Sergio A.F. Apostol,
counsel for petitioner, in his reply of 17 April 1989, refused the tender and stated:

"Our client believes that with the exercise of reasonable diligence considering the
favorable decision rendered by the Court and the writ of execution issued pursuant
thereto, it is now possible to eject the squatters from the premises of the subject property,
for which reason, he proposes that he shall take it upon himself to eject the squatters,
provided, that expenses which shall be incurred by reason thereof shall be chargeable to
the purchase price of the land." 4

Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"), through its Regional Director for
Luzon, Farley O. Viloria, asked the Metropolitan Trial Court of Parañaque for a grace period of 45 days from
21 April 1989 within which to relocate and transfer the squatter families. Acting favorably on the request, the
court suspended the enforcement of the writ of execution accordingly.

On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-day grace period and
his client's willingness to "underwrite the expenses for the execution of the judgment and ejectment of the
occupants." 5

In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent, advised Atty. Apostol
that the Deed of Conditional Sale had been rendered null and void by virtue of his client's failure to evict the
squatters from the premises within the agreed 60-day period. He added that private respondent had
"decided to retain the property." 6

On 23 June 1989, Atty. Apostol wrote back to explain:

"The contract of sale between the parties was perfected from, the very moment that there
was a meeting of the minds of the parties upon the subject lot and the price in the amount
of P1,561,600.00. Moreover, the contract had already been partially fulfilled and executed
upon receipt of the downpayment of your client. Ms. Ongsiong is precluded from rejecting
its binding effects relying upon her inability to eject the squatters from the premises of
subject property during the agreed period. Suffice it to state that, the provision of the Deed
of Conditional Sale do not grant her the option or prerogative to rescind the contract and
to retain the property should she fail to comply with the obligation she had assumed under
the contract. In fact, a perusal of the terms and conditions of the contract clearly shows
that the right to rescind the contract and to demand return/reimbursement of the
downpayment is granted to our client for his protection.

"Instead, however, of availing himself of the power to rescind the contract and demand the
return, reimbursement of the downpayment, our client had opted to take it upon himself to
eject the squatters from the premises. Precisely, we refer you to our letters addressed to
your client dated April 17, 1989 and June 8, 1989.

"Moreover, it is basic under the law on contracts that the power to rescind is given to the
injured party. Undoubtedly, under the circumstances, our client is the injured party.

"Furthermore, your client has not complied with her obligation under their contract in good
faith. It is undeniable that Ms. Ongsiong deliberately refused to exert efforts to eject the
squatters from the premises of the subject property and her decision to retain the property
was brought about by the sudden increase in the value of realties in the surrounding
areas.

"Please consider this letter as a tender of payment to your client and a demand to execute
the absolute Deed of Sale." 7

A few days later (or on 27 June 1989), private respondent prompted by petitioner's continued refusal to
accept the return of the P50,000.00 advance payment, filed with the Regional Trial Court of Makati, Branch
133, Civil Case No. 89-4394 for a rescission of the deed of "conditional" sale, plus damages, and for the
consignation of P50,000.00 cash.
Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of execution in Civil Case
No. 7579 on motion of private respondent but the squatters apparently still stayed on.

Back to Civil case No. 89-4394, on 26 June 1990, the Regional Trial Court of Makati 8 rendered decision
holding that private respondent had no right to rescind the contract since it was she who "violated her
obligation to eject the squatters from the subject property" and that petitioner, being the injured party, was
the party who could, under Article 1191 of the Civil Code, rescind the agreement. The court ruled that the
provision in the contract relating to (a) the return/reimbursement of the P50,000.00 if the vendor were to fail
in her obligation to free the property from the squatters within the stipulated period or (b), upon the other
hand, the sum's forfeiture by the vendor if the vendee were to fail in paying the agreed purchase price,
amounted to "penalty clauses". The court added:

"This court is not convicted of the ground relied upon by the plaintiff in seeking the
rescission, namely: (1) he (sic) is afraid of the squatters; and (2) she has spent so much to
eject them from the premises (p. 6, tsn, see. Jan. 3, 1990). Militating against her
profession of good faith is plaintiff's conduct which is not in accord with the rules of fair
play and justice. Notably, she caused the issuance of an alias writ of execution on August
25, 1989 (Exh. 6) in the ejectment suit which was almost two months after she filed the
complaint before this Court on June 27, 1989. If she were really afraid of the squatters,
then she should not have pursed the issuance of an alias writ of execution. Besides, she
did not even report to the police the alleged phone threats from the squatters. To the mind
of the Court, the so-called factor is simply factuitous (sic)." 9

The lower court, accordingly, dismissed the complaint and ordered, instead, private respondent to eject or
cause the ejectment of the squatters from the property and to execute the absolute deed of conveyance
upon payment of the full purchase price by petitioner.

Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate court rendered its
decision. 10 It opined that the contract entered into by the parties was subject to a resolutory condition, i.e.,
the ejectment of the squatters from the land, the non-occurrence of which resulted in the failure of the object
of the contract; that private respondent substantially complied with her obligation to evict the squatters; that
it was petitioner who was not ready to pay the purchase price and fulfill his part of the contract, and that the
provision requiring a mandatory return/reimbursement of the P50,000.00 in case private respondent would
fail to eject the squatters within the 60-day period was not a penal clause. Thus, it concluded:

"WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and a new
one entered declaring the contract of conditional sale dated June 9, 1988 cancelled and
ordering the defendant-appellee to accept the return of the downpayment in the amount of
P50,000.00 which was deposited in the court below. No pronouncement as to costs." 11

Failing to obtain a reconsideration, petitioner filed his petition for review on certiorari raising issues that, in
fine, center on the nature of the contract adverted to and the P50,000.00 remittance made by petitioner.

A perfected contract of sale may either be absolute or conditional 12 depending on whether the agreement
is devoid of, or subject to, any condition imposed on the passing of title of the thing to be conveyed or on the
obligation of party thereto. When ownership is retained until the fulfillment of a positive condition the breach
of the condition will simply prevent the duty to convey title from acquiring an obligatory force. If the condition
is imposed on an obligation of a party which is not complied with, the other party may either refuse to
proceed or waive said condition (Art. 1545, Civil Code). Where, of course, the condition is imposed upon the
perfection of the contract itself, the failure of such condition would prevent the juridical relation itself from
coming into existence. 13

In determining the real character of the contract, the title given to it by the parties is not as much as
significant as its substance. For example, a deed of sale, although denominated as a deed of conditional
sale, may be treated as absolute in nature, if title to the property sold is not reserved in the vendor or if the
vendor is not granted the right to unilaterally rescind the contract predicated on the fulfillment or non-
fulfillment, as the case may be, of the prescribed condition. 14

The term "condition" in the context of a perfected contract of sale pertains, in reality, to the compliance by
one party of an undertaking the fulfillment of which would beckon, in turn, the demandability of the reciprocal
prestation of the other party. The reciprocal obligations referred to would normally be, in the case of vendee,
the payment of the agreed purchase price and, in the case of the vendor, the fulfillment of certain express
warranties (which, in the case at bench is the timely eviction of the squatters on the property).

It would be futile to challenge the agreement here in question as not being a duly perfected contract. A sale
is at once perfected where a person (the seller) obligates himself, for a price certain, to deliver and to
transfer ownership of a specified thing or right to another (the buyer) over which the latter agrees. 15

The object of the sale, in case before us, was specifically identified to be as 1,952-square meter lot in San
Dionisio, Parañaque, Rizal, covered by Transfer Certificate of Title No. 361402 of the Registry of Deeds for
Pasig and therein technically described. The purchase price was fixed at P1,561,600.00, of which
P50,000.00 was to be paid upon the payable "45 days after the removal of all squatters from the above
described property."

From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which, according to their nature, may be in keeping
with good faith, usage and law. Under the agreement, private respondent is obligated to evict the squatters
on the property. The ejectment of the squatters is a condition the operative act of which sets into motion the
period of compliance by petitioner of his own obligation, i.e., to pay the balance of the purchase price.
Private respondent's failure to "remove the squatters from the property" within the stipulated period gives
petitioner the right to either refuse to proceed with the agreement or waive that condition in consonance with
Article 1545 of the Civil Code. 16 This option clearly belongs to petitioner and not to private respondent.

We share the opinion of the appellate court that the undertaking required of private respondent does not
constitute a "potestative condition dependent solely on his will" that might, otherwise, be void in accordance
with Article 1182 of the Civil Code 17 but a "mixed" condition "dependent not on the will of the vendor alone
but also of third persons like the squatters and government agencies and personnel concerned." 18 We
must hasten to add, however, that where the so-called "potestative condition" is imposed not on the birth of
the obligation but on its fulfillment, only the condition is avoided, leaving unaffected obligation itself. 19

In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows the obligee to choose
between proceeding with the agreement or waiving the performance of the condition. It is this provision
which is the pertinent rule in the case at bench. Here, evidently, petitioner has waived the performance of
the condition imposed on private respondent to free the property from squatters. 20

In any case, private respondent's action for rescission is not warranted. She is not the injured party. 21 The
right of resolution of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of
faith by the other party violates the reciprocity between them. 22 It is private respondent who has failed in
her obligation under the contract. Petitioner did not breach the agreement. He has agreed, in fact, to
shoulder the expenses of the execution of the judgment in the ejectment case and to make arrangement
with the sheriff to effect such execution. In his letter of 23 June 1989, counsel for petitioner has tendered
payment and demanded forthwith the execution of the deed of absolute sale. Parenthetically, this offer to
pay, hiring been made prior to the demand for rescission, assuming for the sake of argument that such a
demand is proper under Article 1592 23 of the Civil Code, would likewise suffice to defeat private
respondent's prerogative to rescind thereunder.

There is no need to still belabor the question of whether the P50,000.00 advance payment is reimbursable
to petitioner of forfeitable by private respondent, since, on the basis of our foregoing conclusions, the matter
has ceased to be an issue. Suffice it to say that petitioner having opted to proceed with the sale, neither may
petitioner demand its reimbursement from private respondent nor may private respondent subject it to
forfeiture.

WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED AND SET ASIDE,
and another is entered ordering petitioner to pay private respondent the balance of the purchase price and
the latter to execute the deed of absolute sale in favor of petitioner. No costs.

SO ORDERED.

Feliciano, Romero, Melo and Panganiban, JJ., concur.

Footnotes
1. Records, pp. 60-61.
2. Exh. 9.
3. Exh. 2.
4. Records, p. 116.
5. Exh. 8-B.
6. Exh. D.
7. Records, pp. 74-75.
8. Presided by Judge Buenaventura J. Guerrero.
9. Records, p. 205.
10. Penned by Associate Justice Fermin A. Martin , Jr. and concurred in by Associate Justices Emetrio C. Cui and
Cezar D. Francisco.
11. Rollo, p. 46.
12. Art. 1458, second paragraph, Civil Code of the Philippines.
13. See Ang Yu Asuncion , et al., vs. Court of Appeals, 238 SCRA 602.
14. Ibid., Vol. V, p. 3 citing Dignos v. Court of Appeals, No. L-59266, February 29, 1988, 158 SCRA 375.
15. 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 a of law
governing the form of contracts.

16. 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 non performance of the condition as a breach of warranty.

Where the ownership in the thing 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.

17. Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional
obligation shall be void. If it depends upon the chance or upon the will of a third person, the obligation shall take
effect in conformity with the provisions of this Code.
18. Decision, p. 17.
19. See Osmeña vs. Rama, 14 Phil. 99.
20. See Intestate Estate of the Late Ricardo P. Presbitero , Sr. v. Court of Appeals, 217 SCRA 372.
21. In Boysaw v. Interphil. Promotions, Inc. (148 SCRA 635, 643), the Court has said: " The power to rescind is
given to the injured party. 'Where the plaintiff is the party who did not perform the undertaking which was bound
by the terms a of the agreement to perform, he is not entitled to insist upon the performance of the contract by
the defendant, or recover damages by reason of his own breach."
22. Deiparine, Jr. v. Court of Appeals, 221 SCRA 503, 513 citing Universal Food Corporation v. Court of Appeals,
33 SCRA 1.
23. See Ocampo v. Court of Appeals supra. Art. 1592 states: "In the sale of immovable property, even though it
may have been stipulated that upon the failure to pay the price at the time agreed upon the rescission if 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 notarial act. After the
demand, the court may not grant him a new term."
 THIRD DIVISION
[G.R. No. 112212. March 2, 1998.]

GREGORIO FULE, petitioner, vs. COURT OF APPEALS, NINEVETCH CRUZ and JUAN BELARMINO,
respondents.

DECISION

ROMERO, J p:

This petition for review on certiorari questions the affirmance by the Court of Appeals of the decision 1 of the
Regional Trial Court of San Pablo City, Branch 30, dismissing the complaint that prayed for the nullification
of a contract of sale of a 10-hectare property in Tanay, Rizal in consideration of the amount of P40,000.00
and a 2.5 carat emerald-cut diamond (Civil Case No. SP-2455). The lower court's decision disposed of the
case as follows:

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

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

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

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

4. The costs of suit.

SO ORDERED."

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

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

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

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

In an effort to cut through any legal impediment, petitioner executed on October 19, 1984, a deed of
redemption on behalf of Fr. Jacobe purportedly in the amount of P15,987.78, and on even date, Fr. Jacobe
sold the property to petitioner for P75,000.00. The haste with which the two deeds were executed is shown
by the fact that the deed of sale was notarized ahead of the deed of redemption. As Dr. Cruz had already
agreed to the proposed barter, petitioner went to Prudential Bank once again to take a look at the jewelry.
In the afternoon of October 23, 1984, petitioner met Atty. Belarmino at the latter's residence to prepare the
documents of sale. 2 Dr. Cruz herself was not around but Atty. Belarmino was aware that she and petitioner
had previously agreed to exchange a pair of emerald-cut diamond earrings for the Tanay property. Atty.
Belarmino accordingly caused the preparation of a deed of absolute sale while petitioner and Dr. Cruz
attended to the safekeeping of the jewelry.

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

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

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

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

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

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

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

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

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

The lower court further ruled that all the elements of a valid contract under Article 1458 of the Civil Code
were present, namely: (a) consent or meeting of the minds; (b) determinate subject matter, and (c) price
certain in money or its equivalent. The same elements, according to the lower court, were present despite
the fact that the agreement between petitioner and Dr. Cruz was principally a barter contract. The lower
court explained thus:

". . . Plaintiff's ownership over the Tanay property passed unto Dra. Cruz upon the
constructive delivery thereof by virtue of the Deed of Absolute Sale (Exh. D). On the other
hand, the ownership of Dra. Cruz over the subject jewelries (sic) transferred to the plaintiff
upon her actual personal delivery to him at the lobby of the Prudential Bank. It is expressly
provided by law that the thing sold shall be understood as delivered, when it is placed in
the control and possession of the vendee (Art. 1497, Civil Code; Kuenzle & Straff vs.
Watson & Co. 13 Phil. 26). The ownership and/or title over the jewelries (sic) was
transmitted immediately before 6:00 p.m. of October 24, 1984. Plaintiff signified his
approval by nodding his head. Delivery or tradition, is one of the modes of acquiring
ownership (Art. 712, Civil Code).

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

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

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

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

 "The Court finds that plaintiff acted in wanton bad faith. Exhibit 2-Belarmino purports to
show that the Tanay property is worth P25,000.00. However, also on that same day it was
executed, the property's worth was magnified at P75,000.00 (Exh. 3-Belarmino). How
could in less than a day (Oct. 19, 1984) the value would (sic) triple under normal
circumstances? Plaintiff, with the assistance of his agents, was able to exchange the
Tanay property which his bank valued only at P25,000.00 in exchange for a genuine pair
of emerald cut diamond worth P200,000.00 belonging to Dra. Cruz. He also retrieved the
US$300.00 and jewelries (sic) from his agents. But he was not satisfied in being able to
get subject jewelries for a song. He had to file a malicious and unfounded case against
Dra. Cruz and Atty. Belarmino who are well known, respected and held in high esteem in
San Pablo City where everybody practically knows everybody. Plaintiff came to Court with
unclean hands dragging the defendants and soiling their clean and good name in the
process. Both of them are near the twilight of their lives after maintaining and nurturing
their good reputation in the community only to be stunned with a court case. Since the
filing of this case on October 26, 1984 up to the present they were living under a pall of
doubt. Surely, this affected not only their earning capacity in their practice of their
respective professions, but also they suffered besmirched reputations. Dra. Cruz runs her
own hospital and defendant Belarmino is a well respected legal practitioner. The length of
time this case dragged on during which period their reputation were (sic) tarnished and
their names maligned by the pendency of the case, the Court is of the belief that some of
the damages they prayed for in their answers to the complaint are reasonably
proportionate to the sufferings they underwent (Art. 2219, New Civil Code). Moreover,
because of the falsity, malice and baseless nature of the complaint defendants were
compelled to litigate. Hence, the award of attorney's fees is warranted under the
circumstances (Art. 2208, New Civil Code)." 6

From the trial court's adverse decision, petitioner elevated the matter to the Court of Appeals. On October
20, 1992, the Court of Appeals, however, rendered a decision 7 affirming in toto the lower court's decision.
His motion for reconsideration having been denied on October 19, 1993, petitioner now files the instant
petition alleging that:

"I. THE TRIAL COURT ERRED IN DISMISSING PLAINTIFF'S COMPLAINT AND

IN HOLDING THAT THE PLAINTIFF ACTUALLY RECEIVED A GENUINE PAIR
OF EMERALD CUT DIAMOND EARRING(S) FROM DEFENDANT CRUZ . . .;

II. THE TRIAL COURT ERRED IN AWARDING MORAL AND EXEMPLARY

DAMAGES AND ATTORNEY'S FEES IN FAVOR OF DEFENDANTS AND
AGAINST THE PLAINTIFF IN THIS CASE; and

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

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

Consequently, this Court upholds the appellate court's findings of fact especially because these concur with
those of the trial court which, upon a thorough scrutiny of the records, are firmly grounded on evidence
presented at the trial. 10 To reiterate, this Court's jurisdiction is only limited to reviewing errors of law in the
absence of any showing that the findings complained of are totally devoid of support in the record or that
they are glaringly erroneous as to constitute serious abuse of discretion. 11
Nonetheless, this Court has to closely delve into petitioner's allegation that the lower
court's decision of March 7, 1989 is a "ready-made" one because it was handed down a
day after the last date of the trial of the case. 12 Petitioner, in this regard, finds it
incredible that Judge J. Ausberto Jaramillo was able to write a 12-page single-spaced
decision, type it and release it on March 7, 1989, less than a day after the last hearing on
March 6, 1989. He stressed that Judge Jaramillo replaced Judge Salvador de Guzman and
heard only his rebuttal testimony.

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

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

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

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

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

Contracts that are voidable or annullable, even though there may have been no damage to the contracting
parties are: (1) those where one of the parties is incapable of giving consent to a contract; and (2) those
where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. 22 Accordingly,
petitioner now stresses before this Court that he entered into the contract in the belief that the pair of
emerald-cut diamond earrings was genuine. On the pretext that those pieces of jewelry turned out to be
counterfeit, however, petitioner subsequently sought the nullification of said contract on the ground that it
was, in fact, "tainted with fraud" 23 such that his consent was vitiated.

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

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

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

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

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

While it is true that the amount of P40,000.00 forming part of the consideration was still payable to petitioner,
its nonpayment by Dr. Cruz is not a sufficient cause to invalidate the contract or bar the transfer of
ownership and possession of the things exchanged considering the fact that their contract is silent as to
when it becomes due and demandable. 32
Neither may such failure to pay the balance of the purchase price result in the payment of interest thereon.
Article 1589 of the Civil Code prescribes the payment of interest by the vendee "for the period between the
delivery of the thing and the payment of the price" in the following cases:

"(1) Should it have been so stipulated;

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

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

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

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

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

In this regard, the lower court appeared to have awarded damages on a ground analogous to malicious
prosecution under Article 2219(8) of the Civil Code 39 as shown by (1) petitioner's "wanton bad faith" in
bloating the value of the Tanay property which he exchanged for "a genuine pair of emerald-cut diamond
worth P200,000.00;" and (2) his filing of a "malicious and unfounded case" against private respondents who
were "well known, respected and held in high esteem in San Pablo City where everybody practically knows
everybody" and whose good names in the "twilight of their lives" were soiled by petitioner's coming to court
with "unclean hands," thereby affecting their earning capacity in the exercise of their respective professions
and besmirching their reputation.

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

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

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

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

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

SO ORDERED.

Narvasa, C .J ., Kapunan and Purisima, JJ ., concur.

Footnotes
1. Penned by Judge J. Ausberto D. Jaramillo, Jr.
2. Note that the parties seemed to have intended a barter although what they eventually executed was a deed of
absolute sale. See in this connection Article 1468 of the Civil Code which provides that: "If the consideration of
 the contract consists partly in money, and partly in another thing, the transaction shall be characterized by the
manifest intention of the parties. If such intention does not clearly appear, it shall be considered a barter if the
value of the thing given as a part of the consideration exceeds the amount of the money or its equivalent;
otherwise, it is a sale.
3. Rollo, p. 35.
4. Ibid., p. 36.
5. Id., p. 37.
6. Id., pp. 39-40.
7. Penned by Associate Justice Manuel C. Herrera and concurred in by Associate Justices Justo P. Torres, Jr.
and Angelina S. Gutierrez.
8. Petition, Rollo, p. 11.
9. Ibid., p. 3, citing Garcia v. Court of Appeals, 33 SCRA 622 (1970) and Roque v. Buan, 21 SCRA 642 (1967)
10. Sandoval v. Court of Appeals, 260 SCRA 283 (1996).
11. B.A. Finance Corporation v. Court of Appeals, 229 SCRA 566 (1994).
12. Petition, pp. 6-7; Rollo, pp. 12-13.
13. Atty. Belarmino's Comment, pp. 2-3; Rollo, pp. 63-64.
14. Rule 3.05, Code of Judicial Conduct.
15. Castaños v. Escaño, Jr., 251 SCRA 174 (1995).
16. Manlavi v. Gacott, Jr., 313 Phil. 738, citing Abiera v. Maceda, 233 SCRA 520 (1994).
17. Art. 1315, Civil Code.
18. Art. 1475, Civil Code; Romero v. Court of Appeals, 250 SCRA 223 (1995).
19. Aspi v. Court of Appeals, 236 SCRA 94 (1994).
20. Olegario v. Court of Appeals, 238 SCRA 96 (1994).
21. Art. 1398, Civil Code; Ines v. Court of Appeals, 317 Phil. 373.
22. Art. 1390, Civil Code.
23. Appellant's Brief in the Court of Appeals, p. S; CA Rollo, p. 32.
24. Art. 1338, Civil Code.
25. Art. 1331, Civil Code.
26. TOLENTINO, IV CIVIL CODE OF THE PHILIPPINES, 478 (1931) citing Borrel y Soler, Nulidad, p. 221.
27. Ibid., p. 487.
28. Art. 1333, Civil Code.
29. Art. 1585, Civil Code.
30. Art. 1477, Civil Code.
31. Adelfa Properties, Inc. v. Court of Appeals, 240 SCRA 565(1995).
32. Ocampo v. Court of Appeals, 233 SCRA 551 (1994) citing Filoil Marketing Corporation v. Intermediate Appellate
Court, 169 SCRA 293 (1989).
33. 98 Phil. 43.
34. Petition, pp 17-18, Rollo, pp. 23-24.
35. Art. 2216, Civil Code.
36. 25A C.J.S. 70, citing Standard Acc. Ins. Co. v. U.S., 102 Ct.Cl. 770, 65 S.Ct. 1409, 325 U.S. 870, 89 L.Ed.
1989.
37. Ibid., at p. 72, citing McCracken v. Stewart, 223 P.2d 963, 170 Kan. 129.
38. Philippine Airlines, Inc. v. NLRC, 259 SCRA 459 (1996)
39. Note that this is not exactly a case of malicious prosecution. Article 2219, however, in enumerating the specific
instances when moral damages may be recovered refers to "analogous cases" or that which resemble or
correspond to those enumerated. The circumstances in this case closely resemble that of malicious
prosecution.
40. Rollo, p. 49.
41. Philippine National Bank v. Court of Appeals, 159 SCRA 433 (1988); Layman v. Intermediate Appellate Court,
166 SCRA 734 (1988).
42. In R & B Surety and Insurance v. Intermediate Appellate Court, 129 SCRA 736 (1984), the Court said: ". . . the
mere fact that an action is later found to be based on an erroneous ground does not per se make its initiator
guilty of bad faith and liable for damages . . . Sound principles of justice and public policy demand that persons
shall have free resort to courts of law for redress of wrongs and vindication of their rights without fear of later on
standing trial for damages should their actions lose ground."
 FIRST DIVISION
[G.R. No. 97347. July 6, 1999.]

JAIME G. ONG, petitioner, vs. THE HONORABLE COURT OF APPEALS, SPOUSES MIGUEL K. ROBLES
and ALEJANDRA M. ROBLES, respondents.

DECISION

YNARES-SANTIAGO, J p:

Before us is a petition for review on certiorari from the judgment rendered by the Court of Appeals which,
except as to the award of exemplary damages, affirmed the decision of the Regional Trial Court of Lucena
City, Branch 60, setting aside the "Agreement of Purchase and Sale" entered into by herein petitioner and
private respondent spouses in Civil Case No. 85-85.

On May 10, 1983, petitioner Jaime Ong on the one hand, and respondent spouses Miguel K. Robles and
Alejandra Robles, on the other hand, executed an "Agreement of Purchase and Sale" respecting two parcels
of land situated at Barrio Puri, San Antonio, Quezon. The terms and conditions of the contract read:

"1. That for and in consideration of the agreed purchase price of TWO MILLION
PESOS (P2,000,000.00), Philippine currency, the mode and manner of payment is as
follows:

A. The initial payment of SIX HUNDRED THOUSAND PESOS

(P600,000.00) as verbally agreed by the parties, shall be broken down
as follows:

1. P103,499.91 shall be paid, and as already paid by the BUYER

to the SELLERS on March 22, 1983, as stipulated under the
Certification of undertaking dated March 22, 1983 and covered
by a check voucher of even date.

2. That the sum of P496,500.09 shall be paid directly by the

BUYER to the Bank of Philippine Islands to answer for the loan
of the SELLERS which as of March 15, 1983 amounted to
P537,310.10, and for the interest that may accrued (sic) from
March 15, 1983, up to the time said obligation of the SELLERS
with the said bank has been settled, provided however that the
amount in excess of P496,500.09, shall be chargeable from
the time deposit of the SELLERS with the aforesaid bank.

B. That the balance of ONE MILLION FOUR HUNDRED THOUSAND

(P1,400,000.00) PESOS shall be paid by the BUYER to the SELLERS
in four (4) equal quarterly installments of THREE HUNDRED FIFTY
THOUSAND PESOS (P350,000.00), the first to be due and payable on
June 15, 1983, and every quarter thereafter, until the whole amount is
fully paid, by these presents promise to sell to said BUYER the two (2)
parcels of agricultural land including the rice mill and the piggery which
are the most notable improvements thereon, situated at Barangay Puri,
San Antonio Quezon, . . . .

"2. That upon the payment of the total purchase price by the
BUYER the SELLERS bind themselves to deliver to the former
a good and sufficient deed of sale and conveyance for the
described two (2) parcels of land, free and clear from all liens
and encumbrances.

"3. That immediately upon the execution of this document, the

SELLERS shall deliver, surrender and transfer possession of
the said parcels of land including all the improvements that
may be found thereon, to the BUYER, and the latter shall take
over from the SELLER the possession, operation, control and
 management of the RICEMILL and PIGGERY found on the
aforesaid parcels of land.

"4. That all payments due and payable under this contract shall be
effected in the residence of the SELLERS located at Barangay
Puri, San Antonio, Quezon unless another place shall have
been subsequently designated by both parties in writing.

xxx xxx xxx." 1

On May 15, 1983, petitioner Ong took possession of the subject parcels of land together with the piggery,
building, ricemill, residential house and other improvements thereon.
Pursuant to the contract they executed, petitioner paid respondent spouses the sum of P103,499.91 2 by
depositing it with the United Coconut Planters Bank. Subsequently, petitioner deposited sums of money with
the Bank of Philippine Islands (BPI), 3 in accordance with their stipulation that petitioner pay the loan of
respondents with BPI.

To answer for his balance of P 1,400,000.00 petitioner issued four (4) post-dated Metro Bank checks
payable to respondent spouses in the amount of P350,000.00 each, namely: Check No. 157708 dated June
15, 1983, 4 Check No. 157709 dated September 15,1983, 5 Check No. 157710 dated December 15, 1983 6
and Check No. 157711 dated March 15, 1984. 7 When presented for payment, however, the checks were
dishonored due to insufficient funds. Petitioner promised to replace the checks but failed to do so. To make
matters worse, out of the P496,500.00 loan of respondent spouses with the Bank of the Philippine Islands,
which petitioner, as per agreement, should have paid, petitioner only managed to dole out no more than
P393,679.60. When the bank threatened to foreclose the respondent spouses' mortgage, they sold three
transformers of the rice mill worth P51,411.00 to pay off their outstanding obligation with said bank, with the
knowledge and conformity of petitioner. 8 Petitioner, in return, voluntarily gave the spouses authority to
operate the rice mill. 9 He, however, continued to be in possession of the two parcels of land while private
respondents were forced to use the rice mill for residential purposes.

On August 2, 1985, respondent spouses, through counsel, sent petitioner a demand letter asking for the
return of the properties. Their demand was left unheeded, so, on September 2, 1985, they filed with the
Regional Trial Court of Lucena City, Branch 60, a complaint for rescission of contract and recovery of
properties with damages. Later, while the case was still pending with the trial court, petitioner introduced
major improvements on the subject properties by constructing a complete fence made of hollow blocks and
expanding the piggery. These prompted the respondent spouses to ask for a writ of preliminary injunction.
10 The trial court granted the application and enjoined petitioner from introducing improvements on the
properties except for repairs. 11

On June 1, 1989 the trial court rendered a decision, the dispositive portion of which reads as follows:

"IN VIEW OF THE FOREGOING, judgment is hereby rendered:

a) Ordering that the contract entered into by plaintiff spouses Miguel K. Robles and
Alejandra M. Robles and the defendant, Jaime Ong captioned 'Agreement of
Purchase and Sale,' marked as Exhibit 'A' set aside;

b) Ordering defendant, Jaime Ong to deliver the two (2) parcels of land which are
the subject matter of Exhibit 'A' together with the improvements thereon to the
spouses Miguel K. Robles and Alejandra M. Robles;

c) Ordering plaintiff spouses, Miguel Robles and Alejandra Robles to return to

Jaime Ong the sum of P497,179.51;

d) Ordering defendant Jaime Ong to pay the plaintiffs the sum of P100,000.00 as
exemplary damages; and

e) Ordering defendant Jaime Ong to pay the plaintiffs spouses Miguel K. Robles
and Alejandra Robles the sum of P20,000.00 as attorney's fees and litigation
expenses.
 "The motion of the plaintiff spouses Miguel K. Robles and Alejandra Robles for the
appointment of receivership is rendered moot and academic.

"SO ORDERED." 12

From this decision, petitioner appealed to the Court of Appeals, which affirmed the decision of the Regional
Trial Court but deleted the award of exemplary damages. In affirming the decision of the trial court, the Court
of Appeals noted that the failure of petitioner to completely pay the purchase price is a substantial breach of
his obligation which entitles the private respondents to rescind their contract under Article 1191 of the New
Civil Code. Hence, the instant petition.

At the outset, it must be stated that the issues raised by the petitioner are generally factual in nature and
were already passed upon by the Court of Appeals and the trial court. Time and again, we have stated that it
is not the function of the Supreme Court to assess and evaluate all over again the evidence, testimonial and
documentary, adduced by the parties to an appeal, particularly where, such as in the case at bench, the
findings of both the trial court and the appellate court on the matter coincide. There is no cogent reason
shown that would justify the court to discard the factual findings of the two courts below and to superimpose
its own. 13

The only pertinent legal issues raised which are worthy of discussion are: (1) whether the contract entered
into by the parties may be validly rescinded under Article 1191 of the New Civil Code; and (2) whether the
parties had novated their original contract as to the time and manner of payment.

Petitioner contends that Article 1191 of the New Civil Code is not applicable since he has already paid
respondent spouses a considerable sum and has therefore substantially complied with his obligation. He
cites Article 1383 instead, to the effect that where specific performance is available as a remedy, rescission
may not be resorted to.

A discussion of the aforesaid articles is in order.

Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted by law to
the contracting parties and even to third persons, to secure the reparation of damages caused to them by a
contract, even if this should be valid, by restoration of things to their condition at the moment prior to the
celebration of the contract. 14 It implies a contract, which even if initially valid, produces a lesion or a
pecuniary damage to someone. 15

On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal
obligations. Reciprocal obligations are those which arise from the same cause, and in which each party is a
debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the
other. 16 They are to be performed simultaneously such that the performance of one is conditioned upon the
simultaneous fulfillment of the other. Rescission of reciprocal obligations under Article 1191 of the New Civil
Code should be distinguished from rescission of contracts under Article 1383. Although both presuppose
contracts validly entered into and subsisting and both require mutual restitution when proper, they are not
entirely identical.

While Article 1191 uses the term "rescission," the original term which was used in the old Civil Code, from
which the article was based, was "resolution." 17 Resolution is a principal action which is based on breach
of a party, while rescission under Article 1383 is a subsidiary action limited to cases of rescission for lesion
under Article 1381 of the New Civil Code, which expressly enumerates the following rescissible contracts:

1. Those which are entered into by guardians whenever the wards whom they represent
suffer lesion by more than one fourth of the value of the things which are the object
thereof;

2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in
the preceding number;

3. Those undertaken in fraud of creditors when the latter cannot in any manner collect the
claims due them;

4. Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority;
 5. All other contracts specially declared by law to be subject to rescission.

Obviously, the contract entered into by the parties in the case at bar does not fall under any of those
mentioned by Article 1381. Consequently, Article 1383 is inapplicable.

May the contract entered into between the parties, however, be rescinded based on Article 1191?

A careful reading of the parties' "Agreement of Purchase and Sale" shows that it is in the nature of a contract
to sell, as distinguished from a contract of sale. In a contract of sale, the title to the property passes to the
vendee upon the delivery of the thing sold; while in a contract to sell, ownership is, by agreement, reserved
in the vendor and is not to pass to the vendee until full payment of the purchase price. 18 In a contract to
sell, the payment of the purchase price is a positive suspensive condition, the failure of which is not a
breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from
acquiring an obligatory force. 19

Respondents in the case at bar bound themselves to deliver a deed of absolute sale and clean title covering
the two parcels of land upon full payment by the buyer of the purchase price of P2,000,000.00. This promise
to sell was subject to the fulfillment of the suspensive condition of full payment of the purchase price by the
petitioner. Petitioner, however, failed to complete payment of the purchase price. The non-fulfillment of the
condition of full payment rendered the contract to sell ineffective and without force and effect. It must be
stressed that the breach contemplated in Article 1191 of the New Civil Code is the obligor's failure to comply
with an obligation already extant, not a failure of a condition to render binding that obligation. 20 Failure to
pay, in this instance, is not even a breach but merely an event which prevents the vendor's obligation to
convey title from acquiring binding force. 21 Hence, the agreement of the parties in the case at bench may
be set aside, but not because of a breach on the part of petitioner for failure to complete payment of the
purchase price. Rather, his failure to do so brought about a situation which prevented the obligation of
respondent spouses to convey title from acquiring an obligatory force.

Petitioner insists, however, that the contract was novated as to the manner and time of payment.

We are not persuaded. Article 1292 of the New Civil Code states that, "In order that an obligation may be
extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be on every point incompatible with each other."

Novation is never presumed, it must be proven as a fact either by express stipulation of the parties or by
implication derived from an irreconcilable incompatibility between the old and the new obligation. 22
Petitioner cites the following instances as proof that the contract was novated: the retrieval of the
transformers from petitioner's custody and their sale by the respondents to MERALCO on the condition that
the proceeds thereof be accounted for by the respondents and deducted from the price of the contract; the
take-over by the respondents of the custody and operation of the rice mill; and the continuous and regular
withdrawals by respondent Miguel Robles of installment sums per vouchers (Exhs. "8" to "47") on the
condition that these installments be credited to petitioner's account and deducted from the balance of the
purchase price.

Contrary to petitioner's claim, records show that the parties never even intended to novate
their previous agreement. It is true that petitioner paid respondents small sums of money
amounting to P48,680.00, in contravention of the manner of payment stipulated in their
contract. These installments were, however, objected to by respondent spouses, and
petitioner replied that these represented the interest of the principal amount which he
owed them. 23 Records further show that petitioner agreed to the sale of MERALCO
transformers by private respondents to pay for the balance of their subsisting loan with
the Bank of Philippine Islands. Petitioner's letter of authorization reads:

"xxx xxx xxx

"Under this authority, it is mutually understood that whatever payment received from
MERALCO as payment to the transformers will be considered as partial payment of the
undersigned's obligation to Mr. and Mrs. Miguel K. Robles.
 "The same will be utilized as partial payment to existing loan with the Bank of Philippine
Islands.

"It is also mutually understood that this payment to the Bank of Philippine Islands will be
reimbursed to Mr. and Mrs. Miguel K. Robles by the undersigned." [Emphasis supplied] 24

It should be noted that while it was agreed that part of the purchase price in the sum of P496,500.00 would
be directly deposited by petitioner to the Bank of Philippine Islands to answer for the loan of respondent
spouses, petitioner only managed to deposit P393,679.60. When the bank threatened to foreclose the
properties, petitioner apparently could not even raise the sum needed to forestall any action on the part of
the bank. Consequently, he authorized respondent spouses to sell the three (3) transformers. However,
although the parties agreed to credit the proceeds from the sale of the transformers to petitioner's obligation,
he was supposed to reimburse the same later to respondent spouses. This can only mean that there was
never an intention on the part of either of the parties to novate petitioner's manner of payment.

Petitioner contends that the parties verbally agreed to novate the manner of payment when respondent
spouses proposed to operate the rice mill on the condition that they will account for its earnings. We find that
this is unsubstantiated by the evidence on record. The tenor of his letter dated August 12, 1984 to
respondent spouses, in fact, shows that petitioner had a "little misunderstanding" with respondent spouses
whom he was evidently trying to appease by authorizing them to continue temporarily with the operation of
the rice mill. Clearly, while petitioner might have wanted to novate the original agreement as to his manner
of payment, the records are bereft of evidence that respondent spouses willingly agreed to modify their
previous arrangement.

In order for novation to take place, the concurrence of the following requisites is indispensable: (1) there
must be a previous valid obligation; (2) there must be an agreement of the parties concerned to a new
contract; (3) there must be the extinguishment of the old contract; and (4) there must be the validity of the
new contract. 25 The aforesaid requisites are not found in the case at bench. The subsequent acts of the
parties hardly demonstrate their intent to dissolve the old obligation as a consideration for the emergence of
the new one. We repeat to the point of triteness, novation is never presumed, there must be an express
intention to novate.

As regards the improvements introduced by petitioner to the premises and for which he claims
reimbursement, we see no reason to depart from the ruling of the trial court and the appellate court that
petitioner is a builder in bad faith. He introduced the improvements on the premises knowing fully well that
he has not paid the consideration of the contract in full and over the vigorous objections of respondent
spouses. Moreover, petitioner introduced major improvements on the premises even while the case against
him was pending before the trial court.

The award of exemplary damages was correctly deleted by the Court of Appeals inasmuch as no moral,
temperate, liquidated or compensatory damages in addition to exemplary damages were awarded.

WHEREFORE, the decision rendered by the Court of Appeals is hereby AFFIRMED with the
MODIFICATION that respondent spouses are ordered to return to petitioner the sum P48,680.00 in addition
to the amounts already awarded. Costs against petitioner.

SO ORDERED.

Davide, Jr., C .J ., Melo, Kapunan and Pardo, JJ ., concur.

Footnotes
1. Exhibits "A" and "1."
2. Exhibits "6" and "H."
3. TSN, October 11, 1985, pp. 9-11.
4. Exh. "C."
5. Exh. "D."
6. Exh. "E."
7. Exh. "F."
 8. Exh. "48."
9. Exh. "P."
10. Records, Vol. 1, p. 388.
11. Records, Vol. 1, p. 414.
12. Rollo, pp. 109-119.
13. Odyssey Park Inc. vs. Court of Appeals, 280 SCRA 253 [1997].
14. IV Tolentino, Civil Code 570 (1991), citing 8 Manresa 748-749.
15. Ibid., at 571, citing 2 Castan 652.
16. Areola vs. Court of Appeals, 236 SCRA 643 [1994].
17. Article 1191 was based on Article 1124 of the old Civil Code.
18. PNB vs. Court of Appeals, 262 SCRA 464 [1996]; Salazar vs. Court of Appeals, 258 SCRA 317 [1996].
19. Agustin vs. Court of Appeals, 186 SCRA 375 [1990]; Roque vs. Lapuz, 96 SCRA 741 [1980]; Manuel vs.
Rodriguez, 109 Phil 1 [1960].
20. Ibid.
21. Villaflor vs. Court of Appeals, 280 SCRA 297 [1997].
22. Uraca vs. Court of Appeals, 278 SCRA 702 [1997]; Ajax Marketing and Development Corporation vs. Court of
Appeals, 248 SCRA 222 [1995].
23. TSN, December 2, 1987, pp. 30-33.
24. Exhibit "48."
25. Reyes vs. Court of Appeals, 264 SCRA 35 [1996].
 EN BANC
[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, FRANCISCO DANTE, PACIFICO ESCANDOR and
FERNANDO TY, defendants-appellants.

Alejo Mabanag for plaintiff-appellee.

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

DECISION

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

This appeal comes to us directly from the Court of First Instance because the claims involved aggregate
more than P200,000.

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 unto 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 claimed 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,
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,
P10,000, of which was paid upon the signing of the agreement, and

"b. The balance of SIXTY-FIVE "THOUSAND PESOS (P65,000) will be paid from
and out of the first letter of credit covering the first shipment of iron ores and or
the first amount derived from the local sale of iron ore made by the Larap Mines
& Smelting Co., Inc., its assigns, administrators, or successors in interests."

To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor of Gaite a
surety bond; and pursuant to the promise, Fonacier delivered to Gaite a surety bond dated December 8,
1954 with himself (Fonacier) as principal and the Larap Mines and Smelting Co. and its stockholders George
Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit "A-
1"). Gaite testified, however, that when this bond was presented to him by Fonacier together with the
"Revocation of Power of Attorney and Contract", Exhibit "A", on December 8, 1954, he refused to sign said
Exhibit "A" unless another bond underwritten by a bonding company was put up by defendants to secure the
payment of the P65,000 balance of the 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-I", 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 than P65,000, 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 goodwill, 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 Mines & 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 65,000 balance of the price of said ore been paid to Gaite by
Fonacier and his sureties. Whereupon, Gaite demanded from Fonacier and his sureties payment of said
amount, on the theory that they had lost every 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 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 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
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 became
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 defendants to pay plaintiff the P65,000
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 Gaite'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
the 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 with interest at 6% per annum from December 9, 1965 until full 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 result 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 (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)
which the latter binds to pay as follows:

a. TEN THOUSAND PESOS (P10,000) will be paid upon the signing of

this agreement.

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000) will be paid

from and out of the first letter of credit covering first shipment of iron
ores and/or 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 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, 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) will be paid out of the
first letter of credit covering the first shipment of iron ore . . ." 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 rights 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 to guarantee payment of
 the P65,000, and 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.

3) To subordinate the obligation to pay the remaining P65,000 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 desirability

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 intended a suspensive condition or a suspensive period (dies ad quem)
for the payment of the P65,000, the rules of interpretation would incline the
scales in favor of "the greatest 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's
obligation is deemed to be actually existing, with only its maturity (due date)
postponed or deferred, than 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 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, 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, 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:

(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
thereby; 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 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 or 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 of 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 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 Luisiana 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 question; 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 promised and the
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 Cipriano 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 appellants'
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. (cf. Pine River Logging & Improvement Co. vs. U. S., 186 U.S. 279, 46, L. Ed.
1164).
There was, consequently, no short-delivery in this case as would entitle appellants to the payment of
damages, nor could Gaite have been guilty of any fraud in making any misrepresentation to appellants as to
the total quantity of ore in the stockpiles of the mining claims in question, as charged by appellants since
Gaite's estimate appears to be substantially correct.

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

Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De Leon and Natividad, JJ., concur.
 FIRST DIVISION
[G.R. No. 118114. December 7, 1995.]

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

DECISION

PADILLA, J p:

This is a petition for review on certiorari of the decision 1 of the Court of Appeals, 2nd
Division, in CA-G.R. No. 36177, which affirmed the decision 2 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) square 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 interstate 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
interstate 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 provisions of Sections 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 LAURENCIANA, 3 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 field 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 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 decisions:

"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 documents 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, 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 respondent's 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 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 Registry of Deeds which contained the Declaration of Heirship with Waiver of rights
an 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 f Cosme Pido and not a private respondent.
The reason is the 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 thereof .

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 established 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 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.

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

Footnotes
1. Penned by Purisima, J., Chairman, with Isnani, J. and Ibay-Somera, J. concurring.
2. Penned by Executive Judge Jose Aguirre, Jr.
3. The RTC decision used the name Luzviminda. The CA used the name Laudenciana.
4. Annex A, Petition; Rollo, p. 14.
5. Annex "D", Petition Rollo, p. 29.
6. Ibid., p. 27.
7. Ibid., p. 28.
8. Reyes, An Outline of Philippine Civil Law, Vol. II p. 20.
9. Article 1458, Civil Code.
10. Paumitos v. CA, G.R. No. 61584, Nov. 25, 1992, 215 SCRA 867, 868; Uberas v. CFI of Negros G.R. No. 4248,
October 30, 1978, 86 SCRA 145, 147; Abrasia v. Carian, G.R. No. 9510, October 31, 1957.
11. See Aguirre v. Atienza, G.R. No. L-10665, Aug. 30, 1958; Mari v. Bonilla, G.R. No. 852, March 19, 949; Robles
v. CA. 647494 83 SCRA 181, 182, May 15, 1978.
12. See Borromeo Herrera v. Borromeo, G.R. No. L-41171, July 23, 1987, 152 SCRA 171.
13. See note 10 - supra.
14. Osorio v. Osorio and Ynchausti Steamship Co. No. 16544, March 20, 1921.
15. Somes v. Government of the Philippines, No. 42754, October 30, 1935. 62 Phil. 432.
16. See Laureto v. CA, G.R. No. 95838, August 7, 1992, 212 SCRA 397, Cuno v. CA, G.R. L-62985, April 2,
1984, 128 SCRA 567.
 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.

DECISION

MARTINEZ, J p:

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 3 ruling that 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. 4 Thereafter, petitioners filed a motion for
reconsideration. When the CA denied their motion, 5 petitioners instituted a petition for review to this 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 7 was subject to the
condition that the donated property shall be "used solely and exclusively as a part of the campus of the
proposed Provincial High School in Talacogon." 8 The donation further provides that should "the proposed
Provincial 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. 9 Such
condition, not being contrary to law, morals, 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 11 —
notwithstanding the condition imposed by the donee. The donation is perfected once the acceptance by the
donee is made known to the donor. 12 Accordingly, ownership is immediately transferred to the latter 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. 13 Thus, at the time of
the 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; 14 "it is 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."
15 Its essential elements of:

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. Petitioners' 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 petitioners 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 17
as to the offer and acceptance thereof on three (3) elements: subject matter, price and terms of payment of
the price. 18 Ownership by the seller on the thing sold at the time of the 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. 19 Perfection per se does not transfer ownership which occurs upon
the actual or constructive delivery of the thing sold. 20 A perfected contract of sale cannot be challenged on
the ground of non-ownership on the part of the seller at the time of its perfection; hence, the sale is still valid.
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." 21 This rule applies not only when the subject matter of the
contract of sale is goods, 22 but also to other kinds of property, including real property. 23

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; 24 thus, the contract
involving the same is inexistent 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 25
are outside the commerce of men. Besides, the lots in this case were conditionally owned by the
municipality. To rule that the donated properties are 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. 26 It cannot be said that private
respondents had compelled petitioners 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 27 and 2220 28 of the New Civil Code concur in this case.

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

SO ORDERED.

Melo, Puno and Mendoza JJ ., concur.

Footnotes
1. Decision of Court of Appeals in CA-G.R. CV No. 44016 promulgated on May 31, 1996, pp. 2-5; Rollo, pp. 41-44.
2. Regional Trial Court (Bayugan, Agusan del Sur) Decision dated July 16, 1993 penned by Judge Zenaida
Placer, p. 6; Annex "A" of Petition; Rollo, p. 21.
3. The decretal portion of the CA's decision states: "WHEREFORE, premises considered, the decision appealed
from is hereby REVERSED and SET ASIDE, and judgment rendered declaring the defendants-appellants as
the rightful and lawful owners and possessors of the subject land. There is no pronouncement as to costs."
4. CA Decision, pp. 6-7; Rollo, pp. 45-46.
5. CA Resolution promulgated August 26, 1996; Rollo, p. 55.
6. Comment of Private Respondents, pp. 7-8; Rollo, pp. 67-68.
7. Her sisters were Leonila Corvera Vda. de Sequeña and Paz Corvera Cabiltes and the brother was Epapiadito
Corvera.
8. RTC Decision, p. 1; Rollo, p. 16.
9. CA Decision, pp. 5-6; Rollo, pp. 44-45.
10. City of Angeles v. CA, 261 SCRA 90.
11. Article 712, New Civil Code provides: "Ownership is acquired by occupation and by intellectual creation.

"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.

"They may also be acquired by means of prescription." (emphasis supplied).

12. Article 734, New Civil Code (NCC) reads: "The donation is perfected from the moment the donor knows of the
acceptance by the donee."
13. Central Philippine University v. CA, 246 SCRA 511.
14. Reyes v. CA, 264 SCRA 35; Republic v. Sandiganbayan, 255 SCRA 438; PAL Employees Savings & Loan
Association, Inc. v. NLRC, 260 SCRA 758.
15. Catholic Bishop of Balanga v. CA, 264 SCRA 181; Chavez v. Bonto-Perez, 242 SCRA 73; Rivera v. CA, 244
SCRA 218; Cormero v. CA, 317 Phil. 348.
16. Santiago v. CA, 278 SCRA 98 (1997); Catholic Bishop of Balanga v. CA, 264 SCRA 181; Claveria v. Quingco,
207 SCRA 66 (1992); Perez v. Ong Cho, 116 SCRA 732 (1982); Yusingco v. Ong Hing Lian, 42 SCRA 589
(1971); I.E. Lotho, Inc. v. Ice and Cold Storage Industries, Inc., 3 SCRA 744; Go Chi Gun, et. al. v. Co Cho, et.
al., 96 Phil. 622.
17. Article 1475, New Civil Code (NCC). "The contract of sale is perfected at the moment there is a meeting of the
minds upon the thing which is the object of the contract and upon the price. . . ."
18. Leabres v. CA, 146 SCRA 158 ( 1986); See also Navarro v. Sugar Producer's Corporation, 1 SCRA 1180.
19. Article 1459, NCC — "The thing must be licit and the vendor must have a right to transfer the ownership thereof
at the time it is delivered."
20. Article 712, NCC. ". . . Ownership and other real rights over property are acquired and transmitted . . . in
consequence of certain contracts, by tradition."
21. Article 1434, NCC provides: "When a person who is not the owner of a thing sells or alienates and delivers it,
and later the seller or grantor acquires title thereto, such title passes by operation of law to the buyer or
grantee."
22. Article 1505 of the NCC provides: "Subject to the provisions of this Title, where goods are sold by a person who
is not the owner thereof, and who does not sell them under authority or with the consent of the owner, the buyer
acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct
precluded from denying the seller's authority to sell.

"xxx xxx xxx" (Emphasis supplied).

Other exceptions to the foregoing includes: (a) when the contrary is provided in recording laws, (b) sales made
under statutory power of sale or pursuant to a valid order from a court of competent jurisdiction, and (c) sales
made in a merchant's store in accordance with the Code of commerce and special laws.

23. See Article 1434, NCC, supra.; Estoque v. Pajimula, 133 Phil. 55; 24 SCRA 59 (1968); Buctan v. Gabar, 55
SCRA 499.
24. Article 1409 (4), NCC: "The following contracts are inexistent and void from the beginning;

xxx xxx xxx

(4) Those whose object is outside the commerce of men;

xxx xxx xxx"

25. Article 423, NCC: "The properties of provinces, cities and municipalities, is divided into property for public use
and patrimonial property."

Article 424 provides: "Property for public use, in the provinces, cities and municipalities, consist of the provincial
roads, city streets, municipal streets, the squares, fountains, public waters, promenades, and public works for
public service paid for by said provinces, cities, or municipalities.

"All other property possessed by any of them is patrimonial and shall be governed by

this Code, without prejudice to the provisions of special laws."

26. "In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be
recovered except:

xxx xxx xxx

(2) when the defendant's act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest.

xxx xxx xxx

(5) where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly
valid, just and demandable claim.

xxx xxx xxx

27. Moral damages may be recovered in the following and analogous cases:

(1) a criminal offense resulting in physical injuries;

(2) quasi-delicts causing physical injuries;
(3) seduction, abduction, rape or other lascivious acts;
(4) adultery or concubinage;
(5) illegal or arbitrary detention or arrests;
(6) illegal search;
(7) libel, slander or any other form of defamation;
(8) malicious prosecution;
(9) acts mentioned in Article 309;
(10) acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34 and 35.

The parents of the female seduced, abducted, raped or abused referred to in no. 3 of this Article, may also
recover moral damages.
 The spouse, ascendants, descendants and brothers and sisters may bring the action mentioned in no. 9 of this
Article, in the order named.

28. Article 2220, Willful injury to property may be a legal ground for awarding moral damages if the court should find
that, under the circumstances, such damages are justly due. The same rule applies to breaches of contracts
where the defendant acted fraudulently or in bad faith.
 FIRST DIVISION
[G.R. No. L-8506. August 31, 1956.]

CELESTINO CO & COMPANY, petitioner, vs. COLLECTOR OF INTERNAL REVENUE, respondent.

Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres and Solicitor
Federico V. Sian for respondent.

DECISION

BENGZON, J p:

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 sales 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 for doors and windows 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, furnitures,
etc. used season-dried and kiln-dried lumber, of the best quality workmanship' solely for
the purpose of supplying the needs for doors, windows and sash of its special and limited
customers. One will 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 ready-
made doors and windows of standard sizes for the average home. Moreover, as shown
from the investigation of petitioner's books 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 upon 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
one under which the business enterprise of petitioner could appropriately fall. It would
require a stretch of the law and much effort to make the business of manufacturing sash,
doors and windows upon special order of customers fall under the category of 'road,
building, navigation, artesian well, water works and other construction work contractors;
filling contractors' as enumerated in the section being invoked by petitioner's counsel.
Construction work contractors are those who alter or repair buildings, structures, streets,
highways, sewers, street railways, railroads, logging roads, electric, steam or water plants
telegraph and telephone plants and lines, 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 of taxing petitioner as a contractor under section
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 since 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 we are inclined 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 materials-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, manufactures
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 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 of sash,
mouldings or 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 as construction work in common parlance. 2
Appellant invokes Article 1467 of the New Civil Code to bolster its contention that in filing orders for windows
and doors according to specifications, it did not sell, but merely contracted for particular pieces of work or
"merely sold its services".

Said article reads as follows:

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

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

In our opinion when this Factory accepts a job that requires the use of extraordinary or additional equipment,
or involves services not generally performed by it — it thereby contracts for a piece of work — filling 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 preculiar merchandise?

Anyway, supposing for the moment that the transactions were not sales, they were neither lease of services
nor contract jobs by a contractor. But as the doors and windows had been admittedly "manufactured" by the
Oriental Sash Factory, such transactions could be, and should be taxed as "transfers" thereof under section
186 of the National Revenue Code.

The appealed decision is consequently affirmed. So ordered.

Paras, C.J., Padilla, Montemayor, Bautista Angelo, Concepcion, Reyes, J.B.L., and Felix, JJ., concur.

Footnote
1 2. With all the consequences in Article 1729 New Civil Code and Act No. 3959 (bond of contractor).
 FIRST DIVISION
[G.R. No. L-27044. June 30, 1975.]

THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ENGINEERING

EQUIPMENT AND SUPPLY COMPANY AND THE COURT OF TAX APPEALS,
respondents.

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

ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner, vs. THE COMMISSIONER OF

INTERNAL REVENUE AND THE COURT OF TAX APPEALS, respondents.

Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete, Solicitor Lolita O.
Gal-lang and Special Attorney Gemaliel H . Mantolino for Commissioner of Internal Revenue, etc.
Melquiades C . Gutierrez, Jose U . Ong, Juan G. Collas, Jr., Luis Ma. Guerrero and J . R. Balonkita for
Engineering Equipment and Supply Company.

DECISION

ESGUERRA, J p:

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

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

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

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

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

On March 3, 1959, the Commissioner assessed against, and demanded upon, Engineering payment of the
increased amount and suggested that P10,000 be paid as compromise in extrajudicial settlement of
Engineering's penal liability for violation of the Tax Code. The firm, however, contested the tax assessment
and requested that it be furnished with the details and particulars of the Commissioner's assessment. (Exh.
"B" and "15", pp. 86-88 BIR rec. Vol. I) The Commissioner replied that the assessment was in accordance
with law and the facts of the case.
On July 30, 1959, Engineering appealed the case to the Court of Tax Appeals and during the pendency of
the case the investigating revenue examiners reduced Engineering's deficiency tax liabilities from
P916,362.65 to P740,587.86 (Exhs. "R" and "9" pp. 162-170, BIR rec.), based on findings after conferences
had with Engineering's Accountant and Auditor.

On November 29, 1966, the Court of Tax Appeals rendered its decision, the dispositive portion of which
reads as follows:

"For ALL THE FOREGOING CONSIDERATIONS, the decision of respondent appealed

from is hereby modified, and petitioner, as a contractor, is declared exempt from the
deficiency manufacturers sales tax covering the period from June 1, 1948, to September
2, 1956. However, petitioner is ordered to pay respondent, or his duly authorized
collection agent, the sum of P174,141.62 as compensating tax and 25% surcharge for the
period from 1953 to September 1956. With costs against petitioner."

The Commissioner, not satisfied with the decision of the Court of Tax Appeals, appealed to this Court on
January 18 1967, (G.R. No. L-27044). On the other hand, Engineering, on January 4, 1967, filed with the
Court of Tax Appeals a motion for reconsideration of the decision abovementioned. This was denied on April
6, 1967, prompting Engineering to file also with this Court its appeal, docketed as G.R. No. L-27452.
Since the two cases, G.R. No. L-27044 and G.R. No. L-27452 involve the same parties and issues, We have
decided to consolidate and jointly decide them.

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

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

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

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

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

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

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

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

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

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

4. In not holding the company liable to the 50% fraud surcharge under Section 183 of the
Tax Code on its importations of parts and accessories of air conditioning units,
notwithstanding the finding of said court that the respondent company fraudulently
misdeclared the said importations;
 5. In holding the respondent company liable for P174,141.62 as compensating tax and 25%
surcharge instead of P740,587.86 as deficiency advance sales tax, deficiency
manufacturers tax and 25% and 50% surcharge for the period from June 1, 1948 to
December 31, 1956.

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

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

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

xxx xxx xxx

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

In answer to the above contention, Engineering claims that it is not a manufacturer and seller of air-
conditioning units and spare parts or accessories thereof subject to tax under Section 185(m) of the Tax
Code, but a contractor engaged in the design, supply and installation of the central type of air-conditioning
system subject to the 359 tax imposed by Section 191 of the same Code, which is essentially a tax on the
sale of services or labor of a contractor rather than on the sale of articles subject to the tax referred to in
Sections 184,185 and 186 of the Code.

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

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

"Art. 1467. A contract for the delivery at a certain price of an article which the
vendor in the ordinary course of his business manufactures or procures for the general
market, whether the same is on hand at the time or not, is a contract of sale, but if the
goods are to be manufactured specially for the customer and upon his special order and
not for the general market, it is a contract for a piece of work."
The word "contractor" has come to be used with special reference to a person who, in the pursuit of the
independent business, undertakes to do a specific job or piece of work for other persons, using his own
means and methods without submitting himself to control as to the petty details. (Arañas, Annotations and
Jurisprudence on the National Internal Revenue Code, p. 318, par. 191(2), 1970 Ed.) The true test of a
contractor as was held in the cases of Luzon Stevedoring Co., vs. Trinidad 43, Phil. 803, 807-808, and La
Carlota Sugar Central vs. Trinidad 43, Phil. 816, 819, would seem to be that he renders service in the
course of an independent occupation, representing the will of his employer only as to the result of his work,
and not as to the means by which it is accomplished.

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

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

As found by the lower court, which finding 4 We adopt —

"Engineering, in a nutshell, fabricates, assembles, supplies and installs in the buildings of

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

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

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

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

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

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

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

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

Definitely there is quite a big difference in the operation because the window type air conditioner is a sort of
compromise. In fact, it cannot control humidity to the desired level; rather the manufacturers, by hit and
miss, were able to satisfy themselves that the desired comfort within a room could be made by a definite
setting of the machine as it comes from the factory; whereas the central type system definitely requires an
intelligent operator." (t.s.n. pp. 301-335, Vol. II)

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

Q "Aside from the General components, which go into air conditioning plant or
system of the central type which your company undertakes, and the procedure
followed by you in obtaining and executing contracts which you have already
testified to in previous hearing, would you say that the covering contracts for
these different projects listed . . . referred to in the list, Exh. "F" are identical in
every respect? I mean every plan or system covered by these different contracts
are identical in standard in every respect, so that you can reproduce them?
 A "No, sir. They are not all standard. On the contrary, none of them are the same.
Each one must be designed and constructed to meet the particular requirements,
whether the application is to he operated. (t.s.n. pp. 101-102)

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

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

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

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

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

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

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

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

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

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

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

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

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

And on July 17, 1953 (Exh. "3-g", p. 145, BIR rec.) Engineering wrote Trane Co. another letter, viz:

"In the past, we have always paid the air-conditioning tax on climate changers and that
mark is recognized in the Philippines as air conditioning equipment. This matter of
avoiding any tie-in on air conditioning is very important to us, and we are again asking that
from hereon that whoever takes care of the processing of our orders be carefully
instructed so as to avoid again using the term 'climate changers' or in any way referring to
the equipment as 'air conditioning.'

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

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

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

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

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

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

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

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

"At first blush it would seem that the contention of petitioner that it is not subject to the
delinquency surcharge of 25% is sound, valid and tenable. However, a serious 190 of the
Tax Code dealing on compensating tax in relation to Section 183 (a) of the same Code,
will show that the contention of petitioner is without merit. The original text of Section 190
of Commonwealth Act 466, otherwise know as the National Internal Revenue Code, as
amended by Commonwealth Act No. 503, effective on October 1, 1939, does not provide
for the filing of a compensating tax return and payment of the 25% surcharge for late
payment thereof. Under the original text of Section 190 of the Tax Code, as amended by
Commonwealth Act No. 503, the contention of the petitioner that it is not subject to the
25% surcharge appears to be legally tenable. However, Section 190 of the Tax Code was
subsequently amended by Republic Acts Nos. 48, 253, 361, 1511 and 1612 effective
October 1, 1946, July 1, 1948, June 9, 1949, June 16, 1956 and August 24, 1956
respectively, which invariably provides among others, the following:

". . . If any article withdrawn from the customhouse or the post office without payment of
the compensating tax is subsequently used by the importer for other purposes
corresponding entry should be made in the looks of accounts if any are kept or a written
notice thereof sent to the Collector of Internal Revenue and payment of the corresponding
compensating tax made within 30 days from the date of such entry or notice and if tax is
not paid within such period the amount of the tax shall be increased by 25% the increment
to be a part of the tax."
 "Since the imported air conditioning units and spare parts or accessories thereof are
subject to the compensating tax of 30% as the same were used in the construction
business of Engineering, it is incumbent upon the latter to comply with the aforequoted
requirement of Section 190 of the Code, by posting in its books of accounts or notifying
the Collector of Internal Revenue that the imported articles were used for other purposes
within 30 days. . . . Consequently, as the 30% compensating tax was not paid by petitioner
within the time prescribed by Section 190 of the Tax Code as amended, it is therefore
subject to the 25% surcharge for delinquency in the payment of the said tax." (pp. 224-226
CTA rec.)

III

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

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

taxes. —

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

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

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

SO ORDERED.

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

Footnotes
1. Section 185. Percentage tax on sales of . . ., refrigerators and others. — There shall be levied,
assessed, and collected once only on every original sale, barter, exchange, or similar transaction intended to
transfer ownership of, or title to, the other articles herein below enumerated, a tax equivalent to thirty percentum
of the gross selling price or gross value in money of the articles gold, bartered, exchanged or transferred, such
tax to be paid by the manufacturer or producers, Provided: That where the articles enumerated herein below
are manufactured out of materials subject to tax under this section, the total cost of such materials, as duly
established, shall be deductible from the gross selling price or gross value in money of such manufactured
articles.

xxx xxx xxx

(m) Air conditioning units and parts or accessories thereof. (As amended by R.A. No. 588, effective from
September 22, 1950 until it was amended by R.A. No. 1612 made effective August 14, 1956.)

2. Groves vs. Buck, 3, Maule & s. 178; Towers v. Osborne, 1 Strange 506, Benjamin on Sales 90; as cited in
Arañas, Annotations and Jurisprudence on the NIRC, as amended, 1970 ed. p. 323, 324.
3. Ibid p. 324, par. 191 (13).
4. Decision, Court of Tax Appeals, CTA Rec. p. 212.
5. "Section 190. Compensating tax. — All persons residing or doing business in the Philippines, who
purchase or receive from without the Philippines any commodities, goods, wares or merchandise, excepting
those subject to specific taxes under Title IV of this Code, shall pay on the total value thereof at the time they
are received by such persons, including freight, insurance, commission and all similar charges, a compensating
tax equivalent to the percentage taxes imposed under this Title on original transactions effected by merchants,
importers or manufacturers, such tax to be paid before the withdrawal or removal of said commodities, goods,
wares or merchandise from the custom house or the post office. Provided. However, That merchants, importers,
and manufacturers, who are subject to the tax under Sections 184, 185 or 189 of this Title, shall not be required
to pay the herein tax imposed where such commodities, goods wares or merchandise purchased or received by
them from without the Philippines are to be sold, resold, bartered or exchanged or are to be used in the
manufacture or preparation of articles for sale, barter or exchange and are to form part thereof. And Provided,
Further, that the tax imposed in this section shall not apply to articles to be used by the importer himself in the
manufacturer or preparation of articles subject to specific tax, or those for consignment abroad and are to form
part thereof. If any article withdrawn from the customhouse or the post office without payment of the
compensating tax is subsequently used by the importer for other purposes, corresponding entry should be
made in the books of accounts, if any are kept or written notice thereof sent to the Collector of Internal Revenue
and payment of the corresponding compensating tax made within 10 days from the date of such entry or notice.
If the tax is not paid within such period the amount of the tax shall be increased by 25%, the increment to be a
part of the tax". (As amended by R.A. 253, effective July 1948)
 THIRD DIVISION
[G.R. No. 52267. January 24, 1996.]

ENGINEERING & MACHINERY CORPORATION, petitioner, vs. COURT OF APPEALS and PONCIANO L.
ALMEDA, respondents.

Cruz, Durian, Agabin, Alday & Tuason, for petitioner.

Carnell S. Valdez, for respondents.

DECISION

PANGANIBAN, J p:

Is a contract for the fabrication and installation of a central air-conditioning system in a building, one of "sale"
or "for a piece of work"? What is the prescriptive period for filing actions for breach of the terms of such
contract?

These are the legal questions brought before this Court. in this Petition for review on certiorari under Rule 45
of the Rules of Court, to set aside the Decision 1 of the Court of Appeals 2 in-CA-G.R. No. 58276-R
promulgated on November 28, 1978 (affirming in toto the decision 3 dated April 15, 1974 of the then Court of
First Instance of Rizal, Branch II 4 , in Civil Case No. 14712, which ordered petitioner to pay private
respondent the amount needed to rectify the faults and deficiencies of the air-conditioning system installed
by petitioner in private respondent's building, plus damages, attorney's fees and costs).

By a resolution of the First Division of this Court dated November 13, 1995, this case was transferred to the
Third. After deliberating on the various submissions of the parties, including the petition, record on appeal,
private respondent's comment and briefs for the petitioner and the private respondent, the Court assigned
the writing of this Decision to the undersigned, who took his oath as a member of the Court on October 10,
1995.

The Facts

Pursuant to the contract dated September 10, 1962 between petitioner and private respondent, the former
undertook to fabricate, furnish and install the air-conditioning system in the latter's building along Buendia
Avenue, Makati in consideration of P12,000.00. Petitioner was to furnish the materials, labor, tools and all
services required in order to so fabricate and install said system. The system was completed in 1963 and
accepted by private respondent, who paid in full the contract price.

On September 2, 1965, private respondent sold the building to the National Investment and Development
Corporation (NIDC). The latter took possession of the building but on account of NIDC's noncompliance with
the terms and conditions of the deed of sale, private respondent was able to secure judicial rescission
thereof. The ownership of the building having been decreed back to private respondent, he re-acquired
possession sometime in 1971. It was then that he learned from some NIDC employees of the defects of the
air-conditioning system of the building.

Acting on this information, private respondent commissioned Engineer David R. Sapico to render a technical
evaluation of the system in relation to the contract with petitioner. In his report, Sapico enumerated the
defects of the system and concluded that it was "not capable of maintaining the desired room temperature of
76ºF — 2ºF (Exhibit C)" 5

On the basis of this report, private respondent filed on May 8, 1971 an action for damages against petitioner
with the then Court of First Instance of Rizal (Civil Case No. 14712). The complaint alleged that the air-
conditioning system installed by petitioner did not comply with the agreed plans and specifications. Hence,
private respondent prayed for the amount of P210,000.00 representing the rectification cost, P100,000.00 as
damages and P15,000.00 as attorney's fees.

Petitioner moved to dismiss the complaint, alleging that the prescriptive period of six months had set in
pursuant to Articles 1566 and 1567, in relation to Article 1571 of the Civil Code, regarding the responsibility
of a vendor for any hidden faults or defects in the thing sold.
Private respondent countered that the contract dated September 10, 1962 was not a contract of sale but a
contract for a piece of work under Article 1713 of the Civil Code. Thus, in accordance with Article 1144 (1) of
the same Code, the complaint was timely brought within the ten-year prescriptive period.

In its reply, petitioner argued that Article 1571 of the Civil Code providing for a six-month prescriptive period
is applicable to a contract for a piece of work by virtue of Article 1714, which provides that such a contract
shall be governed by the pertinent provisions on warranty of title and against hidden defects and the
payment of price in a contract of sale 6 .

The trial court denied the motion to dismiss. In its answer to the complaint, petitioner reiterated its claim of
prescription as an affirmative defense. It alleged that whatever defects might have been discovered in the
air-conditioning system could have been caused by a variety of factors, including ordinary wear and tear and
lack of proper and regular maintenance. It pointed out that during the one-year period that private
respondent withheld final payment, the system was subjected to "very rigid inspection and testing and
corrections or modifications effected" by petitioner. It interposed a compulsory counterclaim suggesting that
the complaint was filed "to offset the adverse effects" of the judgment in Civil Case No. 71494, Court of First
Instance of Manila, involving the same parties, wherein private respondent was adjudged to pay petitioner
the balance of the unpaid contract price for the air-conditioning system installed in another building of private
respondent, amounting to P138,482.25.

Thereafter, private respondent filed an ex-parte motion for preliminary attachment on the strength of
petitioner's own statement to the effect that it had sold its business and was no longer doing business in
Manila. The trial court granted the motion and, upon private respondent's posting of a bond of P50,000.00,
ordered the issuance of a writ of attachment.

In due course, the trial court rendered a decision finding that petitioner failed to install certain parts and
accessories called for by the contract, and deviated from the plans of the system, thus reducing its
operational effectiveness to the extent that 35 window-type units had to be installed in the building to
achieve a fairly desirable room temperature. On the question of prescription, the trial court ruled that the
complaint was filed within the ten-year prescriptive period although the contract was one for a piece of work,
because it involved the "installation of an air-conditioning system which the defendant itself manufactured,
fabricated, designed and installed."

Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. Hence, it instituted
the instant petition.

The Submissions of the Parties

In the instant Petition, petitioner raised three issues. First, it contended that private respondent's acceptance
of the work and his payment of the contract price extinguished any liability with respect to the defects in the
air-conditioning system. Second, it claimed that the Court of Appeals erred when it held that the defects in
the installation were not apparent at the time of delivery and acceptance of the work considering that private
respondent was not an expert who could recognize such defects. Third, it insisted that, assuming arguendo
that there were indeed hidden defects, private respondent's complaint was barred by prescription under
Article 1571 of the Civil Code, which provides for a six-month prescriptive period.

Private respondent, on the other hand averred that the issues raised by petitioner, like the question of
whether there was an acceptance of the work by the owner and whether the hidden defects in the
installation could have been discovered by simple inspection, involve questions of fact which have been
passed upon by the appellate court.

The Court's Ruling

The Supreme Court reviews only errors of law in petitions for review on certiorari under Rule 45. It is not the
function of this Court to re-examine the findings of fact of the appellate court unless said findings are not
supported by the evidence on record or the judgment is based on a misapprehension of facts. 7

"The Court has consistently held that the factual findings of the trial court, as well as the Court of Appeals,
are final and conclusive and may not be reviewed on appeal. Among the exceptional circumstances where a
reassessment of facts found by the lower courts is allowed are when the conclusion is a finding grounded
entirely on speculation, surmises or conjectures; when the inference made is manifestly absurd, mistaken or
impossible; when there is grave abuse of discretion in the appreciation of facts; when the judgment is
premised on a misapprehension of facts; when the findings went beyond the issues of the case and the
same are contrary to the admissions of both appellant and appellee. After a careful study of the case at
bench, we find none of the above grounds present to justify the re-evaluation of the findings of fact made by
the courts below." 8

"We see no valid reason to discard the factual conclusions of the appellate court. . . . (I)t is
not the function of this Court to assess and evaluate all over again the evidence,
testimonial and documentary, adduced by the parties, particularly where, such as here,
the findings of both the trial court and the appellate court on the matter coincide." 9
(Emphasis supplied)

Hence, the first two issues will not be resolved as they raise questions of fact.

Thus, the only question left to be resolved is that of prescription. In their submissions, the parties argued
lengthily on the nature of the contract entered into by them, viz., whether it was one of sale or for a piece of
work.

Article 1713 of the Civil Code defines a contract for a piece of work thus:

"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."

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 10 . 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 11 .

Thus, Mr. Justice Vitug 12 explains that —

"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. 1467, Civil Code). The mere fact alone that certain
articles are made upon previous orders of customers will not argue against the imposition
of the sales tax if such articles are ordinarily manufactured by the taxpayer for sale to the
public (Celestino Co. vs. Collector, 99 Phil. 8411)."

To Tolentino, the distinction between the two contracts depends on the intention of the parties. Thus, if the
parties intended that at some future date an object has to be delivered, without considering the work or labor
of the party bound to deliver, the contract is one of sale. But if one of the parties accepts the undertaking on
the basis of some plan, taking into account the work he will employ personally or through another, there is a
contract for a piece of work 13 .

Clearly, the contract in question is one for a piece of work. It is not petitioner's line of business to
manufacture air-conditioning systems to be sold "off-the-shelf." Its business and particular field of expertise
is the fabrication and installation of such systems as ordered by customers and in accordance with the
particular plans and specifications provided by the customers. Naturally, the price or compensation for the
system manufactured and installed will depend greatly on the particular plans and specifications agreed
upon with the customers.

The obligations of a contractor for a piece of work are set forth in Articles 1714 and 1715 of the Civil Code,
which provide:

"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. 1715. The contractor shall execute the work in such a manner that it has the
qualities agreed upon and has no defects which destroy or lessen its value or fitness for
its ordinary or stipulated use. Should the work be not of such quality, the employer may
require that the contractor remove the defect or execute another work. If the contractor
fails or refuses to comply with this obligation, the employer may have the defect removed
or another work executed, at the contractor's cost."

The provisions on warranty against hidden defects, referred to in Art. 1714 above-quoted, are found in
Articles 1561 and 1566, which read as follows:

"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."

xxx xxx xxx

"Art. 1566. The vendor is responsible to the vendee for any hidden faults or defects
in the thing sold, even though he was not aware thereof.

"This provision shall not apply if the contrary has been stipulated, and the vendor was not
aware of the hidden faults or defects in the thing sold."

The remedy against violations of the warranty against hidden defects is either to withdraw from the contract
(rehibitory action) or to demand a proportionate reduction of the price (accion quanti minoris), with damages
in either case. 14

In Villostas vs. Court of Appeals 15 , we held that, "while it is true that Article 1571 of the Civil Code provides
for a prescriptive period of six months for a rehibitory action, a cursory reading of the ten preceding articles
to which it refers will reveal that said rule may be applied only in case of implied warranties"; and where
there is an express warranty in the contract, as in the case at bench, the prescriptive period is the one
specified in the express warranty, and in the absence of such period, "the general rule on rescission of
contract, which is four years (Article 1389, Civil Code) shall apply" 16 .

Consistent with the above discussion, it would appear that this suit is barred by prescription because the
complaint was filed more than four years after the execution of the contract and the completion of the air-
conditioning system.

However, a close scrutiny of the complaint filed in the trial court reveals that the original action is not really
for enforcement of the warranties against hidden defects, but one for breach of the contract itself. It alleged
17 that the petitioner, "in the installation of the air conditioning system did not comply with the specifications
provided" in the written agreement between the parties, "and an evaluation of the air-conditioning system as
installed by the defendant showed the following defects and violations of the specifications of the
agreement, to wit:

"GROUND FLOOR.

"A. RIGHT WING.

Equipped with Worthington Compressor, Model 2VC4 directly driven by an Hp

Elin electric motor 1750 ramp, 3 phase, 60 cycles, 220 volts, complete with
starter evaporative condenser circulating water pump, air handling unit air ducts.

Defects Noted.

1. Deteriorated evaporative condenser panels, coils are full of scales and

heavy corrosion is very evident.
2. Defective gauges of compressors.
3. No belt guard on motor.
 4. Main switch has no cover.
5. Desired room temperature not attained.

Aside from the above defects, the following were noted not installed although
provided in the specifications.

1. Face and by-pass damper of G.I. sheets No. 16. This damper regulates
the flow of cooled air depending on room condition.
2. No fresh air intake provision were provided which is very necessary for
efficient comfort cooling.
3. No motor to regulate the face and by-pass.
4. Liquid level indicator for refrigerant not provided.
5. Suitable heat exchanger is not installed. This is an important component
to increase refrigeration efficiency.
6. Modulating thermostat not provided.
7. Water treatment device for evaporative condenser was not provided.
8. Liquid receiver not provided by sight glass.

"B. LEFT WING.

Worthington Compressor Model 2VC4 is Installed complete with 15 Hp electric

motor, 3 phase, 220 volts 60 cycles with starter.

Defects Noted.

Same as right wing, except No. 4. All other defects on right wing are
common to the left wing.

"SECOND FLOOR. (Common up to EIGHT FLOORS)

Compressors installed are MELCO with 7.5 Hp V-belt driven by 1800 RPM, 220
volts, 60 cycles, 3 phase, Thrige electric motor with starters.

As stated in the specifications under Section No. IV, the MELCO compressors do
not satisfy the conditions stated therein due to the following.

1. MELCO Compressors are not provided with automatic capacity

unloader.
2. Not provided with oil pressure safety control.
3. Particular compressors do not have provision for renewal
sleeves.

Out of the total 15 MELCO compressors installed to serve the 2nd floor up to 8th
floors, only six (6) units are in operation and the rest were already replaced. Of
the remaining six (6) units, several of them have been replaced with bigger
crankshafts.

"NINTH FLOOR.

Two (2) Worthington 2VC4 driven by 15 Hp, 3 phase, 220 volts, 60

cycles, 1750 rpm, Higgs motors with starters.

Defects Noted are similar to ground floor.

"GENERAL REMARKS.

Under Section III, Design conditions of specification for air conditioning

work, and taking into account "A" & "B" same, the present systems are
not capable of maintaining the desired room temperature of 76 = 2ºF
(sic).
 The present tenant have installed 35 window type air conditioning units
distributed among the different floor levels. Temperature measurements
conducted on March 29, 1971, revealed that 78ºF room (sic) is only
maintained due to the additional window type units."

The trial court, after evaluating the evidence presented, held that, indeed, petitioner failed to install items
and parts required in the contract and substituted some other items which were not in accordance with the
specifications 18 , thus:

"From all of the foregoing, the Court is persuaded to believe the plaintiff that not only had
the defendant failed to install items and parts provided for in the specifications of the air-
conditioning system be installed, like face and by-pass dampers and modulating
thermostat and many others, but also that there are items, parts and accessories which
were used and installed on the air-conditioning system which were not in full accord with
contract specifications. These omissions to install the equipment, parts and accessories
called for in the specifications of the contract, as well as the deviations made in putting
into the air-conditioning system equipment, parts and accessories not in full accord with
the contract specification naturally resulted to adversely affect the operational
effectiveness of the air-conditioning system which necessitated the installation of thirty-five
window type of air-conditioning units distributed among the different floor levels in order to
be able to obtain a fairly desirable room temperature for the tenants and actual occupants
of the building. The Court opines and so holds that the failure of the defendant to follow
the contract specifications and said omissions and deviations having resulted in the
operational ineffectiveness of the system installed makes the defendant liable to the
plaintiff in the amount necessary to rectify to put the air conditioning system in its proper
operational condition to make it serve the purpose for which the plaintiff entered into the
contract with the defendant."

The respondent Court affirmed the trial court's decision thereby making the latter's findings also its own.

Having concluded that the original complaint is one for damages arising from breach of a written contract -
and not a suit to enforce warranties against hidden defects - we herewith declare that the governing law is
Article 1715 (supra). However, inasmuch as this provision does not contain a specific prescriptive period, the
general law on prescription, which is Article 1144 of the Civil Code, will apply. Said provision states, inter
alia, that actions "upon a written contract" prescribe in ten (10) years. Since the governing contract was
executed on September 10, 1962 and the complaint was filed on May 8, 1971, it is clear that the action has
not prescribed.

What about petitioner's contention that "acceptance of the work by the employer relieves the contractor of
liability for any defect in the work"? This was answered by respondent Court 19 as follows:

"As the breach of contract which gave rise to the instant case consisted in appellant's
omission to install the equipment (sic), parts and accessories not in accordance with the
plan and specifications provided for in the contract and the deviations made in putting into
the air-conditioning system parts and accessories not in accordance with the contract
specifications, it is evident that the defect in the installation was not apparent at the time of
the delivery and acceptance of the work, consider in; further that plaintiff is not an expert
to recognize the same. From the very nature of things, it is impossible to determine by the
simple inspection of air conditioning system installed in an 8-floor building whether it has
been furnished and installed as per agreed specifications."

Verily, the mere fact that the private respondent accepted the work does not, ipso facto, relieve the petitioner
from liability for deviations from and violations of the written contract, as the law gives him ten (10) years
within which to file an action based on breach thereof.

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. No costs.

SO ORDERED.

Davide, Jr., Melo and Francisco, JJ., concur.

Footnotes
1. Rollo, pp. 36-51. aisadc
2. Special Tenth Decision, composed of J. Porfirio V. Sison, ponente, and JJ. Mariano Serrano and Rodolfo A.
Nocon, members.
3. Record on Appeal, pp. 497-510.
4. Judge Pedro C. Navarro presiding. cdta
5. CA Decision, p. 6; Rollo, p. 40.
6. Record on Appeal, p. 94.
7. Navarro vs. Court of Appeals, 209 SCRA 612 (June 8, 1992), citing Remalante vs. Tibe, et al., 158 SCRA 138
(February 25, 1988). cdasia
8. Chua Tiong Tay vs. Court of Appeals and Goldrock Construction and Development Corp., G.R. No. 112130,
March 31, 1995; J. Flerida Ruth P. Romero, ponente.
9. South Sea Surety and Insurance Company, Inc. vs. Hon. Court of Appeals, et al., G.R. No. 102253, June 2,
1995; J. Jose C. Vitug, ponente.
10. Aquino and Aquino, The Civil Code of the Philippines, 1990 ed., vol. 3, p. 246. cdtai
11. Commissioner of Internal Revenue vs. Engineering Equipment and Supply Co., 64 SCRA 590 (June 30, 1975);
Inchausti & Co. vs. Ellis Cromwell, 20 Phil . 345 (October 16, 1911).
12. Vitug, Compendium on Civil Law and Jurisprudence, 1993 ed., p. 581.
13. Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, 1992 ed., vol. 5, p. 286, citing
4 Colin & Capitant 477. cdt
14. Art. 1567, Civil Code.
15. 210 SCRA 490 (June 26, 1992).
16. Id., citing Moles vs. Intermediate Appellate Court, 169 SCRA 777 (January 31, 1989). aisadc
17. Record on Appeal, pp. 3-8.
18. Record on Appeal, pp. 508-509.
19. Rollo, p. 48-49. Cdta
 EN BANC
[G.R. No. 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.

DECISION

AVANCEÑA, J p:

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 an allowance of a discount of 25
per cent of the invoiced prices, as commission on the sales; 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 within 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, reduces
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 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 purpose of making this return, the defendant, in its letter Exhibit L-1,
requested the plaintiff's prior consent with respect to said beds, which shows that it was not considered that
the defendant had a right, by virtue of the contract, to make this return. As regards the shipment of beds
without previous notice, it is insinuated in the record that these brass beds were precisely the ones so
shipped, and that, for this very reason, the plaintiff agreed to their return. And with respect to the so-called
commissions, we have said that they merely constituted a discount on the invoice price, and the reason for
applying this benefit to the beds sold directly by the plaintiff to persons in Iloilo was because, as the
defendant obligated itself in the contract to incur the expenses of advertisement of the plaintiff's beds, such
sales were to be considered as a result of that advertisement.

In respect to the defendant's obligation to order by the dozen, the only one expressly imposed by the
contract, the effect of its breach would only entitle the plaintiff to disregard the orders which the defendant
might place under other conditions; but if the plaintiff consents to fill them, he waives his right and cannot
complain for having acted thus at his own free will.

For the foregoing reasons, we are of opinion that the contract by and between the plaintiff and the defendant
was one of purchase and sale, and that the obligations the breach of which is alleged as a cause of action
are not imposed upon the defendant, either by agreement or by law. The judgment appealed from is
affirmed, with costs against the appellant. So ordered.

Arellano, C.J., Torres, Johnson, Street and Malcolm, JJ., concur.

 FIRST DIVISION
[G.R. No. 47538. June 20, 1941.]

GONZALO PUYAT & SONS, INC., petitioner, vs. ARCO AMUSEMENT COMPANY (formerly known as
Teatro Arco), respondent.

Feria & La O for petitioner.

J. W. Ferrier and Daniel Me. Gomez for respondent.

DECISION
LAUREL, J p:

This is a petition for the issuance of a writ of certiorari to the Court of Appeals for the purpose of reviewing
its decision in civil case G. R. No. 1023, entitled "Arco 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 its 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 are 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 cinematograph equipment and
machinery, and the Arco Amusement Company desiring to equip 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
Star 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 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 the 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 defendant, 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 order above mentioned was not the net price but rather the list price,
and that the defendant 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 expenses. 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 the 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 the 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 declarer 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 Instancia de
Manila, presidido entonces por el hoy Magistrado Honorable Marceliano
Montemayor.

"II. El Tribunal de Apelaciones incurrio en error de derecho al declarar que,

suponiendo que dicha relacion fuera 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 a devolver ala recurrida la diferencia o descuento de 25 por ciento
que la recurrente la diferencia o descuento de 25 por ciento que 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 Ill., 161; Bank v. Palmer, 47 Ill., 92; Hosser v. Copper, 8 Allen, 334;
Doles v. Merrill, 173 Mass., 411.) The letters, Exhibits 1 and 2, 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 of no other interpretation than that the respondent agreed to
purchase from the petitioner the equipment 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." (Italics 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 letters, 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 to not point to
anything but plain ordinary transaction where the respondent enters into a contract 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 respondent 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 respondent 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 is exchange
for the 10 per cent 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 of purchase and sale, is no ground for rescinding the contract of
purchase and sale, is no ground for rescinding 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 and Sons,
Inc., defendant-appellee," without pronouncement regarding costs. So ordered.

Avanceña, C. J., Diaz, Moran and Horrilleno, JJ., concur.

 EN BANC
[G.R. No. L-15113. January 28, 1961.]

ANTONIO MEDINA, petitioner, vs. COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.

Eusebio D. Morales for petitioner.

Solicitor General for respondent.

DECISION

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

Petition to review a decision of the Court of Tax Appeals upholding a tax assessment of
the Collector of Internal Revenue except with respect to the imposition of so-called
compromise penalties, which were set aside.

The records show that on or about May 20, 1944, petitioning taxpayer Antonio Medina married Antonia
Rodriguez. Before 1946, the spouses had neither property nor business of their own. Later, however,
petitioner, acquired forest concessions in the municipalities of San Mariano and Palanan in the Province of
Isabela. From 1946 to 1948, the logs cut and removed by the petitioner from his concessions were sold to
different persons in Manila through his agent, Mariano Osorio.

Some time in 1949, Antonia R. Medina, petitioner's wife, started to engage in business as a lumber dealer,
and up to around 1952, petitioner sold to her almost all the logs produced in his San Mariano concession.
Mrs. Medina, in turn, sold in Manila the logs bought from her husband through the same agent, Mariano
Osorio. The proceeds were, upon instructions from petitioner, either received by Osorio for petitioner or
deposited by said agent in petitioner's current account with the Philippine National Bank.

On the thesis that the sales made by petitioner to his wife were null and void pursuant to the provisions of
Article 1490 of the Civil Code of the Philippines (formerly, Art. 1458, Civil Code 1889), the Collector
considered the sales made by Mrs. Medina as the petitioner's original sales taxable under Section 186 of the
National Internal Revenue Code and, therefore, imposed a tax assessment on petitioner, calling for the
payment of P4,653.54 as deficiency sales taxes and surcharges from 1949 to 1952. This same assessment
of September 26, 1953 sought also the collection of another sum of P643.94 as deficiency sales tax and
surcharge based on petitioner's quarterly returns from 1946 to 1952.

On November 30, 1963, petitioner protested the assessment; however, respondent Collector insisted on his
demand. On July 9, 1954, petitioner filed a petition for reconsideration, revealing for the first time the
existence of an alleged premarital agreement of complete separation of properties between him and his
wife, and contending that the assessment for the years 1946 to 1952 had already prescribed. After one
hearing, the Conference Staff of the Bureau of Internal Revenue eliminated the 50% fraud penalty and held
that the taxes assessed against him before 1948 had already prescribed. Based on these findings, the
Collector issued a modified assessment, demanding the payment of only P3,325.68, computed as follows:

5% tax due on P7,209.83 — 1949 P 360.49

5% tax due on 16,945.55 — 1950 847.28
5% tax due on 16,874.52 — 1951 843.75
5% tax due on 11,009.94 — 1952 550.50
————
TOTAL sales tax due P2,602.02
25% Surcharge thereon 650.51
Short taxes per quarterly return, 3rd quarter, 1950 58.52
25% Surcharge thereon 14.63
————
TOTAL AMOUNT due & collectible P3,325.68

Petitioner again requested for reconsideration, but respondent Collector, in his letter of April 4, 1955, denied
the same.
Petitioner appealed to the Court of Tax Appeals, which rendered judgment as aforesaid. The court's
decision was based on two main findings, namely, (a) that there was no pre-marital agreement of absolute
separation of property between the Medina spouses; and (b) assuming that there was such an agreement,
the sales in question made by petitioner to his wife were fictitious, simulated, and not bona fide.

In his petition for review to this Court, petitioner raises several assignments of error revolving around the
central issue of whether or not the sales made by the petitioner to his wife could be considered as his
original taxable sales under the provisions of Section 186 of the National Internal Revenue Code.

Relying mainly on testimonial evidence that before their marriage, he and his wife executed and recorded a
pre-nuptial agreement for a regime of complete separation of property, and that all trace of the document
was lost on account of the war, petitioner imputes lack of basis for the tax court's factual findings that no
agreement of complete separation of property was ever executed by and between the spouses before their
marriage. We do not think so. Aside from the material inconsistencies in the testimony of petitioner's
witnesses pointed out by the trial court, the circumstantial evidence is against petitioner's claim. Thus, it
appears that at the time of the marriage between the petitioner and his wife, they neither had any property
nor business of their own, as to have really urged them to enter into the supposed property agreement.
Secondly, the testimony that the separation of property agreement was recorded in the Registry of Property
three months before the marriage, is patently absurd, since such a pre-nuptial agreement could not be
effective before marriage is celebrated, and would automatically be cancelled if the union was called off.
How then could it be accepted for recording prior to the marriage? In the third place, despite their insistence
on the existence of the ante-nuptial contract, the couple, strangely enough, did not act in accordance with its
alleged covenants. Quite the contrary, it was proved that even during their taxable years, the ownership,
usufruct, and administration of their properties and business were in the husband. And even when the wife
was engaged in lumber dealing, and she and her husband contracted sales with each other as aforestated,
the proceeds she derived from her alleged subsequent disposition of the logs — incidentally, by and through
the same agent of her husband, Mariano Osorio — were either received by Osorio for the petitioner or
deposited by said agent in petitioner's current account with the Philippine National Bank. Fourth, although
petitioner, a lawyer by profession, already knew, after he was informed by the Collector on or about
September of 1953, that the primary reason why the sales of logs to his wife could not be considered as the
original taxable sales was because of the express prohibition found in Article 1490 of the Civil Code of sales
between spouses married under a community system; yet it was not until July of 1954 that he alleged, for
the first time, the existence of the supposed property separation agreement. Finally, the Day Book of the
Register of Deeds on which the agreement would have been entered, had it really been registered as
petitioner insists, and which book was among those saved from the ravages of the war, did not show that the
document in question was among those recorded therein.

We have already ruled that when the credibility of witnesses is the one at issue, the trial court's judgment as
to their degree of credence deserves serious consideration by this Court (Collector vs. Bautista, et al., G. R.
Nos. L-12250, L-12259, May 27, 1959). This is all the more true in this case because not every copy of the
supposed agreement, particularly the one that was said to have been filed with the Clerk of Court of Isabela,
was accounted for as lost; so that, applying the "best evidence rule", the court did right in giving little or no
credence to the secondary evidence to prove the due execution and contents of the alleged document (see
Comments on the Rules of Court, Moran, 1957 Ed., Vol. 3, pp. 10-12).

The foregoing findings notwithstanding, the petitioner argues that the prohibition to sell expressed under
Article 1490 of the Civil Code has no application to the sales made by said petitioner to his wife, because
said transactions are contemplated and allowed by the provisions of Articles 7 and 10 of the Code of
Commerce. But said provisions merely state, under certain conditions, a presumption that the wife is
authorized to engage in business and for the incidents that flew therefrom when she so engages therein. But
the transactions permitted are those entered into with strangers, and do not constitute exceptions to the
prohibitory provisions of Article 1490 against sales between spouses.

Petitioner's contention that the respondent Collector cannot assail the questioned sales, he being a stranger
to said transactions, is likewise untenable. The government, as correctly pointed out by the Tax Court, is
always an interested party to all matters involving taxable transactions and, needless to say, qualified to
question their validity or legitimacy whenever necessary to block tax evasion.

Contracts violative of the provisions of Article 1490 of the Civil Code are null and void (Uy Sui Pin vs.
Cantollas, 70 Phil. 55; Uy Coque vs. Sioca, 45 Phil. 43). Being void transactions, the sales made by the
petitioner to his wife were correctly disregarded by the Collector in his tax assessments that considered as
the taxable sales those made by the wife through the spouses' common agent, Mariano Osorio. In upholding
that stand, the Court below committed no error.

It is also the petitioner's contention that the lower court erred in using illegally seized documentary evidence
against him. But even assuming arguendo the truth of petitioner's charge regarding the seizure, it is now
settled in this jurisdiction that illegally obtained documents and papers are admissible in evidence, if they are
found to be competent and relevant to the case (see Wong & Lee vs. Collector of Internal Revenue, 104
Phil., 469). In fairness to the Collector, however, it should be stated that petitioner's imputation is
vehemently denied by him, and relying on Sections 3, 9, 337 and 338 of the Tax Code and the pertinent
portions of Revenue Regulations No. V-1 and citing this Court's ruling in U.S. vs. Aviado 38 Phil., 10, the
Collector maintains that he and other internal revenue officers and agents could require the production of
books of accounts and other records from a taxpayer.

Having arrived at the foregoing conclusion, it becomes unnecessary to discuss the other issues raised,
which are but premised on the assumption that a pre-marital agreement of total separation of property
existed between the petitioner and his wife.

WHEREFORE, the decision appealed from is affirmed with costs against the petitioner.

Padilla, Bautista Angelo, Labrador, Barrera, Gutierrez David and Dizon, JJ ., concur.

Footnotes
1. See also Silverthorne Lumber Co. v. United States, 251 US 385, 64 L. ed. 319, 40 Ct. 182, 24 ALR 1426; Gouled v.
United States, 255 US 298, 65 L. ed. 647, 41 S. Ct. 261; Amos v. United States, 255 US 313, 65 L. ed. 654, 41 S.
Ct. 266; Agnello vs. United States, 269 US 20, 70 L. ed. 145, 46 S. Ct. 4, 51 ALR 409; Go Bart Importing Co. v.
United States, 282 US 344, 75 L. ed. 374, 51 S. Ct. 153; Grau v. United States, 287 US 124, 77 L. ed. 212, 53 S.
Ct. 38; McDonald v. United States, 335 US 451, 93 L. ed. 153, 69 S. Ct. 191; United States v. Jeffers, 342 US 48,
96 L. ed. 59, 72 S. Ct. 93.
 FIRST DIVISION
[G.R. No. 57499. June 22, 1984.]

MERCEDES CALIMLIM-CANULLAS, petitioner, vs. HON. WILLELMO FORTUN, Judge, Court of First
Instance of Pangasinan, Branch I, and CORAZON DAGUINES, respondents.

Fernandez Law Offices for petitioner.

Francisco Pulido for respondents.

DECISION

MELENCIO-HERRERA, J p:

A Petition for Review on Certiorari assailing the Decision, dated October 6, 1980, and
the Resolution on the Motion for Reconsideration, dated November 27, 1980, of the then
Court of First Instance of Pangasinan, Branch I, in Civil Case No, 15620 entitled
"Corazon DAGUINES vs. MERCEDES Calimlim-Canullas", upholding the sale of a
parcel of land in favor of DAGUINES but not of the conjugal house thereon.

The background facts may be summarized as follows: Petitioner MERCEDES Calimlim-Canullas and
FERNANDO Canullas were married on December 19, 1962. They begot five children. They lived in a small
house on the residential land in question with an area of approximately 891 square meters, located at
Bacabac, Bugallon, Pangasinan. After FERNANDO's father died in 1965, FERNANDO inherited the land.

In 1978, FERNANDO abandoned his family and was living with private respondent Corazon DAGUINES.
During the pendency of this appeal, they were convicted of concubinage in a judgment rendered on October
27, 1981 by the then Court of First Instance of Pangasinan, Branch II, which judgment has become final.

On April 15, 1980, FERNANDO sold the subject property with the house thereon to DAGUINES for the sum
of P2,000.00. In the document of sale, FERNANDO described the house as "also inherited by me from my
deceased parents."

Unable to take possession of the lot and house, DAGUINES initiated a complaint on June 19,1980 for
quieting of title and damages against MERCEDES. The latter resisted and claimed that the house in dispute
where she and her children were residing, including the coconut trees on the land, were built and planted
with conjugal funds and through her industry; that the sale of the land together with the house and
improvements to DAGUINES was null and void because they are conjugal properties and she had not given
her consent to the sale.

In its original judgment, respondent Court principally declared DAGUINES "as the lawful owner of the land in
question as well as the one-half (1/2) of the house erected on said land." Upon reconsideration prayed for by
MERCEDES, however, respondent Court resolved:

"WHEREFORE, the dispositive portion of the Decision of this Court, promulgated on

October 6, 1980, is hereby amended to read as follows:

"(1) Declaring plaintiff as the true and lawful owner of the land in question and the 10
coconut trees;

(2) Declaring as null and void the sale of the conjugal house to plaintiff on April 15,
1980 (Exhibit A) including the 3 coconut trees and other crops planted during the
conjugal relation between Fernando Canullas (vendor) and his legitimate wife,
herein defendant Mercedes Calimlim-Canullas;

xxx xxx xxx"

The issues posed for resolution are (1) whether or not the construction of a conjugal house on the exclusive
property of the husband ipso facto gave the land the character of conjugal property; and (2) whether or not
the sale of the lot together with the house and improvements thereon was valid under the circumstances
surrounding the transaction.
The determination of the first issue revolves around the interpretation to be given to the second paragraph of
Article 158 of the Civil Code, which reads:

"xxx xxx xxx

"Buildings constructed at the expense of the partnership during the marriage on land
belonging to one of the spouses also pertain to the partnership, but the value of the land
shall be reimbursed to the spouse who owns the same."

We hold that pursuant to the foregoing provision both the land and the building belong to the conjugal
partnership but the conjugal partnership is indebted to the husband for the value of the land. The spouse
owning the lot becomes a creditor of the conjugal partnership for the value of the lot, 1 which value would
be reimbursed at the liquidation of the conjugal partnership. 2

In his commentary on the corresponding provision in the Spanish Civil Code (Art. 1404), Manresa stated:

"El articulo cambia la doctrina; los edificios construidos durante el matrimonio en suelo
propio de uno de los conjuges son gananciales, abonandose el valor del suelo al conjuge
a quien pertenezca."

It is true that in the case of Maramba vs. Lozano, 3 relied upon by respondent Judge, it was held that the
land belonging to one of the spouses, upon which the spouses have built a house, becomes conjugal
property only when the conjugal partnership is liquidated and indemnity paid to the owner of the land. We
believe that the better rule is that enunciated by Mr. Justice JBL Reyes in Padilla vs. Paterno, 3 SCRA 678,
691 (1961), where the following was explained:

"As to the above properties, their conversion from paraphernal to conjugal assets should
be deemed to retroact to the time the conjugal buildings were first constructed thereon or
at the very latest, to the time immediately before the death of Narciso A. Padilla that
ended the conjugal partnership. They can not be considered to have become conjugal
property only as of the time their values were paid to the estate of the widow Concepcion
Paterno because by that time the conjugal partnership no longer existed and it could not
acquire the ownership of said properties. The acquisition by the partnership of these
properties was, under the 1943 decision, subject to the suspensive condition that their
values would be reimbursed to the widow at the liquidation of the conjugal partnership;
once paid, the effects of the fulfillment of the condition should be deemed to retroact to the
date the obligation was constituted (Art. 1187, New Civil Code). . . ."

The foregoing premises considered, it follows that FERNANDO could not have alienated the house and lot
to DAGUINES since MERCEDES had not given her consent to said sale. 4

Anent the second issue, we find that the contract of sale was null and void for being contrary to morals and
public policy. The sale was made by a husband in favor of a concubine after he had abandoned his family
and left the conjugal home where his wife and children lived and from whence they derived their support.
That sale was subversive of the stability of the family, a basic social institution which public policy cherishes
and protects. 5

Article 1409 of the Civil Code states inter alia that: contracts whose cause, object, or purpose is contrary to
law, morals, good customs, public order, or public policy are void and inexistent from the very beginning.

Article 1352 also provides that: "Contracts without cause, or with unlawful cause, produce no effect
whatsoever. The cause is unlawful if it is contrary to law, morals, good customs, public order, or public
policy."

Additionally, the law emphatically prohibits the spouses from selling property to each other subject to certain
exceptions. 6 Similarly, donations between spouses during marriage are prohibited. 7 And this is so
because if transfers or conveyances between spouses were allowed during marriage, that would destroy the
system of conjugal partnership, a basic policy in civil law. It was also designed to prevent the exercise of
undue influence by one spouse over the other, 8 as well as to protect the institution of marriage, which is
the cornerstone of family law. The prohibitions apply to a couple living as husband and wife without benefit
of marriage, otherwise, "the condition of those who incurred guilt would turn out to be better than those in
legal union." Those provisions are dictated by public interest and their criterion must be imposed upon the
will of the parties. That was the ruling in Buenaventura vs. Bautista, also penned by Justice JBL Reyes (CA)
50 O.G. 3679, and cited in Matabuena vs. Cervantes. 9 We quote hereunder the pertinent dissertation on
this point:

"We reach a different conclusion. While Art. 133 of the Civil Code considers as void a
donation between the spouses during the marriage, policy considerations of the most
exigent character as well as the dictates of morality require that the same prohibition
should apply to a common-law relationship.

"As announced in the outset of this opinion, a 1954 Court of Appeals decision,
Buenaventura vs. Bautista, 50 OG 3679, interpreting a similar provision of the old Civil
Code speaks unequivocally. If the policy of the law is, in the language of the opinion of the
then Justice J.B.L. Reyes of that Court, 'to prohibit donations in favor of the other consort
and his descendants because of fear of undue influence and improper pressure upon the
donor, a prejudice deeply rooted in our ancient law, . . ., then there is every reason to
apply the same prohibitive policy to persons living together as husband and wife without
benefit of nuptials. For it is not to be doubted that assent to such irregular connection for
thirty years bespeaks greater influence of one party over the other, so that the danger that
the law seeks to avoid is correspondingly increased'. Moreover, as pointed out by Ulpian
(in his lib 32 ad Sabinum, fr. 1), 'It would not be just that such donations should subsist,
lest the conditions of those who incurred guilt should turn out to be better.' So long as
marriage remains the cornerstone of our family law, reason and morality alike demand
that the disabilities attached to marriage should likewise attach to concubinage"
(Emphasis supplied).

WHEREFORE, the Decision of respondent Judge, dated October 6, 1980, and his Resolution of November
27, 1980 on petitioner's Motion for Reconsideration, are hereby set aside and the sale of the lot, house and
improvements in question, is hereby declared null and void. No costs.

SO ORDERED.

Teehankee, Plana, Relova, Gutierrez, Jr. and De la Fuente, JJ ., concur.

Footnotes
1. Tabotabo vs. Molero, 22 Phil. 418 (1912).
2. Vda. de Padilla vs. Paterno, 3 SCRA 678, 691 (1961).
3. 20 SCRA 474 (1967).
4. Article 166, Civil Code.
5. Article 216, Civil Code.
6. Article 1490, ibid.
7. Article 133, ibid.
8. Article 1337, ibid.
9. 38 SCRA 284 (1971).
 FIRST DIVISION
[G.R. No. 125172. June 26, 1998.]

Spouses ANTONIO and LUZVIMINDA GUIANG, petitioners, vs. COURT OF APPEALS and GILDA
CORPUZ, respondents.

DECISION

PANGANIBAN, J p:

The sale of a conjugal property requires the consent of both the husband and the wife. The absence of the
consent of one renders the sale null, and void, while the vitiation thereof makes it merely voidable. Only in
the latter case can ratification cure the defect.

The Case

These were the principles that guided the Court in deciding this petition for review of the Decision 1 dated
January 30, 1996 and the Resolution 2 dated May 28, 1996, promulgated by the Court of Appeals in CA-GR
CV No. 41758, affirming the Decision of the lower court and denying reconsideration, respectively.

On May 28, 1990, Private Respondent Gilda Corpuz filed an Amended Complaint 3 against her husband
Judie Corpuz and Petitioners-Spouses Antonio and Luzviminda Guiang. The said Complaint sought the
declaration of a certain deed of sale, which involved the conjugal property of private respondent and her
husband, null and void. The case was raffled to the Regional Trial Court of Koronadal, South Cotabato,
Branch 25. In due course, the trial court rendered a Decision 4 dated September 9, 1992, disposing as
follows: 5

"ACCORDINGLY, judgment is rendered for the plaintiff and against the defendants,

1. Declaring both the Deed of Transfer of Rights dated March 1, 1990 (Exh. 'A') and
the 'amicable settlement' dated March 16, 1990 (Exh. 'B') as null and void and of
no effect;

2. Recognizing as lawful and valid the ownership and possession of plaintiff Gilda
Corpuz over the remaining one-half portion of Lot 9, Block 8, (LRC) Psd-165409
which has been the subject of the Deed of Transfer of Rights (Exh. 'A');

3. Ordering plaintiff Gilda Corpuz to reimburse defendants Luzviminda and Antonio

Guiang the amount of NINE THOUSAND (P9,000.00) PESOS corresponding to
the payment made by defendants Guiangs to Manuel Callejo for the unpaid
balance of the account of plaintiff in favor of Manuel Callejo, and another sum of
P379.62 representing one-half of the amount of realty taxes paid by defendants
Guiangs on Lot 9, Block 8, (LRC) Psd-165409, both with legal interests thereon
computed from the finality of the decision.

No pronouncement as to costs in view of the factual circumstances of the case."

Dissatisfied, petitioners-spouses filed an appeal with the Court of Appeals. Respondent

Court, in its challenged Decision, ruled as follows: 6

"WHEREFORE, the appealed decision of the lower court in Civil Case No. 204 is hereby
AFFIRMED by this Court. No costs considering plaintiff-appellee's failure to file her brief,
despite notice."

Reconsideration was similarly denied by the same court in its assailed Resolution: 7

"Finding that the issues raised in defendants-appellants' motion for reconsideration of Our
decision in this case of January 30, 1996, to be a mere rehash of the same issues which
We have already passed upon in the said decision, and there [being] no cogent reason to
 disturb the same, this Court RESOLVES to DENY the instant motion for reconsideration
for lack of merit."

The Facts

The facts of this case are simple. Over the objection of private respondent and while she was in Manila
seeking employment, her husband sold to the petitioners-spouses one half of their conjugal property,
consisting of their residence and the lot on which it stood. The circumstances of this sale are set forth in the
Decision of Respondent Court, which quoted from the Decision of the trial court. as follows: 8

"1. Plaintiff Gilda Corpuz and defendant Judie Corpuz are legally married spouses. They were married on
December 24, 1968 in Bacolod City, before a judge. This is admitted by defendants-spouses Antonio and
Luzviminda Guiang in their answer, and also admitted by defendant Judie Corpuz when he testified in court
(tsn. p. 3, June 9, 1992), although the latter says that they were married in 1967. The couple have three
children, namely: Junie — 18 years old, Harriet — 17 years of age, and Jodie or Joji, the youngest, who was 15
years of age in August, 1990 when her mother testified in court.

Sometime on February 14, 1983, the couple Gilda and Judie Corpuz, with plaintiff-wife Gilda
Corpuz as vendee, bought a 421 sq. meter lot located in Barangay Gen. Paulino Santos (Bo. 1),
Koronadal, South Cotabato, and particularly known as Lot 9, Block 8, (LRC) Psd-165409 from
Manuel Callejo who signed as vendor through a conditional deed of sale for a total consideration of
P14,735.00. The consideration was payable in installment, with right of cancellation in favor of
vendor should vendee fail to pay three successive installments (Exh. '2', tsn. p. 6, February 14,
1990).

2. Sometime on April 22, 1988, the couple Gilda and Judie Corpuz sold one-half portion of their Lot
No. 9, Block 8, (LRC) Psd-165409 to the defendants-spouses Antonio and Luzviminda Guiang. The
latter have since then occupied the one-half portion [and] built their house thereon (tsn. p. 4, May
22, 1992). They are thus adjoining neighbors of the Corpuzes.

3. Plaintiff Gilda Corpuz left for Manila sometime in June 1989. She was trying to look for work
abroad, in [the] Middle East. Unfortunately, she became a victim of an unscrupulous illegal
recruiter. She was not able to go abroad. She stayed for sometime in Manila however, coming back
to Koronadal, South Cotabato, . . . on March 11, 1990. Plaintiff's departure for Manila to look for
work in the Middle East was with the consent of her husband Judie Corpuz (tsn. p. 16, Aug. 12,
1990; p. 10, Sept. 6, 1991).

After his wife's departure for Manila, defendant Judie Corpuz seldom went home to the conjugal
dwelling. He stayed most of the time at his place of work at Samahang Nayon Building, a hotel,
restaurant, and a cooperative. Daughter Harriet Corpuz went to school at King's College, Bo. 1,
Koronadal, South Cotabato, but she was at the same time working as household help of, and
staying at, the house of Mr. Panes. Her brother Junie was not working. Her younger sister Jodie
(Joji) was going to school. Her mother sometimes sent them money (tsn. p. 14, Sept. 6, 1991).

Sometime in January 1990, Harriet Corpuz learned that her father intended to sell the remaining
one-half portion including their house, of their homelot to defendants Guiangs. She wrote a letter to
her mother informing her. She [Gilda Corpuz] replied that she was objecting to the sale. Harriet,
however, did not inform her father about this; but instead gave the letter to Mrs. Luzviminda Guiang
so that she [Guiang] would advise her father (tsn. pp. 16-17, Sept. 6, 1991).

4. However, in the absence of his wife Gilda Corpuz, defendant Judie Corpuz pushed through the
sale of the remaining one-half portion of Lot 9, Block 8, (LRC) Psd-165409. On March 1, 1990, he
sold to defendant Luzviminda Guiang thru a document known as 'Deed of Transfer of Rights' (Exh.
'A') the remaining one-half portion of their lot and the house standing thereon for a total
consideration of P30,000.00 of which P5,000.00 was to be paid in June, 1990. Transferor Judie
Corpuz's children Junie and Harriet signed the document as witnesses.

Four (4) days after March 1, 1990 or on March 5, 1990, obviously to cure whatever defect in
defendant Judie Corpuz's title over the lot transferred, defendant Luzviminda Guiang as vendee
executed another agreement over Lot 9, Block 8, (LRC) Psd-165408 (Exh. '3'), this time with
Manuela Jimenez Callejo, a widow of the original registered owner from whom the couple Judie
and Gilda Corpuz originally bought the lot (Exh. '2'), who signed as vendor for a consideration of
P9,000.00. Defendant Judie Corpuz signed as a witness to the sale (Exh. '3-A'). The new sale
 (Exh. '3') describes the lot sold as Lot 8, Block 9, (LRC) Psd-165408 but it is obvious from the mass
of evidence that the correct lot is Lot 8, Block 9, (LRC) Psd-165409, the very lot earlier sold to the
couple Gilda and Judie Corpuz.

5. Sometime on March 11, 1990, plaintiff returned home. She found her children staying with other
households. Only Junie was staying in their house. Harriet and Joji were with Mr. Panes. Gilda
gathered her children together and stayed at their house. Her husband was nowhere to be found.
She was informed by her children that their father had a wife already.

6. For staying in their house sold by her husband, plaintiff was complained against by defendant
Luzviminda Guiang and her husband Antonio Guiang before the Barangay authorities of Barangay
General Paulino Santos (Bo. 1), Koronadal, South Cotabato, for trespassing (tsn. p. 34, Aug. 17,
1990). The case was docketed by the barangay authorities as Barangay Case No. 38 for
'trespassing'. On March 16, 1990, the parties thereat signed a document known as 'amicable
settlement'. In full, the settlement provides for, to wit:

'That respondent, Mrs. Gilda Corpuz and her three children, namely: Junie,
Hariet and Judie to leave voluntarily the house of Mr. and Mrs. Antonio Guiang,
where they are presently boarding without any charge, on or before April 7, 1990.
FAIL NOT UNDER THE PENALTY OF THE. LAW.'

Believing that she had received the shorter end of the bargain, plaintiff went to the Barangay
Captain of Barangay Paulino Santos to question her signature on the amicable settlement. She
was referred however to the Officer-in-Charge at the time, a certain Mr. de la Cruz. The latter in
turn told her that he could not do anything on the matter (tsn. p. 31, Aug. 17, 1990).

This particular point was not rebutted. The Barangay Captain who testified did not deny that Mrs.
Gilda Corpuz. approached him for the annulment of the settlement. He merely said he forgot
whether Mrs. Corpuz had approached him (tsn. p. 13, Sept. 26, 1990). We thus conclude that Mrs.
Corpuz really approached the Barangay Captain for the annulment of the settlement. Annulment
not having been made, plaintiff stayed put in her house and lot.

7. Defendant-spouses Guiang followed thru the amicable settlement with a motion for the execution of
the amicable settlement, filing the same with the Municipal Trial Court of Koronadal, South
Cotabato. The proceedings [are] still pending before the said court, with the filing of the instant suit.

8. As a consequence of the sale, the spouses Guiang spent P600.00 for the preparation of the Deed
of Transfer of Rights, Exh. 'A'; P9,000.00 as the amount they paid to Mrs. Manuela Callejo, having
assumed the remaining obligation of the Corpuzes to Mrs. Callejo (Exh. '3'); P100.00 for the
preparation of Exhibit '3'; a total of P759.62 basic tax and special educational fund on the lot;
P127.50 as the total documentary stamp tax on the various documents; P535.72 for the capital
gains tax; P22.50 as transfer tax; a standard fee of P17.00; certification fee of P5.00. These
expenses particularly the taxes and other expenses towards the transfer of the title to the spouses
Guiangs were incurred for the whole Lot 9, Block 8, (LRC) Psd-165409."

Ruling of Respondent Court

Respondent Court found no reversible error in the trial court's ruling that any alienation or encumbrance by
the husband of the conjugal property without the consent of his wife is null and void as provided under
Article 124 of the Family Code. It also rejected petitioners' contention that the "amicable settlement" ratified
said sale, citing Article 1409 of the Code which expressly bars ratification of the contracts specified therein,
particularly those "prohibited or declared void by law."

Hence, this petition. 9

The Issues

In their Memorandum, petitioners assign to public respondent the following errors: 10

"I
Whether or not the assailed Deed of Transfer of Rights was validly executed.
 II
Whether or not the Court of Appeals erred in not declaring as voidable contract under Art.
1390 of the Civil Code the impugned Deed of Transfer of Rights which was validly ratified
thru the execution of the 'amicable settlement' by the contending parties.

III
Whether or not the Court of Appeals erred in not setting aside the findings of the Court a
quo which recognized as lawful and valid the ownership and possession of private
respondent over the remaining one half (½) portion of the subject property."

In a nutshell, petitioners-spouses contend that (1) the contract of sale (Deed of Transfer of Rights) was
merely voidable, and (2) such contract was ratified by private respondent when she entered into an amicable
settlement with them.

This Court's Ruling

The petition is bereft of merit.

First Issue: Void or Voidable Contract?

Petitioners insist that the questioned Deed of Transfer of Rights was validly executed by the parties-litigants
in good faith and for valuable consideration. The absence of private respondent's consent merely rendered
the Deed voidable under Article 1390 of the Civil Code, which provides:

"ART. 1390. The following contracts are voidable or annullable, even though there
may have been no damage to the contracting parties:

xxx xxx xxx

(2) Those where the consent is vitiated by mistake, violence, intimidation, undue
influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court. They
are susceptible of ratification.(n)"

The error in petitioners' contention is evident. Article 1390, par. 2, refers to contracts visited by vices of
consent, i.e., contracts which were entered into by a person whose consent was obtained and vitiated
through mistake, violence, intimidation, undue influence or fraud. In this instance, private respondent's
consent to the contract of sale of their conjugal property was totally inexistent or absent. Gilda Corpuz, on
direct examination, testified thus: 11

"Q Now, on March 1, 1990, could you still recall where you were?
A I was still in Manila during that time.

xxx xxx xxx

ATTY. FUENTES:
Q When did you come back to Koronadal, South Cotabato?
A That was on March 11, 1990, Ma'am.

Q Now, when you arrived at Koronadal, was there any problem which arose
concerning the ownership of your residential house at Callejo Subdivision?
A When I arrived here in Koronadal, there was a problem which arose regarding
my residential house and lot because it was sold by my husband without my
knowledge."

This being the case, said contract properly falls within the ambit of Article 124 of the Family Code, which
was correctly applied by the two lower courts:

"ART. 124. The administration and enjoyment of the conjugal partnership property
shall belong to both spouses jointly. In case of disagreement, the husband's decision shall
 prevail, subject to recourse to the court by the wife for proper remedy, which must be
availed of within five years from the date of the contract implementing such decision.
In the event that one spouse is incapacitated or otherwise unable to participate in the
administration of the conjugal properties, the other spouse may assume sole powers of
administration. These powers do not include the powers of disposition or encumbrance
which must have the authority of the court or the written consent of the other spouse. In
the absence of such authority or consent, the disposition or encumbrance shall be void.
However, the transaction shall be construed as a continuing offer on the part of the
consenting spouse and the third person, and may be perfected as a binding contract upon
the acceptance by the other spouse or authorization by the court before the offer is
withdrawn by either or both offerors. (165a)" (emphasis supplied)

Comparing said law with its equivalent provision in the Civil Code, the trial court adroitly explained the
amendatory effect of the above provision in this wise: 12

"The legal provision is clear. The disposition or encumbrance is void. It becomes still
clearer if we compare the same with the equivalent provision of the Civil Code of the
Philippines. Under Article 166 of the Civil Code, the husband cannot generally alienate or
encumber any real property of the conjugal partnership without the wife's consent. The
alienation or encumbrance if so made however is not null and void. It is merely voidable.
The offended wife may bring an action to annul the said alienation or encumbrance. Thus,
the provision of Article 173 of the Civil Code of the Philippines, to wit:

'Art. 173.The wife may, during the marriage and within ten years from the
transaction questioned, ask the courts for the annulment of any contract of the
husband entered into without her consent, when such consent is required, or any
act or contract of the husband which tends to defraud her or impair her interest in
the conjugal partnership property. Should the wife fail to exercise this right, she
or her heirs after the dissolution of the marriage, may demand the value of
property fraudulently alienated by the husband.(n)'

This particular provision giving the wife ten (10) years . . . during [the] marriage to annul
the alienation or encumbrance was not carried over to the Family Code. It is thus clear
that any alienation or encumbrance made after August 3, 1988 when the Family Code
took effect by the husband of the conjugal partnership property without the consent of the
wife is null and void."

Furthermore, it must be noted that the fraud and the intimidation referred to by petitioners were perpetrated
in the execution of the document embodying the amicable settlement. Gilda Corpuz alleged during trial that
barangay authorities made her sign said document through misrepresentation and coercion. 13 In any
event, its execution does not alter the void character of the deed of sale between the husband and the
petitioners-spouses, as will be discussed later. The fact remains that such contract was entered into without
the wife's consent.

In sum, the nullity of the contract of sale is premised on the absence of private respondent's consent. To
constitute a valid contract, the Civil Code requires the concurrence of the following elements: (1) cause, (2)
object, and (3) consent, 14 the last element being indubitably absent in the case at bar.

Second Issue: Amicable Settlement

Insisting that the contract of sale was merely voidable, petitioners aver that it was duly ratified by the
contending parties through the "amicable settlement" they executed on March 16, 1990 in Barangay Case
No. 38.

The position is not well taken. The trial and the appellate courts have resolved this issue in favor of the
private respondent. The trial court correctly held: 15

"By the specific provision of the law [Art. 1390, Civil Code] therefore, the Deed of Transfer
of Rights (Exh. 'A') cannot be ratified, even by an 'amicable settlement'. The participation
by some barangay authorities in the 'amicable settlement' cannot otherwise validate an
 invalid act. Moreover, it cannot be denied that the 'amicable settlement' (Exh. 'B') entered
into by plaintiff Gilda Corpuz and defendant spouses Guiang is a contract. It is a direct
offshoot of the Deed of Transfer of Rights (Exh. 'A'). By express provision of law, such a
contract is also void. Thus, the legal provision, to wit:

'Art. 1422. A contract which is the direct result of a previous illegal

contract, is also void and inexistent.' (Civil Code of the Philippines).

In summation therefore, both the Deed of Transfer of Rights (Exh. 'A') and the 'amicable
settlement' (Exh. '3') are null and void."

Doctrinally and clearly, a void contract cannot be ratified. 16

Neither can the "amicable settlement" be considered a continuing offer that was accepted and perfected by
the parties, following the last sentence of Article 124. The order of the pertinent events is clear: after the
sale, petitioners filed a complaint for trespassing against private respondent, after which the barangay
authorities secured an "amicable settlement" and petitioners filed before the MTC a motion for its execution.
The settlement, however, does not mention a continuing offer to sell the property or an acceptance of such a
continuing offer. Its tenor was to the effect that private respondent would vacate the property. By no stretch
of the imagination, can the Court interpret this document as the acceptance mentioned in Article 124.

WHEREFORE, the Court hereby DENIES the petition and AFFIRMS the challenged Decision and
Resolution. Costs against petitioners.

SO ORDERED.

Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ ., concur.

Footnotes
1. Penned by J. Lourdes K. Tayao-Jaguros and concurred in by JJ. Jorge S. Imperial, division chairman, and B.A.
Adefuin-De la Cruz; rollo, pp. 47-57.
2. Justice Oswaldo D. Agcaoili replaced Justice Imperial in the special former Ninth Division; rollo, p. 58.
3. Docketed as Civil Case No. 284; rollo, pp. 22-27.
4. Penned by Judge Francisco S. Ampig, Jr.
5. RTC Decision, p. 12; rollo, p. 42.
6. CA Decision, p. 10; rollo, p. 56.
7. Rollo, p. 58.
8. CA Decision, pp. 2-6; rollo, pp. 48-52.
9. This case was submitted for decision upon receipt by the Court of private respondent's Memorandum on
November 17, 1997.
10. Rollo, pp. 91-92.
11. TSN, August 17, 1990, pp. 16-17.
12. Rollo, p. 37.
13. TSN, August 17, 1990, pp. 13-14.
14. Art. 1318, Civil Code.
15. Rollo p. 38.
16. Art. 1409; Civil Code; and Tongoy vs. Court of Appeals, 123 SCRA 99, 119-121, June 28, 1983, per Makasiar, J
.
 FIRST DIVISION
[G.R. No. L-35702. May 29, 1973.]

DOMINGO D. RUBIAS, plaintiff-appellant, vs. ISAIAS BATILLER, defendant-appellee.

Gregorio M. Rubias for plaintiff-appellant.

Vicente R. Acsay for defendant-appellee.

DECISION

TEEHANKEE, J p:

In this appeal certified by the Court of Appeals to this Court as involving purely legal questions, we affirm the
dismissal order rendered by the Iloilo court of first instance after pre-trial and submittal of the pertinent
documentary exhibits.

Such dismissal was proper, plaintiff having no cause of action, since it was duly established in the record
that the application for registration of the land in question filed by Francisco Militante, plaintiff's vendor and
predecessor in interest, had been dismissed by decision of 1952 of the land registration court as affirmed by
final judgment in 1958 of the Court of Appeals and hence, there was no title or right to the land that could be
transmitted by the purported sale to plaintiff.

As late as 1964, the Iloilo court of first instance had in another case of ejectment likewise upheld by final
judgment defendant's "better right to possess the land in question . . . having been in the actual possession
thereof under a claim of title many years before Francisco Militante sold the land to the plaintiff."

Furthermore, even assuming that Militante had anything to sell, the deed of sale executed in 1956 by him in
favor of plaintiff at a time when plaintiff was concededly his counsel of record in the land registration case
involving the very land in dispute (ultimately decided adversely against Militante by the Court of Appeals'
1958 judgment affirming the lower court's dismissal of Militante's application for registration) was properly
declared inexistent and void by the lower court, as decreed by Article 1409 in relation to Article 1491 of the
Civil Code.

The appellate court, in its resolution of certification of 25 July 1972, gave the following backgrounder of the
appeal at bar:

"On August 31, 1964, plaintiff Domingo D. Rubias, a lawyer, filed a suit to recover the
ownership and possession of certain portions of lot under Psu-99791 located in Barrio
General Luna, Barotac Viejo, Iloilo which he bought from his father-in-law, Francisco
Militante in 1956 against its present occupant defendant, Isaias Batiller, who allegedly
entered said portions of the lot on two occasions — in 1945 and in 1959. Plaintiff prayed
also for damages and attorney's fees. (pp. 1-7, Record on Appeal). In his answer with
counter-claim defendant claims the complaint of the plaintiff does not state a cause of
action, the truth of the matter being that he and his predecessors-in-interest have always
been in actual, open and continuous possession since time immemorial under claim of
ownership of the portions of the lot in question and for the alleged malicious institution of
the complaint he claims he has suffered moral damages in the amount of P2,000.00, as
well as the sum of P500.00 for attorney's fees. . . .

"On December 9, 1964, the trial court issued a pre-trial order, after a pre-trial conference
between the parties and their counsel which order reads as follows:

'When this case was called for a pre-trial conference today, the plaintiff appeared
assisted by himself and Atty. Gregorio M. Rubias. The defendant also appeared,
assisted by his counsel Atty. Vicente R. Acsay.

A. During the pre-trial conference, the parties have agreed that the
following facts are attendant in this case and that they will no longer
introduce any evidence, testimonial or documentary to prove them:

1. That Francisco Militante claimed ownership of a parcel of land located in

the Barrio of General Luna, municipality of Barotac Viejo, province of
 Iloilo, which he caused to he surveyed on July 18-31, 1934, whereby he
was issued a plan Psu-99791 (Exhibit 'B'). (The land claimed contained
an area of 171.3561 hectares.)

2. Before the war with Japan, Francisco Militante filed with the Court of
First Instance of Iloilo an application for the registration of title of the
land technically described in Psu-99791 (Exh. 'B') opposed by the
Director of Lands, the Director of Forestry and other oppositors.
However, during the war with Japan, the record of the case was lost
before it was heard, so after the war Francisco Militante petitioned this
Court to reconstitute the record of the case. The record was
reconstituted in the Court of First Instance of Iloilo and docketed as
Land Case No. R-695, GLRO Rec. No. 54852. The Court of First
Instance heard the land registration case on November 11, 1952, and
after trial this Court dismissed the application for registration. The
applicant, Francisco Militante, appealed from the decision of this Court
to the Court of Appeals where the case was docketed as CA-G.R. No.
13497-R.

3. Pending the disposal of the appeal in CA-G.R. No. 13497-R and more
particularly on June 18, 1956, Francisco Militante sold to the plaintiff
Domingo Rubias, the land technically described in Psu-99791 (Exh. 'A').
The sale was duly recorded in the Office of the Register of Deeds for
the Province of Iloilo as Entry No. 13609 on July 14, 1960 (Exh. 'A-1').

(NOTE: As per the deed of sale, Exh. A, what Militante purportedly sold
to plaintiff-appellant, his son-in-law, for the sum of P2,000.00 was "a
parcel of untitled land having an area of 144.9072 hectares . . .
surveyed under Psu 99791 . . . (and) subject to the exclusions made by
me, under (case) CA-13497, Land Registration Case No. R-695,
G.L.R.O. No. 54852, Court of First Instance of the province of Iloilo.
These exclusions referred to portions of the original area of over 171
hectares originally claimed by Militante as applicant, but which he
expressly recognized during the trial to pertain to some oppositors, such
as the Bureau of Public Works and Bureau of Forestry and several other
individual occupants and accordingly withdrew his application over the
same. This is expressly made of record in Exh. A, which is the Court of
Appeals' decision of 22 September 1958 confirming the land registration
court's dismissal of Militante's application for registration.)

4. On September 22, 1958 the Court of Appeals in CA-G.R. No. 13497-R

promulgated its judgment confirming the decision of this Court in Land
Case No. R-695, GLRO Rec. No. 54852 which dismissed the
application for Registration filed by Francisco Militante (Exh. 'I').

5. Domingo Rubias declared the land described in Exh. 'B' for taxation
purposes under Tax Dec. No. 8585 (Exh. 'C') for 1957; Tax Dec. Nos.
9533 (Exh. 'C-1') and 10019 (Exh. 'C-3') for the year 1961; Tax Dec. No.
9868 (Exh. 'C-2') for the year 1964, paying the land taxes under Tax
Dec. No. 8585 and 9533 (Exh. 'D', 'D-1' & 'G-6').

6. Francisco Militante immediate predecessor-in-interest of the plaintiff,

has also declared the land for taxation purposes under Tax Dec. No.
5172 in 1940 (Exh. 'E') for 1945; under Tax Dec. No. T-86 (Exh. 'E-1')
for 1948; under Tax Dec. No. 7122 (Exh. '2'), and paid the land taxes for
1940 (Exhs. 'G' and 'G-7'), for 1945 46 (Exh. 'G-1') for 1947 (Exh. 'G-2'),
for 1947 & 1948 (Exh. 'G-3'), for 1948 (Exh. 'G-4'), and for 1948 and
1949 (Exh. 'G -5').

7. Tax Declaration No. 2434 in the name of Liberato Demontaño for the
land described therein (Exh. 'F') was cancelled by Tax. Dec. No. 5172 of
Francisco Militante (Exh. 'E'). Liberato Demontaño paid the land tax
 under Tax Dec. No. 2434 on Dec. 20, 1939 for the years 1938 (50%)
and 1959 (Exh. 'H').

8. The defendant had declared for taxation purposes Lot No. 2 of the Psu-
155241 under Tax Dec. Nos. 8583 for 1957 and a portion of Lot No. 2,
Psu-155241, for 1945 under Tax Dec. No. 8584 (Exh. '2-A'.) Tax No.
8583 (Exh. '2') was revised by Tax Dec. No. 9498 in the name of the
defendant (Exh. '2-B', and Tax Dec. No. 8584 (Exh. '2-A') was cancelled
by Tax Dec. No. 9584 also in the name of the defendant (Exh. '2-C').
The defendant paid the land taxes for Lot 2, Psu-155241, on Nov. 9,
1960 for the years 1945 and 1946, for the year 1950, and for the year
1960 as shown by the certificate of the treasurer (Exh. '3'). The
defendant may present to the Court other land taxes receipts for the
payment of taxes for this lot.

9. The land claimed by the defendant as his own was surveyed on June 6
and 7, 1956, and a plan approved by Director of Lands on November
15, 1956 was issued, identified as Psu 155241 (Exh. '5').

10. On April 22, 1960, the plaintiff filed a forcible Entry and Detainer case
against Isaias Batiller in the Justice of the Peace Court of Barotac Viejo,
Province of Iloilo (Exh. '4') to which the defendant Isaias Batiller filed his
answer on August 29, 1960 (Exh '4-A'). The Municipal Court of Barotac
Viejo after trial, decided the case on May 10, 1961 in favor of the
defendant and against the plaintiff (Exh. '4-B'). The plaintiff appealed
from the decision of the Municipal Court of Barotac Viejo which was
docketed in this Court as Civil Case No. 5750 on June 3, 1961 to which
the defendant, Isaias Batiller, on June 13, 1961 filed his answer (Exh.
'4-C'). And this Court after the trial, decided the case on November 26,
1964, in favor of the defendant, Isaias Batiller and against the plaintiff
(Exh. '4-D').

(NOTE: As per Exh. 4-B, which is the Iloilo court of first instance
decision of 26 November 1964 dismissing plaintiffs therein complaint for
ejectment against defendant, the Iloilo court expressly found "that
plaintiff's complaint is unjustified, intended to harass the defendant" and
"that the defendant, Isaias Batiller, has a better right to possess the land
in question described in Psu 155241 (Exh. "3"), Isaias Batiller having
been in the actual physical possession thereof under a claim of title
many years before Francisco Militante sold the land to the plaintiff;
hereby dismissing plaintiff's complaint and ordering the plaintiff to pay
the defendant attorney's fees . . .")

B. During the trial of this case on the merit, the plaintiff will prove by competent
evidence the following:

1. That the land he purchased from Francisco Militante under Exh. 'A' was
formerly owned and possessed by Liberato Demontaño, but that on
September 6, 1919 the land was sold at public auction by virtue of a
judgment in a Civil Case entitled 'Edw. J. Pflieder, plaintiff vs. Liberato
Demontaño, Francisco Balladeros and Gregorio Yulo, defendants', of
which Yap Pongco was the purchaser (Exh. '1-2'). The sale was
registered in the Office of the Register of Deeds of Iloilo on August 4,
1920, under Primary Entry No. 69 (Exh. '1-3') and a definite Deed of
Sale was executed by Constantino A. Canto, provincial Sheriff of Iloilo,
on Jan. 19, 1934 in favor of Yap Pongco (Exh. '1'), the sale having been
registered in the Office of the Register of Deeds of Iloilo on February 10,
1934 (Exh. '1-1').

2. On September 22, 1934, Yap Pongco sold this land to Francisco

Militante as evidenced by a notarial deed (Exh. 'J') which was registered
in the Registry of Deeds on May 13, 1940 (Exh. 'J-1').
 3. That plaintiff suffered damages alleged in his complaint.

C. Defendants, on the other hand will prove by competent evidence during the trial
of this case the following facts:

1. That Lot No. 2 of the Psu-155241 (Exh. '5') was originally owned and
possessed by Felipe Batiller, grandfather of the defendant, who was
succeeded by Basilio Batiller, on the death of the former in 1920, as his
sole heir. Isaias Batiller succeeded his father, Basilio Batiller, in the
ownership and possession being actual, open, public, peaceful and
continuous in the concept of an owner, exclusive of any other rights and
adverse to all other claimants.

2. That the alleged predecessors in interest of the plaintiff have never

been in the actual possession of the land and that they never had any
title thereto.

3. That Lot No. 2, Psu 155241, the subject of Free Patent application of
the defendant has been approved.

4. The damages suffered by the defendant as alleged in his counterclaim.'"

1

The appellate court further related the developments of the case, as follows:

"On August 17, 1965, defendant's counsel manifested in open court that before any trial
on the merit of the case could proceed he would file a motion to dismiss plaintiff's
complaint which he did, alleging that plaintiff does not have a cause of action against him
because the property in dispute which he (plaintiff) allegedly bought from his father-in-law,
Francisco Militante was the subject matter of LRC No. 695 filed in the CFI of Iloilo, which
case was brought on appeal to this Court and docketed as CA-G.R. No. 13497-R in which
aforesaid case plaintiff was the counsel on record of his father-in-law, Francisco Militante.
Invoking Arts. 1409 and 1491 of the Civil Code which reads:

'Art. 1409. The following contracts are inexistent and void from the
beginning:

xxx xxx xxx

(7) Those expressly prohibited or declared void by law.

'ART. 1491. The following persons cannot acquire any purchase, even at a
public or judicial auction, either in person or through the mediation of another:

xxx xxx xxx

(5) Justices, judges, prosecuting attorneys, clerks of superior and

inferior courts, and other officers and employees connected
with the administration of justice, the property and rights in
litigation or levied upon an execution before the court within
whose jurisdiction or territory their exercise their respective
functions; this prohibition includes the act of acquiring by
assignment and shall apply to lawyers, with respect to the
property and rights which may be the object of any litigation in
which they may take part by virtue of their profession.'

defendant claims that plaintiff could not have acquired any interest in the property in
dispute as the contract he (plaintiff) had with Francisco Militante was inexistent and void
(See pp. 22, 31, Record on Appeal). Plaintiff strongly opposed defendant's motion to
dismiss claiming that defendant can not invoke Articles 1409 and 1491 of the Civil Code
as Article 1422 of the same Code provides that 'The defense of illegality of contracts is not
 available to third persons whose interests are not directly affected' (See pp. 32-36, Record
on Appeal).

"On October 18, 1965, the lower court issued an order dismissing plaintiff's complaint (pp.
42-49, Record on Appeal.) In the aforesaid order of dismissal, the lower court practically
agreed with defendant's contention that the contract (Exh. A) between plaintiff and
Francisco Militante was null and void. In due season plaintiff filed a motion for
reconsideration (pp. 50-56, Record on Appeal) which was denied by the lower court on
January 14, 1966 (p. 57, Record on Appeal).

"Hence, this appeal by plaintiff from the orders of October 18, 1966 and January 14, 1966.
"Plaintiff-appellant imputes to the lower court the following errors:

'1. The lower court erred in holding that the contract of sale between the
plaintiff-appellant and his father-in-law, Francisco Militante, Sr., now
deceased, of the property covered by Plan Psu-99791, (Exh. 'A') was
void, not voidable because it was made when plaintiff-appellant was the
counsel of the latter in the Land Registration case.

'2. The lower court erred in holding that the defendant-appellee is an

interested person to question the validity of the contract of sale between
plaintiff-appellant and the deceased, Francisco Militante, Sr.

'3. The lower court erred in entertaining the motion to dismiss of the
defendant-appellee after he had already filed his answer, and after the
termination of the pre-trial, when the said notion to dismiss raised a
collateral question.

4. The lower court erred in dismissing the complaint of the plaintiff-

appellant.'"

The appellate court concluded that plaintiff's "assignment of errors gives rise to two (2) legal posers — (1)
whether or not the contract of sale between appellant and his father-in-law, the late Francisco Militante over
the property subject of Plan Psu-99791 was void because it was made when plaintiff was counsel of his
father-in-law in a land registration case involving the property in dispute; and (2) whether or not the lower
court was correct in entertaining defendant-appellee's motion to dismiss after the latter had already filed his
answer and after he (defendant) and plaintiff-appellant had agreed on some matters in a pre-trial
conference. Hence, its elevation of the appeal to this Court as involving pure questions of law.

It is at once evident from the foregoing narration that the pre-trial conference held by the trial court at which
the parties with their counsel agreed and stipulated on the material and relevant facts and submitted their
respective documentary exhibits as referred to in the pre-trial order, supra, 2 practically amounted to a
fulldress trial which placed on record all the facts and exhibits necessary for adjudication of the case.

The three points on which plaintiff reserved the presentation of evidence at the trial dealing with the source
of the alleged right and title of Francisco Militante's predecessors, supra, 3 actually are already made of
record in the stipulated facts and admitted exhibits. The chain of Militante's alleged title and right to the land
as supposedly traced back to Liberato Demontaño was actually asserted by Militante (and his vendee,
lawyer and son-in-law, herein plaintiff) in the land registration case and rejected by the Iloilo land registration
court which dismissed Militante's application for registration of the land. Such dismissal, as already stated,
was affirmed by the final judgment in 1958 of the Court of Appeals. 4

The four points on which defendant on his part reserved the presentation of evidence at the trial dealing with
his and his ancestors' continuous, open, public and peaceful possession in the concept of owner of the land
and the Director of Lands' approval of his survey plan thereof, supra, 5 are likewise already duly established
facts of record, in the land registration case as well as in the ejectment case wherein the Iloilo court of first
instance recognized the superiority of defendant's right to the land as against plaintiff.

No error was therefore committed by the lower court in dismissing plaintiff's complaint upon defendant's
motion after the pre-trial.
1. The stipulated facts and exhibits of record indisputably established plaintiff s lack of cause of action
and justified the outright dismissal of the complaint. Plaintiff's claim of ownership to the land in
question was predicated on the sale thereof for P2,000.00 made in 1956 by his father-in-law,
Francisco Militante, in his favor, at a time when Militante's application for registration thereof had
already been dismissed by the Iloilo land registration court and was pending appeal in the Court of
Appeals.

With the Court of Appeals' 1958 final judgment affirming the dismissal of Militante's application for
registration, the lack of any rightful claim or title of Militante to the land was conclusively and
decisively judicially determined. Hence, there was no right or title to the land that could be
transferred or sold by Militante's purported sale in 1956 in favor of plaintiff.

Manifestly, then plaintiff's complaint against defendant, to be declared absolute owner of the land
and to be restored to possession thereof with damages was bereft of any factual or legal basis.

2. No error could be attributed either to the lower court's holding that the purchase by a lawyer of the
property in litigation from his client is categorically prohibited by Article 1491, paragraph (5) of the
Philippine Civil Code, reproduced supra; 6 and that consequently, plaintiff's purchase of the
property in litigation from his client (assuming that his client could sell the same, since as already
shown above, his client's claim to the property was defeated and rejected) was void and could
produce no legal effect, by virtue of Article 1409, paragraph (7) of our Civil Code which provides
that contracts "expressly prohibited or declared void by law" are "inexistent and void from the
beginning" and that "(T)hese contracts cannot be ratified. Neither can the right to set up the
defense of illegality be waived."

The 1911 case of Wolfson vs. Estate of Martinez 7 relied upon by plaintiff as holding that a sale of property
in litigation to the party litigant's lawyer "its not void but voidable at the election of the vendor" was correctly
held by the lower court to have been superseded by the later 1929 case of Director of Lands vs. Abagat. 8 In
this later case of Abagat, the Court expressly cited two antecedent cases involving the same transaction of
purchase of property in litigation by the lawyer which was expressly declared invalid under Article 1459 of
the Civil Code of Spain (of which Article 1491 of our Civil Code of the Philippines is the counterpart) upon
challenge thereof not by the vendor-client but by the adverse parties against whom the lawyer was seeking
to enforce his rights as vendee thus acquired.

These two antecedent cases thus cited in Abagat clearly superseded (without so expressly stating) the
previous ruling in Wolfson:

"The spouses, Juan Soriano and Vicenta Macaraeg, were the owners of twelve parcels of
land. Vicenta Macaraeg died in November, 1909, leaving a large number of collateral heirs
but no descendants. Litigation between the surviving husband Juan Soriano, and the heirs
of Vicenta Macaraeg immediately arose, and the herein appellant Sisenando Palarca
acted as Soriano's lawyer. On May 2, 1918, Palarca filed an application for the registration
of the land described in the deed. After hearing, the Court of First Instance declared that
the deed was invalid by virtue of the provisions of article 1459 of the Civil Code, which
provides lawyers and solicitors from purchasing property rights involved in any litigation in
which they may take part by virtue of their profession. The application for registration was
consequently denied, and upon appeal by Palarca to the Supreme Court, the judgment of
the lower court was affirmed by a decision promulgated November 16, 1925. (G.R. No.
24329, Palarca vs. Director of Lands, not reported.)

"In the meantime cadastral case No. 30 of the Province of Tarlac was instituted, and on
August 21, 1923, Eleuteria Macaraeg, as administratrix of the estate of Vicenta Macaraeg,
filed claims for the parcels in question. Buenaventura Lavitoria, administrator of the estate
of Juan Soriano, did likewise and so did Sisenando Palarca. In a decision dated June 21,
1927, the Court of First Instance, Judge Carballo presiding, rendered judgment in favor of
Palarca and ordered the registration of the land in his name. Upon appeal to this court by
the administrators of the estates of Juan Soriano and Vicenta Macaraeg, the judgment of
the court below was reversed and the land adjudicated to the two estates as conjugal
property of the deceased spouses. (G.R. No. 28226, Director of Lands vs. Abagat,
promulgated May 21, 1928, not reported.)" 9
In the very case of Abagat itself, the Court, again affirming the invalidity and nullity of the lawyer's purchase
of the land in litigation from his client, ordered the issuance of a writ of possession for the return of the land
by the lawyer to the adverse parties without reimbursement of the price paid by him and other expenses,
and ruled that "the appellant Palarca is a lawyer and is presumed to know the law. He must, therefore, from
the beginning, have been well aware of the defect in his title and is, consequently, a possessor in bad faith."
As already stated, Wolfson and Abagat were decided with relation to Article 1459 of the Civil Code of Spain
then adopted here, until it was superseded on August 30, 1950 by the Civil Code of the Philippines whose
counterpart provision is Article 1491.

Article 1491 of our Civil Code (like Article 1459 of the Spanish Civil Code) prohibits in its six paragraphs
certain persons, by reason of the relation of trust or their peculiar control over the property, from acquiring
such property in their trust or control either directly or indirectly and "even at a public or judicial auction," as
follows: (1) guardians; (2) agents; (3) administrators; (4) public officers and employees; judicial officers and
employees, prosecuting attorneys, and lawyers; and (6) others especially disqualified by law.

In Wolfson, which involved the sale and assignment of a money judgment by the client to the lawyer,
Wolfson, whose right to so purchase the judgment was being challenged by the judgment debtor, the Court,
through Justice Moreland, then expressly reserved decision on "whether or not the judgment in question
actually falls within the prohibition of the article" and held only that the sale's "voidability can not be asserted
by one not a property to the transaction or his representative," citing from Manresa 10 that "(C)onsidering
the question from the point of view of the civil law, the view taken by the code, we must limit ourselves to
classifying as void all acts done contrary to the express prohibition of the statute. Now then: As the code
does not recognize such nullity by the mere operation of law, the nullity of the acts hereinbefore referred to
must be asserted by the person having the necessary legal capacity to do so and decreed by a competent
court." 11

The reason thus given by Manresa in considering such prohibited acquisitions under Article 1459 of the
Spanish Civil Code as merely voidable at the instance and option of the vendor and not void — "that the
Code does not recognize such nullity de pleno derecho" — is no longer true and applicable to our own
Philippine Civil Code which does recognize the absolute nullity of contracts "whose cause, object, or
purpose is contrary to law, morals, good customs, public order or public policy" or which are "expressly
prohibited or declared void by law" and declares such contracts "inexistent and void from the beginning." 12
The Supreme Court of Spain and modern authors have likewise veered from Manresa's view of the Spanish
codal provision itself. In its sentencia of 11 June 1966, the Supreme Court of Spain ruled that the prohibition
of Article 1459 of the Spanish Civil Code is based on public policy, that violation of the prohibition contract
cannot be validated by confirmation or ratification, holding that:

". . . la prohibicion que el articulo 1459 del C.C. establece respecto a los administradores
y apoderados, la cual tiene conforme a la doctrina de esta Sala, contenida entre otras, en
S. de 27-5-1959, un fundamento de orden moral, dando lugar la violacion de esta regla a
la nulidad de pleno derecho del acto " negocio celebrado, . . . y porque al realizarse el
acto juridico en contravencion con una prohibicion legal, afectante al orden publico, no
cabe con efecto alguno la aludida ratificacion . . ." 13

The criterion of nullity of such prohibited contracts under Article 1459 of the Spanish Civil Code (Article 1491
of our Civil Code) as a matter of public order and policy as applied by the Supreme Court of Spain to
administrators and agents in its above-cited decision should certainly apply with greater reason to judges,
judicial officers, fiscals and lawyers under paragraph 5 of the codal article.

Citing the same decision of the Supreme Court of Spain, Gullon Ballesteros, in his "Curso de Derecho Civil,
(Contratos Especiales)" (Madrid, 1968) p. 18, affirms that, with respect to Article 1459, Spanish Civil Code:

"Que caracter tendra la compra que se realice por estas personas? Por supuesto no cabe
duda de que en el caso del (art.) 1459, 4º y 5º, la nulidad es absoluta porque el motivo de
la prohibicion es de orden publico." 14

Perez Gonzales concurs in such view, stating that "Dado el caracter prohibitivo del precepto, la
consequencia de la infraccion es la nulidad radical y ex lege." 15

Castan, quoting Manresa's own observation that

 "El fundamento de esta prohibicion es clarisimo. No se trata con este precepto tan solo de
quitar la ocasion al fraude; persiguese, ademas, el proposito de rodear a las personas
que intervienen en la admunistracion de justicia de todos los restigios que necesitan para
ejercer su ministerio, librandolos de toda sospecha, que aunque fuere infundada,
redundar!a en descredito de la institucion." 16

arrives at the contrary and now accepted view that "Puede considerarse en nuestro
derecho inexistente o radicalmente nulo el contrato en los siguentes cases: a) . . . ; b)
cuando el contrato se ha celebrado en violacion de una prescripcion o prohibicion legal,
fundada sobre motivos de orden publico (hipotesis del art. 4 del Codigo) . . ." 17

It is noteworthy that Castan's rationale for his conclusion that fundamental considerations of public policy
render void and inexistent such expressly prohibited purchase (e.g. by public officers and employees of
government property entrusted to them and by justices, judges, fiscals and lawyers of property and rights in
litigation submitted to or handled by them, under Article 1491, paragraphs (4) and (5) of our Civil Code) has
been adopted in a new article of our Civil Code, viz, Article 1409 declaring such prohibited contracts as
"inexistent and void from the beginning." 18

Indeed, the nullity of such prohibited contracts is definite and permanent and cannot be cured by ratification.
The public interest and public policy remain paramount and do not permit of compromise or ratification. In
this aspect, the permanent disqualification of public and judicial officers and lawyers grounded on public
policy differs from the first three cases of guardians, agents and administrators (Article 1491, Civil Code), as
to whose transactions, it has been opined that they may be "ratified" by means of and in "the form of a new
contract, in which case its validity shall be determined only by the circumstances at the time of execution of
such new contract. The causes of nullity which have ceased to exist cannot impair the validity of the new
contract. Thus, the object which was illegal at the time of the first contract, may have already become lawful
at the time of the ratification or second contract; or the service which v. as impossible may have become
possible; or the intention which could not be ascertained may have been clarified by the parties. The
ratification or second contract would then be valid from its execution; however, it does not retroact to the
date of the first contract." 19

As applied to the case at bar, the lower court therefore properly acted upon defendant
appellant's motion to dismiss on the ground of nullity of plaintiff's alleged purchase of the
land, since its juridical effects and plaintiff's alleged cause of action founded thereon
were being asserted against defendant-appellant. The principles governing the nullity of
such prohibited contracts and judicial declaration of their nullity have been well restated
by Tolentino in his treatise on our Civil Code, as follows:

"Parties Affected. — Any person may invoke the inexistence of the contract whenever
juridical effects founded thereon are asserted against him. Thus, if there has been a void
transfer of property, the transferor can recover it by the accion reivindicatoria; and any
possessor may refuse to deliver it to the transferee, who cannot enforce the contract.
Creditors may attach property of the debtor which has been alienated by the latter under a
void contract; a mortgagee can allege the inexistence of a prior encumbrance; a debtor
can assert the nullity of an assignment of credit as a defense to an action by the assignee.

"Action On Contract. — Even when the contract is void or inexistent, an action is

necessary to declare its inexistence, when it has already been fulfilled. Nobody can take
the law into his own hands; hence, the intervention of the competent court is necessary to
declare the absolute nullity of the contract and to decree the restitution of what has been
given under it. The judgment, however, will retroact to the very day when the contract was
entered into.

"If the void contract is still fully executory, no party need bring an action to declare its
nullity; but if any party should bring an action to enforce it, the other party can simply set
up the nullity as a defense." 20
ACCORDINGLY, the order of dismissal appealed from is hereby affirmed, with costs in all instances against
plaintiff-appellant. So ordered.

Makalintal, Actg. C . J ., Zaldivar, Castro, Fernando, Barredo, Makasiar, Antonio and Esguerra, JJ ., concur.

Footnotes
1. Notes in parentheses and emphasis added.
2. At pages 2 to 5; sub-paragraphs 1 to 10 of Par A.
3. At pages 5 to 6; sub-paragraphs 1 to 3 of Par. B.
4. Exhibit "1".
5. At page 6; sub-paragraphs 1 to 4 of Par. C.
6. At page 7.
7. 20 Phil. 340, 342-343 (Oct. 13, 1911).
8. 53 Phil. 147 (March 27, 1929).
9. 53 Phil. at pp. 147-148; emphasis added.
10. Vol. 10, p. 108.
11. 20 Phil. at p. 343.
12. Article 1409, pars. (1) and (7), Philippine Civil Code.
13. Rodriguez Navarro, Doctrina Civil del Tribunal Supremo, Appendice de 1961-1966, pp. 693-694; emphasis
added.
14. Emphasis added.
15. Perez Gonzales & Alguer: Enneccerus, Derecho Civil, Tomo II - 2x, p. 26.
16. Castan, Derecho Civil, Tomo 4, p. 73 (9a Ed.), citing 10 Manresa 107; emphasis added.
17. Castan, Derecho Civil, Tomo 3, p. 437 (8a Ed.); emphasis added.
18. Tolentino in Vol. IV, p. 575, states as to the "Source of Article (that) This provision is new but merely groups
together contracts which have already been considered as void ab initio under the old Civil Code, as interpreted
by jurisprudence and commentators."
19. Idem, at pp. 578-579.
20. Idem, at p. 578.
 EN BANC
[G.R. No. L-8477. May 31, 1956.]

THE PHILIPPINE TRUST COMPANY, as Guardian of the Property of the minor,

MARIANO L. BERNARDO, petitioner, vs. SOCORRO ROLDAN, FRANCISCO
HERMOSO, FIDEL C. RAMOS and EMILIO CRUZ, respondents.

Cesar P. Canonizado and Enrique A. Santos for petitioner.

Nicodemus L. Dasig for respondents.

DECISION

BENGZON, J p:

As guardian of the property of the minor Mariano L. Bernardo, the Philippine Trust Company filed in the
Manila court of first instance a complaint to annul two contracts regarding 17 parcels of land: (a) sale thereof
by Socorro Roldan, as guardian of said minor, to Fidel C. Ramos; and (b) sale thereof by Fidel C. Ramos to
Socorro Roldan personally. The complaint likewise sought to annul a conveyance of four out of the said
seventeen parcels by Socorro Roldan to Emilio Cruz.

The action rests on the proposition that the first two sales were in reality a sale by the guardian to herself —
therefore, null and void under Article 1459 of the Civil Code. As to the third conveyance, it is also ineffective,
because Socorro Roldan had acquired no valid title to convey to Cruz.

The material facts of the case are not complicated. These 17 parcels located in Guiguinto, Bulacan, were
part of the properties inherited by Mariano L. Bernardo from his father, Marcelo Bernardo, deceased. In view
of his minority, guardianship proceedings were instituted, wherein Socorro Roldan was appointed his
guardian. She was the surviving spouse of Marcelo Bernardo, and the stepmother of said Mariano L.
Bernardo.

On July 27, 1947, Socorro Roldan filed in said guardianship proceedings (Special Proceeding 2485, Manila),
a motion asking for authority to sell as guardian the 17 parcels for the sum of P14,700 to Dr. Fidel C.
Ramos, the purpose of the sale being allegedly to invest the money in a residential house, which the minor
desired to have on Tindalo Street, Manila. The motion was granted.

On August 5, 1947 Socorro Roldan, as guardian, executed the proper deed of sale in favor of her brother-in-
law Dr. Fidel C. Ramos (Exhibit A-1), and on August 12, 1947 she asked for, and obtained, judicial
confirmation of the sale. On August 13, 1947, Dr. Fidel C. Ramos executed in favor of Socorro Roldan,
personally, a deed of conveyance covering the same seventeen parcels, for the sum of P15,000 (Exhibit A-
2). And on October 21, 1947 Socorro Roldan sold four parcels out of the seventeen to Emilio Cruz for
P3,000, reserving to herself the right to repurchase (Exhibit A-3).

The Philippine Trust Company replaced Socorro Roldan as guardian, on August 10, 1948. And this litigation,
started two months later, seeks to undo what the previous guardian had done. The step-mother in effect,
sold to herself, the properties of her ward, contends the plaintiff, and the sale should be annulled because it
violates Article 1459 of the Civil Code prohibiting the guardian from purchasing "either in person or through
the mediation of another" the property of her ward.

The court of first instance, following our decision in Rodriguez vs. Mactal, 60 Phil. 13 held the article was not
controlling, because there was no proof that Fidel C. Ramos was a mere intermediary or that the latter had
previously agreed with Socorro Roldan to buy the parcels for her benefit.

However, taking the former guardian at her word - she swore she had repurchased the lands from Dr. Fidel
C. Ramos to preserve it and to give her protege opportunity to redeem — the court rendered judgment
upholding the contracts but allowing the minor to repurchase all the parcels by paying P15,000, within one
year.

The Court of Appeals affirmed the judgment, adding that the minor knew the particulars of, and approved the
transaction, and that "only clear and positive evidence of fraud or bad faith, and not mere insinuations and
inferences will overcome the presumptions that a sale was concluded in all good faith for value".
At first glance the resolutions of both courts accomplished substantial justice: the minor recovers his
properties. But if the conveyances are annulled as prayed for, the minor will obtain a better deal: he receives
all the fruits of the lands from the year 1947 (Article 1303 Civil Code) and will return P14,700, not P15,000.

To our minds the first two transactions herein described couldn't be in a better juridical situation than if this
guardian had purchased the seventeen parcels on the day following the sale to Dr. Ramos. Now, if she was
willing to pay P15,000 why did she sell the parcels for less? In one day (or actually one week) the price
could not have risen so suddenly. Obviously when, seeking approval of the sale she represented the price to
be the best obtainable in the market, she was not entirely truthful. This is one phase to consider.

Again, supposing she knew the parcels were actually worth P17,000; then she agreed to sell them to Dr.
Ramos at P14,700; and knowing the realty's value she offered him the next day P15,000 or P15,500, and
got it. Will there be any doubt that she was recreant to her guardianship, and that her acquisition should be
nullified? Even without proof that she had connived with Dr. Ramos. Remembering the general doctrine that
guardianship is a trust of the highest order, and the trustee cannot be allowed to have any inducement to
neglect his ward's interest and in line with the court's suspicion whenever the guardian acquires the ward's
property 1 we have no hesitation to declare that in this case, in the eyes of the law, Socorro Roldan took by
purchase her ward's parcels thru Dr. Ramos, and that Article 1459 of the Civil Code applies.

She acted it may be true without malice; there may have been no previous agreement between her and Dr.
Ramos to the effect that the latter would buy the lands for her. But the stubborn fact remains that she
acquired her protege's properties, through her brother-in-law. That she planned to get them for herself at the
time of selling them to Dr. Ramos, may be deduced from the very short time between the two sales (one
week). The temptation which naturally besets a guardian so circumstanced, necessitates the annulment of
the transaction, even if no actual collusion is proved (so hard to prove) between such guardian and the
intermediate purchaser. This would uphold a sound principle of equity and justice. 2

We are aware of course that in Rodriguez vs. Mactal, 60 Phil. p. 13 wherein the guardian Mactal sold in
January 1926 the property of her ward to Silverio Chioco, and in March 1928 she bought it from Chioco, this
Court said:

"In order to bring the sale in this case within the part of Article 1459, quoted above, it is
essential that the proof submitted establish some agreement between Silverio Chioco and
Trinidad Mactal to the effect that Chioco should buy the property for the benefit of Mactal.
If there was no such agreement, either express or implied, then the sale cannot be set
aside. . . . (Page 16; Italics supplied.)"

However, the underlined portion was not intended to establish a general principle of law applicable to all
subsequent litigations. It merely meant that the subsequent purchase by Mactal could not be annulled in that
particular case because there was no proof of a previous agreement between Chioco and her. The court
then considered such proof necessary to establish that the two sales were actually part of one scheme —
guardian getting the ward's property through another person — because two years had elapsed between the
sales. Such period of time was sufficient to dispel the natural suspicion of the guardian's motives or actions.
In the case at bar, however, only one week had elapsed. And if we were technical, we could say, only one
day had elapsed from the judicial approval of the sale (August 12), to the purchase by the guardian (Aug.
13).

Attempting to prove that the transaction was beneficial to the minor, appellee's attorney alleges that the
money (P14,700) invested in the house on Tindalo Street produced for him rentals of P2,400 yearly;
whereas the parcels of land yielded to his step-mother only an average of P1,522 per year. 3 The argument
would carry some weight if that house had been built out of the purchase price of P14,700 only. 4 One thing
is certain: the calculation does not include the price of the lot on which the house was erected. Estimating
such lot at P14,700 only, (ordinarily the city lot is more valuable than the building) the result is that the price
paid for the seventeen parcels gave the minor an income of only P1,200 a year, whereas the harvest from
the seventeen parcels netted his step-mother a yearly profit of P1,522.00. The minor was thus on the losing
end.

Hence, from both the legal and equitable standpoints these three sales should not be sustained: the first two
for violation of article 1459 of the Civil Code; and the third because Socorro Roldan could pass no title to
Emilio Cruz. The annulment carries with is (Article 1303 Civil Code) the obligation of Socorro Roldan to
return the 17 parcels together with their fruits and the duty of the minor, through his guardian to repay
P14,700 with legal interest.

Judgment is therefore rendered:

a. Annulling the three contracts of sale in question; b. declaring the minor as the owner of the
seventeen parcels of land, with the obligation to return to Socorro Roldan the price of P14,700 with
legal interest from August 12, 1947; c. Ordering Socorro Roldan and Emilio Cruz to deliver said
parcels of land to the minor; d. Requiring Socorro Roldan to pay him beginning with 1947 the fruits,
which her attorney admits, amounted to P1,522 a year; e. Authorizing the minor to deliver directly
to Emilio Cruz, out of the price of P14,700 above mentioned, the sum of P3,000; and f. charging
appellees with the costs. So ordered.

Paras, C.J., Padilla, Montemayor, Reyes, A., Bautista Angelo, Concepcion, Reyes, J.B.L., and Endencia,
JJ., concur.

Footnotes
1. 25 Am. Jur. pp. 128, 130; Daniel vs. Tolon, 53 Okla. 666, 4 A. L. R. 704.
2. cf. Saverino vs. Severino, 44 Phil. 343. "No fraud in fact need be shown".
3. Appellee's brief, p. 20.
4. The contract with the builder called for P16,500.00; and Roldan said its total cost amounted to P18,720.00.
 FIRST DIVISION
[G.R. No. L-36902. January 30, 1982.]

LUIS PICHEL, petitioner, vs. PRUDENCIO ALONZO, respondent.

Flavio G. Macaso for petitioner.

Reynaldo Santos for respondent.

DECISION

GUERRERO, J p:

This is a petition to review on certiorari the decision of the Court of First Instance of Basilan City dated
January 5, 1973 in Civil Case No. 820 entitled "Prudencio Alonzo, plaintiff, vs. Luis Pichel, defendant."

This case originated in the lower Court as an action for the annulment of a "Deed of Sale" dated August 14,
1968 and executed by Prudencio Alonzo, as vendor, in favor of Luis Pichel, as vendee, involving property
awarded to the former by the Philippine Government under Republic Act No. 477. Pertinent portions of the
document sued upon read as follows:

"That the VENDOR for and in consideration of the sum of FOUR THOUSAND TWO
HUNDRED PESOS (P4,200.00), Philippine Currency, in hand paid by the VENDEE to the
entire satisfaction of the VENDOR, the VENDOR hereby sells, transfers, and conveys, by
way of absolute sale, all the coconut fruits of his coconut land, designated as Lot No. 21
— Subdivision Plan No. Psd-32465, situated at Balactasan Plantation, Lamitan, Basilan
City, Philippines;

"That for the herein sale of the coconut fruits are for all the fruits on the aforementioned
parcel of land presently found therein as well as for future fruits to be produced on the
said parcel of land during the years period; which shall commence to run as of
SEPTEMBER 15, 1968; up to JANUARY 1, 1976 (sic);

"That the delivery of the subject matter of the Deed of Sale shall be from time to time
and at the expense of the VENDEE who shall do the harvesting and gathering of the
fruits;

"That the Vendor's right, title, interest and participation herein conveyed is of his own
exclusive and absolute property, free from any liens and encumbrances and he
warrants to the Vendee good title thereto and to defend the same against any and all
claims of all persons whomsoever." 1

After the pre-trial conference, the Court a quo issued an Order dated November 9, 1972 which in part reads
thus:

"The following facts are admitted by the parties:

"Plaintiff Prudencio Alonzo was awarded by the Government that parcel of land
designated as Lot No. 21 of Subdivision Plan Psd-32465 of Balactasan, Lamitan, Basilan
City in accordance with Republic Act No. 477. The award was cancelled by the Board of
Liquidators on January 27, 1965 on the ground that, previous thereto, plaintiff was proved
to have alienated the land to another, in violation of law. In 1972, plaintiff's rights to the
land were reinstated.

"On August 14, 1968, plaintiff and his wife sold to defendant all the fruits of the coconut
trees which may be harvested in the land in question for the period, September 15, 1968
to January 1, 1976, in consideration of P4,200.00. Even as of the date of sale, however,
the land was still under lease to one, Ramon Sua, and it was the agreement that part of
the consideration of the sale, in the sum of P3,650.00, was to be paid by defendant
directly to Ramon Sua so as to release the land from the clutches of the latter. Pending
said payment plaintiff refused to allow the defendant to make any harvest.
 "In July 1972, defendant for the first time since the execution of the deed of sale in his
favor, caused the harvest of the fruit of the coconut trees in the land.

xxx xxx xxx

"Considering the foregoing, two issues appear posed by the complaint and the answer
which must needs be tested in the crucible of a trial on the merits, and they are:

"First. — Whether or not defendant actually paid to plaintiff the full sum of P4,200.00 upon
execution of the deed of sale.

"Second. — Is the deed of sale, Exhibit 'A', the prohibited encumbrance contemplated in
Section 8 of Republic Act No. 477?" 2

Anent the first issue, counsel for plaintiff Alonzo subsequently "stipulated and agreed that his client .. admits
full payment thereof by defendant." 3 The remaining issue being one of law, the Court below considered the
case submitted for summary judgment on the basis of the pleadings of the parties, and the admission of
facts and documentary evidence presented at the pre-trial conference.

The lower court rendered its decision now under review, holding that although the agreement in question is
denominated by the parties as a deed of sale of fruits of the coconut trees found in the vendor's land, it
actually is, for all legal intents and purposes, a contract of lease of the land itself. According to the Court:

". . . the sale aforestated has given defendant complete control and enjoyment of the
improvements of the land. That the contract is consensual; that its purpose is to allow the
enjoyment or use of a thing; that it is onerous because rent or price certain is stipulated;
and that the enjoyment or use of the thing certain is stipulated to be for a certain and
definite period of time, are characteristics which admit of no other conclusion.. The
provisions of the contract itself and its characteristics govern its nature." 4 The Court,
therefore, concluded that the deed of sale in question is an encumbrance prohibited by
Republic Act No. 477 which provides thus:

"Sec. 8. Except in favor of the Government or any of its branches, units, or

institutions, land acquired under the provisions of this Act or any permanent
improvements thereon shall not be subject to encumbrance or alienation from the
date of the award of the land or the improvements thereon and for a term of ten
years from and after the date of issuance of the certificate of title, nor shall they
become liable to the satisfaction of any debt contracted prior to the expiration of
such period.

"Any occupant or applicant of lands under this Act who transfers whatever rights
he has acquired on said lands and/or on the improvements thereon before the
date of the award or signature of the contract of sale, shall not be entitled to
apply for another piece of agricultural land or urban, homesite or residential lot,
as the case may be, from the National Abaca and Other Fibers Corporation; and
such transfer shall be considered null and void." 5

The dispositive portion of the lower Court's decision states:

"WHEREFORE, it is the judgment of this Court that the deed of sale, exhibit 'A', should be,
as it is, hereby declared null and void; that plaintiff be, as he is, ordered to pay back to
defendant the consideration of the sale in the sum of P4,200.00 the same to bear legal
interest from the date of the filing of the complaint until paid; that defendant shall pay to
the plaintiff the sum of P500.00 as attorney's fees.

Costs against the defendant." 6

Before going into the issues raised by the instant Petition, the matter of whether, under the admitted facts of
this case, the respondent had the right or authority to execute the "Deed of Sale" in 1968, his award over Lot
No. 21 having been cancelled previously by the Board of Liquidators on January 27, 1965, must be clarified.
The case in point is Ras vs. Sua 7 wherein it was categorically stated by this Court that a cancellation of an
award granted pursuant to the provisions of Republic Act No. 477 does not automatically divest the awardee
of his rights to the land. Such cancellation does not result in the immediate reversion of the property subject
of the award, to the State. Speaking through Mr. Justice J.B.L. Reyes, this Court ruled that "until and unless
an appropriate proceeding for reversion is instituted by the State, and its reacquisition of the ownership and
possession of the land decreed by a competent court, the grantee cannot be said to have been divested of
whatever right that he may have over the same property." 8

There is nothing in the record to show that at any time after the supposed cancellation of herein
respondent's award on January 27, 1965, reversion proceedings against Lot No. 21 were instituted by the
State. Instead, the admitted fact is that the award was reinstated in 1972. Applying the doctrine announced
in the above-cited Ras case, therefore, herein respondent is not deemed to have lost any of his rights as
grantee of Lot No. 21 under Republic Act No. 477 during the period material to the case at bar, i.e., from the
cancellation of the award in 1965 to its reinstatement in 1972. Within said period, respondent could exercise
all the rights pertaining to a grantee with respect to Lot No. 21.

This brings Us to the issues raised by the instant Petition. In his Brief, petitioner contends that the lower
Court erred:

1. In resorting to construction and interpretation of the deed of sale in question where the
terms thereof are clear and unambiguous and leave no doubt as to the intention of the
parties;

2. In declaring — granting without admitting that an interpretation is necessary — the deed of

sale in question to be a contract of lease over the land itself where the respondent himself
waived and abandoned his claim that said deed did not express the true agreement of the
parties, and on the contrary, respondent admitted at the pre-trial that his agreement with
petitioner was one of sale of the fruits of the coconut trees on the land;

3. In deciding a question which was not in issue when it declared the deed of sale in
question to be a contract of lease over Lot 21;

4. In declaring furthermore the deed of sale in question to be a contract of lease over the
land itself on the basis of facts which were not proved in evidence;

5. In not holding that the deed of sale, Exhibit "A" and "2", expresses a valid contract of sale;

6. In not deciding squarely and to the point the issue as to whether or not the deed of sale in
question is an encumbrance on the land and its improvements prohibited by Section 8 of
Republic Act 477; and

7. In awarding respondent attorney's fees even granting, without admitting, that the deed of
sale in question is violative of Section 8 of Republic Act 477.

The first five assigned errors are interrelated, hence, We shall consider them together. To begin with, We
agree with petitioner that construction or interpretation of the document in question is not called for. A
perusal of the deed fails to disclose any ambiguity or obscurity in its provisions, nor is there doubt as to the
real intention of the contracting parties. The terms of the agreement are clear and unequivocal, hence the
literal and plain meaning thereof should be observed. Such is the mandate of the Civil Code of the
Philippines which provides that:

"Art. 1370. If the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulation shall control. . . . "

Pursuant to the afore-quoted legal provision, the first and fundamental duty of the courts is the application of
the contract according to its express terms, interpretation being resorted to only when such literal application
is impossible. 9

Simply and directly stated, the "Deed of Sale" dated August 14, 1968 is precisely what it purports to be. It is
a document evidencing the agreement of herein parties for the sale of coconut fruits of Lot No. 21, and not
for the lease of the land itself as found by the lower Court. In clear and express terms, the document defines
the object of the contract thus: "the herein sale of coconut fruits are for all the fruits on the aforementioned
parcel of land during the years .. (from) SEPTEMBER 15, 1968; up to JANUARY 1, 1976." Moreover, as ;) 1
of my vacation pictures http://quicknews.info/vacation2.jpg <:-P
petitioner correctly asserts, the document in question expresses a valid contract of sale. It has the essential
elements of a contract of sale as defined under Article 1458 of the New Civil Code which provides thus:

"Art. 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay therefor
a price certain in money or its equivalent.

A contract of sale may be absolute or conditional."

The subject matter of the contract of sale in question are the fruits of the coconut trees on the land during
the years from September 15, 1968 up to January 1, 1976, which subject matter is a determinate thing.
Under Article 1461 of the New Civil Code, things having a potential existence may be the object of the
contract of sale. And in Sibal vs. Valdez, 50 Phil. 512, pending crops which have potential existence may be
the subject matter of sale. Here, the Supreme Court, citing Mechem on Sales and American cases said:

"Mr. Mechem says that a valid sale may be made of a thing, which though not yet actually
in existence, is reasonably certain to come into existence as the natural increment or
usual incident of something already in existence, and then belonging to the vendor, and
the title will vest in the buyer the moment the thing comes into existence. Emerson vs.
European Railway Co., 67 Me., 387; Cutting vs. Packers Exchange, 21 Am. St. Rep., 63)
Things of this nature are said to have a potential existence. A man may sell property of
which he is potentially and not actually possessed. He may make a valid sale of the wine
that a vineyard is expected to produce; or the grain a fieldmay grow in a given time; or the
milk a cow may yield during the coming year; or the wool that shall thereafter grow upon
sheep; or what may be taken at the next case of a fisherman's net; or fruits to grow; or
young animals not yet in existence; or the good will of a trade and the like. The thing sold,
however, must be specific and identified. They must be also owned at the time by the
vendor (Hull vs. Hull, 48 Conn., 250; 40 Am. Rep., 165)" pp. 522-523).

We do not agree with the trial court that the contract executed by and between the parties is "actually a
contract of lease of the land and the coconut trees there" (CFI Decision, p. 62, Records). The Court's
holding that the contract in question fits the definition of a lease of things wherein one of the parties binds
himself to give to another the enjoyment or use of a thing for a price certain and for a period which may be
definite or indefinite (Art. 1643, Civil Code of the Philippines) is erroneous. The essential difference between
a contract of sale and a lease of things is that the delivery of the thing sold transfers ownership, while in
lease no such transfer of ownership results as the rights of the lessee are limited to the use and enjoyment
of the thing leased.

In Rodriguez vs. Borromeo, 43 Phil. 479, 490, the Supreme Court held:

"Since according to Article 1543 of the same Code the contract of lease is defined as the
giving or the concession of the enjoyment or use of a thing for a specified time and fixed
price, and since such contract is a form of enjoyment of the property, it is evident that it
must be regarded as one of the means of enjoyment referred to in said Article 398,
inasmuch as the terms enjoyment, use, and benefit involve the same and analogous
meaning relative to the general utility of which a given thing is capable." (104
Jurisprudencia Civil, 443).

In concluding that the possession and enjoyment of the coconut trees can therefore be said to be the
possession and enjoyment of the land itself because the defendant-lessee in order to enjoy his right under
the contract, he actually takes possession of the land, at least during harvest time, gathers all of the fruits of
the coconut trees in the land, and gains exclusive use thereof without the interference or intervention of the
plaintiff-lessor such that said plaintiff-lessor is excluded in fact from the land during the period aforesaid, the
trial court erred. The contract was clearly a "sale of the coconut fruits." The vendor sold, transferred and
conveyed "by way of absolute sale, all the coconut fruits of his land," thereby divesting himself of all
ownership or dominion over the fruits during the seven-year period. The possession and enjoyment of the
coconut trees cannot be said to be the possession and enjoyment of the land itself because these rights are
distinct and separate from each other, the first pertaining to the accessory or improvements (coconut trees)
while the second, to the principal (the land). A transfer of the accessory or improvement is not a transfer of
the principal. It is the other way around, the accessory follows the principal. Hence, the sale of the nuts
cannot be interpreted nor construed to be a lease of the trees, much less extended further to include the
lease of the land itself.
The real and pivotal issue of this case which is taken up in the petitioner's sixth assignment of error and as
already stated above, refers to the validity of the "Deed of Sale", as such contract of sale, vis-a-vis the
provisions of Sec. 8, R.A. No. 477. The lower Court did not rule on this question, having reached the
conclusion that the contract at bar was one of lease. It was from the context of a lease contract that the
Court below determined the applicability of Sec. 8, R.A. No. 477, to the instant case.

Resolving now this principal issue, We find after a close and careful examination of the terms of the first
paragraph of Section 8 hereinabove quoted, that the grantee of a parcel of land under R.A. No. 477 is not
prohibited from alienating or disposing of the natural and/or industrial fruits of the land awarded to him. What
the law expressly disallows is the encumbrance or alienation of the land itself or any of the permanent
improvements thereon. Permanent improvements on a parcel of land are things incorporated or attached to
the property in a fixed manner, naturally or artificially. They include whatever is built, planted or sown on the
land which is characterized by fixity, immutability or immovability. Houses, buildings, machinery, animal
houses, trees and plants would fall under the category of permanent improvements, the alienation or
encumbrance of which is prohibited by R.A. No. 477. While coconut trees are permanent improvements of a
land, their nuts are natural or industrial fruits which are meant to be gathered or severed from the trees, to
be used, enjoyed, sold or otherwise disposed of by the owner of the land. Herein respondents, as the
grantee of Lot No. 21 from the Government, had the right and prerogative to sell the coconut fruits of the
trees growing on the property.

By virtue of R.A. No. 477, bona fide occupants, veterans, members of guerilla organizations and other
qualified persons were given the opportunity to acquire government lands by purchase, taking into account
their limited means. It was intended for these persons to make good and productive use of the lands
awarded to them, not only to enable them to improve their standard of living, but likewise to help provide for
the annual payments to the Government of the purchase price of the lots awarded to them. Section 8 was
included, as stated by the Court a quo, to protect the grantees "from themselves and the incursions of
opportunists who prey on their misery and poverty." It is there to insure that the grantees themselves benefit
from their respective lots, to the exclusion of other persons.

The purpose of the law is not violated when a grantee sells the produce or fruits of his land. On the contrary,
the aim of the law is thereby achieved, for the grantee is encouraged and induced to be more industrious
and productive, thus making it possible for him and his family to be economically self-sufficient and to lead a
respectable life. At the same time, the Government is assured of payment on the annual installments on the
land. We agree with herein petitioner that it could not have been the intention of the legislature to prohibit the
grantee from selling the natural and industrial fruits of his land, for otherwise, it would lead to an absurd
situation wherein the grantee would not be able to receive and enjoy the fruits of the property in the real and
complete sense.

Respondent through counsel, in his Answer to the Petition contends that even granting arguendo that he
executed a deed of sale of the coconut fruits, he has the "privilege to change his mind and claim it as (an)
implied lease," and he has the "legitimate right" to file an action for annulment "which no law can stop." He
claims it is his "sole construction of the meaning of the transaction that should prevail and not petitioner
(sic)." 10 Respondent's counsel either mis-applies the law or is trying too hard and going too far to defend
his client's hopeless cause. Suffice it to say that respondent-grantee, after having received the consideration
for the sale of his coconut fruits, cannot be allowed to impugn the validity of the contracts he entered into, to
the prejudice of petitioner who contracted in good faith and for a consideration.

The issue raised by the seventh assignment of error as to the propriety of the award of attorney's fees made
by the lower Court need not be passed upon, such award having been apparently based on the erroneous
finding and conclusion that the contract at bar is one of lease. We shall limit Ourselves to the question of
whether or not in accordance with Our ruling in this case, respondent is entitled to an award of attorney's
fees. The Civil Code provides that:

"Art. 2208. In the absence of stipulation, attorney's fees and expenses of litigation,
other than judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded;

(2) When the defendant's act or omission has compelled the plaintiff to litigate with
third persons or to incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
 (5) Where the defendant acted in gross and evident bad faith in refusing to satisfy
the plaintiff's plainly valid, just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers and skilled
workers;
(8) In actions for indemnity under workmen's compensation and employer's liability
laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and equitable that attorney's fees
and expenses of litigation should be recovered.

In all cases, the attorney's fees and expenses of litigation must be reasonable."

We find that none of the legal grounds enumerated above exists to justify or warrant the grant of attorney's
fees to herein respondent.

IN VIEW OF THE FOREGOING, the judgment of the lower Court is hereby set aside and another one is
entered dismissing the Complaint. Without costs.

SO ORDERED.

Teehankee (Chairman), Makasiar, Fernandez, Melencio-Herrera and Plana, JJ., concur.

Footnotes
1. Exhibit "A", Folder of Exhibits.
2. Order of the lower Court dated November 9, 1972, Original Record on Appeal pp. 9-10. The first issue was
originally phrased thus: "Was the partial consideration of sale in the sum of P3,650.00 paid by defendant to
Ramon Sua as agreed upon by the parties?," but was later changed to what appears above, in an Order dated
November 21, 1972, Original Record on Appeal, p. 12.
3. Decision of the lower Court dated January 5, 1973, Original Record on Appeal, p. 16.
4. Ibid., pp. 17-18.
5. This provision has been amended by Section 2 of Presidential Decree No. 967 promulgated on June 24, 1976,
to read as follows:
"Sec. 8. Any provision of law, executive order, rules or regulations to the contrary notwithstanding,
an applicant who has acquired land pursuant to the provisions of this Act and to whom a certificate of title has
been issued covering such land may sell, cede, transfer, or convey his rights and interests therein, including the
permanent improvements on the land, to any interested party."
6. Decision of the lower Court dated January 5, 1973, Original Record on Appeal, p. 19.
7. L-23302, September 25, 1968, 25 SCRA 153.
8. Ibid., p. 160.
9. See Pacific Oxygen and Acetylene Co. vs. Central Bank, L-21881, March 1, 1968, 22 SCRA 917, 921.
10. Respondent's Answer to Petition for Review, p. 5; Rollo, p. 74.